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International Trade: Risks And The Role Of Banks - Business - Nairaland

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International Trade: Risks And The Role Of Banks by ExportPortal: 7:11am On Oct 06, 2022
Companies in international trade are taking increasing risks in order to maintain a satisfactory level of turnover. As a result, they must become more creative in order to find solutions to secure operations. However, traditional solutions, such as credit insurers or forfeiters, are frequently becoming increasingly uncertain. Banks are the preferred actors in such circumstances.

Frequent Risks in International Trade

Country risk is one of the main risks that companies must manage when they go outside their domestic borders. It encompasses the various political, economic, and social factors that may result in a loss during a transaction with a foreign country. It is unrelated to the specific characteristics of the business partner but is related to the business environment in which the transaction occurs. It is a difficult risk to assess, even though certain indicators such as political, social, and economic insecurity, a shaky banking system, stringent legal constraints, almost non-existent or archaic rights, rampant corruption, or protectionism can help.

Besides the country risk, which is both an economic and political risk, there are risks of a purely economic nature such as the risk of non-payment and the currency risk. When it comes to international trade, the risk of non-payment is almost doubled. It occurs when the customers of exporting companies do not fulfill their obligations, in whole or in part. This risk arises when a lapse of time separates the execution of the obligations of the different parties: the seller bears the costs as the product is manufactured, while the buyer pays only after delivery with a certain term of payment. As for the currency risk, it generally concerns debts and receivables from contracts in progress or to be carried out soon. As the rate of foreign currencies is constantly fluctuating, the company may be forced to convert sums from its international activities under less favorable conditions than initially budgeted.

Banks to the Rescue of International Trade Actors

For each of the risks mentioned above, banks offer appropriate services. A letter of credit is one of the banking solutions against the risk of non-payment. It is a conditional payment commitment issued by the bank. By means of this letter, the institution undertakes to pay a determined amount to the supplier of a product or service in exchange for the delivery, within a fixed period, of the documents proving that the goods have been sent or that the service has been rendered. The letter of credit protects both the seller and the buyer during a transaction.

As for currency risk, foreign currency advances are also a banking service valued by regular exporters and importers. The company borrows an amount in foreign currency equal to the amount of the claim to be received on the foreign currency market and immediately resells these currencies on the spot market to obtain national currency. That company will repay the loan with the currencies received from its client, plus foreign currency interest. There are several other banking services available to businesses operating at the international level.

Regarding country risk, banks do not really have any services per se. But they provide exporters and importers with comprehensive studies about the countries and their level of risk so that these companies can better choose their partners and make the best business decisions.

Visit Export Portal

For more information on all things trade, make sure to check out Export Portal!

#ExportPortal #internationaltrade #banksrole #traderisks

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