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The Dynamics of International Trade Finance in Africa
Abstract
International trade involves the movement or exchange of commodities—goods and services—across borders giving opportunities to consumers to gain access to goods and services that are either not available in their respective economies or more expensive to access. International trade activities have grown over the years and this development may be attributed to the globalization of the world’s economy as well as trade finance schemes to finance such trade. The chapter provides an overview of the trade finance dynamic in Africa, and the various payment methods in international trade, which include open accounts, prepayment, documentary collections, letters of credit, drafts, and counter-trade. The chapter also discusses trade finance instruments, including the line of credit, pre- and post-export financing, accounts receivable financing, as well as forfaiting and factoring. The chapter examines the agencies that facilitate international trade in Africa, which include the World Trade Organization (WTO), the Africa Continental Free Trade Area (AfCFTA), the African Export-Import Bank (Afreximbank), and the ECOWAS Bank for Investment and Development (EBID) among others. The chapter offers interesting insights on the financing schemes used in driving Africa’s export trade.
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The African Export-Import Bank (Afreximbank) was established in 1993 as a crisis management institution on the heels of the Latin American debt crisis of the 1980s. It has since grown into Africa’s foremost regional integration bank, and is playing a critical role in supporting the implementation of the African Continental Free Trade Area (AfCFTA). In addition to raising resources dedicated to the expansion of intra-African trade and the diversification of sources of growth, Afreximbank has bolstered its trade facilitation programmes and drawn on digitalisation to build an integrated payments system to assuage liquidity constraints and sustainably boost cross-border trade and growth. This paper reviews various innovative measures and facilities deployed by the bank to finance and leverage more resources toward a successful realisation of the AfCFTA.
In recent years, the volume of international trade has increased enormously due to the effects of globalization and liberalization of trade. However, political and economic changes, changes in consumer demand, market structures, product and market life cycles, domestic and foreign competition and the degree of effects caused by these changes became more and more significant. Such changes forces the firms making or intending to make business globally to implement dynamic strategies and action plans. Considering above mentioned points, this study aims to explore the uncertainties facing the exporting firms located in Izmir. The topics to be explored in this study will include uncertainties related with external and internal environment of the firms.
The paper was written to review the role of the Nigeria Export-Import (NEXIM) bank in the development of Nigerian economy. The NEXIM bank which was set up in 1991 with enviable mandate of propelling the economy through trade finance, export market advisory services and Export Guarantee facility among others could not fulfill the objectives of its funding fathers. This was due to poor management team and poor funding. The bank has been resuscitated in 2010 under the new leadership of Mr. Roberts's Orya who has outperformed his predecessors due to his management doggedness and the cooperation of the current government in terms of funding. It was therefore recommended that the management should be given free hand to perform, and be empowered with more funds and the management should open a cordial linkage with other EXIM banks in bigger economies of the world. Through these, the NEXIM would be able to perform maximally.
Factoring is a global industry with a vast turnover and has gained significant importance in the recent years. This method of payment was used in order to ensure that companies could continue procure raw materials and produce output without any interruption. Factoring helped businessmen getting benefits in having consistent cash flows, reduced credit risks and investing their productive time on their core activities. After having seen the impact of Industrial Revolution, both the domestic and international factoring started gaining popularity at an impressive rate in most of the countries. Although there are several methods of settlement like open account, advance payment and documentary collection, a strong alternative called factoring has been most widely used by businesses in different parts of the world to settle their international trade transactions. This paper focuses on understanding the concept, its growth, comparison of trends in terms of volume of factoring services worldwideand its growth in India.
Accounts receivable financing practice is the act of exchanging Accounts Receivables with money, and it is defined as any type of financing which distinctly relies on AR, either as collateral or as an eligibility requirement. Financing firm operations through Accounts receivables is gaining prominence in the world because it enables firms to access finances easily. The objective of the study was to evaluate the effect of Accounts receivable financing practices on the growth of SMEs in Kenya. Descriptive survey design and purposive random sampling were used in this empirical study, based on a sample of 359 respondents. Secondary data was obtained from Kakamega County Revenue Department, for the examined timeframe. The assumptions that form the basis for the use of the regression model were tested using homoscedasticity and autocorrelation. Ordinary Least Square method was used to determine the cause-effect relationship between variables, while a main hypothesis was tested at 5% significance level. The overall model was found to be significant with values of F=31.692 and p-value of 0.00. The findings revealed that Accounts receivable financing practices lead to growth when they are adopted by SMEs. The study recommended that owners and managers should be enlightened on the importance of the various methods and practices of financing accounts receivables in order to enhance growth. The findings provide a basis for the government and policy makers to formulate strategies and policies that would help reduce the levels of tied up capital in form of accounts receivable. The study also forms a basis for further research and adds to the existing body of knowledge.
This study argues that the ability to mitigate risks associated with international trade is particularly important at times of heightened uncertainty, such as the economic crisis caused by the Covid-19 pandemic. Risk mitigation can be achieved through letters of credit (LCs), trade finance instruments providing guarantees to trading partners. As their use varies across products, exports of some products are more resilient than others during times of increased uncertainty. This situation reverses in times of financial crises when distressed banks may limit the supply of LCs. Our analysis using data on US and EU-15 exports during the Covid crisis and the Global Financial Crisis provides empirical support for these hypotheses.
This study documents a substantial decline in the exports of major trading nations taking place in March 2020. Accounting for product-specific seasonality and annual trends, the data suggest a drop by 38 per cent in France, about a quarter in Turkey and Germany, and 12 per cent in the US, relative to their historical averages. Detailed export data from Turkey, disaggregated by financing terms, show another striking pattern. Flows using bank intermediation which eliminates or reduces the risk of non-payment or non-arrival of prepaid goods, such as letters of credit or documentary collection, appear to have been much more resilient to the current downturn relative to flows using other financing terms. These findings suggest that access to trade finance is vital during times of heightened uncertainty.
While Afro-optimism emphasises the prospects of the African Continental Free Trade Area (AfCFTA), Afro-pessimism focuses on the challenges of AfCFTA in Africa. Even as Afro-optimists and Afro-pessimists continue to dominate academic discourse and African scholarship, this article departs from these two by interrogating the free trade area in Africa through the prism of Afro-realism. The article investigated the implications of prospects and challenges of AfCFTA for achieving the objectives of regional integration as encapsulated in the aspirations of Agenda 2063 in Africa. The article sufficiently demonstrated that the AfCFTA fits into the strategic frameworks and goals of AU regional integration and 2063 Agenda. The conclusion of this article from Afro-realist prognosis, therefore, was that if the prospects are enhanced to overcome the challenges confronting the Agreement through strict implementation and enforcement, it will likely achieve the objectives of the AU regional integration agenda and the aspirations of the AU 2063 Agenda.
Monopolies continue to dominate world trade by controlling global production and distribution chains. Neither free trade nor fair trade has transformed this system; the recent rise in nativism and pseudo‐protectionism has not, and cannot, address these problems either. The African Continental Free Trade Area (AfCFTA), the largest free trade area in the world, promises to be different. AfCFTA rejects classical, neoclassical, and Marxist theories of trade, appealing, instead, to non‐aligned pan‐Africanism. It advocates continental free trade as a way to overcome the lingering effects of slavery, colonialism, and neocolonialism. However, its exclusive focus on continental Africa, its disinterest in systemic redistribution, and encouragement of the private appropriation of socially created land rents prevents AfCFTA from achieving its goals. In fact, AfCFTA might actually foster inequality—progress alongside of poverty—and in so doing, undermine the very essence of this trade regime. What Henry George (1886) called “true free trade,” a theory based on making land common by socializing land rent, offers a more promising and powerful model through which to achieve the pan‐African agenda. Indeed, only true free trade can definitively decolonize global trade.
The 21st century has witnessed swift change in every sphere of the human endeavour. Regulatory re-alignment, digitalisation and economic and political developments have contributed to paradigm shift in banking, trade, finance and the shipping industry virtually transforming the landscape. International Trade Finance is an essential tool for bankers, exporters/importers, shippers, consultants, teachers and students navigating the procedures of international trade finance. The book addresses basic topics relating to international trade including letters of credit mechanism, collections of bills, trade customs and practice. New to this revised edition, it covers SWIFT updates, supply chain system, UKEF, Blockchain technologies, the implications of BREXIT, NAFTA, Mexico, Canada and other bilateral agreements and their implications, the US sanctions, terrorist financing and anti-money laundering provisions, and a check list to control financial crime risks in trade finance. The extended metaphor of the book is that of an arm chair tour covering fundamentals to the nuances of the hard core of the subject matter and enabling the readers to deal with complicated implementation issues in a forthright and comprehensive fashion.
International trade exposes exporters and importers to substantial risks. To mitigate these risks, firms can buy special trade finance products from banks. Based on unique data with global coverage, this paper explores under which conditions and to what extent firms use these products. 15 percent or $2.5 trillion of world exports are settled with letters of credit and documentary collections. Letters of credit are employed the most for exports to countries with intermediate contract enforcement, and they are used for riskier destinations than documentary collections. The 2007/2008 financial crisis affected firms’ payment choices, pushing them to use more letters of credit. These patterns follow naturally from a model of payment contracts in international trade.
Introduction to International Trade Finance covers the complete cycle of international trade and explains the roles of the specialist operators. Introduction to International Trade Finance aims to: Guide the reader through every phase of typical trade transactions, examining in detail the relationships between the various parties involved and explaining the facilities employed. Demonstrate the range of banking instruments and techniques available to exporters and importers which enable them to enter into contracts, confident that whichever method of settlement they agree upon can be provided with the minimum of risk. Provide a firm understanding of when to apply a particular form of finance, what risks are involved and how they can be counteracted. Now updated to include the UCP600.
The increasing participation of relatively inexperienced enterprises in international trade calls for a concise and jargon-free, general reference to the many ways by which traders can arrange for payments to be made and the relative merits, of each from a risk standpoint. The most common methods i.e. letters of credit, are covered in some detail including examples.
In order to provide a better understanding of export financing in Ghana this exploratory study was undertaken on a sample of non-traditional exporting firms and selected banks. The focus is on export financing in Ghana. Ghanaian exporters hardly obtain finance for export operations. Interest rates are high, and financial institutions prefer granting short-term credit to medium or long-term credit, and investing in government treasury bills and bonds rather than lending to small and medium-sized firms. Small and medium-sale exporters hardly meet the requirements of banks to access credit, especially collateral. Default on loans has been high. Exporters need to be more responsible in funds utilization, just as the financial institutions have to be more exporter-friendly to ensure the success of the national export-led growth strategy. The recent (2000) Export Development and Investment Act is likely to provide greater access to export finance for exporting firms.
Esta esla tercera edición en inglés publicada en 1992. Contiene: el ambiente financiero internacional; comporamiento del tipo de cambio; administración del riesgo del tipo de cambio; Administración de los activos y pasivos a largo plazo; administración de activos y pasivos a corto plazo.
This article examines how in a context of limited enforceability of contracts suppliers may have a comparative advantage over
banks in lending to customers because they are able to stop the supply of intermediate goods. Suppliers may act also as liquidity
providers, insuring against liquidity shocks that could endanger the survival of their customer relationships. The relatively
high implicit interest rates of trade credit are the result of insurance and default premiums that are amplified whenever
suppliers face a relatively high cost of funds. I explore these effects empirically for a panel of UK firms. (JEL: G30, M130, D920)
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