Letters of credit (L/Cs) and promissory notes on clay tablets discovered 5000 years ago are the oldest known forms of trade finance, according to a visual timeline of international trade finance posted on J P Morgan's official web site.

It says the L/Cs and promissory notes emerged in Mesopotamia in c 3000 BCE (Before the Common Era) when merchants began making their first forays into far-off markets, and they needed working capital to fund their trading activities.

L/C predecessors

Some scholars suggest these early forms of credit documents cannot be accurately described as L/Cs, but they certainly did function similarly to modern L/Cs by facilitating trade by guaranteeing payments across distances and between parties who did not personally know each other.

This gave rise to trade finance, the catch-all term describing financial strategies that aim to help international commerce thrive.

Advancing civilisation

As civilisation advanced, global trade and its financing co-evolved, with progress in one fuelling developments in the other, as is described on the visual timeline.

The Roman Empire (c300 BCE to 300 CE (Common Era)) created a robust legal framework within which L/Cs could be used to guarantee payment for goods shipped over long distances, according to the timeline.

It says that it was not until the 1980-90s that the use if risk mitigation instruments such as L/Cs began to decline in favour of trade on open account terms.

L/Cs resurgent in risky trades

The timeline does not describe how the use of open account trading is now seeing a decline and L/Cs are resurgent in some areas, particularly in regions where economic instability and heightened trade risk are prevalent.

For example, several exporters in the Middle East are reportedly moving back to L/Cs to reduce credit risk amid economic and geopolitical challenges while certain sectors in Latin America are witnessing a revival in L/C use, especially in transactions involving high-risk buyers or countries with fluctuating creditworthiness.

J P Morgan's A visual timeline of international trade finance can be found here.

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