trade finance

The import/export trade is a global business that sees buyers and sellers interacting across international borders and diverse jurisdictions. Often, the two parties may not even know each other, or even trust one another completely. This is where a Commercial Letter of Credit (LC) shines as it provides a regulated, enforceable and guaranteed mechanism to ensure payment for delivered goods.  

What It Does 

An LC, through the use of a bank as trusted a 3^rd party intermediary, not only guarantees payment for goods supplied, but also works to ensure that the seller cannot directly obtain the payment without fulfilling the requirements of the buyer.  

Thus, an LC is probably the only trade finance instrument that equally minimizes risk for both parties to an international trade transaction. The seller must deliver the goods in full to claim the payment, and the buyer must pay to the seller the full amount agreed upon (the issuing bank guarantees this) no sooner the goods are supplied in full. Usually, this requirement is met upon successful consignment of the goods and presentment of the shipping documents, such as the Bill of Lading, to the bank.  

Importance for SMEs 

Guarantee of Payment – For small export businesses, a single delayed or lost payment can be irreversibly damaging. Therefore, using an LC means that this risk is completely avoided. The converse is true for small import businesses as well; a single failure of a seller to deliver on a large shipment can be devastating.  

Access to Credit/Improved Cash Flow – An LC is typically a negotiable instrument, thus allowing the exporter to use it as collateral against which to borrow funds for short term needs to fulfil the shipment. This allows for much improved cash flows for the exporter and prevents them from obtaining long term debt to fulfil working capital requirements, thus aiding them to maintain a healthier financial position. For importers too, based on their arrangements with their bank, there is significant room for freedom of movement with regard to cash flow and working capital needs, when using an LC. 

Choosing the Right Partner 

When you decide to enter into an international trade transaction governed by an LC, it is necessary to choose the right partner. An international bank, located in a financial centre, with an experienced team, is the best choice. In this digital age, you should also look for a bank that has embraced the latest digital technology such as blockchain, enabling smart contracts, electronic LCs and cutting-edge international settlement mechanisms.

At Euro Exim Bank, we are proud to be a leader in the sphere of trade finance, providing relevant solutions for today’s times using best-in-class digital technology. Based in London, we are ideally positioned to be your trade finance partner in an ever-changing world and burgeoning global marketplace.  

A shocking report by the Rainforest Action Network reveals that the world’s 60 biggest banks have collectively provided financing to the fossil fuel industry amounting to over 3.8 trillion dollars, in just the 5 years since the signing of the Paris Agreement alone. While the COVID-19 pandemic has seen demand for energy fall, funding for fossil fuels maintains its upward trajectory. To illustrate, the volumes of finance provided to the industry in 2020 (the peak of the pandemic disruptions), was more than that provided to the industry during either 2016 or 2017. This has prompted calls for banks to sincerely look at cleaning up their fossil fuel financing and concentrate more on green energy.

G7 Ministers Meet to Discuss

Against this backdrop, G7 finance ministers met during mid-April 2021 to discuss expanding the private sector’s role in climate finance ahead of COP26, in an attempt to guide banks towards cleaning up their financing of fossil fuels. The discussion highlighted the need for amplifying the role of the private sector in financing climate action. Companies and banks are being urged to work together to make the switch to more sustainable forms of energy, which is crucial if the targets of the Paris Agreement are to be met.

The Right Moves Are Being Made

Many firms are demonstrating strong commitments to adopting and supporting climate initiatives. For example, BP has vouched to cut oil and gas production by 40% by 2030, while several other firms and banks, such as Shell, Citi, Total and Barclays have committed to zero green house gas targets by around 2050. Although, they are yet to publish concrete plans explaining how they will achieve such lofty ambitions.

Demonstrable Progress

Financiers have also been working together to establish more robust climate policies, while reducing their support for fossil fuels in recent years. This is not mere rhetoric as the figures certainly back up these claims. The cost of financing for renewables driven projects has been dropping steadily, while the cost of borrowing for ‘dirtier’ projects, such as coalmines and power plants, has shot up by 40%. However, similar effects are yet to be witnessed in the oil and gas sectors.

Concerted Effort Will Determine Success

The main target of the Paris Agreement is to limit global heating to under 2 degrees Celsius. If the world is to achieve this goal, it will require that governments, banks, and the private sector work together to create an environment that prioritizes, supports, and fosters the financing, development, and propagation of renewables driven projects over fossil fuels.

Trump may have started the trade wars, but Biden is transforming them into the tech wars. Contrary to pre-election posturing, the Biden administration has made competition with China a new front in the struggle between democracy and autocracy. Thus, pushing the US and China towards an all-out “tech war”.

The US is blocking semiconductor exports to China, while China is limiting the US’s access to rare earth minerals, which are essential in the manufacture of many electronic components. In addition to the US, many other countries too have banned Huawei from operating in their markets. Tik Tok is another point of contention, with India outright banning the app and many other countries mulling the same course of action.

A Decoupling in the Offing?

The tensions between the US and China have resulted in many speculating about a possible decoupling of the two largest economies in the world, and what that may hold for free trade. The US and Chinese economies have become deeply intertwined over the last two decades, with China becoming the US’s factory for all things and the US the largest market for Chinese products.

In the wake of Trump’s “America First” policy and the resulting trade war, there were calls to decouple the two economies, to reduce US reliance on China-centric supply chains. However, this was initially ignored and dismissed on the grounds that the two economies were inextricably linked. However, both the major political forces in the US have found common ground in terms of a limited decoupling, which already exists to an extent in terms of cyberspace; with Facebook and Google banned in China, while the US attempted to ban or restrict access to apps like TikTok.

A Delicate Balance

Whether a decoupling will occur or not is left to be seen. However, it is very unlikely that a major decoupling will take place in the near future. While the two economies rely on each other, they are also keen to safeguard their own interests and conflict is in neither of their best interests. Still, it is likely that we will continue to see posturing and measures from both sides as the tech wars continue.Whether a decoupling will occur or not is left to be seen. However, it is very unlikely that a major decoupling will take place in the near future. While the two economies rely on each other, they are also keen to safeguard their own interests and conflict is in neither of their best interests. Still, it is likely that we will continue to see posturing and measures from both sides as the tech wars continue.

Traditionally, investors and governments have faced a significant, yet a little-known obstacle, when sourcing financing for renewable energy projects. The cost of borrowing for such projects has usually been higher than for projects involving fossil fuels such as coal. This has increased the cost, and sometimes reduced the viability, of renewable energy projects. However, in a spot of good news for the planet, and everyone on it, the cost of borrowing for renewable has reduced significantly. So much so that it is now cheaper to borrow for a renewable energy project than for a coal-driven project.

Supply and Demand

The reason behind this is, essentially, simple. As renewable projects have grown in popularity and their benefits, risks and business models have become better understood, the supply of financing for them has increased. Consequently, as we understand the serious risks of traditional energy, the supply of financing for such projects has declined. The result; it has become cheaper to borrow for renewables than for traditional energy.

The Figures

A study of loan spreads over the past 20 years, shows that investors are choosing to invest more in greener energy while showing less interest in fossil fuels. Take for example, a solar project. Investors are usually looking to make returns of at least 10% to 11%, which is reflective of the low risk of these investments. On the other hand, the returns needed to justify the risks of heavy pollution generating projects, such as coal plants, has now jumped to over 40%.

When looking at wind energy and comparing the periods 2007-2010 and 2017-2020, the spread on loans for renewable has fallen by an average of 12 points for onshore wind and 24 points for offshore wind. Coal mines and power stations on the other hand saw their loan spreads increase sharply by 38% and 54%, respectively, during the same periods. Furthermore, from 2015 to 2020, the cost of photovoltaic, onshore wind and offshore wind has fallen by 20%, 15% and 33% respectively, when comparing with the period from 2010 to 2015.

A Green Win is a Win for All

As it becomes cheaper to finance renewable-driven projects, the economic incentive to implement them will only see the use of renewable rise and reduce our dependence on fossil fuels. This will ensure further adoption and promotion of renewable, much to the relief of the planet and our communities.

At the end of March 2021, the headlines were full of stories about the ship, the Ever Given, that had managed to get itself stranded in the Suez Canal, completely blocking this important trade route for all traffic.

After a massive, multifaceted operation to dislodge the ship from the banks of the canal, the Ever Given was finally freed and re-floated on the 29^th of March and, within a short time, the canal resumed operations. However, the impacts of this incident will continue to echo throughout the world economy for months to come, and the Ever Given, despite being freed is certainly not free to leave.

Seizure and Insurance Claim

The Egyptian government, which controls the Suez Canal has seized the Ever Given and says it will not allow the ship to leave until the owners have paid compensation and an investigation into the incident is complete.

Egypt is demanding at least 1 billion dollars as operational costs incurred to free the ship. This figure also includes damages for loss of transit fees, which is a major source of foreign currency revenue for Egypt, along with damages for “loss of reputation” and other costs relating to the 100s of ships that were delayed or prevented from using the canal. Over 800 people worked in the operation to release the ship and equipment was brought in from outside too, and work continued around the clock to release the Ever Given, which weighed over 200,000 tonnes. 

The ships insurers however have rejected these claims, saying that they are unjustified and excessive and thus the ship is likely to be detained in the Great Bitter Lake or Port Said until the issues are resolved. The Egyptians have expressed a preference to settle the matter out of court and the ship’s operators/owners are not unwilling to agree to compensation, however no agreements have been reached as at the time of this writing, while lawsuits have not been ruled out.

A Stranded Crew

While the ship’s 25-member crew will likely continue to be paid, they remain stranded in Egypt at present. An extended dispute could see the crew languish in Egypt with continued pay in jeopardy. The ILO has noted that this trend of “seafarer abandonment” is witnessing an alarming rise, particularly as a result of the global pandemic, with over 250 known cases reported as of April 2021.

On April 28th, 2021, the trade window for the 14^th edition of the Indian Premier League (IPL), officially opened. This special window, allows teams to sell, loan, or trade players to other franchises, so long as the player in question is willing.

Some interesting trades have already taken place with Robin Uthapa moving from the Rajasthan Royals to the Chennai Super Kings, although he has still to play a game for the Men in Yellow. Daniel Sams and Harshal Patel are also now mainstays of the Royal Challengers Bangalore playing XL.

Uncapped players have the most to gain from the midseason trade-window, as they may have better opportunities to shine amongst their new teams. Here are some of the benefits such players may enjoy.

An Opportunity to Rub Shoulders with the Greats

Many young players have had the opportunity to work closely with the cricketing titans of the world, thanks to the IPL. Take the Kolkata Knight Riders, for example. Kamlesh Nagarkoti, Shivam Mavi and Prasidh Krishna have learned from the legends Pat Cummins and Lockie Ferguson, while Shubman Gill and Nitish Rana drew inspiration from Dinesh Karthik and Eoin Morgan.

Uncapped players will have opportunities to work alongside some of the world’s greatest cricketers, providing them with the opportunity to learn, grow and hone their skills.

Exposure to Different Coaches and Support Staff

The IPL is not just full of quality players, it also offers players, especially the uncapped ones, a chance to work with a variety of support staff and coaches.

For example, the Sunrisers Hyderabad have Muttiah Muralitharan, Tom Moody and Trevor Bayliss to bank on, while the Punjab Kings can draw on the talents of Wasim Jaffer, Anil Kumble, Andy Flower and Jonty Rhodes.

A number of notable players have taken their games to the next level, assisted by exposure to world class talents at the IPL; Ricky Ponting and Pravin Amre coached Prithvi Shaw to emerge as a T20 batsman, while the Chennai Super Kings have relied on Stephen Fleming to guide their batsmen.

A Chance to Shine

The reason many players are happy to switch franchises is due to a lack of playing time, which they may get as part of another franchise instead. This may result in more opportunities for upcoming players to showcase their talents and prove their worth.

Harshal Patel is an excellent example. He did not get many chances to shine as part of the Delhi Capitals, but now a single season on, he is the RCB’s premier death bowler and proud owner of the IPL 2021 Purple Cap. All due to the right trades being made.

International trade has been hit hard as a result of the global pandemic. The trade finance gap has widened and SMEs are disproportionately affected. Many are unable to borrow from legacy banks as these institutions have either become extremely risk-averse and, or as usual, are reluctant to provide funding to companies that have smaller balance sheets.

In these unprecedented times, when legacy banks are well behind the curve, it is time for SMEs to truly look at alternate trade finance providers such as international export-import banks, like Euro Exim Bank, and other trade finance and factoring companies. There are many advantages to working with such service providers and, in this article, we will look at those that are most beneficial to SMEs.

Quick Turnarounds & Better Treatment

Legacy banks are usually slowed down by legacy systems and archaic processes. They have little room for agility and quick turnaround times, which is crucial in the present trade environment. Furthermore, unlike legacy banks, focused trade finance providers are not looking to cross-sell other unrelated products. Trade finance is not simply a small business component for these alternate providers, it is their main business. Thus, you will receive better treatment and enjoy a more focused approach.

Favorable Accounting & Balance Sheet Enhancement

When you discount receivables at a legacy bank, your cash-in-bank and your short-term borrowings increase, effectively having zero effect on your balance sheet. In fact, in the event of a buyer default, the legacy bank will pursue a dual recourse recovery mechanism, which means more potential debt for your business.

On the other hand, when you work with an alternate trade finance provider, through a factoring arrangement, for example, you will enjoy increased cash-in-hand and your receivables are removed from your balance sheet. Many such institutions will offer these services on a non-recourse basis, meaning that, in the event of a buyer default, they will file an insurance claim against the buyer, leaving the seller out of the matter entirely. Thus, making it an excellent way for SMEs to manage risk.

Cross Border Support & Reduced Need for Collateral

Alternative service providers will usually function across borders, while legacy banks will usually focus only on their domestic market. Furthermore, unlike legacy banks, factoring arrangements and other trade finance mechanisms provided by alternate providers do not have huge collateral requirements, enabling small businesses to easily access financing.CategoriesTrade FinanceTagsImport export, trade finance

The International Relations Subcommittee of the African National Congress (ANC), South Africa’s governing party, held a virtual Umrabulo (panel discussion) on Sunday 27^th June 2021, where various matters were discussed. Of particular importance were the comments by Linidwe Zulu, South Africa’s Minister for Social Development with regard to Africa’s low levels of intra-Africa trade being rooted in the continuity of colonialism.  

Zulu remarked that Africa is home to 17% of the world’s population, of which 60% is under 25 years of age, thus accounting for 3% of the world’s GDP and endless promise. Then she went on to say that despite this, “with 3% of the world’s trade [Africa] claims only 2% of the world’s manufacturing output compared with Intra-Asia Trade, which is 52%; Intra-North America Trade, at 50%; and Intra-EU Trade, which is at 70%. Intra-Africa Trade is small, covering only 16 to 18% of traded goods. Among other factors, the low level of Intra-Africa Trade results from the continuity of colonialism into present Africa and the exclusion of the informal sector by market research methodologies.” 

Zulu went on to say that Africa must continue the work of international relations, regardless of the COVID-19 global pandemic. She further stressed that Africa must, “Learn lessons from the international environment and everything that is happening, including how the world is trying to deal with Covid-19.” 

The other speakers on the panel included Alvin Botes, Deputy Minister of International Relations in South Africa and chairman of the ANCs Subcommittee on International relations, along with Wamkele Mene and Peter Katwesige.  

Mr. Botes stressed the importance of the African Continental Free Trade Agreement as an important repository in an effort to negate poverty in South Africa and the African continent as a whole. Addressing the Umrabulo, he also stated that the purpose of the session was to reimagine Africa within a globalized world order that has become volatile, uncertain, complex and ambiguous. He also stressed the importance of vaccination drives stating that, “As we gather today, below 2% of Africa’s population has been vaccinated and approximately 20 African countries are in the middle of the third wave.” 

Helping to Create Opportunities for Intra-Africa Trade 

African businesses often find it difficult to obtain trade financing and other support they need to engage in easy cross-border intra-African trade. This is due to many reasons which include politics, a lack of cross-border relations between banks and also excessive regulation. Therefore, at Euro Exim Bank, we have made the entire African continent a focus area for us. We are creating opportunities for intra-Africa trade through easy access to world-class trade finance solutions. As a reputed international bank specialized in trade financing, we are ideally positioned to provide even the smallest businesses with the necessary support they need, unlike traditional local banks.