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Commodity Trade Finance: All about The Bank

Commodity trade finance platforms are not something we actively write about, but it is such a key part of world trade that it’s important for readers to understand a bit about how this form of goods flow gets financed.

In a study done by the Bank for International Settlement (“BIS”) examining bank trade finance lending, commodity trade finance is a market dominated by the banks, and at that, very few global banks.

Commodity Trade Finance Characteristics

It is natural for commodity transactions to remain in the bank domain for several reasons.

  • They are big – buying oil shipments or wheat is controlled by big private companies like Cargill, Trafigura, Vitol, etc.  and transaction sizes are in the millions
  • You can manage the collateral – commodities are real collateral that can be valued by market indices. Operation risk can be insured. For example, you can grab collateral if need be. With other goods, say spare parts, or apparel, how would you value?
  • Prices can fluctuate wildly in a short period of time – this market risk can be controlled to some degree through hedging
  • Commodities trade actively

If properly managed, the risk then really comes down to the credit risk of counter-parties, which is something banks generally do well.

Who Funds These Transactions?

The BIS report stated that historically, most of this trade has been dominated by European banks, particularly French and Swiss banks, which reportedly provided up to 80% of the financing for commodities trading worldwide at one point. Many of the largest commodity trading companies are located in Switzerland (egs. Tate and Lyle, Glencore, Cargill International, Vitol Group, Trafigura to name a few).  Commodity trade finance alone in Switzerland is  estimated to be around US$1,7 trillion size market.

But during the Great Recession of 2008, European banks like BNP Paribas and Crédit Agricole had to reduce their exposures in commodity financing as a result of a lack of access to US dollars. However, true to form, as global banks have balance sheet, U.S. and Asian banks as well as banks in the Middle East are now increasing their share of commodity finance. Blockchain based ledgers isn’t a household buzzword, like the cloud or the Internet of Things. It’s not an in-your-face innovation you can see and touch as easily as a smartphone or a package from Amazon. But when it comes to our digital lives—every digital transaction; exchange of value, goods and services; or private data —blockchain is the answer to a question we’ve been asking since the dawn of the internet age: How can we collectively trust what happens online?

Every year we run more of our lives—more core functions of our governments, economies, and societies—on the internet. We do our banking online. We shop online. We log into apps and services that make up our digital selves and send information back and forth. Think of blockchain as a historical fabric underneath recording everything that happens exactly as it occurs. Then the chain stitches that data into encrypted blocks that can never be modified and scatters the pieces across a worldwide network of distributed computers or “nodes.”

Bridging Finance – Use with Great Responsibility

In the world where banks and other financial institutions are being reluctant in extending loans because of the economic crisis in the market, where does one should go? Perhaps you could be one of the many who wants to acquire a new property for personal or commercial purposes. This might be a little hard on your part, especially if you don’t have the budget and other debts in the past makes the realization of your dreams a little difficult. But bridging finance, London is here to help you.

Bridging finance comes in different forms and sizes. This can be a one-man group or may be a professional unit supervised by some regulating bodies. It is recommended that before choosing the bridging lenders, one should go to an authorized or licensed broker under any of the regulating bodies to support which bridge is suitable for you in a particular situation .

Bridging finance London or even in different places in the world offering it will always have this loan backed-up or secured by personal property. This is because the risks involved in it are greater than a standard loan. The interest rate is also high to match the amount of risk. People who are buy ing their property at an auction which requires immediate funds often use bridging finance. The quick transaction makes it attractive in the eye of these clients.

Banks and other financial institutions are way more conservative than these bridge lenders. They are under different policies and procedures that should be strictly implemented. Cases of a financial crisis in a country make it even more difficult to avail housing or business loans from these establishments. Countries like London that have experienced the financial crisis in the past because of the “BREXIT” have its people significantly affected by it especially in the industry of real estate property. This is when this bridging finance London has their edge over any other banks.

Behind all of the advantages, one can get from bridging finance; the regulating bodies should be strict with their functions and responsibilities. They should see to it that people behind these lending businesses and companies should not abuse their clients. Their prima ry functions should be to help them acquire a new property and moved on with the old or existing one. In other words, personal interest should not reign by letting these customers be over-indebted to the point that they have to lose all their properties jus t to come out with.

Bridging finance is an excellent business, and it is actually helpful if everyone will do their part. The client before making a decision that he wants to avail this loan should think a couple of times if he needs it. Priorities s hould be set and should be separated from needs. One can be saved from different problems and pain in the head if he has been a responsible client right from the start. Financial literacy is also critical as everyone of us should know our righ ts as commercial consumers.