Supply Chain Finance Growth Prospects Remain Strong, Finds Research
Three-quarters of top European banks still believe growth prospects for supply chain finance (SCF) remain “strong” or “very strong”, according to Demica’s research report on the SCF market conducted among the top 40 European banks. This represents a somewhat more cautious outlook compared to 2010 opinion, but shows the enduring appeal of SCF despite slow economic recovery and concerns in the eurozone.
Respondents anticipate annual SCF growth rates between 10% and 30% per annum in mature markets, and 20-25% in emerging markets where the need for financing is particularly pressing to help cope with rapid expansion. Growth over the next few years will primarily be driven by developed economies such as the US and Europe, along with larger emerging economies including China and India.
Respondents to this research noted that the financial markets crisis, followed by anaemic economic growth and current concerns about the spread of the sovereign debt crisis across the eurozone, has propelled optimum liquidity management to the top of the financial management agenda, prompting a heightened interest in supplier financing. In mature markets, working capital optimisation and reduction of supply chain risk have been identified as the primary drivers for establishing SCF programmes. In emerging economies, access to liquidity and enabling suppliers to keep pace with buyers’ growth are the key motivations.
Although SCF is seen as having growth prospects in both mature and emerging markets, corporates and banks still face a number of challenges in order to maintain and increase the momentum of adoption. Particularly in emerging markets, bank financiers believe that legal and jurisdictional issues and access to technology platforms require further work to accelerate SCF growth. However, with the growing popularity of domestic SCF facilities, respondents expect that supplier financing solutions will take on a new dimension as corporates and banks are increasingly interested in extending this success into global programmes.
Phillip Kerle, chief executive officer (CEO) of Demica, said: “The corporate credit squeeze triggered by the financial crisis has made companies much more aware of the need to optimise working capital and to protect their smaller suppliers in order to avoid supply chain disruptions. Particularly in emerging markets, suppliers might not have sufficient working capital and often have poor access to bank credit. By binding suppliers into a structured SCF programme, buyers can ensure the financial health of their suppliers and thus secure their supply chains. This strengthened awareness has contributed to the accelerated growth of SCF in the past few years across a wide spectrum of industry segments such as retail, consumer goods and manufacturing as well as different geographic regions including Europe, the Americas and Asia.
“Particularly in light of the growing trend towards off shoring and outsourcing, trade business is increasingly transcending the boundaries of mature and emerging markets nowadays. If suppliers in emerging economies are not able to cope with the pace of growth of their buyers in developed markets, SCF facilities can help them meet the requirements of their large customers by providing them with sufficient liquidity. Even though credit conditions have eased up slightly, many companies, particularly SMEs [small and medium-sized enterprises], are still struggling to obtain bank financing. In a lending market that continues to remain tight, SCF solution offers both buyers and suppliers a particularly valuable proposition to monetise their supply chains to maximise working capital,” he added.