COMCEC Trade Outlook 2019

exporting firms with the ability to cover their expenses until they get the payments from the

importers.

There are various risks faced during the international trade such as political and commercial

risks. These risks are covered by export credit insurance and export guarantee programs. While

export credit insurance protects exporters, guarantees protect banks offering the loans.

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

notes that global trade finance transactions are

estimated to be 10 trillion USD and global

trade finance

gap is estimated to be around 1.5 trillion

USD 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

UNESCAP 2002: 61

WTO statistical Review, 2018