Although international trade has been in existence for centuries, trade finance - which is basically short-term credit - developed as a means of facilitating it further. In fact , you could say that the widespread use of trade finance is one of the factors that has contributed to the enormous growth of international trade.
Trade finance relates to the process of financing certain activities related to commerce and international trade and includes such activities as lending, issuing letters of credit, factoring, export credit and insurance. Financial arrangements for imports and/or exports are quite a bit more complex than those for domestic trade.The most common forms of trade finance are letters of credit. These are documents issued by the importer's bank - the issuing bank - and act as a means of assuring their commitment to pay the exporters. Once a letter of credit has been issued, the exporter can redeem payment by providing the required documentation to the confirming bank.
Simply put, an exporter requires an importer to pay in advance for goods shipped. Meanwhile, the importer naturally wants to reduce risk by asking the exporter to document that the goods have been shipped. To achieve this, the importer’s bank assists by providing a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan to the exporter on the basis of the export contract. Even though trade finance is typically short term and self-liquidating in nature, the traded goods in question are often used as a form of collateral.Ongoing dialogue across the industry is prompting a rise in awareness around trade finance as a result, as well as banks and financiers, stakeholders in trade finance include importers and exporters, insurers and export credit agencies as well as other service providers.Companies involved in foreign trade come across a number of many financial and logistical challenges in both the funding and landing of their goods in South Africa. These challenges include the financing of the goods, the movement of goods and the exchange rate risk.
Indeed, the fact that Small and Medium Enterprises (SMEs) have been identified as productive drivers of inclusive economic growth and development in South Africa presents great opportunities for financial services companies to provide retail banking services to individuals, as well as trade finance to SMEs.This is where banks come in handy. Different banks in South Africa have tailored their trade finance offerings to suit clients needs.So for instance, Nedbank refers to its trade finance arm as its Global Markets team. Through it the bank aims to be the solution provider and execution house of choice to all its valued clients and stakeholders.According to the bank’s website, “The Global Markets offering includes a foreign exchange business that provides the practical solutions and discerning advice our clients need to facilitate uncomplicated trading in the currency market.” They also provide a consolidated equities business that provides solutions, selective research, execution and innovation.Nedbank’s clients include local fund managers, asset managers, pension funds, life companies, other banks, proprietary investors, hedge funds, government, parastatals, municipalities, corporates, business banking clients and crossborder borrowers.At another bank, Bidvest, they say, “As an exporter, you may apply for a trade finance facility on the basis of the export contract you are lending against.
"Importers have to manage both cash flow and currency fluctuations. Overseas suppliers expect part or full payment before shipment, while a local importer may have to wait for some time before on-selling the wares and restoring cash flow. In the interim, other fees have to be met, such as shipping costs, marine insurance and forwarding and clearing. We can pay an overseas supplier on your behalf whilst you are waiting to resell goods. The availability and cost of trade financing is strongly affected by four types of risks: economic or commercial risk, exchange rate risk, transportation risk and political risk. These risks associated with international trade are either much smaller or do not exist in domestic trade.Trade finance appeals to bankers because it offers a good return for a low-risk asset class. Trade finance provides an opportunity for investors to produce yield without taking on excessive rate and credit risk.
This state of affairs has come about partly because of the nature of the underlying transactions, partly because of the high priority attributed to the settlement of trade debt, and partly because of well-tested and flexible risk mitigation options.Raising awareness with institutional investors is therefore a key need for increasing an appetite for trade finance. Advocacy from the trade finance industry is needed to continue to raise awareness among investors.One way to do this is to list the attractions of trade finance as a compelling investment option, with high yields and low volatility. As such it presents an interesting opportunity for investors who want to generate yield without taking on excessive rate and credit risk.According to an article by Alexander Malaket, President of OPUS Advisory Services and Deputy Head of the Executive Committee of the International Chamber of Commerce’s Banking Commission, “Certainly, contrary to popular perception, trade finance is, in fact, low-risk.”
The low-risk nature of trade finance means that for global trade flows to increase and for financing to be available to SMEs and to emerging markets – where the trade finance gap is most severe – an increased global understanding of trade finance and constructive dialogue with regulatory authorities must continue. Malaket said, “Ongoing efforts to demonstrate the favourable credit risk profile of trade finance products can also be complemented by the addition of a wider range of products and types of risk.”