What Is the Unique Role of Banks in Cross-Border Trade?
What is the unique role of banks in cross-border trade?
Banks are important facilitators of cross-border trade (international trade). More specifically, banks not only provide letter of credit, a significant component of financing in many international trades transactions but they also acts as the primary channel for the payment of such transaction flow. As modern business much relies on the efficient functioning of financial market to conduct the international business, the banks play an important role for that business by providing financial services.
Firm engaged in international trade face a number of risks, which are quite different risks from the domestic trade. These include the risk of insolvency or fraud, which concern with the counterparty, and the risk such as the possibility of war, political unrest or unexpected import bans, which concern with the counterparty’s country. As the comprehensive data does not available for the country and partner risks, the firm need to aware for that risks. In addition, firm require additional variable trade costs due to shipping, duties and freight insurance, some of which are incurred before export revenue is earning. Furthermore, the firm can face the problems of the increasing the need for working capital requirements as the cross border delivery take longer time. For example, ocean transit shipping times can be as long as several weeks, during which exporting firm need to be wait for the payment from importers.
Accordingly, banks have developed the instrument to provide trade finance i.e financial instrument that are used to satisfy exporter’s need. The role of trade finance in international trade is important: researcher report that 90 per cent of world trade relies on one or more trade finance instrument. Banks provide trade finance for two purposes. First, trade finance serves as a source to fulfil individual traders and international companies’ working capital needs. Second, trade finance provides credit
Banks are important facilitators of cross-border trade (international trade). More specifically, banks not only provide letter of credit, a significant component of financing in many international trades transactions but they also acts as the primary channel for the payment of such transaction flow. As modern business much relies on the efficient functioning of financial market to conduct the international business, the banks play an important role for that business by providing financial services.
Firm engaged in international trade face a number of risks, which are quite different risks from the domestic trade. These include the risk of insolvency or fraud, which concern with the counterparty, and the risk such as the possibility of war, political unrest or unexpected import bans, which concern with the counterparty’s country. As the comprehensive data does not available for the country and partner risks, the firm need to aware for that risks. In addition, firm require additional variable trade costs due to shipping, duties and freight insurance, some of which are incurred before export revenue is earning. Furthermore, the firm can face the problems of the increasing the need for working capital requirements as the cross border delivery take longer time. For example, ocean transit shipping times can be as long as several weeks, during which exporting firm need to be wait for the payment from importers.
Accordingly, banks have developed the instrument to provide trade finance i.e financial instrument that are used to satisfy exporter’s need. The role of trade finance in international trade is important: researcher report that 90 per cent of world trade relies on one or more trade finance instrument. Banks provide trade finance for two purposes. First, trade finance serves as a source to fulfil individual traders and international companies’ working capital needs. Second, trade finance provides credit