one of the oldest forms of lending, trade finance facilitates the cross border transfer of goods. this type of financing is utilized by exporters and/or importers to assist them in covering any liquidity gap within their trade cycle
Trade Finance, at its core, encompasses a combination of four primary elements:
- Enables secure and timely cross border payments
- Provides liquidity through financing of the Exporter, the Importer or both
- Supports mitigation of risk through structures that transfers credit and repayment risk from financed Exporter's balance sheet to a higher quality Importer's
- Assists in the transfer of information
The evolution of Trade Finance techniques and the liquidity measures they provide have made it an essential driver of global economic growth.
- Approximately 90% of global trade transactions supported by global trade finance *
- Lack of financing resulting from 2008 credit crisis triggered reduction in global trade volume, but global trade flows rebounded strongly in 2010, with exports surging by 14.50% **
- During 2009 global export volumes reached USD 12 trillion and by 2014 USD 19 trillion representing a 10% CAGR**
- Global trade volume has increased exponentially and historically outpaced global GDP growth ***
- 2015 global trade forecasted to increase 2.8% and 3.9% in 2016, in line with 20-year historical average **
- The shortage of trade finance for international trade remains a major challenge for economic recovery and development
- The 2008 credit crisis resulted in increased tightening of capital for banks
- Basel II and Basel III (regulations on capital) have and will continue to drive banks focusing on lending to larger Exporters, leaving SMEs (majority of global market) with limited access resulting in a wider "trade financing gap"
- Numerous bank mergers resulted in a decrease in aggregate lending to global trade creating a unique opportunity for alternative financiers to enter the market.
- Exporters and Importers, especially SMEs in Emerging Markets, continue to rely on loans in local currency or overdrafts, restricting their ability to trade at optimum levels during these challenging times
Trade Finance - Asset Class
While the majority of corporate loans are used for general purposes, Trade Finance loans are usually linked to a specific transaction and are repaid at the culmination of the trade.
Trade Finance as an asset class has experienced historically low default and loss rates.
- Short Term Trade Finance products – default rate at least 10x lower than all corporate credit products rated by Moody’s
- Medium-Long Term Trade Finance loans have a higher risk profile, around 1.11%, they still carry significantly lower risk than the average default risk across all Moody's rated deals from 2008 to 2011, which is 2.41% - (ICC 2013 Global Risks Trade Finance Report)
- Average recovery rates on defaulted transactions remain as high as approximately 60% **
* International Trade Centre (ITC)
** World Trade Organization (WTO)
*** International Monetary Fund (IMF)