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?

Unlike traditional financing, structured trade and commodity finance (STCF) revolves around identifying and mitigating the risk regarding the flow of the goods and their origins – with repayment realized from the export and sale of commodities in preferably hard currency. So, the financier's risk assessment is basically related to the company’s ability to perform – to produce and deliver commodities, even under unstable or uncertain political and financial circumstances.

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