Access To Trade Finance For Developing Countries

Access to Trade Finance for developing countries

The Finance Trade has been essential to the expansion of foreign trade during the last century, transactions intermediate by banks today represent more than a third of the global trade, equal to a trillion of dollars per year.

Only a small part of foreign trade is paid in advance, importers generally want to pay, at least until they receive the merchandise in order to verify their physical integrity upon arrival when they arrive. Exporters on the other hand seek to be paid at the time they embark on the merchandise. In order to close that time gap in which exporters seek to pay them and importers want to pay, it is necessary to have a credit or a payment guarantee. Trade Finance can provide that credit, payment guarantees and the necessary insurance to facilitate the payment of those goods or services that will satisfy both the exporter and the importer.

The concrete purpose of Trade Finance is to mitigate the risks by which any international trade transaction can be exposed. There are 6 types of risk:

• Payment risk: When the exporter does not receive the payment or receives it in different conditions than the agreed.
• Exchange rate risk: When the operation is established in a currency other than that of the countries involved, the possibility of fluctuation in its value is latent.
• Merchandise risk: when the importer receives the merchandise in different conditions to those established.

  Wait! Access To Trade Finance For Developing Countries paper is just an example!

  Get an unique paper

• Legal risks: controversies are resolved with the legislation of one of the parties.
• Operational risks: human errors, inappropriate internal or external processes, system failures, etc.
• Political risks: actions adopted by the Government that impact the payment of the buyer on the operation, such as expropriation, war, political violence, etc.

Financial instruments were designed to reduce or mitigate these risks. Several of them have the support of international institutions that constantly regulate these transactions in order to sponsor greater certainty for international business operations

Main financial instruments

Documentary credit letters

Documentary credit letters, usually called credit or LC letters).

Credit letters specify the nature of the commercial transaction that will be carried out, including the date and destination of the merchandise, the necessary documents that the seller, payment methods must be sent, the date on which the transaction should be completed,the conditions with which the seller must meet to receive the payment, etc.

These precise instructions follow a standard format issued by the International Chamber of Commerce (CC) called "uniform customs and practices for documentary credits" (UCP)

The main parts in transactions with credit letters are:

•  Order
•  Beneficiary
•  Issuing bank
•  Correspondent bank

The ordering (importer or buyer) requests the opening of the letter of credit and indicates to the issuing bank the conditions.

The issuing bank is the one who issues a letter of credit at the request of an order. It is the bank that assumes the obligation to pay the ordering as its own before the beneficiary. He is committed to the beneficiary to pay him against the presentation of documents, as long as the terms and conditions of the letter of credit are complied with.

The beneficiary (exporter or seller) has the right of collection based on compliance with the conditions imposed in the letter. Receive a payment guarantee provided that the documentation required in the corresponding deadlines is submitted.

The correspondent bank acts as a notifier or notifier and/or confirmator. In case of being warning, it only notifies the letter of credit without acquiring payment commitment. In case of being a confirming bank, it is the bank that assumes the payment obligation of the issuing bank, or not has received the reimbursement from the issuing bank. The confirmator bank is the one who maintains a business relationship with the issuing bank and assumes the risks of the issuing bank.

Stand By Credit Letters

Stand By credit letters, usually called Stand By, are a modality of the Documentary Credit of Credit. They guarantee the payment of monetary obligations on a due date or compliance with a agreed good or service between a buyer and a seller, in which a bank as a guarantee of the guarantee intervenes, by instructions of the ordering and in favor of the beneficiary. They are used especially for tenders, real estate and working capital.

Stand By credit letters also follow a standard format issued by the International Chamber of Commerce (ICC) called "International Stand By" (ISP) (ISP)

Unlike a conventional letter of credit, it is not obliged to be used. It is only used in case of contractual breach, and presenting the documents indicated in its clause.

Trade Finance in developing countries

SMEs constitute the vast majority of companies registered in both developed and developing countries. Its role in economic activity and the potential for growth and innovation they offer should not be overlooked. According to the World Bank, SMEs contribute 80% of employment in developing countries, including the informal sector.

In less developed economies, with lower savings rates, local banks are even more conservative by giving support to exporters and importers. In developing countries, they normally lack capacity, Know-How, regulatory environment and international network to grant financing necessary for import and export.

Exports from Asian countries, particularly during the Asian financial crisis, suffered from regional financed crises, in certain cases caused interruptions of international commercial activity due to the lack of confidence of confirming banks with credit letters issued by the affected countriesFor the crisis.

More recently, exports from sub -Saharan countries and other countries in the African contine.

More than simply keeping the international active trade system, Trade Finance is essential in the perspective of future global growth. SMEs are the basis of the global economy, they represent 95% of companies globally and 60% of private sector jobs. The supply of Trade Finance harms SMEs more than any other company and therefore has negative effects for economies and families around the world.

Current efforts

New digital technologies such as Big Data or Blockchain Tinen an immense potential to transform the Finance industry globally, which continues to work mostly on paper. But how advanced are banks in their digital transformation?

The 2018 Global Survey ICC shows that more than 60% of the banks surveyed have implemented or are in the process of implementing technological solutions to digitize their Trade Finance operations. However, only 9% of those banks reported that these implemented solutions have led them to an increase in processes and transactions efficiency.

Trade Finance digitalization is still in early stages, but has the potential to lead to innovation and great advantages. With greater collaboration and the development of standards, industry leaders can foster that necessary progress.

Conclusions

I think that Digitization in Trade Finance is a key element to efficient the sector’s capacity to provide their services to developing countries, especially SMEs, thus promoting economic growth and sustainable development. Digitization will make more inclusive trade.

Crucially, the Trade Finance environment has to grow to help bring different actors, the collaboration between banks, corporate, fintechs, government bodies and many other industry players that will prove to be essential to help digitalisation reach important levels.