The three main areas are micro risks, macro risks, and product risks.
Micro risks are encountered at the individual customer level and are confined to the
financial (credit) and operational risks associated with their business.
Macro risks can be defined as those external factors which have a tendency to impact
adversely on a customer's international trade business. Some of the more frequent
problems in trade financing are caused by a lack of appreciation of country risk,
foreign exchange risk, industry risk, bank risk and fraud.
As international trade takes place across borders, with companies that are unlikely
to be familiar with one another, there are various risks to deal with. These
Bank Risk: The world is full of banks of varying degrees of stability and
strength and indeed the business pages of major magazines and newspapers are filled
with articles on bank performance and bank collapse. When financing an importer or
exporter, a bank often looks to the security of a backing document issued by another
bank, be it a guarantee or a documentary credit. It is important to realize that the
documentary credit issued by Bank A may not be as secure as that issued by Bank B,
due to Bank A.
• having a history or delaying or actually reneging on payment.
• having a habit of rejecting documents citing trivial discrepancies;
• being domiciled in a country notorious for foreign exchange restrictions and
• being domiciled in a country classified as high risk.
Dealing with bank risk is quite complicated and can be a sensitive issue most of the
time, even more than country risk. Again, many banks leave this problem to a
specialized unit and seek their guidance from time to time. In fact, many
international banks produce and distribute instructions for their branches, setting
limits for the various institutions they traditionally deal with. Anything outside
such parameters has to be referred to this specialized unit for clearance.
A contribution to the business decision is also required from the management of the
branch and if they feel that the branch can maintain recourse to a valued customer,
then there is some flexibility to deal with the higher risk bank.
Country risk: A collection of risks associated with doing business with a
foreign country, such as exchange rate risk, political risk and sovereign risk. For
example, a company may not like exporting goods to certain countries because of the
political situation, a deteriorating economy, the lack of legal structures, etc.
Foreign Exchange Risk: Payments and receipts in foreign currency are an
everyday occurrence in international trade and the trader is always at the mercy of
exchange rate fluctuations due to various economic, political and even purely
speculative reasons. The volume of the global foreign exchange market leaves the
importer/exporter with no control and an adverse movement in the transaction
currency vis-a-vis the local currency can wipe out the entire profit and more of the
Fraud: To cover the various aspects of maritime and indeed any other type of
trade fraud requires volumes of paper. There are various types of fraud like
documentary fraud, counterpart fraud, insurance scams, cargo theft, scuttling and
Corporate risk: The risks associated with the company (exporter/importer):
The financial standing of the importer. The bank has to look to the importer to pay
the import bill drawn under the DC and therefore should be sure that the latter has
or will have the funds to pay.
The goods. Trade finance is supposed to be self-liquidating and the goods must be
readily saleable. Consideration should also be given to the risks associated with
perishability of the goods, possible obsolescence, import regulations, packing and
The status of the exporter (or beneficiary of the DC). There is always the risk that
an arrant exporter could ship substandard goods or, worse still, complete rubbish,
and one always guards against this by finding out as much possible about the
exporter using status reports and other confidential information from banks and
credit rating agencies such as Dun & Bradstreet. It is always wise to request a
reliable third party to inspect the goods prior to shipment and produce a report
called an inspection certificate.
To reduce these risks, banks – and other
financiers – have stepped in to provide
trade finance products.