Factors that affect short-term commercial bank lending to developing countries

Developing countries rely on short-term trade credits for imports of several essential consumer goods, including medicines and basic food supplies. The credits also facilitate export-related transactions. The mechanisms commercial banks use to provide trade credits to developing countries are complex and costly. Even a temporary break in the flow of short-term credit can seriously hurt a country's business. But since short-term trade credits can be structured so that they involve a few risks to a bank and at the same time are very costly to the debtor, they are generally the last forms of credit to be cut and the first to be reestablished in debt-distressed developing countries. To gauge the likelihood of continued short-term trade related financial flows to developing countries, the authors examined the factors that affect short-term commercial bank loans. They studied relevant data over time for seven countries for which data were available: Argentina, Brazil, Egypt,India, Kenya, Mexico, and Turkey. They found that : a) countries with greater growth prospects get more short-term credit; b) short-term credits are usually meant to finance countries with significant trade deficits; c) higher levels of external indebtedness are generally coupled with higher levels of short-term indebtedness to commercial banks; and d) country-specific factors affect the volume of short-term lending to a country.