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ACF 465 INTERNATIONAL TRADE FINANCE 2017.pdf

  1. 1. ACF 465: August 2017 INTERNATIONAL TRADE FINANCE Mr. Kwasi Poku kwapok25@gmail.com // 0207401585
  2. 2. Course Overview • • The aim of this course is to help students acquire the necessary background information and also gain an understanding of the finance of international trade, foreign exchange and support services provided for exporters, importers and merchants by financial institutions especially in Ghana. This course also seeks to help students acquire a sound understanding of relevant theoretical and practical concepts, coupled with an ability to apply the principles in a given practical situation. 2
  3. 3. 3 • • Students should however note that, international trade is a rapidly changing subject, hence careful study of publications and newspapers such as graphic business, business and financial times and the various customer leaflets and circulars prepared by banks is essential in order to keep up to date. In addition, students should regularly search the internet to keep abreast of new developments.
  4. 4. Course Objectives • • To help students to appreciate the need for international trade, the risks and problems encountered in international trade and the role played by banks in facilitating international trade. To help students gain an understanding of the various terms of payment in international trade. 4
  5. 5. • • To help students to be able to define the various terminologies developed by the International Chamber of Commerce (ICC) to be used in international trade. It also aims to help students appreciate the obligations and responsibilities that Incoterms impose on importers and exporters. To help students to be able to explain the various international settlement mechanisms through banks and the problems encountered in international settlements. 5
  6. 6. • • • To help students gain an understanding of letters of credit, the parties involved in issuing letters of credit as well as the general instructions to be followed before banks issue letters of credit. To help students appreciate the relevance of documentation in international trade. To help students gain an understanding of the factors which affect export finance as well as the traditional and non­traditional facilities provided by banks to facilitate export trade. 6
  7. 7. • • • To help students to appreciate the types of credit available to importers in Ghana. To help students gain an understanding of the various facilities and services provided by banks to new exporters and the travelling public. To help students to appreciate the basic operations of the foreign exchange market in Ghana and the factors that affect the demand and supply for foreign exchange in Ghana. 7
  8. 8. Course Outline • • • • • Unit 1: OVERVIEW OF INTERNATIONAL TRADE FINANCE Unit 2: METHODS OF PAYMENT IN INTERNATIONAL TRADE Unit 3: INCOTERMS/TERMS OF DELIVERY/SHIPPING TERMS Unit 4: DOCUMENTS USED IN INTERNATIONAL TRADE Unit 5: DOCUMENTARY CREDIT 8
  9. 9. Course Outline • • • • Unit 6: OVERVIEW OF EXPORT FINANCE Unit 7: IMPORT FINANCING Unit 8: METHODS OF INTERNATIONAL SETTLEMENT THROUGH BANKS Unit 9: FOREIGN EXCHANGE MARKETS 9
  10. 10. Grading • • Continuous assessment: 30% End of semester examination: 70% 10
  11. 11. Recommended Reading • • • Arnold, G. (2008). Corporate Financial Management. 4th Edition. Financial Times/Pearson Education Ltd Atuahene, R. (2016). Finance of International Trade­Chartered Institute of Bankers (GH), 2nd Edition. Cowdell, P. and Hyde, D (2003). International Trade Finance­The Institute of Financial Services (UK), 8th Edition. 11
  12. 12. • • • Cranston, R. (2007). Principles of Banking Law. 2nd Edition. Oxford University Press, UK. Luke, K.W. (2015). International Trade Finance: A Practical Guide. 2nd Edition. City University of Hong Kong Press. Watson, D. and Head, A. (2010). Corporate Finance: Principles and Practice. 5th Edition. Financial Times/Prentice Hall. 12
  13. 13. UNIT 1: OVERVIEW OF INTERNATIONAL TRADE • • • • • Objectives; To discuss the need for International Trade To discuss the Problems/Difficulties of International Trade To explain the difference between International and Domestic Trade To discuss the theories of International Trade To know the major players in International Trade
  14. 14. • • • • To examine the objectives of the parties in International Trade To help students appreciate the risks in International Trade To explain International Trade Fraud and Trade Based Money Laundering To understand & appreciate the role of Banks in International Trade system 14
  15. 15. Introduction • • Definition of International Trade: International Trade is the process of buying and selling between two parties in two different countries where business activity calls for payment or settlement in a foreign currency. Trading can be conducted for both goods and services. International can be categorised into visible trade­ the export and import of goods, and invisible trade­ the use of services from other countries.
  16. 16. Why Companies Expand Into Foreign Markets • • • The complexities in International Trade require imaginative and proactive strategies. It is therefore very vital that companies receive quality advice from expert sources to help them make informed business decisions on international trade business. Companies opt to expand outside their domestic market for any of four major reasons:
  17. 17. 1. • • To Gain Access To New Customers Expanding into foreign markets offers potential for increased revenues, profits, and long­term growth and becomes an especially attractive option when a company’s home markets are matured or saturated. Firms like the Ghana Cocoa Board Ltd, Sony, Toyota, Mercedes Benz and General Motors, which are racing for global leadership in their respective industries must move rapidly and aggressively to extend their market reach to all corners of the world. 17
  18. 18. • • 2. To Achieve Lower Costs And Enhance The Firm’s Competitiveness Many companies are driven to sell in more than one country because the sales volume achieved in their domestic markets is not large enough to fully capture manufacturing economies of scale and experience curve effects and thereby substantially improve a firm’s cost competitiveness. The relative small size of country markets in Europe explains why companies like Nestle sell their products all across Europe and then moved into markets in North America, Africa and Latin America.
  19. 19. •   • Also, some companies abroad may have a competitive advantage in the provision of certain goods and services. The need to earn more profit by selling goods or services in overseas markets. Some firms act as export houses or import merchants. Bamson Company ltd. In Ghana, is an importer of Dutch Akzo paints. Thus, acting as a middleman between buyer and seller in different countries. 19
  20. 20. • • • 3. To Capitalize On Its Core Competencies A company with competitively valuable competencies and capabilities may be able to leverage on them into a position of competitive advantage in foreign markets as well as just domestic markets. 4. To spread its business risk across a wider market base A company spreads business risk by operating in a number of different foreign countries rather than depending entirely on its operations in its own domestic market. Globalization and improved technologies equally offer immense opportunities for firms to benefit from economies of scale and tax advantages.
  21. 21. • In a few cases, companies in natural resource­based industries often find it necessary to operate in the international arena because attractive raw materials supplies are located in foreign countries. 21
  22. 22. Differences Between International Trade and Domestic Trade • a) b) c) d) e) f) Domestic trade has the following features which are common for both seller and buyer but differ entirely from that of international trade: A single currency is the mode of payment; Trading is conducted under the same law; Documentation to the domestic trade is very simple; Business is done in the absence of stringent Customs Excise and Preventive Regulations; No or little transportation difficulties are encountered; Most businesses are conducted under common language and culture;
  23. 23. Inherent Problems / Difficulties In International Trade • 1. • Aside the normal problems of trade and commerce which arise in the domestic trade, there are several additional difficulties associated with international Trade. Some of the problems are: Time and distance The time lag between placing an order from suppliers could affect trade through changes in changes in pricing, additional working capital requirement on the part of the supplier, non­payment on the part of the buyer, changes in customer’s taste, substitute product and non­delivery time lag.
  24. 24. • • Differences in time zone also results in communication difficulties. Distance also affects international trade when the risks and inconveniences, in relation to transit times, cannot be avoided considering the time it takes to ship goods and services abroad and the time payment is received. 24
  25. 25. • • 2. Differences in laws/customs Lack of knowledge and understanding about customs, habits and laws of the buyer’s or the seller’s country create an extra degree of uncertainty or mistrust between the two parties involved in trade. e.g. exporting pork to a Moslem country. 3. Documentation The nature of the trade, transportation requirement, mode of payment and terms of delivery used in the trade call for a comprehensive and thorough understanding of the documents which makes international trade more complicated than in domestic trade.
  26. 26. • a) b) c) d) e) f) g) 4. Government regulations Government rules and restrictions can be a serious threat to international trade. Such regulations and restrictions include: Exchange control regulations Export licensing Import licensing Trade Embargoes Import quotas Health and hygiene requirements, notably on food Patent and trademarks
  27. 27. • • i. ii. iii. Exchange control regulation Exchange control is system of controlling the inflows and the outflows of foreign exchange in and out of a country. Government may therefore take extra measures in defense of its currency, such as; Regulations requiring individuals or firms to obtain foreign exchange approval from the Central Bank before engaging international trade activities. Regulations rationing the supply of foreign exchange to those wishing to make payment abroad in a foreign currency. Regulations making the holding of foreign currency or exchange illegal by legislation.
  28. 28. Principal Players In International Trade a) • • • Exporters Exporters may be manufacturers, traders, farmers or commodity producers. Their aim is to get their goods to buyers around the world in the quickest and safest manner possible and to be paid in the correct currency and within their agreed terms of settlement. The importance of exports to the economies of many countries is demonstrated by the wide range of support and encouragement given by governments, particularly through Export Credit Agencies.
  29. 29. • • • b) Importers Importers may be equally be manufacturers buying raw materials for their factories, oil companies buying crude oil for refining, or simply merchants and traders fulfilling contracts with domestic and foreign consumers. c) Freight Forwarders Freight forwarders or forwarding agents are the most versatile operators in the trade chain. They collect goods from exporters, sometimes actually packing them for shipment, transport them to ports of shipment by road, rail or barge and arrange with the shipping company (or airline) for them to be loaded on board their vessels.
  30. 30. • • • d) Warehousing facilities Warehousemen perform a valuable service prior to the shipment of goods and after their arrival at the port of destination. As they are always holding goods belonging to a third party, it is essential that they meet stringent security requirements, the most important of which is that they should be completely independent. e) Carriers Goods may be transported in a number of different ways and by several types of carriers. There exists a need for independent road haulers, barge operators and railway companies to carry goods on specific routes and to be responsible for the whole journey.
  31. 31. • • • f) Insurers However well a consignment is packed, there is always the possibility of damage being incurred in transit. In some parts of the world, piracy and hijacking is prevalent. Most shipments are financed by banks or other financial institutions who want to ensure their security is properly insured.
  32. 32. • • • g) Banks Banks provide a multitude of services to every operator in the trade chain and for every stage of any transaction. Banking instruments and techniques which have been developed over hundreds of years are made available with world­wide branch networks, affiliates and correspondents. The rapid growth of world markets owes much to the ability of these financial institutions to adapt to change, to keep pace with development and to maintain a high level of skill in handling transactions. 32
  33. 33. • • • • • h) Factors Now most international banks have a factoring subsidiary. There is clearly a defined difference between the services offered by banks and factors. Every form of banking finance is effected with recourse to its customer, whereas factors provide facilities for buying debt without recourse. Complete factoring involves the exporter in handling all his documents to the factor who takes an assignment over the debt of the overseas buyer. Although expensive, factoring can take care over a number of administrative operations for the exporter, leaving him to concentrate on his main business of selling.
  34. 34. International Trade Risks • • • No transaction can be undertaken without risk to the importer or exporter, although those risks can be significantly reduced by banks and insurers. For the exporter, the main risks are commercial, political and foreign exchange risks. The main risks for the importer are commercial, involving short landing or non delivery of goods and delivery of sub­standard goods.
  35. 35. Other Risks Involved In Cross Trading a) • • i. ii. iii. Credit Risk This is the risk that a counter party to a transaction fails to perform according to the terms and conditions of the contract. This may be due to one of the following reasons: Inability of the drawee to pay under a bill of exchange which he or she has accepted earlier or the failure of the importer to pay for goods supplied. Bankruptcy/Insolvency or Liquidation Undeveloped mechanisms for efficient assessment of borrowers by credit referencing agencies in the country.
  36. 36. • • • b) Foreign Exchange risk This is caused by the fluctuations in exchange rates over time. Exporters may invoice the buyer in foreign currency (e.g. the currency of the buyers country) or the buyer may pay in foreign currency. (e.g. the currency of the exporters country). The importers problem is therefore the need to obtain foreign currency to make payments abroad and the exporters problem is exchanging foreign currency for the local currency.
  37. 37. i. ii. iii. c) Sovereign Risk This arises when a sovereign government of a country: Obtains a loan from a foreign lender Incurs a debt to a foreign supplier Guarantees a loan or debt on behalf of a third party. But then, either the government or the central bank refuses to pay the loan or debt and claims immunity from the processes of the law. d) Country Risk This arises when a buyer does all he can to pay what he owes to the exporter or lender but authorities of his country either refuse to make available to him the foreign currency, or he is unable to pay because of political/economic instability or imposition of foreign exchange controls
  38. 38. i. ii. iii. e) Bank Risk This arises due to the liquidation or insolvency of a bank that is supposed to honour payments. f) International Fraud Examples include; forged documentary credits over/under insurance cargo theft etc. 38
  39. 39. International Fraud and Trade Based Money Laundering • • The international trade system is subject to a wide range of risks and vulnerabilities, which provide criminal organizations with the opportunity to launder the proceeds of crime and provide funding to terrorist organizations, with a relatively low risk of detection. The relative attractiveness of the international trade system is associated with: The enormous volume of trade flows, which obscures individual transactions and provides abundant opportunity for criminal organizations to transfer value across borders.
  40. 40. • • • The complexity associated with foreign exchange transactions and recourse to diverse financing arrangements The additional complexity that can arise from the practice of commingling illicit funds with the cash flows of ‘legitimate’ businesses The limited recourse to verification procedures or programs to exchange customs data between countries; and 40
  41. 41. • The limited resources that most customs agencies have available to detect illegal trade. Abuse Of The International Trade System Researchers have documented how the international trade system can be used to move money and goods with limited scrutiny by government authorities.
  42. 42. Tax Avoidance And Evasion • A number of authors, including Li and Balachandran (1996), Fisman and Wei (2001), Swenson (2001) and Tomohara (2004), have described the impact that differing tax rates have on the incentives of corporations to shift taxable income from jurisdictions with relatively high tax rates to jurisdictions with relatively low tax rates in order to minimize income tax payments
  43. 43. Capital Flight • • It has been shown that companies and individuals shift money from one country to another to diversify risk and protect their wealth against the impact o financial or political crises. Several of these studies also show that a common technique used to circumvent currency restrictions is to over­invoice imports or under­ invoice exports.
  44. 44. Trade-Based Money Laundering • • Unlike tax avoidance and capital flight, which usually involve the transfer of legitimately earned funds across borders, capital movements relating to money laundering involve the proceeds of crime, which are more difficult to track. A number of these studies have also analyzed techniques to establish whether reported import and export prices reflect fair market values.
  45. 45. The Role of Banks In International Trade i. ii. iii. iv. v. a) Provision of Banking facilities Maintaining customers foreign & local accounts Provision of short/medium term credit facilities Providing documentary credit & documentary collection services Negotiating Bankers Acceptances, Discounting & Factoring services Arranging finance for exporters under various Bank of Ghana finance schemes (private enterprise scheme, EDIF, etc.)
  46. 46. I. II. I. II. b) Collection & Transfer of funds & Settlement Transmitting payments in foreign currency on behalf of importers/lenders International money transfers c) Provision of foreign exchange services Provide foreign exchange in spot/forward market Provide travel facilities, foreign currency, foreign draft, traveller's cheques
  47. 47. i. ii. • • • • • • • d) Facilitation of International Trade by providing information and data Status report on foreign buyers, suppliers & banks (Banks rating) through correspondence banks General information on the Economic and Political situation in trading countries such as: Inflation Foreign exchange position (supply & demand) Exchange controls Money supply Balance of payment Import/Export regulations Interest rates
  48. 48. iii. i. ii. iii. iv. v. Assisting in finding markets for goods and services iv. Advising on various ICCO publications on INCOTERMS, Documentary credits/Documentary collection and others e) Provision of Specialized Trade Finance Standby Credit Arrangement Red Clause Credit and Green Clause Credit Bankers Acceptances Forfaiting Leasing/Hire Purchase
  49. 49. UNIT 2: METHODS OF PAYMENT IN INTERNATIONAL TRADE • • • • Objectives; To explain the different terms of payment in International trade To highlight the problems and risks associated with each mode of payment To discuss the advantages and disadvantages in the methods of payment to the supplier & buyer To make students aware of the relevance of each method of payment
  50. 50. Introduction • • • When an exporter sells goods or services to an overseas buyer, he expects to be paid. Terms of payment reflect the extent of guarantees required by the seller to ensure payment before he sells his goods. The extent of payment guarantee may vary depending on the credit worthiness and reputation of the parties involved.
  51. 51. Payment Consideration • • • For the Seller: Advance payment The exporter needs payment if he cannot finance the production of the goods and/or services ordered At time of shipment or rendering of service Exporter/seller want assurance of payment as soon as goods are or services are rendered After shipment or rendering of services Supplier/seller is prepared to wait for some time after shipment/after services are rendered
  52. 52. cont’d • • • For the Buyer: Payment in advance The buyer trusts that the contract will be fulfilled and he is therefore prepared to pay in advance. At the time of shipment or rendering of service The contract may stipulate that or the buyer does not want to take risk After shipment or rendering of services The buyer possibly wants to sell the goods or wants to be satisfied that the service has been rendered before he pays the seller
  53. 53. TERMS OF PAYMENT • • • 1. Cash in Advance/Payment in Advance The buyer places the funds at the disposal of the seller prior to shipment of the goods or provision of services. In such circumstances, the parties may agree to fund the operation by partial payments in advance or by progress payments. This method of payment is expensive and contains some degree of risk and as such, the buyer may request the seller’s bank to issue advance payment bond in respect of monies advanced, to protect himself from associated risks.
  54. 54. cont’d i. ii. iii. This method of payment is used when: The buyer’s credit is doubtful; or when the parties are doing business for the first time. There is an unstable political or economic environment in the buyer’s country There is a potential delay in the receipt of funds from the buyer, perhaps due to risks beyond his control 54
  55. 55. cont’d i. i. ii. Advantages to the seller Immediate use of funds Disadvantages to the buyer Tying up his capital prior to receipt of the goods/services Has no assurance that goods/services will be: a. supplied b. received c. received timely d. received in the quality or quantity ordered
  56. 56. 2. Open Account • • • • Open account trade is a system where goods and documents are delivered to the buyer before payment is effected at a later date, usually on a revolving basis. This trade practice occurs usually between parties who have dealt with each other over a specified time and have established a reasonable degree of trust between themselves. Open account provides for payment at a stated specific future date without the buyer issuing any negotiable instrument. The seller must have absolute trust that he will be paid at the agreed date.
  57. 57. cont’d i. ii. i. ii. iii. Advantages to the buyer: Payment is effected after receipt of goods/services Payment is conditioned on the political, legal and economic issues as previously discussed Disadvantages to the seller The title of goods is released without payment assurance The possibility of political events deferring or blocking movement of funds to him Tied up capital until services are accepted and payment is made
  58. 58. 3. Collection • • An arrangement whereby goods are shipped and the relevant bill of exchange is drawn by the seller on the buyer, and/or documents are sent to the seller’s bank with clear instructions for collection through one of its correspondent banks located in the domicile of the buyer. The conditions under which the document of title and other documents covering the goods will be released to the buyer/ importer are spelt out in a Collection Order, which the exporter’s bank sends to the importer’s bank.
  59. 59. Normal Precautions To Be Taken By The Seller • i. ii. iii. iv. The seller should: obtain a credit report or status opinion on the buyer, obtain an economic and political analysis of the country of import concerning political stability, foreign currency position and foreign exchange regulations. not consign the goods to the buyer, nor consign the goods to the buyer’s bank without that bank’s prior agreement. establish alternative procedures for the resale, reshipment or warehousing of the goods in the event of non­payment by the buyer.
  60. 60. Collection Procedure • • • • • The exporter ships the goods and obtains the shipping documents and usually draws a Draft The exporter submits the draft(s) and/or documents to his bank, which acts as his agents The exporter’s bank sends the Draft and other documents along with a collection letter to a correspondent bank acting as an agent for the remitting bank, the collecting bank notifies the buyer upon receipt of the Draft and documents, and all the documents, and usually title of the goods, are released to the buyer upon his payment of the amount specified or his acceptance of the Draft for payment at a specified date.
  61. 61. Collection cont’d i. ii. iii. i. ii. iii. Advantages to the Seller documentary collections are uncomplicated and inexpensive documents of value are not released to the buyer until payment or acceptance has been effected collections may facilitate pre­export or post­export financing Disadvantages to the Seller ships the goods without an unconditional promise of payment by the buyer there is no guarantee of payment or immediate payment by the buyer ties up his capital until the funds are received
  62. 62. Collection cont’d i. i. ii. Advantage to the Buyer collections may favour the buyer since payment is deferred by him until the goods arrive or even later if delayed payment arrangements are agreed to Disadvantages to the Buyer by defaulting on bill of exchange, he may become legally liable trades reputation may be damaged if the collection remains unpaid
  63. 63. Types of Collection a) • • • i. ii. Documentary/Clean Collection An arrangement where the seller draws a bill of exchange on the buyer with relevant documents for the value of the goods or services and presents the bill of exchange to his bank. The seller’s bank sends the bill of exchange along with a collection instruction letter to a corresponding bank, usually in the same city as the buyer’s. A clean collection may represent: an underlying merchandise transaction, or an underlying financial transaction
  64. 64. b) Direct Collection • • • • An arrangement where the seller obtains his bank’s pre­numbered direct collection letter, thus enabling him to send his documents directly to his bank’s correspondent bank for collection. This kind of collection accelerates the paper­work process. The seller forwards to his bank a copy of the respective instruction/ collection letter that has been forwarded directly by him to the correspondent bank. The Remitting Bank treats this transaction in the same fashion as a normal documentary collection item, as if it were completely processed by such Remitting Bank.
  65. 65. 4. Documentary Credit • • • Documentary credit or Letter of Credit is an undertaking issued by a bank for the account of the buyer or for its own account, to pay the Beneficiary the value of the Draft and/or documents provided that the terms and conditions of the Documentary Credit are complied with. This Documentary Credit arrangement usually satisfies the seller’s desire for cash and the importer’s desire for credit. The Documentary Credit offers a unique and universally used method of achieving a commercially acceptable undertaking by providing for payment to be made against complying documents that represent the goods and making possible the transfer of title to the those goods.
  66. 66. Cont’d 66 • a) b) c) d) e) f) The meaning of Documentary Credit embodies the following. It is: a written undertaking given by a bank, known as an issuing bank or opening bank; to a seller, known as a beneficiary; at a request and on the instructions of its customer (buyer), known as the D/C applicant; to pay either at sight or at a specific future date; a stated sum of money; against delivery of shipment and submission of stipulated documents and fulfilment of all the terms and conditions in the D/C.
  67. 67. Cont’d 67 • • a) b) • In other words, a documentary credit is a conditional payment instrument made by the issuing bank in favour of a designated beneficiary. It is especially appropriate in the following circumstances: When the importer is not well known, the exporter selling on credit terms may wish to have the importer’s promise of payment backed by his banker; On the other hand, the importer may not wish to pay the exporter until it is reasonably certain that the merchandise has been shipped in good condition and/or in accordance with his instructions. A documentary credit, in this case, can satisfy both the exporter and the importer.
  68. 68. It should be noted that all the aforementioned are methods of obtaining payment for goods shipped and not methods of obtaining finance. 68
  69. 69. BENEFITS OF DOCUMENTARY CREDIT a) b) c) Provides a specific transaction with an independent credit backing and a clear­cut promise of payment. Satisfies the financing needs of the seller and the buyer by placing the bank’s credit standing, distinguished from the bank’s fund, at the disposal of both parties. May allow the buyer to obtain lower purchase price for the goods as well as longer payment terms than would open account terms, or a collection
  70. 70. cont’d d) Reduces or eliminates the commercial credit risk since payment is assured by the bank which issues an irrevocable Documentary Credit. e) Reduces certain exchange and political risks while not necessarily eliminating them f) May not require actual segregation of cash, since the buyer is not always required to collateralize his Documentary Credit obligation to the issuing bank. 70
  71. 71. cont’d g) Expands sources of supply for the buyers since certain sellers are willing to sell only against cash in advance or Documentary Credit h) Provides clear­cut guarantee of payment i) Provides the buyer with the assurance that required documents will be received
  72. 72. UNIT 3: INCOTERMS/TERMS OF DELIVERY/SHIPPING TERMS • • Introduction Incoterms, shipping terms or trade terms are one of the key elements of international contract of sale of goods. They identify the respective responsibilities of the trading parties in the quotation for each contract of sale.
  73. 73. Incoterms • • • • “Incoterms” is an abbreviation of “International Commercial Terms”. It was published by the International Chamber of Commerce in Paris and has its latest version, “Incoterms 2010”, which became effective on January 1, 2011. Incoterms define at the minimum level, the division of cost between buyers and sellers, the point at which delivery occurs, which party is responsible for import and export clearance. Incoterms also give some information regarding documentation.
  74. 74. Cont’d • i. ii. Incoterms provide generally four pieces of Information; Information on the transfer of risk ­ It defines at which place the risks of cargo loss and damage are transferred from the seller to the buyer during transportation operations. Information on the division of cost ­ It defines how costs resulting from the transport operations are shared between the seller and the buyer.
  75. 75. Cont’d iii. Information on the document ­ It defines who will provide the required documents. iv. Information on port of shipment and port of delivery – It defines where cargo or goods be loaded and place of discharge 75
  76. 76. • • • In international trade, there are likely to be three separate contracts for the transportation of goods; From the seller’s or exporter’s premises in his/her country to a named point or place in the importer’s country From the transport operator’s premises in the exporter’s country to the named point in the importer’s country From the port of discharge in the importer’s country to the importer’s own factory
  77. 77. Main Changes In The Incoterms 2010 • • • • • • Guidance Notes have been included before each rule Facilitates usage of electronic records if agreed or where customary Clearly allocates the Terminal Handling Charges (THC) in the relevant terms For ‘String Sales’, Incoterms 2010 clarifies the obligation to ‘procure goods shipped’ as an alternative to the obligation to ship goods Allocates obligations to obtain or render assistance in obtaining security related clearances Insurance cover has been altered with a view to clarify the parties’ obligation relating to insurance.
  78. 78. Cont’d • i. ii. iii. iv. Incoterms is now separated into two groups, those applicable to all modes of transport and those only applicable to sea and inland waterway transport. The two new additions are DAP and DAT and four deletions, DAF, DDU, DEQ and DES Incoterms 2010 Applicable For Sea and Inland Waterway Transport; FAS: free alongside ship FOB: free on board CFR: cost and freight CIF: cost, insurance and freight
  79. 79. Cont’d i. ii. iii. iv. v. vi. vii. Incoterms 2010 Applicable For All Modes of Transport; EXW: ex works FCA: free carrier CPT: carriage paid to CIP: carriage and insurance paid to DAT: delivered at terminal DAP: delivered at place DDP: delivered duty paid
  80. 80. PURPOSE OF INCOTERMS • • Main task of incoterms is; to define the sharing of cost and transfer of risk or damage over the goods, up to an agreed place to avoid misunderstanding and disputes among the parties over the sharing of costs and transfer of risk or damage of the goods Incoterms are used directly by buyers and sellers, and indirectly by banks, insurers and carriers/forwarding agents
  81. 81. Users of Incoterms • • a) a) Banks Most letters of credits will state an Intercom This enables banks to check, to an extent, that: The documents called for in the credit are consistent with the term used The documents presented are consistent with the term used 81
  82. 82. Cont’d • • • • Insurers If there is loss or damage to cargo, insurers will be at pains to establish exactly where it has occurred and therefore whether the buyers or sellers were responsible Incoterms determine whether it is the buyer or seller that is a risk Carriers/Forwarding Agents To determine which party will be responsible for payment of freight charges and from which port of loading to port of discharge or any intermediary To determine which party will be responsible for the various activities in transportation
  83. 83. FORMAT OF INCOTERMS • • • • All incoterms consist of 3 alpha characters Incoterms are followed with either a “DELIVERY PLACE/PORT OF LOADING” or “PLACE OF DESTINATION/PORT OF DISCHARGE” E and F terms are usually followed with a place of delivery/port of loading C and D terms will usually be followed with a place of destination/ port of discharge
  84. 84. Cont’d • • • The named place stated after the incoterms, is the place up to which the seller pays the freight costs. e.g., “EXW New York” Delivery Point is the point at which the risk transfers from the seller to buyer. “Delivery”, in the incoterms sense, has nothing to do with transfer of ownership. Title of the goods always lies with the documents 84
  85. 85. COMMON INCOTERMS 1. • • • • EXW – Ex Works (Aluworks, Tema­Ghana) Exporter/Seller is responsible for producing the goods and: Making them available at the factory premises for the importer Providing the buyer with commercial invoice for goods Buyer/Importer is responsible for: Local transport and insurance to the port of loading On­ and off­ loading charges
  86. 86. • • • • 2. FAS­ Free Alongside Shipping (KINTAMPO, Tema Port) Exporter/seller must arrange to: Deliver the goods at the point and port of loading named in the contract Pay for the production of goods, all charges up to delivery of goods including local transport and insurance cost to the side of the named ship Buyer/Importer is responsible for: Choosing the carrier to transport the goods abroad and paying the cost of freight from the port of loading including the cost of loading on board the vessel to the port of discharge Arranging and paying for any export permit or export taxes, excluding value added tax
  87. 87. • • • • • Free on board means that the buyer does not pay for transporting or insuring the goods from the seller’s premises. The Exporter/seller must: Pay for the transportation to the named port of shipment Provide and pay for the export license The Buyer/Importer must: Nominate the carrier to carry the goods Give the seller/exporter the details of the ship/airline, sailing time, airline flight time/date 3. FOB ­ Free On Board of vessel named carrier/ship (GYATA, Tema Port)
  88. 88. 4. CFR – Cost and Freight (named port of discharge, Tema Port) • • • • The seller/exporter must: Nominate the carrier and so make the contract of carriage Pay for the transportation of the goods to the place of shipment and local insurance The buyer/importer must: Pay for the marine insurance of goods from the time they are taken on board to the port of discharge Pay for the unloading cost at the destination
  89. 89. 5. CIF – Cost, Insurance and Freight (Named Port of discharge, Tema Port) • • • The seller has the same responsibility and obligation as that of C&F, except an added responsibility of arranging and paying for insurance. Buyer should arrange to pay for handling and off­loading charges and: Obtain the import license Arrange to pay the import duties; and Pay for local transport and insurance cost from the port of discharge to the buyer’s premises
  90. 90. 6. DDP – Delivered Duty Paid (Buyer’s Premises) • • • Means that the seller delivers the goods to the buyer, cleared for import, and from any arriving means of transport at the named place of destination. The seller must pay all import duties including value added tax of the importer’s country and also provide relevant import license. The seller has an added responsibility for arranging and payment of import license of import duties and value added tax
  91. 91. 7. DAT – Delivered At Terminal (Shed One, Tema Port) • • • • • Means that seller delivers when the goods, once unloaded from the arriving means of transport, and placed them at the disposal of the buyer at a named terminal at the named port or place of destination Exporter/seller delivers the goods on the terminal at the named port of destination pays for unloading cost Buyer/importer accepts delivery of goods at named port of destination is responsible for local transport, insurance and others 91
  92. 92. 8. FCA – Free Carrier (Boankra Inland Port, Kumasi) • • • • • • This term is used where inland port is used in the transportation of goods. The Exporter/seller: delivers goods to Boankra inland container depot completes export and customs documentation including obtaining export license The importer makes all arrangements at his own cost and risk to cover transport of goods to his own premises from Inland Container Depot arranges for appropriate insurance and obtains policy or certificate obtains the import license pays for import duties
  93. 93. 9. CPT – Carriage Paid To (Named place of destination) • • • • Similar to CFR, except that exporter must arrange and pay for transport to the named port of discharge, which could be an inland container depot. The exporter/seller: completes export and customs requirements including obtaining any export license pays export duties and taxes The buyer/importer must: obtain import license and pay all the import duties, including value added tax
  94. 94. 10. CIP – Carriage and Insurance Paid (to named place of discharge) • • • • The seller/exporter: pays for the freight cost pays for the insurance charges during carriage The buyer/importer: arrange for import license or permit pay import duties and taxes including value added tax
  95. 95. UNIT 4: DOCUMENTS USED IN INTERNATIONAL TRADE • • • • Objectives; To know the documents used in the International Trade business To explain the impact of modern transport on International Trade To explain the type and features of documents used in International Trade To discuss the types of bill of lading and other documents used in International Trade
  96. 96. Introduction • • • Documentation Documentation in international trade transactions provides tangible evidence that goods have been ordered, produced and dispatched in accordance with the buyer’s requirement or pre­sale contract between the seller and buyer. Documentation is also to satisfy government regulation in the country of the exporter or buyer and has thus, become an increasingly important factor in obtaining finance for International Trade. Documents have become an important part of international business because of the complex delivery terms of shipment, payment mechanism and mode of settlements. Documents can be classified as commercial and financial.
  97. 97. The Impact of Modern Transport on International Trade • • The trend towards integrated (door to door) and multi­modal transport accelerated by the advent of the container has made certain traditional “critical point” under FOB, CFR and CIF no longer important as a point for the division of functions, costs and risks between the contracting parties. In addition, since a key function of the transport document is to make evident the goods ordered and their condition, it should be issued at a point where the carrier has reasonable means of conducting a check. In modern transport operations, this point has shifted from the ship’s rail to seaport or inland terminals. Consequently, there is a requirement for documents that specify goods received for shipment.
  98. 98. TRANSPORT DOCUMENTS 1. • • • Bill of Lading There is always a need for a document to cover the movement of goods from one point to another, either by sea, road or rail. Sea transport covers about 70% of the world’s trade, so documents covering goods by sea are very crucial and critical for the sustenance of trade. Bill of lading is a document issued by the shipping line covering goods being transported on sea to the owner of the goods.
  99. 99. cont’d • • • It indicates the port of loading, where the carrier will take the goods and the port of discharge. It also indicates the date, which goods departed from the port of loading and the status of the freight. The document also helps in the determination of the latest shipment date inserted in the letters of credit. 99
  100. 100. The Functions of a Bill of Lading 1) 2) 3) 4) It acts as a receipt for the goods from the shipping company to the exporter It is evidence of the contract of carriage between the exporter and the carrier It acts as a document of title for goods being shipped overseas. The goods are released from the overseas port only by producing one of the original bills of lading. A bill of lading is a quasi­negotiable document. Any transferee for value who takes possession of an endorsed bill of lading obtains
  101. 101. cont’d • Original bills of lading are usually issued in three original sets and any of the original bills of lading enables the possessor to obtain the goods. 10 1
  102. 102. Transfer of Title to Goods • i. Title to the goods can be transferred by the sender, using a marine bill of lading in one of three ways: Issuing a bill of lading to order and endorsed in blank. The title to the goods can be obtained by anyone presenting a signed original copy of the bill of lading ii. Issuing the bill of lading to the order of the named buyer or bank overseas
  103. 103. cont’d • iii. Issuing the bill of lading to the order of a named buyer, but arranging for the bill of lading to be presented to the buyer through the international banking system The bill of lading will indicate the state in which goods were received for shipment (clean, dirty or damaged) 10 3
  104. 104. Types of Bill of Lading a) • • • • • Liner Bill of Lading This is a marine bill of exchange for carriage by a vessel on a scheduled run rather than an “Adhoc” sailing, without a scheduled route or timetable. It has the same function as the ordinary Marine bill of exchange It provides evidence of contract of carriage It serves as receipt for the shipper/exporter. It is a document of title­ the holder has “Constructive” control over the shipped good.
  105. 105. cont’d • • b) Short Form Bill of Lading This is a bill of lading which does not contain the shipping company’s terms and conditions of carriage. A short form bill of lading can therefore not be a contract of carriage between the shipping company and the exporter or overseas buyer, but it refers to the conditions of carriage which can be found on the master document or on a copy of the carrier’s standard condition.
  106. 106. cont’d • • • c) Container Bill of Lading Shipping companies issue a bill of lading which simply acts as a receipt for a container with goods packed in it. Container bills of lading can be issued to cover goods being transported on traditional port to port. Palletized cargoes, and cargoes contained on lash barges, which are loaded on larger vessels qualify for issuance of container bills of lading. 10 6
  107. 107. cont’d • • d) Combined or Through Bill of Lading Combined transport bill of lading may show evidence that goods have been collected from a named inland place and have been dispatched to another seaport or inland container depot in the importer’s country. The goods, although carried by two or more modes of transport, are shipped under a single contract of carriage.
  108. 108. cont’d • • • e) Charter Party Bill of Lading A charter party bill of lading is issued by the hirer of a ship to the exporter and the terms of the bill are subject to the contract of hire between the ship’s owner and hirer. The contract is therefore between the exporter and hirer of the vessel, not the ship owner. A bill of lading issued for the journey will state “Subject to charter party” and the contract of carriage is subject to contract for the hire of the vessel 10 8
  109. 109. cont’d • • f) Trans­shipment Bill of Lading These are used when the goods have been transferred from one vessel to another vessel at a named trans­shipment port. Once again the carrier has full responsibility for the whole journey.
  110. 110. 11 0 • • i. ii. • • 2. Sea Way Bill A sea way bill is a transport document which is issued by the shipping line. It is a document which gives details of a consignment of goods and it acts as: a contract between the shipping company and the exporter or overseas buyer a receipt by the shipping company for the goods received and so, provides evidence of shipment. A sea waybill is non­negotiable and is not a document of title. It is used instead of a bill of lading.
  111. 111. • • • • • 3. Air Way Bill/Air Consignment Note An air waybill is a waybill for goods transported by air. It is a contract of carriage and receipt by the Airline for goods received into custody. Air way bill is not a document of title. The airline will hand the goods to the consignee at the port of discharge without the consignee having to present an original copy of the waybill An air waybill provides evidence of dispatch of goods with detailed flight date, freight, port of loading and discharge, consignee and signature of the airline.
  112. 112. • • • 4. Road Consignment Note/Truck Receipt A road consignment note is a receipt issued by a carrier for goods that are transported by road. The note specifies the name and address of the supplier to the consignee, place of delivery and the place where the goods are to be taken by the carrier. The note acts as both a receipt and a delivery order, and is neither non­negotiable nor a document of title. 11 2
  113. 113. • • • • 5. Railway Consignment Note This is a note issued by a railway corporation for goods dispatched by rail. It is a contract of carriage between the supplier and the railway company. The railway authorities will release the goods at their destination to the consignee, who must apply for them and give proof of identity. It is not a document of title.
  114. 114. 11 4 • • • 6. Post Office Receipts Post office receipts are issued by the relevant postal agencies for goods dispatched by parcel post. They, thus, provide details and confirmation of dispatch of goods. The goods will be sent directly to the person or company to whom the parcel is addressed.
  115. 115. COMMERCIAL DOCUMENTS • • • i. ii. 1. Pro­forma Invoice Pro­forma invoice is the price quotation by an exporter to a potential overseas buyer. The quotation indicates description of goods, unit price , total price, delivery terms, and payment terms. Pro­forma invoices are used for the following purposes: The overseas buyer might need to present a pro­forma invoice to government agencies or bank in his country in order to obtain an import license and foreign exchange for payment of goods Customers importing under documentary collection are supposed to obtain prior approval from their respective banks before importing goods into the country
  116. 116. cont’d iii. They serve as a price quotation and might include the terms of sale iv. In certain cases, they can be used as a document of tender for an export contract
  117. 117. 11 7 • • i. ii. iii. iv. 2. Commercial Invoice This is a demand note issued the supplier for goods or services sold or a claim for payment in connection with goods already supplied to a buyer. A commercial invoice is a claim for payment for goods under the terms of the commercial contract. The commercial invoice will include: detailed description of goods, quality, unit price and total price the terms of delivery or Incoterm terms of payment – open account, documentary credit or advance payment method of settlement – by swift, telegraphic transfers, mail transfers, foreign banker’s draft
  118. 118. • • 3. Certified Invoice It is a commercial invoice, which also includes a statement by the exporter about the condition of goods sent or their country of origin. Some form of statement might be provided at the request of the buyer or for the benefit or customs authorities
  119. 119. • • • • 4. Consular Invoice It is a commercial invoice, which is prepared on a form, printed in the exporter’s country by the consulate of the buyer’s country. The Trade Attaché or Consular then stamps it. The purpose of a Consular invoice is to help the government of the importing country to control imports in the country. Its other function is to provide information which forms the basis for which import duties are paid on goods imported
  120. 120. • • • 5. Certificate of Origin This is a declaration which states the country of origin of the goods and is common place in countries wishing to identify the origin of all imported goods. A certificate of origin is a statement signed by an appropriate authority certifying that goods were produced in the exporter’s country. The forms should be completed by the supplier and may be authenticated by the Local Chamber of Commerce or other authorized body in the exporter’s country. 12 0
  121. 121. • • • 6. Weight Note This is a document issued by the exporter or third party declaring the weight of the goods in the consignment. 7. Packing List This document gives the details of the goods which have been packed. It is normally required by Customs Excise and Preventive Services whenever goods are being cleared.
  122. 122. 12 2 • • • This is a certificate issued by an independent third party resident in the exporter’s country, ensuring that goods being imported are of high quality with reasonable price comparisons. The mandate for companies operating in Ghana like SGS, Cotecna, Bureau de Veritas/ Ghana Standards Board is to check on quality, as well as price comparisons. The mandate of the inspection companies operating in Ghana is derived from the Import declaration form issued by the Ministry of Trade. 8. Inspection Certificate–Pre­Shipment Inspection
  123. 123. 9. Final Classification and Valuation Report – Destination Inspection • • • This is a document issued to classify goods that have been imported into the country. The document also shows the value of goods and thus, enabling the Customs Excise and Preventive Service to charge the relevant import duties as well as sales tax or value added tax. The importer is required to submit a copy of Importation Declaration Form to the appointed inspection company in Ghana to enable them conduct the inspection and the issue the Destination Inspection Certificate which will classify the goods for CEPS valuation purposes.
  124. 124. INSURANCE DOCUMENTS • • • • Insurance Certificate It is an evidence that shipment is insured against loss or damage while in transit. Unlike domestic carriers, ocean going steam ship companies assume no responsibility for the merchandise they carry, unless the loss is caused by their negligence. Marine insurance on an international transaction may be arranged by either the exporter or the importer, depending on the terms of sale. The laws of a country require the importer to buy such insurance, thus protecting the local industry and saving foreign exchange.
  125. 125. 12 5 a. b. • c. • Basic named perils – sea, jettisons, explosions and hurricanes Broad named perils – theft, pilferage, non­delivery, breakage and leakage in addition to the basic perils. Both policies contain a clause that determines the extent to which losses caused by an insured peril will be paid. All risks cover all physical loss or damage from any external cause and is more expensive than the policies previously mentioned. War risks are covered under a separate contract. Three kinds of Marine Insurance Policies:
  126. 126. cont’d • • The premiums charged depend on a number of factors, among which are the goods insured, the destination, the age of the ship, whether the goods are stowed on deck or under deck, the volume of business, how the goods are packed and the number of claims the shipper has filed. Because neither the policies nor the premiums are standard, it is highly recommended that the exporter obtains various quotations.
  127. 127. 1. • • • A Cover Note/Letter of Insurance This is issued by an insurance broker to provide notice that steps are being taken to issue a certificate or policy 2. A Certificate of Insurance It shows the value and details of the shipment and risks covered. It is signed by the exporter/importer and the insurance company. Only a certificate of insurance is required when the policy of the exporter/importer provides “Open Cover” for the whole of its export trade for one year. Three Basic Insurance Documents are:
  128. 128. cont’d 12 8 • When an exporter/importer takes out an open cover with any reputable insurance company for his export or import trade, a certificate of insurance for each individual shipment will be provided by the Insurance Company.
  129. 129. 3. Insurance Policy • • a) b) c) d) e) This gives details of risks covered and is evidence of a contract of insurance. Most insurance policies have an “All Risk Policy”, and the main risks covered are: Perils at sea – accidental loss or damage caused by sinking, collision, sea water, heavy weather and stranding Jettison – loss caused by a decision of the master of the ship to throw goods over board so as to lighten the vessel in an emergency Fire, including smoke damage Theft – forcible theft of goods rather than pilferage Damage in loading, trans­shipment or discharge
  130. 130. cont’d • • Policy or certificate will not cover losses or damage from strikes, riots, civil commotions, wars, coup d'état or capture and seizure of vessel and other force majeure. These risks must be insured separately by payment of an additional premium.
  131. 131. FINANCIAL DOCUMENTS • a. b. In international trade, there are two financial documents which provide for payment by the buyer. These are: after a period of credit establishing a clear legal undertaking by the buyer to make the payment either by the Bill of Exchange or promissory note.
  132. 132. • • • • • A bill of exchange is defined by the Bill of Exchange Act 55, 1961 as an unconditional order in writing addressed by one person to another signed by the person drawing it requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future date, a certain sum in money, and acting to the order of a specified person, or to bearer 1. A Bill of Exchange
  133. 133. • • • • • Bills of exchange can be classified in two types: a. Sight Bill The bill requires payment on sight or on demand drift. All that is required is for the drawee to authorize payment via the banking system. b. Term Bill (Tenor or Usance) Bills which are payable at a future date are called Term Bills. With term bills, payment is due 90 days after sight. Types of Bill of Exchange
  134. 134. cont’d • • • When the bill of exchange is presented to the drawee, he should accept it if he wishes the bill to be honoured. The drawee would sign the bill of exchange on the front and insert the date of acceptance. He would be legally bound to pay 90 days after the date of acceptance shown on the bill of exchange. 13 4
  135. 135. Subdivision of Bill of exchange a) • • • Trade bills – these are bills which are drawn on and are accepted with the underlying transaction being for commerce or trade. These bills drawn on trading entities are accepted by some. Such bills from individual persons are risky by their very nature. b) Bank bills – these are bills are drawn on accepted by the banks. Such bills carry very little risk, especially if the bank accepting it is a first class bank. c) Accommodation bills – these are used by banks to provide accommodation facilities for their clients d) Documentary bills and clean bills
  136. 136. • • • • It provides a convenient method of collecting payment from foreign buyers The exporter can seek immediate finance using term bills of exchange instead of having to wait until the period of credit expires On payment, the foreign buyer keeps the bill as evidence of payment. It therefore serves as a receipt. If a bill of exchange is dishonoured, it may be used by the drawer to pursue payment at maturity. Advantages of Using Bill of Exchange
  137. 137. • • • • • • • A promissory note is defined in the Bill of Exchange Act of Ghana, Act 55, 1961 as: an unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand or fixed or determinable future time a sum of money to the order of a specified person or to bearer 2. Promissory Note
  138. 138. UNIT 5: DOCUMENTARY CREDIT • • • • • • • Objectives; To define Documentary Credit To examine the general instruction for opening Documentary Credit To explain the parties involved in the Documentary Credit To describe the types and benefits of documentary credit To help students to understand the specialized credit available To explain the financing mechanisms under documentary credit facility To discuss the practical handling of discrepant documents under documentary credit
  139. 139. Introduction • • It is the only payment mechanism which usually satisfies the seller’s desire for cash and importer’s desire for credit. A Documentary Credit is a written undertaking issued by a bank, on behalf of the buyer, to the seller, to pay for goods or services, provided that the seller presents documents which comply fully with the terms and conditions of the credit
  140. 140. TYPES OF DOCUMENTARY CREDIT a) b) • Irrevocable Credit – incapable of cancellation or modification except with the consent of the Beneficiary Revocable Credit – can be cancelled or modified by the importer at anytime without the consent of the beneficiary. The cancellation is subject to the customer remaining liable in respect to any negotiation 14 0
  141. 141. PARTIES TO THE DOCUMENTARY CREDIT 1) 2) 3) 4) Applicant/Buyer/Opener – The party on whose behalf it is issued Issuing Bank – The bank that issues it and acts for the Applicant Advising Bank – The Bank through which documentary credit is conveyed to the beneficiary Beneficiary – the party to whom the documentary credit is addressed and who will receive payment.
  142. 142. cont’d 14 2 • • 5) Confirming Bank – the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request. Sometimes, an advising bank is requested by the issuing bank to add an additional commitment to pay the beneficiary. If it agrees to the request, this advising bank will take a dual role.
  143. 143. BANK’S CONSIDERATION BEFORE ISSUING CREDIT a. • • Status Report/Credit Standing on the Beneficiary For the protection of both the issuing bank and the applicant, consideration should be given to a status report on the integrity, credit worthiness and track record of the beneficiary Such reports could be obtained from the beneficiary’s bankers through the importer’s correspondent bank network