Method of International Settlement

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Chapter 2: Methods of International Trade Settlement
WBS 3013 ISLAMIC INTERNATIONAL TRADE AND FINANCING
Dayang Hasliza Muhd Yusuf

Learning objectives
By the end of this session, you should be able to:  Explain what are the risks involved in international trade  List and describe the various trade settlement methods being practiced i.e.:    

Open account / Consignment Payment in advance Documentary collection Documentary credit

 Explain the mechanics of each trade settlement methods
 List the advantages and disadvantages of each trade settlement

methods

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Dayang Hasliza 2011

International Trade Settlement
 International trade - exchange of capital, goods, and services

across international borders or territories
different countries

 International settlement –
 the money transfer via banks to settle accounts, debts and claims among

 fulfillment of contract on both parties i.e. seller delivers

goods/services and buyer make payment

 In the case of international trade – risks is higher  Risks to buyer  seller/exporter does not deliver goods/services

 Risks to seller  buyer does not pay
 So how to mitigate (reduce) the risks?
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Dayang Hasliza 2011

Risk Issues in International Trade
 In any business

transaction, there are risks.  However, these risks are emphasized when dealing internationally.  Added to the commercial risks present in a domestic transaction are foreign exchange as well as country risks. 1-4

Country Risks

• • • •

Stable political climate? War? Revolution? Positive economic environment? Solid legal infrastructure? Foreign exchange restrictions?

Foreign Exchange Risks

• Volatile foreign currency?

Commercial Risks

• Reliable information concerning the company’s track record? Insolvency of your trading partner? • Default or termination on your contract?

Dayang Hasliza 2011

International Trade Risks to Seller/ Exporter
 Risks to seller  buyer does not pay
1.
2. 3. 4. 5.

How to minimize the risks of non-payment? How to ensure prompt payment? How to prevent buyer from doing business with manufacturer i.e. being passed by? How to ensure value of payment to be received in local currency maintains? How to get advance payment from buyer?

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Dayang Hasliza 2011

International Trade Risks to Buyer/ Importer
 Risks to buyer  seller/exporter does not deliver goods/services 1.
2. 3. 4. 5.

How to minimize the risks of non-delivery of goods & services? How to ensure delivery is as per requirement? How to ensure getting good deal from seller/exporter i.e. quantity & quality value for money? How to ensure value of payment to be made in local currency does not increase and hassle free? How to get/arrange for temporary financing?

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Dayang Hasliza 2011

Trade Settlement Methods
 Bearing in mind the risks to both exporters and importers, the

following trade settlement methods are available and can be adopted based on the actual requirements of exporters and importers  Each method have its own advantages and disadvantages to both importer and the exporter  The methods are: 1. 2. 3. 4.

Open account / Consignment Payment in advance Documentary collection Documentary credit

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Dayang Hasliza 2011

Open Account / Consignment

Open Account Method
 The importer is trusted to pay the exporter after receipt of the

goods  More commonly practiced  Importer and exporter has developed good and cordial relationship  Credit relationship in which the buyer pays upon the receipt of goods, or on deferred payment basis

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Dayang Hasliza 2011

Open Account – How it Works
 The exporter forward the

goods (by air, sea or rail) and the documents directly to the importer with the understanding that the importer will make payment for the import within agreed period (credit period)  Based on trust, good track record

Exporter

GOODS

PAYMENT

1

2

Importer
1...
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