Trade Finance Roles of Banks
TRADE FINANCE ROLES OF BANKS
Prepared by Goodluck Nkini Manager Trade Finance CRDB Bank Limited. March 2005
Definition: Trade financing is the provision of any form of financing that enables a trading activity to take place and which may be made directly to the supplier, to facilitate procurement of items for immediate sale and/or for storage for future activities,or it could be provided to the buyer, to enable him meet contract obligations.
Importance of Trade Finance
The availability of trade finance, particularly in developing and least-developed countries, plays a crucial role in facilitating international trade. Exporters with limited access to working capital often require financing to process or manufacture products before receiving payments. Conversely, importers often need credit to buy raw materials, goods and equipment from overseas.
The Role played by a Commercial Bank
Provide Information to buyers and sellers (advisory role)
Settlements for Trade Transactions
Provide Financing
Manage currency risks
Take market risks
Settlements for Trade Transactions Open Account
Advance Payments
Documentary Collections
Letters of Credit
Provide Financing Working capital loans or overdraft, term loans. Issuing Bank Guarantees Issuance of Letters of credit (L/Cs) Accepting and Confirming Letters of Credit Discounting Export documents Structured finance
Manage Currency risks Banks are capable of minimizing Exchange rate fluctuation risk between major traded currencies through a hedging operation by taking a reverse position in the forward market or using options (to buy or to sell) foreign exchange in the futures market, thereafter be able to provide importers and exporters with competitive rates for : Spot Markets Forward Markets Options Swap Etc.
Take Market risks One risk caused by forces of demand and supply is related to price volatility. Banks are capable of selling price hedging options to exporters to
Prepared by Goodluck Nkini Manager Trade Finance CRDB Bank Limited. March 2005
Definition: Trade financing is the provision of any form of financing that enables a trading activity to take place and which may be made directly to the supplier, to facilitate procurement of items for immediate sale and/or for storage for future activities,or it could be provided to the buyer, to enable him meet contract obligations.
Importance of Trade Finance
The availability of trade finance, particularly in developing and least-developed countries, plays a crucial role in facilitating international trade. Exporters with limited access to working capital often require financing to process or manufacture products before receiving payments. Conversely, importers often need credit to buy raw materials, goods and equipment from overseas.
The Role played by a Commercial Bank
Provide Information to buyers and sellers (advisory role)
Settlements for Trade Transactions
Provide Financing
Manage currency risks
Take market risks
Settlements for Trade Transactions Open Account
Advance Payments
Documentary Collections
Letters of Credit
Provide Financing Working capital loans or overdraft, term loans. Issuing Bank Guarantees Issuance of Letters of credit (L/Cs) Accepting and Confirming Letters of Credit Discounting Export documents Structured finance
Manage Currency risks Banks are capable of minimizing Exchange rate fluctuation risk between major traded currencies through a hedging operation by taking a reverse position in the forward market or using options (to buy or to sell) foreign exchange in the futures market, thereafter be able to provide importers and exporters with competitive rates for : Spot Markets Forward Markets Options Swap Etc.
Take Market risks One risk caused by forces of demand and supply is related to price volatility. Banks are capable of selling price hedging options to exporters to