(DLW1083) Lecture-7: Law of International Banking and Financing of International trade Role of Banks in International Trade
By inter-bank payment (e.g., transferring
funds under open account system) Through international trade financing (e.g., L/C) By providing loans to the trading parties By other financial services, e.g., performance guarantee, shipping guarantee, etc. Present System of International Banking and Financing Private banks and financial institutions operating internationally; and International financial institutions or organisations established under agreements of sovereign states, e.g., IMF
Private banks and financial institutions play main
role in financing international trade. International financial institutions play a limited role. They are able to provide funds to member countries pursuant to relevant international agreements, e.g. SDR Legal Framework of International Banking and Financing Strictly speaking, there is no independent system of international banking and financing as such. Banking and financing international elements are subject to different rules of domestic law, and customs and usage accepted in international trade and finance. Conflict of law is thus an essential issue as are the existing international conventions and usage, such as UN Convention on International Bills of Exchage and Intertional Promissory Notes (1998) Unidroit Convention on International Factoring (1988) 1995 - United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (1995) Model Law on International Credit Transfers (1992) Acceptable customs and usage in in international trade and finance Legal Framework of International Banking and Financing (contd.)
Thus the issues of international
banking and financing have to be examined in a particular context: laws of a particular country, or Particular laws or rules which become applicable because of the operation of the rules of conflict of laws. Types of Trade Financing Avalising Export Financing Import Financing Factoring Leasing Demand/performance Guarantee Credit Insurance Syndicated Loans Import Loans Import Loans Import loans are a flexible short-term borrowing facility, linked to one or more specific import transactions. There are typically two types of import loan: a) Loan Against Import made available to importers trading on documentary credit or documentary collection terms. Goods are released to the importer under trust receipts, meaning that the importer can use the goods immediately, but they belong to the bank until the importer settles the loan. b) Clean Import Loan rather than being triggered by the receipt of a documentary credit or documentary collection, the advance is made on presentation of supplier invoices and evidence of shipment only. Export Loans/Pre-shipment Loans Export Loans/Pre-shipment Loans As with import loans, export loans are a flexible short-term borrowing facility, linked to one or more specific export transactions. A bank may assume bank risk in issuing an export loan facility when discounting an export L/C, for example. This is a common means of working capital financing when an L/C is used as the settlement instrument. Export Loans (contd) From the perspective of the bank discounting the L/C, the risk of incurring a defaulted exposure is contingent on a number of factors: (i) the exporter being unable to provide the goods/services stipulated by the L/C; (ii) the issuing bank failing to honour its commitment to pay the exporter; and (iii) the importer deciding not to purchase the goods/services backed by the L/C. Export Loans: Terms of the credit: It is impossible to list the specific terms for all cases in which banks are prepared to grant pre-shipment finance, but the following points are relevant: General financial position of the exporter. Exporters experience in the trade. Period for which finance is required. Method of payment by the overseas buyer (e.g. irrevocable documentary credit). Whether firm orders are held for exports and general standing of the buyer. Type of goods being handled (e.g. general commodities, specialty lines, perishable goods, etc.). Whether export insurance cover is held by the exporter and whether it runs from the date of contract of sale over which the goods are being manufactured or produced (as against the date of shipment). Export Loans (contd.) The exporter may seek financing as red clause credit, transferable credit, or back-to-back credit. Red Clause Credit: A red clause credit would normally be an irrevocable credit containing a special clause (in olden times printed in red) authorising the advising bank on receipt of the credit to make an advance to the beneficiary of the total amount of the credit or some percentage of it. Hence the advising bank grants a loan to the beneficiary which the issuing bank guarantees. It results from an arrangement between the buyer and seller that the former will assist the seller in obtaining pre-shipment finance to enable the goods covered by the credit to be purchased and shipment made. The buyer arranges the issue of a red clause credit by his bank. However, it should be noted that the advising bank is under no obligation to make the advance to the beneficiary until it has agreed to do so. Transferable Credit: An irrevocable credit, which states that it is also transferable, gives the beneficiary the right to request for the credit to be made available in whole or in part to one or more other parties (second beneficiaries). A bank called on to effect payment or acceptance under the credit, or any bank entitled to negotiate, can receive and carry out the beneficiarys instructions to make the transfer(s). Transferable credits can therefore be of assistance to sellers with limited resources, since they provide a means by which payment can be guaranteed (by documentary credit) to parties from whom the seller is purchasing goods to fill an order from a buyer. Back-to-Back Credit: This form of financing may be utilised in circumstances where a seller of goods receives an irrevocable credit in his favour arranged by the buyer and where the seller has to purchase the goods from another party to fill the order. Where the sellers resources are limited or fully utilised and it is difficult to arrange a letter of credit in payment to the initial supplier, it may be possible for the seller to arrange for his bank to issue an irrevocable credit in favour of the supplier, using the original credit as a backing for the second credit (called a counter-credit).