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Awareness of forfaiting techniques is growing in trade finance markets, but more work is needed to reach widespread acceptance. Melodie Michel reports.

The adoption of the universal rules for forfaiting (URF) by the International Chamber of Commerce (ICC) in January 2013 was hailed as a step forward in developing an industry that until then lacked standardisation. By providing a framework for the use of forfaiting techniques, the ICC, in collaboration with the International Forfaiting Association (IFA), hoped to raise awareness of the benefits of such products in the trade finance sphere. At the time, then-head of trade and working capital at Barclays and ICC chairman Tan Kah Chye said: “We believe that the URF will further help to promote trade between member countries, mitigate the risk of non-payment by importers and provide additional liquidity to the market place. The forfaiting market is already huge at US$300bn and we do expect this market to grow under the URF and to benefit from a higher
degree of efficiency.

URF promise

Six months later, it is difficult to notice any change in behaviour from banks and forfaiting providers, but experts are optimistic. It is too early to say whether or not the URF has found an application in the market, but it will take time while we explain exactly to all the players what the rules and their benefits are. Once the biggest players have adopted the rules, the minor ones will follow because otherwise they won’t be able to sign contracts without the URF. I am extremely confident that within 12 months the large majority of market players will adopt the rules,” says Paolo Provera, general manager at Arab Banking Corporation and IFA chairman.

So far few banks have adopted the rules, and most of them are applying a wait-and-see approach to the changes. Silja Calac-Schneider, head of trade risk management at UniCredit, IFA board member and head of the ICC’s URF task force, explains to GTR: “With every new rule you have to adapt your internal documentation and processes, do a business case to show that there is a need for it, and as long as corporate customers as well as the secondary market do not require the need for the rules, banks will keep that wait-and-see attitude.”

The IFA is now organising URF educational events across Europe, the first of which took place in London on June 26, 2013, and targeted Chinese banks exclusively. A London event for UK-based banks, as well as a seminar in Switzerland, are also due to take place in coming months.

At the London Forfaiting Company (LFC), managing director Simon Lay hasn’t seen a change in demand since the adoption of the rules, but is confident that with time, the URF will bring significant improvements to the industry, particularly when it comes to dispute settlement.

Although the URF may not discernibly change forfaiting, a key change may come from the lawyers and courts. The choice regarding whether a forfaiting transaction is concluded under the URF remains with the contractual counterparties. However, the URF puts a document in the public domain against which forfaiting can be judged and benchmarked, even for transactions concluded outside the URF.

In the event of legal disputes arising between forfaiting counterparties, a presiding judge now has a rule book against which to measure the issue and potentially offer a simpler route to making an informed decision on the dispute. This had not previously existed and the success, or failure, of legal action was somewhat dependent upon the judge successfully grasping the long-standing industry practices under which forfaiting has transacted, he says.

UniCredit’s Calac-Schneider also believes the rules will help decrease litigation costs, but also bring new financiers to the fore. She points out: “The other advantage is that it can bring new investors into the forfaiting market, such as insurance companies or funds, who are not in the trade finance business, so who do not understand the business as well as banks, and for which it is very important to have clear rules. Because of these advantages, over time the URF will impose themselves.”

The forfaiting contradiction

Given the growing trend towards more open account and supply chain transactions in the trade finance sector, forfaiting should be in high demand. However, due to high liquidity in the trade finance market, the industry is experiencing pressure from a pricing perspective.

“With all the efforts by the ICC to show that trade finance is a very secure asset, there have been more and more investors coming to the trade finance market, so there is now a large demand and not so much on offer, which has resulted in a decrease in pricing for trade finance bank risk,” says Calac-Schneider.

Moreover, the forfaiting sector still suffers from a bad reputation among certain banks, due to previous controversies, particularly in Kazakhstan, where in 2009 Alliance Bank and BTA Bank defaulted on a number of loans totalling an estimated US$45bn. For that reason there is still a lot of educating to be done to democratise forfaiting techniques, and it is hoped that with time, the URF will help regain the trust of players in the market. Meanwhile the task force created by the ICC will also serve as first point of entry for questions on how to use the rules.

Market trends

One of the major trends noticed by experts in the forfaiting industry is the increased use of secondary market transactions. Paolo Provera at Arab Banking Corporation explains: “The secondary market has been very active in the past six months. Volumes have increased dramatically. There are a lot of transactions that are sold on the secondary market, which means that smaller banks with liquidity can get to participate in trade finance transactions. Looking at the beginning of this year, there has been a very large increase in transactions and today the secondary market is more active than the primary market.”

The URF should prove beneficial in developing that market further, by providing a clear framework and reassuring new players wanting to get involved.

“We want to encourage people to use these rules and to animate this secondary market and attract new investors,” adds UniCredit’s Silja Calac-Schneider.

At the LFC, Simon Lay highlights a trend towards longer tenors across the board. “Although the market essentially remains a short-term lender, recent enquiries suggest exporters are starting to seek five-year and even seven-year financing. This could be an interesting progression for financial institutions capable of funding such longer terms where, due to lack of liquidity, pricing levels can be very attractive,” he says.

In terms of countries, Turkey remains the biggest user of forfaiting tools due to high liquidity and fiscal advantages for Turkish banks, but Africa is emerging as a growing market for the sector. “The LFC currently sees most activity from Turkey and Africa, particularly Nigeria, Ghana and Angola. It is becoming more common for transactions in these markets to have a slant towards pre and post production commodity financing, in place of the import and export of capital equipment and other goods generally financed under such transactions,” adds Lay.