International Banking

1
International Banking and Trade Finance
Chpt 13
2
Managing Economic Exposure and Translation
Exposure

• Chapter 12

3
Overview

• Describe payment methods for international trade
• Explain common methods of trade finance
• Describe the major agencies facilitating
  international trade

4
Payment Methods for International Trade

• Credit may be provided by
• 1. supplier (exporter)
• 2. buyer (importer)
• 3. financial institution
• 4. a combination of the different organizations
• Supplier credit
• funds the entire trade cycle
• from production to delivery

5
Payment Methods for International Trade

• Primary methods of payment include
• 1. prepayment
• 2. letters of credit
• 3. drafts
• 4. consignment
• 5. open account

6
Payment Methods
Letters of Credit (L/C)

• Used by banks on behalf of the importer (buyer)
• bank substitutes its credit for the buyers
  credit
• promises to pay exporter upon receipt of shipping
  documents
• Compromise for buyer and seller
• buyer does not pay for goods until arrival

7
Payment Methods
Drafts (Bill of Exchange)

• A promise by one party (usually exporter) to pay
  draft upon arrival of goods
• Documentary collections
• banking channels used for most drafts
• documents against payments
• documents against acceptance
• trade acceptance

8
Payment Methods
Consignment

• Exporter ships goods to importer while retaining
  title to goods
• importer does not pay for goods until sold
• exporter does not have a draft
• participants are exposed to high level of risk

9
Payment Methods
Open Account

• Agreement based on trust and experience
• exporter ships merchandise
• buyer makes payments based upon agreement
• exporter dependent upon buyers ability to pay
• this method is becoming more popular in
  industrial countries

10
Trade Finance Methods
Factoring

• Selling the accounts receivables (A/R)
• A/R sold before payment received from buyer
• third party buyer of A/R is known as a factor
• duties of factor
• responsible for collections
• performs credit check on buyer of merchandise
• Cross-border factoring
• uses factors in both countries of the transaction

11
Trade Finance Methods
Letters of Credit (L/C)

• Proven usefulness to business community
• provides protection to exporter and importer
• bank makes payment for a party (importer) to a
  beneficiary (exporter)
• importers bank substitutes its credit for the
  importers

banks credit
12
Trade Finance Methods
Letters of Credit (L/C)

• Characteristics of L/C
• does not insure receipt of ordered goods
• bank pays upon examination of documents, not
  goods
• a confirming (domestic) bank may be contacted
• pays exporter upon acceptance of documents by
  foreign bank

13
Trade Finance Methods
Letters of Credit (L/C)

• Trade related L/Cs
• commercial letters of credit
• import/export letters of credit
• Types of trade L/Cs
• revocable L/C
• irrevocable L/C

14
Trade Finance Methods
Letters of Credit (L/C)

• Participating banks
• issuing bank (issues L/C)
• sends the L/C to the exporters bank (advising)
• Advising bank
• receives the L/C from the importers bank
• Negotiating bank
• inspects documents under the L/C
• pays exporter

15
Trade Finance Methods
Letters of Credit (L/C)

• Draft (bill of exchange)
• a promise written by one party (exporter)
• requests importer to pay face amount of draft
• bankers acceptance
• time draft drawn on and accepted by a bank
• Bill of Lading (B/L)
• serves as a receipt for shipment
• key document in international shipping

16
Trade Finance Methods
Letters of Credit (L/C)

• Commercial invoice
• exporters description of the merchandise sold
• Variations of the L/C
• standby L/C
• transferable L/C
• assignment of procedures

17
Trade Finance Methods
Bankers Acceptances

• Bill of exchange (time draft)
• drawn on (accepted) by a bank
• accepting bank had obligation to pay at maturity
• Benefits
• exporter protected from credit risk of importer
• exporter reduces exposure to political risk and
  to exchange controls

18
Trade Finance Methods
Short-term Bank Loans

• Provides financing for working capital cycle
• Importer
• finances acquisition of inventory (goods) from
  overseas
• Exporter
• may finance manufacture of goods for export

19
Trade Finance Methods
Forfaiting

• Long-term financing for importer
• Transaction may involve purchase of financial
  obligations (bills of exchange)
• without recourse to original holder (exporter)
• Example importer buys capital goods
• issues promissory note to exporter
• exporter sells notes to forfaiting bank

20
Trade Finance Methods
Counter Trade

• Reciprocal trade agreements
• sale of goods to one country linked to purchase
  (or exchange) of goods from that same country
• barter
• compensation (clearing-account) arrangement
• delivery of goods to one party includes the
  sellers (exporter) buying back a specified
  amount of product from the buyer (importer)

21
Agencies that Motivate International Trade

• US agencies
• Export-Import Bank (Eximbank)
• Private Export Funding Corporation (PEFCO)
• Overseas Private Investment Corporation (OPIC)

22
Agencies that Motivate International Trade
Eximbank

• Mission
• to finance and facilitate the export of US goods
  and services
• to maintain competitiveness of US companies in
  overseas markets
• Encourages private lenders to finance exports
• Provides direct loans to foreign buyers

23
Agencies that Motivate International Trade
Eximbank

• Guarantee programs
• Working Capital Guarantee Program
• encourages banks to offer short-term financing
• guarantees 100 of loans principal and interest
• Medium-term Guarantee Program
• encourages commercial lenders to finance the sale
  of US capital goods and services to foreign
  buyers
• guarantees 100 of loans principal and interest

24
Agencies that Motivate International Trade
Eximbank

• Direct loan program
• make fixed rate loans directly to foreign buyer
• requires purchase of US capital goods and
  services
• medium term (1-5) years and long term (7-10)
  years
• Intermediary loan program
• provides fixed rate funding to commercial banks
• extends to foreign borrower

25
Agencies that Motivate International Trade
Export Credit Insurance

• Private insurance companies
• work in cooperation with Eximbank
• insures foreign receivables against
• nonpayment risk
• commercial defaults
• political risk defaults

26
Agencies that Motivate International Trade
Private Export Funding Corp

• Private corporation
• owned by consortium of commercial banks
• finance large projects with backing of Eximbank

bank
bank
bank
bank
bank
27
Agencies that Motivate International Trade
Overseas Private Investment Corp

• Federal agency
• insures direct US investments against
• currency inconvertibility
• expropriation
• other political risks

28
Summary

• Common payment methods for international trade
  are
• prepayment
• letters of credit
• drafts
• consignment
• open account

29
Summary

• Popular financing methods of international trade
  are
• accounts receivable financing
• factoring
• letters of credit
• bankers acceptances
• short-term bank loans
• forfaiting
• countertrade

30
Summary

• Major agencies facilitating international trade
  are
• Export-Import Bank
• Private Export Funding Corporation
• Overseas Private Investment Corporation