Trading places


5 December 2011


The Trade Facilitation Programme aims to promote foreign trade to, from and within south-east Europe and the CIS. Rudolf Putz, deputy director of financial institutions at the European Bank for Reconstruction and Development, describes the impact it has had on the region.


Trade finance veterans will remember when a letter of credit (L/C) was still a piece of paper, often hand-delivered by a banker to his client, together with a detailed explanation of how to deal with it.

Times have changed: electronic communication has replaced paper, and trade finance instruments are instantly available wherever clients need them. As a result, most commercial banks in the developed world have centralised their trade finance operations and are now servicing their trade finance costumers from regional centres or their headquarters However, as a result of global mergers, service centres and headquarters of commercial banks are also moving, and in many cases even farther away from their customers. Many commercial banks argue that trade finance operations are labour-intensive and expensive, and to save cost they have to centralise their operations.

Gone are the times when exporters and importers enjoyed the service of trade finance specialists in local branches; today, clients have to look for a bank that is still ready and able to provide basic trade finance services. If importers and exporters are lucky, they may still find some help in the closest capital city. Meanwhile, a few US and European banking groups have moved part of their documentary credit operations to low-cost trade finance service centres in Asia or the Middle East, many small and medium-sized regional banks in the developed world are no longer active in trade finance.

A new trade

What does this development mean for importers and exporters in mature markets? Large corporate clients with good credit-standing and significant international import and export volumes are still target clients for large international banking groups and have no problems securing risk cover and financing for their international trade business. However, for many SMEs it has become increasingly difficult to find banks that would still be ready to cover their trade finance needs.

While trade finance seems to be a shrinking business in mature markets, the picture is different in emerging markets. Access to trade finance is becoming increasingly important for importers and exporters in emerging markets with high economic growth, resulting in fast-growing foreign trade and demand for trade finance. Contrary to their counterparts in more advanced countries, banks in emerging markets are therefore still keen to set up trade finance departments or increase already existing trade finance operations.

A good example of a new trade finance market is Kosovo. In October 2011 the country's Banka per Biznes issued a payment guarantee to Rabobank Netherlands for €23,000, covering imports of cloth from the Netherlands by a small Kosovan textile producer. Since Kosovo is not yet connected to SWIFT, the payment guarantee was issued in the form of a letter, while the European Bank for Reconstruction and Development (EBRD) received a letter from Kosovo with a request to provide risk cover to Rabobank under the EBRD Trade Facilitation Programme (TFP).

The EBRD was established in 1991 following the collapse of communism to aid the transition from centrally planned to market economies in CEE countries and the CIS. The TFP, meanwhile, aims to promote foreign trade to, from and within south-east Europe and the CIS (the EBRD countries of operations). Through the programme, the EBRD provides guarantees to international confirming banks, taking on the political and commercial payment risk of international trade transactions undertaken by banks in the countries of operations (the issuing banks).

"Over 700 confirming banks throughout the world have joined the Trade Facilitation Programme."

The programme can guarantee any genuine trade transaction to, from and within the countries of operations. More than 100 issuing banks in 20 countries participate in the programme and there's a limit of €1.5 billion. In addition, more than 700 confirming banks throughout the world have joined the TFP, including 150 in 24 of the EBRD countries of operations. The programme strengthens the ability of local banks to provide trade financing while giving entrepreneurs in Eastern Europe and the CIS the support they need to expand their import and export trade.

Since start of the TFP in 1999, the EBRD has facilitated more than 11,000 transactions worth €7 billion.

Smaller countries

The appetite of confirming banks to take direct risk for trade transactions continues to grow in the advanced and intermediate transition countries such as Romania, Bulgaria or Croatia. While the main users of the programme in 2011 were Russia, Kazakhstan and Ukraine, the TFP is especially key in less advanced countries where commercial banks continue to be cautious about taking direct risk. Smaller countries that use the TFP extensively are Armenia, Azerbaijan, Belarus, Georgia, Macedonia, Moldova and Tajikistan.

The programme is especially useful to smaller, less advanced countries where short-term tenors for the import of consumer goods and commodities are in demand. In more advanced countries the programme also allows for the longer tenors required for the import of capital equipment goods, and bid and performance bonds, which assist investment and the redevelopment of the region.

One goal of the TFP is to support intra-regional trade, helping not only job creation, but also cooperation and understanding between countries. It supports the restoration of traditional trade links between the bank's countries of operations and, since the start of the programme, the number of intra-regional transactions has been growing constantly, with more than 300 financed in 2011. While Western commercial banks are now ready to take their own risk on major issuing banks under the programme in Slovenia, Croatia, Romania and Bulgaria, banks in these countries have also begun to use the TFP as confirming banks in intra-regional trade finance transactions with less advanced countries.

Small and medium enterprise development is also a fundamental objective of the EBRD, as SMEs can become engines of economic activity in emerging nations if developed on a broad basis. In fact, SME transactions form the majority of TFP business - 87% of all TFP guarantees issued in 2011 covered trade transactions under €1 million.

"Trade finance training is being provided to member banks in the less advanced countries."

The Governments of Switzerland, the Netherlands, Norway, Austria and Germany support the TFP through risk-sharing funds. These funds support the programme's activities in south-eastern Europe and Central Asia and enable the EBRD to provide longer tenors and take higher exposures in trade transactions.

Trade finance training is being provided to member banks in the less advanced countries. The aim is to enhance trade finance skills in the participating banks through training in all aspects of trade finance instruments, structures, risk and business development. In 2010 and 2011, the EBRD organised training courses and workshops for more than 300 bankers from 65 banks and 15 countries, providing them with knowledge in documentary and structured trade finance transactions. These training courses and workshops were financed by the Governments of Norway and Taipei China and EBRD shareholder funds.

The TFP has contributed to institution building and the development of issuing banks' trade finance capabilities. It has made good progress in contributing to the process by supporting a wide range of trade transactions and enabling exporters to develop new markets. It also aims to provide liquidity to the system, assist local banks in developing relationships with Western banks and improve their trade finance capabilities. The TFP is now an established business with worldwide coverage and a strong reputation for responsiveness and efficiency. Average transaction turnaround time is less than 24 hours, and requests for limit availability, pricing and advice on structure receive immediate attention.

The TFP helps less advanced countries achieve growth, particularly through intra-regional trade, which fosters cooperation between countries.
Rudolf Putz is head of EBRD's Trade Facilitation Programme and has more than 25 years' experience in financing trade with eastern European and CIS countries.