Introduction Bank services Vostro and Nostro account Method used to transfer funds Settlement of international trade

Open account Payment in advance Consignment method Counter trade Bilateral payment arrangement Documentary collection Documentary credit

Settlement are normally made through banking system Banks will carry out the instructions of their customers through their account maintained with each other

How do banks become involved with customers who engaged in international trade?

By giving trade information and providing replies to status enquiries Banks can be used as sources trade information. Example: an exporters is looking for potential purchasers for his manufactured goods/users of his services, bank can normally help to identify suitable buyers.
1.

2. By being document processors Banks can be used as the media / channel to passed necessary documents between exporters and importers. 3. By obtaining payment from the importer and remitting the sum obtained. Bank can be used to demand payment from the importer. Importer paid Money must reach the exporter achieved by using bank -to -bank payment.

4. By providing finance Businesses may find that they do not have enough working capital to finance their deals. Thus, they have to resort to external funding. 5. By giving advice about the types of risk involved Bank can identify risks in international trade for their customers, indicate the magnitude of these risks and provide information as well as advice on handling the risks.

6. By supplying foreign currency Banks change domestic currency into foreign currency and vice versa. A bank will be prepared to carry out either types of conversion. Example : a conversion of Ringgit into foreign currency of conversion of foreign currency into Ringgit.

Nostro account

Is an account which a Malaysian bank has

with a foreign bank abroad, and the account is denominated in the currency of the foreign currency. Nostro comes from the Latin word our. Hence it is our account with another bank.

Malaysian bank

Foreign currency

Foreign country

Maybank has a Sterling account in London with the Standard Chartered Bank.
Foreign bank

From the viewpoint of Maybank, this is a nostro account.

Foreign banks will maintain Ringgit accounts with Malaysian banks in, say, Kuching. From the viewpoint of the Malaysian banks, these accounts are called vostro account. Vostro derived from the Latin word your. Hence, a Vostro account is your account maintained with us.

Foreign bank

Barclays Bank, a large commercial bank with its headquarters in London, has a Ringgit account with Maybank.
Local currency Malaysian bank

Maybank will call this account a vostro account.

1.

Telegraphic transfer (TT) Issue an order by telex or cable on the correspondent bank to pay a stated amount of money to the beneficiary/exporter The correspondent bank is located in the exporters country Bank will debit the remitting banks nostro account when they pay to the beneficiary in local currency

2. Mail Transfer Written instruction by one bank to another branch or correspondent bank to pay a stated amount of money to a named beneficiary The instruction is transmitted by mail 3. Demand draft (DD) A cheque issued by an importers bank & addressed to its drawee bank, instructing the bank to pay the stated amount to the beneficiary/exporter.

4. Travellers cheque
Cheques drawn by well established

international banks in main currencies (USD, Pound sterling) Payable at face value Can be used at shops, hotels No need to cash them

5. SWIFT (Society for worldwide interbank financial telecommunication) An independent operators of a very specialized data processing & tele. System to process interbank financial instruction.
The services include collections &

documentary credit, forex

Methods of settlement: Open account Payment in advance Consignment method Counter trade Bilateral payment arrangement Documentary collection Documentary credit

 An agreement between a buyer and a seller,

where the seller ships the goods and the buyer agrees to settle the debt at an agreed period of time.
The exporter will send the underlying

documents directly to the importer once the goods have been shipped. May/may not include a document of title (bills of lading)

 The documents give an indication of the

agreement (date of payment, amount, currency of remittance)

When the agreed time of payment arrives,

the buyer will make an arrangement to pay the seller by draft, TT or using SWIFT.
Used by parties which trust each other

(parents & subsidiaries company)

To an exporter

It is one way to securing a deal Where the exporter used standby LC, this

documents affords him the fullest protection ( if the importer does not pay, he/she can claim from the bank that issued the LC.

To an importer The technique is less formal compared to other methods. No bills of lading are issued, the importer can go straight to the port to claim their goods. Is there is bill of lading issued, the importer can claim the goods without delay provided that the bill come straight to the importer. Importer can delay the payment without damaging their creditworthiness.

To banks Generate fees income in relation to the remittances that are made in settlement, currency conversion and processing the documents. No exposure to the banks provided finance is not given to the trading parties.

To an exporter

The most risky If the importer default payment and a

standby LC is not held, it may be costly to secured payment of the sum due.

To banks If the exporter has been given bank finance and the importer defaults negative effects on their cash flow. If liquidation happened the lending banks unsecured The bank may have to write off a certain sum.

To an importer If asked to get standby LC issued need to arrange this and pay the necessary fee. Providing security and pay incidental fees if bank ask for. If the exporter is fraudulent importer would be pay twice for the same batch of goods.

 Importer has to pay in advance Unattractive and offers least security to the

buyer. Buyer need to pay in advance otherwise the supplier will not send the goods Example :Supplier has a strong bargaining power because the goods he produce is unique or almost unique.

 Factors to be considered by the buyer: Confidence in the seller Confidence in the sellers country Permission by the exchange control

authorities Liquidity (cash flow)

To an exporter The payment improves his cash flow. If the payment is 100% - no need to borrow from the bank and pay interest on the borrowing. To an importer By paying in advance, it enables him to get the goods/service that he wants.

To banks Fee income to the bank that issues an advance payment bond. Generates interest income when the importer make borrowing in order to make advance payment.

To an exporter May called upon to get a bond issues in the buyer favour will need to arrange and pay incidental fees.

To an importer Negative impact on their cash flow May not get the goods that ordered at all or on time.

To banks Supplier may use the advance payment in his ordinary business and the business may be liquidated before the goods shipped to the buyer. If the bank has issued an advance payment bond the buyer would naturally claim on the bond. In the event of fraud the relationship between the bank and supplier will be tarnished.

The shipments of goods are arranged under an agreement that payment will only be made after the goods are sold by a specified date Is the goods do not sell, the consignee may return them without any payment Very risky, the exporter will only extend this arrangement to a well established importers.

 Payments for international transaction

involve transactions in goods instead of money. Popular in developing countries which have problems settling their account by cash payment. 4 forms of counter trade: If I buy from you, 1. Barter Trade you must buy 2. Counter purchase from me 3. Compensation 4. Buyback

To an exporter ( the party who is the original seller). The technique creates a market for his goods for which a sale on a cash basis would not have been possible. Provided the goods he gets in exchange are of quality and their market value is realistic this enable him to make same level of profit that he would have done had the deal been on full or part cash basis.

To an importer (the counterparty) The technique enables importers to get goods that they want and they do not have to pay for them on a cash or full cash basis.

To banks Generates fee income in relation to the remittances, giving information on databases of the company.

To an exporter Often the goods which the counterparty provides are not of good quality and/or easily marketable in either the exporters country or any other country.

To an importer Exporter may want a part-cash payment in this case he will have to find the appropriate sum.

To banks

Fraud

can be happen and losses can be incurred by banks. If the original exporter going into liquidation and leave the bank having to write-off a bad debt, if no security had been taken 0r inadequate security was held.

 Goods are exchanges directly for goods of

the same value No cash payments are involved A single commercial agreement is entered into. Only description of quality and quantity of the goods appear in the contract.

 The original seller enters into obligation to

buy goods which are valued at a % in terms of the value of the goods he is to supply. 2 separate commercial contracts are entered. 1 relating to the goods which the original seller will supply and the other to the goods which he will receive.

 Usually the arrangement is made between an

industrialized country & developing country The exporter (industrialized country) sells capital equipment or plant to importer (developing / under develop) with an agreement to buy back the resultant product using the capital equipment. Single commercial contract, original seller may negotiate partly in form of goods and partly cash (part compensation), but if goods for goods (total compensation).

Negotiation between large cooperation in developed country and buyer in underdeveloped country. Large cooperation will install manufacturing equipment like for production and provide technical know how and in return they will take back proportion of the output from the process.

The exporter agrees to incorporate materials, components, etc from the importers country as specify in the agreement Commonly used in exchanges involving aircraft (civilian or military) or military equipment, including defense systems.

In order to promote trade

The parties to any BPA are BANK Negara Malaysia and the central bank or monetary authority of the counterpartys country.

Under the scheme, the central bank located in the buyers country will either: 1. Claim a payment from the respective importer and will later pay the amount to the central bank located in the sellers country, or 2. The central bank in the buyers country will guarantee that if the importer does not pay, it will pay ( the central bank in the importers country acts as a guarantor).

Send goods Malaysia (Exporter) May claim from central of Thai Thailand (Importer) Fails to pay

Claim from importer Thai Central Bank Pay to Malaysia and act as a guarantor

a. b. c.

An arrangement for obtaining payment through banking intermediaries. URC522 A collection means the handling by bank of documents in accordance with instructions received, in order to: Obtain payment and/or acceptance; or Deliver documents against payment and/or acceptance; or Deliver documents on other term and condition.

Principal Ultimate source from whom all other parties obtain their instructions Is also referred to as the exporter or seller or drawer of the BOE. The buyer Also referred to as the importer or drawee Is the one to whom the collection must be presented.

The remitting bank Is the party that sends the collection, and is the principals/sellers/exporters bank. this party has agreed to take the collection and send it out in terms of the instructions received from the principal. In the collection process, the remitting bank is responsible to the principal.

The collecting bank Is generally a bank in the buyers country. Its receives the collection from the remitting bank in the principals/sellers/exporters country It collect what is owned from the buyer and send the money to the remitting bank.

The presenting bank The bank that makes the documents available to the buyer/drawee in terms of the instruction it receives. Collecting bank has no account with the buyer buyers bank becomes the presenting bank. Buyer has no account with the collecting bank collecting bank presents the collection itself so it becomes the presenting bank.

 1. 2.

The procedures are underlined by The Uniform Rules for Collections 2 types of collections: Clean collection consists only financial documents for obtaining money Documentary collection commercial documents + financial documents

Not so popular because of the risk to the seller since the importer has control over the goods without paying or accepting the bill.

The seller only rely on the willingness & ability of the buyer to make payment.

 The seller will ship the goods minus the

commercial document
These document and BOE are given to his

bank for collection. The collection can be:

1. 2.

Documents against payment (D/P) Documents against acceptance (D/A)

These collections are payable at sight

Collecting bank will only release the shipping documents upon receiving from the buyer

Not payable at sight Allows buyer a credit term known as term of bill / usance

Collecting bank will present the bill of exchange/draft to the buyer for his acceptance (to make a signed promise to pay the bill at fixed future date)
Upon acceptance, other documents will be released to the buyer Payment date due is depending on the agreement between buyer and seller Term is usually computed either from sight / from the date of any document

The case of need is the party in the importer's country named by the exporter who may assist in obtaining payment or acceptance of draft or who may be empowered by the exporter to act fully on his/her behalf

The BOE has been dishonored by either nonacceptance or non-payment, the holder of the bill or his agent will have to consider whether to have the bill noted or protested.
Noting? Protesting?

Is an action that must be carried out by a lawyer who is authorized to act as a notary public. Notary public will presents the bill to the drawee on the same day it was refused or on the next business day. If the drawee continues to dishonour the bill, the notary notes on the bill the amount of his charges, the date and his initial. The reason for refusal is shown on a note attached to the bill.

Is the procedure which follows the noting of a bill and requires the notary public to issue a formal certificate that the bill has been dishonored.
It must specify the place and date of protest, the reason or cause, the demand made and the answer given if any, on the fact that the drawee or acceptor could not be found.

Bank can warned seller about incomplete / inconsistent documents which could cause delays.

seller must give appropriate instructions to the bank whether to clear / store Under URC522 Banks do not have obligation to do so but if they have, they assume no liability / responsibility

if seller wants the interest and / or charges to be collected from the buyer must be an instructions saying that to the remitting bank

An undertaking of payment made by a bank (on the buyers/importers behalf) to the exporters bank Payment normally be against presentation of sight bill, maturity of the usance bill apllied by importer Importer needs to fill in the form, submit a copy of the insurance policy (if purchase is on CIF terms), and import permit

the banks guarantee that they will pay the exporter in the event the importer becoming insolvent serves to facilitate smooth transactions in International Trade

Buyer Importer, opener, applicant, principal Seller Exporter, Beneficiary Buyers bank opening bank, issuing bank

1. When sales contract is made between the exporter & importer, both sides agree to do business on an L/C basis. 2. Importer requests the issuing bank to issue an L/C. Issuing bank will determine the importers financial standing & if acceptable, the bank will issue the L/C to the exporter. The bank may request the importer to make a deposit in order to guarantee them. 3. the issuing bank will forward the credit to its correspondent (advising) bank 4. the advising bank advises the exporter that credit has been issued in his favour

5. the exporter executes the shipment according to the conditions of the L/C 6. the exporter presents the Bill of exchange (Draft) based on the condition of the L/C together with a full set of the shipping document & applies for negotiation of document bill at the exporters bank (negotiating bank) 7. The advising bank will send the document to the issuing bank fro reimbursement 8. The issuing bank will forward the document to the importer for payment. on payment the documents will be released to the importer.

Revocable may be cancelled or amended by the issuing bank at any time & without prior notice to the beneficiary Irrevocable LC that can only be amended / cancelled if all parties to the credit agrees to the alteration or cancellation

Irrevocable and confirmed credits May be used when an exporter is concerned about the creditworthiness of the issuing bank The advising bank on instruction of the issuing bank may also confirm the credit cant be modified/cancelled without agreement of all parties provides an added security to the exporter since it bears the guarantee of two banks

Red-clause-LC Special type of LC which contain a clause printed in red The issuing bank (importer bank) authorizes the negotiating bank (the exporter bank) to make advance payment to the beneficiary (exporter) prior to shipment of goods. this allows the exporter to purchase or prepare the goods that it will export to the importer normally used by parties who have established business relationship

Standby LC Does not provide guarantee of payments to the beneficiary it gives guarantee to the beneficiary against default by the applicant

Revolving LC The LC that provides an element of flexibility to an exporter the credit can revolve either in relation to amount/time and the terms & conditions of the LC the amount is reinstated/renew without specific amendments to the original LC When they has been utilized & paid either fully or partially, the credit amount in that LC is automatically restored to its original amount.

Back-to-back LC Two or more LC issued is issued by the importer bank (LC1) in favour of a beneficiary (exporter 1) who is normally known as the primary beneficiary the credits & value is made available to another or second beneficiary (exporter 2) exporter 1 who gets the BBLC will apply for another LC (LC2) and use the first LC as a security the exporters bank will issue the second LC in favour of a second LC in favour of a second beneficiary (exporter 2) smaller value than LC1

Transferable LC LC that gives the right to the beneficiary to instruct the advising bank to pay to a second beneficiary who is the real supplier of the goods in the transaction normally used when the original beneficiary is only a middleman

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