- First, the shortfall in trade finance and drop in trade volumes have been relatively sudden and of a larger magnitude than anyone would have expected a few months earlier. This contributed to increase the degree of business uncertainty and might have led to a “wait and see mode” attitude as reported by some firms.

- Second, in a world where lean retailing and fragmentation of production prevail, buyers are the drivers. As a consequence, it seems that the crisis has not reversed the secular trend of moving away from L/Cs to open accounts. Firms are rather concerned about keeping their clients and not taking the risk to jeopardize a longterm relationship based on trust. Exporters in Egypt reported that it is still preferable to use open account to facilitate transactions and get deals. SMEs doing business with large firms also find it difficult to request for LCs. Some interviewed Indian sellers, largely small and dispersed, reported that they do not have a lot of bargaining power with large buyers, so it is difficult to ask for L/Cs, let alone cashin-advance. In the Philippines, firms reported to continue to prefer avoiding these formal transactions with banks that tend to be demanding and costly and choose alternative sources of financing such as through family members.

- Third, some local banks in developing countries have somewhat lost confidence in L/Cs issued by buyers’ banks, often in rich countries, as a result of the inability of buyers to pay what they ordered. Thus, the “sanctity” of the L/Cs has diminished. Finally, the slow global economy and drop in global trade volume have translated into a drop in the use of all trade finance instruments (LCs and short-term loans) as reported by most banks interviewed (see next section). Therefore, any drop in LCs should be interpreted with caution.

**III. Banks’ perspective on scarcity of trade finance: Weak demand and heightened risk aversion**

The World Bank survey also included interviews of a total of 78 banks and financial institutions in 13 developing countries (excl. Indonesia) to assess any changes and trends in trade credit volumes post-September 2008. This is particularly useful in light of the absence of data on trade finance. Comprehensive statistical compilation of flows is difficult to extract from balance of payments due to the high cost of information, technology needed, and the difficulty to guarantee a high level of accuracy to very short term capital movements<sup>10</sup> . From the countries surveyed, only two of them (Brazil, and Turkey) had macro trade finance data available overt time as described below. Moreover, a large part of trade finance transactions takes place between buyers and suppliers which are not required to report their transactions.

Against this background, the bank surveys aimed to produce qualitative results and were conducted through phone or in-person interviews. The bank questionnaire covers bank lending activities and practices pertaining to trade loans, trade credits, and short and medium-term financing for export and import transactions from September 2008 to April

> 10 At present, the only available and reliable source of statistics comes from the Berne Union database, which provides data on the amount of business of export credit agencies.

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