Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
18
documents, or will the importer seek to manipulate the process through frivolous issues of
non-compliance (such as a typographical error in a key shipping document) as a means of
obtaining commercial advantage? Will either party commit outright fraud? Is there a
possibility that either party may face bankruptcy or insolvency, and thus cause commercial
loss or hardship to their trading partner?
Commercial risk is a reality of business, but one that is magnified significantly in the context of
international commerce, given the distances involved, the lack of transparency about the
health of a business, and challenges related to the conduct of appropriate due diligence. It is a
recognition of this reality that motivates importers and exporters developing new trading
relationships to include appropriate risk mitigation in their trade financing structures, until
such time as the relationship has been tested and proven over time, and focus can shift
(somewhat) away from risk considerations and allow emphasis on efficient payment and
appropriate financing solutions.
Importers and exporters also frequently contend with various types of transactional risk, such
as risk related to volatility in foreign currency markets. The majority of global trade is still
conducted in US Dollars, with the Euro generally in second position, and the Renminbi gaining
traction quickly as China’s influence grows on both the import and the export side of the
commercial equation.
d. Foreign Exchange Risk
Importers or exporters doing business in foreign currency face the risk of unfavourable
movements in exchange rates, possibly raising the cost of purchasing for the importer, or
reducing the profitability of a transaction for the exporter, when assessed in terms of their
respective domestic currencies. There are also possibilities of exchange rate shifts that are
favourable to one or the other, reducing the cost of the imported goods, or making the export
sale more profitable, however, the key is to manage for the risk of adverse impact, and trade
financiers can assist in this regard by combining trade financing solutions with appropriate
currency hedging solutions.
Figure 4: Risks in International Trade
Source: WTO