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Microsoft power point chapter v – international trade finance

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International credit and payment

International credit and payment

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  • 1. 12/17/2009 Chapter V – International Trade FinanceDefinition Trade finance means money lent to exporters or importers Trade finance has various forms or types: Importer prepay exporter Importer bank issue a letter of credit for the benefit of the exporter The exporters bank may make a loan (by advancing funds) to the exporter on the basis of the export contract. Export credit insurance Export factoring Export forfeitingClassification Based on objects of trade credit relationship Based on duration of trade credit Based on types of lenders Based on purpose of borrowing Special types of trade credits 1
  • 2. 12/17/2009Based on objects of trade creditrelationship Commodity credit Monetary creditsCommodity credit Characteristics Exporter provide goods to importer on credit Duration of the credit is short Amount of credit is small, being limited by production capacity of the Scope of application: consuming products Limited within participants of the value chainsCommodity credit Classifications: 3 types Lending goods and receiving money (as value of the goods at the date of paying) Focus on the use of the goods Notes Price of the goods at the time of lending and at the time of returning Principle to determine the price: domestic price or international price Lending goods and receiving goods The quality of the goods unchanged during the lending period Notes on the how to determine the quality of the goods The quality of the goods changed during the lending period Leasing: financial lease and operational lease Lending goods receiving money by payment (selling on credit) 2
  • 3. 12/17/2009Monetary credits Usually provided by banks, can be provided by importers as an advance Characteristics: Objects of lending is money Duration of lending is flexible Amount of lending can be much larger than commodity credit Scope of application Can be applied for various parties outside value chain of an industry Support commodity creditsBased on duration of trade credit Short term Medium term Long term Question: Lending to buy a system of computers is long term, short term or medium term? Notes on special types of short term loan Overnight (O/N) Tomorrow Next (T/N) Call creditBased on types of lenders Private Government Combination Multinational Institutions: IMF, WB, ADB IMF: loans to help rebalance BOP (in SDR) and loans for investment (in USD) WB: Structural Adjustment Loans (SALS) ADB: Loans on Concessional Terms-LOCTs 3
  • 4. 12/17/2009Based on purpose of borrowing Export credit Import creditSpecial types of trade credits Export credit insurance protects exporter’s foreign receivables against virtually all commercial and political risks that could result in non-payment of your export invoices. Commercial risks include bankruptcy, receivership, and other kinds of insolvencies, as well as protracted defaults caused by cash flow problems, balance sheet issues, bad faith, market demand, currency fluctuations, natural disasters, or general economic conditions in your customers country or abroad. Political risks include currency inconvertibility, foreign exchange controls, transfer risks, war, strikes, riots, revolution, confiscation, expropriation, nationalization, embargoes, trade sanctions, and changes in import or export regulations.Factoring Definition: Represents the sale of outstanding receivables related to export of goods by the exporters to overseas buyer 4
  • 5. 12/17/2009Factoring Transfer the risk of default to another party Seller of receivables receive discounted value Seller can receive immediate payment after export to improve their cash flows Help seller to reduce administration and overhead costs In case of without recourse factoring, enjoy no risk after factoringFactoring - Mechanism Factor 5 3 2 4 Seller Buyer 1Factoring - Mechanism1. Seller raises an invoice on buyer, with instruction to pay the factor directly, and sends it to the customer2. Seller sends a copy of the invoice to the factor3. The factor pays an agreed percentage of the invoice amount to the seller4. The factor operate credit control procedures including maintaining ledger, correspondence and telephoning the buyer if necessary. The factor sends a statement of account to the buyer on behalf of the seller5. The buyer makes payment of the full amount of the invoice to the factor as per agreed term 5
  • 6. 12/17/2009Factoring advantage to exporters Cash is released to the seller by the factor as soon as invoices are received by the factor It can be a cost-effective way of outsourcing sales ledger wile freeing up owner’s time to manage business Assists smoother cash flow and financial planning Businesses may be provided with useful information about the credit standing of the customers (buyers) if they pay on time Can be protected from bad debts if using without recourse factoringFactoring disadvantage to exporters Usually expensive than bank overdraft/loan Factors may/would like to vet the buyers before a business sells goods A business may find it difficult to end factoring at short notice as it will have to pay off all the money the factor has advanced on invoices if the customers have not paid them yetForfaiting Forfait: a French word meaning surrendering rights Is the purchase of a series of credit instruments such as BE, promissory notes etc on a non-recourse basis The forfaiter deducts interest in the form of a discount at an agreed rate for the full credit period covered by the negotiable instruments The debt instruments are drawn by the exporter, accepted by the buyer and will bear an aval or unconditional guarantee normally issued by the importer’s bank Forfeiter then takes over responsibility for claiming the debt from the importer Forfeiter can sell the instruments before maturity to another investor on a without recourse basis 6
  • 7. 12/17/2009Forfaiting calssification Fixed rate finance: allow exporter to receive cash instead of deferred payment Capital goods sale: exporter selling capital goods of high value and having to offer export finance for a longer period such as up to five or more years Discounted rate is calculated based on cost of fund (eg LIBOR rate) plus margin May provided fixed rate and exporter is thus able to lock into his profit from the outsetForfaiting - mechanism 1 Exporter 2 Importer 4 65 4 3 7 Avalising bank Forfaiter 8 9Forfaiting - mechanism1. Commercial contract between importer and exporter2. Delivery of goods by the exporter3. Delivery of BE from importer to the avalizing bank4. Delivery of avalized BE to the exporter5. Forfaiting contract between exporter and the forfaiter6. Delivery of BE by exporter to the forfaiter7. Forfaiter pay cash to the exporter8. Presentation of the avalised BE to the avalizing bank on maturity9. Payment made by the availizign bank to the forfeiter 7
  • 8. 12/17/2009 Forfeiting – advantage to exporter Improves liquidity No interest rate risk No risk of inflation in the exchange rate No risk of changes in the status of the debtor No credit administration and collection problems and related risks and costs Forfeiting – disadvantage to exporter High cost of financing Factoring vs. ForfeitingFactoring Forfeiting-Suitable for financing -Used for financingthe export of consumer capital goodsgoods -Credit terms for-Credit terms between medium and long90 to 180 days term-Can be with recourse -Only on withoutor without recourse recourse 8
  • 9. 12/17/2009International Interest Rate LIBOR: London Interbank Offer Rate Short term interest rate (30 days up to 365 days) Big banks in London: Barclay Bank, Westminster Bank, Trust Bank, National Bank, Charter Bank Base rate for many international finances transactions Announce at 11 GMT everyday (London time)International Interest Rate LIBID -London Interbank Bid Rate Borrow from other lenders in the economies LIMEAN average of LIBOR and LIBID SIBOR EURIBOR: 11 big banks in EuropeCredit duration Maturity From the date of first disbursement to the date of final payback 3 periods: Disbursement periods Grace period: Extra time allowed for meeting with a requirement, satisfaction of an obligation, or implementation of an agreement. Repayment periods Average duration is a time measure of a loans interest- rate sensitivity, based on the weighted average of the time periods over which a loan cash flows accrue to the bondholder 9
  • 10. 12/17/2009 Maturity Economic meaning: Effective duration of loan contract Deposit duration Insurance duration Guaranteed duration Average durationCalculation: Average duration = ∑average duration of each periodAverage duration of each period Balance of each period Total of the loanBalance of each periods depending on the time in year the loan isdisbursed or paid: Disburse from the beginning of the year: balance of the year = loan disbursed Disburse in the middle of the year: balance of the year = (beginning balance + ending balance)/2 Average duration Depending on the way loan is disbursed or repaid Disburse and repay once in a time Average disbursement and repayment: multiple disbursements and repayments with the same amount per each equal period up to maturity Increasing disbursements and repayments Declining disbursements and repayments 10
  • 11. 12/17/2009 Average duration • Increasing disbursements and repayments : longest • Declining disbursements and repayments : shortest • Disburse and repay once in a time? Average duration Economic meaning Used to evaluate the effectiveness of the loan Used to calculate interest expenses Interest expenses = Loan value x Interest rate x Average duration Used to calculate cost of credit Credit duration example Periods Year Cash flow BalanceDisbursement period 2001 200 200 2002 200 400Grace period 2003 0 400 2004 0 400 2005 0 400Repayment period 2006 -100 400 2007 -100 300 2008 -100 200 2009 -100 100 11
  • 12. 12/17/2009Credit duration example Maturity Average duration Assuming the disbursement and is at the beginning of a year and repayment is at the ending of the year. Average duration of disbursement period: (200 + 400)/400 = 1.5 Average duration of repayment period: (400+300+200+100)/400 = 2.5 Average duration of grace period: ? Average duration of the loan: ?Cost of credit Is the percentage amount of Total Actual cost/Total actual loan value/Average duration (per annum) Actual Cost Components: Interest rate: fixed or floating Bank fee: Start up fees, Ongoing fees, Fees for breaking a fixed rate mortgage, Early Exit Fee, Termination fees Broker commissions Compulsory Deposit Others Actual loan value: Total loan value – Deposit 12