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 TF 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. By applying a robust least squares maximum likelihood estimation technique, and using bi-squares and median absolute deviation-centred (MADMED) scaling, this study investigates the international and domestic variables driving demand for TF for several listed South African companies. This study identified 12 instances of individually significant relationships between certain industries and the independent variable (both domestic and international financial and economic variables). It also found significant regression results for the retail industry at first differences and identified that macro-economic and financial variables (such as the US gross domestic product and the rand-British pound exchange rate) influenced the demand for retail TF. The sole significant domestic variable was South African bank asset-to-capital ratios, showing that both financial and economic factors are relevant in identifying TF demand drivers of South African companies.