Relatively low ratings awarded by Fitch to the emerging breed of alternative trade finance providers are in part due to the riskier nature of their products compared with traditional tools such as letters of credit (L/Cs).

Fitch argues that traditional trade finance is generally low risk but the standalone ratings it assigns to specialist trade finance banks indicates their "speculative fundamental credit quality."

Higher risk

Viability Ratings (VRs) for the alternative trade finance providers are almost all in the 'bb' range, reflecting the higher-risk emerging markets in which the new financial firms operate, according to Fitch.

It also says that "their small size, monoline business models and niche franchises" carry additional risks because they often rely on strong client relationships, particular industries, commodities or countries.

Potential losses

"Defaults are more common where banks have diversified away from traditional business, such as L/Cs, into broader trade-related activities," according to Fitch.

These may include the provision of unsecured working capital finance for importers and exporters.

"In our view, a significant shift away from a bank's area of expertise often results in losses," Fitch concludes.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.