International trade and commerce practices use a combination of financial services called Trade Finances, that enable global transactions. These trade finance techniques such as funding, risk management, and seamless transactions for supporting international trade between importers and exporters.
With the help of trade finance instruments, a small-scale business in Kenya can directly sell its products to a global American brand. Similarly, a fresh startup in Nairobi can import base materials from multiple different countries. In this article, we will discover the role of trade finance services in Kenya and in solving the complexities of international trade transactions.
Primary Elements of Trade Finance
Some of the major financial instruments that promote international trade practices are:
Letters of Credit (LCs)
Often used interchangeably, a letter of credit, or a credit letter is a document from the bank that guarantees correct and on time payment from the buyer to the retailer. In case the client fails to make the payment, the bank is responsible to pay the full or outstanding purchase amount. So,the risk of non-payment is reduced through credit letters.
Bank Guarantees
A bank ensures loss coverage in case a buyer or seller fails to meet the agreed conditions. This strengthens the trust between the parties involved.
Documentary Collections
Shipping and payment documents between importers and exporters are handled and exchanged through banks to ensure that payment is made only when the conditions are satisfied.
Invoice Discounting
Outstanding invoices are sold by the business to financial institutions at a discount in order to access immediate funds. It is one of the common yet reliable methods that helps improve cash flow.
Parties Involved
Multiple entities are involved in trade finance:
Importers and Exporters
These are primary parties involved in the sale and purchase of goods or services. They utilise trade finances as means to mitigate risks and secure funding for the international trade transactions.
Banks and Financial Institutions
These are principal providers of financial instruments and services like LCs for smooth international deals through guaranteed support.
Insurers
These are institutions that offer protection against risks such as non-payment, economic crisis, or political changes.
How Does Trade Finance Work
Consider a Kenyan exporter selling goods to an overseas buyer. The process generally starts with discussing the terms related to payment methods, delivery timelines, and the type of financial service to opt for. The exporter then requests a Letter of Credit from the buyer to ensure payment security. The buyer further reaches out to their bank to issue an LC in favour of the exporter.
The exporter receives the payment after shipping the goods and then submitting the required documents (such as a bill of lading, invoice, and shipping documents) to their own bank. The buyer’s bank then collects the payment from the buyer and guarantees both parties fulfill their obligations securely.
Benefits of Trade Finance
Risk Mitigation
Financial tools such as Letters of Credit (LCs) help protect both exporters and importers in international commerce. Exporters are safeguarded from the risk of not getting paid, while importers are assured that they will receive the goods as per the agreed terms
Improved Cash Flow
Invoice discounting or Accounts Receivable are techniques that allow companies to get immediate cash by using their unpaid invoices as collateral. This helps in better cash management as the business can access their funds without having to wait for the customers to pay.
Improved Business Connections
Bank guarantees and documentary collections establish confidence between trading partners by facilitating smoother transactions.
Top Trade Finance Services in Kenya
Like many nations, Kenya also has numerous options of trade finance services to aid businesses that conduct international trade. These services offer the customers the ability to use the best trade finance services in Kenya that offer custom solutions to their multifaceted import and export requirements.
Mwananchi Credit Limited
Mwananchi Credit is widely recognized as one of the top trade finance services in Kenya. Customers can partner with us and be able to pick from various financial solutions like import financing towards the effective management of trade activities.
National Bank of Kenya (NBK)
The bank offers services such as letters of credit, bank guarantees, and invoice discounting. It also performs bid bond processing and ensures that clients that need these financial instruments on short notice are served promptly.
Co-operative Bank of Kenya
The company outlines a number of services through which overseas payments can be made by importers and exporters for the movement of goods and services.
Standard Chartered Kenya
As one of the primary providers of international trade services in Kenya, Standard Chartered delivers these comprehensive services to clients through a network in 50 countries and they are assisted by dedicated trade specialists to facilitate firms.
In conclusion, trade finance services in Kenya are systematically tailored for optimization of business activities in the global arena. Adoption of such services allows firms to take advantage of emerging business activities and positively impact the economy of Kenya.
