DRAFT Improving the SMEs Access to Trade Finance
in the OIC Member States
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V. APPENDIX A: BAFT-IFSA PRODUCT DEFINITIONS
Working Definitions of Traditional and Open Account Trade Finance
(Quoted with Permission from BAFT-IFSA, Washington DC)
Traditional Trade Finance: Industry Product Definitions
Global Trade Industry Council, BAFT-IFSA, February 2012
Traditional Trade Finance products have existed in some form for hundreds of years. Generally
speaking, banks have served as intermediaries to facilitate the flow of documents
(information) and payments related to the flow of goods in international trade or to provide
assurance relating to the performance or financial obligations of a person or company to
another. Different products provide importers and exporters with varying levels of risk
mitigation and/or financing.
1. Collections
Collection refers to the handling by banks of documents, in accordance with instructions
received, in order to obtain payment and/or acceptance or deliver documents against payment
and/or against acceptance or deliver documents on other terms and conditions (Source URC
522).
Specifically,
(i) A Collection that is payable at Sight is known as Documents against Payment (D/P). The
documents are sent to the presenting/drawee bank and delivered to the drawee against
payment. (ii) A Usance Collection is known as Documents against Acceptance(D/A). The
documents are sent by the principal/drawer to the presenting bank and delivered to the
drawee against the buyer's commitment to pay at a future date. Such commitment is usually
evidenced by a bill of exchange, issuance of a promissory note, or an undertaking to pay at a
future date, which, when accepted by the drawee/buyer for payment at a future date, is known
as a trade acceptance.
Unlike a letter of credit there is no explicit undertaking by a bank to make finance available,
however, the Remitting bank may choose to finance the exporter at the bank’s own risk with or
without recourse, by purchasing the bill or by discounting the unaccepted bill before despatch
to the presenting or collecting bank. The remitting bank may also discount the advice of the
drawees acceptance without cognisance of the presenting or collecting banks co-acceptance. If
the presenting/collecting bank is requested to co-accept or avalize the accepted bill it may do
so. In some circumstances the presenting/collecting bank may also offer finance to the
remitting bank by discounting its own acceptance, or in response to the request of the drawer
through the presenting bank, provide a discounted advance payment.
2. Letters of Credit (LCs)
A letter of credit is an arrangement, however named or described, that is irrevocable and
thereby constitutes a definite undertaking of the issuing bank to honor a complying
presentation. There are two main types --- a Commercial (or Documentary) Letter of Credit