58 / 133
50
Figure 59: OIC Countries Receiving the Lowest FDI Inflows in 2017
Source: UNCTADSTAT
Trade Finance:
Trade finance is a general term used for financing of the international trade. Some 80 to 90
percent of the world trade relies on trade finance (trade credit and insurance/guarantees),
mostly of a short-term nature.
31
Exporters usually get payments after delivering the goods to the importers. During this period,
which may take several months, the exporter may need financing for delivering the orders on a
timely manner. Therefore, financing is needed not only for the import-export process itself, but
also for the production of the goods and services to be exported, which often includes imports
of machinery, raw material and intermediate goods
32
.
Available trade financing within a country increases the competitiveness of firms to compete in
international markets and encourages the firms especially the SMEs to export. Thus, it helps to
diversify the exports of the country. UNESCAP
33
classified the trade finance methods and
instruments into the following three categories:
1)
Methods and Instruments to raise capital,
2)
Methods and Instruments to mitigate risk,
3)
Methods and instruments to effect payment.
With regards to raising capital, firms need financing to ensure adequate production to meet the
orders of the commercial transactions on time. They may need to import inputs, hire more
workers and etc. In this context pre-shipment and post-
shipment financings provide the exporting firms with the
ability to cover their expenses until they get the
payments from the importers.
There are various risks faced during the international
trade such as political and commercial risks. These risks
are covered by export credit insurance and export guarantee programs. While export credit
insurance protects exporters, guarantees protect banks offering the loans.
34
31
WTO 2013
32
UNCTAD 2012
33
UNESCAP 2005
34
UNESCAP 2002: 61
0
20
40
60
80
100
120
140
160
180
200
Million Dollars
“Firms face difficulties in
financing trade in many
developing countries”