Professional Documents
Culture Documents
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.
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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.
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.
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Course Objectives
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 non-traditional facilities provided by banks to facilitate export trade.
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
Course Outline
Unit 1: OVERVIEW OF INTERNATIONAL TRADE FINANCE
Unit 2: STRATEGIC OPTIONS FOR ENTERING AND
COMPETING IN FOREIGN MARKETS; MODE OF ENTRY INTO
EXPORT MARKETS
Unit 3: METHODS OF PAYMENT IN INTERNATIONAL TRADE
Unit 4: INCOTERMS/TERMS OF DELIVERY/SHIPPING TERMS
Unit 3: DOCUMENTS USED IN INTERNATIONAL TRADE
Unit 6: DOCUMENTARY CREDIT
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Course Outline
Unit 7: OVERVIEW OF EXPORT FINANCE
Unit 8: IMPORT FINANCING
Unit 9: METHODS OF INTERNATIONAL SETTLEMENT
THROUGH BANKS
Unit 10: TRAVEL FACILITIES AND NON FINANCIAL SERVICES
Unit 11: FOREIGN EXCHANGE MARKETS
Grading
Continuous assessment: 30%
End of semester examination: 70%
Recommended Reading
Arnold, G. (2008). Corporate Financial Management. 4th Edition. Financial Times/Pearson
Education Ltd
Atuahene, R. (2016). Finance of International Trade-Chartered Institute of Bankers (GH),
2nd Edition.
Cowdell, P. and Hyde, D (2003). International Trade Finance-The Institute of Financial
Services (UK), 8th Edition.
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.
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Introduction
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.
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.
Domestic trade has the following features which are common for both
seller and buyer but differ entirely from that of international trade:
o A single currency is the mode of payment
o Trading is conducted under the same law
o Documentation to the domestic trade is very simple
o Business is done in the absence of stringent Customs Excise and
Preventive Regulations
o No or little transportation difficulties are encountered
o Most businesses are conducted under common language and culture
Mercantilism
According to Wild, (2000), the trade theory that states nations
should accumulate financial wealth usually in the form of gold
by encouraging exports and discouraging imports is called
mercantilism. According to this theory other measures of
countries well-being, such as living standards or human
development are irrelevant.
Mainly Great Britain, France, The Netherlands, Portugal and
Spain used mercantilism during the 1500s to the late 1700s.
Mercantilism countries practiced the so-called zero-sum game.
Comparative Advantage
The principle of comparative advantage states that a country
should specialize in producing and exporting those products
and services in which it has a comparative or relative cost,
advantage compared with other countries and should import
those goods in which it has a comparative disadvantage.
Assumptions that countries are driven only by the
maximization of production and consumption and not by
issues driven out of concern for workers or consumers limit
the real-world application of this theory.
Heckscher-Ohlin Theory
The Heckscher-Ohlin theory stresses that countries should produce
and export goods that requires resources that are abundant and import
goods that are short in supply. The theory states that a country should
specialize in production and export using factors that are most
abundant and thus the cheapest to produce, as opposed to earlier
theories that emphasized the goods it could produce most efficiently.
The first mover theory states that firms that enter the export market first
will be able to gain large market share, permitting them to enter obtain
benefits of reduced costs and improved technical expertise early. This can
discourage new entrants that might have to enter at a higher cost.
Sources of advantages of first include:
Technological leadership due to a quick fall off on costs, the learning or
experience curve (Liberation 1987) or success in research and
development (Mansfield, 1986)
Preemption of physical or spiral assets such as skilled labour, unique
channels distribution or manufacturing facilities
Buyer switching costs
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.
Sovereign Risk
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 over-invoice imports or under-invoice
exports.
Basic Trade-Based Money Laundering Typologies (AML Act 749, Act 2008 &
CFT Act 762, Act 2008 Bank of Ghana/FIC Guidelines on Money Laundering
Regulation 2011)
Basic Trade-Based Money Laundering Typologies (AML Act 749, Act 2008
& CFT Act 762, Act 2008 Bank of Ghana/FIC Guidelines on Money
Laundering Regulation 2011)
Fraud Typologies
There are different and numerous types of trade fraud that can be enumerated
including:
Documentary Fraud
Documentary fraud in commodity trading occurs primarily for commodities that are in
high demand. Documentary fraud relates to many scenarios such as forging, alteration
or general misuse of the letter of credit and/or the documents that accompany the
letter of credit (i.e. bill of lading, commercial invoice, insurance certificate, certificate
of origin, inspection certificate, etc.). In some cases, the documents may be forged or
falsified after their execution, in others they may be authentic documents but with false
information.
Fraud Typologies
The bill of lading is the most important document likely to be used in
documentary fraud, due its multipurpose appellation. A predated bill of
exchange is issued principally for two reasons:
i.
Fraud Typologies
Deviation, Piracy and Theft
These types of frauds occur principally with high-value cargo, in port
areas that are not under close supervision and control, during times of
depressed freight markets, when a charter party is not being paid for his
work, or when additional costs occur through excessive and unforeseen
congestion in a port. An example of deviation fraud is the phantom ship
frauds which are aimed at the theft of ship-loads of cargo.
Fraud Typologies
Marine Insurance Fraud
Marine insurance fraud implies a fraudulent misrepresentation or nondisclosure of a material fact to the insurer concerning not only the value
of the cargo, but also the existence and ownership of the cargo. Such
fraud is limited to countries with foreign exchange control and
restrictions, which use over-valued invoices in order to exchange local
currencies into hard currencies.
I.
II. Provide travel facilities, foreign currency, foreign draft, traveller's cheques
Status report on foreign buyers, suppliers & banks (Banks rating) through correspondence banks
II. General information on the Economic and Political situation in trading countries such as:
a. Inflation
b. Foreign exchange position (supply & demand)
c. Exchange controls
d. Money supply
e. Balance of payment
f. Import/Export regulations
g. Interest rates
Introduction
For a company to enter into a foreign market, the company must decide the
best way to market the product or service. There are several ways of doing
this , but the company must decide which method will most appropriately suit
the firms needs. These different methods are export strategies: Contractual
Joint Venture, Equity Joint Venture or through wholly owned subsidiaries.
Transnational strategy
Introduction
When a 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
Payment Consideration
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
Means of Payment
The buyers credit is doubtful; or when the parties are doing business for the first
time.
Means of Payment
Advantages to the seller
I.
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.
Open Account
Advantages to the buyer:
I.
II.
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 sellers bank with bank with clear instructions for
collection through one of his 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
exporters bank send to the importers bank.
Documentary Collection
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 exporters 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.
Documentary Collection
Advantages to the Seller
I.
II. documents of value are not released to the buyer until payment or acceptance has
been effected
III. collections may facilitate pre-export or post-export financing
Disadvantages to the Seller
IV. ships the goods without an unconditional promise of payment by the buyer
V. there is no guarantee of payment or immediate payment by the buyer
VI. ties up his capital until the funds are received
Documentary Collection
Advantage to the Buyer
I.
Clean Collection
An arrangement where the seller draws only a bill of exchange on the
buyer for the value of the goods or services and presents the bill of
exchange to his bank. The sellers bank sends the bill of exchange
along with a collection instruction letter to a corresponding bank,
usually in the same city as the buyers.
A clean collection may represent:
an underlying merchandise transaction, or
an underlying financial transaction
Direct Collection
An arrangement where the seller obtains his banks pre-numbered
direct collection letter, thus enabling him to send his documents
directly to his banks correspondent bank for collection. This kind of
collection accelerates the paper-work 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.
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 sellers desire
for cash and the importers 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.
Goods on Consignment
Where an exporter is satisfied with the standing of an importer, or
appoints an agent after careful enquiries, arrangements might be made
to forward goods on consignment. Payment will only be made when
the goods have been sold. Depending upon the standing of the agent,
the goods might be forwarded to him. Another method is for the
exporters bank to dispatch the shipping documents to one of their
correspondents and arrange warehousing and insurance facilities.
Payment In Advance
When receiving payment in advance, the customer
may have simply sent a pro forma or invoice to his
purchaser overseas. Almost invariably, the customer
may have to arrange for an advance payment
guarantee. This could be for a proportion of the value
of the goods or for 100% of the value of the goods.
Purchase of Receivables
Purchasing (accounts) receivables provides a means
for exporters to raise cash on debts due or becoming
due to them from overseas buyers. It is a simple
process by which a bank purchases the debts and is
repaid by settlement from the buyers.
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 banks
credit standing, distinguished from the banks 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
reduces or eliminates the commercial credit risk since payment is assured by
the bank which issues an irrevocable Documentary Credit.
reduces certain exchange and political risks while not necessarily eliminating
them
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
Use By Banks
Most letters of credits will state an Intercom
This enables banks to check, to an extent, that:
a) The documents called for in the credit are consistent with the term used
b) The documents presented are consistent with the term used
Purpose of Incoterms
Use By 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
Use By 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
Responsibilities
EXW (Ex Works) term defines the minimum that has to be done
from the sellers perspective. The sellers responsibilities end at
making the goods available at the named place where the goods are,
usually at a warehouse or manufacturing point.
DDP (Delivered Duty Paid) term defines the most that has to be
done from the sellers perspective.
The other terms define the points in between these two extremes.
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
Format of Incoterms
The named place started 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
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Introduction
Documentation
Documentation in international trade transactions provides tangible evidence
that goods have been ordered, produced and dispatched in accordance with
the buyers requirement or pre-sale 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.
Transport Documents
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
worlds 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. 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.
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
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
iv. The bill of lading will indicate the state in which goods were received for
shipment (clean, dirty or damaged)
Commercial Documents
Pro-forma Invoice
Commercial Documents
They serve as a price quotation and might include the terms of sale
In certain cases, they can be used as a document of tender for an export contract
o 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
Commercial Documents
terms of payment open account, documentary credit or advance payment
method of settlement by swift, telegraphic transfers, mail transfers, foreign
bankers draft
o 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
Commercial Documents
o A Consular Invoice
It is a commercial invoice, which is prepared on a form, printed in the
exporters country by the consulate of the buyers country. The Trade
Attach 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
Commercial Documents
o Certificate of Origin
Commercial Documents
o Weight Note
This is a document issued by the exporter or third party declaring the weight
of the goods in the consignment.
o Inspection Certificate Pre-Shipment Inspection
Commercial Documents
o 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.
o 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. There are
three kinds of marine insurance policies:
Basic named perils sea, jettisons, explosions and hurricanes
Insurance Documents
Broad named perils theft, pilferage, non-delivery, 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. 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.
Insurance Documents
Three basic insurance documents are:
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
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.
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.
Insurance Policy
The insurance policy 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:
o Perils at sea accidental loss or damage caused by sinking, collision, sea water,
heavy weather and stranding
o 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
o Fire, including smoke damage
o Theft forcible theft of goods rather than pilferage
o Damage in loading, trans-shipment or discharge
Insurance Policy
Policy or certificate will not cover losses or damage from strikes, riots,
civil commotions, wars, coup d'tat or capture and seizure of vessel
and other force majeure. These risks must be insured separately by
payment of an additional premium.
Financial Documents
In international trade, there are two financial documents which
provide for payment by the buyer. These are:
o After a period of credit
o establishing a clear legal undertaking by the buyer to make the
payment either by the Bill of Exchange or promissory note.
Financial Documents
A Bill of Exchange
A bill of exchange is defined by the Bill of Exchange Act 55, 1961 as
o an unconditional order in writing
o addressed by one person to another
o signed by the person drawing it
o 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
o acting to the order of a specified person, or to bearer
Financial Documents
Types of Bill of Exchange
Bills of exchange can be classified in two types:
o 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
o 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. 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.
Financial Documents
Bill of exchange can also be subdivided into:
o 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.
o 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.
o Accommodation bills these are used by banks to provide accommodation
facilities for their clients
o Documentary bills and clean bills
Financial Documents
Advantages of Using Bill of Exchange
o It provides a convenient method of collecting payment from foreign
buyers
o The exporter can seek immediate finance using term bills of exchange
instead of having to wait until the period of credit expires
o On payment, the foreign buyer keeps the bill as evidence of payment. It
therefore serves as a receipt.
o If a bill of exchange is dishonoured, it may be used by the drawer to
pursue payment at maturity.
Financial Documents
Promissory Note
A promissory note is defined in the Bill of Exchange Act of Ghana, Act 55, 1961 as:
o an unconditional promise in writing
o made by one person to another
o signed by the maker
o engaging to pay
o on demand or fixed or determinable future time
o a sum of money
o to the order of a specified person or to bearer
Introduction
It is the only payment mechanism which usually satisfies the sellers
desire for cash and importers desire for credit
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
Documentary Credit
Facilities
Advising Bank The Bank through which documentary credit is conveyed to the
beneficiary
4) Beneficiary the party to whom the documentary credit is addressed and who will receive
payment. Under documentary credit operations, there exists a distant triangular contractual
agreement. That is;
I.
Firstly, the sales contract between Buyer and Seller (proforma arrangement)
II.
III. Thirdly, the Documentary Credit between Issuing Bank through the Advising Bank and
the Beneficiary
II. Revocable Credit may be cancelled 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
o.
Introduction
Financing the pre-shipment, or post-shipment period is an important
consideration for any exporter. The method of financing chosen by the
exporter will be influenced greatly by the following factors:
o The terms of trade
o The payment mechanism
o Currency and cash flows consideration
o The cost of funds/pricing
o The availability of any export credit insurance
Introduction
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 . 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.
Introduction
Export finance may be categorized into:
o Short term To finance working capital. Short term finances
normally repaid within 18 months
o Medium term To finance acquisition of semi-processed items.
Facilities that cover 18 to 36 months may be classified as mediumterm.
o 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.
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Forfaiting
Leasing
Hire Purchase
Counter Trade
Export Merchant
Confirming House
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.
Overdrafts can be split into two categories:
o Agreed Overdraft:
The agreed overdraft limit falls into two types:
I.
Cash-flow is more predictable because the client knows that he can claim up to 85% as
immediate advance against his invoices
II. Bad debt losses are eliminated from those debts that have been factored
III. Sales ledger administration is reduced because sales ledger accounting cost is taken off
IV. Foreign exchange risk may be eliminated if invoices are quoted to foreign currencies
V. Managements time is used efficiently because they can concentrate on production and
sales
VI. 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 use the right to
advance against the invoice
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 exporters 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.
Benefits of Invoice Discounting
I.
II. Under invoice discounting, the client does not run his own accounts ledger
III. This facility is useful when the client has an efficient sale ledger team of his own
IV. Cashflow is improved and management could concentrate on production.
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 semi-consumable goods, semi-capital, 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 importers
bank.
Forfaiting
Advantages of Forfaiting to Exporters
I.
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
II.
Forfaiting
Disadvantages to the Exporter
I.
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
equipments life.
Leasing
Leasing can be made available to the foreign buyer:
o Either by arranging finance from the exporters country into the
lessees country (cross-border leasing)
o by arranging the leasing in the buyers country through an
international contract of a leasing company in the exporters 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
2
Leasing
The advantages of the second method:
I.
II. The terms of the lease might be longer than a cross border leasing
III. 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
Hire Purchase
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:
o By an arrangement with the hire purchase company in the exporters country which
has a branch office in the buyers company
o By an arrangement with a hire purchase company in the exporters 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.
Counter Trade
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
Counter-purchase
Bilateral agreements using clearing accounts
Switch trading
Tolling
Co-operation agreements
Build-operative-transfer
Export Merchants
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 suppliers 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.
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
importers resources. Such a situation may require some kind of financial
assistance.
Seasonal peaks, long transit times and lengthy credit terms may all
compound the importers liquidity problem, which may require bridging
up financing. It is important that the finance to meet the seasonal
fluctuation of the importers working capital requirements be geared
towards the terms and method of pre-payment agreed between supplier
and buyer.
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 my be able to negotiate
better terms or prices with their suppliers.
Import Loans
Where credit is taken from the supplier, the facility can be used to
meet the importers 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.
Import Financing
Documentary Credit Facilities
When a bank issues an irrevocable documentary credit, it conditionally
guarantees a consumers 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 buyers 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.
Introduction
All international trade transactions require settlement to be made by
the importer to the exporter. There is, therefore, the understanding of
the mechanism for settlement, and its related problems and risks are
vital. Transfer of funds from one person to another overseas has its
inherent risks. In the transfer of funds to settle a debt such as tuition
fees, a foreign exchange deal takes place.
Ghanaian banks may have their correspondent banks in countries
overseas with which they maintain accounts designated in the accounts
of that country. These accounts are known as Nostro and Vostro.
Introduction
Nostro Account (Our Account With You)
This account, from the point of view of a Ghanaian bank would be
currency accounts which are maintained in its name in the bank
overseas.
Vostro Account (Your Account With Us)
The Vostro account of a Ghanaian bank would be the Cedi accounts in
the names of overseas banks that are maintained with it.
Payment by Cheque
This is a method of settlement in international transactions where the payees
account is credited when the drawers bank clears the cheque presented by the
payee.
Procedures
o A U.K. buyer draws a cheque in favour of a Ghanaian exporter and then posts
the cheque to the Ghanaian exporter
o The Ghanaian will then present the cheque to his local banker, who will in turn
present it to the drawees bank for payment
o On receipt of funds from the buyers bank in the U.K., the Ghanaian bank will
credit the exporters foreign currency account or foreign exchange account.
o The supplier presents the drafts through his bankers to the correspondent bank on
whom the draft was issued and the overseas account or Nostro account is debited
accordingly
Bankers drafts are commonly used but they are a slow method of payment for the
following reasons:
o The draft could be delayed or stolen in the post
o In view of high technology fraud, payee and amount of the draft could be altered
through laser technique. Bankers draft has advantages over cheques as the issuing
banks do not normally stop payment and also not returned.
o The remitter is debited at the time the draft is issued, but there is a delay before the
beneficiary can pay the draft into his account and obtain cleared funds
Mail Transfer
Procedures For A Mail Transfer
o A Ghanaian firm paying for imports from a British supplier will give
a written instruction to his local bankers to issue a mail transfer
specifying the full name and address of the beneficiary and when the
payment should be made
o The local bank then sends instructions to its correspondent bank in
UK giving details of payment
Telegraphic/Cable Transfer
Telegraphic/Cable Transfers
Telegraphic transfers or cable payment orders are payment instructions
sent by telex or cable. It is faster but slightly more expensive than mail
transfers. All telegraphic payment instructions are authenticated by
Test Code which the correspondent banks use to verify the identity of
the sender of the message and also verify the amount and currency to
be paid to the specified beneficiary
Introduction
Traveling is a bigger business in the European, American, Asian and Far East countries
than in the West African sub-region, but increasingly governments in the sub-region are
trying to improve infrastructure and facilities to attract more tourists. Banks in the subregion are also providing more traveling facilities for the traveling public.
It is important to understand not only the arrangements which might be used to assist
travelers, but also the most appropriate in view of the individuals circumstances and
need.
Matters to be considered will depend on:
o Length of stay abroad
o amount of money required
o Convenience for the individual seeking the loan
Introduction
o The speed at which money has to be made available
o Exchange control regulations and restrictions
o Country being visited
o Why the money is needed
o Travelers are entitled to an equivalent of 10,000 USD as per Bank of
Ghana notice
Travelers Cheque
A traveler might take a travelers cheque to cover all expenses up to $3,000 or its
equivalent in other major currencies
Advantages of Using Travelers Cheque
o The travelers cheque is easy to carry
o The cheque is convenient to handle
o They can be exchanged in any country for the local currency of that country
o In the case of theft or loss, the issuing bank will refund the money, provided it is
notified of the loss straight away
o They might be cashed not only at banks overseas, but at hotels, shops, restaurants
and other businesses
Travelers Cheque
Disadvantages of Using Travelers Cheque
o They might be inconvenient to carry around if the traveler requires
large amount of money during his stay abroad
o They may be stolen during the clients stay abroad
o In some countries of the world, particularly in the U.S. travelers
cheques are not widely accepted
Advantages
o Euro cheques are guaranteed to the currency equivalent of 100 per
transaction.
o It is safer to carry, in relation to cash
o They can be used by a customer to draw on personal current accounts
in overseas countries.
o It makes payment of bills easier because it is accepted by
approximately 10 million businesses worldwide
If a person intend to go overseas, his local bankers can introduce him to the
overseas correspondent bank to open an account for their respectable clients.
Open Credit Facilities
A local bank make prior arrangement on behalf of its customer with specified
bank overseas whereby a particular branch of the overseas bank will cash cheques
for that customer for a specified or up to a maximum total credit limit
Such facilities are appropriate in certain parts of the world. The local bank sends a
specimen signature of the customer to the overseas bank and the customer will
cash his cheques at a specified branch, obtaining foreign currency.
Letters of Introduction
An overseas bank can introduce a traveler or customer to a company, government
department or local council of the area where the traveler or customer wants to do
business. A Ghanaian bank can provide a letter of introduction to an overseas
correspondent bank which would then offer suitable assistance to the traveler or
customer.
The advantages of Letter of Introduction are:
o The customer is more easily identified and he is likely able to meet potential
customer or prospective agents
o The person being approached is assured that the customer is a person of high
integrity with good business credibility, having been introduced by a reputable bank.
Travel Insurance
Banks, in conjunction with the insurance companies, provide travel insurance for their
clients traveling abroad. This type of insurance will cover medical costs, loss of tickets,
travelers cheques or delay of flight whilst on overseas trip. For example, travelers
visiting France are required to have medical insurance with a provident insurance
company before a visa will be issued by the French Consulate in Ghana
Payment By Mall Transfer/Telegraphic Transfer (S.W.I.F.T)
If a person in Ghana wishes to send funds to another person abroad, he or she can arrange
for payment by mail transfer, telegraphic transfer or SWIFT, provided the transfers are
supported by the relevant documentation. Funds could be also be transferred freely if the
Ghanaian customer operates a foreign currency account with any of the Ghanaian local
banks, otherwise approval would have to be sought from an authorized dealer bank.
EXCHANGE
RATES/FOREIGN
EXCHANGE MARKETS
Question.
Question.
debt.
One of the easiest ways to understand interest and exchange
The converse will normally be true for loans and debentures with
fixed interest rates.
Movements in interest rates can be a significant issue for a business
that has high levels of borrowing.
A business with a floating rate of interest may find that interest rate
rises will place real strains on cash flows and profitability.
1. Basis Risk
. A company may have Assets and liabilities of similar sizes,
both with floating interest rates, and so will both receive
interest and pay interest.
. At first sight,
risk exposure.
However, if the two interest rates are not determined using the
same basis (e.g. One is linked to LIBOR but the other is not), it is
unlikely that they will move perfectly in line with each other.
As one rate increases, the other rate might change by a different
amount.
2. Gap Exposure
A company may have assets and liabilities which are
matched in terms of ..
EXCHANGE RATES
Also if the exchange rate between the Ghana cedi and the British
pound is Gh2.25=1, this means that 1 will cost Gh2.25.
Taking the reciprocal, Gh1 will cost 44.44pence.
Besides, if the exchange rate between the Ghana cedi and the U.S
dollar is Gh1.45=US$1.00, this means that, US$1 will cost Gh
1.45. Taking the reciprocal, Gh1 will cost 68.96cent.
Or
-US$1.44/,
Gh/:2.25,
Or
Gh2.25/,
Gh/US$:1.45
Or
Gh1.45/US$
Currency exchange rates are given as a rate which you can buy the
first currency (bid rate) and a rate at which you can sell the first
currency (offer rate).
In the case of the US$/ exchange rate, the market rates on 16th
August 2001 were:
(Sell rate)
(Buy rate)
Bid Rate
Offer Rate
US$/
1.4430
1.4432
You can buy dollars from a you can sell dollars to a bank or broker
Bank/broker at this rate
at this rate
Or or
The number of dollars
The number of dollars you have
receive for giving up one pond.
to give up to receive one pond.
= 692,905
2). However, if you wish to purchase US$1million, the cost would be:
$1000, 000 = 693,001
1.4430
In the above example, if a dealer sold US$1million and bought US$1million with a
bid offer spread of 0.02 of a cent, a profit of 693,001 - 692,905 = 96 is made
CLASSWORK/ ASSIGNMENT
Answer the following questions on the basis that the euro/US$ exchange rate is
1.1168 1.1173
a) What is the cost of buying 200,000 Euros?
b) How much would it cost to purchase US$4million?
c) How many dollars would be received from selling 800,000 Euros?
d) How many Euros would be received from selling US$240,000?
Answers:
200,000 = US$179,083
1.1168
2)
3)
= US$ 716,012
1.1173
4)
There are many currencies, however, for which forward quotes are
difficult to obtain.
The so-called exotic currencies generally do not have forward rates
quoted by dealers.
On the other hand spot markets exist for most of the worlds
currencies e.g. Dollar, Pound Sterling, Euros, Hong Kong Dollar,
Singaporean Dollar, South African Rand, Japanese Yen, Canadian
Dollar, Kroner etc.
1 TRANSACTION RISK
Ghanaian Example:
Ghanaian company exports to a Liberian company and expects to
receive Lib$500,000
Ghanaian company gives 3 months credit
Current spot rate is Lib$2.25211/Gh
Ghanaian company , therefore has in mind:
500,000 = GH198, 326.1
2.5211
= 185,185.18
CONCLUSION:
When Domestic currency (e.g. cedis) appreciates, Ghanaian
exporters will lose.
However importers who have to pay foreign currency will gain
because they will need fewer cedis.
When Domestic currency depreciates, exporters will gain and
importers will lose because importers will have to pay more cedis
for the same quantity of foreign currency.
2 TRANSLATION RISK
Translation risk arises because financial data denominated in one
currency are then expressed in terms of another currency. Between
two accounting dates, the figures can be affected by exchange rate
movements greatly distorting comparability.
The financial statements of overseas units are usually translated into
the home currency in order that they might be consolidated with
the groups financial statements.
3 ECONOMIC RISK
Two ways
a)Directly
If your firms home currency strengthens, then foreign competitors
are able to gain sales and profits at your expense because your
products are more expensive (or you have reduced margins) in the
eyes of customers both abroad and at home.
b) Indirectly
Even if your home currency does not move adversely vis -a - vis your
customers currency, you can lose competitive position.
For example, suppose a Ghanaian firm is selling into Hong Kong and
its main competitor is a New Zealand firm.
If the New Zealand dollar weakens against the Hong Kong dollar, the
Ghanaian firm has lost some competitive position.
Smoothing:
This is where a company maintains a balance between its fixed
rate and floating rate borrowing.
..
Disadvantages of smoothing
1) This hedging method reduces the comparative advantage
a company may gain by using fixed rate debt I preference
to floating rate debt and vice versa.
2) On top of this, the company may incur two lots of
transaction and arrangement costs.
Contd
Matching:
This hedging method involves the internal matching of
liabilities and assets which both have a common interest rate.
Disadvantages of Matching
1) One problem with this method is that it may be difficult for
commercial and industrial companies to match the
magnitudes and characteristics of their liabilities and
assets as many companies, while paying interest on their
liabilities, do not receive much income in the form of
interest payments.
. Matching is most widely used by financial
institutions
such as banks, which derive large amounts of income from
interest received on advances.
TECHNIQUES DISCUSSED
Matching:
Netting only applies to transfers within a group of companies.
Matching can be used to hedge against transaction and translation
risk.
Matching can be used for both intra group transactions and those
involving third parties.
Companies that use this technique match the inflows and outflows
in different currencies caused by trade etc. so that it is only
necessary to deal on the forex markets for the unmatched portion
of the total transactions.
EXAMPLE:
Contd
Also, to reduce transaction risk, a company,
selling goods in the U.S.A with prices
denominated in dollars could import raw
materials through a supplier that invoices in
dollars.
..NETTING
For example
if a Ghanaian parent company owed a subsidiary in Nigeria,
and sold N2.2 million of goods to the subsidiary on credit,
while the Nigerian subsidiary is owed N1.5 million by the
Ghanaian company, instead of transferring a total of
N3.7million , the intra group transfer is the net amount of
N700,000.
Example:
So using our earlier example, if the Ghanaian exporter which has
invoiced a Nigerian Company for N2.2 million on three months
credit and expects that the Nigerian Naira will .
fall over the forth coming three months, it may try to obtain payment
immediately and then exchange for the Ghanaian Cedi at the spot
rate
One easy way to bypass exchange rate risk is to insist that all
foreign customers pay in your currency and your firm pays for all
imports in your home currency.
Employing this technique does not mean that the exchange rate
risk has gone away; it has just been passed on to the customer.
This policy has an obvious drawback., .
.DO NOTHING:
Under this policy, the Ghanaian firm invoices the Nigerian firm for
N2.2 million, waits three months and then exchanges into Ghana
Cedis at whatever spot rate is available then.
Perhaps an exchange rate gain will be made. Many firms adopt
this policy and take a win some, lose some attitude.
b) The second which is related to the first point is the size of the
transaction.
If GHc1million is a large proportion of annual turnover and
greater than profit, then the managers may be more worried
about forex risk.
However, if GHc1million is a small fraction of turnover and profit
and the firm has numerous forex transactions, it may choose to
save on hedging costs.
MANAGING ECONOMIC
RISK(OPERATING EXPOSURE)
Economic exposure is concerned with the long term effects of forex
movements on the firms ability to compete, and add value.
These effects are very difficult to estimate in advance, given their
long term nature, and therefore the hedging techniques described for
transaction risk are of limited use.
The forward markets and matching may be used to a certain
extent.
RISK MANAGEMENT
External Management of Interest Rate and Exchange rate risk e.g.
forwards, futures, options (Derivatives).
5,000,000 =3,125,000
1.3984
The UK firm bases its decision on the profitability of the deal
on this amount expressed in pounds.
FEC Contd
FEC Contd
3,575,515
-3,125,000
450,515
If the sterling weakens to, say, 1.3/, a currency gain is made. The
pounds received in February if euros are exchanged at the spot rate are:
5,000,000 =3,846,154
1.3
The currency gain is:
3,846,154
-3,575,515
270,639
FEC Contd
Rather than run the risk of a possible loss on the currency side
of the deal, the exporter may decide to cover in the forward
market. Under this arrangement, the exporter promises to sell
5,000,000 against sterling in three months time (the
agreement is made on 15th November for delivery of currency
in February).
If the forward rate available on 15th November is 1.3926/,
then this forward contract means that the exporter will receive
3,590,406 in February, regardless of the way in which spot
exchange rates move over the three months.
FEC Contd
5,000,000 =3,590,406
1.3926
From the outset (in November), the exporter knew the amount to be
received in February. It might, with hindsight, have been better not to use
the forward market but to exchange the euro at a spot rate of say 1.3/.
This would have resulted in a larger income for the firm. But there was
uncertainty about the spot rate in February when the export took place in
November.
If the spot rate in February had turned out to be 1.6/ the exporter would
have made much less.
Covering in the forward market is a form of insurance which leads to
greater certainty and certainty has a value.
FRA example:
a) A company wants to borrow GHc5.6m in three months time for
a period of 6 months.
b) Interest rates are currently standing at 6% and the company
expects the rate to rise in 3 months time. The company therefore
decides to hedge using FRA.
c) The bank guarantees the company a rate of 6.5% on GHc5.6m
for 6months starting in 3 months time. This is known as a 3 v 9
FRA.
d) If interest rates have increased after 3 months to, say, 7.5%, the
company will pay 7.5% interest on the GHc5.6 loan that it takes
out: this is 1% more than the agreed rate in the FRA.
e) The bank will make a compensating payment of 28,000 (1%
GHc5.6 6/12) to the company, covering the higher cost of its
borrowing.
END OF SLIDES