Improving the SMEs Access to Trade Finance
DRAFT
in the OIC Member States
28
The most effective trade banks actively work in partnership with public or private sector
export credit agencies, international institutions and private insurers to complement their own
capabilities and to engage in risk mitigation or risk-sharing where necessary. Additionally, it is
common for banks to share risk among themselves, through risk participation and syndication
arrangements – transactions where a lead bank might decide to invite selected financial
institutions to share in the risk (and revenue) associated with a particular deal, perhaps
because the lead bank does not have the necessary risk or credit capacity to hold the
transaction on its own books, or perhaps simply as a means of diversifying its own risk
portfolio.
Bankers increasingly appreciate the importance of trade finance within the broader scope of
transaction banking activity, and have been working for some years now, on better integrating
their capabilities and solutions around trade finance, and related areas such as cash
management and foreign exchange. At the same time, several top banks, (including major
European and American institutions) saved from bankruptcy by government support, are now
being mandated to provide greater support to SME clients, as political leaders recognize the
critical role of small business in sustaining national economies.
This relatively recent demand on bankers, particularly in the US and Europe, conflicts to some
extent with the pressure on those same banks to minimize undue risk exposure and financial
loss: one of the reasons that banks claimed it was prudent not to engage in excessive SME-
focused financing.
OIC Member States face a somewhat different reality, with the majority of businesses likely to
fall in the SME segment, and a differing level of focus among banks and political authorities
relative to the support and servicing of SME businesses, however, some of the same challenges
apply, and the concern of SMEs around access to finance – and access to affordable finance – is
a common thread on a global basis.
As the trade practices and requirements of importers and exporters have evolved to shift away
from traditional mechanisms, to emphasize trade on open account terms, the banks have
responded by developing value propositions aimed at meeting the needs of global supply
chains. This approach is still very much in development however, bank involvement in supply
chain finance allows these institutions to fulfill several objectives at once:
Demonstrate engagement in and support of real economy activities linked to the flow
of goods across borders
Demonstrate a desire to service the SME sector, through programs that facilitate
access to financing and liquidity for small business
Show commitment to the back-to-basics mantra of the post-crisis financial
environment
Maintain activities in a business with an attractive risk profile and very low loan-loss
experience, balancing low risk with steady, conservative returns
While trade (and more recently, trade finance) enjoys significant profile in business and
political circles, as a driver for global recovery and growth, it is worth noting that trade finance
is poorly understood within financial institutions. Until recently, the business of trade finance
was poorly championed within banks, and very few outside the international divisions of
banks had more than a cursory understanding of the financing of international commerce.