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The Roles of Banks in International Trade

The Roles of Banks in International Trade

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The Roles of Banks in International Trade

Chapter One

OBJECTIVES OF THE STUDY

  1. To find out if commercial banks play any role in international trade in Nigeria.
  2. To find out if merchant banks play any role in international trade in Nigeria.
  3. To find out if development banks play any role in international trade in Nigeria.
  4. To find out if commercial banks play any role in international trade.
  5. And equally to find out if peopleโ€™s bank plays any role in international trade in Nigeria.

CHAPTER TWO

LITERATUREย REVIEW

Theoreticalย foundation

The better we understand behaviour from a variety of points of view the more effectiveย we can use it in analysis and problem solving (Kothari, 2004).ย This study will be basedย on three main theories. These are: Transaction cost theory, Porterโ€˜s theory of Diamondย model,ย andย Keynesianย theory.ย Theseย areย presentedย below.

Transactionย Costย Theory

Ronald Coase in (1937) tries to explain why companies exist and why companies expandย or source out activities to the external environment. The transaction cost theory supposesย that companies try to minimize the costs of exchanging resources with the environment,ย andย thatย companiesย tryย toย minimizeย theย bureaucraticย costsย ofย exchangesย withinย theย company. International traders are therefore weighing the costs of exchanging resourcesย with the environment (in this case the banks) against the bureaucratic costs of performingย activities in-house. ย ย The theory sees institutions and markets as different possible formsย ofย organizingย andย coordinatingย economicย transactions.

When external transaction costs are higher than a company’s internal bureaucratic costs,ย the company grows because the company is able to perform its activities more cheaplyย than if the activities are performed in the market. However, if the bureaucratic costs forย coordinating the activity are higher than the external transaction costs, the companyย downsizes and the roles of international trade facilitation and promotion are performed byย commercialย banks.

According to Coase (1937), every company expands as long as the company’s activitiesย can be performed cheaper within the company as opposed to outsourcing the activities toย externalย providers in theย market. According to Williams (1997), a transaction cost occurs when a good or a service isย transferred across a technologically separable interface. Therefore, transaction costs ariseย every time a product or service is being transferred from one stage to another, where newย setsย of technological capabilitiesย areย needed toย makeย the product orย service.

The transaction costs related to the exchange of resources with the external environmentย couldย be reflected by the following factors;ย environmentalย uncertainty,ย opportunism,ย risks, bounded rationality and core company assets. These factors potentially increase theย externalย transactionย costs,ย whereย itย may becomeย ratherย expensiveย forย aย company toย control these factors. Therefore, it may very well be more economical to maintain theย activity in-house, so that the company may not use resources on contracts with suppliers,ย meetings, supervision etc. Therefore, if companies see the environmental uncertainty asย high,ย they mightย choose toย notย outsource or exchange resourcesย withย theย bank.ย Theย theory,ย therefore,ย guidesย theย banksย inย settingย realisticย pricesย forย theirย internationalย business services such as foreign exchange rates and charges to international paymentย transactions.

Porterโ€™sย theoryย ofย Diamondย model

Michaelย Porterย offeredย aย modelย thatย allowsย examiningย whyย someย statesย areย moreย competitive and why some industries within states are more competitive than others are.ย In this way, Porterโ€˜s diamond model of national competitiveness was detected as a modelย with which to assess the sources of competitive advantages of an industry in a particularย country and it can help realise the competitive status of a nation in global competition.ย Thisย modelย consistsย ofย fourย nationalย determinantsย ofย competitiveย advantage:ย factorย conditions, demand conditions, related and supporting industries, and firmโ€˜s strategy,ย structure and rivalry. The Porterโ€˜s theory is that these factors interact with each other toย formย conditions whereย innovation and competitivenessย occurs.

Porterย aimedย atย establishingย aย linkย betweenย theย academicย literaturesย inย strategicย management ย ย and internationalย ย ย economics ย ย in his book ย โ€•Competitive ย ย Advantage ย of Nationsโ€– inย 1990ย andย createย aย base forย developingย nationalย policiesย onย competitiveness.

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Porterย arguedย thatย aย greatย numberย ofย trade-relatedย theoriesย haveย onlyย focusedย onย costย andย a newย ย theory ย was ย essential ย that ย โ€•should ย attract ย a ย comprehensive ย understanding ย of competition that contains segmented markets, differentiated products, the technologicalย differences and economies of scaleโ€–.

 

CHAPTER THREE

RESEARCHย METHODOLOGY

ย Researchย Design

Research design refers to how data collection and analysis are structured in order to meetย the research objectives through empirical evidence (Cooper and Schindler, 2006). Theย studyย adoptedย descriptiveย researchย design.ย Mugendaย andย Mugendaย (2003)ย describesย descriptive research design as a systematic, empirical inquiring into which the researcherย does not have a direct control of independent variable as their manifestation has alreadyย occurred or becauseย the inherentlyย cannot beย manipulated.

The study used a case study design as well in determining the strategic planning andย implementation practices. Kothari (1990) describes a case study as a form of qualitativeย analysis that involves a careful and complete observation of a social unit. He furtherย describes a social unit as a person, family or institution. The researcher adopted a caseย study because of its contribution to the knowledge of individual, group, organizational,ย socialย and political phenomena.

Aย Case study hasย beenย a commonย researchย strategy inย businessย (Ghauri&Gronhaug,ย 2002) and community planning. The distinct need for case studies arises out of the desireย ofย theย researcherย toย understandย theย complexย socialย phenomena.ย Caseย studyย methodย allowed the researcher to retain the holistic and meaningful characteristics of the real lifeย eventsย (Robert, 2002).

Dataย Collection

Primary data was used in the study. The interview guide was divided into 3 sections.ย Section one involved demographics, section two on Zenith bank and International tradeย and section three on development levels of Zenith bank. The interview involved six staffย in the trade and finance department at the Bank. Development levels are measured usingย the Regional Developmentย Indexย (RDI). Interview guide wasย used inย the collection ofย data. Interview is a way to collect data as well as to gain knowledge from individuals.ย Kvale (1996) regarded interviews as an interchange of views between two or more peopleย on a topic of mutual interest, sees the centrality of human interaction for knowledgeย production,ย and emphasizes the social impact ofย research data.

CHAPTERย FOUR

DATAย ANALYSIS,ย RESULTSย AND

Demographicย Factorsย ofย theย Respondentย 

From the data collected, 6 respondents were interviewed in the department. Several demographic factors were considered which were important in the interpretation of responses given. The factors included the gender of the respondent, their highest level of education, and number of years in the organization as well as their position in this department.

CHAPTERย FIVE

SUMMARY, CONCLUSIONย NDย RECOMMENDATIONS

ย ย Introduction

Thisย chapterย presentsย summary,ย conclusion andย recommendationsย ofย theย studyย inย lineย with the objective of the study aimed at examining the role played by Zenith bank inย promotingย international trade.

Summary

The objective of the study was to determine the role played by Zenith bank in promotingย internationalย trade.ย Theย studyย establishedย thatย theย variousย internationalย businessย transactions at Zenith bank Limitedย included issuance of letters of credit which is doneย by getting collaterals and other relevant critical documentation. The letters of credit areย governedย by the internationalย chamberย ofย commerce,ย thusย the terminologiesย usedย isย similarย acrossย allย banks.ย Otherย internationalย businessย transactionsย includedย bankย guarantees which are issued based on various bank specific conditions. The bank alsoย offersย discountingย ofย invoicesย toย theย customersย asย anotherย internationalย businessย transactionย to theย clients.

The respondents further indicated that Zenith bank has put stringent conditions like theย requirement of collaterals which may need to be relaxed to be able to remain competitiveย inย theย bankingย industry.ย Theย documentaryย collectionsย areย guidedย byย internationalย guidelines. The trade finance international guidelines include provision of collateral byย the customers which is a major barrier to the customers. In the discounting of invoices theย collateralย orย securityย requirementย alsoย affectsย theย accessย ofย thisย productย toย theย customer.ย Howeverย inย theย discountingย ofย invoices,ย thereย areย noย internationalย guidelinesย thatย governย theย discountingย of invoices.

Structuring trade deals is also another challenge. This is offering capital solutions (bothย funded and non-funded) are provided outside the traditional fall back on securities thusย focus ย shifts ย from ย the ย โ€•strength ย โ€•of ย the ย borrower ย to ย the ย underlying ย cash ย flow ย and structuresย that enhanceย safeย financing.

The study further revealed that the bank was committed to international trade. The international finance products offered are used abroad and similarly by leading international banks. This is also manifested as a result of the partnerships with other organizations in the financial sector. Eg American Express that offers Gold and Green cards.

Theย studyย alsoย establishedย theย benefitsย accruingย toย Zenith bankย asย aย resultย ofย international trade are: Approximately N. 500M income from international financeย products processing, the institutionโ€™s partnership with other leading organizations eg.ย OPIC (Overseas Private Investment Corporation), World Bank and the customer base thatย is increasing rapidly due to the international finance products offered by the Bank and itโ€™sย efficiency, ability of a product to cross-sell to exporting or importing customers andย earningsย inย foreignย exchange.ย The fundsย haveย largely contributedย toย itsย growthย andย expansion.

The study identified the features that Zenith bank possesses in promoting internationalย trade.ย Most respondents agreed that it is all inclusiveness. The Bank is ready to financeย any customer with their business. The business is to have a fiscal plan; the securityย providedย shouldย beย ofย highย netย worthย becauseย ofย theย riskย implicationsย inย caseย ofย defaultersย andย allowsย forย partnerships.ย Creditย riskย evaluationย isย alsoย anotherย featureย criticalย in promotingย international trade.

Conclusion

The study concluded that the bank led to the establishment of RMA with various banksย especially in China. RMA Africa is a French regulated mutual fund (Fonds Commun deย Placement) issued from the partnership between RMA Asset Management and RMAย Capital. The fund is mostly invested in Africa and gives investors the opportunity toย benefitย fromย the substantialย potentialย of this market,ย withย a firmly established localย expertise. The fund’s objective over the recommended investment period, is to take profitย from the dynamism of a growing continent by selecting African securities offering theย greatest potential of appreciation in the medium term. The annual report released by theย RMA listed Nigeria at the top position up +2.54% rated the best performance. (RMAย Africa,ย 2014).

The Bank received cash inflows as a result of international trade. Zenith bank limitedย generated 500 million in revenue. This has led to the growth and expansion of the bank. Itย has subsidiaries in Uganda, Tanzania, Rwanda, South Sudan and Democratic Republic ofย Congo. The increase in branch network aids in the provision of international trade financeย productsย to new customers.

In turn it leads to increase in customer base to the bank and competition with otherย financialย players in theย industryย for attractiveย andย affordable services.

The study further concluded that international trade finance instruments offered by theย bank have facilitated international business. These include: documentary collection whichย is a process in which the seller instructs his bank to forward documents related to theย exportย ofย goodsย toย theย buyerโ€˜sย bankย withย aย requestย toย presentย theseย documentsย toย theย buyer for payment, indicating when and on what conditions these documents can beย released to the buyer; letters of credit used in international transactions to ensure thatย payment will be received where the buyer and seller may not know each other and areย operating in different countries; electronic funds transfer (SWIFT) that operates aย globalย fund transfer network; bank guarantees enables the customer (debtor) to acquire goods,ย buy equipment, or draw down loans, and thereby expand business activity, travellerโ€˜sย checksย andย foreignย exchange.

The study also concluded that the challenges experienced in international trade include: Knowledge gap and this can be controlled by sensitizing the customers of the products in international trade finance, security/collateral requirements, tariff barriers and substandard imports, unfair competition from other key players in the industry and fluctuations in the exchange rates.

The study concluded that international trade facilitates economic growth; improvement inย infrastructure, information and communication technology, earnings in foreign exchange,ย increaseย inย balanceย ofย payments,ย strongย localย andย foreignย currency,ย expansionย ofย businesses,ย increasedย partnershipsย regionallyย andย internationally.ย Inย addition,ย globalization which assumes similar bank transactionsย around the world, it enhances theย domestic competitiveness of the industry in the economy, there is increase in sales andย profitsย asย inย Zenith bankย thatย receivedย 500M,ย gainย aย globalย marketย share,ย reduceย dependenceย onย existingย localย productsย thusย diversifyย focusย to internationalย products.

Recommendationsย forย policy,ย theoryย andย practice

The study recommends that bank management should review the policies guiding theย provision of international tradeย finance products to customersย with a view to makingย themย attractiveย andย affordable to customers.

The study also recommends that the government with the statutory arm (Central Bank of Nigeria) enact policies that curb transactions on substandard imports and issue hefty penalties to non-abiding business persons.

Theย commercialย banksย inย theย financialย sectorย shouldย sensitizeย customersย toย createย awarenessย ofย theย internationalย tradeย financeย products.ย Theย studyย contributedย toย theย policies development in that the emerging issues like ICT, changing international tradeย financeย productsย environmentย dueย toย theย restructuringย ofย theย internationalย bankingย industry, that affect implementation need to be incorporated in the formulation of policiesย inย international tradeย financeย products.

The study also identified the international trade finance products adopted by Zenith bank;ย essential features assumed by the bank in offering international trade finance products toย customersย thatย haveย madeย Equityย gainย aย competitive edgeย inย theย international banking.

The strategy could be adopted by other players in the industry in their practice on their role in international trade. In addition, the study also contributed towards development of the theories on the concept of international trade. The factors that have helped shape modern day international trade include but not limited to industrialization, development of transportation, globalization and technology that enables trade and communication. It argued that the changing environment and technological advancement in the international banking necessitates review of the existing theories in the international trade.

REFERENCES

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