FITT Webinar - Trade Finance
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Transcript of FITT Webinar - Trade Finance
Introduction & Basic PrinciplesIntroduction & Basic Principles
Global Business Essentials (Part 3 of 3):
International Trade International Trade FinanceFinance
© 2010 Copyright FITTFor PERSONAL use only.
Your Panel Today
Mr. Malaket is an internationally recognized expert in trade finance, co-author of two FITTskills textbooks, and member of the Trade Finance Experts Panels at the World Bank and the EBRD. Alexander has advised blue-chip public and private sector clients, and delivered training seminars in Asia, Europe and the Middle East, in addition to undertaking trade policy & capacity analysis in Africa, related to ACP/EU trade negotiations.He is a frequent feature writer for leading industry publications, from London to Hong Kong and Bahrain.A.R. Malaket, CITP, President,
OPUS Advisory Services International Inc.
Mr. Gnaedinger is a Project Management Professional (PMP) and Certified International Trade Professional (CITP), and is currently the Director of International Trade Resources for FITT - one of the world's leading providers of international trade training.
As part of his current position, Rob's main focus has been on planning and overseeing the implementation of an internal management system for FITT's Body of Knowledge in international trade.
PHOTO
Rob Gnaedinger – PMP, CITPDirector,
International Trade ResourcesFITT
© 2010 Copyright FITT. For PERSONAL use only.
FITT: The Professional Path to Global Markets
• A Canadian, non-profit organization established by industry and government
• World-class programs including Going Global Seminar Series & FITTskills courses leading to CITP/FIBP Professional Designation
• Over 900 members in Canada and internationally• 400+ CITP’s in leadership positions in government,
corporate and entrepreneurial contexts• Annual Conference attended by the elite of the
international trade community
© 2010 Copyright FITT. For PERSONAL use only.
FITT: Related Resources
FITTskills – International Trade Finance
Going Global – An Introduction to International Trade Finance
CITP Competency Profile
© 2010 Copyright FITT. For PERSONAL use only.
Adobe Connect - overviewTo submit questions:• Use the “Chat” box functionality• Enter text in Chat area, select specific
presenters or “Everyone” from the “To” drop-down list, and click the arrow key to submit your question
To change your status:• In the bottom left-hand corner of the
screen, click the “Status Options” key (down arrow)
• Select a status from the list. Please note that not all functionality is available at this time.
We ask that you please mute your telephones during Q&A © 2010 Copyright FITT. For PERSONAL use only.
Webinar OutlineWebinar Outline
Defining Trade Finance The Four Pillars The Documentary Letter of Credit
The Theory The Reality
Understanding the Role of the Banks ECA’s & Non-Bank Providers Trends & Emerging Solutions Questions
© 2010 Copyright FITT. For PERSONAL use only.
Trade FinanceTrade Finance
• A specific branch of finance dealing with import/export transactions
• Short-term, up to 18 months timeframe• Instruments and mechanisms in use for hundreds of
years and well-understood across commercial/legal jurisdictions
• Closely linked to cash management and Foreign Exchange
Transactional Focus: Exclude the Financing Related to the Launch of a Venture© 2010 Copyright FITT. For PERSONAL use only.
Four Pillars of Trade Four Pillars of Trade FinanceFinance
Every trade finance product or solution offers some combination of:
Payment Facilitation – flow of monies across bordersFinancing – some form of lending to the importer, exporter or to one of the banks involvedRisk Mitigation – instruments, features or solutions which mitigate risks such as country, bank or commercial riskInformation – timely information about status of payment or shipment
Optimal combination depends on transaction and on trade skill/relationship © 2010 Copyright FITT. For PERSONAL use only.
The Four PillarsThe Four Pillars
The optimal combination depends on the nature of the transaction:
• The maturity of the trade relationship• The negotiating leverage of one party over the other• The risk profile of the markets involved• The standing of the financial institutions involved
© 2010 Copyright FITT. For PERSONAL use only.
OptionsOptions
Importer(Buyer/Applicant)
Importer(Buyer/Applicant)
Exporter(Seller/Beneficiary)
Exporter(Seller/Beneficiary)
Confirmed Documentary Credit
Documentary Credit
Documentary Collection
Payment in Advance – Safest for Exporter
Payment on Delivery – Safest for Importer
The Documentary Credit offers the most balanced solution for importer/exporter
© 2010 Copyright FITT. For PERSONAL use only.
The Documentary Credit The Documentary Credit (L/C)(L/C)
• Independent, binding Payment Undertaking by a bank on behalf of the Importer/Buyer
• Use/interpretation of L/Cs governed by UCP 600, published by ICC in Paris
• Banks act as intermediaries, verifying documents against L/C terms
• Exporter receives payment if documents are compliant, importer receives documents (control of shipment) once payment authorized or effected
• Versatile instrument, numerous features
© 2010 Copyright FITT. For PERSONAL use only.
L/C Transaction FlowL/C Transaction Flow
Importer(Buyer/Applicant)
Exporter(Seller/Beneficiary)
Advising Bank (Confirming Bank)
Issuing Bank
Sales Contract and Delivery of Goods
Verification & Transmission of Documents, Remittance of
Funds
ImporterPayment,
Exchange for Documents
Exporter Documents,
Exchange for Payment
© 2010 Copyright FITT. For PERSONAL use only.
What is in an L/C?What is in an L/C?
• L/C’s are most commonly transmitted via SWIFT message
• Authenticated, secure message
• Specify documents, payment conditions
• Importer’s bank sends to exporter’s bank
• SWIFT also used for payment
Payment Facilitation
© 2010 Copyright FITT. For PERSONAL use only.
Risk & Trade FinanceRisk & Trade FinanceRisk Mitigation
Importer (Buyer)Exporter (Seller)
Issuing BankConfirming Bank
Country Risk
Commercial Risk: Non-performance or financial failure of a trading partner
Bank Risk: Non-payment or financial failure by a financial institution
Country Risk: risk related to the stability of a market, exchange
controls, expropriation
Any one of these can threaten your deal, and your business
© 2010 Copyright FITT. For PERSONAL use only.
Risk MitigationRisk Mitigation
WARNING: The next slide looks “messy” and complicated – intentionally!
MESSAGE: Trade finance offers many ways to shift/manage risk in a transaction
WHY: As a Canadian exporter, would you rather be paid in Canada, or in an unfamiliar market across the
globe?
© 2010 Copyright FITT. For PERSONAL use only.
Risk MitigationRisk Mitigation
Importer(Buyer/Applicant)
Importer(Buyer/Applicant)
Exporter(Seller/Beneficiary)
Advising Bank (Confirming Bank)
Issuing Bank
Country 1
Exporter(Seller/Beneficiary)
Issuing Bank
Country 2
Advising Bank (Confirming Bank)
Payment type/ timing
Confirmed L/ C
L/ C
Confirmed L/ C Payment Terms
Confirmed L/ C
I ncoterm
ECA Cover
Guarantee/ I FI Programs
ECA Cover Importer(Buyer/Applicant)
Importer(Buyer/Applicant)
Exporter(Seller/Beneficiary)
Advising Bank (Confirming Bank)
Issuing Bank
Country 1
Exporter(Seller/Beneficiary)
Issuing Bank
Country 2
Advising Bank (Confirming Bank)
Payment type/ timing
Confirmed L/ C
L/ C
Confirmed L/ C Payment Terms
Confirmed L/ C
I ncoterm
ECA Cover
Guarantee/ I FI Programs
ECA Cover
Trade Finance allows Risk Transfer through L/C’s & other Options
© 2010 Copyright FITT. For PERSONAL use only.
FinancingFinancing
Negotiations Contracting L/C Issuance Document Preparation
Shipment Settlement
TF as a competitiveadvantage
Payment Terms Bank Re-Finance
Invoice Financing/Factoring
Pre-shipmentFinance Buyer Credit
ECA CoverECA CoverUCP
Importer/Buyer Exporter/Seller
Financing shifts the timing of Financial Flows & Risks between parties
Negotiations Contracting L/C Issuance Document Preparation
Shipment Settlement
TF as a competitiveadvantage
Payment Terms Bank Re-Finance
Invoice Financing/Factoring
Pre-shipmentFinance Buyer Credit
ECA CoverECA CoverUCP
Importer/Buyer Exporter/Seller
Financing shifts the timing of Financial Flows & Risks between parties
Financing
Financing is available at multiple stages in a trade transaction
© 2010 Copyright FITT. For PERSONAL use only.
L/C’s: Selected L/C’s: Selected ObservationsObservations
• L/C’s can, through terms/conditions and the document required, provide a lot of information about the shipment (Inspection Certificates)
• L/C-related transactions such as SWIFT payments can assist companies in managing flows of funds
• Banks and service providers increasingly include detailed reporting in their services
Information
© 2010 Copyright FITT. For PERSONAL use only.
L/C’s: The RealityL/C’s: The Reality
Used correctly, L/C’s work very well, but:
• Goodwill between importer and exporter is key• L/C’s will not protect against intentional fraud• If an exporter is non-compliant, the protection of the
L/C evaporates• Importers have used non-compliance to demand
substantial discounts on threat of refusing the shipment
• Estimates indicate 60-70% of requests for payment involve discrepant (non-compliant) documents
The global crisis has shown the effectiveness/importance of L/C’s in trade© 2010 Copyright FITT. For PERSONAL use only.
Other OptionsOther Options
• Various other forms of payment and financing exist• Pre-crisis trade flows were largely on the basis of
Open Account, as is much of Canada-US trade• Documentary Collections were also popularly used
when trading relationships had been tested and proven: straight exchange of documents for payment (or a payment promise) – no verification role for banks
• Such options may require separate risk mitigation solutions such as foreign A/R insurance
© 2010 Copyright FITT. For PERSONAL use only.
Understanding the BanksUnderstanding the Banks
• Banks are constrained in their ability to support trade transaction, by credit limits at the country and foreign bank level
• Credit committees can also restrict the type and term of exposure that a bank will undertake
• In some cases, such as L/C’s, banks provide standalone undertakings and may not always be able to act strictly in the interest of their clients
• Local and regional banks also may be limited due to lack of experience in certain markets
Engaging early with a bank may assist in securing trade finance support© 2010 Copyright FITT. For PERSONAL use only.
Understanding the BanksUnderstanding the Banks
Your Bank
Exporters have more flexibility in choosing a provider under an L/C.
Commercial bankers RARELY understand the mechanics of trade finance
The standing of the foreign bank can be critical – if you are unsure, check with your trade finance specialist
Other parties such as export credit agencies and private sector risk
insurers can be critical complements to bank support
Any one of these can threaten your deal, and your business
Foreign Bank
?
© 2010 Copyright FITT. For PERSONAL use only.
ECA’s & Non-Bank ECA’s & Non-Bank ProvidersProviders
• Export Credit Agencies, private insurers and non-bank providers provide options, and complementary products
• Northstar Trade Finance – unique Public/Private Model
• GE Capital, UPS Capital• Coface, Euler-Hermes• Canada’s “Financial Crowns” (EDC, BDC, CCC)
© 2010 Copyright FITT. For PERSONAL use only.
International Financial International Financial InstitutionsInstitutions
IFC Global Trade Finance Programhttp://www.ifc.org/ifcext/gfm.nsf/Content/TradeFinance
IDB Trade Financing Programhttp://www.iadb.org/pri/trade_finance.cfm?language=en&parid=2&item1id=2
ADB Trade Finance Facilitation Programhttp://www.adb.org/PrivateSector/Finance/trade_fin.asp
EBRD Trade Facilitation Programhttp://www.ebrd.com/apply/trade/about/index.htm
© 2010 Copyright FITT. For PERSONAL use only.
Trends & Emerging Trends & Emerging SolutionsSolutions
• Global crisis has had significant impact on trade and trade finance
• Bank consolidations included major providers in the US and Europe
• Pricing increases by up to 400%, slowly normalizing• Product development slowed by a return to
traditional instruments – primarily the L/C• Risk mitigation and compliance now at the forefront• Supply chain finance and working capital
optimization continue to evolve; more attention now to risk mitigation element
© 2010 Copyright FITT. For PERSONAL use only.
Questions?Feedback?
Rob Gnaedinger – PMP, CITPFITT
[email protected]: +1 613 230-3553 ext. 110
Alexander R. Malaket, CITP, PresidentOPUS Advisory Services International Inc.
[email protected]: +1 647 680-6787www.opus-advisory.com www.opus-seminars.com
© 2010 Copyright FITT. For PERSONAL use only.