International trade finance is the life blood of international business because it makes the potential for g Back up now markets around the world and business continuity a reality. Trade volume and growth rate in Nigeria and Africa have been very low because of inadequate funding for many exporting businesses operating on the continent, and this has consequently increased the trade finance gap. Many banks find it difficult to finance export transactions, particularly among Micro, Small and Medium Scale Enterprises (MSME) because of the perceived risks inherent in trade transactions in Africa, lack of capacity, skills and competence, coupled with high-level of infrastructural deficit (World Trade Centre, 2016)
The fact that trade financing is critical to the growth of trade is reinforced by the fact that about 85% of world trade are done via open account payment method. The concept of open account trading means that the exporter will need to ship the goods, send the shipping documents to the buyers, and then wait for about 60-90days for buyers to pay for the exported goods (International Chamber of Commerce, 2020). This means the exporter will need funding to cover the working capital gap from when goods are shipped till when payment is made. Another factor that makes trade financing to be very critical to the growth of trade is the fact that giving suppliers credit is common to international trade. This is because, since in international trade the buyers tend to have a higher negotiation power because they often have multiple options of suppliers for the same products, they therefore press sellers for sales on credit. This makes the sellers to not just rely on pre-export financing to export in large volume, they also rely on post export financing to cover the working capital gap created by shipping their goods using open account payment method (Global Trade Funding, 2020). International trade exposes a business to a large market with a demand that might be more than its current capacity.
Pre-export trade financing is therefore a very viable means of supporting a business to build capacity in order to be able to meet the new demand for its products in the export markets around the world (Zuko, 2014). In order to be able to compete favourably in the export market, there is need for efficiency in the production process. This can be achieved through the concept of economy of scale which can be attained by stepping up production; and this will require additional funding which can be sourced through trade finance (Richard, 2013). Businesses will need additional funding which can be raised through trade finance, to become established in a new export market particularly if it has chosen intermediate (partnership mode) or hierarchical (investment mode) as market entry routes to their desired market.
According to the 2021 trade finance gap, growth, and jobs survey report of the African Development Bank (ADB), the global trade finance gap was estimated to have increased from $1.5 trillion in 2018 to $1.7 trillion in 2020. The goal of this survey was to identify what needs to be done in order to bridge this trade finance gap in Nigeria Africa’s most populous nation and by extension in African countries in general.