International Payment Methods and Export Performance in Nigeria

Abstract

This paper investigates the linkages between international payment methods and export performance in Nigeria, focusing on the impact of payment-related financial and contractual frictions on export performance. Based on the theory of trade finance and the iceberg trade cost approach, the study examines how the different major international payment methods (cash in advance, open account, documentary collection, and letters of credit) affect the intensive and extensive margins of trade. The paper concludes that payment methods are not only operational devices that help to complete transactions across borders but also have significant effects on the allocation of risk and financing needs, as well as the efficiency of transactions. The research integrates the theories and empirical evidence to show that institutional quality, financial development, contract enforcement, and macroeconomic conditions play a role in the choice of payment method. The Nigerian context is considered, with the foreign exchange constraints, high borrowing costs, lack of access to trade finance, and lack of institutions all having an impact on export competitiveness and diversification. The paper also examines the key role of digital payment mechanisms, fintech innovation and regional settlement platforms in lowering the cost of transactions and boosting export potential, particularly for small to medium sized enterprises (SMEs). Recent research research shows that enhancements in digital payment system infrastructure and availability of trade finance have a positive impact on exports. The study also finds that improving the trade finance mechanisms, consolidating institutional frameworks, extending credit facilities and increasing the use of digital payments are critical to mitigating payment-related trade friction and driving Nigeria's export diversification strategy within the African Continental Free Trade Area (AfCFTA).