The Roles of Banks in International Trade
Chapter One
OBJECTIVES OF THE STUDY
- To find out if commercial banks play any role in international trade in Nigeria.
- To find out if merchant banks play any role in international trade in Nigeria.
- To find out if development banks play any role in international trade in Nigeria.
- To find out if commercial banks play any role in international trade.
- And equally to find out if people’s bank plays any role in international trade in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Theoretical foundation
The better we understand behaviour from a variety of points of view the more effective we can use it in analysis and problem solving (Kothari, 2004). This study will be based on three main theories. These are: Transaction cost theory, Porter‘s theory of Diamond model, and Keynesian theory. These are presented below.
Transaction Cost Theory
Ronald Coase in (1937) tries to explain why companies exist and why companies expand or source out activities to the external environment. The transaction cost theory supposes that companies try to minimize the costs of exchanging resources with the environment, and that companies try to minimize the bureaucratic costs of exchanges within the company. International traders are therefore weighing the costs of exchanging resources with the environment (in this case the banks) against the bureaucratic costs of performing activities in-house. The theory sees institutions and markets as different possible forms of organizing and coordinating economic transactions.
When external transaction costs are higher than a company’s internal bureaucratic costs, the company grows because the company is able to perform its activities more cheaply than if the activities are performed in the market. However, if the bureaucratic costs for coordinating the activity are higher than the external transaction costs, the company downsizes and the roles of international trade facilitation and promotion are performed by commercial banks.
According to Coase (1937), every company expands as long as the company’s activities can be performed cheaper within the company as opposed to outsourcing the activities to external providers in the market. According to Williams (1997), a transaction cost occurs when a good or a service is transferred across a technologically separable interface. Therefore, transaction costs arise every time a product or service is being transferred from one stage to another, where new sets of technological capabilities are needed to make the product or service.
The transaction costs related to the exchange of resources with the external environment could be reflected by the following factors; environmental uncertainty, opportunism, risks, bounded rationality and core company assets. These factors potentially increase the external transaction costs, where it may become rather expensive for a company to control these factors. Therefore, it may very well be more economical to maintain the activity in-house, so that the company may not use resources on contracts with suppliers, meetings, supervision etc. Therefore, if companies see the environmental uncertainty as high, they might choose to not outsource or exchange resources with the bank. The theory, therefore, guides the banks in setting realistic prices for their international business services such as foreign exchange rates and charges to international payment transactions.
Porter’s theory of Diamond model
Michael Porter offered a model that allows examining why some states are more competitive and why some industries within states are more competitive than others are. In this way, Porter‘s diamond model of national competitiveness was detected as a model with which to assess the sources of competitive advantages of an industry in a particular country and it can help realise the competitive status of a nation in global competition. This model consists of four national determinants of competitive advantage: factor conditions, demand conditions, related and supporting industries, and firm‘s strategy, structure and rivalry. The Porter‘s theory is that these factors interact with each other to form conditions where innovation and competitiveness occurs.
Porter aimed at establishing a link between the academic literatures in strategic management and international economics in his book ―Competitive Advantage of Nations‖ in 1990 and create a base for developing national policies on competitiveness.
Porter argued that a great number of trade-related theories have only focused on cost and a new theory was essential that ―should attract a comprehensive understanding of competition that contains segmented markets, differentiated products, the technological differences and economies of scale‖.
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
Research design refers to how data collection and analysis are structured in order to meet the research objectives through empirical evidence (Cooper and Schindler, 2006). The study adopted descriptive research design. Mugenda and Mugenda (2003) describes descriptive research design as a systematic, empirical inquiring into which the researcher does not have a direct control of independent variable as their manifestation has already occurred or because the inherently cannot be manipulated.
The study used a case study design as well in determining the strategic planning and implementation practices. Kothari (1990) describes a case study as a form of qualitative analysis that involves a careful and complete observation of a social unit. He further describes a social unit as a person, family or institution. The researcher adopted a case study because of its contribution to the knowledge of individual, group, organizational, social and political phenomena.
A Case study has been a common research strategy in business (Ghauri&Gronhaug, 2002) and community planning. The distinct need for case studies arises out of the desire of the researcher to understand the complex social phenomena. Case study method allowed the researcher to retain the holistic and meaningful characteristics of the real life events (Robert, 2002).
Data Collection
Primary data was used in the study. The interview guide was divided into 3 sections. Section one involved demographics, section two on Zenith bank and International trade and section three on development levels of Zenith bank. The interview involved six staff in the trade and finance department at the Bank. Development levels are measured using the Regional Development Index (RDI). Interview guide was used in the collection of data. Interview is a way to collect data as well as to gain knowledge from individuals. Kvale (1996) regarded interviews as an interchange of views between two or more people on a topic of mutual interest, sees the centrality of human interaction for knowledge production, and emphasizes the social impact of research data.
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND
Demographic Factors of the Respondent
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.
CHAPTER FIVE
SUMMARY, CONCLUSION ND RECOMMENDATIONS
Introduction
This chapter presents summary, conclusion and recommendations of the study in line with the objective of the study aimed at examining the role played by Zenith bank in promoting international trade.
Summary
The objective of the study was to determine the role played by Zenith bank in promoting international trade. The study established that the various international business transactions at Zenith bank Limited included issuance of letters of credit which is done by getting collaterals and other relevant critical documentation. The letters of credit are governed by the international chamber of commerce, thus the terminologies used is similar across all banks. Other international business transactions included bank guarantees which are issued based on various bank specific conditions. The bank also offers discounting of invoices to the customers as another international business transaction to the clients.
The respondents further indicated that Zenith bank has put stringent conditions like the requirement of collaterals which may need to be relaxed to be able to remain competitive in the banking industry. The documentary collections are guided by international guidelines. The trade finance international guidelines include provision of collateral by the customers which is a major barrier to the customers. In the discounting of invoices the collateral or security requirement also affects the access of this product to the customer. However in the discounting of invoices, there are no international guidelines that govern the discounting of invoices.
Structuring trade deals is also another challenge. This is offering capital solutions (both funded and non-funded) are provided outside the traditional fall back on securities thus focus shifts from the ―strength ―of the borrower to the underlying cash flow and structures that enhance safe 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.
The study also established the benefits accruing to Zenith bank as a result of international trade are: Approximately N. 500M income from international finance products processing, the institution’s partnership with other leading organizations eg. OPIC (Overseas Private Investment Corporation), World Bank and the customer base that is increasing rapidly due to the international finance products offered by the Bank and it’s efficiency, ability of a product to cross-sell to exporting or importing customers and earnings in foreign exchange. The funds have largely contributed to its growth and expansion.
The study identified the features that Zenith bank possesses in promoting international trade. Most respondents agreed that it is all inclusiveness. The Bank is ready to finance any customer with their business. The business is to have a fiscal plan; the security provided should be of high net worth because of the risk implications in case of defaulters and allows for partnerships. Credit risk evaluation is also another feature critical in promoting international trade.
Conclusion
The study concluded that the bank led to the establishment of RMA with various banks especially in China. RMA Africa is a French regulated mutual fund (Fonds Commun de Placement) issued from the partnership between RMA Asset Management and RMA Capital. The fund is mostly invested in Africa and gives investors the opportunity to benefit from the substantial potential of this market, with a firmly established local expertise. The fund’s objective over the recommended investment period, is to take profit from the dynamism of a growing continent by selecting African securities offering the greatest potential of appreciation in the medium term. The annual report released by the RMA listed Nigeria at the top position up +2.54% rated the best performance. (RMA Africa, 2014).
The Bank received cash inflows as a result of international trade. Zenith bank limited generated 500 million in revenue. This has led to the growth and expansion of the bank. It has subsidiaries in Uganda, Tanzania, Rwanda, South Sudan and Democratic Republic of Congo. The increase in branch network aids in the provision of international trade finance products to new customers.
In turn it leads to increase in customer base to the bank and competition with other financial players in the industry for attractive and affordable services.
The study further concluded that international trade finance instruments offered by the bank have facilitated international business. These include: documentary collection which is a process in which the seller instructs his bank to forward documents related to the export of goods to the buyer‘s bank with a request to present these documents to the buyer for payment, indicating when and on what conditions these documents can be released to the buyer; letters of credit used in international transactions to ensure that payment will be received where the buyer and seller may not know each other and are operating in different countries; electronic funds transfer (SWIFT) that operates a global fund transfer network; bank guarantees enables the customer (debtor) to acquire goods, buy equipment, or draw down loans, and thereby expand business activity, traveller‘s checks and foreign 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 in infrastructure, information and communication technology, earnings in foreign exchange, increase in balance of payments, strong local and foreign currency, expansion of businesses, increased partnerships regionally and internationally. In addition, globalization which assumes similar bank transactions around the world, it enhances the domestic competitiveness of the industry in the economy, there is increase in sales and profits as in Zenith bank that received 500M, gain a global market share, reduce dependence on existing local products thus diversify focus to international products.
Recommendations for policy, theory and practice
The study recommends that bank management should review the policies guiding the provision of international trade finance products to customers with a view to making them attractive and 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.
The commercial banks in the financial sector should sensitize customers to create awareness of the international trade finance products. The study contributed to the policies development in that the emerging issues like ICT, changing international trade finance products environment due to the restructuring of the international banking industry, that affect implementation need to be incorporated in the formulation of policies in international trade finance products.
The study also identified the international trade finance products adopted by Zenith bank; essential features assumed by the bank in offering international trade finance products to customers that have made Equity gain a competitive edge in the 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.
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