Definition: Monetary exchange between countries as a result of cross-border transactions.
In a modern economy, adequate access to credit and foreign exchange are essential for efficient, secure trade and competitiveness. Poor access to credit, on the other hand, impedes start-ups of domestic-owned traders and stifles expansion by the country’s producers. Burdensome foreign exchange requirements also increase the costs of doing business and ward off foreign investors.
A country’s legal framework, along with its public and private institutions, is critical in supporting access to credit and trade-related money flows. A sound regulatory environment and a supervisory framework raise the confidence of domestic and foreign investors alike. Of significant importance are laws that enable the oversight of financial transactions. Sound laws enable the financial sectors ability to facilitate trade through many of the traditionally recognized mechanisms utilized internationally.
Another critical element to facilitating trade-related financial flows is the strength of a country’s banking sectors. Basic trade finance products should be widely available, and foreign currency should be easily exchanged by all traders. These countries also need to deepen their offerings of both bank and nonbank trade-related financial instruments. It is equally important to increase the number of long-term credit providers, which can be very difficult to find due to market volatility. When providers of long-term credit are few, costs are high, and market coverage is minimal. But if these products are offered by more institutions, interinstitution competition reduces cost to trade financiers and dramatically increases usage among small and medium-sized enterprises (SMEs).
Moreover, organizations that provide financial services, such as banks and export credit agencies, should be required to register and operate under licenses issued by a competent authority, and subject to financial crimes–reporting regulations. The penalties for violation should be significant enough to compel performance, and the judicial system should be robust enough to create incentive for compliance. A country’s weak and inactive dispute resolution system is more often the driving factor in noncompliance cases than a weak legal framework.
Bolstering trade finance ought to be a priority of the government. Only then will a country be on a progressive path toward developing a more sophisticated and diversified financial system that will bring improved access to longer-term capital, increased credit access for SMEs, and product and service innovations that meet the needs of businesses conducting international trade.
