Singapore sets higher financing standards to mend damaged reputation as commodity trading hub
By Celine Chen
Singapore banks have collectively rushed out the industry’s first set of commodity financing best practices to help fix its dented reputation as a trusted trading hub following recent uncovering of financing fraud cases involving billions of dollars.
Serving as a broad guidance, the code of best practices was launched on Monday (Nov. 30) by the Association of Banks in Singapore (ABS), together with the support of the Monetary Authority of Singapore (MAS), Enterprise Singapore (ESG) and the Accounting and Corporate Regulatory Authority (ACRA).
The code lays out key principles governing prudent financing practices, providing banks with a benchmark for lending standards to "help enhance the resilience, relevance and competitiveness of Singapore as a global commodity trading hub," said a statement by the association of banks.
The code was developed by an industry working group of 28 banks, representing the majority of commodity financing banks in Singapore, in consultation with trading firms.
The group includes ABN, DBS Bank, OCBC Bank, AMRO, Mizuho, Sumitomo Mitsui Banking Corp., Bank of China, Citibank, Deutsche Bank, First Abu Dhabi Bank, HSBC, and UBS.
Samuel Tsien, Chairman of ABS and Group CEO of OCBC, said, “This is an important step to strengthen Singapore’s stature as a global commodity trading hub. The Code of Best Practices ensures a more robust and disciplined financing approach to support the growth of Singapore’s thriving commodity trading sector, which comprises a broad spectrum of participants, ranging from boutique firms to leading international commodity groups.”
Underpinning the code at a macro level is banks’ understanding of traders’ corporate governance, risk management practices, business and transactions through due diligence and policy requirements.
Banks must also obtain sufficient transparency and control over financed transactions, goods and receivables.
Ho Hern Shin, MAS Assistant Managing Director for banking and insurance, said the code will encourage greater transparency and trust between trading firms and their lenders.
It will also promote sustainable credit flows to support Singapore’s growth as a global commodities trading hub, she added.
In October, Tharman Shanmugaratnam, Senior Minister and Minister in charge of the Monetary Authority of Singapore (MAS) said banks, MAS and other government agencies would be strengthening standards and practices of transparency and governance in the commodities trading sector after the cases of trade financing fraud led banks to take steps to de-risk from the sector.
Speaking in Parliament, the minister said, " The fraud cases in the commodities trading sector have been attributed to weak disclosure practices and internal controls among a minority of trading companies. However, we do not take this lightly."
"To prevent such fraudulent activities and restore confidence, there needs to be a strengthening of standards and practices of transparency and governance in the commodities trading sector, more robust credit risk assessment, as well as a move away from paper-based processes as they are more susceptible to risk of fraud," he said.
In this connection, Shanmugaratnam stressed the importance of digital trade.
MAS is partnering with the finance industry and other government agencies to digitalize trade financing and replace the current paper-based systems with electronic documents and data flows.
He said, "This will better ensure authenticity of documents, and allow banks to obtain data directly from Singapore Customs to perform risk assessment."
While trading companies were facing more rigorous credit assessments and tighter financing conditions, they would still be able to access the financing commensurable with their creditworthiness.
Said Shanmugaratnam, "But the initiatives are necessary, to enhance commodity financing standards and practices, and strengthen Singapore’s resilience, relevance and competitiveness as a global commodities trading hub. "
Satvinder Singh, Assistant CEO of Enterprise Singapore, a statutory board under the ministry of trade and industry, said: “The Code of Best Practices was developed with feedback from a diverse range of commodity trading companies. It is the industry’s commitment to raise trust and confidence in Singapore as a premier trade and financial hub."
The common set of risk management considerations will "guide creditors and provide them comfort when financing global trading companies,” he added.
Also backing the launch of the code is the Accounting and Corporate Regulatory Authority (ACRA), the national regulator of financial reporting, public accountants and corporate service providers.
Andy Sim, its Assistant Chief Executive for legal services and compliance, said, “This will help to promote accountability and uphold the integrity of the commodity trading sector.”
The segment is a component of Singapore's wholesale trade, a highly diversified industry. A key contributor to Singapore’s economy, wholesale trade accounted for SG$47.3 billion (US$35.4 billion) or 9 percent of the Gross Domestic Product (GDP) in 2017, according to Enterprise Singapore.