Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
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2. LC Financing
Letters of credit are contingent instruments, that are payable only at such time as the terms of
the letter of credit have been complied with. Nevertheless, there are instances when banks
choose to advance funds during the course of the life cycle of the letter of credit, and certain
events trigger the contingent liability to become on-balance sheet.
A. Negotiation - the purchase by the nominated bank of drafts (drawn on a bank other than
the nominated bank) and/or documents under a complying presentation, by advancing or
agreeing to advance funds to the beneficiary on or before the banking day on which
reimbursement is due to the nominated bank. Banks often deduct the cost of advancing funds
from the proceeds based on the expected time between the negotiation and reimbursement
from the Issuing Bank.
B. Acceptance – the accepted draft under the LC becomes a negotiable instrument. The holder
in due course can hold until maturity, or receive discounted funds in advance.
C. Bills of Exchange / Promissory Notes – a bill of exchange is a written order from the
drawer to the drawee to pay the payee on demand or at a fixed date. A promissory note is a
written unconditional promise to pay the payee (or bearer) on demand or at a date in the
future. In negotiable form, these instruments also function similar to acceptances in that the
holder in due course can hold until maturity or receive discounted funds. The difference being
when the maker of a note pays the payee directly, rather than ordering a 3rd party to do so.
D. LC Refinancing / Post-Shipment Financing – through the wording of the LC, the issuing
bank requests the presenting bank to pay the exporter through a loan granted to the issuing
bank. At final maturity, the issuing bank repays the presenting bank the principal plus interest.
E. LC Financing by Reimbursement Bank - The Issuing Bank opens a Commercial LC and
nominates a Reimbursement Bank which agrees to pay the reimbursement claim of an entitled
claiming bank and grant a pre-agreed loan to the Issuing Bank. The Issuing Bank repays
principal plus interest to the reimbursing bank at maturity.
3. Trust Receipts
When issuing a Trust Receipt, the bank enables the importer to obtain goods and/or shipping
documents while retaining title/ownership. The importer that obtains the goods (or proceeds
from sale of the goods) is obligated to identify and maintain them separate from other assets.
Payment is made by the importer by the Trust Receipt due date. Trust receipts may be set up
as specific facilities, or may be treated as import loans.
4. Shipping Guarantees
A Shipping Guarantee is an indemnity that the bank executes jointly and severally with its
customer in favour of a shipping company, enabling the importer to obtain goods without the
actual title documents (e.g. bills of lading). This is used when the goods arrive prior to the
actual title documents, and the buyer wish to obtain the goods so as to avoid demurrage
charges or losses due to deterioration of goods (esp. Perishables).Settlement occurs upon