FINANCING OF INTERNATIONAL TRADESpecial Terms Pre-text assignment A. Match these terms with their definitions Bankers ' acceptance, foreign brunch, letter of credit, country risk, draft, open account, commercial bank, collection, consignment, export credit, correspondent bank, credit insurance a) All the risks, political as well as commercial, inherent in trading with a for b) A service provided by a bank when it agrees to collect the proceeds of a c) Banks which maintain accounts with one another and which channel busi d) The agency of a bank abroad. e) Trade between an exporter and an importer, in which no documents are re f) Trade between an exporter and an importer whereby the importer does not g) An order to pay; also called a bill of exchange. There are sight drafts (pay h) A letter from a bank to an exporter saying that a credit has been opened in the exporter's favor. It states that the exporter will get paid if the documents conform to the conditions set forth in the letter. These conditions are based on the sales contract between exporter and importer. i) A time draft drawn on by an exporter and accepted by that bank. j) A financial institution whose primary functions are to gather deposits and lend part of these funds either on a short-term or medium-term basis. k) A system of financing an exporter, usually through loans, at an interest rate that is lower than that of the local money market, 1) A system whereby government-sponsored institutions insure an exporter against commercial and political risks. B. Vocabulary Practice 1. Give a definition of country risk. 2. Is a bank responsible if it is unable to collect a draft? 3. What do correspondent banks do for each other throughout the world?
4. Why is an open account the simplest form of trading with an importer? In 5. What is a draft? Give another word for it. What does sight draft mean? What 6. What is a letter of credit? Under what condition will an exporter be paid? 7. Define bankers' acceptance. 8. What are the two basic functions of a commercial bank? 9. What risks are insured by credit insurance? Financing of International Trade Trading with other countries is not the same as trading within one's own country. At home a company or a bank is familiar with its own people, laws, and business practices. Abroad the picture becomes a complex one. Each country is different and therefore is said to cany different risks. Political risks, for example, relate to such varied factors as treaties, war, import quotas, and foreign exchange restrictions. Commercial risks, also to be found at home, may increase abroad because business practices in the foreign country may differ or because the foreign country may be in a weaker economic position than that of the exporter's country. Trading abroad is also a risk because the seller usually does not know the buyer. Time and distance are factors that may create problems in communications and in the salability of goods, especially those which are perishable. Language barriers, differences in laws, and exchange rate fluctuations all add to a company's problems. Banks that finance world trade are guided in the same way as exporters. They take a very close look at each country they become involved with. They rate each country according to its overall country risk, which encompasses all the factors mentioned above. The total amount of loans extended by a bank to a foreign nation is called country exposure. Country exposure will depend on the bank's estimate of the country risk involved. Commercial banks that finance international trade take a risk either in the foreign country or in the exporter. Sometimes banks perform merely a collection function (i.e., they collect the proceeds of a sale from the importer abroad) without financing anybody. At the outset of foreign trade, banks develop a network of correspondent banks abroad with which they maintain accounts. This facilitates long distance communication transfer of funds and other transactions. Eventually many banks decide to establish foreign branches, which then assume various functions previously carried out by correspondent banks. In addition, many banks buy into existing overseas banks (joint ventures) thus achieving the.same objective: generating business overseas and keeping it in their own bank. Today the various networks of branches, joint ventures, and correspondent banks coexist peacefully. An exporter has a number of trading options. If the country risk is great and the importer's credit standing is uncertain, the exporter may wish to settle on cash in advance or partial cash in advance. If the buyer and seller know each other well, they may decide to trade on open account. This means that no documents are involved and
that legally the buyer can pay anytime. The seller loses all control over the goods once they have been shipped. In this arrangement the buyer would have to he in a stable market. The chance of the foreign country imposing exchange controls should be absolutely minimal in open account cases. To retain title or ownership to the goods, the exporter can enter into consignment transactions. The exporter is then paid only when the goods have been sold. If not sold, the goods can be shipped back. n consignment or open account transactions, (he bank plays no role. However, it features prominently when a seller draws a draft (an order to pay) on a buyer. The draft, also called a bill of exchange, is the document normally used to effect payment in international transactions. It is signed by the seller (drawer) and drawn on the importer (drawee). It contains an unconditional order to pay, and it is payable either on sight (on presentation) or on time For example, ninety days sight means ninety days after presentation. A lime draft allows a delay in settlement. The time span of a draft (e.g., ninety days) is called tenor. A draft is either clean (without documents) or documentary. In the latter case, documents, such as bills of lading, invoices, certificates of origin, and insurance policies accompany the draft. The exporter will forward drafts, whether clean or documentary, to the bank, which in turn will send the drafts to a foreign bank for collection. The importer can take possession of the goods only upon payment. However, in the case of a clean draft, where the importer has been sent documents directly from the exporter the merchandise can be collected on presentation. A clean draft is therefore only used if the seller knows the customer well. In the case of a documentary draft, the bank possesses the documents and surrenders them only upon payment. A documentary draft offers greater security to the exporter. The methods of payment just described are used if a buyer and a seller have gained a degree of confidence in each other. But trading partners have other alternatives. If an importer's bank is satisfied with its customer's credit rating, it will open a letter of credit in favor of and addressed to the exporter. This letter pledges to pay the exporter if the merchandise is shipped in accordance with the conditions in the letter of credit - conditions that are based on the contract between the buyer and. seller. Thus, the bank backs up the business transaction between the importer and exporter. Both parties are protected under a letter of credit. The importer has the assurance that the goods will conform to the agreement, and the exporter is assured that the goods will be paid for. Further, the importer might be able to get better trade terms by using the letter of credit system, though this will be offset somewhat by the bank's charges. The importer may also be able to get financing from the bank under tiie same letter of credit. The exporter knows that the goods will be paid for by the importer's bank, even if the exporter is unfamiliar with the foreign bank's credit standing. The confirming bank pays the drafts drawn under the letter of credit and has no recourse to collect from the exporter, even if the opening bank issuing the letter of credit does not reimburse the confirming bank. When a bank issues a letter of credit, it informs its foreign branch or correspondent to advise the beneficiary (the exporter), who then examines the letter of credit. If it does not conform to the conditions set in the sales contract, the exporter may request an amendment. If it is an irrevocable letter of credit, and they usually are, it cannot be changed unless all parties agree to amend. After confirming the letter of credit, the exporter delivers the goods to the shipper who then issues a bill of lading. Other documents, such as invoices and insurance documents, are prepared by the exporter. The next step occurs when the exporter draws a draft on the opening bank and presents it, with the letter of credit plus documents, to his or her own bank. Usually this bank will investigate the documents and, if they are in order, it will pay the draft. The letter of credit and documents are sent to the opening bank. It is the bank's responsibility to examine the documents in relation to the letter of credit issued. If discrepancies exist, they will have to be corrected, either by a new letter of credit, by new documents, or by amendments. Discrepancies include any one of the following: the letter of credit expired; the draft was not properly drawn; there was no indication on the bill of lading that goods were received on board; there was insufficient insurance; or an invoice description did not match that of the letter of credit. When the documents finally arrive, the draft is paid by the bank, which in turn gets paid by the importer. The bills of lading are turned over to the shipper, who will surrender the letter of indemnity to the bank; the bank will then cancel it. When the documents are presented to the opening bank, the bank accepts to pay the draft drawn by the exporter on the bank at maturity (e.g., ninety days after date). This time draft now becomes a banker's acceptance. Financing of international trade is made possible in part by commercial banks. The basic function of a bank is to gather deposits (demand, time, and savings accounts) in order to lend these funds at a profit. Deposits are received from customers who are "cash rich." They might be exporters who regularly receive payments from their buyers. They will ultimately use these funds in their businesses in order to pay for production costs (i.e., salaries, wages, raw materials, or energy). Granting loans goes to the heart of banking. Banking officers ask themselves many questions before making a loan: What is the foreign country risk? What is the risk of depositors suddenly withdrawing their funds on which the loans have been based? What is the risk of decline of the industry in which borrowers operate? What are the ups and downs of the industry, and when are they likely to occur? The bank's responsibility is one of protection. It should protect its customers' deposits by molding big-risk borrowers; it should protect borrowers themselves by seeing that they don't overextend themselves; and finally it should protect itself by keeping its business deals relatively risk free. However, risk cannot be avoided altogether, as a bank would then be driven out of business by its competitors. Regulations from a country's central bank do not allow a commercial bank to lend all funds that have been received on deposit. There must be certain cushion assets, such as government or municipal securities, bankers' acceptances, and deposits with other banks. Sometimes the central bank requires banks to keep funds at the central bank. These are called reserxe requirements and are often used to restrict loans. Banks play a pivotal role in the financing of world trade, but they are not alone. Man)' countries have government-sponsored banks or insurance institution that issue export credit and credit insurance. These give favorable credit terms to exporters or insure political and foreign commercial risks in order to stimulate a country's exports. Expanding vocabulary A. Say it in English Здійснювати платіж, надати документи банку, оцінювати країну за сукупним ризиком, виписати вексель, банки відіграють вирішальну роль, високий рівень довіри, експортер не знайомий з фінансовим становищем, процентна ставка банку, банк витісняють конкуренти, сприятливі умови для кредитування, сповістити бенефіціара, викопувати функцію, вводити контроль за валютою, втрачати контроль над товаром, товар, який швидко псується, обидві сторони захищено акредитивом, брати на себе різні функції, застрахувати від політичного і комерційного ризиків, вносити зміни в контракт, банки мирно вживаються, обмежити позику, банки керуються, давати позику, банки, що мають рахунки один у одного. В. Find in the text and give the translation Salability of goods, to collect the proceeds of a draft at a foreign bank, the confirming bank has no recourse to collect from the exporter, many banks buy into existing overseas banks, the bank backs up the business transaction, to retain title or ownership to the goods, at the outset of foreign trade, the exporter draws a draft on the opening bank, an exporter has a number of trading options, to gather deposits and lend funds either on a short-term or medium-term basis, the bank accepts to pay the draft at maturity, the bank surrenders the documents only upon payment, regulations from a country's central bank, this will be offset by the bank's charges, in this arrangement the buyer would have to be in a stable market, the time span of a draft is termed tenor,the opening bank does not reimburse the confirming bank, this facilitates long-distance communication transfer of funds, the letter of credit pledges to pay the exporter, cash rich customers, an invoice description matches that of the letter of credit, to withdraw the funds, the credit is opened in the exporter's favor, the ups and downs of the industry, the risks inherent in trading with a foreign country, discrepancies include any one of the following. C. Give synonyms to the words To perform, goods, a decline, to conform to, a competitor, funds, to estimate, to occur D. Study the use of the italicized word and suggest the translation 'LOAN To redeem a 1., to issue a I., to float a I., to back a 1., to contract a I., to subscribe to a I., to raise a I., to write off a I., to cut back a I., to place a I., to grant a 1.. to call in loans, to sink a I., to make a I., to.collect a I., to extend a I., to split a 1.
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