DRAFT Improving the SMEs Access to Trade Finance
in the OIC Member States
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3) Letters of Guarantee
A bank guarantee is an irrevocable promise of a bank to compensate the beneficiary under
clearly prescribed conditions fully, immediately, and without failure for damages suffered. To
be utilized in the event of default by the applicant of the letter of guarantee. Guarantees are
usually governed by local law and different ICC rules (URDG 758 and others).
a. Letter of Guarantee issued on behalf of another bank - Issuing Bank issues a Letter of
Guarantee at the request of another bank, which issues a counter guarantee in favour of the
Issuing Bank.
b. "Silently" confirmed Letter of Guarantee issued by another bank - Issuing Bank adds at the
request of its customer a silent guarantee to a L/G issued by another bank in favour of said
customer
Section 3: Trade Finance Definitions - Traditional Financing Products
Trade Finance lending also uses traditional products that have existed in practice for a long
period of time, but are not necessarily governed by the same structured ICC rules that
traditional documentary products use. Nevertheless, industry practice and standards have
demonstrated these instruments to be fairly widely used, fairly consistent in structure and
application, and consistently low-risk. These are funded assets that in some cases originated as
contingents. The key differentiating component of these financing methods are that they all
support identifiable trade transactions.
1. Trade Loans
Trade loans occur when a lender grants a loan to a corporate or bank client to finance clearly
defined trade transactions. The proof of the underlying trade transaction comes either from
local regulatory practice (e.g. currency control), documentary evidence, or from the way the
transaction is structured. Such evidence may include shipping documents or other documents
that demonstrate the financing to be consistent with the goods or services imported/exported
(e.g. tenor of loan is consistent with goods being financed).Loans typically come from a flexible
short-term borrowing facility and may facilitate a pool of trade transactions (e.g. bank loans)
or be linked to single transactions. Loans may be made against either corporate risk or bank
risk.
A. Import Loans – provide financing for the importation of goods or services. These loans are
often a bridge to enable importers to pay suppliers on a timely basis, while providing
additional time to convert imported goods into cash receipts. Import loans are often made
against evidence of shipment and/or supplier invoices.
B. Export Loans – provide financing for the exportation of goods or services. Export loans are
typically needed to fund activities required prior to shipment. Loans may be made to banks to
enable them to fund pre-export activity on behalf of their customers. Some banks may consider
LC discounting a form of export loans, while others measure LC discounting separately.