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ACF 465:
August 2017
INTERNATIONAL TRADE FINANCE
Mr. Kwasi Poku
kwapok25@gmail.com // 0207401585
Course Overview
•
•
The aim of this course is to help students acquire the necessary
background information and also gain an understanding of the finance of
international trade, foreign exchange and support services provided for
exporters, importers and merchants by financial institutions especially in
Ghana.
This course also seeks to help students acquire a sound understanding of
relevant theoretical and practical concepts, coupled with an ability to
apply the principles in a given practical situation.
2
3
•
•
Students should however note that, international trade is a rapidly
changing subject, hence careful study of publications and newspapers such
as graphic business, business and financial times and the various customer
leaflets and circulars prepared by banks is essential in order to keep up to
date.
In addition, students should regularly search the internet to keep abreast of
new developments.
Course Objectives
•
•
To help students to appreciate the need for international trade, the
risks and problems encountered in international trade and the role
played by banks in facilitating international trade.
To help students gain an understanding of the various terms of
payment in international trade.
4
•
•
To help students to be able to define the various terminologies
developed by the International Chamber of Commerce (ICC) to be used
in international trade. It also aims to help students appreciate the
obligations and responsibilities that Incoterms impose on importers and
exporters.
To help students to be able to explain the various international
settlement mechanisms through banks and the problems encountered in
international settlements.
5
•
•
•
To help students gain an understanding of letters of credit, the parties
involved in issuing letters of credit as well as the general instructions to be
followed before banks issue letters of credit.
To help students appreciate the relevance of documentation in international
trade.
To help students gain an understanding of the factors which affect export
finance as well as the traditional and non­traditional facilities provided by
banks to facilitate export trade.
6
•
•
•
To help students to appreciate the types of credit available to importers
in Ghana.
To help students gain an understanding of the various facilities and
services provided by banks to new exporters and the travelling public.
To help students to appreciate the basic operations of the foreign
exchange market in Ghana and the factors that affect the demand and
supply for foreign exchange in Ghana.
7
Course Outline
•
•
•
•
•
Unit 1: OVERVIEW OF INTERNATIONAL TRADE FINANCE
Unit 2: METHODS OF PAYMENT IN INTERNATIONAL TRADE
Unit 3: INCOTERMS/TERMS OF DELIVERY/SHIPPING TERMS
Unit 4: DOCUMENTS USED IN INTERNATIONAL TRADE
Unit 5: DOCUMENTARY CREDIT
8
Course Outline
•
•
•
•
Unit 6: OVERVIEW OF EXPORT FINANCE
Unit 7: IMPORT FINANCING
Unit 8: METHODS OF INTERNATIONAL SETTLEMENT
THROUGH BANKS
Unit 9: FOREIGN EXCHANGE MARKETS
9
Grading
•
•
Continuous assessment: 30%
End of semester examination: 70%
10
Recommended Reading
•
•
•
Arnold, G. (2008). Corporate Financial Management. 4th Edition.
Financial Times/Pearson Education Ltd
Atuahene, R. (2016). Finance of International Trade­Chartered Institute
of Bankers (GH), 2nd Edition.
Cowdell, P. and Hyde, D (2003). International Trade Finance­The
Institute of Financial Services (UK), 8th Edition.
11
•
•
•
Cranston, R. (2007). Principles of Banking Law. 2nd Edition. Oxford
University Press, UK.
Luke, K.W. (2015). International Trade Finance: A Practical Guide. 2nd
Edition. City University of Hong Kong Press.
Watson, D. and Head, A. (2010). Corporate Finance: Principles and
Practice. 5th Edition. Financial Times/Prentice Hall.
12
UNIT 1:
OVERVIEW OF INTERNATIONAL TRADE
•
•
•
•
•
Objectives;
To discuss the need for International Trade
To discuss the Problems/Difficulties of International Trade
To explain the difference between International and Domestic Trade
To discuss the theories of International Trade
To know the major players in International Trade
•
•
•
•
To examine the objectives of the parties in International Trade
To help students appreciate the risks in International Trade
To explain International Trade Fraud and Trade Based Money
Laundering
To understand & appreciate the role of Banks in International Trade
system
14
Introduction
•
•
Definition of International Trade:
International Trade is the process of buying and selling
between two parties in two different countries where
business activity calls for payment or settlement in a
foreign currency. Trading can be conducted for both
goods and services.
International can be categorised into visible trade­ the
export and import of goods, and invisible trade­ the use of
services from other countries.
Why Companies Expand Into Foreign Markets
•
•
•
The complexities in International Trade require imaginative and proactive
strategies.
It is therefore very vital that companies receive quality advice from expert
sources to help them make informed business decisions on international
trade business.
Companies opt to expand outside their domestic market for any of four
major reasons:
1.
•
•
To Gain Access To New Customers
Expanding into foreign markets offers potential for increased
revenues, profits, and long­term growth and becomes an
especially attractive option when a company’s home markets are
matured or saturated.
Firms like the Ghana Cocoa Board Ltd, Sony, Toyota, Mercedes
Benz and General Motors, which are racing for global
leadership in their respective industries must move rapidly and
aggressively to extend their market reach to all corners of the
world.
17
•
•
2. To Achieve Lower Costs And Enhance The Firm’s
Competitiveness
Many companies are driven to sell in more than one country
because the sales volume achieved in their domestic markets is
not large enough to fully capture manufacturing economies of
scale and experience curve effects and thereby substantially
improve a firm’s cost competitiveness.
The relative small size of country markets in Europe explains
why companies like Nestle sell their products all across Europe
and then moved into markets in North America, Africa and
Latin America.
•


•
Also, some companies abroad may have a competitive advantage in the
provision of certain goods and services.
The need to earn more profit by selling goods or services in overseas
markets.
Some firms act as export houses or import merchants. Bamson Company
ltd.
In Ghana, is an importer of Dutch Akzo paints. Thus, acting as a
middleman between buyer and seller in different countries.
19
•
•
•
3. To Capitalize On Its Core Competencies
A company with competitively valuable competencies and capabilities may be
able to leverage on them into a position of competitive advantage in foreign
markets as well as just domestic markets.
4. To spread its business risk across a wider market base
A company spreads business risk by operating in a number of different
foreign countries rather than depending entirely on its operations in its own
domestic market.
Globalization and improved technologies equally offer immense opportunities
for firms to benefit from economies of scale and tax advantages.
• In a few cases, companies in natural resource­based industries
often find it necessary to operate in the international arena because
attractive raw materials supplies are located in foreign countries.
21
Differences Between International Trade and Domestic Trade
•
a)
b)
c)
d)
e)
f)
Domestic trade has the following features which are common for both
seller and buyer but differ entirely from that of international trade:
A single currency is the mode of payment;
Trading is conducted under the same law;
Documentation to the domestic trade is very simple;
Business is done in the absence of stringent Customs Excise and
Preventive Regulations;
No or little transportation difficulties are encountered;
Most businesses are conducted under common language and culture;
Inherent Problems / Difficulties In International Trade
•
1.
•
Aside the normal problems of trade and commerce which arise in the
domestic trade, there are several additional difficulties associated with
international Trade.
Some of the problems are:
Time and distance
The time lag between placing an order from suppliers could affect trade
through changes in changes in pricing, additional working capital
requirement on the part of the supplier, non­payment on the part of the
buyer, changes in customer’s taste, substitute product and non­delivery
time lag.
•
•
Differences in time zone also results in communication difficulties.
Distance also affects international trade when the risks and
inconveniences, in relation to transit times, cannot be avoided
considering the time it takes to ship goods and services abroad and the
time payment is received.
24
•
•
2. Differences in laws/customs
Lack of knowledge and understanding about customs, habits and laws of
the buyer’s or the seller’s country create an extra degree of uncertainty or
mistrust between the two parties involved in trade. e.g. exporting pork to
a Moslem country.
3. Documentation
The nature of the trade, transportation requirement, mode of payment and
terms of delivery used in the trade call for a comprehensive and thorough
understanding of the documents which makes international trade more
complicated than in domestic trade.
•
a)
b)
c)
d)
e)
f)
g)
4. Government regulations
Government rules and restrictions can be a serious threat to international trade.
Such regulations and restrictions include:
Exchange control regulations
Export licensing
Import licensing
Trade Embargoes
Import quotas
Health and hygiene requirements, notably on food
Patent and trademarks
•
•
i.
ii.
iii.
Exchange control regulation
Exchange control is system of controlling the inflows and the outflows of
foreign exchange in and out of a country.
Government may therefore take extra measures in defense of its currency, such
as;
Regulations requiring individuals or firms to obtain foreign exchange approval
from the Central Bank before engaging international trade activities.
Regulations rationing the supply of foreign exchange to those wishing to
make payment abroad in a foreign currency.
Regulations making the holding of foreign currency or exchange illegal by
legislation.
Principal Players In International Trade
a)
•
•
•
Exporters
Exporters may be manufacturers, traders, farmers or commodity producers.
Their aim is to get their goods to buyers around the world in the quickest
and safest manner possible and to be paid in the correct currency and
within their agreed terms of settlement.
The importance of exports to the economies of many countries is
demonstrated by the wide range of support and encouragement given by
governments, particularly through Export Credit Agencies.
•
•
•
b) Importers
Importers may be equally be manufacturers buying raw materials for their
factories, oil companies buying crude oil for refining, or simply merchants
and traders fulfilling contracts with domestic and foreign consumers.
c) Freight Forwarders
Freight forwarders or forwarding agents are the most versatile operators in
the trade chain.
They collect goods from exporters, sometimes actually packing them for
shipment, transport them to ports of shipment by road, rail or barge and
arrange with the shipping company (or airline) for them to be loaded on
board their vessels.
•
•
•
d) Warehousing facilities
Warehousemen perform a valuable service prior to the shipment of goods
and after their arrival at the port of destination.
As they are always holding goods belonging to a third party, it is essential
that they meet stringent security requirements, the most important of
which is that they should be completely independent.
e) Carriers
Goods may be transported in a number of different ways and by several
types of carriers. There exists a need for independent road haulers, barge
operators and railway companies to carry goods on specific routes and to
be responsible for the whole journey.
•
•
•
f) Insurers
However well a consignment is packed, there is always the
possibility of damage being incurred in transit.
In some parts of the world, piracy and hijacking is prevalent.
Most shipments are financed by banks or other financial
institutions who want to ensure their security is properly insured.
•
•
•
g) Banks
Banks provide a multitude of services to every operator in the trade
chain and for every stage of any transaction.
Banking instruments and techniques which have been developed over
hundreds of years are made available with world­wide branch networks,
affiliates and correspondents.
The rapid growth of world markets owes much to the ability of these
financial institutions to adapt to change, to keep pace with development
and to maintain a high level of skill in handling transactions.
32
•
•
•
•
•
h) Factors
Now most international banks have a factoring subsidiary.
There is clearly a defined difference between the services offered by banks and
factors.
Every form of banking finance is effected with recourse to its customer, whereas
factors provide facilities for buying debt without recourse.
Complete factoring involves the exporter in handling all his documents to the
factor who takes an assignment over the debt of the overseas buyer.
Although expensive, factoring can take care over a number of administrative
operations for the exporter, leaving him to concentrate on his main business of
selling.
International Trade Risks
•
•
•
No transaction can be undertaken without risk to the importer or exporter,
although those risks can be significantly reduced by banks and insurers.
For the exporter, the main risks are commercial, political and foreign
exchange risks.
The main risks for the importer are commercial, involving short landing or
non delivery of goods and delivery of sub­standard goods.
Other Risks Involved In Cross Trading
a)
•
•
i.
ii.
iii.
Credit Risk
This is the risk that a counter party to a transaction fails to perform
according to the terms and conditions of the contract.
This may be due to one of the following reasons:
Inability of the drawee to pay under a bill of exchange which he or she
has accepted earlier or the failure of the importer to pay for goods
supplied.
Bankruptcy/Insolvency or Liquidation
Undeveloped mechanisms for efficient assessment of borrowers by credit
referencing agencies in the country.
•
•
•
b) Foreign Exchange risk
This is caused by the fluctuations in exchange rates over time.
Exporters may invoice the buyer in foreign currency (e.g. the currency of
the buyers country) or the buyer may pay in foreign currency. (e.g. the
currency of the exporters country).
The importers problem is therefore the need to obtain foreign currency to
make payments abroad and the exporters problem is exchanging foreign
currency for the local currency.
i.
ii.
iii.
c) Sovereign Risk
This arises when a sovereign government of a country:
Obtains a loan from a foreign lender
Incurs a debt to a foreign supplier
Guarantees a loan or debt on behalf of a third party.
But then, either the government or the central bank refuses to pay the loan or
debt and claims immunity from the processes of the law.
d) Country Risk
This arises when a buyer does all he can to pay what he owes to the exporter
or lender but authorities of his country either refuse to make available to him
the foreign currency, or he is unable to pay because of political/economic
instability or imposition of foreign exchange controls
i.
ii.
iii.
e) Bank Risk
This arises due to the liquidation or insolvency of a bank that is supposed
to honour payments.
f) International Fraud
Examples include;
forged documentary credits
over/under insurance
cargo theft etc.
38
International Fraud and Trade Based Money Laundering
•
•
The international trade system is subject to a wide range of risks
and vulnerabilities, which provide criminal organizations with the
opportunity to launder the proceeds of crime and provide funding
to terrorist organizations, with a relatively low risk of detection.
The relative attractiveness of the international trade system is
associated with:
The enormous volume of trade flows, which obscures individual
transactions and provides abundant opportunity for criminal
organizations to transfer value across borders.
•
•
•
The complexity associated with foreign exchange transactions
and recourse to diverse financing arrangements
The additional complexity that can arise from the practice of
commingling illicit funds with the cash flows of ‘legitimate’
businesses
The limited recourse to verification procedures or programs to
exchange customs data between countries; and
40
• The limited resources that most customs agencies have available to
detect illegal trade.
Abuse Of The International Trade System
Researchers have documented how the international trade system can be
used to move money and goods with limited scrutiny by government
authorities.
Tax Avoidance And Evasion
• A number of authors, including Li and Balachandran (1996), Fisman
and Wei (2001), Swenson (2001) and Tomohara (2004), have
described the impact that differing tax rates have on the incentives of
corporations to shift taxable income from jurisdictions with
relatively high tax rates to jurisdictions with relatively low tax rates
in order to minimize income tax payments
Capital Flight
•
•
It has been shown that companies and individuals shift money from one
country to another to diversify risk and protect their wealth against the
impact o financial or political crises.
Several of these studies also show that a common technique used to
circumvent currency restrictions is to over­invoice imports or under­
invoice exports.
Trade-Based Money Laundering
•
•
Unlike tax avoidance and capital flight, which usually involve the
transfer of legitimately earned funds across borders, capital movements
relating to money laundering involve the proceeds of crime, which are
more difficult to track.
A number of these studies have also analyzed techniques to establish
whether reported import and export prices reflect fair market values.
The Role of Banks In International Trade
i.
ii.
iii.
iv.
v.
a) Provision of Banking facilities
Maintaining customers foreign & local accounts
Provision of short/medium term credit facilities
Providing documentary credit & documentary collection services
Negotiating Bankers Acceptances, Discounting & Factoring services
Arranging finance for exporters under various Bank of Ghana finance
schemes (private enterprise scheme, EDIF, etc.)
I.
II.
I.
II.
b) Collection & Transfer of funds & Settlement
Transmitting payments in foreign currency on behalf of importers/lenders
International money transfers
c) Provision of foreign exchange services
Provide foreign exchange in spot/forward market
Provide travel facilities, foreign currency, foreign draft, traveller's cheques
i.
ii.
•
•
•
•
•
•
•
d) Facilitation of International Trade by providing
information and data
Status report on foreign buyers, suppliers & banks (Banks rating) through
correspondence banks
General information on the Economic and Political situation in trading
countries such as:
Inflation
Foreign exchange position (supply & demand)
Exchange controls
Money supply
Balance of payment
Import/Export regulations
Interest rates
iii.
i.
ii.
iii.
iv.
v.
Assisting in finding markets for goods and services
iv. Advising on various ICCO publications on INCOTERMS,
Documentary credits/Documentary collection and others
e) Provision of Specialized Trade Finance
Standby Credit Arrangement
Red Clause Credit and Green Clause Credit
Bankers Acceptances
Forfaiting
Leasing/Hire Purchase
UNIT 2:
METHODS OF PAYMENT IN INTERNATIONAL TRADE
•
•
•
•
Objectives;
To explain the different terms of payment in International trade
To highlight the problems and risks associated with each mode of
payment
To discuss the advantages and disadvantages in the methods of payment
to the supplier & buyer
To make students aware of the relevance of each method of payment
Introduction
•
•
•
When an exporter sells goods or services to an overseas buyer, he
expects to be paid.
Terms of payment reflect the extent of guarantees required by the seller
to ensure payment before he sells his goods.
The extent of payment guarantee may vary depending on the credit
worthiness and reputation of the parties involved.
Payment Consideration
•
•
•
For the Seller:
Advance payment
The exporter needs payment if he cannot finance the production of the goods
and/or services ordered
At time of shipment or rendering of service
Exporter/seller want assurance of payment as soon as goods are or services are
rendered
After shipment or rendering of services
Supplier/seller is prepared to wait for some time after shipment/after services are
rendered
cont’d
•
•
•
For the Buyer:
Payment in advance
The buyer trusts that the contract will be fulfilled and he is therefore prepared to
pay in advance.
At the time of shipment or rendering of service
The contract may stipulate that or the buyer does not want to take risk
After shipment or rendering of services
The buyer possibly wants to sell the goods or wants to be satisfied that the
service has been rendered before he pays the seller
TERMS OF PAYMENT
•
•
•
1. Cash in Advance/Payment in Advance
The buyer places the funds at the disposal of the seller prior to
shipment of the goods or provision of services.
In such circumstances, the parties may agree to fund the operation
by partial payments in advance or by progress payments.
This method of payment is expensive and contains some degree of
risk and as such, the buyer may request the seller’s bank to issue
advance payment bond in respect of monies advanced, to protect
himself from associated risks.
cont’d
i.
ii.
iii.
This method of payment is used when:
The buyer’s credit is doubtful; or when the parties are doing business
for the first time.
There is an unstable political or economic environment in the buyer’s
country
There is a potential delay in the receipt of funds from the buyer, perhaps
due to risks beyond his control
54
cont’d
i.
i.
ii.
Advantages to the seller
Immediate use of funds
Disadvantages to the buyer
Tying up his capital prior to receipt of the goods/services
Has no assurance that goods/services will be:
a. supplied
b. received
c. received timely
d. received in the quality or quantity ordered
2. Open Account
•
•
•
•
Open account trade is a system where goods and documents are
delivered to the buyer before payment is effected at a later date, usually
on a revolving basis.
This trade practice occurs usually between parties who have dealt with
each other over a specified time and have established a reasonable degree
of trust between themselves.
Open account provides for payment at a stated specific future date without
the buyer issuing any negotiable instrument.
The seller must have absolute trust that he will be paid at the agreed date.
cont’d
i.
ii.
i.
ii.
iii.
Advantages to the buyer:
Payment is effected after receipt of goods/services
Payment is conditioned on the political, legal and economic issues
as previously discussed
Disadvantages to the seller
The title of goods is released without payment assurance
The possibility of political events deferring or blocking movement
of funds to him
Tied up capital until services are accepted and payment is made
3. Collection
•
•
An arrangement whereby goods are shipped and the relevant
bill of exchange is drawn by the seller on the buyer, and/or
documents are sent to the seller’s bank with clear instructions
for collection through one of its correspondent banks located in
the domicile of the buyer.
The conditions under which the document of title and other
documents covering the goods will be released to the buyer/
importer are spelt out in a Collection Order, which the exporter’s
bank sends to the importer’s bank.
Normal Precautions To Be Taken By The Seller
•
i.
ii.
iii.
iv.
The seller should:
obtain a credit report or status opinion on the buyer,
obtain an economic and political analysis of the country of import
concerning political stability, foreign currency position and foreign
exchange regulations.
not consign the goods to the buyer, nor consign the goods to the
buyer’s bank without that bank’s prior agreement.
establish alternative procedures for the resale, reshipment or
warehousing of the goods in the event of non­payment by the buyer.
Collection Procedure
•
•
•
•
•
The exporter ships the goods and obtains the shipping documents and usually draws
a Draft
The exporter submits the draft(s) and/or documents to his bank, which acts as his
agents
The exporter’s bank sends the Draft and other documents along with a collection
letter to a correspondent bank
acting as an agent for the remitting bank, the collecting bank notifies the buyer upon
receipt of the Draft and documents, and
all the documents, and usually title of the goods, are released to the buyer upon his
payment of the amount specified or his acceptance of the Draft for payment at a
specified date.
Collection cont’d
i.
ii.
iii.
i.
ii.
iii.
Advantages to the Seller
documentary collections are uncomplicated and inexpensive
documents of value are not released to the buyer until payment or
acceptance has been effected
collections may facilitate pre­export or post­export financing
Disadvantages to the Seller
ships the goods without an unconditional promise of payment by the
buyer
there is no guarantee of payment or immediate payment by the buyer
ties up his capital until the funds are received
Collection cont’d
i.
i.
ii.
Advantage to the Buyer
collections may favour the buyer since payment is deferred by him
until the goods arrive or even later if delayed payment arrangements
are agreed to
Disadvantages to the Buyer
by defaulting on bill of exchange, he may become legally liable
trades reputation may be damaged if the collection remains unpaid
Types of Collection
a)
•
•
•
i.
ii.
Documentary/Clean Collection
An arrangement where the seller draws a bill of exchange on the buyer
with relevant documents for the value of the goods or services and
presents the bill of exchange to his bank.
The seller’s bank sends the bill of exchange along with a collection
instruction letter to a corresponding bank, usually in the same city as the
buyer’s.
A clean collection may represent:
an underlying merchandise transaction, or
an underlying financial transaction
b) Direct Collection
•
•
•
•
An arrangement where the seller obtains his bank’s pre­numbered direct
collection letter, thus enabling him to send his documents directly to his
bank’s correspondent bank for collection.
This kind of collection accelerates the paper­work process.
The seller forwards to his bank a copy of the respective instruction/
collection letter that has been forwarded directly by him to the
correspondent bank.
The Remitting Bank treats this transaction in the same fashion as a normal
documentary collection item, as if it were completely processed by such
Remitting Bank.
4. Documentary Credit
•
•
•
Documentary credit or Letter of Credit is an undertaking issued by a
bank for the account of the buyer or for its own account, to pay the
Beneficiary the value of the Draft and/or documents provided that the
terms and conditions of the Documentary Credit are complied with.
This Documentary Credit arrangement usually satisfies the seller’s
desire for cash and the importer’s desire for credit.
The Documentary Credit offers a unique and universally used method
of achieving a commercially acceptable undertaking by providing for
payment to be made against complying documents that represent the
goods and making possible the transfer of title to the those goods.
Cont’d
66
•
a)
b)
c)
d)
e)
f)
The meaning of Documentary Credit embodies the following. It is:
a written undertaking given by a bank, known as an issuing bank or
opening bank;
to a seller, known as a beneficiary;
at a request and on the instructions of its customer (buyer), known as
the D/C applicant;
to pay either at sight or at a specific future date;
a stated sum of money;
against delivery of shipment and submission of stipulated documents
and fulfilment of all the terms and conditions in the D/C.
Cont’d
67
•
•
a)
b)
•
In other words, a documentary credit is a conditional payment
instrument made by the issuing bank in favour of a designated
beneficiary.
It is especially appropriate in the following circumstances:
When the importer is not well known, the exporter selling on credit
terms may wish to have the importer’s promise of payment backed by
his banker;
On the other hand, the importer may not wish to pay the exporter
until it is reasonably certain that the merchandise has been shipped in
good condition and/or in accordance with his instructions.
A documentary credit, in this case, can satisfy both the exporter and
the importer.
It should be noted that all the aforementioned are methods of
obtaining payment for goods shipped and not methods of obtaining
finance.
68
BENEFITS OF DOCUMENTARY CREDIT
a)
b)
c)
Provides a specific transaction with an independent credit backing
and a clear­cut promise of payment.
Satisfies the financing needs of the seller and the buyer by placing
the bank’s credit standing, distinguished from the bank’s fund, at the
disposal of both parties.
May allow the buyer to obtain lower purchase price for the goods as
well as longer payment terms than would open account terms, or a
collection
cont’d
d) Reduces or eliminates the commercial credit risk since payment
is assured by the bank which issues an irrevocable Documentary
Credit.
e) Reduces certain exchange and political risks while not necessarily
eliminating them
f) May not require actual segregation of cash, since the buyer is
not always required to collateralize his Documentary Credit
obligation to the issuing bank.
70
cont’d
g) Expands sources of supply for the buyers since certain sellers are
willing to sell only against cash in advance or Documentary Credit
h) Provides clear­cut guarantee of payment
i) Provides the buyer with the assurance that required documents will
be received
UNIT 3:
INCOTERMS/TERMS OF DELIVERY/SHIPPING TERMS
•
•
Introduction
Incoterms, shipping terms or trade terms are one of the key elements of
international contract of sale of goods.
They identify the respective responsibilities of the trading parties in the
quotation for each contract of sale.
Incoterms
•
•
•
•
“Incoterms” is an abbreviation of “International Commercial Terms”.
It was published by the International Chamber of Commerce in Paris
and has its latest version, “Incoterms 2010”, which became effective
on January 1, 2011.
Incoterms define at the minimum level, the division of cost between
buyers and sellers, the point at which delivery occurs, which party is
responsible for import and export clearance.
Incoterms also give some information regarding documentation.
Cont’d
•
i.
ii.
Incoterms provide generally four pieces of Information;
Information on the transfer of risk ­ It defines at which place the
risks of cargo loss and damage are transferred from the seller to
the buyer during transportation operations.
Information on the division of cost ­ It defines how costs
resulting from the transport operations are shared between the
seller and the buyer.
Cont’d
iii. Information on the document ­ It defines who will provide
the required documents.
iv. Information on port of shipment and port of delivery – It defines
where cargo or goods be loaded and place of discharge
75
•
•
•
In international trade, there are likely to be three separate contracts for the
transportation of goods;
From the seller’s or exporter’s premises in his/her country to a named
point or place in the importer’s country
From the transport operator’s premises in the exporter’s country to the
named point in the importer’s country
From the port of discharge in the importer’s country to the importer’s
own factory
Main Changes In The Incoterms 2010
•
•
•
•
•
•
Guidance Notes have been included before each rule
Facilitates usage of electronic records if agreed or where customary
Clearly allocates the Terminal Handling Charges (THC) in the relevant
terms
For ‘String Sales’, Incoterms 2010 clarifies the obligation to ‘procure
goods shipped’ as an alternative to the obligation to ship goods
Allocates obligations to obtain or render assistance in obtaining
security related clearances
Insurance cover has been altered with a view to clarify the parties’
obligation relating to insurance.
Cont’d
•
i.
ii.
iii.
iv.
Incoterms is now separated into two groups, those applicable to all
modes of transport and those only applicable to sea and inland
waterway transport. The two new additions are DAP and DAT and
four deletions, DAF, DDU, DEQ and DES
Incoterms 2010 Applicable For Sea and Inland Waterway Transport;
FAS: free alongside ship
FOB: free on board
CFR: cost and freight
CIF: cost, insurance and freight
Cont’d
i.
ii.
iii.
iv.
v.
vi.
vii.
Incoterms 2010 Applicable For All Modes of Transport;
EXW: ex works
FCA: free carrier
CPT: carriage paid to
CIP: carriage and insurance paid to
DAT: delivered at terminal
DAP: delivered at place
DDP: delivered duty paid
PURPOSE OF INCOTERMS
•
•
Main task of incoterms is;
to define the sharing of cost and transfer of risk or damage over the
goods, up to an agreed place
to avoid misunderstanding and disputes among the parties over the
sharing of costs and transfer of risk or damage of the goods
Incoterms are used directly by buyers and sellers, and indirectly by banks,
insurers and carriers/forwarding agents
Users of Incoterms
•
•
a)
a)
Banks
Most letters of credits will state an Intercom
This enables banks to check, to an extent, that:
The documents called for in the credit are consistent with the term
used
The documents presented are consistent with the term used
81
Cont’d
•
•
•
•
Insurers
If there is loss or damage to cargo, insurers will be at pains to
establish exactly where it has occurred and therefore whether the
buyers or sellers were responsible
Incoterms determine whether it is the buyer or seller that is a risk
Carriers/Forwarding Agents
To determine which party will be responsible for payment of freight
charges and from which port of loading to port of discharge or any
intermediary
To determine which party will be responsible for the various activities
in transportation
FORMAT OF INCOTERMS
•
•
•
•
All incoterms consist of 3 alpha characters
Incoterms are followed with either a “DELIVERY PLACE/PORT
OF LOADING” or “PLACE OF DESTINATION/PORT OF
DISCHARGE”
E and F terms are usually followed with a place of delivery/port of
loading
C and D terms will usually be followed with a place of destination/
port of discharge
Cont’d
•
•
•
The named place stated after the incoterms, is the place up to
which the seller pays the freight costs. e.g., “EXW New York”
Delivery Point is the point at which the risk transfers from the
seller to buyer.
“Delivery”, in the incoterms sense, has nothing to do with
transfer of ownership. Title of the goods always lies with the
documents
84
COMMON INCOTERMS
1.
•
•
•
•
EXW – Ex Works (Aluworks, Tema­Ghana)
Exporter/Seller is responsible for producing the goods and:
Making them available at the factory premises for the importer
Providing the buyer with commercial invoice for goods
Buyer/Importer is responsible for:
Local transport and insurance to the port of loading
On­ and off­ loading charges
•
•
•
•
2. FAS­ Free Alongside Shipping (KINTAMPO, Tema Port)
Exporter/seller must arrange to:
Deliver the goods at the point and port of loading named in the contract
Pay for the production of goods, all charges up to delivery of goods
including local transport and insurance cost to the side of the named ship
Buyer/Importer is responsible for:
Choosing the carrier to transport the goods abroad and paying the cost of
freight from the port of loading including the cost of loading on board the
vessel to the port of discharge
Arranging and paying for any export permit or export taxes, excluding
value added tax
•
•
•
•
•
Free on board means that the buyer does not pay for transporting or
insuring the goods from the seller’s premises.
The Exporter/seller must:
Pay for the transportation to the named port of shipment
Provide and pay for the export license
The Buyer/Importer must:
Nominate the carrier to carry the goods
Give the seller/exporter the details of the ship/airline, sailing time, airline
flight time/date
3. FOB ­ Free On Board of vessel named carrier/ship (GYATA,
Tema Port)
4. CFR – Cost and Freight (named port of discharge, Tema Port)
•
•
•
•
The seller/exporter must:
Nominate the carrier and so make the contract of carriage
Pay for the transportation of the goods to the place of shipment
and local insurance
The buyer/importer must:
Pay for the marine insurance of goods from the time they are
taken on board to the port of discharge
Pay for the unloading cost at the destination
5. CIF – Cost, Insurance and Freight (Named Port of discharge,
Tema Port)
•
•
•
The seller has the same responsibility and obligation as that of C&F,
except an added responsibility of arranging and paying for
insurance.
Buyer should arrange to pay for handling and off­loading charges
and:
Obtain the import license
Arrange to pay the import duties; and
Pay for local transport and insurance cost from the port of
discharge to the buyer’s premises
6. DDP – Delivered Duty Paid (Buyer’s Premises)
•
•
•
Means that the seller delivers the goods to the buyer, cleared for
import, and from any arriving means of transport at the named
place of destination.
The seller must pay all import duties including value added tax of
the importer’s country and also provide relevant import license.
The seller has an added responsibility for arranging and payment
of import license of import duties and value added tax
7. DAT – Delivered At Terminal (Shed One, Tema Port)
•
•
•
•
•
Means that seller delivers when the goods, once unloaded from the
arriving means of transport, and placed them at the disposal of the
buyer at a named terminal at the named port or place of destination
Exporter/seller
delivers the goods on the terminal at the named port of destination
pays for unloading cost
Buyer/importer
accepts delivery of goods at named port of destination
is responsible for local transport, insurance and others
91
8. FCA – Free Carrier (Boankra Inland Port, Kumasi)
•
•
•
•
•
•
This term is used where inland port is used in the transportation of goods.
The Exporter/seller:
delivers goods to Boankra inland container depot
completes export and customs documentation including obtaining export
license
The importer makes all arrangements at his own cost and risk to cover
transport of goods to his own premises from Inland Container Depot
arranges for appropriate insurance and obtains policy or certificate
obtains the import license
pays for import duties
9. CPT – Carriage Paid To (Named place of destination)
•
•
•
•
Similar to CFR, except that exporter must arrange and pay for
transport to the named port of discharge, which could be an inland
container depot.
The exporter/seller:
completes export and customs requirements including obtaining any
export license
pays export duties and taxes
The buyer/importer must:
obtain import license and pay all the import duties, including value
added tax
10. CIP – Carriage and Insurance Paid (to named place of
discharge)
•
•
•
•
The seller/exporter:
pays for the freight cost
pays for the insurance charges during carriage
The buyer/importer:
arrange for import license or permit
pay import duties and taxes including value added tax
UNIT 4:
DOCUMENTS USED IN INTERNATIONAL TRADE
•
•
•
•
Objectives;
To know the documents used in the International Trade business
To explain the impact of modern transport on International Trade
To explain the type and features of documents used in
International Trade
To discuss the types of bill of lading and other documents used in
International Trade
Introduction
•
•
•
Documentation
Documentation in international trade transactions provides tangible
evidence that goods have been ordered, produced and dispatched in
accordance with the buyer’s requirement or pre­sale contract between the
seller and buyer.
Documentation is also to satisfy government regulation in the country of
the exporter or buyer and has thus, become an increasingly important
factor in obtaining finance for International Trade.
Documents have become an important part of international business
because of the complex delivery terms of shipment, payment mechanism
and mode of settlements. Documents can be classified as commercial and
financial.
The Impact of Modern Transport on International Trade
•
•
The trend towards integrated (door to door) and multi­modal transport
accelerated by the advent of the container has made certain traditional
“critical point” under FOB, CFR and CIF no longer important as a point
for the division of functions, costs and risks between the contracting
parties.
In addition, since a key function of the transport document is to make
evident the goods ordered and their condition, it should be issued at a
point where the carrier has reasonable means of conducting a check. In
modern transport operations, this point has shifted from the ship’s rail to
seaport or inland terminals. Consequently, there is a requirement for
documents that specify goods received for shipment.
TRANSPORT DOCUMENTS
1.
•
•
•
Bill of Lading
There is always a need for a document to cover the movement of
goods from one point to another, either by sea, road or rail.
Sea transport covers about 70% of the world’s trade, so documents
covering goods by sea are very crucial and critical for the
sustenance of trade.
Bill of lading is a document issued by the shipping line covering
goods being transported on sea to the owner of the goods.
cont’d
•
•
•
It indicates the port of loading, where the carrier will take the
goods and the port of discharge.
It also indicates the date, which goods departed from the port of
loading and the status of the freight.
The document also helps in the determination of the latest
shipment date inserted in the letters of credit.
99
The Functions of a Bill of Lading
1)
2)
3)
4)
It acts as a receipt for the goods from the shipping company to the
exporter
It is evidence of the contract of carriage between the exporter and
the carrier
It acts as a document of title for goods being shipped overseas.
The goods are released from the overseas port only by producing
one of the original bills of lading.
A bill of lading is a quasi­negotiable document. Any transferee for
value who takes possession of an endorsed bill of lading obtains
cont’d
• Original bills of lading are usually issued in three original sets and
any of the original bills of lading enables the possessor to obtain
the goods.
10
1
Transfer of Title to Goods
•
i.
Title to the goods can be transferred by the sender, using a marine
bill of lading in one of three ways:
Issuing a bill of lading to order and endorsed in blank.
The title to the goods can be obtained by anyone presenting a
signed original copy of the bill of lading
ii. Issuing the bill of lading to the order of the named buyer or
bank overseas
cont’d
•
iii. Issuing the bill of lading to the order of a named buyer, but
arranging for the bill of lading to be presented to the buyer through
the international banking system
The bill of lading will indicate the state in which goods were
received for shipment (clean, dirty or damaged)
10
3
Types of Bill of Lading
a)
•
•
•
•
•
Liner Bill of Lading
This is a marine bill of exchange for carriage by a vessel on a
scheduled run rather than an “Adhoc” sailing, without a scheduled
route or timetable.
It has the same function as the ordinary Marine bill of exchange
It provides evidence of contract of carriage
It serves as receipt for the shipper/exporter.
It is a document of title­ the holder has “Constructive” control
over the shipped good.
cont’d
•
•
b) Short Form Bill of Lading
This is a bill of lading which does not contain the shipping
company’s terms and conditions of carriage.
A short form bill of lading can therefore not be a contract of
carriage between the shipping company and the exporter or
overseas buyer, but it refers to the conditions of carriage which
can be found on the master document or on a copy of the carrier’s
standard condition.
cont’d
•
•
•
c) Container Bill of Lading
Shipping companies issue a bill of lading which simply acts as a
receipt for a container with goods packed in it.
Container bills of lading can be issued to cover goods being
transported on traditional port to port.
Palletized cargoes, and cargoes contained on lash barges, which are
loaded on larger vessels qualify for issuance of container bills of
lading.
10
6
cont’d
•
•
d) Combined or Through Bill of Lading
Combined transport bill of lading may show evidence that goods
have been collected from a named inland place and have been
dispatched to another seaport or inland container depot in the
importer’s country.
The goods, although carried by two or more modes of transport,
are shipped under a single contract of carriage.
cont’d
•
•
•
e) Charter Party Bill of Lading
A charter party bill of lading is issued by the hirer of a ship to the
exporter and the terms of the bill are subject to the contract of hire
between the ship’s owner and hirer.
The contract is therefore between the exporter and hirer of the vessel,
not the ship owner.
A bill of lading issued for the journey will state “Subject to charter
party” and the contract of carriage is subject to contract for the hire of
the vessel
10
8
cont’d
•
•
f) Trans­shipment Bill of Lading
These are used when the goods have been transferred from one
vessel to another vessel at a named trans­shipment port.
Once again the carrier has full responsibility for the whole journey.
11
0
•
•
i.
ii.
•
•
2. Sea Way Bill
A sea way bill is a transport document which is issued by the
shipping line.
It is a document which gives details of a consignment of goods and
it acts as:
a contract between the shipping company and the exporter or
overseas buyer
a receipt by the shipping company for the goods received and so,
provides evidence of shipment.
A sea waybill is non­negotiable and is not a document of title.
It is used instead of a bill of lading.
•
•
•
•
•
3. Air Way Bill/Air Consignment Note
An air waybill is a waybill for goods transported by air.
It is a contract of carriage and receipt by the Airline for goods
received into custody.
Air way bill is not a document of title.
The airline will hand the goods to the consignee at the port of
discharge without the consignee having to present an original copy
of the waybill
An air waybill provides evidence of dispatch of goods with detailed
flight date, freight, port of loading and discharge, consignee and
signature of the airline.
•
•
•
4. Road Consignment Note/Truck Receipt
A road consignment note is a receipt issued by a carrier for goods
that are transported by road.
The note specifies the name and address of the supplier to the
consignee, place of delivery and the place where the goods are to
be taken by the carrier.
The note acts as both a receipt and a delivery order, and is neither
non­negotiable nor a document of title.
11
2
•
•
•
•
5. Railway Consignment Note
This is a note issued by a railway corporation for goods dispatched
by rail.
It is a contract of carriage between the supplier and the railway
company.
The railway authorities will release the goods at their destination to
the consignee, who must apply for them and give proof of identity.
It is not a document of title.
11
4
•
•
•
6. Post Office Receipts
Post office receipts are issued by the relevant postal agencies for
goods dispatched by parcel post.
They, thus, provide details and confirmation of dispatch of goods.
The goods will be sent directly to the person or company to whom
the parcel is addressed.
COMMERCIAL DOCUMENTS
•
•
•
i.
ii.
1. Pro­forma Invoice
Pro­forma invoice is the price quotation by an exporter to a potential
overseas buyer.
The quotation indicates description of goods, unit price , total price,
delivery terms, and payment terms.
Pro­forma invoices are used for the following purposes:
The overseas buyer might need to present a pro­forma invoice to
government agencies or bank in his country in order to obtain an
import license and foreign exchange for payment of goods
Customers importing under documentary collection are supposed to
obtain prior approval from their respective banks before importing
goods into the country
cont’d
iii. They serve as a price quotation and might include the terms of
sale
iv. In certain cases, they can be used as a document of tender for
an export contract
11
7
•
•
i.
ii.
iii.
iv.
2. Commercial Invoice
This is a demand note issued the supplier for goods or services sold or a
claim for payment in connection with goods already supplied to a buyer.
A commercial invoice is a claim for payment for goods under the terms of
the commercial contract.
The commercial invoice will include:
detailed description of goods, quality, unit price and total price
the terms of delivery or Incoterm
terms of payment – open account, documentary credit or advance
payment
method of settlement – by swift, telegraphic transfers, mail transfers,
foreign banker’s draft
•
•
3. Certified Invoice
It is a commercial invoice, which also includes a statement by the
exporter about the condition of goods sent or their country of
origin.
Some form of statement might be provided at the request of the
buyer or for the benefit or customs authorities
•
•
•
•
4. Consular Invoice
It is a commercial invoice, which is prepared on a form, printed in the
exporter’s country by the consulate of the buyer’s country.
The Trade Attaché or Consular then stamps it.
The purpose of a Consular invoice is to help the government of the
importing country to control imports in the country.
Its other function is to provide information which forms the basis for
which import duties are paid on goods imported
•
•
•
5. Certificate of Origin
This is a declaration which states the country of origin of the goods
and is common place in countries wishing to identify the origin of
all imported goods.
A certificate of origin is a statement signed by an appropriate
authority certifying that goods were produced in the exporter’s
country.
The forms should be completed by the supplier and may be
authenticated by the Local Chamber of Commerce or other
authorized body in the exporter’s country.
12
0
•
•
•
6. Weight Note
This is a document issued by the exporter or third party declaring the
weight of the goods in the consignment.
7. Packing List
This document gives the details of the goods which have been packed.
It is normally required by Customs Excise and Preventive Services
whenever goods are being cleared.
12
2
•
•
•
This is a certificate issued by an independent third party resident in the
exporter’s country, ensuring that goods being imported are of high
quality with reasonable price comparisons.
The mandate for companies operating in Ghana like SGS, Cotecna,
Bureau de Veritas/ Ghana Standards Board is to check on quality, as
well as price comparisons.
The mandate of the inspection companies operating in Ghana is
derived from the Import declaration form issued by the Ministry of
Trade.
8. Inspection Certificate–Pre­Shipment Inspection
9. Final Classification and Valuation Report –
Destination Inspection
•
•
•
This is a document issued to classify goods that have been imported
into the country.
The document also shows the value of goods and thus, enabling the
Customs Excise and Preventive Service to charge the relevant import
duties as well as sales tax or value added tax.
The importer is required to submit a copy of Importation Declaration
Form to the appointed inspection company in Ghana to enable them
conduct the inspection and the issue the Destination Inspection
Certificate which will classify the goods for CEPS valuation purposes.
INSURANCE DOCUMENTS
•
•
•
•
Insurance Certificate
It is an evidence that shipment is insured against loss or damage while
in transit.
Unlike domestic carriers, ocean going steam ship companies assume no
responsibility for the merchandise they carry, unless the loss is caused by
their negligence.
Marine insurance on an international transaction may be arranged by
either the exporter or the importer, depending on the terms of sale.
The laws of a country require the importer to buy such insurance, thus
protecting the local industry and saving foreign exchange.
12
5
a.
b.
•
c.
•
Basic named perils – sea, jettisons, explosions and hurricanes
Broad named perils – theft, pilferage, non­delivery, breakage and
leakage in addition to the basic perils.
Both policies contain a clause that determines the extent to which
losses caused by an insured peril will be paid.
All risks cover all physical loss or damage from any external cause
and is more expensive than the policies previously mentioned.
War risks are covered under a separate contract.
Three kinds of Marine Insurance Policies:
cont’d
•
•
The premiums charged depend on a number of factors, among
which are the goods insured, the destination, the age of the ship,
whether the goods are stowed on deck or under deck, the volume
of business, how the goods are packed and the number of claims
the shipper has filed.
Because neither the policies nor the premiums are standard, it is
highly recommended that the exporter obtains various quotations.
1.
•
•
•
A Cover Note/Letter of Insurance
This is issued by an insurance broker to provide notice that steps are
being taken to issue a certificate or policy
2. A Certificate of Insurance
It shows the value and details of the shipment and risks covered.
It is signed by the exporter/importer and the insurance company.
Only a certificate of insurance is required when the policy of the
exporter/importer provides “Open Cover” for the whole of its
export trade for one year.
Three Basic Insurance Documents are:
cont’d
12
8
• When an exporter/importer takes out an open cover with any
reputable insurance company for his export or import trade, a
certificate of insurance for each individual shipment will be
provided by the Insurance Company.
3. Insurance Policy
•
•
a)
b)
c)
d)
e)
This gives details of risks covered and is evidence of a contract of
insurance.
Most insurance policies have an “All Risk Policy”, and the main risks
covered are:
Perils at sea – accidental loss or damage caused by sinking, collision,
sea water, heavy weather and stranding
Jettison – loss caused by a decision of the master of the ship to
throw goods over board so as to lighten the vessel in an emergency
Fire, including smoke damage
Theft – forcible theft of goods rather than pilferage
Damage in loading, trans­shipment or discharge
cont’d
•
•
Policy or certificate will not cover losses or damage from strikes,
riots, civil commotions, wars, coup d'état or capture and seizure of
vessel and other force majeure.
These risks must be insured separately by payment of an additional
premium.
FINANCIAL DOCUMENTS
•
a.
b.
In international trade, there are two financial documents which
provide for payment by the buyer. These are:
after a period of credit
establishing a clear legal undertaking by the buyer to make the
payment either by the Bill of Exchange or promissory note.
•
•
•
•
•
A bill of exchange is defined by the Bill of Exchange Act 55, 1961
as
an unconditional order in writing
addressed by one person to another
signed by the person drawing it
requiring the person to whom it is addressed to pay on demand or
at a fixed or determinable future date, a certain sum in money, and
acting to the order of a specified person, or to bearer
1. A Bill of Exchange
•
•
•
•
•
Bills of exchange can be classified in two types:
a. Sight Bill
The bill requires payment on sight or on demand drift.
All that is required is for the drawee to authorize payment via the
banking system.
b. Term Bill (Tenor or Usance)
Bills which are payable at a future date are called Term Bills.
With term bills, payment is due 90 days after sight.
Types of Bill of Exchange
cont’d
•
•
•
When the bill of exchange is presented to the drawee, he should
accept it if he wishes the bill to be honoured.
The drawee would sign the bill of exchange on the front and insert
the date of acceptance.
He would be legally bound to pay 90 days after the date of
acceptance shown on the bill of exchange.
13
4
Subdivision of Bill of exchange
a)
•
•
•
Trade bills – these are bills which are drawn on and are accepted
with the underlying transaction being for commerce or trade.
These bills drawn on trading entities are accepted by some.
Such bills from individual persons are risky by their very nature.
b) Bank bills – these are bills are drawn on accepted by the banks.
Such bills carry very little risk, especially if the bank accepting it is
a first class bank.
c) Accommodation bills – these are used by banks to provide
accommodation facilities for their clients
d) Documentary bills and clean bills
•
•
•
•
It provides a convenient method of collecting payment from
foreign buyers
The exporter can seek immediate finance using term bills of
exchange instead of having to wait until the period of credit expires
On payment, the foreign buyer keeps the bill as evidence of
payment. It therefore serves as a receipt.
If a bill of exchange is dishonoured, it may be used by the drawer
to pursue payment at maturity.
Advantages of Using Bill of Exchange
•
•
•
•
•
•
•
A promissory note is defined in the Bill of Exchange Act of Ghana,
Act 55, 1961 as:
an unconditional promise in writing
made by one person to another
signed by the maker
engaging to pay
on demand or fixed or determinable future time
a sum of money
to the order of a specified person or to bearer
2. Promissory Note
UNIT 5:
DOCUMENTARY CREDIT
•
•
•
•
•
•
•
Objectives;
To define Documentary Credit
To examine the general instruction for opening Documentary Credit
To explain the parties involved in the Documentary Credit
To describe the types and benefits of documentary credit
To help students to understand the specialized credit available
To explain the financing mechanisms under documentary credit facility
To discuss the practical handling of discrepant documents under
documentary credit
Introduction
•
•
It is the only payment mechanism which usually satisfies the
seller’s desire for cash and importer’s desire for credit.
A Documentary Credit is a written undertaking issued by a bank,
on behalf of the buyer, to the seller, to pay for goods or services,
provided that the seller presents documents which comply fully
with the terms and conditions of the credit
TYPES OF DOCUMENTARY CREDIT
a)
b)
•
Irrevocable Credit – incapable of cancellation or modification
except with the consent of the Beneficiary
Revocable Credit – can be cancelled or modified by the importer
at anytime without the consent of the beneficiary.
The cancellation is subject to the customer remaining liable in
respect to any negotiation
14
0
PARTIES TO THE DOCUMENTARY CREDIT
1)
2)
3)
4)
Applicant/Buyer/Opener – The party on whose behalf it is issued
Issuing Bank – The bank that issues it and acts for the Applicant
Advising Bank – The Bank through which documentary credit is
conveyed to the beneficiary
Beneficiary – the party to whom the documentary credit is
addressed and who will receive payment.
cont’d
14
2
•
•
5) Confirming Bank – the bank that adds its confirmation to a
credit upon the issuing bank’s authorization or request.
Sometimes, an advising bank is requested by the issuing bank to
add an additional commitment to pay the beneficiary.
If it agrees to the request, this advising bank will take a dual role.
BANK’S CONSIDERATION BEFORE ISSUING CREDIT
a.
•
•
Status Report/Credit Standing on the Beneficiary
For the protection of both the issuing bank and the applicant,
consideration should be given to a status report on the integrity,
credit worthiness and track record of the beneficiary
Such reports could be obtained from the beneficiary’s bankers
through the importer’s correspondent bank network
cont’d
14
4
•
•
•
b. Status Report/Credit Standing on the Applicant
An opening bank needs to ensure that the applicant is a customer
with high integrity and repayment ability.
For a new customer, a marginal deposit may be required.
For existing customers with a credit limit, a D/C line of credit will
be earmarked and deducted for the amount of the credit or added
to their existing facilities.
cont’d
•
•
•
c. Facilities
The Bank should have an appropriate import facility put in place.
All cannons of lending should be strictly applied, especially the
foreign exchange component of this facility should be well
highlighted.
If the customer does not have import facility or approved line of
credit, the bank should take 100% total deposit cover against the
establishment of Letters of Credit.
14
6
•
•
•
d. Nature of Goods
A D/C issuing bank undertakes to pay a seller against his goods as
the collateral.
Therefore, the bank is quite concerned about the nature of the
goods and in particular its marketability and durability.
The goods are considered valuable to guard against the insolvency
of the applicant (buyer) to pay for the shipping documents.
cont’d
14
7
•
•
e. Control of Goods and Title Documents
In all cases, an opening bank is prepared to issue a credit calling
for a full set of title documents
This allows the issuing bank to take control over the goods only if
the bills of lading are made out in the name of the issuing bank or
“to order” and “blank endorsed”.
cont’d
14
8
f.
•
•
•
Nature of the Credit
Whether it is a local D/C or a foreign D/C and in particular the
means of delivery of the goods.
g. Type of Currency
Whenever a documentary credit is issued in a currency other than
that of the buyer, an exchange risk occurs.
If the credit is issued in a rare currency or exposed to great
fluctuation, it is advisable for the issuing bank to remind its
customer to take foreign exchange cover.
cont’d
14
9
•
h. New Business and Cross­selling
The possible volume of new business and the chance of cross­
selling may also be a consideration.
cont’d
THE TRIANGULAR CONTRACTUAL AGREEMENT
15
0
•
i.
ii.
iii.
Under documentary credit operations, there exists a distant
triangular contractual agreement. That is;
Firstly, the sales contract between Buyer and Seller (proforma
arrangement)
Secondly, the Application and Security Agreement or the
Reimbursing Agreement between the Buyer and the Issuing
Bank
Thirdly, the Documentary Credit between Issuing Bank
through the Advising Bank and the Beneficiary
GENERAL INSTRUCTIONS FOR OPENING A DOCUMENTARY
CREDIT
a)
•
b)
•
Responsibility of the Issuing Bank – its duty is to receive
shipping documents on behalf of the importer which purport to
comply with the condition stated in the documentary credit.
It deals in documents but not in goods
Availability – the expiry date must always be given by the
importer.
The expiry date can of course be extended on the instruction
of the customer.
c) Negotiation – this instruction should be used where drafts are
drawn by the beneficiary on the bank named to negotiate.
d) Acceptance /Payment – these instructions are appropriate where
the currency of the credit is that of the country of the beneficiary
who is to draw draft for acceptance on an issuing bank or the
confirming bank
15
2
cont’d
•
e) Documents Required – details of documents required in
documentary credit should be mentioned in the application
form.
It is not sufficient to say “usual documents”
f) Delivery Terms – applicant should state the delivery terms
to avoid ambiguities in transport and delivery charges
cont’d
g) General – unless the letter of credit states otherwise, shipping
documents bearing reference to other charges in addition to
freight charges will be accepted.
h) Unless instructions are given to the contrary, issuing banks
will take up documents presented to them up to 21 days from
the date on the transport document Bill of Lading /Airway Bill
15
4
cont’d
UNIT 6:
OVERVIEW OF EXPORT FINANCE
•
•
•
•
•
•
Objectives;
To discuss the factors which affect Export Finance
To explain the criteria used in the financing of the trade cycle
To describe the trade cycle in relation to international business
To explain pre and post shipment financing
To discuss the factors which make trade finance attractive to banks
To discuss the traditional and non­traditional facilities provided by
banks in export trade
Introduction
•
•
a)
b)
c)
d)
e)
Financing the pre­shipment, or post­shipment period is an
important consideration for any exporter.
The method of financing chosen by the exporter will be influenced
greatly by the following factors:
The terms of trade
The payment mechanism
Currency and cash flows consideration
The cost of funds/pricing
The availability of any export credit insurance
•
•
•
Most exporting companies sell their goods on terms which
typically do not exceed 180 days and payment mechanism will
vary from the open account through documentary collection to
irrevocable documentary credit.
The better secured method of payment chosen, the cheaper the
cost of the transaction will be.
Banks have been providing various facilities to both exporters
and importers .
cont’d
15
8
• When an exporter sells on open account basis, the exporter
might suffer cash strap, this is because he has made payment
out of his own money to deliver the goods, but has not yet
received anything in return.
cont’d
•
a)
•
•
Export finance may be categorized into:
Short term – to finance working capital. Short term finances
normally repaid within 18 months.
b) Medium term – to finance acquisition of semi­processed items.
Facilities that cover 18 to 36 months may be classified as medium­
term.
c) Long term – to finance the acquisition of fixed assets.
Any facility over the period of 36 months and above may be classified
as long term finance.
15
9
cont’d
PRE-SHIPMENT AND POST-SHIPMENT FINANCE
•
•
Pre­shipment finance is the money required to finance the
business between the commencement of the manufacturing
process or production process and the shipment of goods to the
importer
Post­shipment finance is money required to finance the
exporter between dispatch of goods and receipt of payment
from the importer.
FINANCING THE TRADE CYCLE
•
•
Growth in international trade has greatly increased over the
last century for both demand for trade finance and the degree
of sophistication with which the goods are delivered.
There is now a much greater choice of ‘financial engineering’
for both exporters and importers to consider when developing
an international trade strategy.
•
•
Organizing the finance is an important part of any well­defined
strategy and also a key contributor to the success in
international trade.
The availability of finance can be a major factor in securing a
new business as it provides the flexibility to offer competitive
terms to an overseas partner.
16
2
cont’d
•
a)
b)
c)
d)
e)
f)
Every facility will depend on the payment mechanism and
other criteria such as:
Customer’s requirement
Assessment of risks in the chosen facility
Terms of trade
Cost and benefit analysis of the facility
Expected income to be derived
Cross­selling of other related services
cont’d
UNDERSTANDING THE TRADE CYCLE
•
•
Every business cycle is unique in its own sense, even though
they might have certain elements that might be common to all
of them.
Each stage in the trade cycle places different demand on the
company’s finance, but the key component in the determining
the overall level of working capital required for any business is
the time taken between the start of the cycle and the receipt of
payment for the corresponding sales of the finished product.
•
•
The bank, through its knowledge of customer’s business, terms
of trade and its view of risks inherent a each stage of a
particular trade cycle, can structure facilities that provide
working capital for the different stages in the cycle and in
effect, directly relate to the needs of customer’s business.
As the bulk of international trade is undertaken on terms of
180 days or less, these facilities are important consideration for
a company engaged in exporting and importing.
16
5
cont’d
FACTORS THAT MAKE EXPORT FINANCING
ATTRACTIVE TO BANKS
•
a)
b)
c)
Banks considering the financing of international trade, from
the standard point of the exporter, may consider the
following:
Short Term of the Transaction – should not exceed 18
months
Self­Liquidating Nature of Business – repayment from the
sale of underlying goods
Security – the underlying goods could be used as security
16
7
d)
e)
f)
Selective Nature of Business – the bank examines each
application on its merit to ensure that proper facility is
structured
Monitoring – trade related business is relatively easy to
monitor
Expected Foreign Exchange – the anticipated receipt
of foreign exchange to service its import clients.
cont’d
SHORT TERM FACILITIES AVAILABLE TO EXPORTERS
FROM BANKS
•
•
•
•
•
•
•
•
•
Export finance can be classified as traditional and non­traditional banking facilities
TRADITIONAL NON­TRADITIONAL
Secured/Unsecured Overdraft Export Factoring
Loans (Short & Medium) Invoice Discounting
Advance Against Collection Forfaiting
Negotiating Leasing
Sight Payment Hire Purchase
Documentary Credit Acceptance Counter Trade
Accommodation Finance Export Merchant
Acceptance Credit Confirming House
Avalisation
TRADITIONAL BANKING FACILITIES:
Overdraft
•
•
Overdraft is provided to cover borrowing of a temporary
fluctuating nature which will be repaid on the receipt of
expected funds.
The banks will grant an overdraft facility to finance business
requirements in both international and domestic trade.
17
0
•
a)
i.
ii.
Overdrafts can be split into two categories:
Agreed Overdraft
The agreed overdraft limit falls into two types:
Short term – covers a specific requirement. Essentially, a
small bridging facility and the source and timing of the
repayment should be made clear on the onset.
Renewable/Revolving – is a facility which is essentially to
be used as a standby.
cont’d
b) Unauthorised Overdraft Facilities
•
•
Customers are allowed to draw above the customers’ authorized
limits for a very short period.
For most customers, there is a level to which a bank would be
prepared to allow an overdraft without insisting on a formal
arrangement.
17
2
•
•
The appearance of an excess over an unadvised limit for more
than a few days in advance of export proceeds could indicate
impending problems.
Any excess over an unadvised limit should lead to a review of
the customer’s account to ensure that the assumptions on which
the original limit was marked have not changed.
cont’d
Short Term and Medium Term Loan
•
•
Banks provide both short and medium term loans for
exporters to purchase equipment, construction of irrigation,
and others.
These loans are granted both in local and foreign currencies.
Interest rates on the foreign currency loans are either the
base rate or the prime rate prevailing plus a margin.
•
•
•
a) Bill Advances
This method of obtaining payment will be used by an exporter
who requires greater protection than is provided by open
account method of payment.
After shipment of goods, there can be a considerable time lag
before the exporter receives payment.
The exporter submits collection documents to his bankers and
receives an advance against the documents submitted.
17
4
cont’d
•
•
•
•
The lending will be made with full recourse on the exporter, who
will be made to pay any dishonoured bills plus cost and charges.
The advances can be made either against individual bills or a
portfolio of bills.
A letter of hypothecation pledging the bills as security would be
required in the granting of such a facility.
Although there will be recourse to the exporter the primary source
of repayment will be payment of the bills by the overseas buyer.
17
5
cont’d
•
•
•
•
b) Bills Negotiation
Bills negotiation facility differs from an advance against bills held for
collection in that, rather than a set percentage of a bill being advanced,
the lending banker in effect buys or purchases the bill at face value less
a discount to cover interest, cost and commission.
The holder of a bill becomes the holder for value, for having given
consideration by purchasing the bills involved.
This is, in effect, a 100% lending against the value of the bill.
The lender retains full recourse against the exporter if the bill is
cont’d
i.
ii.
iii.
iv.
v.
vi.
vii.
The basic considerations under the Negotiation facility will be:
Credit Standing of the exporter
Exporter’s proven track record
Ability to get full control over goods through the
documentation
Marketing of the goods
Existence of exchange control in the importer’s country
Whether credit is held
Terms of Payment (i.e. D/A or D.P.)
cont’d
Acceptance Credit or Accommodation
Finance
•
•
This facility is where the exporter’s bank allows the exporter
to draw a bill of exchange on the bank itself and the bank
accepts that bill of exchange so the exporter can discount it in
the money market at a fine rate.
As a security, the exporter’s bank obtains authority to take over
all rights to documentary collection, which it submits on the
exporter’s behalf.
17
9
•
•
The repayment of the acceptance facility will be from the
expected export proceeds under the documentary collection.
Such a facility is granted to an undoubted customer with a
proven track record.
cont’d
Facilities Available Under Documentary Credits
•
•
•
a) Negotiation of Bills of Exchange Drawn Under Documentary
Credit:
This facility is provided under documentary credit, where a bill of
exchange drawn on the issuing or confirming bank is purchased and
credited to the customer’s current account.
By negotiating, the issuing or confirming bank is, in fact, buying the bill
of exchange under the documentary credit from the exporter and
therefore, collects the export proceeds in its own name.
Provided the terms and conditions of the documentary credits are
complied with, the issuing bank will reimburse any bank called upon to
negotiate.
•
•
•
b) Discounting of Bills of Exchange Drawn Under
Documentary Credits
When the documentary credit calls for a bill of exchange with
tenor or term payment, the nominated bank designated as the
accepting bank will accept the tenor bill and, once the bill is
accepted, it becomes an eligible bill.
The exporter may be able to discount the bill in the money market.
The exporter should remember that it may be that it may be
possible to convince the importer to pay for the cost of discounting
the bills of exchange drawn under documentary credit.
18
1
cont’d
•
•
i.
ii.
•
c) Assignment of Proceeds of a Documentary Credit
This is a means of obtaining pre­shipment finance with the
cooperation of the exporter’s bank.
The exporter’s bank, acting on its customer’s authority, issues a letter
of comfort to the exporter’s local supplier indicating:
that the exporter is the beneficiary of a documentary credit
that the bank is authorized to pay over, direct to the supplier,
certain sum from the proceeds of the credit when received.
This letter of comfort may persuade the exporter’s local suppliers to
grant pre­shipment and post­shipment credit to the exporter.
cont’d
Red Clause Documentary Credit
•
•
A red clause documentary credit contains an instructions from
the issuing bank for the advising bank to make an advance to
the beneficiary prior to shipment.
When the exporter subsequently presents the shipping
documents, the amount of advance and interest will be
deducted from the full amount of the credit.
•
i.
ii.
•
The advance can be in two forms:
Conditional, whereby the beneficiary must sign an
undertaking to use the money to help him assemble the goods
referred to in the credit.
Unconditional, whereby the beneficiary merely signs a
receipt for money
In either case, the bank will be responsible for reimbursing the
advising bank if the exporter should subsequently fail to
present the documents called for under the credit.
18
4
cont’d
Green Clause Credit
•
•
Green clause credit contains an instruction from the issuing
bank authorizing the advising bank or nominated or confirming
bank to make advance against goods that have been
warehoused and inspected by a third party against a simple
receipt.
In all cases, the goods will be inspected by the third party
inspection company ensuring that goods have been properly
stored and warehoused in an approved or recommended
warehouse before payment is made to the beneficiary against a
simple receipt.
18
6
•
•
Beneficiary on the presentation of the receipt issued by the
third party to the nominated or advising or confirming bank
will be granted advance against the shipping document.
The issuing bank will reimburse the advising or nominated or
confirming bank for the amount advanced to the beneficiary.
cont’d
Documentary Acceptance Credit
•
•
Documentary acceptance is a facility where the exporter draws a
bill of exchange on the issuing, advising or nominated bank, which
accepts that bill and has the bill subsequently discounted and the
proceeds credited to the exporter’s account.
An eligible bank bill can be discounted at a finer rate.
18
8
•
•
This form of finance is sometimes called Accommodation
finance because the bills are accepted by first class banks.
The use of acceptance credits has expanded considerably since
the operations of the discount houses in Ghana began in the
mid nineteen eighties.
cont’d
NON-TRADITIONAL BANKING FACILITIES:
Factoring
•
•
•
Export factoring is the purchasing of book debts of company
or business concern for immediate cash by a factor company.
An export factoring service is particularly suited to business
conducted to an open account and improves the cash flows, as
well as savings.
Under export factoring, a customer’s entire turnover is
purchased with or without recourse.
•
i.
ii.
iii.
The export factoring services are as follows:
Accounting, credit checking and debt collection
Credit insurance against bad debts
The provision of immediate cash against client invoices up
to 75% to 85% of face value.
19
0
cont’d
a)
b)
c)
Benefits of Export Factoring­Customer
Cash­flow is more predictable because the client knows
that he can claim up to 85% as immediate advance against
his invoices
Bad debt losses are eliminated from those debts that have
been factored
Sales ledger administration is reduced because sales ledger
accounting cost is taken off
cont’d
f)
•
d) Foreign exchange risk may be eliminated if invoices are quoted in
foreign currencies
e) Management’s time is used efficiently because they can
concentrate on production and sales
Debtors settle indebtedness more quickly because the factor is
more efficient at collecting debt.
Some clients use the factor for this reason and do not utilize the
right to advance against the invoice.
19
2
cont’d
Invoice Discounting
•
•
•
Invoice discounting is an arrangement where the business
concern collects the debts which have been discounted by
financial institutions.
The facility is provided by a financial institution when an
exporter’s invoices are discounted and immediate cash paid to
the exporter.
On receipt of the funds, they are transferred to the financial
institutions that discounted the invoices.
a)
b)
c)
d)
Benefits of Invoice Discounting
Invoice discounting is not disclosed to the debtors of the factor
client
Under invoice discounting, the client does not run his own
accounts ledger
This facility is useful when the client has an efficient sale ledger
team of his own
Cash flow is improved and management could concentrate on
19
4
cont’d
Forfaiting
•
•
•
•
The term forfaiting is derived from a French word ‘forfait which
means to surrender or relinquish the right to something.
Forfaiting can be defined as the discounting of short, medium to
long term trade debt without recourse to the importer.
Forfaiting provides finance to exporters of semi­consumable goods,
semi­capital, plant and machinery and capital goods.
Exporters of all sizes have discounted the benefits of securing
payment by using bills of exchange as debt instrument, accepted by
the importer and available to the importer’s bank.
a)
b)
c)
Advantages to the Exporter
The exporter is freed from the liabilities of debts owed by the
buyer in the immediate future and also the contingent liabilities
which are payable by the foreign buyer.
The exporter’s liquidity and cashflow are improved because he
receives cash at once.
Enhances the customer’s borrowing capacity.
19
6
cont’d
a)
b)
c)
Disadvantages to the Exporter
Costs can be high and there is no interest rate subsidy
It may be difficult to find an institution which will be
prepared to guarantee the importer’s liabilities
There is possibility that the government of the buyer’s
country may impose foreign exchange controls
cont’d
Leasing
•
•
Leasing company buys the equipment or plant and
machinery outright from the supplier and then leases them to
the ultimate user, who has the use of the equipment or
machine for an agreed period, subject to payment of the
agreed rent to the lessor.
Leasing arrangement enables a user to have equipment or
machines without first having to pay for the full cost and
instead pays for it over the equipment’s life.
•
a)
b)
•
Leasing can be made available to the foreign buyer:
either by arranging finance from the exporter’s country into the
lessee’s country (cross­border leasing)
by arranging the leasing in the buyer’s country through an
international contract of a leasing company in the exporter’s
country.
The first method is more suited to major and capital intensive
equipment and machines, whilst the second approach is more
convenient to items with lower value. i.e. office equipment.
19
9
cont’d
a)
b)
c)
The advantages of the second method:
Leasing could be arranged for the delivered cost of the
equipment or plant.
The terms of the lease might be longer than a cross border
leasing.
The lessee will not be exposed to any foreign exchange risks
*The type of lease involved in such an arrangement will be a
finance lease
cont’d
20
1
a)
b)
c)
d)
Benefits of Leasing to the Exporter
Being able to use equipment without necessarily owning the
asset.
Leasing charges affect the profitability and cash flow without
affecting the company’s gearing ratio.
Enhances the exporter’s chances of company’s borrowing
capacity.
There is no recourse unless the exporter defaults on the contract.
cont’d
20
2
a)
b)
c)
Disadvantages of Leasing to the Exporter
Leasing charges could be very expensive.
It may be difficult to find a leasing company which will be
prepared to do Cross Border leasing.
There could be tax implication for the leasing company.
cont’d
Hire Purchase
•
•
i.
ii.
Hire purchase agreement is similar to the leasing except that
ownership of the asset passes to the hirer.
Hire purchase can be organized in one of two ways:
By an arrangement with the hire purchase company in the
exporter’s country which has a branch office in the buyer’s
company.
By an arrangement with a hire purchase company in the
exporter’s country which is a member of the International
Purchase Credit Union.
•
•
Under hire purchase agreement, the exporter will receive
payment immediately from the hire purchase company.
The buyer, on the other hand, has the use of equipment or
machine and is able to pay for it by instalments with only a low
initial cash deposit.
20
4
cont’d
Avalisation – Avalised Bills Facility
•
•
•
Avalisation involves adding the lender’s name to a bill or
promissory note on behalf of the drawee, giving the effect of
guaranteeing payment.
An importer is, therefore able to get his banker’s to
unconditionally guarantee a debt to an overseas supplier.
Avalising is mainly used when dealing with European suppliers.
•
•
•
Avalisation is the specific endorsement on a bill of exchange by a bank
which guarantees payment should the drawee or importer defaults on
payment of the avalised bill at maturity.
Lenders under such facility will wish to take a counter – indemnity
from the customer to ensure that they have a right of recourse should
the customer fail to meet the primary obligation on the bill.
Avalisation can help the importer to establish new trading relationship
with an overseas supplier and possibly negotiate improved terms of
payment.
20
6
cont’d
Counter Trade
•
•
a)
b)
c)
d)
Counter trade covers a wide range of techniques for
handling reciprocal trade.
The principal types of counter trade are:
Offset: direct and indirect
Compensation
Buy back
Counter­purchase
e) Bilateral agreements using clearing accounts
f) Switch trading
g) Tolling
h) Co­operation agreements
i) Build­operative­transfer
20
8
cont’d
Export Merchants
•
a)
b)
•
An export merchant is a trader who:
Buys goods in one country and sells them in another on his
own account
Acts as an agent for a manufacturing company that wishes to
sell his goods abroad
The export merchant buys goods from a supplier on normal
trade credit terms and in the supplier’s own currency.
•
•
•
The supplier does not have to concern himself with the business
of exporting because this is the role assumed by the merchant.
The export merchant pays for the goods more quickly than
overseas buyer.
The export merchants thus, provide a source of fund or
financing to the exporter.
21
0
cont’d
Export Finance House
•
•
•
•
Export finance houses provide finance for consumer goods, semi­capital
and capital goods on a recourse basis.
The primary objective of the export finance house is to supply finance
on and off basis or at regular intervals.
The export finance house concern themselves with the production,
processing or manufacturing of items stage by stage and also arrange
promotional activities for the items being produced.
They also pay for the administrative expenses for the goods being
manufactured.
UNIT 7:
IMPORT FINANCING
•
•
•
•
Objectives;
To distinguish between Buyer and Supplier Credit
To describe the types of credit available to the importer
To explain the specialized facility available to importers
To help students to know the usage of Standby Letter of Credit
Facilities
Introduction
•
•
•
•
The time between placing an order for goods and receipt of payment, in
respect of their subsequent resale can put significant strain on an
importer’s resources.
Such a situation may require some kind of financial assistance.
Seasonal peaks, long transit times and lengthy credit terms may all
compound the importer’s liquidity problem, which may require bridging
up financing.
It is important that the finance to meet the seasonal fluctuation of the
importer’s working capital requirements be geared towards the terms
and method of pre­payment agreed between supplier and buyer.
Buyer and Supplier Credit
•
•
•
Buyer credit facility
This involves a loan from a local bank (e.g. Ecobank Ghana Ltd)
to enable an overseas buyer to pay the full cash price of the export
on shipment.
The loan is made directly to the overseas buyer.
Supplier credit
This involves the exporter’s bank lending money to the exporter, to
provide post­shipment finance.
TYPES OF CREDIT AVAILABLE TO THE IMPORTER
•
•
•
a) Overdrafts
Overdrafts are provided for imports to cover borrowing of
temporary fluctuating nature and are repaid from the sale of the
imported items.
Overdrafts are available in local and foreign currencies, and are
simple and convenient to overdraw within an agreed facility.
The overdrawn account is then replenished with payment received
from the sales.
21
5
•
•
•
Overdrafts could also be provided to cover specific import requirements.
Considerations for such facilities are not granted if the bank cannot
obtain control over the source of repayment
Although simple and flexible, the importers may not be able to finance
all elements of import contracts from overdrafts, particularly as
borrowing in this way may be more expensive than other forms of
financing.
cont’d
b) Import Loans
•
•
•
Import loans provides importers with the flexibility to take a period
of extended credit undisclosed to the seller, whilst allowing
optimum payment terms to be offered.
This allows the importer time to sell the goods and realize the
proceeds before having to repay the loan.
It is common for the underlying transaction to be settled ‘on sight’
basis, with the goods being consigned to the order of the bank.
•
•
•
By offering to settle import bills immediately, importers may be
able to negotiate better terms or prices with their suppliers.
Where credit is taken from the supplier, the facility can be used to
meet the importer’s obligation on the maturity date of a term bill
and provide finance for an extended period to match sales receipts.
Import loans usually cover individual shipments of goods and may
be arranged in both local and foreign currencies, with fixed or
variable rate to the prevailing local interest rate or base rate or
prime rate.
21
8
cont’d
c) Product Loans or Warehousing Facility
•
•
•
This is a short term loan made by a bank to an importer, using the
imported goods as security.
The purpose of this facility is to enable the importer to pay for
goods, and he is usually expected to repay the facility from the
proceeds of the eventual sale of his goods.
Sometimes, importers buy goods on Document Against Payment,
or Irrevocable Letter of Credit payable at Sight Terms for resale to
a third party in the same country.
• Thus, the importer may require finance to bridge the gap between
sight payment and receipt of funds from the third party.
22
0
cont’d
PROCEDURE FOR PRODUCE LOAN
i.
ii.
iii.
The lending bank will obtain a letter of hypothecation from the
importer that incorporates a letter of pledge that the importer
accepted the loan granted against the usage of goods as security.
When the shipping documents are received, they will be pledged
as security to the bank.
The lending bank pays the bill of exchange with the instructions
as per the collection order or terms and conditions of the letter
of credit.
22
1
iv.
v.
The bank will debit a produce loan and credit the customer’s
current account with the agreed amount of the advance.
The shipping documents would be retained by the lending bank.
The banks will arrange with its agents to have the goods
warehoused in the name of the lending bank.
vi. The goods should be insured at the expense of the importer.
cont’d
vii. The goods remain in the warehouse until the time comes for
delivery to the ultimate buyer.
viii. The ultimate buyer pays directly to the lending bank and the
proceeds are used to clear the produce loan, including interest and
charges.
22
3
cont’d
d) Acceptance Credit facility/Accommodation Facility
•
•
•
Banker’s acceptances are facilities granted by banks to enable
importers to pay the exporters, pending the sale of goods.
The importer’s bank allows the exporter to draw the bill of
exchange on the bank itself and accept the bill of exchange.
Since this bill is a bank bill, the importer can discount it in a money
market at a finer rate to pay off the exporter.
•
•
As security for the lending bank, it will usually obtain authority to
take over the right of the goods.
Normally under such arrangement, the bank will require a letter of
hypothecation from the importer and if the documents of title or
goods are held by the importer prior to their resale, the bank will
require a Trust Receipt or Trust Letter.
22
5
cont’d
e) Documentary Credit Facilities
•
•
•
When a bank issues an irrevocable documentary credit, it
conditionally guarantees a consumer’s trade debt.
Documentary credit represents an obligation to pay or accept
liability, provided the overseas supplier meets the terms and
conditions of the credit, including the provision of the documents
of title to the goods being shipped.
The bank must be satisfied with the buyer’s ability to meet the
liability on the due date, and if any doubts persist about the
importer, the full or partial cash cover should be taken from the
buyer at the time the letter of credit is issued.
f) Standby Letter of Credit
•
•
•
A standby letter of credit can be used to support open account
trading.
It performs a similar function as a bank guarantee, but it is issued
in a format corresponding to that of a documentary credit and
governed by the Uniform Customs and Practice for Documentary
Credit and International Standby Credit Practice.
A standby credit is one which is issued to cover non­performance.
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ACF 465 INTERNATIONAL TRADE FINANCE 2017.pdf

  • 1. ACF 465: August 2017 INTERNATIONAL TRADE FINANCE Mr. Kwasi Poku kwapok25@gmail.com // 0207401585
  • 2. Course Overview • • The aim of this course is to help students acquire the necessary background information and also gain an understanding of the finance of international trade, foreign exchange and support services provided for exporters, importers and merchants by financial institutions especially in Ghana. This course also seeks to help students acquire a sound understanding of relevant theoretical and practical concepts, coupled with an ability to apply the principles in a given practical situation. 2
  • 3. 3 • • Students should however note that, international trade is a rapidly changing subject, hence careful study of publications and newspapers such as graphic business, business and financial times and the various customer leaflets and circulars prepared by banks is essential in order to keep up to date. In addition, students should regularly search the internet to keep abreast of new developments.
  • 4. Course Objectives • • To help students to appreciate the need for international trade, the risks and problems encountered in international trade and the role played by banks in facilitating international trade. To help students gain an understanding of the various terms of payment in international trade. 4
  • 5. • • To help students to be able to define the various terminologies developed by the International Chamber of Commerce (ICC) to be used in international trade. It also aims to help students appreciate the obligations and responsibilities that Incoterms impose on importers and exporters. To help students to be able to explain the various international settlement mechanisms through banks and the problems encountered in international settlements. 5
  • 6. • • • To help students gain an understanding of letters of credit, the parties involved in issuing letters of credit as well as the general instructions to be followed before banks issue letters of credit. To help students appreciate the relevance of documentation in international trade. To help students gain an understanding of the factors which affect export finance as well as the traditional and non­traditional facilities provided by banks to facilitate export trade. 6
  • 7. • • • To help students to appreciate the types of credit available to importers in Ghana. To help students gain an understanding of the various facilities and services provided by banks to new exporters and the travelling public. To help students to appreciate the basic operations of the foreign exchange market in Ghana and the factors that affect the demand and supply for foreign exchange in Ghana. 7
  • 8. Course Outline • • • • • Unit 1: OVERVIEW OF INTERNATIONAL TRADE FINANCE Unit 2: METHODS OF PAYMENT IN INTERNATIONAL TRADE Unit 3: INCOTERMS/TERMS OF DELIVERY/SHIPPING TERMS Unit 4: DOCUMENTS USED IN INTERNATIONAL TRADE Unit 5: DOCUMENTARY CREDIT 8
  • 9. Course Outline • • • • Unit 6: OVERVIEW OF EXPORT FINANCE Unit 7: IMPORT FINANCING Unit 8: METHODS OF INTERNATIONAL SETTLEMENT THROUGH BANKS Unit 9: FOREIGN EXCHANGE MARKETS 9
  • 10. Grading • • Continuous assessment: 30% End of semester examination: 70% 10
  • 11. Recommended Reading • • • Arnold, G. (2008). Corporate Financial Management. 4th Edition. Financial Times/Pearson Education Ltd Atuahene, R. (2016). Finance of International Trade­Chartered Institute of Bankers (GH), 2nd Edition. Cowdell, P. and Hyde, D (2003). International Trade Finance­The Institute of Financial Services (UK), 8th Edition. 11
  • 12. • • • Cranston, R. (2007). Principles of Banking Law. 2nd Edition. Oxford University Press, UK. Luke, K.W. (2015). International Trade Finance: A Practical Guide. 2nd Edition. City University of Hong Kong Press. Watson, D. and Head, A. (2010). Corporate Finance: Principles and Practice. 5th Edition. Financial Times/Prentice Hall. 12
  • 13. UNIT 1: OVERVIEW OF INTERNATIONAL TRADE • • • • • Objectives; To discuss the need for International Trade To discuss the Problems/Difficulties of International Trade To explain the difference between International and Domestic Trade To discuss the theories of International Trade To know the major players in International Trade
  • 14. • • • • To examine the objectives of the parties in International Trade To help students appreciate the risks in International Trade To explain International Trade Fraud and Trade Based Money Laundering To understand & appreciate the role of Banks in International Trade system 14
  • 15. Introduction • • Definition of International Trade: International Trade is the process of buying and selling between two parties in two different countries where business activity calls for payment or settlement in a foreign currency. Trading can be conducted for both goods and services. International can be categorised into visible trade­ the export and import of goods, and invisible trade­ the use of services from other countries.
  • 16. Why Companies Expand Into Foreign Markets • • • The complexities in International Trade require imaginative and proactive strategies. It is therefore very vital that companies receive quality advice from expert sources to help them make informed business decisions on international trade business. Companies opt to expand outside their domestic market for any of four major reasons:
  • 17. 1. • • To Gain Access To New Customers Expanding into foreign markets offers potential for increased revenues, profits, and long­term growth and becomes an especially attractive option when a company’s home markets are matured or saturated. Firms like the Ghana Cocoa Board Ltd, Sony, Toyota, Mercedes Benz and General Motors, which are racing for global leadership in their respective industries must move rapidly and aggressively to extend their market reach to all corners of the world. 17
  • 18. • • 2. To Achieve Lower Costs And Enhance The Firm’s Competitiveness Many companies are driven to sell in more than one country because the sales volume achieved in their domestic markets is not large enough to fully capture manufacturing economies of scale and experience curve effects and thereby substantially improve a firm’s cost competitiveness. The relative small size of country markets in Europe explains why companies like Nestle sell their products all across Europe and then moved into markets in North America, Africa and Latin America.
  • 19. •   • Also, some companies abroad may have a competitive advantage in the provision of certain goods and services. The need to earn more profit by selling goods or services in overseas markets. Some firms act as export houses or import merchants. Bamson Company ltd. In Ghana, is an importer of Dutch Akzo paints. Thus, acting as a middleman between buyer and seller in different countries. 19
  • 20. • • • 3. To Capitalize On Its Core Competencies A company with competitively valuable competencies and capabilities may be able to leverage on them into a position of competitive advantage in foreign markets as well as just domestic markets. 4. To spread its business risk across a wider market base A company spreads business risk by operating in a number of different foreign countries rather than depending entirely on its operations in its own domestic market. Globalization and improved technologies equally offer immense opportunities for firms to benefit from economies of scale and tax advantages.
  • 21. • In a few cases, companies in natural resource­based industries often find it necessary to operate in the international arena because attractive raw materials supplies are located in foreign countries. 21
  • 22. Differences Between International Trade and Domestic Trade • a) b) c) d) e) f) Domestic trade has the following features which are common for both seller and buyer but differ entirely from that of international trade: A single currency is the mode of payment; Trading is conducted under the same law; Documentation to the domestic trade is very simple; Business is done in the absence of stringent Customs Excise and Preventive Regulations; No or little transportation difficulties are encountered; Most businesses are conducted under common language and culture;
  • 23. Inherent Problems / Difficulties In International Trade • 1. • Aside the normal problems of trade and commerce which arise in the domestic trade, there are several additional difficulties associated with international Trade. Some of the problems are: Time and distance The time lag between placing an order from suppliers could affect trade through changes in changes in pricing, additional working capital requirement on the part of the supplier, non­payment on the part of the buyer, changes in customer’s taste, substitute product and non­delivery time lag.
  • 24. • • Differences in time zone also results in communication difficulties. Distance also affects international trade when the risks and inconveniences, in relation to transit times, cannot be avoided considering the time it takes to ship goods and services abroad and the time payment is received. 24
  • 25. • • 2. Differences in laws/customs Lack of knowledge and understanding about customs, habits and laws of the buyer’s or the seller’s country create an extra degree of uncertainty or mistrust between the two parties involved in trade. e.g. exporting pork to a Moslem country. 3. Documentation The nature of the trade, transportation requirement, mode of payment and terms of delivery used in the trade call for a comprehensive and thorough understanding of the documents which makes international trade more complicated than in domestic trade.
  • 26. • a) b) c) d) e) f) g) 4. Government regulations Government rules and restrictions can be a serious threat to international trade. Such regulations and restrictions include: Exchange control regulations Export licensing Import licensing Trade Embargoes Import quotas Health and hygiene requirements, notably on food Patent and trademarks
  • 27. • • i. ii. iii. Exchange control regulation Exchange control is system of controlling the inflows and the outflows of foreign exchange in and out of a country. Government may therefore take extra measures in defense of its currency, such as; Regulations requiring individuals or firms to obtain foreign exchange approval from the Central Bank before engaging international trade activities. Regulations rationing the supply of foreign exchange to those wishing to make payment abroad in a foreign currency. Regulations making the holding of foreign currency or exchange illegal by legislation.
  • 28. Principal Players In International Trade a) • • • Exporters Exporters may be manufacturers, traders, farmers or commodity producers. Their aim is to get their goods to buyers around the world in the quickest and safest manner possible and to be paid in the correct currency and within their agreed terms of settlement. The importance of exports to the economies of many countries is demonstrated by the wide range of support and encouragement given by governments, particularly through Export Credit Agencies.
  • 29. • • • b) Importers Importers may be equally be manufacturers buying raw materials for their factories, oil companies buying crude oil for refining, or simply merchants and traders fulfilling contracts with domestic and foreign consumers. c) Freight Forwarders Freight forwarders or forwarding agents are the most versatile operators in the trade chain. They collect goods from exporters, sometimes actually packing them for shipment, transport them to ports of shipment by road, rail or barge and arrange with the shipping company (or airline) for them to be loaded on board their vessels.
  • 30. • • • d) Warehousing facilities Warehousemen perform a valuable service prior to the shipment of goods and after their arrival at the port of destination. As they are always holding goods belonging to a third party, it is essential that they meet stringent security requirements, the most important of which is that they should be completely independent. e) Carriers Goods may be transported in a number of different ways and by several types of carriers. There exists a need for independent road haulers, barge operators and railway companies to carry goods on specific routes and to be responsible for the whole journey.
  • 31. • • • f) Insurers However well a consignment is packed, there is always the possibility of damage being incurred in transit. In some parts of the world, piracy and hijacking is prevalent. Most shipments are financed by banks or other financial institutions who want to ensure their security is properly insured.
  • 32. • • • g) Banks Banks provide a multitude of services to every operator in the trade chain and for every stage of any transaction. Banking instruments and techniques which have been developed over hundreds of years are made available with world­wide branch networks, affiliates and correspondents. The rapid growth of world markets owes much to the ability of these financial institutions to adapt to change, to keep pace with development and to maintain a high level of skill in handling transactions. 32
  • 33. • • • • • h) Factors Now most international banks have a factoring subsidiary. There is clearly a defined difference between the services offered by banks and factors. Every form of banking finance is effected with recourse to its customer, whereas factors provide facilities for buying debt without recourse. Complete factoring involves the exporter in handling all his documents to the factor who takes an assignment over the debt of the overseas buyer. Although expensive, factoring can take care over a number of administrative operations for the exporter, leaving him to concentrate on his main business of selling.
  • 34. International Trade Risks • • • No transaction can be undertaken without risk to the importer or exporter, although those risks can be significantly reduced by banks and insurers. For the exporter, the main risks are commercial, political and foreign exchange risks. The main risks for the importer are commercial, involving short landing or non delivery of goods and delivery of sub­standard goods.
  • 35. Other Risks Involved In Cross Trading a) • • i. ii. iii. Credit Risk This is the risk that a counter party to a transaction fails to perform according to the terms and conditions of the contract. This may be due to one of the following reasons: Inability of the drawee to pay under a bill of exchange which he or she has accepted earlier or the failure of the importer to pay for goods supplied. Bankruptcy/Insolvency or Liquidation Undeveloped mechanisms for efficient assessment of borrowers by credit referencing agencies in the country.
  • 36. • • • b) Foreign Exchange risk This is caused by the fluctuations in exchange rates over time. Exporters may invoice the buyer in foreign currency (e.g. the currency of the buyers country) or the buyer may pay in foreign currency. (e.g. the currency of the exporters country). The importers problem is therefore the need to obtain foreign currency to make payments abroad and the exporters problem is exchanging foreign currency for the local currency.
  • 37. i. ii. iii. c) Sovereign Risk This arises when a sovereign government of a country: Obtains a loan from a foreign lender Incurs a debt to a foreign supplier Guarantees a loan or debt on behalf of a third party. But then, either the government or the central bank refuses to pay the loan or debt and claims immunity from the processes of the law. d) Country Risk This arises when a buyer does all he can to pay what he owes to the exporter or lender but authorities of his country either refuse to make available to him the foreign currency, or he is unable to pay because of political/economic instability or imposition of foreign exchange controls
  • 38. i. ii. iii. e) Bank Risk This arises due to the liquidation or insolvency of a bank that is supposed to honour payments. f) International Fraud Examples include; forged documentary credits over/under insurance cargo theft etc. 38
  • 39. International Fraud and Trade Based Money Laundering • • The international trade system is subject to a wide range of risks and vulnerabilities, which provide criminal organizations with the opportunity to launder the proceeds of crime and provide funding to terrorist organizations, with a relatively low risk of detection. The relative attractiveness of the international trade system is associated with: The enormous volume of trade flows, which obscures individual transactions and provides abundant opportunity for criminal organizations to transfer value across borders.
  • 40. • • • The complexity associated with foreign exchange transactions and recourse to diverse financing arrangements The additional complexity that can arise from the practice of commingling illicit funds with the cash flows of ‘legitimate’ businesses The limited recourse to verification procedures or programs to exchange customs data between countries; and 40
  • 41. • The limited resources that most customs agencies have available to detect illegal trade. Abuse Of The International Trade System Researchers have documented how the international trade system can be used to move money and goods with limited scrutiny by government authorities.
  • 42. Tax Avoidance And Evasion • A number of authors, including Li and Balachandran (1996), Fisman and Wei (2001), Swenson (2001) and Tomohara (2004), have described the impact that differing tax rates have on the incentives of corporations to shift taxable income from jurisdictions with relatively high tax rates to jurisdictions with relatively low tax rates in order to minimize income tax payments
  • 43. Capital Flight • • It has been shown that companies and individuals shift money from one country to another to diversify risk and protect their wealth against the impact o financial or political crises. Several of these studies also show that a common technique used to circumvent currency restrictions is to over­invoice imports or under­ invoice exports.
  • 44. Trade-Based Money Laundering • • Unlike tax avoidance and capital flight, which usually involve the transfer of legitimately earned funds across borders, capital movements relating to money laundering involve the proceeds of crime, which are more difficult to track. A number of these studies have also analyzed techniques to establish whether reported import and export prices reflect fair market values.
  • 45. The Role of Banks In International Trade i. ii. iii. iv. v. a) Provision of Banking facilities Maintaining customers foreign & local accounts Provision of short/medium term credit facilities Providing documentary credit & documentary collection services Negotiating Bankers Acceptances, Discounting & Factoring services Arranging finance for exporters under various Bank of Ghana finance schemes (private enterprise scheme, EDIF, etc.)
  • 46. I. II. I. II. b) Collection & Transfer of funds & Settlement Transmitting payments in foreign currency on behalf of importers/lenders International money transfers c) Provision of foreign exchange services Provide foreign exchange in spot/forward market Provide travel facilities, foreign currency, foreign draft, traveller's cheques
  • 47. i. ii. • • • • • • • d) Facilitation of International Trade by providing information and data Status report on foreign buyers, suppliers & banks (Banks rating) through correspondence banks General information on the Economic and Political situation in trading countries such as: Inflation Foreign exchange position (supply & demand) Exchange controls Money supply Balance of payment Import/Export regulations Interest rates
  • 48. iii. i. ii. iii. iv. v. Assisting in finding markets for goods and services iv. Advising on various ICCO publications on INCOTERMS, Documentary credits/Documentary collection and others e) Provision of Specialized Trade Finance Standby Credit Arrangement Red Clause Credit and Green Clause Credit Bankers Acceptances Forfaiting Leasing/Hire Purchase
  • 49. UNIT 2: METHODS OF PAYMENT IN INTERNATIONAL TRADE • • • • Objectives; To explain the different terms of payment in International trade To highlight the problems and risks associated with each mode of payment To discuss the advantages and disadvantages in the methods of payment to the supplier & buyer To make students aware of the relevance of each method of payment
  • 50. Introduction • • • When an exporter sells goods or services to an overseas buyer, he expects to be paid. Terms of payment reflect the extent of guarantees required by the seller to ensure payment before he sells his goods. The extent of payment guarantee may vary depending on the credit worthiness and reputation of the parties involved.
  • 51. Payment Consideration • • • For the Seller: Advance payment The exporter needs payment if he cannot finance the production of the goods and/or services ordered At time of shipment or rendering of service Exporter/seller want assurance of payment as soon as goods are or services are rendered After shipment or rendering of services Supplier/seller is prepared to wait for some time after shipment/after services are rendered
  • 52. cont’d • • • For the Buyer: Payment in advance The buyer trusts that the contract will be fulfilled and he is therefore prepared to pay in advance. At the time of shipment or rendering of service The contract may stipulate that or the buyer does not want to take risk After shipment or rendering of services The buyer possibly wants to sell the goods or wants to be satisfied that the service has been rendered before he pays the seller
  • 53. TERMS OF PAYMENT • • • 1. Cash in Advance/Payment in Advance The buyer places the funds at the disposal of the seller prior to shipment of the goods or provision of services. In such circumstances, the parties may agree to fund the operation by partial payments in advance or by progress payments. This method of payment is expensive and contains some degree of risk and as such, the buyer may request the seller’s bank to issue advance payment bond in respect of monies advanced, to protect himself from associated risks.
  • 54. cont’d i. ii. iii. This method of payment is used when: The buyer’s credit is doubtful; or when the parties are doing business for the first time. There is an unstable political or economic environment in the buyer’s country There is a potential delay in the receipt of funds from the buyer, perhaps due to risks beyond his control 54
  • 55. cont’d i. i. ii. Advantages to the seller Immediate use of funds Disadvantages to the buyer Tying up his capital prior to receipt of the goods/services Has no assurance that goods/services will be: a. supplied b. received c. received timely d. received in the quality or quantity ordered
  • 56. 2. Open Account • • • • Open account trade is a system where goods and documents are delivered to the buyer before payment is effected at a later date, usually on a revolving basis. This trade practice occurs usually between parties who have dealt with each other over a specified time and have established a reasonable degree of trust between themselves. Open account provides for payment at a stated specific future date without the buyer issuing any negotiable instrument. The seller must have absolute trust that he will be paid at the agreed date.
  • 57. cont’d i. ii. i. ii. iii. Advantages to the buyer: Payment is effected after receipt of goods/services Payment is conditioned on the political, legal and economic issues as previously discussed Disadvantages to the seller The title of goods is released without payment assurance The possibility of political events deferring or blocking movement of funds to him Tied up capital until services are accepted and payment is made
  • 58. 3. Collection • • An arrangement whereby goods are shipped and the relevant bill of exchange is drawn by the seller on the buyer, and/or documents are sent to the seller’s bank with clear instructions for collection through one of its correspondent banks located in the domicile of the buyer. The conditions under which the document of title and other documents covering the goods will be released to the buyer/ importer are spelt out in a Collection Order, which the exporter’s bank sends to the importer’s bank.
  • 59. Normal Precautions To Be Taken By The Seller • i. ii. iii. iv. The seller should: obtain a credit report or status opinion on the buyer, obtain an economic and political analysis of the country of import concerning political stability, foreign currency position and foreign exchange regulations. not consign the goods to the buyer, nor consign the goods to the buyer’s bank without that bank’s prior agreement. establish alternative procedures for the resale, reshipment or warehousing of the goods in the event of non­payment by the buyer.
  • 60. Collection Procedure • • • • • The exporter ships the goods and obtains the shipping documents and usually draws a Draft The exporter submits the draft(s) and/or documents to his bank, which acts as his agents The exporter’s bank sends the Draft and other documents along with a collection letter to a correspondent bank acting as an agent for the remitting bank, the collecting bank notifies the buyer upon receipt of the Draft and documents, and all the documents, and usually title of the goods, are released to the buyer upon his payment of the amount specified or his acceptance of the Draft for payment at a specified date.
  • 61. Collection cont’d i. ii. iii. i. ii. iii. Advantages to the Seller documentary collections are uncomplicated and inexpensive documents of value are not released to the buyer until payment or acceptance has been effected collections may facilitate pre­export or post­export financing Disadvantages to the Seller ships the goods without an unconditional promise of payment by the buyer there is no guarantee of payment or immediate payment by the buyer ties up his capital until the funds are received
  • 62. Collection cont’d i. i. ii. Advantage to the Buyer collections may favour the buyer since payment is deferred by him until the goods arrive or even later if delayed payment arrangements are agreed to Disadvantages to the Buyer by defaulting on bill of exchange, he may become legally liable trades reputation may be damaged if the collection remains unpaid
  • 63. Types of Collection a) • • • i. ii. Documentary/Clean Collection An arrangement where the seller draws a bill of exchange on the buyer with relevant documents for the value of the goods or services and presents the bill of exchange to his bank. The seller’s bank sends the bill of exchange along with a collection instruction letter to a corresponding bank, usually in the same city as the buyer’s. A clean collection may represent: an underlying merchandise transaction, or an underlying financial transaction
  • 64. b) Direct Collection • • • • An arrangement where the seller obtains his bank’s pre­numbered direct collection letter, thus enabling him to send his documents directly to his bank’s correspondent bank for collection. This kind of collection accelerates the paper­work process. The seller forwards to his bank a copy of the respective instruction/ collection letter that has been forwarded directly by him to the correspondent bank. The Remitting Bank treats this transaction in the same fashion as a normal documentary collection item, as if it were completely processed by such Remitting Bank.
  • 65. 4. Documentary Credit • • • Documentary credit or Letter of Credit is an undertaking issued by a bank for the account of the buyer or for its own account, to pay the Beneficiary the value of the Draft and/or documents provided that the terms and conditions of the Documentary Credit are complied with. This Documentary Credit arrangement usually satisfies the seller’s desire for cash and the importer’s desire for credit. The Documentary Credit offers a unique and universally used method of achieving a commercially acceptable undertaking by providing for payment to be made against complying documents that represent the goods and making possible the transfer of title to the those goods.
  • 66. Cont’d 66 • a) b) c) d) e) f) The meaning of Documentary Credit embodies the following. It is: a written undertaking given by a bank, known as an issuing bank or opening bank; to a seller, known as a beneficiary; at a request and on the instructions of its customer (buyer), known as the D/C applicant; to pay either at sight or at a specific future date; a stated sum of money; against delivery of shipment and submission of stipulated documents and fulfilment of all the terms and conditions in the D/C.
  • 67. Cont’d 67 • • a) b) • In other words, a documentary credit is a conditional payment instrument made by the issuing bank in favour of a designated beneficiary. It is especially appropriate in the following circumstances: When the importer is not well known, the exporter selling on credit terms may wish to have the importer’s promise of payment backed by his banker; On the other hand, the importer may not wish to pay the exporter until it is reasonably certain that the merchandise has been shipped in good condition and/or in accordance with his instructions. A documentary credit, in this case, can satisfy both the exporter and the importer.
  • 68. It should be noted that all the aforementioned are methods of obtaining payment for goods shipped and not methods of obtaining finance. 68
  • 69. BENEFITS OF DOCUMENTARY CREDIT a) b) c) Provides a specific transaction with an independent credit backing and a clear­cut promise of payment. Satisfies the financing needs of the seller and the buyer by placing the bank’s credit standing, distinguished from the bank’s fund, at the disposal of both parties. May allow the buyer to obtain lower purchase price for the goods as well as longer payment terms than would open account terms, or a collection
  • 70. cont’d d) Reduces or eliminates the commercial credit risk since payment is assured by the bank which issues an irrevocable Documentary Credit. e) Reduces certain exchange and political risks while not necessarily eliminating them f) May not require actual segregation of cash, since the buyer is not always required to collateralize his Documentary Credit obligation to the issuing bank. 70
  • 71. cont’d g) Expands sources of supply for the buyers since certain sellers are willing to sell only against cash in advance or Documentary Credit h) Provides clear­cut guarantee of payment i) Provides the buyer with the assurance that required documents will be received
  • 72. UNIT 3: INCOTERMS/TERMS OF DELIVERY/SHIPPING TERMS • • Introduction Incoterms, shipping terms or trade terms are one of the key elements of international contract of sale of goods. They identify the respective responsibilities of the trading parties in the quotation for each contract of sale.
  • 73. Incoterms • • • • “Incoterms” is an abbreviation of “International Commercial Terms”. It was published by the International Chamber of Commerce in Paris and has its latest version, “Incoterms 2010”, which became effective on January 1, 2011. Incoterms define at the minimum level, the division of cost between buyers and sellers, the point at which delivery occurs, which party is responsible for import and export clearance. Incoterms also give some information regarding documentation.
  • 74. Cont’d • i. ii. Incoterms provide generally four pieces of Information; Information on the transfer of risk ­ It defines at which place the risks of cargo loss and damage are transferred from the seller to the buyer during transportation operations. Information on the division of cost ­ It defines how costs resulting from the transport operations are shared between the seller and the buyer.
  • 75. Cont’d iii. Information on the document ­ It defines who will provide the required documents. iv. Information on port of shipment and port of delivery – It defines where cargo or goods be loaded and place of discharge 75
  • 76. • • • In international trade, there are likely to be three separate contracts for the transportation of goods; From the seller’s or exporter’s premises in his/her country to a named point or place in the importer’s country From the transport operator’s premises in the exporter’s country to the named point in the importer’s country From the port of discharge in the importer’s country to the importer’s own factory
  • 77. Main Changes In The Incoterms 2010 • • • • • • Guidance Notes have been included before each rule Facilitates usage of electronic records if agreed or where customary Clearly allocates the Terminal Handling Charges (THC) in the relevant terms For ‘String Sales’, Incoterms 2010 clarifies the obligation to ‘procure goods shipped’ as an alternative to the obligation to ship goods Allocates obligations to obtain or render assistance in obtaining security related clearances Insurance cover has been altered with a view to clarify the parties’ obligation relating to insurance.
  • 78. Cont’d • i. ii. iii. iv. Incoterms is now separated into two groups, those applicable to all modes of transport and those only applicable to sea and inland waterway transport. The two new additions are DAP and DAT and four deletions, DAF, DDU, DEQ and DES Incoterms 2010 Applicable For Sea and Inland Waterway Transport; FAS: free alongside ship FOB: free on board CFR: cost and freight CIF: cost, insurance and freight
  • 79. Cont’d i. ii. iii. iv. v. vi. vii. Incoterms 2010 Applicable For All Modes of Transport; EXW: ex works FCA: free carrier CPT: carriage paid to CIP: carriage and insurance paid to DAT: delivered at terminal DAP: delivered at place DDP: delivered duty paid
  • 80. PURPOSE OF INCOTERMS • • Main task of incoterms is; to define the sharing of cost and transfer of risk or damage over the goods, up to an agreed place to avoid misunderstanding and disputes among the parties over the sharing of costs and transfer of risk or damage of the goods Incoterms are used directly by buyers and sellers, and indirectly by banks, insurers and carriers/forwarding agents
  • 81. Users of Incoterms • • a) a) Banks Most letters of credits will state an Intercom This enables banks to check, to an extent, that: The documents called for in the credit are consistent with the term used The documents presented are consistent with the term used 81
  • 82. Cont’d • • • • Insurers If there is loss or damage to cargo, insurers will be at pains to establish exactly where it has occurred and therefore whether the buyers or sellers were responsible Incoterms determine whether it is the buyer or seller that is a risk Carriers/Forwarding Agents To determine which party will be responsible for payment of freight charges and from which port of loading to port of discharge or any intermediary To determine which party will be responsible for the various activities in transportation
  • 83. FORMAT OF INCOTERMS • • • • All incoterms consist of 3 alpha characters Incoterms are followed with either a “DELIVERY PLACE/PORT OF LOADING” or “PLACE OF DESTINATION/PORT OF DISCHARGE” E and F terms are usually followed with a place of delivery/port of loading C and D terms will usually be followed with a place of destination/ port of discharge
  • 84. Cont’d • • • The named place stated after the incoterms, is the place up to which the seller pays the freight costs. e.g., “EXW New York” Delivery Point is the point at which the risk transfers from the seller to buyer. “Delivery”, in the incoterms sense, has nothing to do with transfer of ownership. Title of the goods always lies with the documents 84
  • 85. COMMON INCOTERMS 1. • • • • EXW – Ex Works (Aluworks, Tema­Ghana) Exporter/Seller is responsible for producing the goods and: Making them available at the factory premises for the importer Providing the buyer with commercial invoice for goods Buyer/Importer is responsible for: Local transport and insurance to the port of loading On­ and off­ loading charges
  • 86. • • • • 2. FAS­ Free Alongside Shipping (KINTAMPO, Tema Port) Exporter/seller must arrange to: Deliver the goods at the point and port of loading named in the contract Pay for the production of goods, all charges up to delivery of goods including local transport and insurance cost to the side of the named ship Buyer/Importer is responsible for: Choosing the carrier to transport the goods abroad and paying the cost of freight from the port of loading including the cost of loading on board the vessel to the port of discharge Arranging and paying for any export permit or export taxes, excluding value added tax
  • 87. • • • • • Free on board means that the buyer does not pay for transporting or insuring the goods from the seller’s premises. The Exporter/seller must: Pay for the transportation to the named port of shipment Provide and pay for the export license The Buyer/Importer must: Nominate the carrier to carry the goods Give the seller/exporter the details of the ship/airline, sailing time, airline flight time/date 3. FOB ­ Free On Board of vessel named carrier/ship (GYATA, Tema Port)
  • 88. 4. CFR – Cost and Freight (named port of discharge, Tema Port) • • • • The seller/exporter must: Nominate the carrier and so make the contract of carriage Pay for the transportation of the goods to the place of shipment and local insurance The buyer/importer must: Pay for the marine insurance of goods from the time they are taken on board to the port of discharge Pay for the unloading cost at the destination
  • 89. 5. CIF – Cost, Insurance and Freight (Named Port of discharge, Tema Port) • • • The seller has the same responsibility and obligation as that of C&F, except an added responsibility of arranging and paying for insurance. Buyer should arrange to pay for handling and off­loading charges and: Obtain the import license Arrange to pay the import duties; and Pay for local transport and insurance cost from the port of discharge to the buyer’s premises
  • 90. 6. DDP – Delivered Duty Paid (Buyer’s Premises) • • • Means that the seller delivers the goods to the buyer, cleared for import, and from any arriving means of transport at the named place of destination. The seller must pay all import duties including value added tax of the importer’s country and also provide relevant import license. The seller has an added responsibility for arranging and payment of import license of import duties and value added tax
  • 91. 7. DAT – Delivered At Terminal (Shed One, Tema Port) • • • • • Means that seller delivers when the goods, once unloaded from the arriving means of transport, and placed them at the disposal of the buyer at a named terminal at the named port or place of destination Exporter/seller delivers the goods on the terminal at the named port of destination pays for unloading cost Buyer/importer accepts delivery of goods at named port of destination is responsible for local transport, insurance and others 91
  • 92. 8. FCA – Free Carrier (Boankra Inland Port, Kumasi) • • • • • • This term is used where inland port is used in the transportation of goods. The Exporter/seller: delivers goods to Boankra inland container depot completes export and customs documentation including obtaining export license The importer makes all arrangements at his own cost and risk to cover transport of goods to his own premises from Inland Container Depot arranges for appropriate insurance and obtains policy or certificate obtains the import license pays for import duties
  • 93. 9. CPT – Carriage Paid To (Named place of destination) • • • • Similar to CFR, except that exporter must arrange and pay for transport to the named port of discharge, which could be an inland container depot. The exporter/seller: completes export and customs requirements including obtaining any export license pays export duties and taxes The buyer/importer must: obtain import license and pay all the import duties, including value added tax
  • 94. 10. CIP – Carriage and Insurance Paid (to named place of discharge) • • • • The seller/exporter: pays for the freight cost pays for the insurance charges during carriage The buyer/importer: arrange for import license or permit pay import duties and taxes including value added tax
  • 95. UNIT 4: DOCUMENTS USED IN INTERNATIONAL TRADE • • • • Objectives; To know the documents used in the International Trade business To explain the impact of modern transport on International Trade To explain the type and features of documents used in International Trade To discuss the types of bill of lading and other documents used in International Trade
  • 96. Introduction • • • Documentation Documentation in international trade transactions provides tangible evidence that goods have been ordered, produced and dispatched in accordance with the buyer’s requirement or pre­sale contract between the seller and buyer. Documentation is also to satisfy government regulation in the country of the exporter or buyer and has thus, become an increasingly important factor in obtaining finance for International Trade. Documents have become an important part of international business because of the complex delivery terms of shipment, payment mechanism and mode of settlements. Documents can be classified as commercial and financial.
  • 97. The Impact of Modern Transport on International Trade • • The trend towards integrated (door to door) and multi­modal transport accelerated by the advent of the container has made certain traditional “critical point” under FOB, CFR and CIF no longer important as a point for the division of functions, costs and risks between the contracting parties. In addition, since a key function of the transport document is to make evident the goods ordered and their condition, it should be issued at a point where the carrier has reasonable means of conducting a check. In modern transport operations, this point has shifted from the ship’s rail to seaport or inland terminals. Consequently, there is a requirement for documents that specify goods received for shipment.
  • 98. TRANSPORT DOCUMENTS 1. • • • Bill of Lading There is always a need for a document to cover the movement of goods from one point to another, either by sea, road or rail. Sea transport covers about 70% of the world’s trade, so documents covering goods by sea are very crucial and critical for the sustenance of trade. Bill of lading is a document issued by the shipping line covering goods being transported on sea to the owner of the goods.
  • 99. cont’d • • • It indicates the port of loading, where the carrier will take the goods and the port of discharge. It also indicates the date, which goods departed from the port of loading and the status of the freight. The document also helps in the determination of the latest shipment date inserted in the letters of credit. 99
  • 100. The Functions of a Bill of Lading 1) 2) 3) 4) It acts as a receipt for the goods from the shipping company to the exporter It is evidence of the contract of carriage between the exporter and the carrier It acts as a document of title for goods being shipped overseas. The goods are released from the overseas port only by producing one of the original bills of lading. A bill of lading is a quasi­negotiable document. Any transferee for value who takes possession of an endorsed bill of lading obtains
  • 101. cont’d • Original bills of lading are usually issued in three original sets and any of the original bills of lading enables the possessor to obtain the goods. 10 1
  • 102. Transfer of Title to Goods • i. Title to the goods can be transferred by the sender, using a marine bill of lading in one of three ways: Issuing a bill of lading to order and endorsed in blank. The title to the goods can be obtained by anyone presenting a signed original copy of the bill of lading ii. Issuing the bill of lading to the order of the named buyer or bank overseas
  • 103. cont’d • iii. Issuing the bill of lading to the order of a named buyer, but arranging for the bill of lading to be presented to the buyer through the international banking system The bill of lading will indicate the state in which goods were received for shipment (clean, dirty or damaged) 10 3
  • 104. Types of Bill of Lading a) • • • • • Liner Bill of Lading This is a marine bill of exchange for carriage by a vessel on a scheduled run rather than an “Adhoc” sailing, without a scheduled route or timetable. It has the same function as the ordinary Marine bill of exchange It provides evidence of contract of carriage It serves as receipt for the shipper/exporter. It is a document of title­ the holder has “Constructive” control over the shipped good.
  • 105. cont’d • • b) Short Form Bill of Lading This is a bill of lading which does not contain the shipping company’s terms and conditions of carriage. A short form bill of lading can therefore not be a contract of carriage between the shipping company and the exporter or overseas buyer, but it refers to the conditions of carriage which can be found on the master document or on a copy of the carrier’s standard condition.
  • 106. cont’d • • • c) Container Bill of Lading Shipping companies issue a bill of lading which simply acts as a receipt for a container with goods packed in it. Container bills of lading can be issued to cover goods being transported on traditional port to port. Palletized cargoes, and cargoes contained on lash barges, which are loaded on larger vessels qualify for issuance of container bills of lading. 10 6
  • 107. cont’d • • d) Combined or Through Bill of Lading Combined transport bill of lading may show evidence that goods have been collected from a named inland place and have been dispatched to another seaport or inland container depot in the importer’s country. The goods, although carried by two or more modes of transport, are shipped under a single contract of carriage.
  • 108. cont’d • • • e) Charter Party Bill of Lading A charter party bill of lading is issued by the hirer of a ship to the exporter and the terms of the bill are subject to the contract of hire between the ship’s owner and hirer. The contract is therefore between the exporter and hirer of the vessel, not the ship owner. A bill of lading issued for the journey will state “Subject to charter party” and the contract of carriage is subject to contract for the hire of the vessel 10 8
  • 109. cont’d • • f) Trans­shipment Bill of Lading These are used when the goods have been transferred from one vessel to another vessel at a named trans­shipment port. Once again the carrier has full responsibility for the whole journey.
  • 110. 11 0 • • i. ii. • • 2. Sea Way Bill A sea way bill is a transport document which is issued by the shipping line. It is a document which gives details of a consignment of goods and it acts as: a contract between the shipping company and the exporter or overseas buyer a receipt by the shipping company for the goods received and so, provides evidence of shipment. A sea waybill is non­negotiable and is not a document of title. It is used instead of a bill of lading.
  • 111. • • • • • 3. Air Way Bill/Air Consignment Note An air waybill is a waybill for goods transported by air. It is a contract of carriage and receipt by the Airline for goods received into custody. Air way bill is not a document of title. The airline will hand the goods to the consignee at the port of discharge without the consignee having to present an original copy of the waybill An air waybill provides evidence of dispatch of goods with detailed flight date, freight, port of loading and discharge, consignee and signature of the airline.
  • 112. • • • 4. Road Consignment Note/Truck Receipt A road consignment note is a receipt issued by a carrier for goods that are transported by road. The note specifies the name and address of the supplier to the consignee, place of delivery and the place where the goods are to be taken by the carrier. The note acts as both a receipt and a delivery order, and is neither non­negotiable nor a document of title. 11 2
  • 113. • • • • 5. Railway Consignment Note This is a note issued by a railway corporation for goods dispatched by rail. It is a contract of carriage between the supplier and the railway company. The railway authorities will release the goods at their destination to the consignee, who must apply for them and give proof of identity. It is not a document of title.
  • 114. 11 4 • • • 6. Post Office Receipts Post office receipts are issued by the relevant postal agencies for goods dispatched by parcel post. They, thus, provide details and confirmation of dispatch of goods. The goods will be sent directly to the person or company to whom the parcel is addressed.
  • 115. COMMERCIAL DOCUMENTS • • • i. ii. 1. Pro­forma Invoice Pro­forma invoice is the price quotation by an exporter to a potential overseas buyer. The quotation indicates description of goods, unit price , total price, delivery terms, and payment terms. Pro­forma invoices are used for the following purposes: The overseas buyer might need to present a pro­forma invoice to government agencies or bank in his country in order to obtain an import license and foreign exchange for payment of goods Customers importing under documentary collection are supposed to obtain prior approval from their respective banks before importing goods into the country
  • 116. cont’d iii. They serve as a price quotation and might include the terms of sale iv. In certain cases, they can be used as a document of tender for an export contract
  • 117. 11 7 • • i. ii. iii. iv. 2. Commercial Invoice This is a demand note issued the supplier for goods or services sold or a claim for payment in connection with goods already supplied to a buyer. A commercial invoice is a claim for payment for goods under the terms of the commercial contract. The commercial invoice will include: detailed description of goods, quality, unit price and total price the terms of delivery or Incoterm terms of payment – open account, documentary credit or advance payment method of settlement – by swift, telegraphic transfers, mail transfers, foreign banker’s draft
  • 118. • • 3. Certified Invoice It is a commercial invoice, which also includes a statement by the exporter about the condition of goods sent or their country of origin. Some form of statement might be provided at the request of the buyer or for the benefit or customs authorities
  • 119. • • • • 4. Consular Invoice It is a commercial invoice, which is prepared on a form, printed in the exporter’s country by the consulate of the buyer’s country. The Trade Attaché or Consular then stamps it. The purpose of a Consular invoice is to help the government of the importing country to control imports in the country. Its other function is to provide information which forms the basis for which import duties are paid on goods imported
  • 120. • • • 5. Certificate of Origin This is a declaration which states the country of origin of the goods and is common place in countries wishing to identify the origin of all imported goods. A certificate of origin is a statement signed by an appropriate authority certifying that goods were produced in the exporter’s country. The forms should be completed by the supplier and may be authenticated by the Local Chamber of Commerce or other authorized body in the exporter’s country. 12 0
  • 121. • • • 6. Weight Note This is a document issued by the exporter or third party declaring the weight of the goods in the consignment. 7. Packing List This document gives the details of the goods which have been packed. It is normally required by Customs Excise and Preventive Services whenever goods are being cleared.
  • 122. 12 2 • • • This is a certificate issued by an independent third party resident in the exporter’s country, ensuring that goods being imported are of high quality with reasonable price comparisons. The mandate for companies operating in Ghana like SGS, Cotecna, Bureau de Veritas/ Ghana Standards Board is to check on quality, as well as price comparisons. The mandate of the inspection companies operating in Ghana is derived from the Import declaration form issued by the Ministry of Trade. 8. Inspection Certificate–Pre­Shipment Inspection
  • 123. 9. Final Classification and Valuation Report – Destination Inspection • • • This is a document issued to classify goods that have been imported into the country. The document also shows the value of goods and thus, enabling the Customs Excise and Preventive Service to charge the relevant import duties as well as sales tax or value added tax. The importer is required to submit a copy of Importation Declaration Form to the appointed inspection company in Ghana to enable them conduct the inspection and the issue the Destination Inspection Certificate which will classify the goods for CEPS valuation purposes.
  • 124. INSURANCE DOCUMENTS • • • • Insurance Certificate It is an evidence that shipment is insured against loss or damage while in transit. Unlike domestic carriers, ocean going steam ship companies assume no responsibility for the merchandise they carry, unless the loss is caused by their negligence. Marine insurance on an international transaction may be arranged by either the exporter or the importer, depending on the terms of sale. The laws of a country require the importer to buy such insurance, thus protecting the local industry and saving foreign exchange.
  • 125. 12 5 a. b. • c. • Basic named perils – sea, jettisons, explosions and hurricanes Broad named perils – theft, pilferage, non­delivery, breakage and leakage in addition to the basic perils. Both policies contain a clause that determines the extent to which losses caused by an insured peril will be paid. All risks cover all physical loss or damage from any external cause and is more expensive than the policies previously mentioned. War risks are covered under a separate contract. Three kinds of Marine Insurance Policies:
  • 126. cont’d • • The premiums charged depend on a number of factors, among which are the goods insured, the destination, the age of the ship, whether the goods are stowed on deck or under deck, the volume of business, how the goods are packed and the number of claims the shipper has filed. Because neither the policies nor the premiums are standard, it is highly recommended that the exporter obtains various quotations.
  • 127. 1. • • • A Cover Note/Letter of Insurance This is issued by an insurance broker to provide notice that steps are being taken to issue a certificate or policy 2. A Certificate of Insurance It shows the value and details of the shipment and risks covered. It is signed by the exporter/importer and the insurance company. Only a certificate of insurance is required when the policy of the exporter/importer provides “Open Cover” for the whole of its export trade for one year. Three Basic Insurance Documents are:
  • 128. cont’d 12 8 • When an exporter/importer takes out an open cover with any reputable insurance company for his export or import trade, a certificate of insurance for each individual shipment will be provided by the Insurance Company.
  • 129. 3. Insurance Policy • • a) b) c) d) e) This gives details of risks covered and is evidence of a contract of insurance. Most insurance policies have an “All Risk Policy”, and the main risks covered are: Perils at sea – accidental loss or damage caused by sinking, collision, sea water, heavy weather and stranding Jettison – loss caused by a decision of the master of the ship to throw goods over board so as to lighten the vessel in an emergency Fire, including smoke damage Theft – forcible theft of goods rather than pilferage Damage in loading, trans­shipment or discharge
  • 130. cont’d • • Policy or certificate will not cover losses or damage from strikes, riots, civil commotions, wars, coup d'état or capture and seizure of vessel and other force majeure. These risks must be insured separately by payment of an additional premium.
  • 131. FINANCIAL DOCUMENTS • a. b. In international trade, there are two financial documents which provide for payment by the buyer. These are: after a period of credit establishing a clear legal undertaking by the buyer to make the payment either by the Bill of Exchange or promissory note.
  • 132. • • • • • A bill of exchange is defined by the Bill of Exchange Act 55, 1961 as an unconditional order in writing addressed by one person to another signed by the person drawing it requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future date, a certain sum in money, and acting to the order of a specified person, or to bearer 1. A Bill of Exchange
  • 133. • • • • • Bills of exchange can be classified in two types: a. Sight Bill The bill requires payment on sight or on demand drift. All that is required is for the drawee to authorize payment via the banking system. b. Term Bill (Tenor or Usance) Bills which are payable at a future date are called Term Bills. With term bills, payment is due 90 days after sight. Types of Bill of Exchange
  • 134. cont’d • • • When the bill of exchange is presented to the drawee, he should accept it if he wishes the bill to be honoured. The drawee would sign the bill of exchange on the front and insert the date of acceptance. He would be legally bound to pay 90 days after the date of acceptance shown on the bill of exchange. 13 4
  • 135. Subdivision of Bill of exchange a) • • • Trade bills – these are bills which are drawn on and are accepted with the underlying transaction being for commerce or trade. These bills drawn on trading entities are accepted by some. Such bills from individual persons are risky by their very nature. b) Bank bills – these are bills are drawn on accepted by the banks. Such bills carry very little risk, especially if the bank accepting it is a first class bank. c) Accommodation bills – these are used by banks to provide accommodation facilities for their clients d) Documentary bills and clean bills
  • 136. • • • • It provides a convenient method of collecting payment from foreign buyers The exporter can seek immediate finance using term bills of exchange instead of having to wait until the period of credit expires On payment, the foreign buyer keeps the bill as evidence of payment. It therefore serves as a receipt. If a bill of exchange is dishonoured, it may be used by the drawer to pursue payment at maturity. Advantages of Using Bill of Exchange
  • 137. • • • • • • • A promissory note is defined in the Bill of Exchange Act of Ghana, Act 55, 1961 as: an unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand or fixed or determinable future time a sum of money to the order of a specified person or to bearer 2. Promissory Note
  • 138. UNIT 5: DOCUMENTARY CREDIT • • • • • • • Objectives; To define Documentary Credit To examine the general instruction for opening Documentary Credit To explain the parties involved in the Documentary Credit To describe the types and benefits of documentary credit To help students to understand the specialized credit available To explain the financing mechanisms under documentary credit facility To discuss the practical handling of discrepant documents under documentary credit
  • 139. Introduction • • It is the only payment mechanism which usually satisfies the seller’s desire for cash and importer’s desire for credit. A Documentary Credit is a written undertaking issued by a bank, on behalf of the buyer, to the seller, to pay for goods or services, provided that the seller presents documents which comply fully with the terms and conditions of the credit
  • 140. TYPES OF DOCUMENTARY CREDIT a) b) • Irrevocable Credit – incapable of cancellation or modification except with the consent of the Beneficiary Revocable Credit – can be cancelled or modified by the importer at anytime without the consent of the beneficiary. The cancellation is subject to the customer remaining liable in respect to any negotiation 14 0
  • 141. PARTIES TO THE DOCUMENTARY CREDIT 1) 2) 3) 4) Applicant/Buyer/Opener – The party on whose behalf it is issued Issuing Bank – The bank that issues it and acts for the Applicant Advising Bank – The Bank through which documentary credit is conveyed to the beneficiary Beneficiary – the party to whom the documentary credit is addressed and who will receive payment.
  • 142. cont’d 14 2 • • 5) Confirming Bank – the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request. Sometimes, an advising bank is requested by the issuing bank to add an additional commitment to pay the beneficiary. If it agrees to the request, this advising bank will take a dual role.
  • 143. BANK’S CONSIDERATION BEFORE ISSUING CREDIT a. • • Status Report/Credit Standing on the Beneficiary For the protection of both the issuing bank and the applicant, consideration should be given to a status report on the integrity, credit worthiness and track record of the beneficiary Such reports could be obtained from the beneficiary’s bankers through the importer’s correspondent bank network
  • 144. cont’d 14 4 • • • b. Status Report/Credit Standing on the Applicant An opening bank needs to ensure that the applicant is a customer with high integrity and repayment ability. For a new customer, a marginal deposit may be required. For existing customers with a credit limit, a D/C line of credit will be earmarked and deducted for the amount of the credit or added to their existing facilities.
  • 145. cont’d • • • c. Facilities The Bank should have an appropriate import facility put in place. All cannons of lending should be strictly applied, especially the foreign exchange component of this facility should be well highlighted. If the customer does not have import facility or approved line of credit, the bank should take 100% total deposit cover against the establishment of Letters of Credit.
  • 146. 14 6 • • • d. Nature of Goods A D/C issuing bank undertakes to pay a seller against his goods as the collateral. Therefore, the bank is quite concerned about the nature of the goods and in particular its marketability and durability. The goods are considered valuable to guard against the insolvency of the applicant (buyer) to pay for the shipping documents. cont’d
  • 147. 14 7 • • e. Control of Goods and Title Documents In all cases, an opening bank is prepared to issue a credit calling for a full set of title documents This allows the issuing bank to take control over the goods only if the bills of lading are made out in the name of the issuing bank or “to order” and “blank endorsed”. cont’d
  • 148. 14 8 f. • • • Nature of the Credit Whether it is a local D/C or a foreign D/C and in particular the means of delivery of the goods. g. Type of Currency Whenever a documentary credit is issued in a currency other than that of the buyer, an exchange risk occurs. If the credit is issued in a rare currency or exposed to great fluctuation, it is advisable for the issuing bank to remind its customer to take foreign exchange cover. cont’d
  • 149. 14 9 • h. New Business and Cross­selling The possible volume of new business and the chance of cross­ selling may also be a consideration. cont’d
  • 150. THE TRIANGULAR CONTRACTUAL AGREEMENT 15 0 • i. ii. iii. Under documentary credit operations, there exists a distant triangular contractual agreement. That is; Firstly, the sales contract between Buyer and Seller (proforma arrangement) Secondly, the Application and Security Agreement or the Reimbursing Agreement between the Buyer and the Issuing Bank Thirdly, the Documentary Credit between Issuing Bank through the Advising Bank and the Beneficiary
  • 151. GENERAL INSTRUCTIONS FOR OPENING A DOCUMENTARY CREDIT a) • b) • Responsibility of the Issuing Bank – its duty is to receive shipping documents on behalf of the importer which purport to comply with the condition stated in the documentary credit. It deals in documents but not in goods Availability – the expiry date must always be given by the importer. The expiry date can of course be extended on the instruction of the customer.
  • 152. c) Negotiation – this instruction should be used where drafts are drawn by the beneficiary on the bank named to negotiate. d) Acceptance /Payment – these instructions are appropriate where the currency of the credit is that of the country of the beneficiary who is to draw draft for acceptance on an issuing bank or the confirming bank 15 2 cont’d
  • 153. • e) Documents Required – details of documents required in documentary credit should be mentioned in the application form. It is not sufficient to say “usual documents” f) Delivery Terms – applicant should state the delivery terms to avoid ambiguities in transport and delivery charges cont’d
  • 154. g) General – unless the letter of credit states otherwise, shipping documents bearing reference to other charges in addition to freight charges will be accepted. h) Unless instructions are given to the contrary, issuing banks will take up documents presented to them up to 21 days from the date on the transport document Bill of Lading /Airway Bill 15 4 cont’d
  • 155. UNIT 6: OVERVIEW OF EXPORT FINANCE • • • • • • Objectives; To discuss the factors which affect Export Finance To explain the criteria used in the financing of the trade cycle To describe the trade cycle in relation to international business To explain pre and post shipment financing To discuss the factors which make trade finance attractive to banks To discuss the traditional and non­traditional facilities provided by banks in export trade
  • 156. Introduction • • a) b) c) d) e) Financing the pre­shipment, or post­shipment period is an important consideration for any exporter. The method of financing chosen by the exporter will be influenced greatly by the following factors: The terms of trade The payment mechanism Currency and cash flows consideration The cost of funds/pricing The availability of any export credit insurance
  • 157. • • • Most exporting companies sell their goods on terms which typically do not exceed 180 days and payment mechanism will vary from the open account through documentary collection to irrevocable documentary credit. The better secured method of payment chosen, the cheaper the cost of the transaction will be. Banks have been providing various facilities to both exporters and importers . cont’d
  • 158. 15 8 • When an exporter sells on open account basis, the exporter might suffer cash strap, this is because he has made payment out of his own money to deliver the goods, but has not yet received anything in return. cont’d
  • 159. • a) • • Export finance may be categorized into: Short term – to finance working capital. Short term finances normally repaid within 18 months. b) Medium term – to finance acquisition of semi­processed items. Facilities that cover 18 to 36 months may be classified as medium­ term. c) Long term – to finance the acquisition of fixed assets. Any facility over the period of 36 months and above may be classified as long term finance. 15 9 cont’d
  • 160. PRE-SHIPMENT AND POST-SHIPMENT FINANCE • • Pre­shipment finance is the money required to finance the business between the commencement of the manufacturing process or production process and the shipment of goods to the importer Post­shipment finance is money required to finance the exporter between dispatch of goods and receipt of payment from the importer.
  • 161. FINANCING THE TRADE CYCLE • • Growth in international trade has greatly increased over the last century for both demand for trade finance and the degree of sophistication with which the goods are delivered. There is now a much greater choice of ‘financial engineering’ for both exporters and importers to consider when developing an international trade strategy.
  • 162. • • Organizing the finance is an important part of any well­defined strategy and also a key contributor to the success in international trade. The availability of finance can be a major factor in securing a new business as it provides the flexibility to offer competitive terms to an overseas partner. 16 2 cont’d
  • 163. • a) b) c) d) e) f) Every facility will depend on the payment mechanism and other criteria such as: Customer’s requirement Assessment of risks in the chosen facility Terms of trade Cost and benefit analysis of the facility Expected income to be derived Cross­selling of other related services cont’d
  • 164. UNDERSTANDING THE TRADE CYCLE • • Every business cycle is unique in its own sense, even though they might have certain elements that might be common to all of them. Each stage in the trade cycle places different demand on the company’s finance, but the key component in the determining the overall level of working capital required for any business is the time taken between the start of the cycle and the receipt of payment for the corresponding sales of the finished product.
  • 165. • • The bank, through its knowledge of customer’s business, terms of trade and its view of risks inherent a each stage of a particular trade cycle, can structure facilities that provide working capital for the different stages in the cycle and in effect, directly relate to the needs of customer’s business. As the bulk of international trade is undertaken on terms of 180 days or less, these facilities are important consideration for a company engaged in exporting and importing. 16 5 cont’d
  • 166. FACTORS THAT MAKE EXPORT FINANCING ATTRACTIVE TO BANKS • a) b) c) Banks considering the financing of international trade, from the standard point of the exporter, may consider the following: Short Term of the Transaction – should not exceed 18 months Self­Liquidating Nature of Business – repayment from the sale of underlying goods Security – the underlying goods could be used as security
  • 167. 16 7 d) e) f) Selective Nature of Business – the bank examines each application on its merit to ensure that proper facility is structured Monitoring – trade related business is relatively easy to monitor Expected Foreign Exchange – the anticipated receipt of foreign exchange to service its import clients. cont’d
  • 168. SHORT TERM FACILITIES AVAILABLE TO EXPORTERS FROM BANKS • • • • • • • • • Export finance can be classified as traditional and non­traditional banking facilities TRADITIONAL NON­TRADITIONAL Secured/Unsecured Overdraft Export Factoring Loans (Short & Medium) Invoice Discounting Advance Against Collection Forfaiting Negotiating Leasing Sight Payment Hire Purchase Documentary Credit Acceptance Counter Trade Accommodation Finance Export Merchant Acceptance Credit Confirming House Avalisation
  • 169. TRADITIONAL BANKING FACILITIES: Overdraft • • Overdraft is provided to cover borrowing of a temporary fluctuating nature which will be repaid on the receipt of expected funds. The banks will grant an overdraft facility to finance business requirements in both international and domestic trade.
  • 170. 17 0 • a) i. ii. Overdrafts can be split into two categories: Agreed Overdraft The agreed overdraft limit falls into two types: Short term – covers a specific requirement. Essentially, a small bridging facility and the source and timing of the repayment should be made clear on the onset. Renewable/Revolving – is a facility which is essentially to be used as a standby. cont’d
  • 171. b) Unauthorised Overdraft Facilities • • Customers are allowed to draw above the customers’ authorized limits for a very short period. For most customers, there is a level to which a bank would be prepared to allow an overdraft without insisting on a formal arrangement.
  • 172. 17 2 • • The appearance of an excess over an unadvised limit for more than a few days in advance of export proceeds could indicate impending problems. Any excess over an unadvised limit should lead to a review of the customer’s account to ensure that the assumptions on which the original limit was marked have not changed. cont’d
  • 173. Short Term and Medium Term Loan • • Banks provide both short and medium term loans for exporters to purchase equipment, construction of irrigation, and others. These loans are granted both in local and foreign currencies. Interest rates on the foreign currency loans are either the base rate or the prime rate prevailing plus a margin.
  • 174. • • • a) Bill Advances This method of obtaining payment will be used by an exporter who requires greater protection than is provided by open account method of payment. After shipment of goods, there can be a considerable time lag before the exporter receives payment. The exporter submits collection documents to his bankers and receives an advance against the documents submitted. 17 4 cont’d
  • 175. • • • • The lending will be made with full recourse on the exporter, who will be made to pay any dishonoured bills plus cost and charges. The advances can be made either against individual bills or a portfolio of bills. A letter of hypothecation pledging the bills as security would be required in the granting of such a facility. Although there will be recourse to the exporter the primary source of repayment will be payment of the bills by the overseas buyer. 17 5 cont’d
  • 176. • • • • b) Bills Negotiation Bills negotiation facility differs from an advance against bills held for collection in that, rather than a set percentage of a bill being advanced, the lending banker in effect buys or purchases the bill at face value less a discount to cover interest, cost and commission. The holder of a bill becomes the holder for value, for having given consideration by purchasing the bills involved. This is, in effect, a 100% lending against the value of the bill. The lender retains full recourse against the exporter if the bill is cont’d
  • 177. i. ii. iii. iv. v. vi. vii. The basic considerations under the Negotiation facility will be: Credit Standing of the exporter Exporter’s proven track record Ability to get full control over goods through the documentation Marketing of the goods Existence of exchange control in the importer’s country Whether credit is held Terms of Payment (i.e. D/A or D.P.) cont’d
  • 178. Acceptance Credit or Accommodation Finance • • This facility is where the exporter’s bank allows the exporter to draw a bill of exchange on the bank itself and the bank accepts that bill of exchange so the exporter can discount it in the money market at a fine rate. As a security, the exporter’s bank obtains authority to take over all rights to documentary collection, which it submits on the exporter’s behalf.
  • 179. 17 9 • • The repayment of the acceptance facility will be from the expected export proceeds under the documentary collection. Such a facility is granted to an undoubted customer with a proven track record. cont’d
  • 180. Facilities Available Under Documentary Credits • • • a) Negotiation of Bills of Exchange Drawn Under Documentary Credit: This facility is provided under documentary credit, where a bill of exchange drawn on the issuing or confirming bank is purchased and credited to the customer’s current account. By negotiating, the issuing or confirming bank is, in fact, buying the bill of exchange under the documentary credit from the exporter and therefore, collects the export proceeds in its own name. Provided the terms and conditions of the documentary credits are complied with, the issuing bank will reimburse any bank called upon to negotiate.
  • 181. • • • b) Discounting of Bills of Exchange Drawn Under Documentary Credits When the documentary credit calls for a bill of exchange with tenor or term payment, the nominated bank designated as the accepting bank will accept the tenor bill and, once the bill is accepted, it becomes an eligible bill. The exporter may be able to discount the bill in the money market. The exporter should remember that it may be that it may be possible to convince the importer to pay for the cost of discounting the bills of exchange drawn under documentary credit. 18 1 cont’d
  • 182. • • i. ii. • c) Assignment of Proceeds of a Documentary Credit This is a means of obtaining pre­shipment finance with the cooperation of the exporter’s bank. The exporter’s bank, acting on its customer’s authority, issues a letter of comfort to the exporter’s local supplier indicating: that the exporter is the beneficiary of a documentary credit that the bank is authorized to pay over, direct to the supplier, certain sum from the proceeds of the credit when received. This letter of comfort may persuade the exporter’s local suppliers to grant pre­shipment and post­shipment credit to the exporter. cont’d
  • 183. Red Clause Documentary Credit • • A red clause documentary credit contains an instructions from the issuing bank for the advising bank to make an advance to the beneficiary prior to shipment. When the exporter subsequently presents the shipping documents, the amount of advance and interest will be deducted from the full amount of the credit.
  • 184. • i. ii. • The advance can be in two forms: Conditional, whereby the beneficiary must sign an undertaking to use the money to help him assemble the goods referred to in the credit. Unconditional, whereby the beneficiary merely signs a receipt for money In either case, the bank will be responsible for reimbursing the advising bank if the exporter should subsequently fail to present the documents called for under the credit. 18 4 cont’d
  • 185. Green Clause Credit • • Green clause credit contains an instruction from the issuing bank authorizing the advising bank or nominated or confirming bank to make advance against goods that have been warehoused and inspected by a third party against a simple receipt. In all cases, the goods will be inspected by the third party inspection company ensuring that goods have been properly stored and warehoused in an approved or recommended warehouse before payment is made to the beneficiary against a simple receipt.
  • 186. 18 6 • • Beneficiary on the presentation of the receipt issued by the third party to the nominated or advising or confirming bank will be granted advance against the shipping document. The issuing bank will reimburse the advising or nominated or confirming bank for the amount advanced to the beneficiary. cont’d
  • 187. Documentary Acceptance Credit • • Documentary acceptance is a facility where the exporter draws a bill of exchange on the issuing, advising or nominated bank, which accepts that bill and has the bill subsequently discounted and the proceeds credited to the exporter’s account. An eligible bank bill can be discounted at a finer rate.
  • 188. 18 8 • • This form of finance is sometimes called Accommodation finance because the bills are accepted by first class banks. The use of acceptance credits has expanded considerably since the operations of the discount houses in Ghana began in the mid nineteen eighties. cont’d
  • 189. NON-TRADITIONAL BANKING FACILITIES: Factoring • • • Export factoring is the purchasing of book debts of company or business concern for immediate cash by a factor company. An export factoring service is particularly suited to business conducted to an open account and improves the cash flows, as well as savings. Under export factoring, a customer’s entire turnover is purchased with or without recourse.
  • 190. • i. ii. iii. The export factoring services are as follows: Accounting, credit checking and debt collection Credit insurance against bad debts The provision of immediate cash against client invoices up to 75% to 85% of face value. 19 0 cont’d
  • 191. a) b) c) Benefits of Export Factoring­Customer Cash­flow is more predictable because the client knows that he can claim up to 85% as immediate advance against his invoices Bad debt losses are eliminated from those debts that have been factored Sales ledger administration is reduced because sales ledger accounting cost is taken off cont’d
  • 192. f) • d) Foreign exchange risk may be eliminated if invoices are quoted in foreign currencies e) Management’s time is used efficiently because they can concentrate on production and sales Debtors settle indebtedness more quickly because the factor is more efficient at collecting debt. Some clients use the factor for this reason and do not utilize the right to advance against the invoice. 19 2 cont’d
  • 193. Invoice Discounting • • • Invoice discounting is an arrangement where the business concern collects the debts which have been discounted by financial institutions. The facility is provided by a financial institution when an exporter’s invoices are discounted and immediate cash paid to the exporter. On receipt of the funds, they are transferred to the financial institutions that discounted the invoices.
  • 194. a) b) c) d) Benefits of Invoice Discounting Invoice discounting is not disclosed to the debtors of the factor client Under invoice discounting, the client does not run his own accounts ledger This facility is useful when the client has an efficient sale ledger team of his own Cash flow is improved and management could concentrate on 19 4 cont’d
  • 195. Forfaiting • • • • The term forfaiting is derived from a French word ‘forfait which means to surrender or relinquish the right to something. Forfaiting can be defined as the discounting of short, medium to long term trade debt without recourse to the importer. Forfaiting provides finance to exporters of semi­consumable goods, semi­capital, plant and machinery and capital goods. Exporters of all sizes have discounted the benefits of securing payment by using bills of exchange as debt instrument, accepted by the importer and available to the importer’s bank.
  • 196. a) b) c) Advantages to the Exporter The exporter is freed from the liabilities of debts owed by the buyer in the immediate future and also the contingent liabilities which are payable by the foreign buyer. The exporter’s liquidity and cashflow are improved because he receives cash at once. Enhances the customer’s borrowing capacity. 19 6 cont’d
  • 197. a) b) c) Disadvantages to the Exporter Costs can be high and there is no interest rate subsidy It may be difficult to find an institution which will be prepared to guarantee the importer’s liabilities There is possibility that the government of the buyer’s country may impose foreign exchange controls cont’d
  • 198. Leasing • • Leasing company buys the equipment or plant and machinery outright from the supplier and then leases them to the ultimate user, who has the use of the equipment or machine for an agreed period, subject to payment of the agreed rent to the lessor. Leasing arrangement enables a user to have equipment or machines without first having to pay for the full cost and instead pays for it over the equipment’s life.
  • 199. • a) b) • Leasing can be made available to the foreign buyer: either by arranging finance from the exporter’s country into the lessee’s country (cross­border leasing) by arranging the leasing in the buyer’s country through an international contract of a leasing company in the exporter’s country. The first method is more suited to major and capital intensive equipment and machines, whilst the second approach is more convenient to items with lower value. i.e. office equipment. 19 9 cont’d
  • 200. a) b) c) The advantages of the second method: Leasing could be arranged for the delivered cost of the equipment or plant. The terms of the lease might be longer than a cross border leasing. The lessee will not be exposed to any foreign exchange risks *The type of lease involved in such an arrangement will be a finance lease cont’d
  • 201. 20 1 a) b) c) d) Benefits of Leasing to the Exporter Being able to use equipment without necessarily owning the asset. Leasing charges affect the profitability and cash flow without affecting the company’s gearing ratio. Enhances the exporter’s chances of company’s borrowing capacity. There is no recourse unless the exporter defaults on the contract. cont’d
  • 202. 20 2 a) b) c) Disadvantages of Leasing to the Exporter Leasing charges could be very expensive. It may be difficult to find a leasing company which will be prepared to do Cross Border leasing. There could be tax implication for the leasing company. cont’d
  • 203. Hire Purchase • • i. ii. Hire purchase agreement is similar to the leasing except that ownership of the asset passes to the hirer. Hire purchase can be organized in one of two ways: By an arrangement with the hire purchase company in the exporter’s country which has a branch office in the buyer’s company. By an arrangement with a hire purchase company in the exporter’s country which is a member of the International Purchase Credit Union.
  • 204. • • Under hire purchase agreement, the exporter will receive payment immediately from the hire purchase company. The buyer, on the other hand, has the use of equipment or machine and is able to pay for it by instalments with only a low initial cash deposit. 20 4 cont’d
  • 205. Avalisation – Avalised Bills Facility • • • Avalisation involves adding the lender’s name to a bill or promissory note on behalf of the drawee, giving the effect of guaranteeing payment. An importer is, therefore able to get his banker’s to unconditionally guarantee a debt to an overseas supplier. Avalising is mainly used when dealing with European suppliers.
  • 206. • • • Avalisation is the specific endorsement on a bill of exchange by a bank which guarantees payment should the drawee or importer defaults on payment of the avalised bill at maturity. Lenders under such facility will wish to take a counter – indemnity from the customer to ensure that they have a right of recourse should the customer fail to meet the primary obligation on the bill. Avalisation can help the importer to establish new trading relationship with an overseas supplier and possibly negotiate improved terms of payment. 20 6 cont’d
  • 207. Counter Trade • • a) b) c) d) Counter trade covers a wide range of techniques for handling reciprocal trade. The principal types of counter trade are: Offset: direct and indirect Compensation Buy back Counter­purchase
  • 208. e) Bilateral agreements using clearing accounts f) Switch trading g) Tolling h) Co­operation agreements i) Build­operative­transfer 20 8 cont’d
  • 209. Export Merchants • a) b) • An export merchant is a trader who: Buys goods in one country and sells them in another on his own account Acts as an agent for a manufacturing company that wishes to sell his goods abroad The export merchant buys goods from a supplier on normal trade credit terms and in the supplier’s own currency.
  • 210. • • • The supplier does not have to concern himself with the business of exporting because this is the role assumed by the merchant. The export merchant pays for the goods more quickly than overseas buyer. The export merchants thus, provide a source of fund or financing to the exporter. 21 0 cont’d
  • 211. Export Finance House • • • • Export finance houses provide finance for consumer goods, semi­capital and capital goods on a recourse basis. The primary objective of the export finance house is to supply finance on and off basis or at regular intervals. The export finance house concern themselves with the production, processing or manufacturing of items stage by stage and also arrange promotional activities for the items being produced. They also pay for the administrative expenses for the goods being manufactured.
  • 212. UNIT 7: IMPORT FINANCING • • • • Objectives; To distinguish between Buyer and Supplier Credit To describe the types of credit available to the importer To explain the specialized facility available to importers To help students to know the usage of Standby Letter of Credit Facilities
  • 213. Introduction • • • • The time between placing an order for goods and receipt of payment, in respect of their subsequent resale can put significant strain on an importer’s resources. Such a situation may require some kind of financial assistance. Seasonal peaks, long transit times and lengthy credit terms may all compound the importer’s liquidity problem, which may require bridging up financing. It is important that the finance to meet the seasonal fluctuation of the importer’s working capital requirements be geared towards the terms and method of pre­payment agreed between supplier and buyer.
  • 214. Buyer and Supplier Credit • • • Buyer credit facility This involves a loan from a local bank (e.g. Ecobank Ghana Ltd) to enable an overseas buyer to pay the full cash price of the export on shipment. The loan is made directly to the overseas buyer. Supplier credit This involves the exporter’s bank lending money to the exporter, to provide post­shipment finance.
  • 215. TYPES OF CREDIT AVAILABLE TO THE IMPORTER • • • a) Overdrafts Overdrafts are provided for imports to cover borrowing of temporary fluctuating nature and are repaid from the sale of the imported items. Overdrafts are available in local and foreign currencies, and are simple and convenient to overdraw within an agreed facility. The overdrawn account is then replenished with payment received from the sales. 21 5
  • 216. • • • Overdrafts could also be provided to cover specific import requirements. Considerations for such facilities are not granted if the bank cannot obtain control over the source of repayment Although simple and flexible, the importers may not be able to finance all elements of import contracts from overdrafts, particularly as borrowing in this way may be more expensive than other forms of financing. cont’d
  • 217. b) Import Loans • • • Import loans provides importers with the flexibility to take a period of extended credit undisclosed to the seller, whilst allowing optimum payment terms to be offered. This allows the importer time to sell the goods and realize the proceeds before having to repay the loan. It is common for the underlying transaction to be settled ‘on sight’ basis, with the goods being consigned to the order of the bank.
  • 218. • • • By offering to settle import bills immediately, importers may be able to negotiate better terms or prices with their suppliers. Where credit is taken from the supplier, the facility can be used to meet the importer’s obligation on the maturity date of a term bill and provide finance for an extended period to match sales receipts. Import loans usually cover individual shipments of goods and may be arranged in both local and foreign currencies, with fixed or variable rate to the prevailing local interest rate or base rate or prime rate. 21 8 cont’d
  • 219. c) Product Loans or Warehousing Facility • • • This is a short term loan made by a bank to an importer, using the imported goods as security. The purpose of this facility is to enable the importer to pay for goods, and he is usually expected to repay the facility from the proceeds of the eventual sale of his goods. Sometimes, importers buy goods on Document Against Payment, or Irrevocable Letter of Credit payable at Sight Terms for resale to a third party in the same country.
  • 220. • Thus, the importer may require finance to bridge the gap between sight payment and receipt of funds from the third party. 22 0 cont’d
  • 221. PROCEDURE FOR PRODUCE LOAN i. ii. iii. The lending bank will obtain a letter of hypothecation from the importer that incorporates a letter of pledge that the importer accepted the loan granted against the usage of goods as security. When the shipping documents are received, they will be pledged as security to the bank. The lending bank pays the bill of exchange with the instructions as per the collection order or terms and conditions of the letter of credit. 22 1
  • 222. iv. v. The bank will debit a produce loan and credit the customer’s current account with the agreed amount of the advance. The shipping documents would be retained by the lending bank. The banks will arrange with its agents to have the goods warehoused in the name of the lending bank. vi. The goods should be insured at the expense of the importer. cont’d
  • 223. vii. The goods remain in the warehouse until the time comes for delivery to the ultimate buyer. viii. The ultimate buyer pays directly to the lending bank and the proceeds are used to clear the produce loan, including interest and charges. 22 3 cont’d
  • 224. d) Acceptance Credit facility/Accommodation Facility • • • Banker’s acceptances are facilities granted by banks to enable importers to pay the exporters, pending the sale of goods. The importer’s bank allows the exporter to draw the bill of exchange on the bank itself and accept the bill of exchange. Since this bill is a bank bill, the importer can discount it in a money market at a finer rate to pay off the exporter.
  • 225. • • As security for the lending bank, it will usually obtain authority to take over the right of the goods. Normally under such arrangement, the bank will require a letter of hypothecation from the importer and if the documents of title or goods are held by the importer prior to their resale, the bank will require a Trust Receipt or Trust Letter. 22 5 cont’d
  • 226. e) Documentary Credit Facilities • • • When a bank issues an irrevocable documentary credit, it conditionally guarantees a consumer’s trade debt. Documentary credit represents an obligation to pay or accept liability, provided the overseas supplier meets the terms and conditions of the credit, including the provision of the documents of title to the goods being shipped. The bank must be satisfied with the buyer’s ability to meet the liability on the due date, and if any doubts persist about the importer, the full or partial cash cover should be taken from the buyer at the time the letter of credit is issued.
  • 227. f) Standby Letter of Credit • • • A standby letter of credit can be used to support open account trading. It performs a similar function as a bank guarantee, but it is issued in a format corresponding to that of a documentary credit and governed by the Uniform Customs and Practice for Documentary Credit and International Standby Credit Practice. A standby credit is one which is issued to cover non­performance.