COMCEC Trade Outlook 2017

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

(UNESCAP 2002: 61).

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).

The situation worsens during the crisis periods. For example during the global economic crisis

in 2008, getting trade finance for exporters in the developing countries became more expensive

and harder. The results of the survey conducted by the World Bank in 2009 on 14 developing

countries demonstrated how difficult the situation was. Overall trends from the survey indicate

that trade finance has been noticeably constrained post-September 2008 as illustrated by the

increased pricing of the trade loans and short-term financing, shortened payment terms,

requests for more guarantees, and tightened counterparty bank requirements. (Malouche 2009:

22).

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