Structured Trade and Commodity Finance
Introduction
In traditional finance, the banks or financial institutions,
while providing loans normally depend on tangible assets such as real estate,
offered as collateral or they depend on fixed rate bonds or shares issued by
financially strong companies etc., Also, they rely on pervious financial
statements, such as accounting balance sheet, profit and loss account
etc.,
During the financial crisis, these collaterals do not work
to provide loans to the business, especially in the emerging markets as the
real estate prices go much below, there is hardly any company, which has good
financial results, whose shares and bonds could be kept as security. The
balance sheet does not provide a reliable picture of the assets, as their value
is quite different than the actual market value.
The commodity finance is one of the solutions to the
problem.
What is structured trade and commodity finance?
The focal point of STCF is on every single transaction structure and the company’s business performance ability, as contrast to their balance sheet analysis. This type of financing offers another different and cost effective financing tool to companies in the commodity business especially in the developing markets. The main aim of STCF is to provide maximum security to all parties in a transaction – financier, producer and trader – essentially by changing payment and sovereign risk into performance risk that is carefully discovered and mitigated by proper control tools, one of which is hiring a warehouse to store and issue the commodities in a professional way.
In simple words, commodity finance is the type of finance,
in which commodities are kept as collateral and the loan, is issued against it
by the banks.
The commodities are not the documents, which a bank can keep
in a lock and key and issue the finance against these documents. Neither, a
commodity is like a real estate, which has some ownership documents, where a
bank can mark lien and possess it. Nor
it is an audited balance sheet, which can be analyzed and the funds could be
issued. Commodities can only be kept in a warehouse by the bank as collateral
and can be sold if the loan is not paid.
How it Works?
There is no standard for STCF deals as the one of the basic
principle of this type of financing is to tailor the structure according to the
requirements and conditions of all the parties involved with an assurance that apparent
and actual risks are mitigated. However, it is possible to develop a general
type of model, which will improve the concept.
Who provides STCF facilities?
1. Commercial Banks
State owned and private commercial banks
provide these facilities. Especially Multinational banks are very active in
this type of financing. Few examples are
as follows:
- Rabo Bank Group (Netherlands) serves in 47 countries. www.rabobank.com
- Societe Generale Bank (France) www.commodities.sgcib.com
- Standard Bank (South Africa) www.standardbank.com
2. Regional and
International Development Banks or Financial Institutions
These types of banks are formed by the
funds provided by the governments of different countries. They are directly or
indirectly involved in the funding and structuring of commodity finance. Few examples are as follows:
- International Finance Corporation (IFC) – Offers short-term loan or guarantees up to 50 percent to the banks, which will lend funds to farmers, agricultural commodity producers or traders under the scheme named “Global Warehouse Finance Program” started in September 2010. For details: www.ifc.org
- European Bank for Reconstruction and Development (EBRD) – have develop many transactional models and participates with banks and companies in funding producers, suppliers and local traders of commodities or agribusiness SMEs of the member countries. For Details: www.ebrd.com
- International Islamic Trade Finance Corporation (itfc) a member of Islamic Development Bank Group (IDB) provides funds to state-controlled and private sector companies of the member states of IDB. For details: www.itfc-idb.org
