DRAFT Improving the SMEs Access to Trade Finance
in the OIC Member States
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2.10. Islamic Trade Finance
Recent developments in risk mitigation linked to Islamic Trade Finance provide one example
of the evolutionary nature of the sector – and of the opportunity to leverage learning and
experiences from one sector (conventional) to the other (Islamic). Shari’ah-compliant hedging
and risk mitigation techniques have now entered the landscape, and Islamic institutions are
looking at ways to engage in the financing of trade beyond the use of traditional instruments
such as documentary letters of credit. This includes extending offerings into emerging supply
chain finance solutions, currently under assessment in terms of Shari’ah compliant models and
options.
It is notable that the evolution and adoption of Shari’ah compliant trade finance covers not
only the nature of the product and the transaction flow, but also requires certification of
compliance of the various banking systems and accounting practices used in support of Islamic
Trade Finance. The evolution of capabilities in delivering Shari’ah-compliant trade and supply
chain financing solutions links directly to the ability of financiers to tap into and to enable
trade flows in high-growth markets, and in markets where trade is and will remain critical to
economic development, poverty reduction and overall increase in prosperity.
2.11. Political and Policy Context around Trade Finance
Post-crisis efforts to champion the importance of trade finance to global recovery; regulatory
issues, the drive to assure SME access to trade finance, the role of public sector entities and
international institutions in responding to the global funding gap in trade; consideration of the
role of finance within a broader context of policy-driven trade promotion; capacity
development and technical assistance efforts in support of trade finance.
The political momentum around support for trade finance globally since the eruption of the
global crisis has been addressed earlier in this paper, and the need for and opportunity in
championing and promoting trade within banks and financial institutions, likewise, has been
noted. The key trend in this respect is the ongoing engagement of public officials and the
increasing visibility of industry bodies and associations in promoting and supporting the
development of trade finance capacity. This includes, specifically, the contributions of national
and international entities, and the emerging trend in developing markets to include an explicit
trade finance component to broader trade facilitation and promotion strategies and efforts.
UNCTAD (2012) and others have argued that fast-paced financial and trade liberalization has
been damaging to developing economies, and that the absence of local infrastructure has led to
expensive, cyclically influenced capacity in trade finance in addition to broader adverse
impacts on trade and capital markets. Such a situation argues for targeted policy measures
aimed at offsetting such adverse consequences, though it is noted that markets like Korea and
Brazil have had only limited success in applying unilateral measures aimed at curbing negative
impacts from the reliance on foreign capital and financing. Regional monetary and financial
arrangements have also been linked to attempts to resolve or offset such dynamics.
Limitations in the availability of trade finance have traditionally placed developing
country producers at a disadvantage compared with their competitors based in the
advanced economies. There are several reasons for this, but two are especially