Letters of credit (L/Cs) are becoming an increasingly popular choice for international traders according to a Malaysian banker.

The Royal Bank of Scotland Bhd's senior vice-president for global transaction services, Harm Bots, says the L/C is in some cases replacing open account as the preferred payment method.

Tough times

The banker says the global economic downturn has made it tougher for traders to access finance, especially in emerging Asian markets.

He also notes that bank financing is not as readily available as it was, the liquidity pool is smaller and trade finance pricing has increased.

Changes

But, Bots also reports changes in types of trade finance products in demand.

"We are seeing a shift from open account trading, which was popular when the risk of trading account defaulting was considered small, to documentary trading using conventional trade finance products - such as L/Cs, bills of exchange and guarantees - to mitigate risk," he told local media.

"In the short term, L/Cs are becoming an increasingly popular way to mitigate risk," he added.

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