International Trade and Trade Financing Instruments
What Are The Basic Problems Arising In International Trade Financing And How Do The Main Financing Instruments Help Solve Those Problems
1. Trade Financing Instruments
The main types of trade financing instruments are as follows: a) Documentary Credit
This is the most common form of the commercial letter of credit. The issuing bank will make payment, either immediately or at a prescribed date, upon the presentation of stipulated documents. These documents will include shipping and insurance documents, and commercial invoices. The documentary credit arrangement offers an internationally used method of attaining a commercially acceptable undertaking by providing for payment to be made against presentation of documentation representing the goods, making possible the transfer of title to those goods. A letter of credit is a precise document whereby the importer’s bank extends credit to the importer and assumes responsibility in paying the exporter.
A common problem faced in emerging economies is that many banks have inadequate capital and foreign exchange, making their ability to back the documentary credits questionable. Exporters may require guarantees from their own local banks as an additional source of security, but this may generate significant additional costs as the banks may be reluctant to assume the risks. Allowing internationally reputable banks to operate in the country and offer documentary credit is one way to effectively solve this problem. b) Countertrade
As mentioned above, most emerging economies face the problem of limited foreign exchange holdings.
One way to overcome this constraint is to promote and encourage countertrade. Today’s modern counter trade appears in so many forms that it is difficult to devise a definition. It generally encompasses the idea of subjecting the agreement to purchase goods or services to an undertaking by the supplier to take on a compensating obligation. The seller is required to
1. Trade Financing Instruments
The main types of trade financing instruments are as follows: a) Documentary Credit
This is the most common form of the commercial letter of credit. The issuing bank will make payment, either immediately or at a prescribed date, upon the presentation of stipulated documents. These documents will include shipping and insurance documents, and commercial invoices. The documentary credit arrangement offers an internationally used method of attaining a commercially acceptable undertaking by providing for payment to be made against presentation of documentation representing the goods, making possible the transfer of title to those goods. A letter of credit is a precise document whereby the importer’s bank extends credit to the importer and assumes responsibility in paying the exporter.
A common problem faced in emerging economies is that many banks have inadequate capital and foreign exchange, making their ability to back the documentary credits questionable. Exporters may require guarantees from their own local banks as an additional source of security, but this may generate significant additional costs as the banks may be reluctant to assume the risks. Allowing internationally reputable banks to operate in the country and offer documentary credit is one way to effectively solve this problem. b) Countertrade
As mentioned above, most emerging economies face the problem of limited foreign exchange holdings.
One way to overcome this constraint is to promote and encourage countertrade. Today’s modern counter trade appears in so many forms that it is difficult to devise a definition. It generally encompasses the idea of subjecting the agreement to purchase goods or services to an undertaking by the supplier to take on a compensating obligation. The seller is required to