Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
8
Figure 1: Risk in Payment/Settlement Options
Source: International Trade Procedures, Wells Fargo Bank
Commercial or documentary letters of credit provide the most balanced protection covering
the interests of importers and exporters. Confirmed documentary letters of credit provide
equally strong protection to the buyer, while enhancing the protection provided to the
exporter.
Standby letters of credit are sometimes used to facilitate trade between buyer and seller, but
are more commonly intended to serve as a protective instrument, to ensure that the
beneficiary of that credit is protected in the event of non-payment or non-performance of
agreed obligations by the party providing the standby credit.
Collections or Documentary Collections involve an exchange of shipping documents (including
documents of title to the goods shipped) for payment or for an undertaking to pay at an agreed
future date. Such instruments involve banks acting to facilitate an exchange, with no
responsibility to engage in any meaningful verification of documents submitted by the
exporter.
Documentary letters of credit provide an excellent illustration of the flexibility and efficacy of
established trade finance mechanisms, in facilitating and enabling global trade, in that they can
show all four elements and a variety of features and mechanisms available for importers,
exporters and their financiers.