International business unit2

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Trade Finance Facilities
Swift and Other Bank International Payments
Vostro Accounts and Nostro Accounts
Dealing in Foreign Currencies
Currency Options
Forward Contracts
MODULE COVERAGE
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How Collections Work
Factoring

2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
What is SWIFT?
Swift stands for Society for Worldwide Interbank Financial Telecommunications. SWIFT
provides a platform for banks and other member financial institutions to exchange
messages in a fast and secure environment.
SWIFT provides banks with a centralized data base which allows them to settle their
indebtedness through their nostro accounts in their correspondent banks all over
the world as well as messages without the vulnerability inherent in using mail,
phone fax or telegraphic transfer.
In Uganda, SWIFT is mainly used by banks to remit and receive funds to and from all
over the world not only on their own behalf but also on behalf of their customers
Other international bank payments
1.Payment in Advance
The importer sends money to the exporter who on receipt of payment ships the
goods. There are no risks to the seller since he has the money and the goods. It is,
however, extremely risky for the importer because the exporter may default and
not send the goods or the quality agreed.
Alternatively government may restrict exports; goods may be stolen or damaged in
transit etc. Payment in advance is the least preferred for the buyer
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
2. Letters of Credit (L/C)
A letter of credit also known as a documentary credit is a conditional guarantee of
payment made by a bank to a named beneficiary guaranteeing payment provided
that the terms of the credit are met. The terms normally require that the
beneficiary submits specified documents to a stated bank and by a certain date.
There are five important parties to a documentary credit:
• Applicant – This is the customer of the bank (importer) who applies for letters of
credit from his bank
• Issuing Bank – This is the importer’s bank that issues the letters of credit
• Advising bank – This is the bank domiciled in the beneficiary’s country which is
requested by the issuing bank to advise the beneficiary the terms and conditions
of the credit
• Beneficiary – This is the seller or exporter in whose favour the credit is made
• Confirming Bank – This is the bank which, at the request of the issuing bank, adds
its own irrevocable undertaking to honour the credit should for one reason or
another, the issuing bank defaults. Note that, in most cases, the advising and
confirming banks are one and the same.
• One important point to note is that letters of credit can be revocable or
irrevocable. A revocable letter of credit can be amended without consulting other
parties to the credit.
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4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Types of letters of credit
• Unless a Letter of credit specifically states that it is only available with the issuing
bank, all credits must nominate a bank which is authorized to pay, to incur a
deferred payment undertaking, to accept or to negotiate.
• Payment – means that the nominated bank will pay on presentation of correct
documents as specified in the credit
• Negotiation – The issuing bank sometimes nominates the advising bank to
negotiate a credit or leaves it freely negotiable in which case any bank is a
nominated bank and can freely negotiate it. Negotiating a credit means that the
bank will advance money to the beneficiary on presentation of the required
documents and later claim reimbursement from the issuing bank
• Acceptance – This applies only when the letter of credit calls for bills of exchange
payable at a specified time after acceptance by the drawee. In practice the seller
(beneficiary) will draw a draft on the nominated bank demanding payment at a
determinable future date say at 30 days sight instead of at sight. In this case
payment will be made after 30 days instead of receiving immediate payment.
• Deferred payment - Normally such a credit includes instructions to the beneficiary
to draw bills of exchange and the issuing bank guarantees that such bills will be
honoured provided terms of credit are met.
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Under letters of credit negotiation means:
i. Transfer of benefits to another party
ii. Receiving part payment pending receipt of proceeds
iii. Assigning rights to third parties without recourse to the beneficiary
Uniform Customs and Practice for Documentary Practice
Documentary credits operate almost in all countries of the world. Because of
different cultures, legal practices and other peculiarities, it would be
impossible for documentary credits to operate if there were no guidelines
regarding acceptable customs and practices hence the birth of UNIFORM
CUSTOMS AND PRACTICE FOR DOCUMENTARY PRACTICE.
This is a set of internationally accepted rules and definitions which cover the
liabilities and duties of parties to documentary credits.
All banks will stipulate that credits are subject to rules embodied in UCP
However, where the rules conflict with laws of a country, the laws of the
country will take precedence or where the terms of the specific credit
conflict with UCP the specific terms in the credit take precedence.
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
3. International Bank Draft
A draft is a cheque drawn by a bank on its branches, or on a correspondent bank in
another city or country. Bank drafts are commonly used by banks in dealings with
other banks, but an international draft is normally in foreign currency and drawn
on the correspondent bank in that country. In normal circumstances a draft is
certain to be paid and is generally accepted as a cash equivalent.
The draft can be:
i) A sight draft –Drafts drawn under Bills of exchange may call for payment at sight
which means the draft must be paid payment is on demand or on presentation of
the negotiation documents to the paying bank or the importer.
ii) Term draft- payment is on the maturity date determinable in accordance with the
stipulations of the letter of credit (L/C).
International drafts – It is issued by a bank in one country drawn on a branch or
correspondent bank in another country. They are widely used in international
trade and are simple methods of making foreign payments. They are available in
many currencies and ideal for lower value payments as they provide lower cost
method of sending funds overseas.
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
The main advantage of an international bank draft is that it is a secure way of
payment to another country, guaranteed by the originating bank.
The main disadvantages of international bank drafts are:
a. Need to be physically sent, by mail or courier to the beneficiary and
therefore takes longer than electronic payments
b. A commission is normally charged for issuing a draft and other charges
may be levied when recipient cashes it or when the draft is deposited on
the account.
4. Open Account
An open account transaction is a sale where the goods are shipped and
delivered before payment is due. The exporter sends goods to the
importer in another country together with attendant documents. The
importer then takes possession of the goods and effects payment. This
option is the most advantageous to the importer in terms of cash flow and
cost since there are no other formalities. However, from the point of view
of an exporter it is the most risky since he loses control of the goods and is
therefore left at the mercy the importer.
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8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Telephone banking
International payments via telephone can be made as long as the destination account is
in the names of the person paying. There is need to be registered for telephone
banking and have telephone banking pass code in order to use this service.
Depositing a foreign cheque
Cheque payments drawn in a foreign currency can be made to the beneficiaries’
account as long as the cheque is not stale. However, the cheque may need
clearance. There are two different methods of clearance available to process these
cheques:
a. Collection -the cheque has to be sent to the bank where it originated from,
requesting payment on the beneficiaries’ behalf and the bank waits to receive the
proceeds before crediting the beneficiary’s account applying the current exchange
rates. If the cheque is unpaid, additional charges from the correspondent bank will
be levied and sending bank will also apply their charges by debiting the customer’s
account
b. Negotiation method (Direct Credit) -The beneficiary’s account is credited without
any confirmation of clearance from the bank on which the cheque is drawn. If the
cheque is unpaid, the beneficiary’s account is debited by the value of the cheque
and an unpaid fee using the current exchange rate. The Account will therefore be
debited for a greater amount than was originally credited.
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9. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Information required for international payments.
The correct account information of the beneficiary and their Bank details
which includes:
• Beneficiary’s full names.
• Name and address of the payee’s bank (including SWIFT address)
• Beneficiaries Account number
• International Bank Account Number (IBAN) - is a way of identifying a bank
account and cuts down errors and delays in international payments. When
you use an IBAN, you must also use a Bank Identifier Code (BIC). An IBAN
is not a new bank account number. Existing sort codes and account
numbers are retained, and additional characters are added to create a
standard identifier which is known as an IBAN.
• Bank Identifier Code (BIC) - The BIC is an international standard used to
uniquely identify a bank. To make a cross border payment you need to
quote the IBAN of the beneficiary and its associated BIC (Bank Identifier
Code).
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10. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Key benefits of electronic international
payments
• Compared to the traditional paper-
based methods, electronic
international payments have the
following benefits:
• Enhanced cash flow - as funds are
received from abroad as quickly as
possible
• Cost effective - Electronic payment
transaction fees are cheaper than
paper-based payments
• Less paper work - cut the
administration involved in handling
paper-based payments
• Real Time Visibility - Monitor
payment status real time online
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