Guide to International Trade Finance CITF

306 Pages·2016·1.817 MB·English

by  Paul Cowdell, Peter McGregor, Siraj Ibrahim, Neil Chantry, David Hennah

Guide to International
Trade and Finance
Paul Cowdell
Peter McGregor
Siraj Ibrahim
(Chapter 10)
Neil Chantry
(Chapter 14)
David Hennah
(Chapter 15)
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Author information
Paul Cowdell worked for many years at Midland Bank dealing with the
international trade needs of corporate clients. Now a Senior Lecturer
at Sheffield Business School in Risk Management, Corporate Treasury
Management and Derivatives, Paul has authored and co-authored
several texts and articles on international trade facilities and foreign
currency risk exposure management. Paul is an Associate and a Fellow
(ACIB & FCIB) of the Chartered Institute of Bankers, and also holds the
Institute’s Diploma in Financial Services (Dip.FS). Paul also holds the
MembershipDiplomaoftheAssociationofCorporateTreasurers(MCT).
He is currently a project supervisor for the Association of Corporate
Treasurers on the Membership Diploma.
Peter McGregor spent over twenty years as a practising domestic and
internationalbanker,bothintheUKandoverseas,followedbyasimilar
period as an academic at Sheffield Business School/Sheffield Hallam
University. His main areas of teaching expertise were international
trade finance, corporate treasury management, lending and risk
management, banking and financial services law and regulation. Peter
hasalsobeeninvolvedinwritingseveralbooksandarticlesonfinancial
matters. Peter is now the Managing Director of the financial and
business education consultancy, The McGregor Education Consultancy
Ltd,withclientsthroughouttheUKandoverseas.Heundertakesseveral
roles with The London Institute of Banking & Finance in the UK. Peter
is an Associate and a Fellow (ACIB & FCIB) of the Chartered Institute
of Bankers, and also holds the Institute’s Diploma in Financial Services
(Dip.FS). He is a Fellow of the Higher Education Academy (FHEA).
Additionalcontributors
Siraj Ibrahim works as a banker within FI and Trade Finance for Qatar
Islamic Bank (UK). In a career spanning over ten years largely within
two global banks, Siraj has worked in the FI, Treasury and Corporate
coverage sectors. In addition, he sits on the UK Technical Committee
fortheinternationalIslamicFinanceQualification(IFQ),administeredby
theCISI,andisthejointeditor/othercontributorfortheIFQWorkbook.
He is also the UK correspondent for the IslamicFinanceNews.
DavidHennahMIFSisHeadofTradeatMisys,aleadingserviceprovider
of banking software solutions. He is now enjoying his second stint
at Misys having previously worked for Barclays, ICL/Fujitsu Services
UK and SWIFT. David is credited with launching the world’s first
international direct debit service. He also played a leading role in the
establishment of the bank payment obligation (BPO) as an accepted
market practice in international trade. He was a member of the ICC
DraftingGrouponURBPOandistheauthoroftheICCGuidetotheUniform
RulesforBankPaymentObligations.
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Thereviewers
David Meynell is the founder of TradeLC Advisory, an advisory and
consultancy service. He previously worked for Deutsche Bank for over
30 years in a number of international locations, his most recent role
having been Global Head Trade Product Management for Financial
Institutions. David is Chief Examiner for the Certificate in International
Trade Finance.
Gary Collyer is Managing Director of Collyer Consulting Global Ltd,
a company that provides trade advisory, consultancy and training
services. He previously worked for Midland Bank/HSBC, Citibank and
ABN Amro in a banking career spanning over 30 years. In his last
position at ABN Amro, he was the Global Trade Product Head based in
London.GaryisaVisitingProfessorforTheLondonInstituteofBanking
& Finance and author of the fifth edition of the Guide to Documentary
Credits.
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Copyright acknowledgements
ICCUniformCustomsandPracticeforDocumentaryCredits
ICCPublicationN°600−ISBN978-92-842-1257-6
Copyright © 2007, International Chamber of Commerce (ICC), Paris − All
rightsreserved.
ICCUniformRulesforBankPaymentObligations
ICCPublicationNo.750−ISBN978-92-842-0189-1
Copyright © 2013 − International Chamber of Commerce (ICC), Paris − All
rightsreserved.
ICCUniformRulesforCollections
ICCPublicationNo.522−ISBN978-92-842-1184-0
Copyright © 1995 − International Chamber of Commerce (ICC), Paris − All
rightsreserved.
ICCUniformRulesforDemandGuarantees
ICCPublicationNo.758−ISBN978-92-842-0036-8
Copyright © 2010 − International Chamber of Commerce (ICC), Paris − All
rightsreserved.
ICCUniformRulesforForfaiting
ICCPublicationNo.800−ISBN978-92-842-0184-6
Copyright © 2012 − International Chamber of Commerce (ICC), Paris − All
rightsreserved.
Availableatstore.iccwbo.org/
ExtractsfromISP98©1998InstituteofInternationalBankingLaw&Practice,
Inc.AllRightsReserved.Reproductionofanypartofthisworkbyanymeans
without express written permission is prohibited. For further information
aboutISP98oritsOfficialCommentary,seewww.iiblp.org
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GuidetoInternationalTradeandFinance
Note to students
Forthepurposeofconsistencythisstudytextrefersto‘documentarycredit’.
However, ‘DC’, ‘letter of credit’, ‘LC’ or ‘credit’ are also widely used in the
samecontextas‘documentarycredit’.Studentsshoulddecideontheirown
preferencefordescribingtheproduct.
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Contents
1 Introduction 1
2 The international trade environment 19
3 Contracts 41
4 Intermediaries and how they operate 55
5 Documents used in international trade and
the Incoterms® 2010 rules 75
6 Methods of settlement 105
7 Documentary collections 113
8 Documentary credits 131
9 Short-, medium- and long-term trade finance 161
10 Islamic trade finance 191
11 Guarantees and standby letters of credit 207
12 Export credit insurance 227
13 Foreign currencies and the exchange risk 235
14 Financial crime 249
15 Bank payment obligations (BPOs) 269
Bibliography 287
Answers to review questions 289
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Chapter 1
Introduction
Learningobjectives
Bytheendofthischapter,youshouldhaveanunderstandingof:
(cid:117) whatismeantbyinternationaltrade;
(cid:117) theconceptofcomparativeadvantage;
(cid:117) whyinternationaltradediffersfromdomestictrade;
(cid:117) thedifferenttypesofbusinessentity;
(cid:117) thewaysinwhichtherisksininternationaltradecanbereduced(risk
mitigants);
(cid:117) theeffectsoftheglobalfinancialcrisisonworldtrade;
(cid:117) the role of the World Trade Organization (WTO) and of the
InternationalChamberofCommerce(ICC).
1.1 What is international trade?
International trade is the exchange of goods, services or performance and
capital across international borders or territories. In many ways it is similar
to domestic trade. The motivation of all parties is to gain, by exchanging
something that is surplus to requirements for something that is scarce or
unavailable.That‘something’couldbeaphysicalgood,oritmaybeaservice
or performance or a skill. Originally, the exchange was goods for goods or
serviceforservice−basicallyaformofbarter.Obviously,moneycomesinto
playnowadays,buttheprincipleofalltraderemains:thateachpartyshould
gainfromthetransaction.
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1:Introduction
To illustrate how pervasive international trade is today, next time you
open your computer, think about the sources of some of the components
and how interdependent the countries of the world have become. If you
investigated the source of the various components of your computer, you
might find, for instance, that: oil from the Middle East may have been used
to manufacture the plastic; the components could have been produced in
China; the programs could have been written in India; the gold could have
beenminedinAfrica;andthepatentmayhavebeendrawnupintheUSA.
1.1.1 Why do businesses trade internationally?
First, we must ask why a business would wish to trade internationally,
despitetheadditionalproblemsandrisks.Intoday’sglobaleconomy,where
consumerdemandsarefar-reaching,companiesneedtoproducetheirgoods
and services as quickly and efficiently as possible to meet that demand. In
addition, they must do so as competitively as possible. Not doing so would
resultinalossofcompetitiveadvantageandbusinessfailure.
A company may require raw materials or components for their product that
cannot be sourced from the domestic market. They would need to look
to overseas markets and buy the product from overseas suppliers. This is
knownas‘importing’.Anotherexamplewouldbewhenacompanyisunable
to manufacture or purchase the product in the domestic market and, for
reasons of cost, it is cheaper to have it manufactured overseas. A business
that imports may purchase goods for its own sales, or it may be acting as
an agent or distributor for a foreign supplier. This is covered in more detail
inTopic2.
On the opposite side of an international trade transaction is the seller. The
reasons why businesses enter the export market are different. There may
simply not be a domestic market for their product or service, or they may
find that an export market offers them an additional customer base, from
whichtheycangenerateadditionalincomeforthebusiness.
1.1.2 Comparative advantage as a reason
to trade internationally
In some countries of the world, it would be possible, at least in theory,
for most of the population to practise self-sufficiency. This involves people
providing everything they need through their own labour. Thus they could,
in theory, grow their own food, make their own clothes, and provide the
necessities of life. However, this would not appeal to most people, because
theywouldfindtheirconsumptionconfinedtoanarrowrangeofgoods.
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