DRAFT Improving the SMEs Access to Trade Finance
in the OIC Member States
17
conditions that private sector financiers often retreat from markets, and any measures to
respond to the resulting gaps in support generally must come from public sector sources or
from multilateral institutions.
Country and political risk assessments are available from a variety of sources including
multilateral institutions, banks, risk insurers, export credit agencies and others.
b. Bank Risk
Bank risk relates to the risk of default or non-payment by a bank involved in a trade
transaction. An exporter and the exporter’s own bank may face bank risk if a transaction
involves a financial institution in the importing country (for example, the bank issuing a letter
of credit in favour of the exporter) with questionable standing or financial health.
The realities and potential scope of bank risk were brought sharply into focus by the global
crisis, when top-name UK, EU and American financial institutions teetered on the brink of
bankruptcy as a result of exposure to toxic mortgage assets. Several of these institutions were
effectively nationalized and rescued by government bailout, and others were merged with or
taken over by competitor institutions. Several highly regarded banks were deemed unviable
and the payment and trade finance undertakings they made were accorded very little
confidence, with the effect that these banks needed to seek risk mitigation against their own
undertakings to assure importers and exporters of the viability of transactions in which they
were involved.
Letters of credit issued by formerly top-name financial institutions had to be confirmed, for
example, by banks that were known to be solid and to have negligible exposure to the high-risk
mortgaged assets that generated huge losses. American and European institutions sought help
from Canadian banks, for example, in backstopping trade finance commitments by providing
confirmations of letters of credit issued by these US and European institutions.
To be clear, when an importer seeks support, they do so from a bank with which a credit
relationship already exists, or can be quickly established: on the import side, risk relates to the
risk of non-payment by an importer and as such, a bank will want to ensure that the importer
is a well-known existing customer prior to providing the support of a letter of credit, for
example.
On the export side, the exporter’s bank may provide financing or some form of risk mitigation
to an exporter, but does so on the basis that the importer’s bank will meet its obligations under
the relative letter of credit. The importer’s actions are irrelevant to the exporter’s bank, as it
relies strictly on the payment undertaking of the issuing bank of the L/C. This is one example
of the way in which export transactions typically involve a focus on foreign bank risk, rather
than risk related to the financial health and capacity to pay of the importer.
c. Commercial Risk
Commercial risk involves various risks related directly to the actions (or inactions) of the
importer and exporter relative to their respective obligations under the trade transaction. Will
the exporter perform as agreed, producing goods of agreed quality and shipping them in the
timeframe agreed? Will the importer act in good faith and approve payment against compliant