2 BF 732 Methods of Settlements-1

INTERNATIONAL
TRADE FINANCE
06/23/20 Facilitator: MUSSA E!! 1
Agenda 2
Methods
of
International Settlements

Part One: Corresponding
Banking
One of the traditional functions of a bank
is the transfer of funds from one account
to another or from one place to another.
Transfer of funds can be internally or
internationally and the same methods are
used in both kinds of transfers.

Introduction
NB NB NB NB NB
It is important to note that what is being
sent or transferred is not the funds per se,
but it is the
PAYMENT INSTRUTION or ORDER
from one bank to the other.

Corresponding Banking
• To facilitate international transfer of funds,
banks do establish a certain kind of
relationship; Corresponding Banking
relationship
• Corresponding Banking is the relationships
which exists between banks in different
countries; correspondent banks.

Corresponding Banking
On one hand, the correspondent bank is
an agent of the home bank abroad helping
the home bank to deliver or complete a
service to its customers.
On the other hand, the correspondent
bank is a customer of the home bank and
vise versa.

Types of Overseas Banking Offices
Correspondent Bank
Representative Offices
Foreign Branches
Subsidiary and
Affiliate Banks

Correspondent Bank
A correspondent banking relationship exists
when two banks maintain deposits with each
other.
Correspondent banking allows a bank’s Multi-
National Corporate (MNC) client to conduct
business worldwide through his local bank or
its correspondents.
Representative Offices
A representative office is a small service
facility staffed by parent bank personnel that is
designed to assist MNC clients of the parent
bank in dealings with the bank’s
correspondents.
Representative offices also assist with
information about local business customs, and
credit evaluation of the MNC’s local customers.

Foreign Branches
A foreign branch bank operates like a
local bank, but is legally part of the
parent.
Branch Banks are the most popular way
for big banks to expand overseas.

A foreign branch bank is subjected to
both the banking regulations of home
country and foreign country.
A foreign branch bank can provide a
much fuller range of services than a
representative office.

Subsidiary
A subsidiary bank is a locally
incorporated bank wholly or partly owned
by a foreign parent.
Affiliate Banks
An affiliate bank is one that is partly
owned but not controlled by the parent.
Factors in choosing a correspondent bank
• The choice of the correspondent bank may
depend on:
i. Direction and volume of trade between
one country and another
ii. Political affinity between one country and
another
iii. Reputation of the overseas bank
iv. Fees and charges
Role of Corresponding Banks
Corresponding banks do play an important role in
international trade, these include;
a.Keeping of accounts used in international settlement
and transfer of funds, namely:
 Nostro Accounts, and
 Vostro / Lorro Accounts

Nostro Accounts
 Nostro is a Latin word means ‘our’
 From the point of view of a Tanzanian bank, a nostro
account is our bank’s account in the books of an
overseas bank, denominated in foreign currency.

Example:
 An account in the name of NIC (T) Ltd in the Chase
Manhattan Bank, Denver, denominated in US $.
 NIC (T) Ltd is a customer of Chase Manhattan,
Denver

Vostro/Loro Accounts
 Vostro/ loro means ‘your’.
 From the point of view of Tanzania, a vostro account
is your bank’s account with us denominated in Tshs

Example:
An account in the name of Chase Manhattan Bank
in the books of NIC (T) Ltd. The account would be
denominated in Tshs
Chase Manhattan Bank is a customer of NIC (T)
Ltd.
Loro account is used to meet payments expressed
in Tshs in favour of beneficiaries residing in our
country
b. Documentary credits are advised through
correspondent banks, with correspondent bank
nominated to pay
c. Willingness to recommend the services of a
correspondent bank to facilitate a deal

d. Sharing of information, e.g. status reports
e. Sharing special technology links between banks
which provide low cost cross border funds transfer for
their respective customers, i.e. SWIFT, Money gram,
Western Union Money Transfer, etc.

Part Two
Methods of Settlement

Cheques
Customer may use personal cheque for
transferring the funds. However, most people would
not go for such arrangement due to the following
reasons;
Risk of non-payment
Time taken for collection
Cheque may get lost or stolen
Cost for collection

Bank Draft
A bank draft is a document drawn by one bank on
another bank, or drawn upon itself but in another
branch
There must be an application which must be
accompanied with either a cheque or an authority to
debit the account if cash has not been tendered

The application must has at least the following
details;
 Amount to transferred
 Name of the beneficiary
 Name of the drawee bank, i.e. where the draft is going
to be paid
 Name of the place where the draft is to be paid

The issuing bank must send a notification to the
drawee bank while the draft is given to the applicant
or sent direct by safest means to the beneficiary
Advantage of a Draft
The draft is drawn on a bank where the beneficiary
probably maintains an account, hence no delays

Disadvantages of a Draft
While the applicant pays cash immediately on the
day the draft issued, payment is made on a latter date
The draft could be lost
The draft could be stolen
The draft could be forged

Mail Transfers and Telegraphic Transfers
These are bank to bank transfers. In both
methods, the applicant has to instruct his bank to
transfer funds to a named beneficiary at a certain
bank or branch of the same bank abroad.
The difference between the two methods lies on
the manner the order is sent to the payee bank
abroad

 Mail transfer: the order which contain details of
payment is sent by ordinary airmail. The order must
be signed by authorized signatories
 Telegraphic transfer: the order is sent by telex or
other electronic means. The order must have a special
authenticated code in order to be acted upon

SWFT
SWIFT stands for the Society for Worldwide
Interbank Financial Telecommunications.
It is a messaging network that financial
institutions use to securely transmit information
and instructions through a standardized system of
codes.

SWIFT provides a network that enables
financial institutions worldwide to send and
receive information about financial
transactions in a secure, standardized and
reliable environment using Swift Codes.

SWIFT transports financial messages but does not
hold accounts for its members and does not
perform any form of clearing or settlement.
SWIFT does not facilitate funds transfer: rather, it
sends payment orders, which must be settled by
correspondent accounts that the institutions have
with each other.

There are two kinds of SWIFT messages, Urgent
SWIFT and Ordinary SWIFT
Urgent SWIFT is also known as Priority SWIFT
because of the urgency they are given in
transmission. These kind of SWIFT transfers are
also known as express international money transfers
Ordinary SWIFT is also called Non Priority
Sometimes they are also referred to as international
money orders

Money Gram and Western Union Money
Transfers; these are very common these days and
they do not require the applicant to have an
account
The applicant goes to a bank which offers such
services and fills in an instruction form giving
details of the transfer

The applicant will be given a secret
number which he has to send to the
beneficiary
The beneficiary will only be paid if he/she gives the
correct secret number and other details as stipulated
in the contract/ by the service.

Accounting Procedure for Banks
Before effecting any kind of payment
abroad, the applicant must complete an

application form requesting the transfer.

The applicant must give the following details;
 Name of the applicant and address
 Name of beneficiary and his address
 Amount and currency to be transferred
 Method of transfer, e.g., MT, TT, SWIFT, Draft,
Money gram, etc.

 Terms of payment, i.e., debit his account or cash
payment
 Name of the place where payment shall be made and
name of the bank
 Whether payment through an account or by
application and identification
The bank shall have to select a suitable
correspondent bank through which the transfer will
be effected

Payment in Home Currency
This assumes freely convertible currency, i.e. the
T.shs can be easily used in other countries
 Suppose Shahanga Ltd has imported goods worth SAR
20,000.00 from Metro Plc. in Durban, South Africa.
Shahanga maintains its account with Azania Bank while
Metro Plc. has its account with Stanbic Bank which is also
happens to be the correspondent bank of Azania Bank in
South Africa.

In Dar at Azania Bank:
 Convert the SAR into Tshs using the current selling
rate
 Entries;
 Dr. Shahanga Ltd T.shs. eqv. to
SAR 20,000.00
 Cr. Vostro (Stanbic) T.shs eqv to
SAR 20,000.00

In Durban at Stanbic Bank
Dr. Nostro (Azania Bank) SAR 20,000.00
Cr. Metro Plc. SAR 20,000.00

Payment in Foreign Currency
Suppose Shahanga Ltd has imported goods worth
SAR 20,000.00 from Metro Plc. in Durban, South
Africa.
Shahanga maintains its account with Azania Bank
while Metro Plc. has its account with Stanbic
Bank which is also happens to be the
correspondent bank of Azania Bank in South
Africa.

 In Dar at Azania Bank;
Convert the SAR into Tshs using the current selling
rate
 Dr. Shahanga Ltd T.shs. Eqv. to
SAR 20,000.00
 Cr. Nostro Mirror Acct (Stanbic) SAR 20,000.00

In Durban at Stanbic Bank:
Dr. Nostro (Azania) SAR 20,000.00
Cr. Metro Plc. SAR 20,000.00

Payment Involving Three Currencies
Suppose Shahanga Ltd has imported goods worth
USD 20,000.00 from Metro Plc. in Durban, South
Africa. Shahanga maintains its account with Azania
Bank while Metro Plc. has its account with Stanbic
Bank, SA.
Azania’s correspondent bank in USD is Morgan Trust,
NY, in USA.

Currencies involved
 Shahanga has Tshs account,
 Metro Plc. has a SAR account
 Goods invoiced in USD

 In Dar at Azania bank:
 Convert the USD into T.shs using the current
selling rate
 Dr. Shahanga Ltd T.shs. Eqv. to
USD 20,000.00
 Cr. Nostro Mirror act (Morgan) USD 20,000.00

 In New York at Morgan Trust
 Dr. Nostro (Azania) USD 20,000.00
 Cr. Nostro (Stanbic) USD 20,000.00
 In Durban at Stanbic Bank
 Dr. Nostro Mirror Act( Morgan) USD 20,000.00
 Cr Metro Plc. SAR eqv. To USD 20,000.00

Part Three
International Chamber
of
Commerce Rules

Uniform Rules for Collection
(URC)
A set of rules published by the International Chamber
of Commerce (ICC) to aid bankers, buyers, and sellers
in the collections process.
The Rules have been prepared to resolve problems
that practitioners have experienced in their everyday
operations.

(URC) cont.…
The URC 522 (last edition) underlines the
need for the principal and/or the remitting
bank to attach a separate document, the
collection instruction/order, to every
collection subject to the Rules.

(URC) cont.…
The URC 522 (last edition) makes it very
clear that banks will not examine
documents, particularly not to look for
instructions in respect of documents
against acceptance (D/A) and documents
against payment(D/P).

(URC) cont.…
The Rules clearly indicate that banks have
no obligation to store and insure goods
when instructed.

Uniform Rules for Reimbursement (URR)
These are also known as Uniform
Rules for
Bank-to-Bank Reimbursements Under
Documentary Credits.
Were developed as a set of Rules to
document worldwide practice and
standardize the processing of bank-to-bank
reimbursements.

These Rules are used in together with UCP
600, URR 525 sets forth a series of concepts
to facilitate the reimbursement process.

URR 525 makes it clear that reimbursements are not
irrevocable commitments.
Clarifies the issues surrounding expiry of
reimbursements.
Establishes a reasonable time, not to exceed three
banking days, for reimbursing bank to process claims.

States clearly the conditions under which
reimbursement claims do and do not have to be
authenticated
Specifies the items that a claiming bank must include
in its claim if required by the credit and/or the
reimbursement undertaking.

Uniform Customs and Practice for Documentary
Credits (UCP 600)
Uniform Customs and Practice for Documentary
Credits provide a global standard set of practices
for letters of credit.
The UCP defines the responsibilities of banks
involved in handling letters of credit and provides
rules for examining documents they call for under
the credit.

Uniform Customs and Practice for Documentary
Credits (UCP 600)
Documents must strictly comply in order to
trigger the issuing and confirming banks’ payment

obligation, but if documents do not strictly
comply, the banks must themselves follow strict
rules for refusing payment.

Part Four
Challenges in International Trade

Lack of Security/Collaterals
Absence of counter party willing to offer
financing alternatives outside the banking system:
promissory notes, bill of exchange, . suppliers
credit etc.
High costs of borrowing to compensate banks for
credit risks (Interest rates, application fee, facility
fee)

Regulatory issues: difficulties for importers and
banks to comply with regulatory requirements e.g.
Foreign exchange controls.
Compliance to terms of Trade: documentations
Absence of reliable Market information about:
Counter party risks and trading requirements.

Poor negotiations skills for some
importers/exporters which have caused them to
become victims of unfavorable terms in
international trade.
Overseas supplier insist on Advance payments,
while Exporters are forced to accept Open account
terms
While overseas suppliers require L/C’s confirmed
by first class bank, few of the L/C’s in favour of
suppliers in Tanzania will request for confirmation

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INTERNATIONAL

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abroad, the applicant must complete an

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In Durban at Stanbic Bank

Dr. Nostro (Azania Bank) SAR 20,000.00

Cr. Metro Plc. SAR 20,000.00

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In Durban at Stanbic Bank:

Dr. Nostro (Azania) SAR 20,000.00

Cr. Metro Plc. SAR 20,000.00

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 Shahanga has Tshs account,

 Metro Plc. has a SAR account

 Goods invoiced in USD

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