Trade Finance Identification of Needs and Product Offerings
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Transcript of Trade Finance Identification of Needs and Product Offerings
Trade Finance
Yudy Yunardy
What you need to know to get going
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
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
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
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.
Trade Finance Background
Sources of Trade Finance
Commercial Banks Trading Partners (exporter/importer) Specialized house or institutions Government and related institutions
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)
Commercial Banks
Loans
Overdraft, Term Loans
Take currency risks (Spot, Swap, forward, Options)
Take market risks (Price risk options, future, forward)
Commercial Banks
Settlement
(Terms of payments, Open A/C, Advance payments, Collections, L/C)
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
Commercial Banks
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
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
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
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
Government and related institutions
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
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
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
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
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
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
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
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
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
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
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
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
Letters of Credit – Types
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
Standby Letters of Credit
Guarantees are Legal transactions that are unrelated to the underlying transactions
Individual commitment from Issuing Bank to pay a specified amount to thebeneficiary with the conditions set out in the guarantee
Bank that issues the guarantee may not take into objections raised either byprincipal or a third party when performing its payment obligation
In the case of disputes - unless otherwise stipulated- the law of the issuer’s countryshall 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 thelaw applicable to the bank guarantee, the solution may be to use a so calledstandby letter of credit (regulated by ISP98 or UCP500)
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
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
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
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
Guarantee
Post Import FinanceFinancing provided for settlement of purchase under Letters of Credit
Pre-Export FinanceFinancing provided for processing of goods/shippingIt may be based on Purchase Order or Letters of Credit (given up to 90% of LC)
Post-Export FinanceFinancing provided after submission of export bills
- Collection (D/P and D/A) - LC (sight and usance)
* Discrepant
Trade Finance
Post Import Financing
Buyer Supplier
Issuing Bank Negotiating Bank
$$
REQUEST
IMPORT EXPORT
LC Issuance
LC AdvisingLC Application
Export Bills
Checking BillsChecking Bills
Request PIF
Release Docs
Send Bills
Settlement LC
Post Export Financing
Buyer Supplier
Issuing Bank Negotiating Bank
$$
IMPORT EXPORT
LC Issuance
LC AdvisingLC Application
Export Bills
Checking BillsChecking Bills
Settlement
Release Docs
Send Bills
Post Export Finance
SETTLE FINANCING
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
Avalisation
Avalisation
Buyer Supplier
Collecting Bank Payment Bank
SWIFT Confirmation - AVAL
$$
DOCUMENTS SENT FROM SUPPLIER TO BUYER
THROUGH BANKS
BUYER ACCEPT AND ENDORSED BoE
BANK ADD OUR AVAL : OBLIGATION TO PAY ON
MATURITY DATE
SWIFT CONFIRMATION SENT TO SUPPLIERS BANK
AVAL BANK TO PAY TO SUPPLIER ON MATURITY DATE
AVALISATION LIMIT IS REQUIRED
RISK IS THE SAME ASBILL ACCEPTANCE
BoE
AVA
L
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
Funding requirements
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
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:
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)
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.
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)
Factoring
Forfaiting is the discounting of international trade receivables on a without recourse basis
Forfaiting
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
Countertrade
Countertrade is exchanging goods or services that are paid for, in whole or part, with other goods or services
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
Countertrade - Types
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
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
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
Challenges
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
UPAS – Usance paid at sight
Buyer Supplier
Issuing Bank Negotiating Bank$$
IMPORT EXPORT
LC Issuance
LC AdvisingLC Application
Export Bills
Checking BillsChecking Bills
Acceptance
Release Docs
Send Bills
Settlement LC
BoE
CountryRisk
IndustryRisk
TradingRisk
CurrencyRisk
Bank Risk
Transferable LC
APPLICANT BENEFICIARY
Transfer able LC
BENEFICIARIES
LC
LC
Transfer LC
LC Issued LC received & transferred
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
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
Bill of Exchange - Sample
Promissory Note - Sample
Distribution Channel/Client Group Combination Delivery Channels
The delivery channels used for these products are:
Max Trad SWIFT Fax
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
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)
Product Risks