Executive Overview of Trade Finance by Oxford Credit Banque Limited (OCB)

 Oxford Credit Banque’s study explores the structure and recent developments in the global market for trade finance and the interplay between trade finance and foreign trade shifts. In particular, it measures the size and evolution of the market, sheds light on the performance and effect of trade finance during recent episodes of global market funding stresses, and looks at how ongoing structural changes can impact the potential resilience of the market. The primary results are:

The function of bank-intermediated Trade finance 

Two important roles are performed by bank-intermediated trade finance (or trade finance, in short): providing working capital linked to and in support of foreign trade transactions and/or providing means to reduce the cost of payment. Inter-firm trade credit is the primary alternative to bank-intermediated goods. The ability of companies to lend credit directly is enabled by the ability to discount their receivables and the availability of funding not directly related to commercial transactions, as well as the ability to reduce payment risks through the purchase of commercial credit insurance.



Coverage information

For the calculation of the size and composition of the trade finance sector, there is no systematic source. Statistics in many CGFS member countries capture aspects of bank-intermediated trade finance, but scope varies considerably across countries and is very limited in many cases. If these data are coupled with information from other sources, such as trade associations and SWIFT, the general characterisation of the scale, structure and patterns of the global market can be encouraged, but the methodology requires considerable interpolation and inference. There is very little insight into developments in pricing.

The scale and composition of the funding market for trade

The Group reports that approximately one third of global trade is directly funded by trade finance, with letters of credit (L/Cs) covering approximately one-sixth of total trade. However the proportion varies widely at the level of the country: bank-based products are mainly used to fund trade involving emerging market economies (EMEs), particularly in Asia. Global banks tend to provide about one-quarter to a third of global trade finance, and almost half of their exposure is to companies in emerging Asia. With 80 percent of L/Cs and a high proportion of the operations of global and local banks denominated in dollars, trade finance appears to be much more dollar-denominated than global trade. If banks' dollar financing lines are curtailed, the capacity of global and local banks to provide trade finance can be hampered, as seems to have been the case in some cases in 2008/09 and again in 2011/12.

Methods and changes in market structure

Over the last 10-15 years, growth in trade finance has continued to lag behind growth in nominal trade in many countries. In the decreasing severity of L/C use this trend is most evident. Global banks see supply chain finance as an important new area of operation and a focal point of current rivalry, in which banks control the processing and financing of receivables within a network of firms.

The trade finance industry is experimenting with new mechanisms and products to allocate exposures to trade finance to non-bank investors, citing new regulatory demands and high marginal costs of equity capital. The scope of this operation has been limited to date, with take-off not appearing imminent. Expanding the position of non-bank investors can require a major effort to educate investors and regulators and to standardise trade finance products more effectively.

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