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October 28, 2007
October 27, 2007
The Evolution of International Trade
In the Americas, Australia, Canada and Europe, the proportion of the import/export transactions done on open account basis is increasing significantly. This is partly attributed to the healthy judicial systems, almost similar cultures, long trade heritage and strong economies of these regions. Conversely, the documentary credits remain the principal vehicle for international trade in many other continents such as Asia and Africa.
Although intercontinental trade is in a constant state of evolution, it would be extremely hasty to say that the LCs role in it could be demeaned by the tendency to buy and sell on either open account basis or using letters for collection. This is because of the risk factor and the necessity to account for a vast number of external and internal variables that have, in a way or another, an effect on the trade transaction; complex issues such as balance of payment, foreign exchange controls, legal environment, social stability, and political stability are only few of the risk factor components that have to be carefully examined in any international trade transaction.
My own guess is that the coming years will witness a vast increase in the use of LCs due to the introduction of the new UCP600 that represents a much easier to understand set of rules. The simpler language will assist the non – English speaking users to accurately and efficiently apply the new provisions which will lead to fewer discrepancies and thus smoother trade.
Further, the advancement in technology is allowing banks to run efficient controlled operations and transparent transactions. A rule of thump, automation is effective in risk mitigation and cost reduction. Banks almost always seek to arm themselves with the newest state of the art trade services systems to remain in the supply chain finance structure.
Semi automated banks are no longer capable of meeting the demands of their sophisticated customers, fully automated systems is the least standard required to allow banks, importers and exporters to gain the highest values.
On trade finance volumes, a very interesting and important source of information is the League Tables for the Trade Finance Market compiled by a multinational firm named Dealogic. The Tables show the top banks that had granted loans for trade finance purposes during the first three quarters of 2006 (1Jan-30Sep06) in two types of stats tables; one excluding aircraft
and shipping finance whilst the other including them. The chart shows ABN AMRO Bank as the first global trade finance loan arranger at the end of the third quarter 06 with a total running at $4.988 billion representing a market share of 8.3%.
Deutsche Bank came second with $3.986 billion and in third place BBVA with $3.846 billion. The number of loans constituting these totals are 55, 117 and 128 consecutively. Surprisingly, the Citigroup came in fifth position with a total of $3,720 billion and a share of 6.20% granted through 31 loans. Banco Santander (BSCH) occupied the seventh position with a book of $ 2.779 billion and Barclays in tenth position with a $2.509 billion. Whilst there are no significant participation of any Arab banks in the league, the three major Japanese banks namely Bank of Tokyo Mitsubishi UFJ, Mizuho and Sumitomo Mitsui Banking Corporation preserved their seats amongst the world’s top 21 arrangers.
In terms of numbers of transactions completed, BSCH came first with the high volume of 159 deals, followed by BBVA with 128 deals, Deutsche in third place with 117 and the next nearest rival being SG with 65 deals.
The overall volume in this first category amounts to deals worth $60 billion for the first 20 banks in the chart compared to the overall volume of $78 billion for the whole of 2005. One can certainly expect to see a much higher total in the year end 2006 tables which had not yet been released.
The picture is completely different when collating data inclusive of aircraft and shipping loans. In first position here is DnB NOK bank with a spectacular $7.853 billion. In second position comes Nordea Bank with $7.156 billion, and in third place Citigroup with $7.034 billion. The Nordic banks advanced place is attributed to ship financing. Citigroup's position reveals an involvement in financing ships. Obviously, the HSBC was absent from the first three positions.
It is worthwhile noting that the total figure for the top 20 global mandated arrangers including A&S at the end of the 3rd quarter recorded $106.2 billion; a vast increase over the same period last year.
For the global arranger tables (note this is not the same as the global mandated arrangers analyzed above), exclusive A&S, ABN AMRO is also in the number one position, with $3.937 billion worth of business. In second position is BBVA with $3.873 billion and in third position is SG with $3.817 billion. As for the category of figures including A&S, the Nordea Bank is ranked first, DnB bank second and SG in third position.
The regional Top Mandated Arrangers of Middle Eastern and African Trade Finance Loans (excluding aircraft and shipping finance) tables reflected quite impressive trading activities in the Middle East and North Africa. The Standard Chartered topped the table in a spectacular pause with a stunning share of 17.4% representing a total of $ 838 million followed by the SG with 13.7% ($684 million) share and BNP Paribas in third place with 9.4%. The only Arab Bank that actually managed to record its presence in the list which contains 19 international banks was Qatar National Bank with a tiny share of %1.3 representing $68 million from a total of $4.979 billion. Surprisingly, the National Bank of Kuwait, Emirates Bank Group, National Bank of Dubai, Commercial Bank of Abu Dhabi, the Arab Bank plc, Audi and many other major Arab banks were absence in the trade finance lending activities of the Middle East.
The regional Top Mandated Arrangers of Middle Eastern and African Trade Finance Loans (including aircraft and shipping finance) — 1 Jan to 30 Sep 2006 tables that constitutes of 20 global banks showed Barclays Capital in first place with a book of $869 million representing 10.4% share of market and the Standard Chartered in second place with a total of $868 million i.e. a share of 10.3%. The Qatar International Bank came in the 14th place followed by the Gulf International Bank BSC in the 15th place with a share of 3% and 4% respectively.
For the Asian region, excluding Japan, and exclusive of A&S, there is a complete change in the rankings with BBVA coming into first position and BSCH coming in second position. This is a remarkable achievement for these two Spanish banking institution and this result reflects the strong investment that both have made in the region for their trade finance operations. In
third place is HSBC. With regards to the number of deals completed we see BSCH has a total of 41 in the region and BBVA has 30. The nearest rivals have seven deals. This says volumes. Not surprisingly, when A&S is included for Asia, topping the table is Nordea Bank followed by DnB NOR Bank and then BNP Paribas. This reflects the high level of ship financing in the
region.
In Latin America, exclusive of A&S, BBVA came in first, Citigroup in second, and BSCH in third. The number of deals done by each institution is the highest of all the regions, demonstrating the high activity in trade finance arranging that takes place throughout Latin America. BSGH has the most number of deals, with a total of 70 in the region. BBVA also has 69 transactions under its belt here, while the nearest rival is HSBC with 15 deals.
In Eastern Europe, exclusive of A&S, the bank leading the show is ABN AMRO. with a staggering $3.388 billion. This is driven by loans to Russian oil companies. In second place is Dresdner Kleinwort, a surprising entrant doing remarkably well with the volume of $1.959 billion. In third position is Barclays Capital. As far as the number of deals goes, RZB steals the show with 32 deals, while ABN AMRO is right behind with 31 and Deutsche with 30. Commerzbank has done a total of 25 deals.
Once again, the first indication is that 2007 will witness a higher trade finance activities.
www.graincon.com, all rights reserved
October 18, 2007
Finance of International Trade
A successful training program should always focus on the most relevant issues and this can be achieved only through a continuous and unbiased interaction with the marketplace. Training should make a measurable difference for those who participate and the institutions they represent; it should constitute the beginning and not the end of a relationship, and it should set new and higher standards for the benefit of all.
At JSCS we are so proud to be the sole external providers of the Import -Export Training Program for your account relationship managers and executives. This specialized and advanced course is by all means essential for each and every executive/officer involved is setting LCs issuance limits or similar trade related roles and who requires an understanding of the Corporate customers' trade cycles and the specific characteristics and risks involved in the setting of trade services lines and limits. Read more http://www.graincon.com/FinanceofInternationalTrade.html .
October 06, 2007
The Greatest of all Times - John Kennedy
On November 22, 1963, when he was hardly past his first thousand days in office, John Fitzgerald Kennedy was killed by an assassin's bullets as his motorcade wound through Dallas, Texas. Kennedy was the youngest man elected President; he was the youngest to die.
Of Irish descent, he was born in Brookline, Massachusetts, on May 29, 1917. Graduating from Harvard in 1940, he entered the Navy. In 1943, when his PT boat was rammed and sunk by a Japanese destroyer, Kennedy, despite grave injuries, led the survivors through perilous waters to safety.
Back from the war, he became a Democratic Congressman from the Boston area, advancing in 1953 to the Senate. He married Jacqueline Bouvier on September 12, 1953. In 1955, while recuperating from a back operation, he wrote Profiles in Courage, which won the Pulitzer Prize in history.
In 1956 Kennedy almost gained the Democratic nomination for Vice President, and four years later was a first-ballot nominee for President. Millions watched his television debates with the Republican candidate, Richard M. Nixon. Winning by a narrow margin in the popular vote, Kennedy became the first Roman Catholic President.
His Inaugural Address offered the memorable injunction: "Ask not what your country can do for you--ask what you can do for your country." As President, he set out to redeem his campaign pledge to get America moving again. His economic programs launched the country on its longest sustained expansion since World War II; before his death, he laid plans for a massive assault on persisting pockets of privation and poverty.
Responding to ever more urgent demands, he took vigorous action in the cause of equal rights, calling for new civil rights legislation. His vision of America extended to the quality of the national culture and the central role of the arts in a vital society.
He wished America to resume its old mission as the first nation dedicated to the revolution of human rights. With the Alliance for Progress and the Peace Corps, he brought American idealism to the aid of developing nations. But the hard reality of the Communist challenge remained.
Shortly after his inauguration, Kennedy permitted a band of Cuban exiles, already armed and trained, to invade their homeland. The attempt to overthrow the regime of Fidel Castro was a failure. Soon thereafter, the Soviet Union renewed its campaign against West Berlin. Kennedy replied by reinforcing the Berlin garrison and increasing the Nation's military strength, including new efforts in outer space. Confronted by this reaction, Moscow, after the erection of the Berlin Wall, relaxed its pressure in central Europe.
Instead, the Russians now sought to install nuclear missiles in Cuba. When this was discovered by air reconnaissance in October 1962, Kennedy imposed a quarantine on all offensive weapons bound for Cuba. While the world trembled on the brink of nuclear war, the Russians backed down and agreed to take the missiles away. The American response to the Cuban crisis evidently persuaded Moscow of the futility of nuclear blackmail.
Kennedy now contended that both sides had a vital interest in stopping the spread of nuclear weapons and slowing the arms race--a contention which led to the test ban treaty of 1963. The months after the Cuban crisis showed significant progress toward his goal of "a world of law and free choice, banishing the world of war and coercion." His administration thus saw the beginning of new hope for both the equal rights of Americans and the peace of the world.
For more information about President Kennedy, please visit
The John F. Kennedy Library and Museum
The Effective Management of LCs
SELECTING AN IMPORT TRADE BANK: WHAT YOU NEED TO KNOW
The LC is a basic import/export bank product. However, the quality of an LC varies considerably from institution to institution. Documents can clear within twenty-four hours or collect dust for up to five days. Initiation can be accomplished nearly instantaneously--via PC--or require a lengthy manual process. How should a company select a bank to handle its trade transactions? What should it look for, and how will it know when the right blend of technical knowledge and practical experience has been found?
A bank should be a source of contacts for the company, a repository of relationships that can be of assistance in a particular country--whether with funding or distribution. A bank should be helpful in providing introductions so that business can be conducted smoothly and easily. A large correspondent network is essential.
It is estimated that 25 U.S. banks handle more than 90 percent of the dollar flow related to international transactions. These players will obviously have a more extensive reach. It is helpful if the banker is intimately familiar with local customs and regulations so that the appropriate level of resources can be brought to bear in overcoming anticipated (or unanticipated) obstacles.
The bank's commitment to the region where the company's trading partners are resident should be examined. How long has it been in operation in the country? Companies should consider the ratio of local hires to expatriates: A large base of local hires connotes local expertise and can provide a telling indication of commitment. What is the bank's reputation among the people with whom the company is doing or wants to do business? At the same time, companies should consider the bank's commitment to providing international trade services.
Many banks are pulling back now--restructuring and re-thinking their lines of business, in general concentrating scarce resources on areas where they have achieved notable success, and adopting more of a niche strategy than they did in the past. Some banks have had difficulty maintaining the considerable network of contacts needed to perform effectively on behalf of customers in the international arena.
Commitment is important, but how can it be assessed? Queried directly, bankers can be quite expansive about the resources their particular institutions have dedicated to address whatever concerns are being articulated at the moment. The customer needs to probe beneath this veneer to find the unvarnished truth. He or she should ask about a bank's client base --how extensive it is--and whether the business is profitable. Does the bank make money on trade services in this region? If it does not, how steadfast can its commitment be? It may be only a matter of time before the doors are locked for good.
In selecting an LC provider, the company should also explore a bank's processing capabilities--and the level of experience to be expected from the people responsible for the account--those who will be contacted directly as well as those involved indirectly.
Even though some functions have beer completely automated at some banks, there is still a huge amount of manual labor involved in processing documents. As indicated previously, the paper generated by the typical LC transaction is voluminous. How a bank manages the flow of paperwork will affect how well the corporation's cash flow can be managed. A company should find out how long it takes a bank to process a transaction and ask for concrete evidence. The treasury manager should visit the back office to observe how LCs are handled and ask about the procedures for notification, what information can be expected, when, and through what sources.
If reports must be drawn up in a particular manner--by invoice, purchase order number, or internal identification codes, for example--the company should find out how the bank would address this request. Is the bank accustomed to providing this kind of service to customers o: does this inquiry generate silence and confusion?
Finally, a company should ask how the trade products area is organized within the bank. Is it a self-contained group with sales, product management, customer support, and operations all reporting to the same head, or are the various components scattered throughout? And how closely allied is it with other treasury management services? This may not seem significant (in fact, most institutions do not connect these services organizationally) but the banker who can intelligently discuss a company's entire cash management program, both domestic an( international, can offer advice far more readily on the most effective strategies t follow, based on a consideration of the company's total needs.
SELECTING A BANK: THE EXPORTER'S PERSPECTIVE
When a company is engaged in exporting --an activity that has increased considerably in the U.S. in the past couple of years--the bank, in particular the confirming bank, assumes great significance. This reflects the greater risk that is inherent in the uncertain political environment and the unstable currency of some countries with which a company may be transacting business.
A confirming bank reviews the credit risk of the issuing bank--which may be unfamiliar to the exporter--and protect the exporter if either the importer or the issuing bank becomes insolvent or if payment is blocked for any reason (such as political unrest, the imposition of foreign exchange controls, etc.). In essence, the confirming bank takes on the commitment as if it had issued the LC itself.
When a company exports to a stable geographic area, knows its trading partner, and the credit has been issued by a major indigenous bank, the risk could be minimal and confirmation would probably be superfluous.
But with countries where economic, political, and social conditions are more volatile-where the banking and currency systems are not necessarily reliable --confirmation is common practice.
What the exporter must demand from his or her confirming bank is, first and foremost, capital strength. The exporter should remember that if all else fails, he is paid by the confirming bank. The buck --pound, franc, deutsche mark, etc.--stops here! That is the protection the company is buying. How can a company evaluate a banking institution's capital strength? The exporter should ask several key questions to protect his or her interests. These are:
* Is the bank adequately capitalized?
* How does the bank's capital position compare to what is required of it according to current regulatory standards?
* Is there an adequate allowance for loan losses?
* What is the ratio of non-performing loans to total loans?
* How is the bank's stock performing?
EXPERIENCE COUNTS BECAUSE THINGS CAN, AND DO, GO WRONG
Familiarity with local customs and procedures is imperative. It facilitates every step of the process. It prevents costly errors. It is plainly and simply essential.
The exporter's relationship with his or her bank should be a consultative one. Approached with the proposed transaction, the bank should alert the exporter to possible sources of trouble or dissatisfaction or even, hopefully, showing the company how efficiencies can be gained by specifying different procedures. The bank should assume a partnership role with its client, tracking the credit from its inception to its receipt.
Here's an example of what can go wrong when the bank fails to do this. A construction company that today has its bank confirm its LCs formerly used an institution whose experience with trade services was limited. Because of the way the credit was worded, the exporter actually lost a shipment of raw materials destined for Bolivia somewhere between the railway station and the border in Argentina.
The documents indicated that the materials were to be transferred from the rail car to a truck before being moved across the border--in fact, there was ample evidence that the materials were loaded onto the truck. However, the materials never arrived at their final destination--presumably having been spirited away by a gang of roving bandits.
But all instructions had been followed to the letter, and the exporter had no recourse except to switch banks (which he did post-haste) to one able to advise him properly the next time. The weak link on the bank side was a lack of experience in the market.
A bank with knowledge of the Latin American market--or even an experienced freight forwarder--would have advised the exporter not to use two modes of transportation--both rail and truck--in this situation. It would have been better to use only one method which, in this case, might have prevented the abduction of the goods.
A recent poll in Banking World magazine indicated that at least 70 percent of all LCs are refused on first presentation due to discrepancies--anything from an administrative oversight in the paperwork to uncertainty about the source of the LC. Of these 70 percent, perhaps half are corrected and resubmitted for approval. Others are returned to the issuing bank where they may languish for a month or more while treasury grinds its teeth waiting for the funds to be released.
THE MORAL: BE DEMANDING
The importance of using a confirming/negotiating bank that has the wherewithal to follow through on transactions--whether it is specific expertise in trade or the clout of an extensive correspondent network--cannot be over-emphasized.
For exporters, the primary concern is getting paid. They have to worry about goods not arriving on time--or worse, disappearing. They want to know that their documents are receiving immediate attention and are being processed expeditiously--because, again, until the documents clear, no one gets paid. If everything is in order, the LC should be in and out of the confirming institution on the same day, but exporters should insist that everything clear well within the Uniform Customs and Practices Guidelines.
For the treasury manager, efficiency in the processing of international receivables is a significant issue because he or she ultimately takes charge of the incoming funds and is responsible for putting them to good use. This introduces yet another obligation of the confirming bank--one that should be observed closely to as certain how faithfully it is fulfilled. That is pre-advisement. Banks should pre-advise payments.
When this is not possible because of late receipts, for example, arrangements should be made to sweep the account of excess balances. Idle cash is useless cash. While the sweep should not be treated as a primary investment vehicle, it works well in situations in which one's account is flush unexpectedly--and in which treasury has not been notified in time to take advantage of the windfall. A banker should not be satisfied merely with crediting an account. He or she should help ensure immediate use of the cash for the client.
Some would argue that this is not within a bank's purview--that it is up to the individual company to figure out its collections strategy and to decide who within its walls should receive information concerning payments--when, how, and how much.
Treasury is supposed to be content with little bits and pieces of paper that float in from places unknown, and faxes that may or may not be legible and arrive almost as an afterthought. Rather than struggling to negotiate with those in the company who have the information needed, cash managers should insist that their banks assume the role of a provider. If a bank is sending data to one place, it can certainly send it to another.
It can easily establish multiple drop points. Treasury managers frequently say that the information they want is probably available somewhere in the company, but the company is so big, procedures are so complex, and people are so scattered, that the answer is difficult to obtain. Everything is just too complicated.
Treasury should demand that the bank perform this function. The bank is the institution that credits the account; so, at the time it is passing entries, it can send an electronic message--that day--indicating what has been done or, what is more important, what will be done. This is an obtainable goal. Once this becomes common practice, cries of anguish from cash managers will cease. At last the treasury manager can determine what that line marked $275,362.38 is--without having to search in frustration through files and piles of paper messages.
In addition, if treasury managers assign responsibility to the bank for notifying them directly about these LC transactions, they may also be able to find out in detail how they are being processed. In fact, there is nearly always a lag between the time the confirming bank receives the documents and reviews them and the time the money is actually available for withdrawal or investment.
Even though the obligation to pay is indisputable, it usually takes a couple of days to charge the account of the foreign bank. There are the obvious delays caused by time differences, but there are also local rules and regulations which may preclude a quick turnaround. Sometimes a confirming bank must provide as much as six days' pre-debit advice to the issuing bank that the credit has been cleared before debiting its account.
Often the treasury manager, whose bank has not informed him or her about these sources of potential delay, will assume that funds are available immediately. After all, the treasury manager has been told that everything was in order and that the bank has passed entry. In discussing LC transactions--and in structuring them--the bank must consider the customs of the country its customers are trading with and how they should be handled to speed the flow of funds.
ASK YOUR BANK FOR A NEEDS ANALYSIS
In general, banks providing trade services for a company should be willing to engage in a continuing needs analysis. They should be asking with regularity: Where is the business going? What new markets should be explored? What new instruments, and new technology, should be considered? Contrary to popular banking wisdom, solutions do not come from banks. Solutions come from companies--and from the people who will ultimately implement them.
GLOBAL CHANGE AFFECTS ALL OF US
It is possible each day to watch this world expand--as barriers between countries, both political and commercial, fall. It is hard to believe that, as even small companies search for opportunities beyond their domestic markets, the LC will not increase in importance as a payment mechanism.
While those in treasury might once have been able to ignore the international side of the company's payables and receivables, this will become increasingly difficult. No matter where it is coming from or where it is going, if it is money it is the treasury professional's job to manage the journey. Even more so than with domestic transactions, a bank is needed that can and will act in an advisory role --and has the technical and financial resources and the expertise to do so.
Capital strength. Commitment to the business. Back-office efficiency. An extensive network of contacts and correspondents. These should be taken for granted. What cannot be taken for granted is the relationship that should exist between a company and its LC provider to ensure that international trade transactions are handled in the most effective manner possible. This must be developed with a willing partner--so that ultimately the connection between the corporate back office and the company's front office is seamless.
Posted with permission
