2. By
Shumaila Talib
M.Phil: Business Administration
Major: Commerce & Finance(Silver Medalist)
MBA major commerce& finance
Punjab University Lahore
3. Chapter 1
Concept of international Trade Financing
Trade finance is the financial help provided by banks or
financial institutions in the field of international trade
through various types of financial instruments like bank
guarantee, letter of credit etc. These varieties of financial
instruments and products helps importer and exporter to
execute business transactions without facing any financial
inconveniences.
It bridges the gap between importer and exporter by adding a
third parties and covers activities like issuance of letter of
credit etc.
The parties involved are
Importer and Exporter
Banks
Trade financial institution
4. 4
International Trade vs. Domestic Trade
Meaning of International Trade
• Trade promote specialization.
International Trade vs. Domestic Trade
1. Expand Trading opportunity
2. Sovereign Nation
3. International Finance
5. 5
Why International Trade
Diversity of natural recourses
Difference in Taste among Nations
Difference in cost of production
David Ricardo idea
1. Absolute Advantages
Average cost of production
2. Principle of comparative Advantages
Compare opportunity cost
6. 6
Criticism of international Trade
cost of Trade
External cost of Trade
Diminishing Return
Dutch Disease
Complexity of Global Trade
7. 7
Import and Export
Import
An import is a good or service made in one country and
bought by an other country.
The Eu, Us,China,Japan and France are biggest importer
of the world.
Export
Export are the goods and services that a country
produces domestically, or within the borders of its own
country and sells to buyers in a foreign countries.
Exports and imports are the component of
international trade, which is exchange of goods and
services between countries.
8. 8
Method of payment in international Trade
1. Open Account
2. Advance Payment
3. Documentary collection
4. Documentary credit
9. 1. Open Account(Direct Shipment)
An open Account transaction is a sale where goods
are shipped and delivered before payment is due.
Two parties involved in this payment method .
1-Importer
2-Exporter
In this method Importer is secure and Exporter on
high risk.
10. 2. Advance Payment
Advance payment is a payment made by a buyer to
seller before the actual scheduled time of receiving
the goods
•Exporter take advance payment from importer.
• It makes to secure of exporter and importer on high
risk.
•These are following steps involve in Advance payment
method.
•Sales contract
•Shipped Goods
•Documents
•Payments
11. Documentary Collection
A Documentary collection is a transaction whereby the exporter
entrust the collection of payment to the exporter
bank(remitting bank)which sends documents to the importer
bank(collecting bank),along with instructions of payment.
Banks involve in this payment method.
Two types of Payment in this method
1. Documents Against Payment(D/P)
(At sight)
2. Documents Against Acceptance(D/A)
(Payment after 90 days at sight)
Both parties decide which payment method will use D/P or D/A?
Documents and sales contract process
same in both methods.
12. Documentary Credit
Letter of Credit
A Letter of credit or Documentary credits a promise by a
bank on behalf of the buyer(importer)to pay the seller a
specified sum in the agreed currency, provided that the
seller submit the required documents by a predetermined
deadline.
•LC always open on the behalf of importer.
•Its type of Bank guarantee on the behalf of importer.
•Issuing Bank ,Advisory Bank, Negotiating Bank involve
in this process.
13. Types of Letter of credit
These are following types of LC.
1-Commercial credit
A commercial letter of credit is a legal document from a bank or a
financial institution, it represent a promise to pay the holder if holder
fulfils his obligation.
2-Stand by Letter of credit
A stand by letter of credit is a document that provides a guarantee to
the beneficiary that, if due to any circumstances, the importer is unable
to pay, then the bank will make the payment to beneficiary(exporter).
3-Revocable Letter of credit
An LC that is issuing bank or the buyer can alter any time without any
notification to the seller.
4-Irrevocable Letter of credit
An Lc does not allow the issuing bank to make any changes without
the approval of all the parties.
5-Unconfirmed Letter of credit
A letter of credit that is issues only by the issuing bank and does not
need a guarantee from the second bank. Mostly letter of credit are
unconfirmed.
14. 6-Confirmed Letter of Credit
A confirmed LC is a letter of credit which the seller or
exporter has payment guarantee from a second bank or a
confirming bank n case the first bank fails to pay then
the payment will be done by the second bank.
7-Transferable LC
A letter of credit that allow a beneficiary to further
transfer all or a part of the payment to an other supplier
in the chain or any other beneficiary.
8-Red clause Letter of credit
A red clause LC is a specific type of letter of credit in
which the buyer can extend the facility of advance
payment to the seller against a certain documentary
requirement. Originally these letters of credit were
written in red ink.
15. Banks role in International Trade
settlement
•Commercial bank plays an important role in
financing of foreign trade by collecting export
documents, remittance of import bills and many
other services.
•Banks provide finance international trade like
import export process, provide pre and post
shipment finance etc.
•Pre shipment means advance payment provided
by bank to exporter for the purpose of
purchasing of raw material, manufacture of
goods and packing of raw materials.
16. •Post shipment finance include payment after shipping of
goods.
•Credit is most important element in foreign trade. credit
given by bank to the exporter for manufacturing process
•This is require to both importer and exporter to share
information for import and export purpose.
•Commercial banks helps to do foreign exchange and
provide remittance facility.
