Prof. Dr.

Bernhard Müller

International Trade and Finance

X. New Trends in Trade

Finance
 1. Bank Payment Obligation (BPO)

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
 1. Bank Payment Obligation (BPO)

a) A BPO is an irrevocable undertaking given by an obligor

bank (typically the buyer’s bank to a recipient bank
(seller’s bank) to pay a specified amount on a agreed
date under the condition of a successful electronic
matching of data according to an industry-wider set of
rules adopted by the ICC.
b) BPO constitutes a legally binding, valid and enforceable
payment obligation of the obligor bank to the recipient
bank.
c) BPO is not a light letter of credit or an electronic letter
of credit.
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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
 1. Bank Payment Obligation (BPO)

d) Only the data required to assess the financing risk is

extracted from existing documentation – purchase
order, commercial invoice, transport- and insurance
certificate.

e) Importer or exporter need to agree on the use of a BPO

in their commercial agreement. Both will establish the
BPO terms and conditions in the bilateral agreement
with their own bank.

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
 BPO flows for data, documents and goods

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Source: International Chamber of Commerce; page 6.
 BPO data flows for the Trade Matching Application

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Source: International Chamber of Commerce; page 5.
 2. General market trends

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
 2. General market trends

a) Increased risk profile of certain countries (for instance

Algeria, Ukraine)
b) Significantly decreased risk appetite of banks and
insurance companies
c) Increased number of defaults and demanding
indemification procedures with insurance companies
d) Volatile pricing (in times of financial crisis)
e) Limited overall transaction volumes

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
 Potential Impacts of Financial Crises on Trade Finance, by Type

Trade finance type Potential impacts of crisis

Letters of credit (LCs) • The importer's creditworthiness
Importers use LCs issued by is undermined, and the issuing
their banks (the issuing banks) bank will not assume the risk.
as a means of assuring • The issuing bank lacks sufficient
exporters that they will be funds to extend credit to the
paid. Payment is made importer.
to the exporter upon • The confirming bank lacks
production of required confidence in the issuing bank.
documentation (for example, • Trade finance institutions reduce
invoices or bills of their overall exposure or
lading) to its (confirming)bank. exposure to particular countries
during a financial crisis.

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
 Potential Impacts of Financial Crises on Trade Finance, by Type

Trade finance type Potential impacts of crisis

Domestic bank lending • Financial outflows reduce
Domestic banks provide credit liquidity in the domestic
to exporters to cover banking System.
preshipment or postshipment • International banks operating in
costs. Such funding is similar the domestic market reduce
to provision of working credit to cut the exposure of
capital in general. parent banks.
• Shortages of foreign currency
prevent banks from lending the
foreign exchange needed for
import of inputs or export freight
charges.

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
Potential Impacts of Financial Crises on Trade Finance, by Type
Trade finance type Potential impacts of crisis
Trade credit • General shortages of credit in
Companies extend credit to domestic markets prevent
each other when buyers delay importers and exporters from
or advance payments to extending credit to each other.
suppliers. This is called trade • As credit becomes scarce, not only
credit, even within the do banks reduce lending to their
domestic market In customers, but more creditworthy
open-account trade, importers firms also reduce lending to less
pay invoices once goods are creditworthy ones as their own
received. Equally, importers access to finance is reduced (Love,
can extend credit to exporters Preve, and Sarria-Allende 2007).
if they pay for goods in • Firms reduce credit extended to
advance. suppliers or buyers because of the
increased risk of nonrepayment by
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© Prof. Dr. Bernhard Müller, 2013 all rights reserved these firms.
 3. Main trends in trade

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
 3. Main trends in trade

a) Emergence of global supply chains. Countries and

producers increasingly specialize in certain stages of
production depending on their particular comparative
advantage.

b) The need for firms to organize their supply chains across

different countries has led to a demand for regional
agreements that cover more than preferential tariffs.

c) Trade services have grown faster than trade in goods

over the last two decades.

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
 3. Main trends in trade

d) Another ongoing trend is the increasing importance of

consumer concerns regarding pollution, fair trade or
food safety which has led to different policy measures
that affect international trade.

e) Finally, international trade is influenced by the rise of a

number of emerging countries (for instance BRIICS) and
the associated increase in their shares in world trade.

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© Prof. Dr. Bernhard Müller, 2013 all rights reserved
Sources:
ICC Publishing
Guide to Export-Import Basics. 2nd Edition
ICC Publishing SA, Paris, 2003
Grath, Anders
The Handbook of International Trade and Finance. 2nd Edition
Kogan Page, London, 2014
Luk, Kwai Wing
International Trade Finance – A Practical Guide. 2nd Edition
City University of Hong Kong Press, Hong Kong, 2011
Reuvid, Jonathan / Sherlock, Jim
International Trade – An Essential Guide to the Principles
and Practice of Export
Kogan Page, London, 2011
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