Question

The role of banks in facilitating international trade

Some of the challenges in international trade

The risks and costs of international trade

The difference between using Trade Finance Products for International Trade, compared to using international Local Bank Financing.

Answer 1

Role of banks in facilitating international trade

Banks is backbone of any economy. Banks plays important role not only in providing key financial services in an economy but also in international trade. International trade is an important activity because every country is dependent on other countries for meeting domestic requirements of goods and services as well as for selling surplus items to other countries for revenue. All earnings through exports and expense on imports are in foreign exchanges which needs to be converted into local currency of a country. Banks converts all foreign exchanges into local currency of a country and also provide mechanism for business transactions between foreign traders and traders within a country. Today many of leading banks has overseas branches which means traders of a country can easily buy items from abroad or sell items to foreign countries using same bank service.

Banks paves the way for hassle free international trade in manifold ways such as issuance of letter of credit, identification of prospective buyers and sellers abroad, disbursement of working capital requirements of traders and guarantee of payments on letter of credits issued by other banks. With letter of credits, bank guarantees payment of specific payment amount to the beneficiary. Commercial banks release payment funds to the companies after verification of export sales receipts. Verification of shipment details, sales vouchers etc are done by banks in timely manner to ensure quick and hassle free trade deals.

Some of the Challenges of international trade

International Trade has several challenges due to complexity of global market. Some of the challenges of international trade is political and economic uncertainty in a region. When in a certain country or region, there is political instability or internal public unrest, trading of that region with other countries gets affected.   Moreover, every country has its own specific trading policy that forces domestic companies to plan their foreign trade accordingly. Some other challenges are inflationary trends, purchasing power of people etc. also determine volume of international trade between a country with others. Another challenge is volatility in balance of payment position. When a country’s import bill is higher than export earnings, it is supposed to have unfavourable balance of payment with other countries. However, balance of payment position of a country varies from different foreign countries. Country having weak currency value always have risk of draining internal resources with high imports.

The risks and costs of international trade

There are always certain risks in carrying any business activity. International trade is also a type of business activity and the volume of risk is quite higher in international trade than internal trade. Though international trade is an important medium of meeting indigenous requirements of essential commodities such as food grains, fuel products and finished items, it also has risk of draining country’s internal finance especially if the country has high fiscal deficit and weak currency valuation in the international market.

Another risk is advantageous position of foreign companies in comparison to domestic companies. Cheap imports badly affects financial health of domestic companies and similarly rising production cost factors reduces competitiveness of a country in global market. Thus the risks and costs of international trade are risk of exchange rates, exports and imports quota and financial insolvency of companies in a country.

The difference between using Trade Finance Products for International Trade, compared to using international Local Bank Financing.

Trade Finance products are loans, letter of credits, export credit and insurance etc. The agencies involved in trade finance are export import banks, insurance companies, importers and exporters and service providers. Trade finance is monetary activities of international trade and commerce.

International local bank financing is trade finance offered to international traders by international financial institutions such as World Bank and local commercial banks operating in different countries such as Bank of China, Santander Bank, Bank of Georgia(USA) etc. The type of international trade finance services offered by these banks are trade loans, Banker’s acceptance, letters of credit, export payment clearance etc.