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Article
Publication date: 15 December 2020

Alexis Habiyaremye and Veysel Avsar

This study investigates the impact of trade integration on payment choice in international transactions using data from Turkey, an emerging economy that signed many trade

Abstract

Purpose

This study investigates the impact of trade integration on payment choice in international transactions using data from Turkey, an emerging economy that signed many trade agreements in the last two decades.

Design/methodology/approach

The authors use industry-level trade finance data from Turkey, which reports payment methods in exports at two-digit ISIC level for 180 export destinations. The authors performed linear as well as maximum likelihood techniques to test our hypothesis.

Findings

The authors show that the removal of trade barriers by bilateral free trade agreements leads to more exporter-financed transactions. This implies that lowering trade barriers contributes to reducing risk, which leads to more trade finance by exporters.

Originality/value

Trade finance is the lifeblood of global trade. Although the previous literature have analyzed the institutional and financial factors affecting exporters' decision to extend trade credit, the effect of economic integration has been overlooked. In this regard, this study represents the first attempt to analyze the impact of trade integration on trade finance.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 4 October 2011

Jun Su and Yuefan Sun

The purpose of this paper is to test the effect of informal finance and trade credit on the performance of private firms.

Abstract

Purpose

The purpose of this paper is to test the effect of informal finance and trade credit on the performance of private firms.

Design/methodology/approach

Based on a survey to private firms in 19 cities, the paper empirically tests the promoting effects of informal finance and trade credit on the performance of private firms in China.

Findings

It was found that informal finance and trade credit have positive effects on private firms' performance measured by ROA. The net income reinvestment rate of private firms is positively related to whether or not the firm adopts informal financing or trade credit financing. A private firm having limited access to formal finance is more inclined to rely on self‐funds and is more limited by financing choices. Informal financing and trade credit can relieve the tension of cash flow chain but cannot solve the financing constraints. The empirical results also show that bank credit is still not the main financing choice for private firms and has not yet played a promoting role in private firms' performance and growth. Informal finance is more important to promote performance in manufacturing industry, while trade credit is more effective in wholesale and trading industry. The results show the coexistence viability of informal financing channels and formal financial institutions in China.

Practical implications

The policy implication is the Chinese Government should take careful steps to regulate informal financing sources.

Originality/value

After some theoretical literature, such as Lin and Sun, this paper explores for the first time the effect of informal financing channels on the performance of private firms.

Details

Nankai Business Review International, vol. 2 no. 4
Type: Research Article
ISSN: 2040-8749

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Article
Publication date: 14 June 2013

Umar Oseni

The purpose of this paper is to examine the current legal framework for payment system in international Islamic trade finance vis‐à‐vis the new regime introduced by the…

Abstract

Purpose

The purpose of this paper is to examine the current legal framework for payment system in international Islamic trade finance vis‐à‐vis the new regime introduced by the Uniform Customs and Practice for Documentary Credits (UCP) 600 as well as the Sharī'ah Standard on Documentary Credits issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Sharī'ah Resolutions of selected Sharī'ah Boards of Islamic financial institutions.

Design/methodology/approach

A partial comparison of both the UCP 600 and the Sharī'ah framework for documentary credit is given through the content analysis of relevant sources.

Findings

The AAOIFI Sharī'ah Standard on Documentary Credits, as well as other applicable Sharī'ah resolutions of Islamic financial institutions, does provide a good framework for a Sharī'ah‐compliant documentary credit system, which is unique to trade in Islamic finance products, but there is scope for further improvement, taking into consideration the two possibilities proposed in the available literature on the subject – harmonization or bifurcation of rules. The UCP 600 also allows for the exclusion or modification of the rules to suit the specific needs of the Islamic finance industry.

Research limitations/implications

This study focuses only on UCP 600 and the Sharī'ah framework on Documentary Credits, though bearing mind that there are other frameworks for documentary credit systems such as the International Standby Practices (ISP98) and letters of credit issued under Article 5 of the New York Uniform Commercial Code.

Practical implications

Islamic financial institutions should implement the provisions of the AAOIFI Sharī'ah standard on documentary credits but may require a different framework for international trade financing involving both Islamic banks and conventional banks.

Originality/value

Though few studies have been conducted on Sharī'ah issues regarding the application of the documentary credits, this seems to be the first time where a more proactive step is taken to propose two different frameworks for transactions involving Sharī'ah compliant financing.

Details

Journal of International Trade Law and Policy, vol. 12 no. 2
Type: Research Article
ISSN: 1477-0024

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Book part
Publication date: 28 September 2020

JaeBin Ahn

This chapter provides a theory model of trade finance to explain the “great trade collapse.” The model shows that, first, the riskiness of international transactions rises…

Abstract

This chapter provides a theory model of trade finance to explain the “great trade collapse.” The model shows that, first, the riskiness of international transactions rises relative to domestic transactions during economic downturns; and second, the exclusive use of a letter of credit in international transactions exacerbates a collapse in trade during a financial crisis. The basic model considers banks’ optimal screening decisions in the presence of counterparty default risks. In equilibrium, banks will maintain a higher precision screening test for domestic firms and a lower precision screening test for foreign firms, which constitutes the main mechanism of the model.

Details

Emerging Market Finance: New Challenges and Opportunities
Type: Book
ISBN: 978-1-83982-058-8

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Article
Publication date: 1 April 2003

Georgios I. Zekos

Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination…

Abstract

Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination of some legal aspects concerning MNEs, cyberspace and e‐commerce as the means of expression of the digital economy. The whole effort of the author is focused on the examination of various aspects of MNEs and their impact upon globalisation and vice versa and how and if we are moving towards a global digital economy.

Details

Managerial Law, vol. 45 no. 1/2
Type: Research Article
ISSN: 0309-0558

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Article
Publication date: 5 June 2017

Godfred Adjapong Afrifa and Ernest Gyapong

The purpose of this paper is to extend the literature on trade receivables and trade payables by examining the determinants of net trade credit.

Abstract

Purpose

The purpose of this paper is to extend the literature on trade receivables and trade payables by examining the determinants of net trade credit.

Design/methodology/approach

To do that, a sample of 67,047 firms in the UK with 443,190 firm year observations is used.

Findings

The results are robust to unobserved heterogeneity and industry effects. The evidence suggests that firms with more inventories, market share and are financially distressed invest less in trade credit. Moreover, higher operating cash flow, annual sales growth, export propensity, access to bank credit and larger firms lead to higher investment in trade credit.

Originality/value

Additionally, the paper broadens the scope of the literature by analysing the determinants of net trade credit around the financial crisis and industry competitiveness.

Details

International Journal of Managerial Finance, vol. 13 no. 3
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 9 April 2018

Candida Bussoli and Francesca Marino

The purpose of this paper is to investigate the use of trade credit in a sample of small and medium enterprises in Europe, before and after the outbreak of the subprime…

Abstract

Purpose

The purpose of this paper is to investigate the use of trade credit in a sample of small and medium enterprises in Europe, before and after the outbreak of the subprime financial crisis and the sovereign debt crisis (2006-2013). This study aims to verify whether trade credit is an alternative source of funding compared to other sources of financing. In addition, it tests whether firms that grant extended payment terms to their customers demand delayed accounts payable terms from their suppliers.

Design/methodology/approach

The empirical analysis is conducted on a sample of European SMEs that were observed over the period immediately before and after the outbreak of the subprime crisis (2008) and the sovereign debt crisis (2010-2011). A panel data analysis is conducted using the generalized method of moment.

Findings

The results suggest that SMEs with a high probability of insolvency use trade credit more extensively. Distressed and weaker SMEs are less able to match accounts receivable to accounts payable. Finally, the evidence suggests that during the financial crises, the substitution hypothesis is weakened and liquidity shocks are propagated through trade credit channels.

Originality/value

This study contributes to the extant literature as very few studies have analyzed intercompany financing for European SMEs during periods of financial crisis. The results suggest that supporting trade credit channels, through timely injections of liquidity to companies, could reduce the impact of both financial and intercompany credit crunch on SMEs.

Details

Journal of Small Business and Enterprise Development, vol. 25 no. 2
Type: Research Article
ISSN: 1462-6004

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Article
Publication date: 7 October 2019

Mario Menz

The purpose of this study was to investigate the perception of trade-based money laundering in Letters of Credit (“L/C”) transactions among trade finance practitioners in…

Abstract

Purpose

The purpose of this study was to investigate the perception of trade-based money laundering in Letters of Credit (“L/C”) transactions among trade finance practitioners in the UK banking sector and to compare it to the perception of the same risk by the Financial Conduct Authority (“FCA”), the regulator of the UK’s banking sector.

Design/methodology

A survey was used to carry out research among financial services professionals engaged in trade finance in the UK.

Findings

This paper contributes to the existing literature in a number of ways. First, it investigates the perception of trade-based money laundering risk from the perspective of financial services professionals, which has not previously been done. Second, it argues that the perception of trade-based money laundering in financial services is overly focussed on placement, layering and integration, and that the full extent of the offence under the Proceeds of Crime Act 2002 is less well known. It further found that financial services firms need to improve their understanding of the nature of trade-based money laundering under UK law.

Practical implications

This study argues that the financial services sector’s perception of trade-based money laundering risk in trade finance is underdeveloped and makes suggestions on how to improve it.

Originality/value

It provided unique insight into the perception of trade-based money laundering risk among financial services professionals.

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Case study
Publication date: 9 July 2015

Namita Rajput, Rohit Bhagat and Saachi Bhutani Bhagat

Trade Finance, International Trade, International Business, Emerging Markets, Textile Industry.

Abstract

Subject area

Trade Finance, International Trade, International Business, Emerging Markets, Textile Industry.

Study level/applicability

This case has been designed for the students studying courses on International Business during their graduation/post-graduation. Students are expected to have basic knowledge of International Trade and are also expected to study the different ways of financing the foreign trade to appreciate the case.

Case overview

The case describes the various ways of financing of foreign trade. The case has been designed in the context of an Indian Textile Exporter who has grown steadily over the past years. As business has increased, simultaneously the requirement of funds for the exporter has also increased. Through the medium of conversations, the different ways of financing the foreign trade have been explained in detail. Equipped with this knowledge, students are required to discuss the pros and cons of the different ways of financing the foreign trade. The case also discusses the dilemma of foreign currency hedging. This is a common dilemma faced by importers and exporters as they grow over a period of time.

Expected learning outcomes

This case has been designed to: understand the various ways of financing the foreign trade and understand their merits and demerits; understand the difference between factoring and forfeiting understand how the Exim Bank of India plays an important role in supporting exporters and importers in India; and understand the various ways of hedging the foreign currency risk.

Supplementary materials

Teaching notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

Details

Emerald Emerging Markets Case Studies, vol. 5 no. 4
Type: Case Study
ISSN: 2045-0621

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Article
Publication date: 31 December 2019

Guoshu Dong, Lihong Wei, Jiaping Xie, Weisi Zhang and Zhefu Zhang

The development of small- and medium-sized enterprises (SMEs) is vital to the economy, as such the financing of SMEs has become the focus of government and enterprises…

Abstract

Purpose

The development of small- and medium-sized enterprises (SMEs) is vital to the economy, as such the financing of SMEs has become the focus of government and enterprises. The purpose of this paper is to find the operational and financial strategies of the supplier and retailer in supply chain.

Design/methodology/approach

In a Stackelberg game, supplier moves first setting wholesale price, while the retailer follows, setting the ordering quantity. Enterprises maximize their profits by optimization. When measuring profit targets, the capital constraints and income taxes of two companies are considered. In the portfolio financing model, the retailer can obtain products from suppliers through trade credit, and the supplier can use asset-backed securitization (ABS) to solve his/her financing problems.

Findings

The wholesale price is a decreasing function of retailer’s initial cash balance, and the supplier’s financing interest rate is a decreasing function of his/her own capital, the incentive effect of the supplier’s price discount strategy on retailer is more intense in the supply chain with high-priced product or high-capital retailer. And in a capital-constrained supply chain, an increase in tax rate or financing rate does not necessarily motivate the supplier to increase wholesale price. Most importantly, if the supplier’s markup is moderate, portfolio financing has value for both retailer and supplier, while solving the financing problems of both parties.

Research limitations/implications

Future research can consider the explicit and implicit interest when supplier provides trade credit to retailer. It is also possible to consider the portfolio financing when multiple retailers are facing financial constraints.

Practical implications

It provides guidance for supply chain enterprises with financing needs, helping them find optimal decisions. With financial interest, enterprise income tax on the enterprises’ financing factors will produce a tax shield effect; thus, a cost–benefit analysis with the tax shield effect can provide more accurate picture when making corresponding decisions.

Social implications

Government takes feasible adjustments of tax rate for the sake of motivation on financial SMEs tax shield. Furthermore, ABS calls for service from financial institutions, which will, in turn, expedite financial institutions revenue.

Originality/value

The authors provide insights on enterprise financing models, combining ABS with trade credit, expanding enterprise financing channels and enriching the theory of financial supply chain and supply chain management. The authors analyze in detail the influence of tax factors on enterprises by introducing tax factors into traditional process of enterprise operation and financing strategy.

Details

Industrial Management & Data Systems, vol. 120 no. 4
Type: Research Article
ISSN: 0263-5577

Keywords

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