DRAFT Improving the SMEs Access to Trade Finance
in the OIC Member States
13
k. Supply chain finance
Supply chain finance is the term used to refer to a set of “new” solutions, which can involve for
some banks, one or two very specific products, and for others, comprehensive programs
covering, say one large buyer and dozens of suppliers.
The development of supply chain finance as a proposition evolved from the near-global shift
away from traditional mechanisms to trade on open account terms. This trend which began
prior to the global financial crisis was seen as a serious threat by banks in particular, as their
role in open account transactions was typically limited only to the transmission of payment,
without any need for risk mitigation or financing. Supply chain finance was seen as one way for
banks to “re-intermediate” themselves back into a more significant (and profitable) role in
supporting international trade activity.
Supply chain finance is particularly promising in terms of assuring adequate levels of trade
finance to SMEs, including those located in developing and emerging markets, thus potentially
well suited to providing financing solutions in support of international development. It should
be noted that supply chain finance can involve the use of certain financing mechanisms long-
established in trade finance, such as factoring or invoice-based finance. It is the way in which
such mechanisms are applied to the financing of supply chains that makes the framework
around supply chain finance innovative and evolutionary.
1.2.2.2. The Documentary Letter of Credit: Illustrating the Flexibility of
Trade Finance
Documentary letters of credit are among the most established instruments of trade finance,
favoured by markets across the MENA Region and parts of Asia in particular, as proven
mechanisms of trade payment and financing and as effective means for mitigating a wide range
of risks. Letters of credit are also appreciated for their linkage to international commercial
practice and to long-established guiding rules like the Uniform Customs and Practice for
Documentary Credits. The transaction flow and structure around a documentary letter of
credit can be used to illustrate the flexibility and features available through trade financing
practices and mechanisms.
Figure 3: Documentary Letter of Credit Transaction Flow
Source: OPUS Advisory Services International Inc.
Importer
Issuing
Bank
Exporter
Advising
Bank
Sales Contract
&
Delivery of Goods
L/C Application
Payment Exchanged
For Documents
Exporter Documents
Document Verification
Exchange for Payment
L/C Issued/Advised
(With Confirmation)
Document Verification
Settlement/Payment Confirming
Bank