Identifying the drivers of trade finance in South Africa

Abstract

Trade finance (or bank intermediated trade finance) plays an integral role in facilitating trade across the globe: most studies assert that trade finance (TF) forms part of more than 80% of total global trade. Although trade finance has increased in importance for policy makers after the financial crises of 2008, most studies conducted over the last decade (2009 onward) focussed on the supply side of TF and how its reduction has hampered trade. To develop a more fleshed-out and well-rounded understanding of TF, research should also be conducted into what drives the demand for TF. By applying a Robust Least Squares maximum likelihood estimation technique and using bisquares and median absolute deviation-centred (MADMED) that improves statistical dispersion of outliers around the mean, this study investigates the international and domestics variables which drive the demand for TF of several listed South African companies. This study identified 12 instances of individually significant relationships between certain industries and the included independent variable (both domestic and international financial and economic variables). It also modelled two significant regressions for the retail industry at 1st differences and second differences. The investigation found that the United States of America, nominal GDP, South African banks’ asset to capital ratios, and the South African Rand-British Pound exchange rate were significant at 1st differences. The South African sovereign rating and VIX index of implied volatility variables were found to be significant at 2nd differences.