INTERNATIONAL TRADE

by
Joe Rayen
Trade Advisor
 Agenda

 Risks in International Trade

 International Payment Methods

 Trade Products
Types of Risks in International Trade

 Buyer Credit Risk

 Supplier Performance Risk
 Sovereign and Country Risk
 Foreign Exchange Risk
 Market Risk
 Operational Risk
 Buyer Risk

Exporters have to assess both the honesty and financial

standing of overseas buyers they do not know. The risks
include:

 Goods are retained by dishonest buyer and not paid

 Buyers are slow in payments for goods supplied
 Goods are shipped to a buyer who cannot pay
 Methods of Mitigating Buyer Risk

 Credit Reports
 Advance Payment
 Letter of Credit
 Documentary Collection
 Export Credit Insurance
 Supplier Performance Risk

Buyer takes the risk that the goods they order:

 May arrive late

 May arrive damaged / perished
 May not match the required specification
 Methods of mitigating
Supplier Performance Risk

 Performance Bond issued by a

recognised / acceptable Bank

 Letter of Credit calling :

 Inspection Certificate by an
independent Inspection agency
 Penalty clause for delayed shipment
 Sovereign and Country risk

 Sovereign risk – default on payment

obligations by a government or civil
authority
 Country risk – though the buyer is
willing to meet his payment
obligations, economic or political
factors prevent fulfillment of buyers
obligations. These factors may include
shortage of foreign exchange, political
instability, civil unrest etc.
 Methods of mitigating
Sovereign and Country risk

 Export Credit Insurance

 Confirmed Letter of Credit

 Foreign Exchange Risk

Whenever an importer/exporter has to

make/receive a payment in another
currency there may be a risk of
exchange rate movement against him
which will:


For an importer, increases the counter value that
must be paid


For an exporter, reduces the counter value that
must be received
 Methods of mitigating
Foreign Exchange Risk

 Forward Currency Contracts

 Currency Options

 Currency swaps
 Market Risk

Price volatility in the market is a major aspect.

There are many risks related to MARKET which
ultimately result in price movement. Some of
these are:

 Lack of adequate market to sell

 Market volatility
 Product obsolescence / perishability
 Product substitution
 Market depending on single buyer
 Market depending on current trend in fashion
 Product facing the end of its life cycle
 How can NBD help to mitigate
some of these risks

 Act as a channel of communications for

payments
 Maintain control over goods on behalf of the
seller
 Give our financial backing to these transactions
 Act as a guarantor for these transactions
 Apply international codes of practices
 Structure transactions in the best interest of
the customer
 Provide or obtain buyer / seller reports
 Methods of Trade Settlements

 Open Account --Most secure for buyer

 Collections

 Letter of Credit

 Advance Payment -- Most secure for seller

 Open Account

 A sum to be paid
 To the seller by the buyer
 Upon receipt of goods / services
 Directly to the seller
 Documentary Collection

 A set of commercial document made by a seller

 Presented to a buyer

 Through the buyer’s bank

 To be released against payment or acceptance

 For a given sum of money

 Types of Documentary
Collection

 Documents against payment

• Documents are released to the buyer against
the payment of bill value

 Documents against acceptance

• Documents are released to the buyer against
the acceptance of the bill

 Clean collection
• Presentation of a financial instrument only for
payment or acceptance
 Avalisation of Bill

Avalisation of a Bill is an acceptance or

a payment undertaking of a term bill by
a bank in addition to that of the
acceptance of the drawee

 Avalised bills can be discounted under risk of the

bank who accepted the bill
 The counter party risk is moved from the buyer to
the bank
 The risk for the seller is non performance of the
contract if goods are not acceptable by the buyer
 Letter of Credit

 A Bank’s irrevocable undertaking

 Made on behalf of the buyer
 To pay a seller
 A given sum of money
 Provided that goods are shipped
 And documents are presented
 As per the terms and condition of the credit
 And presented within time and place specified
 Governed by UCP 500
 Advance Payment

 A sum paid in advance

 To the seller by the buyer
 For supply of goods / services
 In full or in part
 Directly to the seller
 Payment Methods Compared

Advance Letter of Credit Documentary Open Account

Payment Collections
Seller totally Seller’s security is Seller’s security is Seller must
secured prior payment constructive trust the buyer
undertaking given control over goods
by a Bank is possible

Buyer must trust Buyer’s security is Buyer’s security is Buyer is totally

the seller that the Bank will sight of shipping secure
pay only if documents and will
documents comply have to pay
with all the terms of thereafter
the credit
 Types of Letter of Credit

All credits should either be revocable or irrevocable. In the absence of

such notation it will be deemed as irrevocable. The tenor of the credit
should either be sight or usance. They also can be opened for third port
shipment or local deliveries subject to appropriate credit approvals

The types of credits are:

 Confirmed
 Revolving
 Transferable
 Back to Back
 Standby
 Confirmed Letter of Credit

Is an undertaking by a bank other than the issuing bank to

effect payment as per the payment terms of the credit in the
event the issuing bank fails to honour its payment
commitment, subject to presentation of documents called
under the credit is in full compliant with the terms and
conditions of the credit.

It is:
 Undertaken by the confirming bank, mostly at the request of
beneficiary
 Subject to the agreement of issuing Bank
 All risks of the issuing bank is shifted to confirming bank
 Charges are generally borne by the beneficiary
 Silent Confirmation of Letter of
Credit

Is an undertaking by a bank other than the issuing bank to

effect payment as per the payment terms of the credit in the
event the issuing bank fails to honour its payment
commitment, subject to presentation of documents called
under the credit is in full compliant with the terms and
conditions of the credit.

It is:
 Added without the consent of the issuing bank
 Not recognised by UCP 500
 Added at the request of beneficiary by the confirming bank
 All risks of the issuing bank is shifted to confirming bank
 Charges are generally borne by the beneficiary and is higher
than the open confirmation
 Revolving Letter of Credit

A credit which is available for an amount that

reinstated by the amount of the drawing in a
given period of time. Such amount becomes
available again under the credit either
automatically or by means of an amendment to
the credit.
It is often used in a series of similar transactions between trading
partners e.g.:
 A pre-agreed fixed quantity of merchandise once a month
OR
 Ten consignments of merchandise over a year
 Transferable Letter of Credit

A credit which is permitted by the issuing

bank to be transferred to one or more 2nd
beneficiaries by a bank nominated by the
issuing bank at the request of 1st benef.
It is transferred:
 At the request of 1st beneficiary
 In whole or in part to one or more 2nd beneficiaries
 Not exceeding the credit amount
 Unit price, Shipment, expiry and presentation period can be
curtailed
 Percentage of insurance can be adjusted
 Subject to UCP 500
 Back To Back Letter of Credit

A credit (Slave LC) which is issued by a bank

for a customer against an export LC (Master
LC) received by him. The source of payment for
his obligation under the LC opened by the bank
will be the export LC.

BTB LC is :
 An independent LC from the export LC
 Structured by the Slave LC issuing bank
 Enabling smooth substitution of documents under Master LC
 More complex and high risk
 Subject to availability of Bank & Country risk on Master LC
 Subject to internal credit approval
 Not recognised by UCP 500
 Back To Back Letter of Credit

In order to give consideration to open a Slave

LC by the issuing bank, the master LC:
 Be available with the issuing bank

 Expires at the counters of slave LC issuing bank

 Allow third party documents to be acceptable. (exception for

Iranian LC on transport document)

 Terms and conditions are unambiguous

 Is not a transferred LC
 Standby Letter of Credit

 A Standby Letter of Credit is very similar in

nature to a payment guarantee.
 It is issued between trading parties who
have high degree of trust between them.
 Usually opened when there is regular
shipments and parties would want to avoid
opening independent LC each time
 Generally calls for a simple written claim
 Amendments to Letter of Credit

 Amendments are normally initiated by the beneficiaries.

However, credits are amended by the issuing bank at the
request of the applicant.

 The amendments follows the same route as the original letter

of credit.

 Before issuance of the amendment the issuing bank will

consider whether the amendment could be accommodated.

 The beneficiary need not give acceptance or rejection of

amendment. The presentation of documents will imply the
acceptance or rejection.

 The amendments cannot be accepted partially.

 Availability of Letter of Credit

The tenor of the credit will either be sight or term (usance). It

must also stipulate the availability of the credit. The
methods of availability are:

 Payment

 Negotiation

 Acceptance

 Deferred Payment
 Availability of Letter of Credit -
Sight

Payment Bank claims Payment is No draft is

money and pay without required
the beneficiary recourse to
beneficiary
Negotiation Bank pays the Payment is with Draft must be
beneficiary and recourse drawn on the
waits for issuing bank
repayment by
issuing bank
 Availability of letter of credit -
Term
Acceptance Bank accept the Bank is Draft must be
draft drawn on committed to drawn on the
itself. pay at maturity accepting bank
May discount at
its discretion
Negotiation Bank pays the Payment is with Draft is drawn
beneficiary and recourse to on the issuing
obtain beneficiary bank
reimbursement
from issuing
bank
Deferred Bank pays at Payment is with No draft is
Payment maturity date recourse to required
determinable in beneficiary.
accordance May discount at
with the terms its discretion
of credit.
 Parties to a Letter of Credit

 Applicant
 Issuing Bank
 Advising Bank
 Beneficiary
 Confirming Bank
 Negotiating Bank
 Reimbursing Bank
 Points to be checked on receipt of a
Letter of Credit

 Is authentic and operative

 Issued by an acceptable bank
 Name and address of beneficiary is correct
 Amount, unit price and description of goods are correct
 Is opened as per pre agreed terms and conditions
 Is available for negotiation at the country of beneficiary
 Port of loading and discharge is specified
 Charges on whose account ie applicant or beneficiary
 Reimbursement terms and clear
 Shipment and expiry dates are sufficient
 Shipment term is specified (CFR / FOB etc)
 No ambiguity in clauses
 Is subject to UCP 500
 Financial Documents

 Bills of Exchange

 Promissory Notes
 Bill of Exchange

 A financial document establishes a legal undertaking to

make a payment distinct from the underlying
transaction

 A bill of exchange is the commonest financial document

used in international trade

 Bill of exchange has been recognised for many years by

trade and customs and by the laws of many countries.
So, there is a widely recognised code of practice for
their use

 Bill of exchange is also called as draft

 Bill of Exchange - sample

Bill of Exchange

Date 10th July 2005 Amount usd 75,000

At ________ pay against this sole Bill of Exchange to the

order of _______________________________________
the sum of _____________________________________
for value received against _________________________

National Bank of Dubai for Mitsui Corporation

Dubai

Manager
 Bill of Exchange

 An unconditional order in writing

 Addressed by one party (drawer) to another (drawee)

 Signed by the party drawing it

 Requiring the party to whom it is addressed tp pay on

demand or at a fixed determinable future date

 A certain sum of money

 To a specified party or to the order of a specified party

or to bearer
 Commercial Documents

Commercial documents looks into various other aspects

of trade transactions relating to the goods

 What goods are being shipped

 How are they being transported
 What insurance is in force …… and so on
 Types of Commercial
Documents

Commercial documents can be broadly classified as follows:

Documents describing the Commercial Invoice

commercial transaction as a whole Pro forma Invoice
Documents describing a specific Transport Document
aspect of the transaction Insurance Document
Inspection Certificate
Weight Note
Documents dealing with customs Consular Invoice
or duty considerations Certificate of Origin
Certified Invoice

The above is not a hard and fast classification. Sometimes a

single document can perform multiple functions.
 Types of Transport Documents

 Marine Bill of lading

 Air Way Bill

 Truck Consignment Note

 Railway receipt
 Bill of Lading

 A Bill of lading is issued in sets of signed

originals, anyone one of which can be
used to claim the goods

 Extra copies are also issued for record

purposes, which are not signed. These
are called non negotiable copies. They do
not have any control on goods unlike the
originals.
 Signatories to a transport
document
Transport document issued must be
signed as follows as per UCP 500:
As carrier…………………………..
or
As agents……………….. For and behalf of
the carrier………………………..
or
The master………………………..
or
As agents……………….. For on behalf of the
master……………………………..
 Insurance

The buyer will want to know whether the

goods have been adequately insured and
for what damages. The insurance
document must state:

 The amount covered

 The risks covered ie war, theft, pilferage
etc
 The period covered
 Common documents called
under LC

 Bill of Exchange
 Commercial Invoice
 Transport Document
 Packing List
 Shipment Advice
 Insurance Policy
 Certificate of Origin
 Inspection Certificate
 Certificates issued by beneficiary
 Postal Receipts etc. etc.
 Incoterms

The International Chamber of Commerce has

defined a standard set of terms clearly defining
the shipping arrangements. It prevents
misunderstanding and simplifies the
responsibilities between the buyer and seller.
These are called as INCOTERMS.
Some of them which are commonly used are:

EXW Ex-works
FOB Free on board
CFR Cost and freight
CIF Cost, freight and insurance
CPT Carriage paid to
CIP Carriage and insurance paid to
DDP Delivery duty paid
 Points to be noted when documents
are prepared

 Drafts to be drawn for the net invoice value

 Invoice to be addressed to the applicant, unless the credit
specifies otherwise
 Goods description on the invoice must be exactly as appearing
on the credit
 LC No and name of the issuing bank to be shown on all
documents, unless the credit specifies otherwise
 If credit calls for signed documents, ensure such documents
are signed
 Original documents must be marked “original” and copies as
“copy”
 Ensure to effect shipment prior to last date of shipment
 If expiry or last date of presentation falls on a holiday,
documents can be presented to the nominated bank on the
following working day
 Common discrepancies

 Credit expired
 Late presentation
 Late shipment
 Goods description not as per credit
 Excess drawing
 Short shipment
 Incomplete set of transport document
 Name of beneficiary differs from credit
 Inconsistency of information/data between documents
 Documents not submitted (ie Inspection/Certificate of
origin)
 Bank Guarantee

 A Bank’s irrevocable undertaking

 Payable to beneficiary
 On demand
 Against a valid claim
 Without demur / protest
 Mostly governed by land of law

It is an obligation by the Bank:

to pay the seller in case of buyer’s default to pay OR
to pay the buyer in case of non performance by the
seller
 Types of Bank Guarantee

Guarantees are broadly divided into two

categories. They are Financial and Non
Financial.
Financial Non Financial
3 Advance payment Bid/Tender Bond
4 Retention Gtee Performance Bond
5 Payment Gtee Labour Gtee
6 Facilities Gtee Customs Gtee
 Bank Guarantee Vs Letter of Credit

Bank Guarantee Letter of Credit

1. Payment upon non 1. Payment upon performance

performance or default by seller
2. Mostly payable on demand 2. Payable on compliance with
terms and conditions of credit
4. Generally governed by law of 3. Always governed by UCP 500
the land
5. Standalone instrument. 5. Transaction flow through the
Transaction flows separately instrument
6. A simple process for the 6. A complex process for the
beneficiary beneficiary
Questions?
Thank You for Your Attendance