Trade finance programs sponsored by international or government finance organizations encourage banks to finance commercial transactions in areas with failing financial markets. Programs include credit guarantees, revolving lines of credit, and risk mitigation programs, particularly in regions with currency restrictions. Regional trade finance programs promote trade exchanges within the region and support member country banks and companies in import/export activities outside the region.
Trade finance programs are sponsored by international or government finance organizations to encourage banks to finance private sector commercial transactions in areas where financial markets are failing. Typical programs include credit guarantees, revolving lines of credit, and risk mitigation programs, particularly in regions that have currency restrictions and where foreign trade provides foreign currency liquidity. International organizations sponsored as of 2011 included the Asian Development Bank, the International Finance Corporation of the World Bank, and the European Bank for Reconstruction and Development.
Credit Guarantee Programs ensure that an exporter’s bank will receive payment on a letter of credit, even if the importer or the importer’s bank fails to pay as expected. This encourages banks to take on clients they might not normally work with and allows smaller companies to participate in import and export transactions. Credit guarantees are given on an individual basis after the importer and exporter have negotiated terms. The importer’s bank and exporter’s bank generally need to be approved before the sponsor of trade finance programs will offer a credit guarantee.
Risk mitigation is one of the key objectives of trade finance programs. Sponsorship organizations reduce or eliminate risk to individual banks by guaranteeing full or partial reimbursement in the face of commercial or political risk. For companies in more developed countries, this risk is usually covered by private trade credit insurance, but in less developed regions the cost of such a policy would be prohibitive, thus requiring the intervention of the public sector or regional international organizations. For example, the Asian Development Bank could guarantee the transaction from a Chinese company to a Thai company, promising payment if political instability in one country or the other prevents the completion of the transaction.
Trade finance programs also offer revolving lines of credit to help banks fund loans for pre- and post-transaction spending. Many trade finance organizations offer programs to lend additional money to banks that lend the funds to client companies to pay expenses that are not necessarily part of the individual export/import contract. In this case, the organization assumes the bank’s risk, rather than guaranteeing the performance of the private sector importer or exporter. An example of such a loan would be to an Indonesian garment manufacturer to purchase fabrics and other supplies to fill a large export order.
Regional Trade Finance programs such as those of the Asian Development Bank or the African Development Bank are designed to promote trade exchanges within the region, as well as support member country banks and companies in import/export activities outside the region. outside the region. Banks from third or even fourth countries could be involved in the transactions, further increasing the risk of any commercial venture. For example, a Vietnamese company might import French-owned equipment, with a German bank financing the export. The Asian Development Bank could then offer a credit guarantee to the German bank which the importer’s bank would pay.
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