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The Role of Banks in International Trade

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Banks play an essential role in international trade by providing trade finance instruments to reduce exporting risks and guaranteeing payment for almost a fifth of world trade. They ensure transparency and security in the flow of documents and money and work as an intermediary between the importer and the exporter. Moreover, they provide assistance to facilitate trade by identifying potential markets, financing working capital requirements, financing capital goods, identifying buyers and sellers, managing payment, issuing Import Letters of Credit, and guaranteeing payment under Letters of Credit issued by other banks.

Banks also play a significant role in securing business transactions between a buyer and a seller located in two different countries. In the context of a documentary credit, for example, the bank plays both the role of intermediary and guarantor of the proper execution of the commercial contract. This allows sellers to feel reassured that as long as they provide all the requested documents, they will be paid without having to wait too long, which gives them the advantage of reduced payment times.

Banks also allow companies, especially small and medium-sized enterprises (SMEs), to operate their business without interruption by granting loans. For example, a small local business that receives a large order from a foreign customer but does not have sufficient financial resources to fulfill this order may resort to a bank to obtain an export credit. This allows the company to pre-finance the production of the order without cash flow issues or experience interruptions to the production process.

Investment banks also play a crucial role in assessing country risk by conducting studies in several countries around the world. They advise national and international companies and investors about countries at risk and sectors in trouble to enlighten foreign investment decisions. Banks, therefore, play a versatile role at all levels of international trade.

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