International business unit1

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
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Module 6: International Business

2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
LEARNING OBJECTIVES
By the end of this module, you should be able to:
• Understand the rationale behind international business
• Explain the nature and usefulness of trade finance
• Explain how the different international payment services work
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Trade Finance Facilities
Swift and Other Bank International Payments
Vostro Accounts and Nostro Accounts
Dealing in Foreign Currencies
Currency Options
Forward Contracts
MODULE COVERAGE
3
How Collections Work
Factoring

4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Introduction and Background
International business refers to business activities that take place beyond one
country’s geographical boarders.
The main players in this field are exporters and importers although
governments and other service providers like banks also play a major role.
Compared to domestic trade, international trade has its own unique
characteristics and challenges such as:
• Lack of common language and culture(Ugandan importers claim they are
cheated by Chinese traders because they don’t understand the language)
• Foreign Countries’ laws may hinder business activity
• Foreign Customs’ formalities and taxes may prove a hindrance and difficult
to understand
• Complex Trade documentation may prove problematic
• Foreign currency availability, appreciation and depreciation visa avis local
currency may prove a big challenge and lead to losses
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Benefits of international trade
• Provision of vital inflows of foreign currency(export of goods and services)
• Availing a wide range of goods and services – facilitating consumer choice and
satisfaction
• It is a source of income and profit for businesses as well as providing employment
for a big number of people
• Promotion of diplomatic relations among countries through increased trade and
political interaction
• Because the Uganda importer uses shillings as his currency and the Japanese use
yen as their currency, a mechanism has to be devised to exchange shillings for yen
thus giving rise to foreign currency exchange market
How payments are effected in international business
• Prior to receipt of goods (Advance payment)
• On receipt of goods
• On deferred basis in accordance with terms agreed by the purchaser and seller
• Exporters taking advantage of pre or post shipment finance
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
International trade players
• Exporters
• Importers
• Banks
• Central banks
• Insurance companies
• Shipping/freight companies
• Chambers of commerce
• Customs
• Embassies
• Trade missions
Role of Banks in international Trade
• Maintaining Vostro and Nostro
accounts hence facilitating money
transfers
• Assisting customers in the
purchase of foreign currencies
and facilitating transactions
• Extending credit facilities,
documentary credits, guarantees
etc
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
What are trade finance facilities?
Trade finance facilities are financial products or services offered by financial
institutions to their customers engaged in international business to enable them
run their businesses smoothly. Depending on the terms agreed between exporters
and importers in the various countries, financial institutions will tailor financing
facilities to suit their customers’ financial requirements.
Below are some of the areas where trade finance is available:
• Import or export of goods prior to resale- Banks will extend credit to an exporter
or importer expecting repayment to come from proceeds of sale of goods
exported or imported
• Purchase of finished goods against firm customer orders- Banks can finance
purchase of finished goods using the goods as collateral with repayment coming
from proceeds of sale
• Purchase of raw materials to use for manufacturing concerns – Banks will extend
credit to an importer to purchase machinery for manufacture of goods. Repayment
of the credit may come from sales of manufactured goods or other sources
depending on terms of the credit
• Finance for contract expenses abroad, against firm contracts – Banks can finance
contractors pending receipts of contractual proceeds
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8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Benefits of trade finance to customers
Among the advantages of using trade finance facilities are:
• It helps customers plan their business transactions without having to
worry about cash flow problems.
• It May help the customer expand his business and improve profitability as
in most cases goods in question are used as collateral.
• Convenience and Flexibility -Trade facilities provide the convenience and
flexibility to utilize facilities only when the customer needs them hence
saving on costs of financing.
• Working Capital - trade facilities are a short-term source of Working
Capital
Types of trade finance facilities
Trade finance facilities are tailored to meet the specific needs of the importer
or exporter and are categorized as short-term, medium-term and long-
term. It can also be pre-shipment (before goods are dispatched) or post –
shipment (after goods have been dispatched)
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9. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Term loan- A long or medium- Term loan is usually given to customers to purchase
goods of capital nature such as fixed assets with repayment of loan timed to
coincide with the life of the asset. Term loans are mainly used for importing
machinery and other lasting assets which are productive in nature.
Leasing –The financial institution will purchase an asset such as a tractor and lease it
to the customer. Although the customer takes physical possession of the tractor, it
will remain the property of the lessor (bank) until the cost of asset and lease
charges are paid in full (financial lease) when it becomes his property.
Alternatively, he will pay all the lease charges for an agreed period and thereafter
the asset reverts to the lessor (operating lease). DFCU Bank is one of the pioneers
of leasing facilities in Uganda.
Advantages of leasing
• No large initial capital outlay is required since the cost is spread over a number of
years. This can significantly help maintain cash flow, which is critical to all
businesses.
• Collateral security - When you lease a product, it is still owned by the leasing
company while you have the benefit of using it. This means you need little or no
other collateral security in a leasing contract
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10. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Advantages of leasing...
•Tax advantages-Lease rentals
are considered as an
operating cost, which means
that it is often possible to
deduct them from taxable
profits (as a trading expense).
•Budgeting-As a lease
agreement is almost always a
fixed contract, it is relatively
easy to budget and make
more accurate cash-flow
forecasts.
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11. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Disadvantages of leasing
• No ownership- you never own the productive asset. It remains the property of the
leasing company during and sometimes after the lease.
• Long term cost -although leasing avoids paying a large lump sum, over a long
period of time it often works out considerably more expensive. Over the course of
a standard lease, you pay the cost of the equipment as well as the leasing
company’s interest and charges.
• Maintenance- Although you do not own the equipment that you lease, you are still
responsible for its maintenance and repair. This may negatively impact on your
costs.
Overdraft (OD) – This is an arrangement for the customer to draw funds in excess of
his credit balances and is suited for use as working capital. A limit is normally
agreed and a customer can move from credit to debit from time depending on his
business activity.
Bank guarantee (BG) – This is an undertaking by a bank in favour of his customer’s
creditor that should he fail to meet his obligations, then the bank will be liable and
step in. Banks will treat guarantees in the same way they assess the
creditworthiness of a customer since they will be required to make good in case
the customer defaults.
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12. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Trust receipt (TR) –This type of financing requires that goods are warehoused and are
released to the customer for sale in instalments until the whole debt has been
repaid. The warehoused goods serve as collateral. This offers increased control
over payment timing and improved cash flow. The warehousing of goods is
normally evidenced by a receipt that is issued
Bankers acceptance (BA) – When letters of credit call for usance bills/term bills- i.e.
bills of exchange payable at a specified date after acceptance by the drawee, the
seller will draw a draft on the nominated bank demanding payment at a
determinable future date say 30 days after sight.
Bills of exchange –This is a written order used primarily in international trade that
binds one party to pay a fixed sum of money to a named third party at a
predetermined future date. Bills of exchange are similar to cheques and
promissory notes. They can be drawn by individuals or banks and are generally
transferable by endorsements.
Letter of Credit (LOC) commonly known as documentary credit) Normally bills of
exchange are drawn under letters of credit by the exporter and his bank may
advance him money (negotiation) pending receipt of proceeds from the importer.
Banks also accept bills of exchange which are thereafter negotiated by the
beneficiaries at fine rates since payment is already guaranteed by banks.
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13. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Short term revolving credit (STRC) - A revolving credit limit is usually structured as a
short-term facility where the customer repays each drawing within a fixed period
of time. The customer has the possibility to re-borrow sums as needed, up to the
total amount of the limit. This form of facility is usually used for financing
recurrent working capital needs.
Letter of comfort
The exporter’s bank issues a letter of comfort to the exporter’s local suppliers that the
exporter is the beneficiary of a documentary credit that the bank is authorized to
pay over direct to the supplier a certain sum of money from the proceeds of the
credit when received.
Outward / Inward Bills for Collection (OBC/IBC)
Outward Bills for Collection (OBC) refers to the handing over of domestic sales and
export documents to the bank by the seller, for the bank to collect payment from
the buyer through the buyer's bank. The bank may advance the customer some
money pending receipt of proceeds from the buyer
Factoring or Invoice financing
If you are an exporter and you are in need of funds but you do not want to borrow
from your bank, you can sell your invoices to a factor for immediate cash at a
discount. It is then up to the factor to collect the proceeds and recover the moneys
due to the exporter.
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