The Role of Banks in International Trade

The Role of Banks in International Trade

The Role of Banks in International Trade ‘Role’ according to Oxford Advanced Learners Dictionary of current English, Third Edition by Horby (p. 750) defined role as “Actor’s part in a play; person’s task or duty in an undertaking’s.

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If related to the research topic, it then means the banks part, duty in an international trade.

While international trade as described by the author, Nobert M. Ile in his published test economics for Business studies (1999, P. 278) defines an international trade or external trade as “a trade between two or more countries; it is the exchange of goods and services between two or more countries”.

Definition of Banks and International Trade Meaning of Bank And Banking:

The terms “bank” and banking are very difficult to define, such authorities have attempted to define a bank as any person carrying on banking business.

However, we can define a bank as an organization that handles people’s money (African Encyclopedia, 1974: 76). It is a dealer in debts, but indebtedness has a correlation to wealth and hence, a bank can be described as a liquefier of wealth.

The whole concept of a bank revolves on the public confidence on the bank’s ability and willingness to deliver on its obligations.

Banking on the other hand according to Emekekwu (1994) citing corns (1968: 6 – 7) can be defined as the instrumentality or agency through which debts and credits are converted and exchanged between owners. The mere exchange of indebtedness would have no purpose unless there are some vital differences between the varieties of debts.

Banking realizes its purpose and at the same time achieves a very great social importance through the fact that debts of a bank are generally accepted by the public in discharge of obligations; and hence becomes money. The banks business is therefore, to take the debts of other people to offer its own in exchange and there by to create money.

While international trade is as stated above.

Types of Banks.

There are various types of banking institutions. They are as below:

  1. Savings banks.
  2. Commercial or joint stock banks.
  3. Merchant banks.
  4. Central banks.
  5. Development banks.
  6. Specialized banks.

We shall discuss only the role of central banks in international trade.

 The Role of Central Banks In International Trade.

Central banking refers to the role of a central monetary authority or an apex financial institution within the entire financial structure in promoting monetary stability and a sound financial system.

A central banks plays a major role in a country’s growth and development of international trade. Included, the world of central banks is one of variety of structures, functions and powers which are in themselves by products of the economic, political and other realities prevailing in a society.

Background to The Establishment Of C. B. N.

The growth and development of international trade along the West Africa coast played a major role in extending the medium of exchange beyond trade by barter in the nineteenth century. The native currency system which relied on items such as cowries, manila, brass and copper rods, had to accommodate foreign currencies such as Maria Theresa dollar and British silver coins increased trade motivated the setting up of the bank of British West Africa (BBWA) in 1894, thereby drastically reducing the barter system and ushering in a rudimentary form of commercial banking. The issue of legal lender currency for the West African region was however, deferred till 1912. When the West African Currency Board (WACB) was established. The WACB was an offshoot of the recommendation of the Emote committee set up the secretary of state, the Rt. Hon. Lewis Harcourt. The WACB returned the services of the BBWA as its currency distribution agent. It set up four currency centuries in Lagos (Nigeria), Accra (Ghana), Freetown (Sierra Leaone) and Barthurst, now Bamjul (The Gambia). The currency in circulation in West Africa increased steadily through the 1950s in response to the growing demand your West African Primary products such as Cocoa, Groundnuts and Palm oil and increase in third world prices of such products.

The WACB, did not have discretionary control over the money stock of the territories under its sphere of influence. It was set up primarily to promote the financing of export trade specially; it was charge with the issue of a West African Currency, the exchange of existing currencies, the repatriation of such currencies and the investment of reserves. There was a fixed parity between the local currency and the British pound while the currency had 100 per cent sterling coverage. The reserves were invested in Britain and this, in a way, facilitated Nigeria’s international payments. As the WACB was automatically linked to the British system, the investment policy was rather conservative in the sense that sterling reserves were invested only in Britain. Moreover, the WACB could not engage in monetary management, neither were Nigerians trained in the art. In order to eliminate this deficiency and promote the growth of the domestic money and capital markets, especially as the country marched towards political independence in 1960, the CBN was established by the central bank of Nigeria act of 1958. The Bank Commercial Business on 1 July, 1959 with an initial capital of N3.0 million (CBN briefs, 1995: 1 – 2).

The Role Of Central Bank In International Trade.

Currency Issue and Distribution In International Trade:

International Trade transactions in the Nigerian economy are, to a large extent cash oriented. Consequently the bank’s currency issue function which involves distribution, saft custody of stocks and management of orders, constitutes a vital part of the day to day management of the trade. Without the regular supply of the currency, international trade activities would be much restricted.

Banker to Other Banks:

The relationship between, the CBN and other banks, however imposes mutual obligations on both sides. Every other banks in Nigeria banks in CBN, CBN promotes confidence in the system through its activities as banker to other banks will within and outside M (IU Nigeria and may seek the cooperation of other banks in pursuit of this objective (CBN Decree No. 24 of 1991, sections 37 and 38).

Banker to the Government that Controls International Trade:

The CBN as banker to the Federal Government undertakes most of the Federal government’s banking business within and outside Nigeria.

Debt Management of International Trade:

Not only does the CBN mobilize funds for international trade to the Federal government, it also manages its domestic and external debt in conjunction with the federal ministry of finance.

External Debt of International Trade:

The CBN also cooperates with other agencies to manage the country’s external debt. The federal ministry of finance is in charge of multilateral and bilateral debts while the CBN is responsible for trade arrears.

Promotion of Money Stability in External Trade:

The effectiveness of any central bank in executing its functions hinges crucially on its ability to promote monetary stability in international trade. Price stability is indispensable for money to perform its role of medium of exchange, store of value, standard of deferred payments and unit of account. Attainment of monetary stability devolves on a central bank’s ability to evolve effective monetary policy and to implement it efficiently. Implementation is often difficult because of conflicting conceptual issues, various constraints and other day – to – day realities. Monetary management inevitably involves trade offs in overall objectives and achievable targets.

Foreign Exchange Management:

Foreign exchange management involves the acquisition and development of foreign exchange resources in order to reduce destabilizing short ter-capital shows. The CBN monitors the use of scarce foreign exchange resources to ensure that foreign exchange disbursement and utilization are in line with economic priorities and within the foreign exchange budget.

Caused and Problems of Banks Role In International Trade:

(a)              One of the cause and problems of banks role in international trade in corruption in banking sector.

Poor Appropriate Role:

(b)             This research proves that a bank has taken on too many non-central banking functions, which has constrained the effectiveness of its performance in international trade.

Fraud in Banking Management:

(c)              Fraud in the areas of monetary management, clearing and payment system, ineffective regulation and supervision, foreign exchange management, debt management, financial innovations and technological development in the financial system has contributed to problems of banks role in international trade.

Monetary Management:

(d)             It has also contributed to problems of banks role in external trade in the sense that open market operations (OMO) is less efficient, unsophisticated financial environment.

Inefficient Payments System:

(e)              Cheque clearing delays payments in an international trade.

Foreign Exchange and Exchange Rate:

(f)               Lack of improved for foreign exchange and exchange rate management. Poor unification of the exchange rate coupled with unliberalized trade.

Lack of Promotion of Banking Technology:

(g)              This added in the sense that it is not all the banks that has appropriate banking technology especially computerization. Computer networking has not gone far in all the operating banks that plays role in external trade.

New Political International in a Country:

(h)             Atimes new politicians in the government parastatals bring in new ideas, constitutions, thereby affecting the country’s economy.

War in a Country.

(i)                War immensely contributes to census and problems of banks role in international trade because a lot of its external trade documents, transactions are destroyed by war.

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