International Banking and Financial Institutionsch02

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December 13, 2021
International Public Financial Management

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December 13, 2021
Contents
 Central banking
 Central bank as the Government’s
Bank
 International banking and Trade
 International trade finance Methods
and
Instruments
 Role of International Financial
institutions
 World Bank, IMF, IFC, AfDB

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2.1 Central Banking
Purpose
 Set monetary policy
 Acts as the currency authority
 Manages foreign exchange
 Serves as a banker to the
government
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2.1 Central Banking
Purpose…
 Builds up and strengthens the
country's financial infrastructure
 Acts as the banker of banks
 Regulate the financial system.
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2.1 Central Banking
Setting monetary policy
 are set with the objective of attaining
price stability and full employment of
resources.
 the tools used are:
Discount rate
Reserve requirement
 Open market operation December 13, 2021

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Discussion
Discuss the tools of monetary policy
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2.1 Central Banking
Acts as the currency authority
prints and issues official currency
of a country
Manages foreign exchange
 with the objective of maintaining
internal balance and external
balance December 13, 2021

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2.1 Central Banking
Builds up and strengthens the
country's financial infrastructure
Charged with the responsibility of
laying down the foundation for
financial markets and institutions in
the country
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2.1 Central Banking
Acts as the banker of banks
Lender of last resort
Extends loans to banks through a
discount window
provides them with centralized
clearing and cheap and quick
remittance December 13, 2021

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2.1 Central Banking
Regulate the banking system
 regulation of ownership
 regulation of deposits and loans
 regulation of capital
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2.2 Central Bank as the govt’s bank
 Conducts bank accounts of government
departments, board and enterprises
 Makes temporary advances to the
government in anticipation of tax
revenue and extraordinary advances
during emergencies
 Carries out government transactions
that involve purchases/sales of foreign
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National Bank of Ethiopia
የኢትዮጵያ ብሔራዊ ባንክ
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Proclamation to amend establishment of
National Bank of Ethiopia (Proc #
591/2008)
Purposes of NBE
 to maintain stable rate of price and
exchange
 to foster a healthy financial system
and
 to undertake such other related
activities as are conducive to rapid
economic development of Ethiopia.
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591/2008)
Duties of NBE
 coin, print, and circulate the legal tender
currency
 issue its own debt and payment
Instruments
 regulate and determine the supply and
availability of money, credit, and the
applicable interest rates and other
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591/2008)
Duties of NBE…
 formulate and implement exchange rate
policy
 manage and administer the
international reserves of Ethiopia
 license and supervise banks, insurers
and other financial institutions and
create favorable conditions for the
expansion of banking, insurance and
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591/2008)
Duties of NBE…
 set limits on gold and silver bullion and
foreign exchange assets which banks and
authorized dealers can hold;
 set limits on the net foreign exchange
position and on the terms and the amount
of external indebtedness of financial
institutions;
 make short term and long term refinancing
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591/2008)
Duties of NBE…
 accept deposits of any kind from foreign
sources
 prepare periodic economic studies, on
the balance of payments, money supply,
price forecasts, etc
 act as banker, fiscal agent and financial
advisor to the Government
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591/2008)
Duties of NBE…
 establish, modernize, conduct, monitor,
regulate and supervise payment,
clearing and settlement systems
 act in compliance with international
monetary and banking agreements of
Ethiopia
 represent Ethiopia in the IMF and other
international financial organizations
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2.3 International banking and trade
Operations of International banks
 finance foreign trade and foreign
investment
 underwrite international bonds
 borrow and lend in the foreign currency
 organize syndicated loans
 participate in international cash
management
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Why do banks go international?
 managerial and marketing knowledge
developed at home can be used abroad
with low marginal cost
 foreign bank subsidiaries have a
knowledge advantage over local banks
 large international banks have high-
perceived prestige, liquidity, and deposit
safety December 13, 2021

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Why do banks go international?...
 foreign bank subsidiaries have a
regulatory advantage over local banks
 growth prospects in a home market may
be limited because market is saturated
 reduce risk through international
diversification
 follow their multinational customers
abroad to prevent erosion of their client
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Types of foreign banking offices
Representative office
 obtain information, give advice, and
arrange local contacts for their parent
bank’s business customers
 do not have traditional banking
functions such as deposits, loans,
letters of credit, drafts
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Types of foreign banking offices…
Correspondent Banking
 an informal arrangement in which a
bank in a country maintains deposit
balances with banks in foreign countries
and looks to them for services and
assistance.
 correspondent banks accept drafts and
honor letters of credit. December 13, 2021

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Branch Banks
 do not have a corporate charter, board
of directors, or shares stock
outstanding.
 they are an operational part of the
parent bank; their assets and liabilities
are those of the parent bank.
provide a full range of banking services
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Foreign Subsidiary Banks
 have their own charter, board of
directors, stockholders, managers
 they are able to attract additional local
deposits and have greater access to the
local business community
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International loans
 US, Japanese and European banks
extend large international loans to many
developing countries
 these loans become part of sovereign
debts of a country
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Syndicated loans
 a credit in which a group of banks
makes funds available on common
terms and conditions to a particular
borrower.
 is a device a group of banks adopt to
handle large loans that one bank is
unable or unwilling to supply.
For example, Kuwait signed a $5.5 billion loan accord
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2.4 International trade finance: methods
and instruments
The problem in international trade
Time lag
Cultural differences-language
Financing the transaction
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and instruments
The problem…
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Importer
Timeand
distance
Exporter
Mone
y
Good
s

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and instruments
Payment Methods
 Prepayment
 Letters of credit
 Drafts (sight/time)
 Consignment
 Open account
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and instruments
Prepayment
Exporter ships goods only after importer
remits payment.
Payment is made in the form of an
international wire transfer to the
exporter’s bank account or foreign bank
draft.
 Safest to the exporter
 Riskiest to the importer December 13, 2021

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and instruments
Letters of Credit (L/Cs)
 instrument issued by a bank on behalf of
the importer promising to pay the exporter
upon presentation of shipping documents
in compliance with the terms stipulated
therein
 is a compromise between seller and buyer
 importer relies on exporter to ship goods
described in the documents December 13, 2021

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and instruments
Drafts(bill of exchange)
 unconditional promise drawn by the
exporter, instructing the buyer to pay the
face amount of the draft upon
presentation.
 does not obligate banks to honor the
payment on behalf of the importer
 it is riskier than L/C
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and instruments
Consignment
 the exporter ships the goods to the
importer while retaining actual title
 the importer pays for the goods only
when they are sold to a third party
 the exporter trusts the importer to remit
payment for the goods sold.
 highly risky for the exporter
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and instruments
Open Account
 the exporter ships the merchandise and
expects the buyer to remit payment.
 the exporter relies upon the financial
credit worthiness, integrity, and
reputation of the buyer.
 this method is used when the seller and
buyer have mutual trust and a great deal
of experience with each other.
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and instruments
Trade finance methods
 Accounts receivable financing
 Factoring
 Letters of credit (L/Cs)
 Banker’s acceptances
 Working capital financing
Countertrade
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and instruments
Accounts receivable financing
 is when exporter needs money to
finance accounts receivable
 exporter obtains a bank loan by
assigning accounts receivable
 payment of loan to bank remains
exporter’s responsibility
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and instruments
Factoring
 involves sales of accounts receivable
without recourse to a factor
 exporter transfers administrative burden
and credit risk to the factor
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and instruments
Letter of credit
December 13, 2021
Importer Exporter
Importer’s
Bank
Exporter’s
Bank
(1) Sales contract
(5) Delivery of goods
(2)
Request
for credit
(8) Doc &
claim for
payment
(6)
Document
presented
(4) L/C
Delivered
(7) Doc presented to
issuing bank
(9) Payment
(3) Credit sent to
correspondent

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and instruments
Banker’s acceptance
 time draft along with shipping
documents accepted by importer’s bank
 can be sold by the exporter in the money
market
 less risky to the exporter
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and instruments
Banker’s acceptance
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and instruments
Working Capital Financing
 a bank can extend a loan to an importer
to finance cost of imports
 a bank can also finance production of
goods destined for foreign markets
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2.5 Role of International Financial
institutions
International Financial Institutions
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institutions
International Monetary Fund(IMF)
 Is established in 1944 as an element of
the Breton Woods system
 It has the following objectives:
 promote cooperation among countries on
international monetary issues
 promote stability of exchange rates
 provide temporary funds to countries to
correct international payment imbalances
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institutions
IMF…
 objectives:
Provide free mobility of capital across
countries
Promote free trade
 During the Breton woods era IMF would
maintain fixed exchange rate system
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institutions
IMF…
 During the post-Breton woods era, the
fund engaged more on helping nations
correct payment balances
 It also extended loans to countries with
difficulty in servicing their financial
obligations
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institutions
IMF…
 Established a special drawing
limit(SDR) to facilitate international
payments
 SDR represents basket of currencies of
selected countries.
 In 2002, it comprised
- Euro 0.4260 - US dollar 0.5770
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institutions
The world bank
 Established in 1944 with the IMF
 Formerly International Bank for
reconstruction and development(IBRD)
 Established to provide long-term loans
to promote economic growth and also
encourage international trade
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institutions
The world bank
 The main sources of funds are sales of
debt and other instrument to private
investors and governments
 Has facilities such as Structural
Adjustment Loans(SALs) intended to
enhance a country’s long-term
economic growth
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institutions
International Finance Corporation(IFC)
 Established in 1956 to promote private
sector development across the world
 Comprises countries as its members
 Provides loans to corporations and buys
their shares
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institutions
African Development Bank(AfDB)
 Established in 1964 in Khartoum
 Has 53 countries as its members
 Provides loans aimed at alleviating
poverty and enhancing economic
growth
 Has ministers and high-level officials of
economic and financial institutions of
member countries as board of
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2.6 International Financial Markets
International financial markets include:
foreign exchange market,
Eurocurrency market,
Eurocredit market,
Eurobond market, and
international stock markets
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Foreign Exchange Market
 allows currencies to be exchanged in
order to facilitate international trade or
financial transactions.
 there is no specific building or location
where traders exchange currencies.
Trading also occurs around the clock.
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Foreign Exchange Market…
 the market for immediate exchange is
known as the spot market.
 the forward market enables a firm to
lock in the exchange rate at which it will
buy or sell a certain quantity of currency
on a specified future date.
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 Banks provide foreign exchange services for
a fee: the bank’s bid (buy) quote for a foreign
currency will be less than its ask (sell) quote.
This is the bid/ask spread.
bid/ask % spread = ask rate – bid rate
ask rate
Example: Suppose bid price for £ = $1.52, ask price =
$1.60.
bid/ask % spread = (1.60–1.52)/1.60 = 5%
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 A cross exchange rate reflects the amount of
one foreign currency per unit of another foreign
currency.
Value of 1 unit of currency A in units of
currency B = value of currency A in $
value of currency B in $
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Eurocurrency Market
 U.S. dollar deposits placed in banks in
Europe and other continents are called
Eurodollars
 it is made up of several large banks called
Eurobanks that accept deposits and provide
loans in various currencies.
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Eurobond Market
There are two types of international bonds.
 Bonds denominated in the currency of the country
where they are placed but issued by borrowers
foreign to the country are called foreign bonds or
parallel bonds.
 Bonds that are sold in countries other than the
country represented by the currency denominating
them are called Eurobonds
 About 70% of the Eurobonds are denominated in
the U.S. dollar. December 13, 2021

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International Stock Markets…
 In addition to issuing stock locally, firms &
governmental agencies can also obtain funds
by issuing stock in international markets.
 this will enhance the firm’s image and name
recognition, and diversify the shareholder base.
 The stocks may also be more easily digested.
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December 13, 2021

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