🏦6. Why local banks?

Spread arbitrage, regulatory relief, and synthetic risk transfer.

Market imperfections persist, which enable local banks to maintain de facto monopolies as authorised “foreign exchange dealers” and lowest-cost credit providers:

1. Foreign exchange control: The South African Reserve Bank, for instance, delegates exchange control powers to “authorised dealers” in foreign exchange. Only local banks can authorise high-value USD and crypto exchange (above the “discretionary yearly allowance” of $50k). Banks legally monopolise local USD liquidity.

2. AAA-underwriting and portfolio diversification: Highly capitalised banks afford the global credit credentials offered by rating agencies like S&P. Their collateral is strengthened by discounted access to sovereign guarantees. Their diverse pool of liquid assets (including USD) is distributed in correspondent accounts globally (facilitating forex-denominated redemptions).

3. Structural barriers to documentary requirements for trade offer absolute cost, data, and compliance advantages: Only “authorised” local banks can access the Electronic Export Monitoring System, overseen by tax authorities.

4. Tokenised CDOs provide synthetic exposure to corporate credit risk, whereas vanilla securitisation transfers full credit ownership. The latter requires extensive diligence and legal opinion, as the enforceability of a transfer in insolvency is essential.

Banks' comparative advantages maintain asymmetric information and right-way risk favouring incumbents. Alternate credit providers cannot acquire identical trade finance assets at superior costs or benefit from bank-specific regulatory arbitrage and USD capital relief. As empirical evidence of their dominance, you will note that the World Trade Organisation measures 48% of global trade as being “bank-intermediated” credit for over 20 years.