Basics of Trade Finance

&
Workflow Process

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What Is Trade Finance?
Trade finance represents the financial instruments and products that are used by companies to
facilitate international/domestic trade and commerce. -Trade finance is an umbrella term meaning it
covers many financial products that banks and companies utilize to make trade transactions feasible-

“Banks only deal with documents and not the actual goods or services”

Trade Finance is Bank is also known as

 Trade Finance Department
 Trade Foreign Center
 ‫اداره االعتمادات‬
 ‫اداراه التجارة الخارجية‬

Trade Finance benefits

 Makes it possible and easier for importers and exporters to transact business through trade.
 Can help reduce the risk associated with global trade by reducing the gab of needs between
an exporter and importer.

Parties involved in trade finance can include

 Importer & Exporter ‘or’ Seller & Buyer
 Banks
 Trade Finance companies -Factoring-
 Insurers

Trade Finance Products and Service

 Letter of Credit ‘LC’ ‫اعتماد مستندي‬
o Documentary Collection ‫مستندات تحصيل‬
 Letter of Guarantee ‘LG’ ‫خطابات ضمان‬

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Document Collection Cycle
 Agreement / Trade Contract between Buyer & Seller
 Seller ships goods and send related documents
 Documents received by the buyer bank through
o Bank to Bank: Seller bank send it to buyer bank -notify buyer-
o Over the counter: client provides the document directly
 Bank delivers documents to client to release goods

Methods of Payment:
 Advance Payment: Seller receives the value of goods before shipment
 Open Account/Documentary collection:
o Documentary collection -Banks as agents-: Buyer receive goods & pay at maturity
 Bill of exchange: issued by seller bank, and signed by buyer
 Irrevocable undertaking: issued by buyer/buyer bank
 Avalization: buyer bank is obligated to pay the amount -instead of the buyer-
o Sight (Document Against Payment): pay before delivering documents
o Open Account: payment at maturity without conditions or obligations
 Letter of Credit: payment is guaranteed by the banks subject to the fulfilment of certain terms
and conditions by seller and buyer

Payment in Documentary Open Account

Letter of Credit
Advance Collection Payment

Seller has Payment is

Payment risk seller is
concerns over the guaranteed by
unchanged, but comfortable with
Payment Risk ability and issuing bank if
mitigated by the reliability of
willingness of terms of credit are
control over goods the buyer to pay
Buyer to pay met

Medium - seller
High - seller
mitigates risk by
High - seller Low - Does not requires
using banks to
Country Risk requires payment mitigate country confirmation from
retain control over
before shipment risk in any way a bank in a low
the goods and
risk country
documents
Trust Level Nil to Low Trust Medium Trust High Trust Low Trust
Credit Facilities Not required Not required Not required Required

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Letter of Credit (LC):
Is an irrevocable undertaking that guarantees the buyer’s payment to the sellers.
It is issued by a bank and ensures timely and full payment to the seller if all terms and condition are
met. Even if the buyer is unable to make the payment, the bank covers the full or the remaining
amount on behalf of the buyer.

Parties involved in LC:

 Applicant
 Beneficiary
 Issuing Bank
 Advising Bank

Terms Definition Activity

Applicant Importer Buy Goods
Beneficiary Exporter Sell Goods
Issuing/Opening Bank Importer Bank Issues LC
Advising Bank Exporter Bank Advice LC

Letter of Credit Life Cycle:

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Letter of Credit Life Cycle:
1. Buyer and seller agree on terms of sale
2. Buyer fills an LC application and forward it to his bank
3. The Issuing bank (Buyer bank) send the LC to the Advising bank (Seller bank)
4. Advising bank relay the LC to the beneficiary (Seller)
5. Beneficiary accepts LC and make the necessary shipping arrangements
6. Beneficiary prepare the required documents and send it to the Advising bank
7. Advising bank receive and examine the documents and if they are in order with the LC he send
it to the issuing bank and pay the seller in accordance with LC terms
8. Issuing bank receive and examine the documents and if they are in order with the LC he pay
the advising bank by debiting the buyer account, and deliver document to buyer
9. Buyer receives the documents and release goods from shipper (port)

Main components of LC include:

 Advising bank
 Date of Issue
 Date & Place of Expiry
 Applicant Name & Add.
 Beneficiary Name & Add.
 Currency & Amount
 Terms of payment
 Partial-shipment and trans-shipment
 Ports of Loading & Discharge
 Latest date of shipment
 Description of goods (Name, Quantity, Incoterm, Order No.)
 Documents required
 Additional terms and condition
 Charge account
 Period of presentation (Default 21 days)

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Incoterms® ‘International commercial terms’
The most important function is to make it clear who is responsible for what. It specifies which parts of
the shipping process are the responsibility of the buyer, and which of the seller. This includes who is
responsible for paying for and managing the shipment, insurance, documentation, customs clearance,
and other logistical activities. -There are two group with total of 11 incoterms-

Any mode of transport: Sea and water transport:

EXW – Ex works FAS – Free alongside ship
FCA – Free carrier FOB – Free on board
CPT – Carriage paid to CFR – Cost and freight
CIP – Carriage and insurance paid to CIF – Cost, insurance and freight
DAP – Delivered at place
DPU – Delivered at place unloaded
DDP – Delivered duty paid