Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
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across a wide variety of commercial and legal contexts, and it can be important for businesses
of all sizes engaged in international trade to be conversant in the fundamentals of the various
ICC rules.
Documentary letters of credit provide the most balanced protection for buyer and seller,
compared to other available settlement options. Unless one of the trading partners possesses
more leverage than another, and can demand or impose advantageous payment terms, the
popularity of the L/C is also based on this potential for balanced protection of commercial
interests between buyer and seller. Despite the issues related to discrepancy and non-
compliance it remains true that letters of credit can be very effective in enabling quick
payment, various forms of financing and numerous options linked to risk mitigation.
A letter of credit can provide a combination of solutions for importers and exporters, including
payment, financing, risk mitigation and the facilitation of information flow about the trade
transaction.
1.2.3. Risk Mitigation
Traditional trade finance in particular has evolved numerous mechanisms aimed at effective
mitigation of a wide variety of risks, allowing trade to take place in the most complex and
challenging environments on the globe.
Most commonly, importers and exporters require the mitigation of several fundamental risks:
 Country and sovereign risk
 Bank risk
 Commercial risk
 Foreign exchange or currency risk
While there are complexities and nuances in the definition, for purposes of this analysis, it is
sufficient to note that country risk covers a range of risks associated with doing business in or
with a particular country or jurisdiction, including risk of civil unrest or war, risk of default of
the country, risks related to economic conditions that might impede a country’s ability to meet
its trade obligations, and risks related to possible expropriation or nationalization of foreign
assets.
a. Country Risk
Country risk is a very real consideration in international business and trade; there are
countless examples where such considerations have impeded the flow of trade, or caused
financial challenges to companies attempting to do business under difficult conditions only to
find that they sustain significant financial loss due to inadequate mitigation. Country, sovereign
and political risk is a very real consideration in numerous OIC Member States, in some cases
due to systemic economic issues, in other cases due to serious instability and risk arising from
civil war, military action and unrest and relatedly difficult conditions.
These difficulties directly impact risk analysis and risk ratings related to these jurisdictions,
either making it impossible to obtain risk mitigation and financing assistance, or making the
cost of such measures prohibitively expensive and commercially impractical. It is under such