Original article from Gulf Business published on 18 Jan 2020 by Zainab Mansoor.
Blockchain’s decentralised technology has industry-disrupting capabilities, but how far will it venture in the trade finance arena?
To say that the trade finance process is a complex and archaic one wouldn’t be entirely wrong; trade transactions entail multiple stakeholders with exchange of – and reliance on – a multitude of paper documents, creating delays and potential administrative hurdles.
Trade finance, essentially, is the bridge between an exporter’s shipment of goods and the importer’s payment against it. Bankers on either side work on the documents and/or finance the transaction on an interim basis. Since a bulk of trade finance transactions are cross-border, information – such as real-time shipping data and credit history – is limited.
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 aluminium 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.
While blockchain technology for trade finance purposes isn’t widespread, and does carry legal concerns over jurisdiction and lack of a central governance authority, given its inevitability, one can expect blockchain to form a firm base on which international trade finance will be conducted in years to come.