Despite continuing uncertainty in Iraq and Afghanistan, trends in letters of credit (L/C) pricing are pointing to growing confidence in trade with Middle Eastern countries.

This confidence seems to be shared by export credit agencies (ECAs) that are increasing their cover on L/Cs used in trades with countries in the region.

Premium declines

An analysis of trade finance trends and L/C pricing published by a paper in the United Arab Emirates says there has been a steady decline over the last two years in the premiums attached to the underlying risk of financing instruments for Middle Eastern countries.

The Khaleej Times reports that some premiums are at the lowest ever witnessed. It quotes Head of Corporate & Institutional Banking at Dubai Bank, Vikram Venkataraman, as saying that the Qatari government can now borrow for 7 years at a mere 40 basis points.

The banker reckons that pricing on Sri Lanka and Pakistan has dropped from a peak of 12 per cent per annum to only a fraction of that today. The same applies to the risk premium on Iran he says.

ECAs push Iran

Trade on L/C terms with Iran is being strongly encouraged by ECAs across the world. Italy's SACE has increased its cover on several types of transactions for Italian exporters doing business in Iran, including short-term transactions on L/C terms.

Export-Import Bank of India (Exim Bank India) meanwhile has extended a second US$20 million short-term line of credit to six Iranian commercial banks. Under its line of credit refinancing facility, the bank will reimburse Indian exporters 100 per cent value of L/Cs opened by any one of the six Iranian banks.

Credit facility

Under this scheme, Iranian importers participating in this scheme would be able to take up to 12 months credit.

The participating Iranian banks are Bank Melli, Bank Mellat, Bank Saderat, Bank Tejarat, Bank Sepah and Industry & Mine Bank.

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