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- The originate-to-distribute (OTD) model is being incorporated as a risk distribution mechanism.
- Banks can offload and spread their risk, giving them more comfort when originating additional loans.
- This increased capacity and security can help SMEs receive bank loans.
Risk distribution is another vital strategy in closing the trade finance gap and the OTD model has gained traction in recent years, offering a solution that enables banks to shift risk from their balance sheets to a wider network of institutional investors.
This model, in which banks originate loans and distribute the associated risks to a diverse range of investors (such as pension funds, insurance companies, and non-bank financial institutions), is particularly well-suited for trade finance, where high levels of risk concentration often hinder banks from extending their full lending capabilities to smaller businesses.
Expanding access through partnerships
At the heart of the OTD model is the idea of partnership, with banks collaborating closely with insurers, credit funds, and other financial institutions to spread risk more evenly across a broader investor base.
As one participant said, “Redistribution allows us to access their programs and them to access our programs. That is a partnership.”
This collaborative approach enables banks to offload risk and allows institutional investors to participate in trade finance, an asset class that many are just beginning to explore.
The redistribution of risk creates new opportunities for both banks and non-bank financial institutions, particularly in the context of financing SMEs. By distributing risk to a wider pool of investors, banks can increase their lending capacity while adhering to regulatory capital requirements, making it easier to fund businesses that traditionally struggle to access credit.
For investors, trade finance represents an attractive investment option. When properly structured, it offers relatively high yields with manageable risk.
In this way, the OTD model is not just a tool for reducing risk exposure but a mechanism for expanding access to capital across the trade finance ecosystem. As more institutions become comfortable with trade finance as an asset class, the network of investors willing to support SME lending continues to grow.
Increasing lending capacity through expanded distribution networks
By expanding their distribution networks, banks can significantly increase their lending capacity, and the OTD model allows them to originate more loans without taking on additional risk, supporting a higher volume of trade finance transactions.
One participant said, “The more we can spread risk across a broader network of investors, the more capacity we create for new trade deals.”
In this sense, the OTD model acts as a scaling mechanism for the trade finance industry, allowing banks to continuously lend without being constrained by their balance sheet limitations.
This increased capacity is particularly beneficial for SMEs, which often find themselves locked out of traditional financing channels due to their perceived riskiness and average smaller transaction sizes. Under an OTD model, however, banks will be better able to lend to these businesses, knowing that the associated risks will be shared among a wider network of investors.
