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Concept and Objective Necessity of International Trade Finance Activities:

CHAPTER 1‌‌

BASIC THEORETICAL ISSUES ON INTERNATIONAL TRADE FINANCE ACTIVITIES OF COMMERCIAL BANKS.


I. INTERNATIONAL TRADE FINANCE:


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1. Concept and objective necessity of international trade finance activities:


Concept and Objective Necessity of International Trade Finance Activities:

1.1. Concept:


For a long time, we have often heard the word " sponsorship " such as "gold sponsor", "sponsorship for football tournament"... So what is sponsorship ? According to the Vietnamese dictionary, sponsorship means financial support and assistance. And sponsorship in the above example means that sponsorship is considered a tool in the field of marketing, an extremely effective tool, much more effective in many ways than establishing brand awareness through advertising. Sponsorship has been present in international sports Olympics, to major concerts, and it also participates in district-level competitions, and there seems to be no limit to the sponsorship of businesses. In fact, the method of building a brand through sponsorship has developed dramatically in the marketing industry in recent decades. Usually, sponsorship is simply understood as paying a sum of money to have the right to have the name and logo of the company appear on stadiums or event venues. The main role of sponsorship is to enhance the company's position and reputation, and that is why many companies spend a significant amount of money on this activity.


That is financing as a marketing tool, but what is trade financing ? Is there any difference? Trade financing can be simply understood as financing capital used for commercial purposes. It is different from marketing financing in terms of purpose and object of financing activities . Trade financing aims to support commercial activities, making commercial processes smoother and more convenient. In the case of financing foreign trade activities (import and export), it is called international trade financing .

It can be understood that: " International trade finance is a set of measures and forms of direct or indirect financial support for enterprises or economic units participating in commercial business activities in some or all stages of the investment process, from production to consumption of products or provision of services on the world market for the purpose of making a profit". (Reference document No. 1)

1.2. Objective necessity of international trade finance activities:


The world trade market is constantly expanding, the demand for goods consumption markets and investment markets is becoming an urgent need of import-export enterprises. Due to limited financial capacity, import-export enterprises do not always have enough money to pay for imported goods or have enough capital to purchase and process export goods.

Stemming from the particularly important role of import-export activities in the economy and the complex risks it faces as well as from the difficulties in the actual operations of import-export enterprises, the emergence of international trade finance is a very objective and inevitable need.

Export financing needs: (for example in the case of exporting machinery and equipment)

Exporting machinery and equipment usually takes from several months to several years, so the need for financing often arises at different stages. Specifically:

The stage of analyzing needs, designing, finding customers , representing fairs, preliminary negotiations, planning: to complete this stage well, experts must make long trips and conduct many negotiations, must make samples and models for display and introduction. Then they must also complete the design documents and calculate accurately for contract negotiations. The cost for this activity is not small, especially for businesses with limited financial resources. Contract signing stage : In case the exporter does not have a high reputation abroad, partners can request a delivery guarantee or a contract performance guarantee. This guarantee will be effective if the delivery and completion of the project are not as agreed. In other cases, if the exporter

Exporting requires a deposit and the foreign importer is having financial difficulties, the exporter can request his bank to provide a credit amount equivalent to the deposit amount and the importer is obliged to pay for that credit. Production stage : After signing the contract, the exporter will proceed with production. Although there are agreements on the buyer's subsequent payment, during this period there often arise high financial needs for supplies, raw materials and related costs that exceed the interim payments and the exporter needs to be financed. Supply, assembly and testing stage : This stage also arises many costs such as transportation costs, insurance, assembly, testing... those costs must be fully borne by the exporter until the goods are received by the buyer and accepted for payment. Payment stage: Currently, to facilitate the supply of export goods, exporters often have to give buyers an incentive to extend the payment period (within the range that the exporter and their bank can accept). While waiting for payment, exporters often need financing to ensure capital for the next production process.


Import financing needs:

If the exporter needs financing to boost sales, the importer also needs financing to purchase goods when the financial capacity cannot meet. Therefore, the importer also needs financing in many aspects.

Pre-contract stage : At this stage, importers need to have costs for hiring experts to accurately analyze their needs in order to make appropriate purchases. Post-contract stage : After signing the contract, the importer needs to be financed to make deposits and advances to the exporter... Production and project completion stage : During this stage, the importer may have to make interim payments to the exporter. Supply and transportation stage : Depending on the delivery conditions, many costs for insurance and transportation may arise for the importer. Receiving stage : If payment is made under D/P terms, the importer will only receive the goods when full payment has been made or financed to pay the full value of the goods in the contract. In case the importer does not have enough financial capacity to pay

In order to pay the entire contract value, bank financing by credit is extremely meaningful. The stage of further processing, further sale, and consumption financing : for goods intended for further sale, the importer also needs intermediate financing for the period from the time of importation until the goods are consumed. If the product is a technological chain, the importer will need financing for the period from the production of the new product until the consumption of the product and the receipt of payment for the goods.


Through examining the funding needs through the stages of export and import activities above, we can affirm that international trade activities have very large and diverse funding needs.

2. Subjects performing international trade finance activities:


2.1. Sponsorship from businesses themselves:


Enterprises participating in import-export activities can help each other to promote business activities. Exporters finance importers to promote the sale of their goods quickly, increase product turnover, reduce storage costs... when the payment capacity of the importer is not ready. On the contrary, importers finance exporters to help exporters promote faster production and purchase of export goods at more preferential interest rates than banks when the exporting enterprise lacks business capital and needs to borrow. However, this type of finance is often short-term and is usually only within the scope of each contract or each business transaction. The forms of finance of enterprises are often commercial credit such as: deferred payment bills, red clause L/C, prepayment before delivery, book payment,...


2.2. Government funding:


Government funding is very important in the field of international trade. Over the years, the government and relevant sectors have issued many policies and implemented a series of measures to support the export of Vietnamese goods such as:

Minimize regulations and procedures on exporting goods; implement tax reduction commitments and have preferential tax policies for import and export activities; provide information, promote trade, provide export consulting services... as well as financial support for export activities.


2.3. Funding from credit institutions:


Financing by credit institutions is an important and widely applied form, because this form is carried out directly from the sponsor to the recipient without going through any other intermediary organizations. Credit institutions include commercial banks and non-bank organizations (such as financial companies, development investment funds, etc.). Of these, commercial banks account for the largest proportion. For example, in the US, this proportion is 70%, while in Vietnam it is more than 90%. Thus, it can be said that the main sponsors for foreign trade activities of enterprises are commercial banks.


II. INTERNATIONAL TRADE FINANCE OF COMMERCIAL BANKS:


1. Concept:


Commercial bank financing is essentially a credit provided by a bank. And commercial bank financing is the financing used for commercial purposes, with a short term, linked to a transaction, so the capital recovery time is fast. However, the bank participates in financing with only a certain proportion of the total capital required for the project or transaction, the remaining capital must be the equity of the recipient. Compared with the lending function, commercial bank financing also has the following characteristics:

The responsibility of the recipient is higher than that of the borrower, because in addition to the capital financed from the bank, a certain proportion of capital must be involved.

The funding objects are projects or deals, so the subjects participating in the funding can only be legal entities with business registration.

International Trade Finance is a part of trade finance, an important service of commercial banks to support businesses in import and export activities in the form of providing capital and support services to help businesses successfully carry out transactions and increase business efficiency.


So, international trade finance of commercial banks (in the specific form of import-export finance) is a financial activity of commercial banks to meet the specific financial needs and business reputation of import-export enterprises in the process of international trade transactions.

2. The role of commercial banks in international trade finance activities:


Recognizing the importance of international trade for the development of the national economy, the government has also implemented many direct and indirect measures to finance import and export activities. However, with Vietnam becoming a member of the WTO, Vietnam will operate on a level playing field, protecting its legitimate rights and interests. In addition, Vietnam is also obliged to fully implement the rules of the WTO. Government policies need to be developed and adjusted in accordance with the international principles that Vietnam has committed to. Thus, the policies and forms of export support that Vietnam has applied in the past must be quickly narrowed or removed in accordance with Vietnam's WTO commitments. Therefore, once the government is not allowed to deeply intervene in financing international trade, the participation of financial institutions, especially commercial banks, is inevitable and necessary.


Since ancient times, international trade has needed the support of banks. As early as the 12th century, during the fairs held regularly in different places, the first banks often played the role of necessary exchange intermediaries, allowing transactions between traders from all over Europe and in different currencies. Today, commercial banks play an even more important role. They technically carry out foreign circulation operations, assume the risks associated with them, and contribute significantly to the financing of international trade.


According to the above concept, international trade financing of commercial banks includes the preparation of financial means and financial alternatives (credit loans) to complete payment and production obligations in foreign economic relations as well as ensuring related payment processes. The scope of international trade financing includes export financing (including in the production stage) and import financing from short to long term. Banks in the fields of international and foreign exchange activities provide diverse assistance to customers, helping them ensure profits while limiting risks. In international trade, buyers may have to transact with a seller they do not know, far from the border, language barriers, unfamiliar customs... Thus, buyers and sellers cannot grasp each other's financial capacity, reputation and ability to fulfill payment responsibilities, so it is difficult to foresee possible risks. With specific technical measures of international trade, banks will protect the interests of sellers and buyers, eliminate risks and help the trade process go more smoothly. For example, when the issuing bank replaces the role of the buyer to commit to the seller that they will receive payment if they comply with the conditions specified in the L/C.


Thus, international exchanges involving credit methods, payment guarantees or financing complicate the exchange and give rise to many techniques or procedures associated with the needs of the two buying and selling parties. In such a complex context, banks must be experts in the field of international trade activities, capable of providing information and advice to lead to the signing of contracts and the implementation of necessary financing. Through their operations, banks become the link between two buying and selling parties separated by continents. Remittance methods, by mail transfer or telegraphic transfer, serve commercial or non-commercial payments. Documentary collection or documentary credit methods meet the purchase and payment requirements between importers and exporters with different levels of acquaintance. Ensuring safe, fast and accurate payments. In addition, banks also help buyers and sellers eliminate risks through

hedging, foreign exchange contracts or conversions at the client's option.


Therefore, as a member operating in the international field, the role of banks in international trade finance has made a significant contribution to the country's economy and the national balance of payments by providing services abroad. The services provided by banks are called "invisible exports" because they are services and not tangible goods. Today, invisible exports contribute more and more to the national income and that speaks to the increasingly important role of commercial banks in international trade finance.


III. INTERNATIONAL TRADE FINANCE ACTIVITIES OF COMMERCIAL BANKS:

1. Import financing:


Import financing is also an important part of the international trade financing activities of commercial banks. Import financing services aim to provide financial support and related paperwork so that importing enterprises can fulfill their obligations in the goods purchase and sale contract. The financing value is usually medium and large. The objects of import financing are the money needs of importers to pay the exporter in the goods purchase and sale contract. The financing term is usually short-term. Importing organizations that want to receive financing must also meet certain conditions such as having an import business license, importing goods that are allowed to be imported according to the provisions of law and some requirements on financial capacity to ensure debt repayment.

Next, we will learn about the forms of import financing at current commercial banks:

(Reference No. 7)

1.1. Opening L/C to pay for imported goods :


An importer who has entered into a contract with a distant party will face many problems. Before making payment, the financier wants to be sure that the goods have been delivered in accordance with the terms of the contract. Similarly, the exporter does not want to release his goods or even start production before he is sure that payment will be made.

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