The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) and the International Islamic Trade Finance Corporation (ITFC), both part of the Islamic Development Bank (IsDB) Group, have signed a strategic agreement aimed at enhancing documentary credit facilitation to support trade across member countries.

The agreement introduces the documentary credit insurance policy (DCIP), a risk-mitigation instrument that strengthens the use of letters of credit (L/Cs) in international trade.

By providing insurance coverage against both commercial and political risks, this policy aims to increase confidence among financial institutions, making it easier for banks to finance trade transactions involving member states.

Boosting L/Cs for international trade

While documentary credits, particularly L/Cs, are a vital tool for mitigating risks in international trade, many banks, particularly in developing markets, are hesitant to confirm L/Cs due to concerns over counterparty risk and political instability.

Through the DCIP, ICIEC will provide insurance for confirming banks, reducing their exposure and encouraging them to process a greater number of L/Cs. This expands access to trade finance, allowing importers and exporters in member countries to secure financing, improve cash flow, and enhance supply chain stability.

Broader correspondent network

By insuring L/Cs issued by local banks, the DCIP enables broader correspondent banking relationships, allowing businesses to trade with partners they might otherwise struggle to reach.

This is particularly important for small- and medium-sized enterprises in emerging markets that often face barriers to accessing trade finance.

Financial inclusion

The collaboration between ICIEC and ITFC will directly strengthen trade finance channels, ensuring that businesses in IsDB member countries have reliable access to international markets.

By increasing the acceptance and confirmation of documentary credits, the DCIP will expand financing opportunities for local banks issuing L/Cs while reducing trade finance costs by lowering the risk premium on cross-border transactions.

The DCIP also aims to encourage more international banks to engage in correspondent relationships with financial institutions in member states and foster economic development by improving liquidity and trade accessibility.

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