COMCEC Trade Outlook 2018
51
Another issue in trade financing is the type of payment. There are several types of payments in
international trade such as open account, Letters of Credit (L/C), payment in advance and
documentary collection. Most common type is L/C, which is the most secure way for both
exporters and importers. This instrument is particularly suitable for international contracts that
are difficult to enforce and riskier than domestic contracts because the creditworthiness of the
foreign counterparty is hard to evaluate (Contessi and de Nicola 2012). L/C’s are commonly used
in trade among the developing countries including the LDCs. Another instrument, namely open
account is mostly used in trade among the developed countries and in exports of SMEs to large
firms. Malouche (2009) cites SMEs weaker bargaining power position versus large firms as the
reason for their use of open account in exports.
Trade finance, provided by commercial banks, export credit agencies, multilateral development
banks, suppliers and purchasers, has grown by about 11 per cent annually over the last two
decades (UNESCAP 2002: 4). However, in many developing countries, firms still face difficulties
in getting trade finance. The trade financing gap is especially noticeable in the least developed
countries, where the financial sector tends to be heavily transnationalized and strongly risk-
averse, and where a significant share of deposits are invested in very low-risk instruments,
including short-term liquid assets and foreign government bonds (UNCTAD 2012).
Since the global crisis access to trade finance for exporters in the developing countries has
become more expensive and harder. WTO 35 notes that global trade finance transactions are
estimated to be 10 trillion dollars and global trade finance gap is estimated to be around 1.5
trillion dollars where 60 per cent of unmet demand is from small firms in developing countries.
Trade finance opportunities in many OIC Member States are underdeveloped. Firms, in
particular the SMEs face difficulty in accessing trade finance opportunities in competitive terms.
For the Middle East and North African Countries (MENA), AMCML (2012) cites the reasons for
the unwillingness of the Banks to engage in trade finance business as low revenue margins and
identifies the factors leading to lower profit margins as the following:
- Shift of global trade from traditional trade finance products, such as L/Cs and guarantees,
to open accounts that require less banking intervention.
- Reduction in the average value of trade finance transactions due to increased activity of
small- and medium-sized enterprises (SMEs) in the international trade.
In many OIC Member States, the SMEs play an important role in total exports. However, they
face more difficulties than larger firms to get finance. Firms have not traditionally relied too
much on traditional trade finance instruments for export finance because either the local
banking sector and institutions are poorly developed to start with, or banks find it difficult to
find creditworthy customers (Malouche 2009: 19). This Situation is similar in most of the
Member States inMENA. MENA banks quote the lack of SME transparency and the weak financial
infrastructure (weak credit information, weak creditor rights and collateral infrastructure), as
the main obstacles for further engagement in SME finance (Rocka, Farazi, Khouri and Pearce
2011:3).
Out of 57, only 23 OIC Member States have established national export-import banks to provide
trade finance for their firms. On the other hand, for even these countries, due to inadequate
financial resources, shorter maturity and limited types of products, many firms still face
difficulties in exporting and competing in the foreign markets. 36
35 WTO statistical Review, 2018
36 COMCEC 2015 “Increasing the Role of Eximbanks/Export Credit Aagencies in the OIC Member States”