Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
4
I. CONCEPTUAL FRAMEWORK: TRADE FINANCING
POLICIES
1.1. An Overview of Trade Finance
1.1.1. Definition of Trade Finance
Trade finance is a specialized branch of finance focused on providing payment, financing and
risk mitigation solutions in support of transactions between importers and exporters, or those
involving international supply chains. Trade finance, at its core, is nothing more that financing
provided in support of the conduct of international trade.
Generally, the term “trade finance” refers to transactions considered to be short-term in
nature, up to 18 to 24 months in duration, but most commonly up to 90 or 180 days in
duration.
“Trade finance differs from other forms of credit (for example, investment finance and
working capital) in ways that have important economic consequences during periods of
financial crisis. Perhaps its most distinguishing characteristic is that it is offered and
obtained not only through third-party financial institutions, but also through interfirm
transactions. The vast majority of trade finance involves credit extended bilaterally
between firms in a supply chain or between different units of individual firms.
According to messaging data from the Society for Worldwide Interbank Financial
Telecommunication (SWIFT), a large share of trade finance occurs through interfirm,
open-account exchange. Banks also play a central role in facilitating trade, both
through the provision of finance and bonding facilities and through the establishment
and management of payment mechanisms…”
Source: Trade Finance During the Great Trade Collapse, IBRD/World Bank, 2011
Transactions that extend beyond 24 months in duration, up to 7 years or so, are referred to as
“Medium-Term Trade Finance”, while those with even longer timeframes, up to 15 or 20 years
or more, fall into the category of Project Finance; the focus of this paper will be on the short
term variety of trade finance, where the majority of SME trade activity takes place.
The financing of international trade can be viewed and understood from several perspectives,
and the definitions typically utilized are not always consistently applied even among
specialists and practitioners. That said trade finance exhibits several important and consistent
characteristics that are critically relevant in terms of the nature of the financing involved, the
nature of the related risk, and the types of policy measures that can and should be taken to
ensure the availability of adequate levels of trade finance.
Trade finance is:
 Linked directly to an underlying flow of goods
 Connected directly to “real economy” activity