Trade Finance Identification of needs and product offerings for sales and marketing frontliners as well as Branch Managers

1. Trade Finance
What you need to know to get going
Yudy Yunardy

2.  Sometimes getting a bigger slice of the market
means needing more cakes
 Having the right contacts in new markets is
crucial for those first steps

3. Objectives
 The importance of Trade Finance
 Distinction between Trade Finance and
regular lending
 Various sources of Trade Finance
 Various instruments of Trade Finance
 Challenges facing various stake holders in
need of Trade Finance

4. Trade Finance Background
 Trade finance is more than regular lending. It refers to innovative
financial products and services that assist importers and
exporters to fulfill their financing needs
 Trade Finance is a source of working capital for many traders in
need of financing to procure, process or manufacture products
before sale in future
 Trade finance is also important for individual traders and firms
trading internationally, because it can shape competitiveness of
their contract terms
 Trade finance is therefore important for any country as it
facilitates international trade. As international trade increases, so
does the importance of trade finance

5. Trade Finance Background
 Absence of an adequate trade finance infrastructure is, in effect,
equivalent to a trade barrier
 Importers facing difficulties in accessing trade finance, have
limited chance to offer competitive terms to their suppliers the
like of advance payment terms, Sight letters of credit, Bills
avalized etc.
 Conversely, exporters with limited supply of trade finance, will
have difficulties in penetrating the market, because while
importer may prefer to buy on open account, or on deferred
terms, the supplier may not be in position to accept/offer such
terms.

6. Sources of Trade Finance
 Commercial Banks
 Trading Partners (exporter/importer)
 Specialized house or institutions
 Government and related institutions

7. Commercial Banks
 Commercial Banks are the main source of trade
finance
 They provide pre-export financing (O/D, Term Loans)
 They help in the collection process
 They issue and confirm letters of credit
 They book acceptance and discounting drafts
 They offer fee-based services such as providing credit
and country information on buyers
 Other roles played by commercial banks include
 Taking foreign exchange risks (spot, forward, swap etc)
 Taking market risks (options)

8. Commercial Banks
Loans
Overdraft, Term Loans
Take currency
risks (Spot, Swap,
forward, Options)
Commercial
Banks
Take market risks (Price
risk options, future, forward)
Settlement
(Terms of payments,
Open A/C, Advance
payments, Collections,
L/C)

9. Commercial Banks
Summary of trade finance sources from Commercial Banks:
 Loans facilities, which may take the form of Working capital or
overdraft and Term loan facilities
 Off balance sheet financing:
 Issuing performance, bid, custom, advance payment bonds etc
 Opening letters of credit
 Accepting and confirming letters of credit
 Bills Avalisation
 Discounting documents under letters of credit
 Advance under red clause letters of credit
 Structured Finance

10. Trading Partners (exporter/importer)
 Supplier may offer credit to a buyer by releasing goods to a
buyer against bills of exchange, by which a seller can get an
undertaking from the buyer to pay at a specified future date
 Alternatively may decide to release the goods against
promissory notes, in which a buyer promises to pay at a future
date, but which offer less legal protection as compared to the bill
of exchange
 Under counter trade arrangements valued goods are
exchanged at an agreed value without cash or credit terms,
involving a barter-exchange, counter-purchase, or buy-back

11. Specialized house or institutions
 Specialized house or other trading institutions
may under forfaiting arrangement purchase
from exporters receivables without recourse
at a discounted rate to allow exporter access
financing before maturity of the bill. In this
case the receivable becomes a tradable
security

12. Government and related institutions
 Governments, and other institutions like
World Bank, regional bank, community bank
can be good source of trade finance
especially in less developed economies
where financial markets and money markets
are underdeveloped

13. Government and related institutions
 Establish scheme of guarantees to support
exporters
 Establish floating line of credit to support imports
for and exports from specific sectors, e.g.
confirmation line
 Establish guarantees schemes for SME, Micro
group
 Embark on support policies, e.g. tax deferral for
export

14. Instruments of Trade Finance
 Letters of Credit (Documentary Credit)
 Bank Guarantees
 Pre and Post shipment finance loan facilities
 Buyers and Sellers credit
 Bills Acceptance and Avalisation
 Structured Finance
 Leasing
 Factoring and Forfaiting
 Countertrade

15. Letters of Credit - Definition
A Letter of Credit is a conditional undertaking issued
by a bank, at the request of one of its customers, to
pay a named beneficiary a specified amount of
money upon presentation of documents that
comply with the terms and conditions stated therein

16. Letters of Credit – Types
 Import letter of credit/Documentary Credit
Import
 Import letter of credit off-shore issuance
 Export letter of credit/Documentary Credit
Export
 Commitment to pay/accept negotiate
 Bank to bank reimbursement
 Reimbursement undertaking

17. Letters of Credit – Types
Import Letter of Credit
 Import Letter of Credit is a term used to
describe a Documentary Credit Import
(Commercial Letter of Credit) from the point
of view of the importer and the issuing bank
 LCs may be payable at sight or at a date in
the future

18. Letters of Credit – Types
Documentary Credit Import
 A documentary credit is an irrevocable undertaking
issued by a bank, at the request of one of its
customers, to pay a named beneficiary a specified
amount of money upon presentation of documents
in compliance with the terms and conditions stated
in the Letter of Credit
 An Import Documentary Credit constitutes a credit
exposure on the customer

19. Letters of Credit – Types
Import Letter of Credit Off-Shore Issuance
 A variant in the processing of the Import LC is the
Offshore Issuance. This is an efficient way of issuing
LCs, which eliminates the use of multiple banks in
the transaction
 The bank requests its foreign branches, mostly in
the country of the beneficiary, to issue LCs directly
to the beneficiary
 The client-facing branch carries the credit risk of the
buyer

20. Letters of Credit – Types
Export Letters of Credit
 Export LC is a term used by an exporter to
describe a Documentary Credit Export that is
a Commercial LC
 Export LCs may be payable at sight or at a
date in the future

21. Letters of Credit – Types
Documentary Credit Export
 A documentary credit is an irrevocable
undertaking issued by a bank, at the request
of one of its customers, to pay a named
beneficiary a specified amount of money
upon presentation of documents in
compliance with the terms and conditions
stated in the LC

22. Letters of Credit – Types
Confirmed Letters of Credit
 A confirmation to a Credit constitutes a definite
undertaking of the Confirming Bank, in addition to
that of the Issuing Bank, provided that the stipulated
documents are presented to that Confirming Bank
and that the terms and conditions of the LC are
complied with
 An export LC only constitutes a credit exposure on
the bank if the credit is confirmed

23. Letters of Credit – Types
Commitment to Pay/Accept Negotiate
 A variant of the advising of the LC is the
Commitment to Pay/Accept Negotiate. This is
also known as a silent confirmation
 This represents a commitment by the bank to
an exporter to pay or negotiate or accept
documents on a without recourse basis,
provided the terms and conditions of the LC
have been complied with

24. Letters of Credit – Types
Bank to Bank Reimbursement/Clean
Reimbursement
 This is a reimbursement service offered to branches
or other banks, whereby the bank administers
processes and settles claims made under Letters of
Credit issued by such other branches or banks
 There is no commitment issued by the bank, but the
bank has the obligation to process and pay a claim if
previously authorised by the LC issuing bank,
provided sufficient funds or cover are available

25. Letters of Credit – Types
Reimbursement Undertaking
 This is a reimbursement service offered to branches
or other banks, whereby the bank administers
processes and settles claims made under LCs
issued by such other branches or banks
 The Undertaking is an irrevocable commitment
issued by the bank but the bank has the obligation
to process and pay a claim if previously authorised
by the LC issuing bank

26. Standby Letters of Credit
 Do not cover the direct purchase of merchandise
 Based on the underlying principle of LC that payment is made against
presentation of documents, not necessarily shipping documents but
whatever docs the applicant, beneficiary, and issuing bank may agree to
 The party requesting a bank to issue an SBLC (the applicant) need not be
involved in a commercial transaction at all
 SBLC are payable against the presentation of documents as simple as a
certificate from the beneficiary stating that the applicant has not
performed some act, has not complied with a specific contract or other
agreement, or has defaulted either in payment for certain goods and
services or in making repayment on a loan

27. Guarantee
Guarantees are Legal transactions that are unrelated to the underlying transactions
Individual commitment from Issuing Bank to pay a specified amount to the
beneficiary with the conditions set out in the guarantee
Bank that issues the guarantee may not take into objections raised either by
principal or a third party when performing its payment obligation
In the case of disputes - unless otherwise stipulated- the law of the issuer’s country
shall prevail in the matters that are not regulated in the wording of the guarantee
In the event that the contracting parties are unable to agree on the selection of the
law applicable to the bank guarantee, the solution may be to use a so called
standby letter of credit (regulated by ISP98 or UCP500)

28. Guarantee
Bid Bond/Tender Bond
To participates in international public tenders, Company usually has to
submit a bid bond along with its offer
This ensures payment of the guaranteed amount in the event of :
 the bid being withdrawn before the due date
 the contract not being accepted by the party submitting the bid
after the contract has been awarded
 the bid bond not being replaced by a performance bond after the
contract has been awarded

29. Guarantee
Performance Bond
The Bank undertakes to pay the beneficiary the
guaranteed amount at the request of the
seller in the event that the supplier does not
fulfil his contractual delivery obligations or
does not fulfil them as per the terms of the
contract

30. Guarantee
Payment Guarantee
This is used especially with deliveries against open
account payment and can be issued to secure the
full payment of the delivery of the goods or
services.
The beneficiary can claim the guarantee by declaring
in writing that he delivered the goods but had not
received payment by the due date

31. Guarantee
Advance Payment Guarantee
The payment conditions for large export orders often stipulate that the
buyer has to pay for the raw materials and the manufacturing
costs in advance
However, prepayment of this kind is only made after the buyer has
received an Advance payment guarantee, which stipulates that
the prepayment will be reimbursed in the event of the seller not
meeting his contractual delivery obligations and or/not providing
the agreed services

32. Trade Finance
Post Import Finance
Financing provided for settlement of purchase under Letters of Credit
Pre-Export Finance
Financing provided for processing of goods/shipping
It may be based on Purchase Order or Letters of Credit (given up to 90% of LC)
Post-Export Finance
Financing provided after submission of export bills
- Collection (D/P and D/A)
- LC (sight and usance)
* Discrepant

33. Post Import Financing
Buyer Supplier
LC Application LC Advising
Issuing Bank Negotiating Bank
$$
REQUEST
IMPORT EXPORT
LC Issuance
Export Bills
Checking Bills Checking Bills
Request PIF
Send Bills
Release Docs
Settlement LC

34. Post Export Financing
Buyer Supplier
LC Application LC Advising
Issuing Bank Negotiating Bank
$$
IMPORT EXPORT
LC Issuance
Export Bills
Checking Bills Checking Bills
Settlement
Release Docs
Send Bills
Post Export Finance
SETTLE FINANCING

35. Avalisation
The Bank adds our guarantee (aval) to a draft accepted by a
buyer. This relates to transaction conducted under
documentary collection (document against acceptance)
This is similar to our acceptance in LC

36. Avalisation
Buyer Supplier
DOCUMENTS AVAL BANK SENT TO PAY FROM
TO
SUPPLIER SUPPLIER TO ON
BUYER
SWIFT CONFIRMATION
SENT TO SUPPLIERS BANK
$$
BANK BUYER ADD ACCEPT OUR AVAL AND
:
OBLIGATION ENDORSED TO BoE
PAY ON
THROUGH MATURITY BANKS
DATE
AVALISATION LIMIT
IS REQUIRED
RISK IS THE SAME AS
BILL ACCEPTANCE
Collecting Bank Payment Bank
SWIFT Confirmation - AVAL
BoE
AVAL

37. Structured trade finance
 Structured Trade Finance (STF) is a specialised activity dedicated to
the financing of high-value supply chains, especially upstream financing
of cross-border commodity flows and limited recourse trade finance.
Every loan is bespoke with each facility tailored to the specific needs of
client, transaction and jurisdiction. STF facility structures can provide
short term working capital or longer term funding with loans of up to five
years or more

38. Funding requirements
The tools and techniques of STF are used extensively in the commodity-related
sectors for the benefit of producers, processors, traders and
industrial end-users alike to meet a diverse range of funding requirements
which include:
Upstream Financing
 Pre-export finance (including
Contract Pre-payment)
 Tolling and processing
 Funding investment in capital
equipment or production assets
 Development or refurbishment of
production facilities (with or without
project risk)
Downstream Financing
 Warehouse finance (for inventories
of exchange traded commodities)
 Receivables finance (for trade and
other receivables)
 Borrowing Base finance (funding a
revolving asset base)
 Provision of payment guarantees
for sellers of crude oil and refined
products

39. Leasing
 A lease or tenancy is the right to use or
occupy personal property or real property
given by a lessor to another person (usually
called the lessee or tenant) for a fixed or
indefinite period of time, whereby the lessee
obtains exclusive possession of the property
in return for paying the lessor a fixed or
determinable consideration (payment)

40. Factoring
Factoring is a form of commercial finance whereby a business sells
its accounts receivable (in the form of invoices) at a discount.
Effectively, the business is no longer dependent on the
conversion of accounts receivable to cash from the actual
payment from their customers, which takes place on typical 30-
to-90-day terms. Businesses benefit from the acceleration of
cash flow by obtaining cash from the factor equal to the face
value of the sold accounts receivable, less a factor's fee.
Factoring is considered off balance sheet financing in that it is not a
form of debt or a form of equity. This fact makes factoring more
attainable than traditional bank and equity financing.

41. Factoring
There are usually three parties involved when an
invoice is factored:
 Seller of the product or service who originates the
invoice.
 Debtor is the customer of the seller (i.e., the
recipient of the invoice for services rendered who
promises to pay the balance within the agreed
payment terms).
 Factor (the factoring company)

42. Forfaiting
Forfaiting is the discounting of international
trade receivables on a without recourse basis

43. Forfaiting
Forfaiting, or Medium-Term Capital Goods
Financing, means selling a bill of exchange,
at a discount, to a third party, the forfaiter,
who collects the payment from an,
essentially, overseas customer, through a
collateral bank(s), and, thus, assuming the
underlying responsibility of exporters and
simultaneously providing trade finance for
importers by converting a short-term loan to a
medium term one

44. Countertrade
 Countertrade is exchanging goods or
services that are paid for, in whole or part,
with other goods or services

45. Countertrade - Types
There are five main variants of countertrade:
 Barter: Exchange of goods or services directly for other goods or services
without the use of money as means of purchase or payment
 Switch trading: Practice in which one company sells to another its obligation to
make a purchase in a given country
 Counter purchase : Sale of goods and services to a country by a company that
promises to make a future purchase of a specific product from the country
 Buyback : Export of industrial equipment in return for products produced by that
equipment
 Offset : Agreement that a company will offset a hard - currency purchase of an
unspecified product from that nation in the future

46. Challenges
 Lack of Security/Collaterals
 Absence of counter party willing to offer financing
alternatives outside the banking system
 Promissory notes, Bill of Exchange, Counter trade,
Forfeiting, 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 currency controls
 Compliance to terms of Trade
 Documentations

47. Challenges
 Absence of reliable Market information about
Counter party risks and trading requirements
 Missing link to buyers and sellers (Financial
institutions link)
 Infrastructure gap
 Transportation, Storage, Clearing & forwarding
 especially commodities
 Price Volatility for export

48. Challenges
 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
 Bank charges are not shared equally

50. LC - UPAS (Usance Paid at Sight)
LC allows for beneficiary to claim payment at sight, even though LC is
issued as Usance LC
Benefit (to beneficiary) :
Provide flexibility to applicant and beneficiary
Risk involved :
Issuing Bank : Applicant risk of non payment (on maturity)
Mitigation :
Provided selectively

51. UPAS – Usance paid at sight
Buyer Supplier
LC Application LC Advising
Issuing Bank Negotiating Bank
$$
IMPORT EXPORT
LC Issuance
Export Bills
Checking Bills Checking Bills
Acceptance
Send Bills
Release Docs
Settlement LC
BoE

52. Transferable LC
Country
Risk
APPLICANT BENEFICIARY
Industry
Risk
Trading
Risk
Currency
Risk
Bank
Risk
Transfer
able LC
BENEFICIARIES
LC
LC
Transfer
LC
LC Issued LC received & transferred

53. Without Recourse
 An individual who endorses a check or
promissory note using the phrase without
recourse specifically declines to accept any
responsibility for payment. By using this phrase,
the endorser does not assume any responsibility
by virtue of the endorsement alone and, in
effect, becomes merely the assignor of the title
to the paper

54. Off Balance Sheet
 Off balance sheet usually means an asset or
debt or financing activity not on the
company's balance sheet. It could involve a
lease or a separate subsidiary or a contingent
liability such as a letter of credit. It also
involves loan commitments, futures, forwards
and other derivatives, when-issued securities
and loans sold

56. Bill of Exchange - Sample

57. Promissory Note - Sample

58. Distribution Channel/Client Group
Combination
Delivery Channels
The delivery channels used for these products
are:
 Max Trad
 SWIFT
 Fax

59. Product Risks
The following tools are used to assess product
related risks:
 AIM policies and standards
 Business cases
 Product Approval Committee
 Operational Risk Assessment Procedure
 Risk Self Assessment
 Audit reports

60. Product Risks
The following product risks are subject to Risk Management methods (if
applicable):
 Customer risk
 Country risk
 Credit risk
 Information Technology risk
 Insourcing risk
 Liquidity risk
 Market risk
 Operational risk
 Outsourcing risk
 Reputation risk (as part of the product integrity)
 Strategic Business risk (a.o. sustainability, effects on the bank's
results/equity)