Low risk letters of credit (L/Cs) and other trade finance offerings provide untapped opportunities for institutional investors according to Cerulli Associates.

The financial services consultancy based in the US city of Boston says demand for trade finance as an asset class is growing, but the number of providers is limited.

Unmet demand

Cerulli reckons unmet demand for trade finance from businesses globally amounts to billions of US dollars and the consultancy believes that the financing gap that exists for businesses all over the world will motivate and attract new players.

It expects future growth to be driven by newcomers as real new lenders rather than only buying portion of portfolios.

Low risk L/Cs

The consultancy's analysis of default rates for trade finance investments indicates that less than 0.1% of L/Cs are defaulted.

This makes an investment portfolio containing L/Cs a safe investment, but according to Cerulli, many institutional investors have a limited understanding of the asset class.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.