Sanderson Abel
International trade shapes our everyday lives and the world we live in.
In nearly every instance that we make a purchase or sale, we are participating in the global economy. Whole products and or their component parts come to our store shelves from all over the world.
Most international trade consist of the purchase and sale of industrial equipment, consumer goods, oil and agricultural products.
Services such as banking, insurance, transportation, telecommunications, engineering and tourism account for one-fifth of the world global trade.
The current situation obtaining in Zimbabwe thus calls for increased participation in international trade by local players, particularly by exporters.
With the country operating without its own currency, the sources of the liquidity in the country comes largely from trading with the rest of the world.
It is therefore important to understand how the resources flow in international trade and how policies can be tailor made so that the country is in a position to generate as much revenue as possible for the benefit of our multi-currency system.
With the structure of the economy fast changing and the informal sector leading in the productive system, it is important that the players in this sector understand and adapt to the use of the banking system to effect their international payments and receive payments from their foreign buyers.
Banks are important facilitators of international trade.
Besides providing liquidity, they guarantee payment for around a fifth of world trade. The banking sector thus plays an important role in international business.
Today, almost all banks have formed collaborative alliances and established correspondent banking relationships with banks in other countries to better serve their international business community.
Banks play a key role in forming a bond of trust between buying and selling agents, executing transactions in international markets.
Local banks have intermediaries outside the country, which assist in effecting international payments hence the receipt and payment for goods and services by local people.
Banks play a pivotal role in foreign trade through the provision of the financial structure and instruments necessary for the conduct of business transactions between foreign buyers and sellers. Banks ensure safety and transparency in the flow of documents and money.
Buyers (importers) of goods from abroad, the sellers (exporters) will want to be assured of payment, and as a buyer, one would want assurance that all terms and conditions of the purchase agreement are kept. This requires then that the banks come in to broker an agreement and work as an intermediary between the importer and the exporter.
Banks play a major role by providing assistance in many ways to facilitate international trade business, which encompasses financing working capital requirements, financing capital goods, identification of potential markets for international trade, identification of buyers and sellers, facilitating payment for international trade transactions, issuing import letters of credit, pre and post shipment financing and guaranteeing payment under letters of credit issued by other banks.
The most common instrument used for payment and shipment control is a letter of credit issued by the bank of the buyer in favour of the seller.
After the bank of the buyer approves the issuance of the letter of credit, the issued letter of credit is sent to the advising bank that establishes the authenticity of the instrument and informs the beneficiary of receipt.
The advising bank may confirm the letter of credit after checking the terms and conditions for payment by adding its own guarantee to that of the issuer.
Commercial banks facilitate trade and the payment of funds through documents.
After all the terms and conditions for shipment and quality standards have been checked via the presentation of proper documentation, the issuing bank pays the seller for the goods.
The post shipment facility provides short-term financing to exporting manufacturers, distributors and service providers.
Businesses receive financing in the form of a loan equivalent to invoice value of export sales, which must be repaid from the assigned proceeds of payments. The post shipment facility aims to bridge the gap between the settlement of production costs and export sales receipts, allowing a business to accelerate cash flow and shorten operating cycles.
The advantages of this financing mechanism are that the exporter’s working capital cycle is shortened therefore allowing for increased production levels and exporters are able to convert a credit sale into a cash sale, thereby freeing up their capital for further exports
Pre-shipment financing is a short-term loan or direct financing that a commercial bank extends to an approved company to assist in the payment of inventory, be it raw materials, semi-finished or finished products.
Once goods are received, the exporter can now prepare products for local sale or export.
The pre shipment facility is offered at competitive rates and is designed for trade transactions that are short-term and self-liquidated.
Advantages associated with this type of financing include; the company is offered credit terms so that it can add flexibility to its cash flow and thereby manage the business more efficiently; provides extra time for the goods to clear customs and be resold before you need to pay for the goods and also suppliers are assured payment upon request from the exporter.
Feedback: Sanderson Abel is an economist. He writes in his capacity as senior economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw or on numbers 04-744686 and 0772463008