EBI Publications

Financial Infos Issue (18) Trade Finance is a specialized field of finance that provides different tools for financing the short-term facilities of international trade transactions. Trade finance tools aim to secure the position of traders (sellers/buyers), ensure the receiving of payments/ proceeds by the sellers and receiving the subject goods and/or services and/or performances by the buyers. The term Trade Finance comprises of four main elements: - Payment Facilitation; Secure payment in both prompt and safe manners across international borders of different legal and commercial laws. - Financing; Provide and offer finance to one or all party(ies) involved in the trade transaction. - Risk Mitigation; Mitigate risk under trade transactions. - Provision of information; Provide detailed and accurate information to all the parties about the transaction. Trade Finance is of vital importance to the global economy, with the World Trade Organization’s estimates showing that 80 to 90% of the global trade is reliant on this method of financing. The plausible explanation for this is the growing importance of trade finance in the light of the recent widespread of financial uncertainty resulted from the successive crisis the world had witnessed. Examples of those crises are the financial crisis, the Euro Debt crisis and the Arab spring revolutions. These crises increased the need for the protection provided by trade finance to mitigate certain countries’ political and economic risks as well as shortages of liquidity. In fact, trade finance minimizes the exposure to two main levels of international trades’ risks: micro and macro. Starting by micro risks, they cover the financial (credit) and operational risks associated with the business at the individual’s level. On the other hand, macro risks pertain to external factors such as political, foreign exchange, transportation and industrial uncertainties. Trade Finance Tools; include a wide range of payment arrangements, products and services that can serve and satisfy the needs of traders, banks and financial intermediaries or institutions to facilitate the settlement of the trade transactions. Said arrangements may include, but not limited to, the following:- - - Letters of credit (L/Cs) including confirmation - - Pre shipment finance for exporters (Financing export contracts) - - Import financing (Finance and Re-finance) - - Invoice financing (Discounting and Forfaiting) - Collections - Letters of Guarantees - Documentary Collections Trade Finance Tools / Instruments Trade financial instruments include two major types: - Traditional Instruments - Modern Instruments Trade Finance