INSTITUTE OF BANKERS IN MALAWI

DIPLOMA IN BANKING EXAMINATION

SUBJECT: INTERNATIONAL TRADE FINANCE (IOBM – D202)

Date: Tuesday, 5th May 2015

Time Allocated: 3 hours (08:00 – 11: 00 am)

INSTRUCTIONS TO CANDIDATES

1 This paper consists of TWO Sections, A and B.

2 Section A consists of 4 questions, each question carries 15 marks.

Answer ALL questions.

3 Section B consists of 4 questions, each question carries 20 marks. Answer ANY

TWO questions.

4 You will be allowed 10 minutes to go through the paper before the start of the
examination, you may write on this paper but not in the answer book.

5 Begin each answer on a new page.

6 Please write your examination number on each answer book used. Answer
books without examination number will not be marked.

7 All persons writing examinations without payment will risk expulsion from the
Institute.

8 If you are caught cheating, you will be automatically disqualified in all subjects
seated this semester.

9 DO NOT open this question paper until instructed to do so.

SECTION A (60 MARKS)

Answer ALL questions from this section.

QUESTION 1

(a) On a documentary collection issued under delivery against acceptance (D/A),

explain two reasons why the mere acceptance of the Bill of Exchange by the
importer is not a guarantee that payment will be made at the expiry of the tenor/
usance mentioned. (2 marks)

(b) Define the term transferable documentary credit. State when it is used and how it
becomes operative. (5 marks)

(c) In a revolving documentary credit, the LC is automatically renewed and reinstated

without the need for amendments. Your customer approached you that their shipment
schedule for goods they imported is as below:

Month Amount

January 2010 10 000

March 2010 10 000

May 2010 10 000

July 2010 10 000

September 2010 10 000

November 2010 10 000

(i) How much will the documentary credit be issued for and why? (2
marks)

(ii) Assuming the customer is using a loan or overdraft facility what is the total
liability / exposure incurred by your bank on the date of issuance of the
Letter of Credit and why? (2 marks)

(iii) Explain what is meant by Cumulative and Non Cumulative in a Revolving

L/C. (4 marks)
(Total 15 marks)
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QUESTION 2

You have been hired as a consultant by the Malawi Chambers of Commerce and
Industry to analyse general and specific risks in international trade.

(a) Outline any four major risks that are associated

with international trade.
(4 marks)
(b) Give advice to an importer on the use of Letters
of credit method of payment.
(4 marks)
(c) Illustrate that the exporter faces various degrees of risk associated with the
various payment methods in international trade. (7 marks)
(Total 15 marks)

QUESTION 3

(a) Mention three reasons why international trade banking products are important in
the contribution to a banks overall profitability. (9 marks)

(b) Describe the following documents as used in international trade

i) Commercial Invoice
ii) Customs invoice
iii) Bill of Lading (6 marks)
(Total 15 marks)

QUESTION 4

Matenje Limited, a Malawian company, has won a tender to construct office buildings in
Mozambique at a contract price of US$250 million and the following are some of
conditions of the tender:

(a) It is estimated that the company will pay a total of MK 7 million monthly salaries.

(b) A performance bond to be sourced by the contractor.

(c) All employees at the construction site to be insured.

An enquiry from the banks reveal that performance bonds are issued at the rate of
K100,000 administration fee and 2% of contract price.

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Insurance premium is charged at a provisional rate of 5% of total annual basic salary as
estimated at the beginning of the year to be adjusted at the end of the year using actual
salaries paid.

Assume that the construction works take two calendar years to complete and the
company spends K80 million for basic salaries in the first year and K88 million in the
second year. For purposes of premium calculation, actual expenditure of basic salaries
for the year is used as the estimated expenditure for the next year.

Required:
(a) Define (i) Performance bond. (1mark)
(ii) Insurance premium. (1
mark)

(b) Calculate the cost of performance bond that will be paid by Matenje Limited
(3 marks)
(c) Calculate:
(i) Premium payable at the beginning of each year. (4 marks)
(ii) Actual premium payable after year -end adjustments for the two years.
(6 marks)
(Total 15 marks)

SECTION B (40 MARKS)

Answer ANY TWO questions from this section.

QUESTION 5

Your Branch has received this letter from a potential client. You are requested and
asked to give a written response to the client on behalf of the bank, using your
knowledge in international trade finance:

Matola & Sons Trading

P.O. Box 123
Lilongwe
10th March 2015

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 The Manager
City Branch
P.O. Box 457
Blantyre

Dear Sir

ADVICE ON INTERNATIONAL TRADE

I write to seek professional advice regarding issues that we consider may affect our
business. I shall appreciate receiving your response addressing my fears in the areas
highlighted.

We are involved in cotton farming and after trading locally we intend to start exporting
our produce but we are not sure of the following issues:

(i) The customers identified are not well known to us and goods delivered may not
be paid for.
(ii) The countries to which we will export the goods do not use our local currency
and their currency has no value on the market, advise which currency should
then be used.

(iv) There is speculation that the Malawi Kwacha will be devalued any time, how do
we protect our business in this trade to ensure value is not lost.

(v) We may be short of working capital until payment is made as customers might
ask for long credit period.

(vi) The cotton may be damaged before delivery to the customers due to long
distances.

(vii) The customer may pay us using a cheque drawn on their local bank and it may
be costly for us to travel to that country just to cash the cheque.

Required:
Write a response to the potential client addressing the issues raised using your
knowledge of international trade finance. (Total 20 marks)

QUESTION 6

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(a) Explain the evolution of the Exchange Rate System in Malawi. (10 marks)

(b) Explain briefly the main five factors that affect Malawi Kwacha’s Exchange Rate.
(10 marks)
(Total 20 marks)

QUESTION 7

(a) Explain four reasons why it is practically difficult to rely on trade based on the
absolute cost advantage theory as stated by David Ricardo. (10
marks)

(b) Briefly explain any five advantages of exchange control regulations. Clearly
indicating how these advantages materialize. (10 marks)
(Total 20 marks)

QUESTION 8

(a) Briefly explain any four measures that the Reserve Bank of Malawi has used in
order to regulate foreign currency transactions in Malawi. (8 marks)

(b) It has been argued that international trade would have been extremely difficult if it
were not for commercial banks that are available in countries. Substantiate this
argument by describing four ways which banks in Malawi use in order to simplify
international trade transactions. (12
marks)
(Total 20 marks)

END OF EXAMINATION PAPER

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