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1. INTERNATIONAL
TRADE AND
BANKING PRACTICE

2. Introduce your-self
1
Name
Educational background
Organization and position
Experience

3. Your expectations
2
What do you hope to achieve from
these two days training?

4. Aim of the training
3
At the end this training, trainees will be
acquainted with the Basic concept of
International Trade and Banking
Practice.

5. Learning objectives
4
 After taking of this training, the trainees will be able to:-
Trainees will understand theoretical and
historical development of trade
Trainees will understand theoretical and
empirical relationships of trade and
development/growth at various contexts.
Trainees will understand trade agreement and
trade policy of trade
To understand about the formalities associated
with International trade
To know about the documentation of
International Trade

6. Cont…
5
Describe the methods of payment available for
international transactions and the situation when
each is appropriate.
Understand when payments will be made and
the risks associated with each method of
payment both to the buyer and the seller.
Know the benefits of agreeing to a particular
method of payment and what kind of financing
options it may or may not provide for the buyer
and/ or seller.
Know about trade finance methods

7. TRAINING METHODS
Presentation
Discussion
Question and Answers
Group Discussion
Reflection
Brainstorming
6

8. Session
7
Session-I


9. Cont…
8
Session-II


10. 9
In five basic methods of payment are
used to settle international transactions
each with a different degree of risk to the
exporter and importer.
1. Cash in Advance/Prepayment
2. Documentary Collections
3. Letters of Credit
4. Open Account
5. Combining Methods of Payment
International trade payment
methods

11. Cont…
10
1. Cash in Advance/Prepayment
 Cash in Advance/Prepayment occurs when
a buyer sends payment in the agreed
currency and through agreed method to a
seller before the product is manufactured
and/or shipped.
 Upon receipt of payment this seller then
ships the goods and all the necessary
shipping and commercial documents
directly to the buyer.

12. Cont…
11

13. Cont…
12
2. Documentary Collections
Using a documentary collection process requires
that a seller ship the product and create a
negotiable document, usually a draft or bill of
exchange.
The draft and shipping documents are then
processed either through a buyer‘s bank (the
collecting bank) or through the seller and buyer‘s
banks.
Upon arrival at the buyer‘s bank, the buyer is
notified to make payment; then the documents are
released and used to clear the shipment through
customs upon arrival.

14. Cont….
13
A documentary collection is best used
for ocean shipments where original bills
of lading are required.
An original bill of lading is a document of
title which enables a buyer to gain
possession of the goods.
When all the originals of a bill of lading
are sent to the collecting bank, it is in the
interest of the buyer to effect payment in
order to obtain title to the goods.

15. Cont…
14
Documentary collections may be
more competitive than letter of credit
terms because they are less costly
and do not require the buyer to tie up
his/her local bank credit lines.

16. Cont…
15
There are a variety of terms associated with
documentary collections that should be
understood:
 Buyer = Importer
Seller = Exporter
 Remitting Bank = Exporter‘s Bank >> receives
payment
Collecting Bank = Importer‘s Bank >> transmits
funds from buyer to seller
 Bill of Exchange/Draft – document issued by
exporter and used for remittance of funds
Time/Usance Bill of Exchange – tenured at 30,
60, 90, 120 or 180 days, etc.

17. Cont….
16
There are four types of processes
available to buyers and sellers:
1. D/P – Documents against Payment
 The export documents and the bill of
exchange provided to a collecting bank
are only made available to an importer
when payment is made.
 The collecting bank then transfers the
funds to the seller through the remitting
bank.

18. Con’t…
17
2. D/A – Documents against Acceptance
The export documents and a time/usance bill of
exchange are sent to a remitting bank.
The documents are then sent to a collecting bank
with instructions to release the documents against a
buyer‘s acceptance of the bill of exchange.
3. Clean Collection
The exporter creates a bill of exchange, which is sent
without any export documents to a buyer for
collection through the remitting bank to the collecting
bank.
There is less security for an exporter since the
documents are sent directly to the importer.

19. Cont…
18
4. Cash against Documents
This process lacks the security and legal protection
of a documentary collection since the exports
documents are sent through a remitting bank to a
collection bank without a bill of exchange.
It is, however, still a collection through the banking
system.

20. Cont…
19

21. Con’t…
20

22. Cont…
21
3. Letters of Credit
 A letter of credit is a bank instrument
that can be used to even the risk
between a buyer and a seller since a
seller is guaranteed to receive payment if
when he/she has complied with the exact
requirements of this buyer.
A letter of credit offers a seller numerous
advantages but only if that seller
complies exactly with its terms and
conditions of the transaction.

23. Cont…
22
The terminology that is used when working with letters
of credit is very specific and should be understood.
Involved Parties:
 Applicant = Buyer/ Importer
 Beneficiary = Seller/Exporter
Opening Bank = Importer‘s Bank >> Issues L/C
Advising Bank= Exporter‘s Bank >> Advises L/C
 Confirming Bank = Advising Bank or 3rd Party Bank
>> Confirms L/C
 Paying Bank = Any Bank as Specified in L/C >> Pays
the Draft

24. Cont…
23
Activities and Terms:
 Advice – review and approval of L/C
Amendment – change to L/C
Confirmed – the commercial, political and
economic risk of the transaction absorbed
by the confirming bank
Discrepancy – mistake in the
documentation
 Documentation – documents required
within L/C
Draft – negotiable order to pay

25. Cont…
24
Sight Draft – payment assured upon shipment and
presentation of documents in compliance with its
terms
Time Draft – bank assurance of payment at the
maturity of the banker‘s acceptance with option of
obtaining immediate funds by discounting the BA
(30, 60, 90 days at sight or acceptance)
Irrevocable – cannot be changed without
approval from beneficiary or advising bank
Issuance – opening of L/C
Negotiation – review of documents
Revocable – can be changed without approval
of beneficiary or advising bank

26. Cont…
25
Types of L/Cs:
Back-to-Back – credit and terms of a
transaction rollover to a new transaction
upon completion, which eliminates the need
to apply or issue a new L/C for identical
shipments
Confirmed – credit risk taken by bank and
agreement to pay (fee charged)
Straight – payable only at paying bank
Negotiation – payable at negotiating bank
Sight – payable at acceptance of
documents

27. Cont
26
Standby – used by the beneficiary for
payment should the applicant not pay the
exporter directly
Transferable – part or all of the proceeds
from the L/C may be transferred to
another party, used by sales brokers or
agents to disguise buyers and sellers
Usance – time draft based on invoice,
bill of lading, or documents, up to 180
days

28. Cont…
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29. Cont…
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30. Cont…
29
4. Open Account
 Open account occurs when a seller
ships the goods and all the necessary
shipping and commercial documents
directly to a buyer who agrees to pay a
seller‘s invoice at a future date.
 Open account is typically used between
established and trusted traders.

31. Cont….
30

32. Cont…
31

33. Cont…
32

34. Cont…
33
5. Combining Methods of Payment
The important thing to remember about
methods of payment is that they are not
absolute.
They can be combined in many ways to
reduce risk for all of the parties involved. For
example, should a new customer require
custom-made products, but cannot afford
100% prepayment, an exporter could offer
50% prepayment to cover the cost of
manufacturing and 25% payment at invoice
date and 25% payment 90 days after invoice.

35. Trade Finance Methods
34
The following are some of the more popular
methods of financing international trade:
1. Accounts receivable financing
2. Factoring
3. Letters of credit (L /Cs)
4. Banker’s acceptances
5. Working capital financing
6. Medium-term capital goods financing
(forfaiting)
7. Countertrade

36. Cont…
35
1. Accounts Receivable Financing
 accounts receivable financing, the
bank will provide a loan to thee
exporter secured by an assignment of
the account receivable.
 The bank‘s loan is made to the
exporter based on its creditworthiness.
 In the event the buyer fails to pay the
ex-porter for whatever reason, the
exporter is still responsible for
repaying the bank.

37. Cont…
36
Accounts receivable financing involves
additional risks, such as government restrictions
and exchange controls that may prevent the
buyer from paying the exporter.
As a result, the loan rate is often higher than
domestic accounts receivable financing.
The length of a financing term is usually one to
six months.
To mitigate the additional risk of a foreign
receivable, exporters and banks often require
export credit insurance before financing foreign
receivables.

38. Cont…
37
2. Factoring
When an exporter ships goods before
receiving payment, the accounts receivable
balance increases.
Unless the exporter has received a loan
from a bank, it is initially financing the
transaction and must monitor the
collections of receivables.
Since there is a danger that the buyer will
never pay at all, the exporting firm may
consider selling the accounts receivable to
a third party, known as a factor.

39. Cont…
38
In this type of financing, the ex-porter
sells the accounts receivable without
recourse.
The factor then assumes all
administrative responsibilities
involved in collecting from the buyer
and the associated credit exposure.

40. Cont…
39
The factor performs its own credit
approval process on the foreign
buyer before purchasing the
receivable.
For providing this service, the factor
usually purchases the receivable at a
discount and also receives a flat
processing fee.

41. Cont….
40
3. Letters of Credit (L /C)
 the letter of credit (L /C) is one of the
oldest forms of trade finances still in
existence.
Because of the protection and benefits it
accords to both exporter and importer, it is
a critical component of many international
trade transactions.
The L /C is an undertaking by a bank to
make payments on behalf of a specified
party to a beneficiary under specified
conditions

42. Cont…
41
Bill of Lading: the key document in
an international shipment under an L
/C is the bill of lading (B /L). It serves
as a receipt for shipment and a
summary of freight charges; most
importantly, it conveys title to the
merchandise.

43. Cont…
42
A B / L usually include the following
provisions:
 A description of the merchandise
 Identification marks on the merchandise
 Evidence of loading (receiving) ports
Name of the exporter (shipper)
Name of the importer
Status of freight charges (prepaid or
collect)
 Date of shipment

44. Cont…
43
Commercial Invoice: The exporter‘s (seller‘s)
description of the merchandise being sold to
the buyer is the commercial invoice, which
normally contains the following information:
 Name and address of seller
Name and address of buyer
 Date
Terms of payment
Price, including freight, handling, and insurance if
applicable
Quantity, weight, packaging, etc.
Shipping information

45. Cont…
44
4. Working Capital Financing
The loan finances the working capital
cycle that begins with the purchase of
inventory and continues with the sale
of the goods, creation of an account
receivable, and conversion to cash.

46. Cont…
45
5. Medium-Term Capital Goods Financing
(Forfaiting)
Forfaiting refers to the purchase of financial
obligations, such as bills of exchange or
promissory notes, without recourse to the
original holder, usually the exporter.
In a for fait transaction, the importer issues a
promissory note to pay the exporter for the
imported goods over a period that generally
ranges from three to seven years.
The exporter then sells the notes, without
recourse, to the forfaiting bank.

47. Cont….
46
6. Banker’s Acceptance
A banker's acceptance requires the bank to
pay the holder a set amount of money on a
set date.
They are most commonly issued 90 days
before the date of maturity but can mature
at any later date from one to 180 days.
BAs are issued at a discount to their face
value. Thus, like a bond, they earn a return.
They also can be traded like bonds in the
secondary money market.

48. Cont…
47
7.Counter trade
The term countertrade denotes all types of
foreign trade transactions in which the sale
of goods to one country is linked to the
purchase or exchange of goods from that
same country.
Some types of countertrade, such as
barter, have been in existence for
thousands of years.
Only recently, however, has countertrade
gained popularity and importance.

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THANKS FOR YOUR ATTENTION