Saying that the mechanism of trade finance is a complicated and outdated one wouldn’t be completely wrong; trade transactions involve multiple parties exchanging – and depending on – a multitude of paper documents, causing delays and possible administrative obstacles.
Trade finance, in fact, is the connection between the shipping of goods by an exporter and the charge the importer makes against it. Bankers on both sides are working on the paperwork and/or provisional funding of the deal. Since a large part of trade finance transactions are cross-border, information is minimal, such as real-time shipping data and credit history.
However, blockchain’s digital ledger technology points at a transparent and digitised approach to trade finance across contract and invoice creation. Simply put, an updated and accurate version of the transaction is instantly accessible to all stakeholders.
Blockchain could also deploy satellite or additional tracking technology to monitor shipments en route to the importer.
“Blockchain lets you track every step along the way. Therefore, it lowers the interest rate, because less collateral is needed,” Prof Hau Lee at the Stanford Graduate School of Business told the Financial Times.
That blockchain’s disruptive capabilities can chart a new course for the archaic, paper-centric trade finance sector comes as no surprise, but what’s promising is how receptive institutions in the GCC are to the potential of this much-talked technology.
In November 2019, Saudi British Bank (SABB) and HSBC Bank debuted blockchain technology in Saudi Arabia and Bahrain. The transaction entailed the shipment of homogenised aluminum billets from Aluminium Bahrain (Alba) to the kingdom’s Altaiseer Aluminium Corporation (TALCO). TALCO issued a letter of credit (LC) on a blockchain-powered platform using R3’s Corda system.
Similarly, in Q4 2019, Oman Oil and Orpic group (OQ) and HSBC Bank conducted Oman’s first blockchain-based trade finance transaction entailing a shipment of polypropylene to UAE-based Abu Dhabi National Carpet factory. The transaction was also executed using R3’s Corda system.
As for the UAE, Abu Dhabi Commercial Bank (ADCB) has digitised trade finance deploying the Singaporean dltledgers platform, and also concluded its debut, live end-to-end blockchain trade transaction in 2019, moving goods worth $6.5m from Canada to Bangladesh. The goods were moved for Western Red Spring Canadian Wheat.
Additionally, Dubai Chamber of Commerce and Industry (DCCI) and Dubai Future Foundation (DFF) announced the Digital Silk Road project – a Dubai 10X initiative – to use blockchain technology to strengthen the global trade system and eliminate trade barriers.
In Q4 2019, DCCI signed an MoU with Emirates NBD for the state-owned bank to offer trade finance solutions for the Digital Silk Road project, which is expected to go live in 2020.
Although blockchain technology is not ubiquitous for commercial finance purposes and, given its inevitability, brings legal concerns about jurisdiction and lack of a central governance authority, one can expect blockchain to form a firm basis on which international trade finance will be conducted in years to come.