Trade Finance and World Economy

Trade finance simply means financing international trade. It is a business activity that includes things such as export credit and insurance, issuing letters of credit, lending among other activities.

BREAKING DOWN ‘Trade Finance’

Although international trade has been in existence for centuries, trade finance developed as a means of facilitating it further. The widespread use of trade finance is one of the factors that have contributed to the enormous growth of international trade in recent decades.

In its simplest form, trade form works by reconciling the divergent needs of an exporter and importer. While an exporter would prefer to be paid upfront by the importer for an export shipment, the risk to the importer is that the exporter may simply pocket the payment and refuse shipment. Conversely, if the exporter extends credit to the importer, the latter may refuse to make payment or delay it inordinately. The most common solution to this problem is through a letter of credit, which is opened in the exporter’s name by the importer through a bank in his or her home country. The letter of credit essentially guarantees payment to the exporter by the bank issuing the letter of credit upon receipt of documentary proof that the goods have been shipped. Although this is a somewhat cumbersome process, the letter of credit system is one of the most popular trade finance mechanisms.

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Trade finance products are divided into. There are import trade finance products and export trade finance products.


Import Letters of Credit:

The Bank issues Letters of Credit for clients where their overseas or local suppliers may require them to provide an irrevocable Letter of Credit in their favour to secure a trade finance transaction. Our network of branches and correspondent banks across the globe enables us to issue Letters of Credit to beneficiaries in virtually all countries worldwide and in all freely convertible currencies.


Exports Letters of Credit:

Leveraging on our global presence, we are your ideal Trade bank to receive your Export Letters of Credit from banks overseas.

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Economic experts say that ninety per cent of the world’s trade relies on trade finance however since 2009 the trade finance sector has been going through rough times. These difficulties hit the world’s economy on a negative scale.

One clear lesson from the Asian financial crisis is that, in periods prone to herd behaviour and a lack of trust and transparency, all actors — including private banks (which account for some 80% of the trade finance market), export credit agencies, and regional development banks — should pool their resources as much as practicable (IMF 2003). Strong links among the various players are also important because of an absence of comprehensive and reliable data on trade finance flows. This means that the main channel for making a reasonable assessment of the market situation is via the collection of informed views and partial statistics from various institutions. This has been a key aspect of the activities of the WTO Expert Group.

While trade finance is generally sound finance (underwritten by long-standing practices and procedures used by banks and traders, strong collateral and documented credit operations), and seemed to have “resisted” rather well throughout 2007 and the beginning of 2008, it became clear over the course of 2008 that the overall liquidity squeeze was hitting trade credit supply. The refinancing of such credit was becoming more difficult, and lending was also affected by the general re-assessment of risk linked to the worsening global economic climate. Spreads on short-term trade credit facilities soared to 300 to 600 basis points above LIBOR, compared to 10 to 20 basis points in normal times. A market gap has emerged among the largest suppliers of trade finance, estimated by the main private Wall Street banks to be around $25 billion in November 2008 — out of a global market for trade finance estimated at some $10 trillion a year. Large banks have reported on several occasions that the lack of financing capacity has rendered them unable to finance trade operations. Recently, for example, a $1 billion bilateral trade contract between the US and China was dropped due to a lack of finance.

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