FINANCE OF INTERNATIONAL TRADE FULL COURSE NOTES.

COURSE OUTLINE

1: INTERNATIONAL TRADE AND FINANCE

The meaning and scope of international trade and international finance.
Balance of payments accounts
Types of international finance
Commercial terms
Method of settlement through the banking system
Terms of credit
Shipping, transport and insurance and licensing document.

2: RISK IN FINANCING INTERNATIONAL TRADE

Types of risks
Protection against risks
Methods used by government and regional trading blocks

3: METHODS OF SETTLEMENT PAYMENTS AND COLLECTION AND SOURCES OF FINANCE

International payment systems
Methods of payments and collection
Vostro and nostro accounts
Nature of foreign exchange and use of forward exchange, trading and foreign currency account.
Bank undertaking as a means of obtaining payments
Collection of bills
Sources of finance eg through bank guarantees, overdrafts, documenting letters of credit, underwriting of commercial contract etc

4: OTHER SERVICES PROVIDED BY BANK TO TRADERS IN INTERNATIONAL TRADE

Business travel arrangements
Trade promotion by oversea connections
Finding agents, potential buyers, tender guarantees etc
Arranging banking services for customers abroad
Providing information on joint ventures and franchising operations.
Government and non-governmental assistance to exporters, importers and merchants

TOPIC: 1 INTERNATIONAL TRADE AND FINANCE

The meaning and scope of international trade and international finance.

What is International trade ?

International trade refers to the exchange or trade of goods and services between different nations that is, it is the exchange of goods and services between one country and another. International Trade can be in goods, termed visible or in services, termed invisibles e.g. trade in. services such as tourism, shipping and insurance.

The scope of international trade is extensive and covers the global exchange of goods, services, capital, and technology. It has expanded significantly beyond traditional exports and imports to include a wide range of activities driven by liberalization and globalization.

Key components of international trade

Merchandise trade: This is the trade of tangible (visible) goods, which involves exports (selling domestically produced goods to other countries) and imports (buying foreign-produced goods for domestic use).
Services trade: Often called “invisible trade,” this includes the cross-border exchange of intangible services like tourism, banking, construction, and financial services.
Foreign investment: A critical aspect of international business is the investment of capital across borders, which can take two main forms:
- Foreign Direct Investment (FDI): When a company invests in foreign business operations, such as setting up a manufacturing plant or acquiring a foreign company.
- Portfolio investment: When foreign parties invest in a country’s financial assets, such as stocks and bonds.
Technology and knowledge transfer: International trade facilitates the transfer of technology, managerial expertise, and technical know-how between countries, which is particularly beneficial for developing nations.
Licensing and franchising: Companies can expand internationally by granting a foreign company the right to use their trademarks, patents, and copyrights in exchange for a fee. Examples include multinational food and beverage companies using a network of local bottlers.

Factors influencing the scope of international trade

Several factors drive or constrain the scope of international trade:

Differences in natural resources and technology: No country is entirely self-sufficient. Nations engage in trade to acquire goods they cannot produce efficiently themselves, leveraging other countries’ natural resources and technological advancements.
Product differentiation and demand: Trade is driven by consumer preferences for different product varieties. Even countries producing similar goods will trade to offer consumers a wider range of options.
Differences in economic growth rates: Developed, developing, and underdeveloped nations rely on one another to fuel economic growth. Developing nations often depend on developed ones for financial aid, which stimulates foreign trade.
Comparative advantage: This economic principle suggests that countries should specialize in producing goods and services they can produce at the lowest opportunity cost and trade for others. This specialization increases overall efficiency and living standards.
Globalization and trade liberalization: The dismantling of trade barriers like tariffs and quotas, along with the rise of international bodies like the World Trade Organization (WTO), has enabled companies to operate on a global scale.
Advancements in transportation and communication: Improvements in technology, shipping, and logistics have made it cheaper and faster to move goods and services across the globe, dramatically expanding the reach of international trade.

The evolution of international trade

Historically, the scope of international trade was limited mainly to the exchange of finished goods and raw materials. However, the rise of globalization has profoundly changed this. Companies now engage in a global value chain, with production, assembly, and marketing activities occurring in multiple countries. This expanded scope creates a more interconnected global economy, where domestic economic activities are linked to those in other countries.

Reasons for the development of international trade

Economic factors

Uneven distribution of resources: No country is completely self-sufficient. Every country has a unique combination of natural resources (land, minerals, water), climate, labor force, and technology. International trade allows nations to overcome this natural lottery by importing goods they lack or cannot produce efficiently and exporting what they have in abundance.
Specialization and comparative advantage: According to economist David Ricardo’s theory of comparative advantage, countries gain from trade by specializing in producing the goods and services where they have the lowest opportunity cost. Even if one country can produce everything more efficiently than another (absolute advantage), both can still benefit by specializing and trading. Specialization also fosters greater efficiency, lower costs, and higher productivity.
Economies of scale: International trade allows firms to expand their market beyond domestic borders, increasing their scale of production. This larger production volume can lead to lower per-unit costs, which benefits both consumers (through lower prices) and the firms themselves (through higher profits).
Increased competition: Trade increases competition from foreign producers, which encourages domestic firms to innovate, improve efficiency, and offer higher-quality products to remain competitive. This ultimately benefits consumers by offering greater variety and better prices.

Technological factors

Advances in transportation and logistics: Modern international trade has been shaped by continuous improvements in shipping, aviation, and infrastructure. This has drastically reduced the cost and time it takes to move goods and services across the globe, making trade feasible over long distances.
Information and Communication Technology (ICT): The rise of the internet, digital communication, and online platforms has dramatically lowered information costs for both buyers and sellers. E-commerce, digital trade in services, and efficient supply chain management are all products of this technological revolution, which allows for a greater volume and complexity of trade.

Political factors

Trade liberalization and globalization: A global trend toward reduced tariffs, quotas, and other trade barriers has been a major driver of international trade. The efforts of organizations like the World Trade Organization (WTO) and various free trade agreements have facilitated a more open, interconnected, and interdependent global economy.
Political stability: Stable political conditions and a reliable legal framework in a trading partner nation significantly reduce the risk and cost of doing business. This stability fosters greater investor confidence and encourages long-term trade relationships.
Economic policies: Favorable government policies, such as export incentives, access to credit, and infrastructure investment, can directly stimulate a country’s participation in international trade.

Cultural factors

Cultural exchange: As a side effect of trade, cultural exchange exposes people to foreign ideas, traditions, languages, and products. This can build cultural familiarity and understanding, which helps lower transaction costs and foster stronger trade ties.
Consumer preferences: As consumers become exposed to goods and services from other countries, their preferences evolve. This can create demand for imported products that were previously unavailable or unknown, further driving trade.

Advantages of international trade

International trade offers significant advantages to countries, businesses, and consumers by enhancing economic efficiency, stimulating growth, and increasing access to a variety of goods and services.

Impact to a country’s economy

Economic growth and development: By engaging in international trade, countries can expand their economies by attracting foreign investment, boosting export revenue, and increasing their Gross Domestic Product (GDP). Historically, this has proven to be a powerful tool for reducing poverty and raising living standards.
Efficient resource allocation: Trade allows countries to specialize in the production of goods and services where they have a comparative advantage—the ability to produce at a lower opportunity cost. By exporting these specialized products and importing others, they can maximize their production and use of resources more effectively.
Access to foreign direct investment (FDI): Participation in the global economy attracts FDI, where foreign companies invest in or acquire domestic assets. This brings in foreign capital, technology, and management expertise, creating jobs and further boosting economic growth.
Technology and skills transfer: Trade promotes the exchange of ideas, best practices, and innovative technologies between countries. Developing nations, in particular, can benefit from adopting advanced technology to improve productivity and modernize their industries.

Benefits for businesses

Larger market access: Businesses are no longer limited to their domestic customer base. By exporting, they can sell their products and services to a larger global market, leading to increased revenue and potential profits.
Economies of scale: Exporting to a larger market enables companies to increase their production volume. This can lead to economies of scale, where the cost per unit of output decreases, lowering production costs.
Diversification of risk: Participating in international trade reduces a company’s dependence on its home market. If domestic demand or an economic crisis weakens, a business can stabilize its revenue by selling to other markets.
Enhanced competitiveness: Facing competition from foreign firms pushes domestic businesses to innovate, improve the quality of their products, and increase efficiency to remain competitive.

Significance to consumers

Greater variety of goods: Consumers gain access to a wider selection of goods and services from around the world that may not be available domestically.
Lower prices: Increased competition from global markets puts pressure on domestic firms to offer more competitive pricing. This generally leads to lower prices for consumers and increased purchasing power.
Higher quality of products: Competition drives firms to improve their product quality to attract and retain customers, leading to better goods and services for consumers.
Improved living standards: Access to a variety of goods at competitive prices allows for a higher standard of living for the population

Limitations of international trade

International trade, despite its numerous benefits, is not without its limitations. These drawbacks can affect individual companies, domestic economies, and global stability

Risks and complexities for businesses

Logistical challenges: Shipping goods over long distances and across borders is complex. Delays, damages, and higher transportation costs are constant threats to supply chains.
Currency fluctuations: Volatility in foreign exchange rates can erode the profitability of international transactions. A currency’s devaluation can lower the value of export revenues for a company.
Cultural and language barriers: Differences in language, customs, and business etiquette can lead to misunderstandings during negotiations, causing delays or the complete collapse of a deal. Companies must adapt marketing and service to local norms.
Complex regulations: Navigating the legal and regulatory frameworks of different countries is challenging. It requires significant resources to comply with various laws on tariffs, taxes, and import/export licenses.
Increased financial risk: The potential for non-payment from international buyers is higher than in domestic trade and resolving such issues can be difficult and costly.

Economic downsides for countries

Economic dependence: Over-reliance on international trade can make a country vulnerable to global economic shocks, political instability, or market downturns in major trading partners.
Competition and job displacement: Increased competition from foreign imports can harm domestic industries and lead to job losses, particularly in manufacturing sectors with higher labor costs.
Exhaustion of natural resources: To meet the demands of international markets, some countries may over-exploit their natural resources, leading to environmental degradation and future impoverishment.
Trade deficits and balance of payments issues: A persistent trade deficit (imports exceeding exports) can create a negative balance of payments. This puts a country in debt and can cause currency devaluation, inflation, and a loss of investor confidence.
Income inequality: While international trade can increase overall wealth, its benefits are often unevenly distributed. It can widen the gap between high-skilled and low-skilled workers and concentrate wealth in certain regions.

Global instability and ethical concerns

Geopolitical tensions and conflicts: International trade is susceptible to political instability. Events like trade wars, sanctions, and blockages can disrupt supply chains and escalate tensions between nations.
Environmental degradation: Expanded global trade increases transportation and production, which can contribute to pollution, deforestation, and carbon emissions. Developing countries, in particular, may relax environmental regulations to stay competitive.
Labor exploitation: To reduce costs, some multinational companies may move production to countries with low wages and weak labor laws, leading to poor working conditions and the exploitation of workers.
Intellectual property theft: Businesses face the risk of their patents, trademarks, and proprietary information being stolen or infringed upon in foreign markets

International finance

International finance (also called international monetary economics or global finance) is a branch of financial economics that deals with the study of monetary interactions betweentwo or more countries. It focuses on how countries, businesses, and individuals conduct financial transactions across borders.

Types of international finance

The types of international finance are categorized based on the nature of the transaction and the parties involved. These range from short-term funding for trade to long-term investments in foreign markets.

International trade finance

This category includes financial instruments and services that facilitate the exchange of goods and services between importers and exporters.

Letters of credit (LCs): A bank guarantees payment to the exporter once they present documents proving the goods have been shipped and the contract terms have been met.
- Sight LC: Payment is made immediately upon the bank’s receipt of the documents.
- Usance LC (time LC): Payment is made at a specified future date.
Documentary collections: The exporter’s bank sends shipping documents to the importer’s bank, which releases them to the importer in exchange for payment or a promise to pay.
Bank guarantees: A bank promises to pay a specific amount if the importer fails to meet a contractual obligation.
Factoring and forfaiting: The exporter sells their accounts receivable (invoices) to a third party (a factor or forfaiter) at a discount for immediate cash, often without recourse.
Export credit insurance: Provided by government agencies (like the Export-Import Bank in the US) or private companies, this protects exporters from non-payment risk.
Pre-shipment and post-shipment finance: Exporters receive financing before and after the goods are shipped to cover working capital needs.
Supplier’s and buyer’s credit:
- Supplier’s credit: The exporter offers credit terms to the buyer, often with the support of a bank.
- Buyer’s credit: A financial institution lends money to the importer to pay the exporter.

Foreign direct investment (FDI) finance

FDI involves a long-term investment by a company into a foreign enterprise, granting the investor significant influence over the foreign operation.

Greenfield investments: Financing for establishing a new facility or venture in a foreign country.
Brownfield investments: Financing for acquiring or merging with an existing foreign company.
Equity capital: The foreign investor provides funds in exchange for an ownership stake, typically 10% or more, in the foreign company.
Intra-company loans: Financing provided by the parent company to its foreign subsidiary.
Project finance: Financing provided for a large-scale, long-term project (e.g., infrastructure or energy) based on the project’s projected cash flow.

Foreign portfolio investment (FPI) finance

FPI is a “passive” investment in a foreign country’s financial assets, where the investor has no direct managerial control.

International equity market: Buying and selling of stocks in foreign companies.
International money market: The market for short-term funds, involving transactions in various currencies.
International credit market: The market where companies and governments issue debt instruments, such as international bonds, to global investors.

Foreign exchange market

Also known as the forex or FX market, this is the largest and most liquid financial market in the world, where currencies are exchanged.

Spot contracts: Exchanging currencies at the current market rate for immediate delivery.
Forward contracts: Agreeing to exchange a set amount of currency at a predetermined exchange rate on a future date to hedge against currency risk.
Currency swaps: An agreement to exchange one currency for another at a specified time and to re-exchange them at a later date.

International financial institutions

This includes financing provided by large multilateral and regional organizations.

Multilateral development banks: Institutions like the World Bank, International Monetary Fund (IMF), and regional development banks provide loans and other financial support to developing countries.
Commercial bank financing: International banks offer various short-term and long-term loans to exporters, importers, and multinational corporations

World bank

The World Bank is a vital international financial institution dedicated to providing financing, advice, and research to developing nations to aid their economic advancement. It consists of two main institutions, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), with an overarching mission to create a world free of poverty.

Functions of the World Bank

The World Bank’s functions primarily revolve around long-term economic development and poverty reduction. These include:

Providing financing: The World Bank supplies loans, interest-free credits, and grants to governments in middle-income and low-income countries for capital projects.
Funding development projects: The bank’s funds support a wide array of investments in areas such as:
1. Education, including building schools and training teachers.
2. Health, including maternal and child health and combating infectious diseases.
3. Public administration and governance.
4. Infrastructure, such as roads, railways, ports, energy, and telecommunications.
5. Financial and private sector development.
6. Agriculture, food security, and environmental management.
Offering policy advice and technical assistance: The bank provides global expertise, research, and analysis to help countries design and implement better policies, strengthen institutions, and build capacity.
Promoting long-term capital investment: The World Bank aims to ensure a smooth transition toward a peace economy for its member countries through capital investment.
Encouraging investment and trade: The bank works to promote private sector solutions and mobilize private investment to spur inclusive and sustainable growth.
Facilitating international cooperation: The bank provides a platform for its member countries to discuss global development issues and decide on the world’s development focus.

Benefits of the World Bank

The World Bank provides numerous benefits to its member countries, particularly developing nations:

Poverty reduction: The bank’s primary goal is to reduce poverty by investing in sectors that have the greatest impact on living standards, health, and economic opportunities for the most vulnerable populations.
Financial stability: The World Bank’s operations help countries maintain financial stability and navigate global economic shocks through lending, policy guidance, and support for debt management.
Mobilizing resources: The bank’s low-interest loans and credits allow developing countries to finance critical development projects that would otherwise be difficult or impossible to fund.
Infrastructure development: Projects financed by the World Bank, such as roads, railways, and energy facilities, improve connectivity, create jobs, and foster long-term economic opportunities.
Human capital investment: The World Bank emphasizes investment in human capital through education, health, and social protection programs, which are crucial for a country’s long-term growth and competitiveness.
Risk management: The World Bank helps countries manage financial and climate-related risks, including providing insurance coverage against pandemics and natural disasters.
Knowledge sharing: The bank offers a vast pool of knowledge, data, and expertise, helping countries learn from successful development practices and implement effective policies.
Resilience building: Through programs focused on disaster risk management and climate change adaptation, the bank helps countries build resilience against global shocks and threats that could undermine development gains

The International Monetary Fund (IMF)

The International Monetary Fund (IMF) is a global organization focused on maintaining stability in the international monetary system. Unlike the World Bank, which focuses on long-term development projects, the IMF provides short- and medium-term financial assistance to help countries address balance-of-payments problems.

Functions of the IMF

The IMF fulfills its mission through three primary functions: surveillance, financial assistance, and capacity development.

1. Surveillance

The IMF monitors the economic and financial policies of its member countries and the global economy.

Country surveillance: The IMF holds regular dialogues with each member country (known as Article IV consultations) to monitor economic developments, assess policies, and provide recommendations.
Global surveillance: The IMF publishes regular reports like the World Economic Outlook and the Global Financial Stability Report, which provide analysis of global and regional economic trends and risks. This helps to identify potential threats to global financial stability.

2. Financial assistance (Lending)

The IMF provides loans to member countries that are experiencing balance-of-payments difficulties.

Purpose: The loans are intended to help countries implement policy adjustments that restore economic stability and growth.
Conditionality: In most cases, the loans are conditioned on the borrowing country agreeing to implement specific economic reforms.
Loan types: The IMF offers various lending facilities, including:
- Stand-By Arrangements (SBA): Short-term assistance for temporary balance-of-payments problems.
- Extended Fund Facility (EFF): Longer-term support for countries with more deep-seated structural issues.
- Rapid Financing Instrument (RFI): Emergency funding for countries facing urgent needs, such as natural disasters or pandemics.
Special Drawing Rights (SDRs): The IMF allocates an international reserve asset called Special Drawing Rights to supplement member countries’ official reserves. Members can exchange SDRs for other currencies.

3. Capacity development

The IMF offers technical assistance and training to help member countries strengthen their economic institutions and build human capital. This includes assistance in areas such as:

Taxation and revenue administration
Expenditure management
Monetary and exchange rate policy
Financial system supervision

Benefits of the IMF

Financial stability during crises: The IMF provides a critical financial lifeline during economic crises, helping countries manage balance-of-payments problems and stabilize their economies.
Access to expertise: Members benefit from the IMF’s research and policy advice, which is based on a wide range of economic data and global expertise.
Restored market confidence: Entering into an IMF program signals to private investors that a country is committed to addressing its economic problems. This can help to restore market confidence and attract investment.
Improved economic management: The technical assistance provided by the IMF helps countries strengthen their economic institutions and improve their economic management capabilities.
International cooperation: The IMF provides a forum for member countries to discuss and coordinate economic policies, helping to manage a complex and interconnected global economy.
Preventing economic contagion: By providing financial assistance to countries in crisis, the IMF can prevent economic instability from spreading to other nations, thereby safeguarding the entire global economy.
Stable exchange rates: By fostering stable exchange rates and an orderly system of international payments, the IMF facilitates the balanced expansion of international trade

The African Development Bank (AfDB)

The African Development Bank (AfDB) is a multilateral development finance institution established to contribute to the sustainable economic development and social progress of its African member countries.

Its core functions are:

1. Providing finance for projects and programs

Loans and equity investments: The AfDB’s primary function is to make direct loans and equity investments for the socio-economic advancement of its Regional Member Countries (RMCs).
Concessional lending: The bank provides soft loans and grants through the African Development Fund (ADF), particularly for low-income member countries.
Private and public capital mobilization: It actively promotes investment in Africa by stimulating and mobilizing both public and private capital for development projects.

2. Promoting regional integration

The AfDB prioritizes and supports projects and programs that foster regional integration among African countries.
This includes financing large-scale multinational infrastructure projects, such as cross-border roads and regional power pools, to facilitate trade and connect African economies.

3. Offering technical assistance and policy advice

The AfDB also provides technical assistance and policy advice to help RMCs prepare and implement development projects effectively and formulate sound economic strategies. It also focuses on building capacity within member countries to enhance their ability to manage and implement development programs.

4. Special initiatives and strategic focus

The AfDB’s strategic priorities, known as the “High 5s,” guide its development agenda to accelerate Africa’s transformation. These focus areas include investing in energy (Light Up and Power Africa), boosting agriculture (Feed Africa), promoting industrialization (Industrialize Africa), enhancing regional connectivity (Integrate Africa), and improving living conditions (Improve the Quality of Life for the People of Africa).

5. Managing risks and promoting sustainability

The bank integrates environmental and social safeguards into its projects and has initiatives like the Climate Risk Management and Adaptation Strategy to address climate change. It also works to ensure the responsible use of funds through its anti-corruption efforts.

The African Development Fund (ADF)

The African Development Fund (ADF) is the concessional financing window of the African Development Bank (AfDB) Group. Its specific functions are to provide grants and “soft loans”—loans with zero interest, long grace periods, and extended repayment terms—to the poorest and most vulnerable African countries that cannot borrow on market terms.

The core functions of the African Development Fund include:

Providing concessional finance: The ADF’s main function is to offer grants and low-interest loans for critical projects and programs in Africa’s least developed countries.
Poverty reduction: In harmony with the AfDB Group’s overall mission, the ADF’s primary goal is to reduce poverty by improving living conditions and spurring economic growth in the poorest member countries.
Focusing on vulnerable states: Nearly half of the 37 countries benefiting from ADF financing are considered fragile states. The fund provides resources to help them address basic service delivery and build resilience against shocks.
Supporting strategic development areas: The ADF’s activities align with the AfDB’s broader “High 5” strategic priorities. This includes projects that address energy access, food security, industrialization, regional integration, and quality of life.
Strengthening climate resilience: The ADF increasingly earmarks funds for climate change-related initiatives. This includes both adaptation projects (helping countries cope with the effects of climate change) and mitigation projects (reducing greenhouse gas emissions).
Gender equality: The fund places a strong emphasis on projects that empower women and girls, including those that offer improved access to education, water, and sanitation.
Improving project implementation and accountability: The ADF works to build the capacity of its recipient countries and improve institutional governance to ensure that projects are implemented effectively and sustainably.
Mobilizing resources: The ADF raises its funds primarily through contributions and periodic replenishments from its contributing non-African and African countries. This allows it to act as a crucial channel for leveraging global resources to finance Africa’s development.

Balance of payments accounts

The balance of payments (BOP) is a systematic record of all economic transactions between the residents of a country and the rest of the world over a specified period. It operates on a double-entry bookkeeping system, where credits (money inflows) and debits (money outflows) must, in theory, always balance.

Structure of the balance of payments accounts

The BOP is divided into three main accounts: the current account, the capital account, and the financial account.

1. Current account

This records the flow of goods, services, income, and current transfers. It includes:

Balance of trade (visible trade): The difference between the value of a country’s exports and imports of tangible goods. A positive balance indicates a trade surplus, while a negative balance indicates a trade deficit.
Balance of services (invisible trade): The difference between the value of exported and imported services, such as tourism, banking, and transportation.
Primary income: Reflects income earned from factors of production, such as interest, dividends, and profits earned from foreign investments.
Secondary income (current transfers): Includes one-way transfers of money, such as foreign aid, gifts, and remittances from workers abroad.

2. Capital account

This account records international capital transfers and transactions in non-produced, non-financial assets. It typically includes:

Capital transfers: Transfers of ownership of fixed assets and the forgiveness of debt.
Acquisition/disposal of non-produced, non-financial assets: This involves transactions in things like patents, copyrights, and brand names.

3. Financial account

This records transaction related to international investment flows. It is composed of:

Foreign Direct Investment (FDI): Investments that give a firm a controlling ownership in a foreign business.
Portfolio investment: Includes transactions in equity and debt securities, such as stocks and bonds, where the investor does not gain significant control.
Reserve assets: Controlled by the central bank, these are foreign currency reserves, gold, and Special Drawing Rights (SDRs) used to manage the country’s currency and international payments.

Balancing act: Deficits and surpluses

In accounting terms, the total of all credits and debits should equal zero. However, a deficit or surplus can emerge in the sub-accounts.

Current account deficit: Occurs when a country’s spending on imports, net income, and transfers exceeds its earnings from exports. This deficit must be financed by a surplus in the capital and financial accounts.
Current account surplus: Occurs when a country’s earnings from exports exceed its foreign spending. The surplus is typically used to fund investment abroad, leading to a deficit in the capital and financial accounts.

Causes of balance of payments disequilibrium

Persistent deficits or surpluses can result from various economic, political, and social factors:

High domestic prices: Make a country’s exports less competitive and imports more attractive, worsening the trade balance.
Economic growth: Rapid growth can increase domestic demand for both locally produced goods and imports, which can lead to a current account deficit.
Capital flight: Political instability can cause large capital outflows, negatively affecting the capital account.
Structural changes: Shifts in a country’s industrial base, such as deindustrialization, can lead to a long-term decline in export competitiveness.

Measures to correct disequilibrium

Governments can implement various measures to address imbalances in the balance of payments:

Monetary measures: Using tools like interest rates and money supply to influence aggregate demand and spending on imports.
Trade policy: Implementing measures such as tariffs, quotas, and export promotion to manage the flow of goods and services.
Expenditure-switching policies (devaluation): Reducing the value of the domestic currency to make exports cheaper and imports more expensive, which encourages exports and discourages imports.
Expenditure-reducing policies: Adopting contractionary fiscal or monetary policies to reduce aggregate demand and thus the demand for imports.

Commercial terms

These internationally recognized rules clarify the tasks, costs, and risks for buyers and sellers. Each rule is a three-letter code that applies to a specific mode of transport or any mode.

EXW (Ex Works): The seller’s responsibility is to make the goods available at their premises. The buyer bears almost all costs and risks from that point onward.
FCA (Free Carrier): The seller delivers the goods, cleared for export, to a carrier or another party nominated by the buyer at an agreed-upon place.
FOB (Free on Board): The seller delivers the goods on board a vessel at a named port of shipment. The buyer bears all risks and costs from that moment.
CIF (Cost, Insurance, and Freight): The seller pays for the cost, insurance, and freight to bring the goods to a named port of destination. Risk transfers from the seller to the buyer once the goods are on board the vessel.
DAP (Delivered at Place): The seller delivers the goods to a named place of destination, and the buyer assumes responsibility from that point onward, including import clearance.
DDP (Delivered Duty Paid): The seller bears all costs and risks, including customs duties and taxes, to deliver the goods to the buyer’s named destination.

methods of payments

Letter of Credit (L/C): A bank’s commitment to pay the seller a specific amount on behalf of the buyer, provided the seller meets all conditions outlined in the L/C.
Documentary Collection: An exporter’s bank forwards shipping documents to an importer’s bank with instructions for payment. The importer receives the documents in exchange for payment or a promise to pay.
Cash in Advance: The buyer pays the seller in full before the goods are shipped. This is the most secure method for the exporter but carries the highest risk for the importer.
Open Account: A transaction in which goods are shipped and delivered before payment is due, which is typically 30 to 90 days after delivery. This is the riskiest option for an exporter.
Factoring: A financial service in which a company sells its accounts receivable (invoices) to a third party (a factor) at a discount for immediate cash.

Shipping and logistics terms

These terms cover the physical movement of goods and associated processes.

Bill of Lading (B/L): A legal document issued by a carrier to a shipper that acknowledges receipt of the cargo and serves as a contract of carriage and document of title.
Freight Forwarder: A firm that acts as an intermediary between the shipper and carrier, arranging and overseeing the transport of goods across borders.
Customs Clearance: The process of obtaining permission from a country’s government to either import or export goods by fulfilling regulatory requirements and paying any necessary duties.
Demurrage: A fee charged by a carrier to a shipper for delays in loading or unloading cargo that extends beyond the agreed-upon time.
Containerization: The use of standardized containers for the transport of goods, which increases efficiency and reduces handling time.

General trade and economic terms

Tariff: A tax or duty to be paid on a particular class of imports or exports.
Quota: A government-imposed limit on the quantity of a specific good that can be imported or exported during a specified period.
Balance of Payments (BOP): A record of all economic transactions between the residents of one country and the rest of the world over a specified period.
Protectionism: An economic policy of restricting imports from other countries through methods such as tariffs and quotas.
Trade Surplus/Deficit: A trade surplus occurs when a country’s exports exceed its imports, while a trade deficit happens when imports are greater than export.

Documents used in international trade

The Commercial Invoice, which describes the goods, quantity, price, and terms of sale, used by customs to assess duties.
The Proforma Invoice, a preliminary bill outlining the seller’s intent and used for quoting.
The Packing List, which details the contents, weight, and dimensions of each package for customs and inventory.
The Certificate of Origin (CO), verifying the country of manufacture and influencing customs duties.
The Inspection Certificate, confirming goods meet contractual specifications.
The Bill of Lading (B/L) for sea transport, which acts as a receipt and document of title.
The Air Waybill (AWB) for air transport, a non-negotiable contract of carriage and receipt.
The Consignment Note for road or rail, serving as a receipt but not a document of title.
The Multimodal Transport Document used for shipments involving multiple transport modes.
The Letter of Credit (L/C), a bank guarantee of payment upon presentation of required shipping documents.
A Bill of Exchange, an exporter’s order for payment from the importer on a specific date.
An Insurance Certificate, providing proof of coverage against loss or damage during transit.
Import/Export Licenses for controlled goods.
The Customs Declaration, detailing the shipment for officials.
The Bill of Entry, filed by the importer to declare goods

Method of settlement through the banking system

1.Letters of credit (L/C)

A letter of credit is a contractual agreement where a bank, on behalf of the importer (the buyer), guarantees payment to the exporter (the seller) for a specified amount. The payment is made once the exporter provides documents proving that the goods have been shipped and all terms and conditions of the L/C are met.

It involves the following:

Importers’ bank issues L/C: The importer applies to their bank to issue an L/C in the exporter’s favor.
Exporter ships goods: Upon receiving and verifying the L/C, the exporter ships the goods as specified in the agreement.
Exporter submits documents: The exporter presents the required shipping documents (e.g., bill of lading, commercial invoice) to their own bank.
Banks verify and process: The exporter’s bank verifies the documents and forwards them to the importer’s bank. If the documents are in order, the importer’s bank makes the payment.
Payment and goods transfer: The importer’s bank pays the exporter’s bank. The importer repays their bank and receives the shipping documents, which they use to claim the goods.

2. Documentary collections

This is a transaction where the exporter’s bank (the remitting bank) sends shipping documents to the importer’s bank (the collecting bank) with payment instructions. The importer can only obtain the documents, which are needed to claim the goods, by following the instructions. Unlike a letter of credit, the banks do not guarantee payment.

Types of documentary collections:

Documents against Payment (D/P): The importer can collect the shipping documents only after paying for the goods. This is also called “cash against documents”.
Documents against Acceptance (D/A): The importer accepts a bill of exchange (promising to pay at a future date) to receive the shipping documents. The exporter is therefore extending credit to the importer.

Risk balance:

Exporter: Medium to high risk. Payment is not guaranteed by a bank and depends on the importer’s willingness and ability to pay. The risk is higher with D/A terms, as the goods are released before payment.
Importer: Medium risk. The importer is assured the goods have been shipped before payment or acceptance but is trusting the exporter to deliver the correct goods.

3. Wire transfer (Telegraphic Transfer)

This is a simple electronic funds transfer from the importer’s bank to the exporter’s bank. The bank’s role is primarily as an intermediary for the transfer of funds; it does not offer any payment guarantees.

types:

Cash in Advance (CIA): The importer pays the exporter by wire transfer before the goods are shipped. This is the safest method for the exporter.
Open Account (OA): The exporter ships the goods and sends the documents directly to the importer, who sends payment via wire transfer at a later agreed-upon date (e.g., 30, 60, or 90 days). This is the riskiest option for the exporter.

Risk balance:

Exporter (Open Account): High risk. Relies entirely on the buyer’s promise to pay after receiving the goods.
Importer (Cash in Advance): High risk. Pays for the goods before shipment and has no guarantee of receiving them.
Importer (Open Account): Low risk. Benefits from favorable cash flow and inspects goods before payment.

4. Correspondent banking

For international bank transfers to work, an extensive network of relationships between banks is required. Correspondent banks hold accounts for foreign banks and facilitate the transfer of funds and messages between them.

It involves the following:

SWIFT network: Banks primarily use the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network to send standardized, secure messages and instructions for financial transactions.
Transfer of funds: Instead of physically moving currency, the correspondent bank system allows for debits and credits to be made to the accounts that banks hold with each other.
Intermediaries: For currency pairs with lower transaction volumes, a longer chain of correspondent banks may be involved, increasing the cost and time of the transfer
Terms of credit

Credit terms in international trade are a critical component of a sales contract, specifying how and when a buyer will pay a seller. They define the allocation of risk and impact the cash flow for both parties. The choice of credit terms is a balancing act influenced by factors like the level of trust between the trading partners, country risks, and market conditions.

Common international credit terms

1.Cash in Advance

Description: The importer pays the exporter for the goods before they are shipped. Wire transfers and credit cards are commonly used.
Risk: This is the most secure method for the exporter, eliminating credit risk entirely. It is, however, the riskiest for the importer, who has paid before receiving the goods.
Application: Suitable for new trading relationships, unstable markets, or where the exporter’s product is unique or in high demand.

Letters of Credit (L/C)

Description: A bank, on behalf of the importer, guarantees payment to the exporter, provided the exporter submits the required documents on time.
Risk: The risk is evenly distributed between the exporter and importer. The exporter is assured of payment, while the importer is assured that payment is made only when documents proving shipment are presented.
Types:
- Irrevocable L/C: Cannot be changed or canceled without the consent of all parties.
- Confirmed L/C: A second bank adds its guarantee of payment, offering more security to the exporter in high-risk countries.
Application: A secure method for new or less-established trade relationships, especially when reliable credit information is difficult to obtain.

Documentary Collections

Description: The exporter uses their bank to collect payment from the importer’s bank in exchange for shipping documents. Unlike L/Cs, the banks do not guarantee payment.
Risk: This method is less secure than a letter of credit but more balanced than open account terms.
Types:
- Documents against Payment (D/P): The importer pays immediately upon receiving the documents.
- Documents against Acceptance (D/A): The importer accepts a bill of exchange, promising to pay at a future date, to get the documents and take possession of the goods.

Open Account

Description: The exporter ships the goods directly to the importer and sends the shipping documents with a request for payment at a future date, typically within 30, 60, or 90 days.
Risk: This is the most advantageous term for the importer in terms of cash flow but carries the highest risk for the exporter.
Application: Used when a high degree of trust exists between the trading partners or in competitive markets where sellers must offer liberal credit terms.

Consignment

Description: The exporter ships goods to the importer but retains ownership until the importer sells them. Payment is made to the exporter only after the goods are sold.
Risk: This is the highest-risk method for the exporter, as they only get paid if the goods are sold.
Application: Suitable for certain industries like fresh produce or for testing new markets.

Factors in negotiating credit terms

Relationship of parties: The level of trust and the duration of the trading relationship heavily influence credit terms.
Risk assessment: Evaluating the commercial and political risks in the importer’s country is crucial.
Cost and convenience: More secure methods like L/Cs are more complex and costly than simpler options like open accounts.
Competitive environment: In highly competitive markets, exporters may need to offer more lenient credit terms to win business.

Tools for managing credit risk

Exporters can use several financial tools to mitigate the risks associated with offering credit in international trade.

Trade credit insurance: Protects the exporter against commercial and political risks of non-payment by foreign buyers.
Factoring: Selling foreign accounts receivable at a discount to a third party for immediate cash.
Forfaiting: A type of factoring specifically for medium- to long-term trade receivables.

Shipping, transport and insurance and licensing document.

Transport and shipping documents

These documents govern the physical movement of goods and serve as a contract of carriage between the shipper and the carrier.

Common documents

Bill of Lading (B/L): The most critical document in maritime shipping. It serves as:

A receipt for goods received on board.
Evidence of a contract of carriage.
A document of title to the goods, meaning its holder has the legal right to claim them.
Air Waybill (AWB): A non-negotiable transport document covering cargo transport from airport to airport. It serves as:

A contract of carriage between the shipper and the airline.
A receipt of goods for the airline.
It is not a document of title to the goods.
Consignment Note (or Rail/Road Waybill): Used for land transport, it serves as a receipt and a contract of carriage but is not a document of title.
Dock Receipt: Issued by a port authority or a carrier, it confirms that the shipment has been received at the dock for export.

2. Insurance documents

International shipping exposes goods to various risks, including damage, loss, or theft. Insurance documents provide protection against these risks.

Common documents

Insurance Certificate: Provides proof that the goods are insured and specifies the type and amount of coverage.
Marine Insurance Policy: A specific policy covering shipments transported by sea.
Export Credit Insurance Policy: Protects the exporter against the risk of non-payment by the importer due to commercial or political reasons.

3. Licensing and regulatory documents

These are government-issued documents required to comply with the legal and regulatory frameworks of both the exporting and importing countries.

Common documents

Export and Import Licenses: Required for certain controlled goods (e.g., firearms, pharmaceuticals, specific agricultural products). In Kenya, licenses are issued by relevant government bodies.
Customs Declaration: Declares the contents, value, and other relevant details of a shipment to customs officials for duty assessment.
Certificate of Origin (COO): Certifies the country where the goods were manufactured. It is often required for duty assessment or to claim preferential tariff treatment under trade agreements.
Pre-Shipment Inspection (PSI) Certificate: For countries like Kenya that require it, this document verifies that goods meet certain quality, quantity, and safety standards. In Kenya, this is the Pre-Export Verification of Conformity (PVoC).
Health and Phytosanitary Certificates: Required for food, plants, and animal products to ensure they meet health and quarantine regulations.

4. Integration of Incoterms with documents

The specific Incoterm agreed upon by the buyer and seller in the sales contract dictates which party is responsible for obtaining, presenting, and paying for which transport, insurance, and licensing documents.

For example, under CIF (Cost, Insurance, and Freight), the seller is responsible for the cost of the goods, insurance, and freight to a named port. Thus, the seller will arrange and pay for the transport and insurance documents.
Under EXW (Ex Works), the buyer is responsible for all costs and risks from the seller’s premises. The buyer, therefore, handles almost all the documentation required.

TOPIC: 2 RISK IN FINANCING INTERNATIONAL TRADE

Types of risks

1. Commercial risks

These risks are associated with the buyer’s ability or willingness to pay for goods.

Credit risk: The risk that the buyer defaults on payment or declares insolvency.
Performance risk: The risk that the seller fails to fulfill their obligations as per the sales contract, delivering the wrong or poor-quality goods.
Solvency risk: The possibility that the buyer’s business fails financially, leaving them unable to pay their debts.

2. Country (or Political) risks

These risks arise from political or economic instability in the importing country that could disrupt trade.

Currency inconvertibility: A government places restrictions on converting local currency into foreign currency, preventing the buyer from paying.
Expropriation: A government takes control of foreign assets without providing adequate compensation.
Political violence: Events like war, civil unrest, or terrorism can disrupt trade and cause damage to goods or assets.
Change in laws and regulations: New tariffs, quotas, or other barriers may be imposed that negatively affect the transaction.

3. Financial risks

These risks are related to financial market instability and fluctuations.

Foreign exchange (FX) risk: The risk of financial loss due to unfavorable movements in exchange rates between the time a contract is made and payment is received.
Interest rate risk: Fluctuations in interest rates can affect the cost of borrowing for both the exporter and importer.

4. Shipping and logistics risks

These risks relate to the transportation of goods.

Marine risk: The risk of goods being damaged, lost, or stolen during transit, especially by sea.
Documentary risk: The risk of errors or discrepancies in the required paperwork, which can delay or prevent payment.
Fraud risk: The use of falsified documents or fraudulent schemes to cheat importers or exporters.

Protection against risks

For exporters

Letters of Credit (L/C): A bank guarantees payment to the exporter on behalf of the importer, provided the exporter meets the terms of the L/C.
Trade Credit Insurance: Purchased from private companies or government agencies, this protects the exporter against non-payment from the buyer due to commercial or political risks.
Factoring and Forfaiting: Selling foreign receivables to a factor or forfaiter for immediate cash, which transfers the payment risk to that financial institution.
Cash in Advance: Receiving payment from the buyer before shipping the goods, which eliminates commercial risk.
FX Hedging: Using financial instruments like forward contracts, options, and currency swaps to lock in an exchange rate, protecting against currency fluctuations.

For importers

Letters of Credit (L/C): Ensures that the exporter has shipped the goods and met all contractual obligations before the bank releases payment.
Pre-shipment Inspection (PSI): Hiring a third-party inspector to verify the quality and quantity of the goods before they are shipped.
Marine Insurance: Provides compensation for loss or damage to goods during transit.
Escrow services: A third party holds the payment until the importer confirms that the goods have been delivered and meet the agreed-upon standards.

Methods used by governments and regional trading blocs

Government actions

Export Credit Agencies (ECAs): Government-backed agencies that offer credit insurance and guarantees to exporters, protecting them against commercial and political risks.
Protectionism: Implementing policies like tariffs, quotas, and subsidies to protect domestic industries from foreign competition.
Trade regulations: Setting rules and standards for imports and exports, including licensing requirements, to ensure compliance and control.
Investment Treaties: Entering into bilateral investment treaties (BITs) that provide foreign investors with legal protections against expropriation and other government actions.
Sanctions and Embargoes: Imposing economic restrictions on specific countries to address political or security concerns, which directly impacts trade with those nations.

Regional trading blocs

Reduced Barriers: Trading blocs (e.g., EU, USMCA) eliminate or reduce tariffs, quotas, and non-tariff barriers among member states, facilitating smoother trade within the bloc.
Harmonized Regulations: Blocs standardize regulations and customs procedures, which simplifies compliance and reduces the documentary risk for businesses trading within the region.
Enhanced Market Access: By creating a larger, integrated market, blocs provide member firms with greater access and economies of scale, reducing dependence on single markets.
Risk Diversification: Firms operating within a trade bloc can diversify their supply sources and markets across member countries, mitigating geopolitical risks and external shocks.
Dispute Resolution Mechanisms: Some blocs, like the EU, have established mechanisms for resolving trade disputes between member states, offering a more stable and predictable environment for businesses.

TOPIC: 3 METHODS OF SETTLEMENT PAYMENTS AND COLLECTION AND SOURCES OF FINANCE

International payment systems

International payments are facilitated by complex systems that move money between different countries and currencies.

SWIFT (Society for Worldwide Interbank Financial Telecommunication):
- This is a global messaging network used by banks to send secure financial transaction information. It does not transfer money directly but sends payment orders that banks act upon.
- A bank sends a SWIFT message with payment instructions, which is then routed to the recipient’s bank, often involving intermediary correspondent banks.

Correspondent Banking
This isa network of bilateral agreements between banks to process foreign currency transactions. Banks hold accounts with each other to facilitate cross-border payments.
- A domestic bank uses its foreign correspondent bank to clear payments in the foreign currency. This process often relies on Nostro and Vostro accounts.
Automated Clearing House (ACH):
- While primarily a domestic system, ACH can facilitate international payments through partnerships with foreign payment networks. It is used for batch processing of electronic payments.
Real-Time Gross Settlement (RTGS):
- A system that processes payments between banks in real-time, with each transaction settled individually. Its principles can apply to international payments, typically for the final domestic leg of a transaction.
Digital Payment Platforms (FinTech):
- Modern financial technology companies (FinTech) offer fast and efficient alternatives to traditional banking. These platforms often leverage new networks and APIs for cross-border payments. Examples include PayPal, Wise (formerly TransferWise), Stripe, and others offer services for international transfers with competitive rates.

Methods of payments and collection

The choice of payment and collection method depends on the level of trust between the trading partners and the desired allocation of risk.

Cash in Advance:
Letters of Credit (L/C):
Documentary Collection:.eg Documents against Payment (D/P),Documents against Acceptance (D/A)
Open Account.
Consignment:
- The exporter ships goods to the importer but retains ownership until the goods are sold to the end customer. It has Highest risk for the exporter.Specialized industries or testing new markets.
Wire Transfer (Telegraphic Transfer)
Electronic funds transfer via the SWIFT network. It is a fast and secure way to send money.Can be used for cash in advance, open account, or as part of other arrangements.

Sources of finance

Businesses need access to finance to manage cash flow and cover costs associated with international trade.

Trade Finance:
- Description: Instruments and products designed to facilitate international trade. It includes many of the methods of payment and collection listed above.
Export Credit Insurance:
- Description: A policy that protects the exporter from the risk of non-payment by the foreign buyer. It is offered by government agencies (like Export Credit Agencies) or private insurers.
Factoring and Forfaiting:
- Factoring: Selling foreign accounts receivable at a discount for immediate cash.
- Forfaiting: Similar to factoring, but typically for medium- to long-term trade receivables.
Pre-shipment and Post-shipment Finance:
- Pre-shipment Finance: Loans provided to exporters to purchase raw materials and cover manufacturing costs before the goods are shipped.
- Post-shipment Finance: Funding provided to exporters after the goods have been shipped to cover the period until the final payment is received.
Working Capital Loans:
- Description: Commercial banks provide short-term loans to cover the day-to-day operational activities of a business involved in trade, such as purchasing raw materials and paying salaries.

Vostro and Nostro accounts

These are terms used in correspondent banking to describe the same account from two different perspectives.

Nostro Account (Ours):
- This is where the bank holding an account with a foreign bank. Example: A Kenyan bank (Bank A) holds a USD account with a US bank (Bank B). From Bank A’s perspective, this is a Nostro account (“our account with your bank”).
Vostro Account (Yours):
- This is where the foreign bank holds the account for the other bank.
- Example: In the above scenario, from the US bank’s (Bank B’s) perspective, the account is a Vostro account (“your account with our bank”).
Role of nostro and vostro accounts in International Trade:

They are essential for international transactions, allowing banks to settle payments in foreign currencies without needing a physical presence in every country.
They streamline payments and help manage foreign exchange risks

Nature of foreign exchange

Foreign Exchange (Forex or FX): This refers to global market where currencies are traded. It is the largest financial market in the world, operating 24/5.

Spot Exchange: The immediate exchange of one currency for another at the current market rate.
Floating Exchange Rates: Most major currencies are free-floating, meaning their value is determined by supply and demand in the forex market.
A forward exchange contract is an agreement to exchange a fixed amount of one currency for another at a specific future date, at an exchange rate that is locked in at the time of the contract.
Hedging: Forward contracts are primarily used by importers and exporters to mitigate foreign exchange risk. By locking in a future exchange rate, a company can protect itself from unfavorable currency fluctuations.
Example: A Kenyan exporter expects to receive USD 100,000 in three months. By entering a forward contract, they can sell those dollars at a predetermined KES exchange rate, ensuring they know exactly how much Kenyan Shillings they will receive, regardless of market movements.

Trading and foreign currency accounts

Forex Trading: Speculators and investors buy and sell currency pairs to profit from exchange rate movements. This differs from hedging, which aims to protect against risk.
Foreign Currency Account: A bank account held in a foreign currency. This allows businesses or individuals who frequently deal in a specific foreign currency to manage their transactions without constant conversion, which helps mitigate exchange rate risk.

Bank undertaking as a means of obtaining payments

A bank undertaking is an irrevocable commitment by a bank to pay a beneficiary (e.g., an exporter) on behalf of a client (e.g., an importer) once certain conditions are met. This is one of the most secure ways for an exporter to obtain payment.

Letters of Credit (L/C): As discussed above, a letter of credit is a classic example of a bank undertaking where the issuing bank commits to pay the exporter once compliant documents are presented.
Bank Payment Undertaking (BPU): A modern, digitized version of a bank undertaking, often used in supply chain finance. A BPU is an irrevocable payment obligation from a bank, triggered by the matching of electronic data rather than the physical presentation of paper documents.
Bank Guarantees: A bank issues a guarantee on behalf of a customer, agreeing to be liable for a debt or obligation to a third party. Unlike an L/C, a guarantee is typically called upon only if the customer defaults.
Standby Letters of Credit (SBLC): This acts as a “backup” or secondary payment method, often used to guarantee an open account or other trade facility. If the buyer defaults on their primary payment obligation, the seller can draw on the SBLC

Bills for collection

Documentary collections (D/C) are used in international trade as a method for an exporter’s bank to forward shipping and trade documents to an importer’s bank with instructions for collecting payment or accepting a bill of exchange. This method reduces the risks of open account trading without the complexity and cost of a letter of credit.

The process involves the exporter shipping goods and sending documents to their bank (remitting bank). The remitting bank forwards these documents and instructions to the importer’s bank (collecting bank), which then notifies the importer. The importer obtains the documents and claims the goods after meeting the conditions (payment or acceptance), and the collecting bank sends the payment to the remitting bank for the exporter.

There are two main types: Documents against Payment (D/P), where the importer pays upon receiving the documents, and Documents against Acceptance (D/A), where the importer accepts a future payment date via a bill of exchange to receive the documents.

Sources of finance

Businesses involved in international trade utilize various financing options to manage cash flow and mitigate risk.

Bank Guarantees: These are a bank’s commitment to pay a specified amount if a client fails to meet a contractual duty. They come in various types, such as bid bonds and performance guarantees, providing security and facilitating trade.
Overdrafts: A short-term credit facility allowing businesses to withdraw funds beyond their account balance up to a set limit for working capital.
Letters of Credit (L/Cs): While primarily a payment tool, L/Cs also serve as a financing mechanism. The issuing bank guarantees payment to the exporter upon receipt of compliant documents. L/Cs can facilitate import loans for buyers and serve as collateral for pre-shipment finance for exporters.
Underwriting of Commercial Contracts: Bank undertakings like performance guarantees are forms of underwriting, where the bank compensates a party if the other fails to meet contractual obligations, shifting performance risk to the bank.
Pre-shipment Finance: Funding for exporters to cover costs before shipping goods, often against a confirmed export order or L/C.
Post-shipment Finance: Funding provided after shipment until the importer’s payment is received, which can include discounting export bills.
Factoring and Forfaiting: Exporters sell foreign accounts receivable at a discount for immediate cash, transferring credit risk and improving cash flow.
Receivables Discounting: Selling invoices or bills of exchange at a discount for prompt payment.
LPO Financing: Providing funds to clients with confirmed purchase orders who need immediate cash flow to fulfill them.
Buyer’s Credit: A loan from a financial institution in the exporting country to a foreign buyer to finance purchases from that country.
Supplier’s Credit: The exporter directly extends credit to the overseas buyer

TOPIC 4: OTHER SERVICES PROVIDED BY BANK TO TRADERS IN INTERNATIONAL TRADE

Business travel arrangements

Banks can offer services that simplify international business travel for traders, either directly or through partnerships with travel management companies.

Foreign currency services: Providing foreign exchange, multi-currency accounts, and travel cards to manage expenses and reduce currency risk while abroad.
International banking services: Facilitating access to cash at foreign ATMs and making electronic payments abroad. Some banks, particularly those with international branches, allow customers to set up accounts or access services in different countries.
Trade advisory: Offering advice on the specific banking, financial, and logistical requirements for business travel in a particular country, based on their correspondent banking network and international insights.

Trade promotion by overseas connections

Banks leverage their global network and deep market knowledge to help traders identify new opportunities.

Correspondent banking network: Banks have relationships with banks in other countries. This network provides a vast source of information on foreign markets, local customs, regulations, and business practices.
Trade mission and fair facilitation: Sponsoring or helping to organize trade missions and participation in overseas trade fairs, where traders can display products and network with potential partners.
Market intelligence: Providing reports and research on economic trends, industry conditions, and investment opportunities in various countries.

Finding agents, potential buyers, and tender guarantees

Finding partners: Using their overseas connections, banks can act as a bridge to find reliable agents, distributors, and potential buyers. They can also offer due diligence services to verify the credibility of a potential partner.
Tender guarantees: Issuing guarantees like bid bonds and performance bonds on behalf of a trader. These guarantees assure the overseas project owner that the trader will fulfill their obligations, which helps the trader bid on large international tenders with confidence.

Arranging banking services for customers abroad

Offshore and multi-currency accounts: Assisting multinational corporations (MNCs) and traders in setting up accounts in foreign countries or holding foreign currency accounts domestically.
Cash and liquidity management: Offering global cash and liquidity management services to help companies with international operations optimize their cash positions, manage funds, and make payments efficiently across different jurisdictions.

Providing information on joint ventures and franchising operations

Structuring advice: Banks and their specialized advisory teams can provide guidance on the financial and legal aspects of forming joint ventures or engaging in franchising operations abroad.
Partner search: Leveraging their network to identify potential partners for joint ventures, assessing the financial and strategic fit.
Financial modeling: Assisting with the financial modeling and projections for new ventures to secure financing and ensure profitability.

Government and non-governmental assistance

Export Credit Agency (ECA) collaboration: Acting as an intermediary between traders and government ECAs (e.g., Export-Import Bank). Banks help traders access ECA-backed loans, guarantees, and insurance to mitigate political and commercial risks.
Development finance institutions: Partnering with Multilateral Development Banks (MDBs) and other development finance institutions to provide funding and support for projects in developing and emerging markets.
Trade promotion bodies: Collaborating with government-sponsored trade promotion organizations to offer special programs, subsidies, or market access initiatives to exporters.