INTERNATIONAL TRADE FINANCE

SUGGESTED SOLUTIONS

Question 1

(a) The two similarities are

(i) In both arrangements an exporter and importer entrust banks to be
responsible for transfer of goods and payments
(ii) In both arrangements the banks have a duty to verify validity of documents
of title and shipment of goods

The main difference between the two is that in a letter of credit the bank has an
obligation to pay the exporter in the event of the buyer defaulting payment while
there is no such obligation under documentary collection.

(b) (i) Geographycal physical features such as mountains and seas determine the
mode of transportation of goods and services between two countries. The mode
of transport in turn affect the cost and time taken to deliver. For example
Mauritius and South Africa are relatively nearer to each other than South Africa
and Malawi. However since Mauritius and South Africa are separated by The
Indian Ocean it means rail and road transport are not available and this may
cause trade between these countries to be more expensive.
(ii) Politics: Political unrest such as civil wars may limit the ability of a country to
participate in international trade as other counties will be discouraged with the
risk of loss through frustrations due to failure by trade partners to honour their
obligations. For example during the civil war in Mozambique there was little trade
between Malawi and Mozambique due to difficulties in transport and
communication.
(iii) Exchange rate policy deployed by the central bank affects international trade
in the sense that some policies may cause scarcity of foreign currency and this
may limit the ability by traders to pay for imports. For example when a fixed rate
of exchange was adopted by the RBM it was perceived that the Malawi Kwacha
was overvalued and this caused scarcity of foreign currency as many parties
were not willing to exchange for the Kwacha at that rate. In turn traders faced
difficulties to secure foreign currency to pay foreign suppliers.
(iv) Government subsidies generally make cost of production for its citizens to be
low and therefore encourages production to the extent that a country can have
surplus commodities to export to other countries. For example in recent years
The Government of Malawi has been subsidizing the cost of production of maize
and this has led to the country having surplus maize which has been exported to
other neighbouring countries such as Zimbabwe.
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Question 2

(a) Conflict risk. This is a risk that arises due to wars, riots, invasions or any civil
unrest in the importing country. These may nullify the contract and cause heavy
losses to the exporting company. The exporting company can therefore access
relief by claiming from a specific export credit insurance.
(b) Insolvency risk: This risk arises due to the inability by the importer to pay
because of financial difficulties such as liquidation or bankruptcy.
(c) Transfer risk: This refers to inability by the importer to pay the exporter due to
shortage of foreign exchange in the importing country.
(d) Importation risk: This is the risk of failure by the importer to import goods or
services due restrictions enforced by law after a contract is concluded and the
seller has already incurred costs.
(e) Repudiation risk: The risk that an importer refuses to accept imported goods for
no lawful reason at all.

Question 3

(a)

UPI

The premium will b calculated using the rate for 1 to 3 trucks ie 12.5% because this is
the relevant rate

= 45,000 x 23= MK1,035,000

Therefore premium =1,035,000 X 12.5%

= MK129,375

SHANTAM

The rate applicable is that of >20 up to 45 ton which is R1.5 per Km

Premium = 3,500 x 1.5= R5,250

Conversion: 5,250 x 21= MK110,250

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Commission: 110,250 x 0.01%= K99.23

Total cost MK110,349.22

The option to use SHANTAM appears cheaper

(c) The other factors to consider are (i) The ability by Shantam to honour any claims
(ii) Other incidental costs that might arise due to dealing with a foreign company
(iii) Past history or relationship with these insurance companies.
(iv) Payment terms or credit period offered by the two insurance firms.

Question 4

(a)Applicant: An applicant is normally the importer who applies for a letter of credit from
a bank in his country of domicile. The role of the applicant is to make an application for
a letter of credit informing the bank of all details of the transaction and the beneficiary.

(b) Issuing bank : This is ordinarily the banker for the importer that approves the letter of
credit and sends the letter of credit to the remitting bank. This bank will also receive the
documents of title and in turn facilitate payment by debiting the account of the importer
and remitting the funds accordingly.

(c) Confirming bank: A nominated bank which, at the request or with the consent of the
issuing bank adds its own undertaking to the issuing bank. Its role is to confirm that
payment will be honoured by the importer and if the importer defaults then this bank will
be liable.

(d)Beneficiary: This is the party named in the letter of credit and it is ordinarily the
exporter. The role of the exporter is to remit the shipping documents and title
documents to the bank before claiming payment.

(e) Advising bank: This a bank usually in the beneficiary’s country which informs the
beneficiary that another bank has issued a letter of credit in its favour. This is the bank
that will also eventually remit the payment to the beneficiary.

SECTION B

Question 5 (To provide summary guide)

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The Role of banks in international trade

The candidate should explain briefly the following roles

(i) Provision of foreign exchange services

(ii) Transfer and clearing of funds through Nostro and Vostro
(iii) Provision of import trade finance facilities i.e financing a trader to enable him
import so that he can honour a contract and repay the loan using the
proceeds.
(iv) Collection of export proceeds
(v) Acting as intermediaries through documentary collections and documentary
credits

Question 6 ( Incomplete answer pls provide detailed answer)

Answer: (a) Fixed rate- diadvtgs: (i) May lead to scarcity of foreign currency if the
general feeling by the market is that the currency has been overvalued (ii) May
encourage illegal trading of foreign currencies in order to benefit from rates considered
better

8 (b) The client should apply for a bankers acceptance with a maturity duration of more
than 90 days. With the BA the client will be able to obtain cash on the secondary
market, of course at a discount, which he can use to purchase the raw materials. The
holder of the BA will present it to the bank when it matures and by then his proceeds
would already have been credited in his account and the bank use them to honour the
BA

© A nostro account is an account of a local bank held in a foreign country in foreign

currency while a vostro account is an account of a foreign bank in local bank in local
currency

Question 7 (pls provide solution)

(a) Candidates should describe the process from application of LC to settlement, all
the parties to the LC should be mentioned together with their roles in brief.
(b) The advantages to Matekwe are (i) Risk of loss of goods through importer
dishonesty is significantly reduced (ii) There is assurance of payment once the
goods are successfully deliverd since the bank makes its own undertaking to pay
in the event that the importer defaults.
(c) SWIFT stands for Society for Worldwide Inter-bank Financial
Telecommunications. It is a non profit organization that operates switching

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 centres in various countries. Each user of the SWIFT network has a unique code
which provides immediate transmissions in specific message formats within
banks. The SWIFT network is secure and safe and it is virtually impossible to to
transmit fraudulent messages. Question changed and its relevance to
International Trade - pls provide solution)

(d) MT 200 :Transaction involving a financial institution

Question 8

Exchange control regulations over exports are implemented in order to make sure that
proceeds of exports are received in the country from which the exports originated. This
is necessary in order to improve the balance of payments position for any country.
Credit period offered to foreign customers should also be regulated as delays in receipt
of foreign currency will also have a negative effect on the balance of payments position
for a country.

Cases in which these regulations may be waived are:

(i) There are satisfactory reasons to suggest that a lengthy credit period is
necessary due to circumstances in that particular trade.
(ii) There is good reason to secure or protect an export market share hence a
longer credit period may be used as a competitive advantage.

(i) CFR: Cost and Freight: The seller delivers when the goods pass the ship’s
rail at a named port. The seller has to clear the goods for export but does not
pay freight costs
(ii) DEQ : Delivered Ex Quay: The seller delivers when the goods are placed at
the disposal of the buyer on board the ship and has to discharge the goods
on the quay.
(iii) FAS: Free Alongside Ship: The seller delivers when the goods are placed
alongside the vessel at a named port. The seller should also clear the goods
for export.
(iv) CPT: Carriage Paid To: The seller delivers the goods to the carrier
nominated by seller, and additionally, pays for carriage costs.