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Trade Finance Identification of Needs and Product Offerings

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Trade Finance Identification of needs and product offerings for sales and marketing frontliners as well as Branch Managers

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Trade Finance Identification of Needs and Product Offerings

  1. 1. Trade Finance What you need to know to get going Yudy Yunardy
  2. 2.  Sometimes getting a bigger slice of the market means needing more cakes  Having the right contacts in new markets is crucial for those first steps
  3. 3. Objectives  The importance of Trade Finance  Distinction between Trade Finance and regular lending  Various sources of Trade Finance  Various instruments of Trade Finance  Challenges facing various stake holders in need of Trade Finance
  4. 4. Trade Finance Background  Trade finance is more than regular lending. It refers to innovative financial products and services that assist importers and exporters to fulfill their financing needs  Trade Finance is a source of working capital for many traders in need of financing to procure, process or manufacture products before sale in future  Trade finance is also important for individual traders and firms trading internationally, because it can shape competitiveness of their contract terms  Trade finance is therefore important for any country as it facilitates international trade. As international trade increases, so does the importance of trade finance
  5. 5. Trade Finance Background  Absence of an adequate trade finance infrastructure is, in effect, equivalent to a trade barrier  Importers facing difficulties in accessing trade finance, have limited chance to offer competitive terms to their suppliers the like of advance payment terms, Sight letters of credit, Bills avalized etc.  Conversely, exporters with limited supply of trade finance, will have difficulties in penetrating the market, because while importer may prefer to buy on open account, or on deferred terms, the supplier may not be in position to accept/offer such terms.
  6. 6. Sources of Trade Finance  Commercial Banks  Trading Partners (exporter/importer)  Specialized house or institutions  Government and related institutions
  7. 7. Commercial Banks  Commercial Banks are the main source of trade finance  They provide pre-export financing (O/D, Term Loans)  They help in the collection process  They issue and confirm letters of credit  They book acceptance and discounting drafts  They offer fee-based services such as providing credit and country information on buyers  Other roles played by commercial banks include  Taking foreign exchange risks (spot, forward, swap etc)  Taking market risks (options)
  8. 8. Commercial Banks Loans Overdraft, Term Loans Take currency risks (Spot, Swap, forward, Options) Commercial Banks Take market risks (Price risk options, future, forward) Settlement (Terms of payments, Open A/C, Advance payments, Collections, L/C)
  9. 9. Commercial Banks Summary of trade finance sources from Commercial Banks:  Loans facilities, which may take the form of Working capital or overdraft and Term loan facilities  Off balance sheet financing:  Issuing performance, bid, custom, advance payment bonds etc  Opening letters of credit  Accepting and confirming letters of credit  Bills Avalisation  Discounting documents under letters of credit  Advance under red clause letters of credit  Structured Finance
  10. 10. Trading Partners (exporter/importer)  Supplier may offer credit to a buyer by releasing goods to a buyer against bills of exchange, by which a seller can get an undertaking from the buyer to pay at a specified future date  Alternatively may decide to release the goods against promissory notes, in which a buyer promises to pay at a future date, but which offer less legal protection as compared to the bill of exchange  Under counter trade arrangements valued goods are exchanged at an agreed value without cash or credit terms, involving a barter-exchange, counter-purchase, or buy-back
  11. 11. Specialized house or institutions  Specialized house or other trading institutions may under forfaiting arrangement purchase from exporters receivables without recourse at a discounted rate to allow exporter access financing before maturity of the bill. In this case the receivable becomes a tradable security
  12. 12. Government and related institutions  Governments, and other institutions like World Bank, regional bank, community bank can be good source of trade finance especially in less developed economies where financial markets and money markets are underdeveloped
  13. 13. Government and related institutions  Establish scheme of guarantees to support exporters  Establish floating line of credit to support imports for and exports from specific sectors, e.g. confirmation line  Establish guarantees schemes for SME, Micro group  Embark on support policies, e.g. tax deferral for export
  14. 14. Instruments of Trade Finance  Letters of Credit (Documentary Credit)  Bank Guarantees  Pre and Post shipment finance loan facilities  Buyers and Sellers credit  Bills Acceptance and Avalisation  Structured Finance  Leasing  Factoring and Forfaiting  Countertrade
  15. 15. Letters of Credit - Definition A Letter of Credit is a conditional undertaking issued by a bank, at the request of one of its customers, to pay a named beneficiary a specified amount of money upon presentation of documents that comply with the terms and conditions stated therein
  16. 16. Letters of Credit – Types  Import letter of credit/Documentary Credit Import  Import letter of credit off-shore issuance  Export letter of credit/Documentary Credit Export  Commitment to pay/accept negotiate  Bank to bank reimbursement  Reimbursement undertaking
  17. 17. Letters of Credit – Types Import Letter of Credit  Import Letter of Credit is a term used to describe a Documentary Credit Import (Commercial Letter of Credit) from the point of view of the importer and the issuing bank  LCs may be payable at sight or at a date in the future
  18. 18. Letters of Credit – Types Documentary Credit Import  A documentary credit is an irrevocable undertaking issued by a bank, at the request of one of its customers, to pay a named beneficiary a specified amount of money upon presentation of documents in compliance with the terms and conditions stated in the Letter of Credit  An Import Documentary Credit constitutes a credit exposure on the customer
  19. 19. Letters of Credit – Types Import Letter of Credit Off-Shore Issuance  A variant in the processing of the Import LC is the Offshore Issuance. This is an efficient way of issuing LCs, which eliminates the use of multiple banks in the transaction  The bank requests its foreign branches, mostly in the country of the beneficiary, to issue LCs directly to the beneficiary  The client-facing branch carries the credit risk of the buyer
  20. 20. Letters of Credit – Types Export Letters of Credit  Export LC is a term used by an exporter to describe a Documentary Credit Export that is a Commercial LC  Export LCs may be payable at sight or at a date in the future
  21. 21. Letters of Credit – Types Documentary Credit Export  A documentary credit is an irrevocable undertaking issued by a bank, at the request of one of its customers, to pay a named beneficiary a specified amount of money upon presentation of documents in compliance with the terms and conditions stated in the LC
  22. 22. Letters of Credit – Types Confirmed Letters of Credit  A confirmation to a Credit constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to that Confirming Bank and that the terms and conditions of the LC are complied with  An export LC only constitutes a credit exposure on the bank if the credit is confirmed
  23. 23. Letters of Credit – Types Commitment to Pay/Accept Negotiate  A variant of the advising of the LC is the Commitment to Pay/Accept Negotiate. This is also known as a silent confirmation  This represents a commitment by the bank to an exporter to pay or negotiate or accept documents on a without recourse basis, provided the terms and conditions of the LC have been complied with
  24. 24. Letters of Credit – Types Bank to Bank Reimbursement/Clean Reimbursement  This is a reimbursement service offered to branches or other banks, whereby the bank administers processes and settles claims made under Letters of Credit issued by such other branches or banks  There is no commitment issued by the bank, but the bank has the obligation to process and pay a claim if previously authorised by the LC issuing bank, provided sufficient funds or cover are available
  25. 25. Letters of Credit – Types Reimbursement Undertaking  This is a reimbursement service offered to branches or other banks, whereby the bank administers processes and settles claims made under LCs issued by such other branches or banks  The Undertaking is an irrevocable commitment issued by the bank but the bank has the obligation to process and pay a claim if previously authorised by the LC issuing bank
  26. 26. Standby Letters of Credit  Do not cover the direct purchase of merchandise  Based on the underlying principle of LC that payment is made against presentation of documents, not necessarily shipping documents but whatever docs the applicant, beneficiary, and issuing bank may agree to  The party requesting a bank to issue an SBLC (the applicant) need not be involved in a commercial transaction at all  SBLC are payable against the presentation of documents as simple as a certificate from the beneficiary stating that the applicant has not performed some act, has not complied with a specific contract or other agreement, or has defaulted either in payment for certain goods and services or in making repayment on a loan
  27. 27. Guarantee Guarantees are Legal transactions that are unrelated to the underlying transactions Individual commitment from Issuing Bank to pay a specified amount to the beneficiary with the conditions set out in the guarantee Bank that issues the guarantee may not take into objections raised either by principal or a third party when performing its payment obligation In the case of disputes - unless otherwise stipulated- the law of the issuer’s country shall prevail in the matters that are not regulated in the wording of the guarantee In the event that the contracting parties are unable to agree on the selection of the law applicable to the bank guarantee, the solution may be to use a so called standby letter of credit (regulated by ISP98 or UCP500)
  28. 28. Guarantee Bid Bond/Tender Bond To participates in international public tenders, Company usually has to submit a bid bond along with its offer This ensures payment of the guaranteed amount in the event of :  the bid being withdrawn before the due date  the contract not being accepted by the party submitting the bid after the contract has been awarded  the bid bond not being replaced by a performance bond after the contract has been awarded
  29. 29. Guarantee Performance Bond The Bank undertakes to pay the beneficiary the guaranteed amount at the request of the seller in the event that the supplier does not fulfil his contractual delivery obligations or does not fulfil them as per the terms of the contract
  30. 30. Guarantee Payment Guarantee This is used especially with deliveries against open account payment and can be issued to secure the full payment of the delivery of the goods or services. The beneficiary can claim the guarantee by declaring in writing that he delivered the goods but had not received payment by the due date
  31. 31. Guarantee Advance Payment Guarantee The payment conditions for large export orders often stipulate that the buyer has to pay for the raw materials and the manufacturing costs in advance However, prepayment of this kind is only made after the buyer has received an Advance payment guarantee, which stipulates that the prepayment will be reimbursed in the event of the seller not meeting his contractual delivery obligations and or/not providing the agreed services
  32. 32. Trade Finance Post Import Finance Financing provided for settlement of purchase under Letters of Credit Pre-Export Finance Financing provided for processing of goods/shipping It may be based on Purchase Order or Letters of Credit (given up to 90% of LC) Post-Export Finance Financing provided after submission of export bills - Collection (D/P and D/A) - LC (sight and usance) * Discrepant
  33. 33. Post Import Financing Buyer Supplier LC Application LC Advising Issuing Bank Negotiating Bank $$ REQUEST IMPORT EXPORT LC Issuance Export Bills Checking Bills Checking Bills Request PIF Send Bills Release Docs Settlement LC
  34. 34. Post Export Financing Buyer Supplier LC Application LC Advising Issuing Bank Negotiating Bank $$ IMPORT EXPORT LC Issuance Export Bills Checking Bills Checking Bills Settlement Release Docs Send Bills Post Export Finance SETTLE FINANCING
  35. 35. Avalisation The Bank adds our guarantee (aval) to a draft accepted by a buyer. This relates to transaction conducted under documentary collection (document against acceptance) This is similar to our acceptance in LC
  36. 36. Avalisation Buyer Supplier DOCUMENTS AVAL BANK SENT TO PAY FROM TO SUPPLIER SUPPLIER TO ON BUYER SWIFT CONFIRMATION SENT TO SUPPLIERS BANK $$ BANK BUYER ADD ACCEPT OUR AVAL AND : OBLIGATION ENDORSED TO BoE PAY ON THROUGH MATURITY BANKS DATE AVALISATION LIMIT IS REQUIRED RISK IS THE SAME AS BILL ACCEPTANCE Collecting Bank Payment Bank SWIFT Confirmation - AVAL BoE AVAL
  37. 37. Structured trade finance  Structured Trade Finance (STF) is a specialised activity dedicated to the financing of high-value supply chains, especially upstream financing of cross-border commodity flows and limited recourse trade finance. Every loan is bespoke with each facility tailored to the specific needs of client, transaction and jurisdiction. STF facility structures can provide short term working capital or longer term funding with loans of up to five years or more
  38. 38. Funding requirements The tools and techniques of STF are used extensively in the commodity-related sectors for the benefit of producers, processors, traders and industrial end-users alike to meet a diverse range of funding requirements which include: Upstream Financing  Pre-export finance (including Contract Pre-payment)  Tolling and processing  Funding investment in capital equipment or production assets  Development or refurbishment of production facilities (with or without project risk) Downstream Financing  Warehouse finance (for inventories of exchange traded commodities)  Receivables finance (for trade and other receivables)  Borrowing Base finance (funding a revolving asset base)  Provision of payment guarantees for sellers of crude oil and refined products
  39. 39. Leasing  A lease or tenancy is the right to use or occupy personal property or real property given by a lessor to another person (usually called the lessee or tenant) for a fixed or indefinite period of time, whereby the lessee obtains exclusive possession of the property in return for paying the lessor a fixed or determinable consideration (payment)
  40. 40. Factoring Factoring is a form of commercial finance whereby a business sells its accounts receivable (in the form of invoices) at a discount. Effectively, the business is no longer dependent on the conversion of accounts receivable to cash from the actual payment from their customers, which takes place on typical 30- to-90-day terms. Businesses benefit from the acceleration of cash flow by obtaining cash from the factor equal to the face value of the sold accounts receivable, less a factor's fee. Factoring is considered off balance sheet financing in that it is not a form of debt or a form of equity. This fact makes factoring more attainable than traditional bank and equity financing.
  41. 41. Factoring There are usually three parties involved when an invoice is factored:  Seller of the product or service who originates the invoice.  Debtor is the customer of the seller (i.e., the recipient of the invoice for services rendered who promises to pay the balance within the agreed payment terms).  Factor (the factoring company)
  42. 42. Forfaiting Forfaiting is the discounting of international trade receivables on a without recourse basis
  43. 43. Forfaiting Forfaiting, or Medium-Term Capital Goods Financing, means selling a bill of exchange, at a discount, to a third party, the forfaiter, who collects the payment from an, essentially, overseas customer, through a collateral bank(s), and, thus, assuming the underlying responsibility of exporters and simultaneously providing trade finance for importers by converting a short-term loan to a medium term one
  44. 44. Countertrade  Countertrade is exchanging goods or services that are paid for, in whole or part, with other goods or services
  45. 45. Countertrade - Types There are five main variants of countertrade:  Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment  Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country  Counter purchase : Sale of goods and services to a country by a company that promises to make a future purchase of a specific product from the country  Buyback : Export of industrial equipment in return for products produced by that equipment  Offset : Agreement that a company will offset a hard - currency purchase of an unspecified product from that nation in the future
  46. 46. Challenges  Lack of Security/Collaterals  Absence of counter party willing to offer financing alternatives outside the banking system  Promissory notes, Bill of Exchange, Counter trade, Forfeiting, Suppliers credit etc  High costs of borrowing to compensate banks for credit risks (Interest rates, application fee, facility fee)  Regulatory issues  Difficulties for importers and banks to comply with regulatory requirements e.g. Foreign currency controls  Compliance to terms of Trade  Documentations
  47. 47. Challenges  Absence of reliable Market information about Counter party risks and trading requirements  Missing link to buyers and sellers (Financial institutions link)  Infrastructure gap  Transportation, Storage, Clearing & forwarding  especially commodities  Price Volatility for export
  48. 48. Challenges  Poor negotiations skills for some importers/exporters which have caused them to become victims of unfavorable terms in international trade  Overseas supplier insist on Advance payments, while Exporters are forced to accept Open account terms  While overseas suppliers require L/C’s confirmed by first class bank, few of the L/C’s in favour of suppliers in Tanzania will request for confirmation  Bank charges are not shared equally
  49. 49. LC - UPAS (Usance Paid at Sight) LC allows for beneficiary to claim payment at sight, even though LC is issued as Usance LC Benefit (to beneficiary) : Provide flexibility to applicant and beneficiary Risk involved : Issuing Bank : Applicant risk of non payment (on maturity) Mitigation : Provided selectively
  50. 50. UPAS – Usance paid at sight Buyer Supplier LC Application LC Advising Issuing Bank Negotiating Bank $$ IMPORT EXPORT LC Issuance Export Bills Checking Bills Checking Bills Acceptance Send Bills Release Docs Settlement LC BoE
  51. 51. Transferable LC Country Risk APPLICANT BENEFICIARY Industry Risk Trading Risk Currency Risk Bank Risk Transfer able LC BENEFICIARIES LC LC Transfer LC LC Issued LC received & transferred
  52. 52. Without Recourse  An individual who endorses a check or promissory note using the phrase without recourse specifically declines to accept any responsibility for payment. By using this phrase, the endorser does not assume any responsibility by virtue of the endorsement alone and, in effect, becomes merely the assignor of the title to the paper
  53. 53. Off Balance Sheet  Off balance sheet usually means an asset or debt or financing activity not on the company's balance sheet. It could involve a lease or a separate subsidiary or a contingent liability such as a letter of credit. It also involves loan commitments, futures, forwards and other derivatives, when-issued securities and loans sold
  54. 54. Bill of Exchange - Sample
  55. 55. Promissory Note - Sample
  56. 56. Distribution Channel/Client Group Combination Delivery Channels The delivery channels used for these products are:  Max Trad  SWIFT  Fax
  57. 57. Product Risks The following tools are used to assess product related risks:  AIM policies and standards  Business cases  Product Approval Committee  Operational Risk Assessment Procedure  Risk Self Assessment  Audit reports
  58. 58. Product Risks The following product risks are subject to Risk Management methods (if applicable):  Customer risk  Country risk  Credit risk  Information Technology risk  Insourcing risk  Liquidity risk  Market risk  Operational risk  Outsourcing risk  Reputation risk (as part of the product integrity)  Strategic Business risk (a.o. sustainability, effects on the bank's results/equity)

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