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International Business Law

(DLW1083)
Lecture-7:
Law of International Banking and
Financing of International trade
Role of Banks in International
Trade

By inter-bank payment (e.g., transferring


funds under open account system)
Through international trade financing (e.g.,
L/C)
By providing loans to the trading parties
By other financial services, e.g.,
performance guarantee, shipping
guarantee, etc.
Present System of International
Banking and Financing
Private banks and financial institutions operating
internationally; and
International financial institutions or
organisations established under agreements of
sovereign states, e.g., IMF

Private banks and financial institutions play main


role in financing international trade.
International financial institutions play a limited
role. They are able to provide funds to member
countries pursuant to relevant international
agreements, e.g. SDR
Legal Framework of International
Banking and Financing
Strictly speaking, there is no independent system of
international banking and financing as such.
Banking and financing international elements are
subject to different rules of domestic law, and customs
and usage accepted in international trade and finance.
Conflict of law is thus an essential issue as are the
existing international conventions and usage, such as
UN Convention on International Bills of Exchage and Intertional Promissory
Notes (1998)
Unidroit Convention on International Factoring (1988)
1995 - United Nations Convention on Independent Guarantees and Stand-by
Letters of Credit (1995)
Model Law on International Credit Transfers (1992)
Acceptable customs and usage in in international trade and finance
Legal Framework of International
Banking and Financing (contd.)

Thus the issues of international


banking and financing have to be
examined in a particular context:
laws of a particular country, or
Particular laws or rules which become
applicable because of the operation of
the rules of conflict of laws.
Types of Trade Financing
Avalising
Export Financing
Import Financing
Factoring
Leasing
Demand/performance Guarantee
Credit Insurance
Syndicated Loans
Import Loans
Import Loans
Import loans are a flexible short-term borrowing
facility, linked to one or more specific import
transactions. There are typically two types of
import loan:
a) Loan Against Import made available to importers trading
on documentary credit or documentary collection terms. Goods
are released to the importer under trust receipts, meaning that
the importer can use the goods immediately, but they belong to
the bank until the importer settles the loan.
b) Clean Import Loan rather than being triggered by the
receipt of a documentary credit or documentary collection, the
advance is made on presentation of supplier invoices and
evidence of shipment only.
Export Loans/Pre-shipment
Loans
Export Loans/Pre-shipment Loans
As with import loans, export loans are a
flexible short-term borrowing facility, linked
to one or more specific export transactions.
A bank may assume bank risk in issuing
an export loan facility when discounting
an export L/C, for example. This is a
common means of working capital
financing when an L/C is used as the
settlement instrument.
Export Loans (contd)
From the perspective of the bank discounting
the L/C, the risk of incurring a defaulted
exposure is contingent on a number of
factors:
(i) the exporter being unable to provide the
goods/services stipulated by the L/C;
(ii) the issuing bank failing to honour its
commitment to pay the exporter; and
(iii) the importer deciding not to purchase the
goods/services backed by the L/C.
Export Loans: Terms of the credit:
It is impossible to list the specific terms for all cases
in which banks are prepared to grant pre-shipment
finance, but the following points are relevant:
General financial position of the exporter.
Exporters experience in the trade.
Period for which finance is required.
Method of payment by the overseas buyer (e.g. irrevocable
documentary credit).
Whether firm orders are held for exports and general standing of the buyer.
Type of goods being handled (e.g. general commodities, specialty lines, perishable
goods, etc.).
Whether export insurance cover is held by the exporter and
whether it runs from the date of contract of sale over which the goods are being
manufactured or produced (as against the date of shipment).
Export Loans (contd.)
The exporter may seek financing as
red clause credit,
transferable credit, or
back-to-back credit.
Red Clause Credit:
A red clause credit would normally be an irrevocable credit
containing a special clause (in olden times printed in red)
authorising the advising bank on receipt of the credit to make an
advance to the beneficiary of the total amount of the credit or
some percentage of it. Hence the advising bank grants a loan to
the beneficiary which the issuing bank guarantees.
It results from an arrangement between the buyer and seller that
the former will assist the seller in obtaining pre-shipment finance to
enable the goods covered by the credit to
be purchased and shipment made. The buyer arranges the issue of
a red clause credit by his bank.
However, it should be noted that the advising bank is under
no obligation to make the advance to the beneficiary until it has
agreed to do so.
Transferable Credit:
An irrevocable credit, which states that it is also
transferable, gives the beneficiary the right to
request for the credit to be made available in whole or
in part to one or more other parties (second
beneficiaries).
A bank called on to effect payment or acceptance
under the credit, or any bank entitled to negotiate, can
receive and carry out the beneficiarys instructions to
make the transfer(s).
Transferable credits can therefore be of assistance to sellers with
limited resources, since they provide a means by which payment can
be guaranteed (by documentary credit) to parties from whom the seller
is purchasing goods to fill an order from a buyer.
Back-to-Back Credit:
This form of financing may be utilised in
circumstances where a seller of goods receives an
irrevocable credit in his favour arranged by the buyer
and where the seller has to purchase the goods from
another party to fill the order.
Where the sellers resources are limited or fully
utilised and it is difficult to arrange a letter of credit in
payment to the initial supplier, it may be possible for
the seller to arrange for his bank to issue an
irrevocable credit in favour of the supplier, using the
original credit as a backing for the second credit
(called a counter-credit).