IMPROVING THE POLICIES AND LAWS SYSTEM TO PROMOTE INTERNATIONAL TRADE FINANCE IN VIETNAM’S COMMERCIAL BANKS

MINISTRY OF EDUCATION AND TRAINING
FOREIGN TRADE UNIVERSITY

MASTER THESIS

IMPROVING THE POLICIES AND LAWS SYSTEM
TO PROMOTE INTERNATIONAL TRADE FINANCE IN VIETNAM’S
COMMERCIAL BANKS

Major: International Trade Policy and Law

Student: Hoang Thi Thu Phuong
Instructor: Associate Professor, Dr. Dang Thi Nhan

Hanoi - 2016


TABLE OF CONTENT
PLIGHT
LIST OF TABLES
LIST OF FIGURE
ABBREVITION LIST
PREFACE .................................................................................................................. 1
CHAPTER 1: GENERAL THEORY OF POLICY AND LAW IN THE
INTERNATIONAL TRADE FINANCE OF COMMERCIAL BANKS ............. 5
1.1 International trade finance ............................................................................. 5
1.1.1 International trade ...................................................................................... 5
1.1.2 International trade finance ......................................................................... 7
1.1.3 The entities involved in international trade finance ................................... 8
1.2 International trade finance of commercial banks ........................................ 9
1.2.1 Definition ................................................................................................... 9

1.2.2 Main types of international trade finance of commercial banks .............. 10
1.2.3. Role of international trade finance of commercial banks ....................... 30
1.3. Applicable laws and policies system on international trade finance in
commercial banks ................................................................................................ 31
1.3.1. Applicable laws system on international trade finance in commercial
banks ................................................................................................................. 32
1.3.2 Applicable policies on international trade finance in commercial banks 40
CHAPTER 2: REALITY OF APPLICABLE POLICIES AND LAWS
SYSTEM IN TRADE FINANCE OF VIETNAM COMMERCIAL BANKS ... 43
2.1 International trade finance of the Vietnam commercial banks system ... 43
2.1.1 Reality of international trade finance at Vietnam Commercial Banks .... 43
2.1.2 Assessment of international trade finance of Vietnam‟s commercial bank
system ................................................................................................................ 49
2.2 Reality of policies and laws system on International Trade Finance of
Commercial Banks in Vietnam .......................................................................... 52


2.2.1 Reality of Applicable laws system on International Trade Finance of
Vietnam Commercial Banks ............................................................................. 52
2.2.2 Reality of Applicable policies system in International Trade Finance of
Vietnam Commercial Banks ............................................................................. 83
CHAPTER 3: ORIENTATION AND SOLUTION TO IMPROVE THE
LEGAL SYSTEM AND POLICY IN ORDER TO PROPEL THE
INTERNATIONAL

TRADE

FINANCE

ACTIVITY

IN

VIETNAM’S

COMMERCIAL BANKS ....................................................................................... 90
3.1 The need of improving law and policy in order to propel the international
trade finance in Vietnam’s Commercial Banks ................................................ 90
3.2 Orientation and viewpoint to improve laws and policies system to propel
the international trade finance ........................................................................... 92
3.2.1 Orientation and viewpoint to improve laws system to propel the
international trade finance ................................................................................. 92
3.2.2 Orientation and viewpoint to improve regulations system to propel the
international trade finance ................................................................................. 97
3.2.3 Orientation and viewpoint to improve policies system (interest rate policy
and exchange rate policy) to propel the international trade finance ................. 99
3.3 Solutions to improve the law system and policies to promote the
International Trade Finance in Vietnam Commercial Banks ...................... 101
3.3.1 Solutions to improve the law system to promote the international trade
finance in Vietnam commercial banks ............................................................ 101
3.3.2 Solutions to improve the regulations system to promote the international
trade finance in Vietnam commercial banks ................................................... 108
3.3.3 Solutions to improve the policies system (interest rate policy and
exchange rate policy) to promote the international trade finance in Vietnam
commercial banks............................................................................................ 117
3.3.4 Providing specific regulations and guidance for new issues ................. 118
CONCLUSION ...................................................................................................... 120
REFERENCE ........................................................................................................ 122

PLIGHT

I plight that this thesis is my own study and there is no information used with
unauthorized data from study of other authors. All secondary information used in
my thesis has clearly sources and be downright noted. I respond to accuracy of my
own thesis absolutely.
Due to limited time and knowledge, this thesis certainly faces flaws. I
therefore look forward to receiving the contributing ideas to complete this research.
To complete this thesis I would like to sincerely thank Associate Professor,
Doctor. Dang Thi Nhan, who enthusiastically guided me under the process of
conducting this thesis.
Hanoi, December, 2016

Student: Hoang Thi Thu Phuong


LIST OF TABLES

Table 1: Total Factoring Volume by country in the last 7 years (in million euros) . 64
Table 2: Interest rate of interbank market (value date: 28/11/2016) ........................ 84
Table 3: Interest rate of SBV .................................................................................... 84
Table 4: Central exchange rate of SBV, value date 01/12/2016 ............................... 86
Table 5: International trade finance fees at Techcombank ....................................... 88

LIST OF FIGURE

Figure 1: Rate of finance working capital loans for SME enterprises ...................... 45
Figure 2: Rate of finance working capital loans of Wholesale banking enterprises . 45
Figure 3: Fees/charge collected from international trade finance services with SME
enterprises.................................................................................................................. 48

Figure 4: Fees/charge collected from international trade finance services with
Wholesale banking enterprises .................................................................................. 48


ABBREVITION LIST

AMLOCK : Anti-money laundering
BEA

: Bill of Exchange Act

D/A

: Against Document acceptance - D/A

D/P

: Document Against payment -D/P

D/TC

: Document Against other terms and conditions-D/TC.

DBB

: Draft buy back letter of credit

EUR

: Currency of European Union

FCI

: Factors Chain International

GATS

: General Agreement on Trade in Services

ICC

: International Chamber of Commercial

ISBP 745

: International Standard banking practice for the examination of
documents under documentary credits subject to UCP600

ISP 98

: International Standby Practices 1998

JPY

: Japanese Yen

L/C

: Letter of credit

L/G

: Letter of Guarantee

MFN

: Most Favoured Nation

SBV

: State Bank of Vietnam

SME

: Small and medium enterprises

UCC

: Uniform Commerce Code

UCP 600

: The Uniform customs and Practice for Documentary Credits, 2007
Revision, ICC Publication No.600

ULB

: Uniform Law for Bills of Exchange

UNCITRAL: United Nations Commission on International Trade Law

UPAS

: Usance Payable At Sight Letter of credit

URC 522

: Uniform Rules for Collection 522

URDG

: Uniform Rules for Demand Guarantee

USD

: United State dollar

VND

: Vietnam Dong

WTO

: World Trade Organization


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PREFACE
1.

Rationale of study

Vietnam is on the path of deeper integration into the world economy. In recent
years, Vietnam has achieved a lot of success in the integration process leading the
growth in Vietnam economy. Obviously, opportunities and benefits of integration
are tremendous. However, the challenge is still significant. Vietnam joyfully raised
the victory wine when becoming the 150th member of The World Trade
Organization („‟WTO‟‟). However, behind that joy is an enormous challenge posed
to both Vietnam economy in general and banking sector in particular. According to
statistics, banking sector is one of the most intensely competitive sectors after
joining WTO. The commercial banks have to compete not only with each other but
more importantly, to compete with competitors which are the foreign banks with
strong financial power and professional banking services. Moreover, after joining
WTO, both domestic and international trade have become ever more active. Thanks
to that, Vietnam commercial banks have increasingly been focusing further on the
development of international trade finance which is a traditional activity and brings
a great benefit to the bank, in order to meet the needs and inevitable development
trend of the market. In order to promote the international trade finance in Vietnam
commercial banks, in addition to the efforts to improve the service quality of the
commercial banks themselves, it is necessary to complete the system of policies and
laws to create a clear legal framework for the international trade finance in Vietnam
commercial banks. Therefore, I choose to research the topic "Improving policies
and laws system to promote the international trade finance in Vietnam’s
commercial banks " in order to systematize the theoretical issues about policies and
laws in international trade finance, to assess the reality of policy and law of the
international trade finance of Vietnam commercial banks in the current context, to
give the orientation and views to complete the policy and law of international trade
finance; and to subsequently propose solutions to promote and enhance
international trade finance of Vietnam commercial banks.

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2.

The purpose of the study

The general objective of the thesis is analysis the characteristic of policy and
law of Vietnam on international trade finance in commercial banks, provide
assessments include positive points and negative points, then to offer suggestions
for Vietnam policy and law development. To achieve this overall aim, there are
specific tasks that the thesis needs to solve:


Interpreting of basic theoretical issues of international trade finance,

policy and law relate to international trade finance


Analysing the situation of international trade finance at commercial

banks, impact of policy and law on international trade finance services


Assessing the overall situation of Vietnam policy and law on

international trade finance, identifying the deficiencies that restrict international
trade finance services at commercial banks


Providing some suggestions for improvement of policy and law systems

to promote international trade finance in Vietnam commercial banks
3.

Literature review

In recent years, with an increasingly important role in determining
competitiveness, international trade finance has attracted the attention of
researchers. Studies of laws and policies system on international trade finance are
also focused, out of which these following researches are typical:
The group of authors J. F. Hornbeck, Coordinator - Specialist in International
Trade and Finance and Mary A. Irace, Coordinator - Section Research Manager in
their paper „‟ International Trade and Finance: Key Policy Issues for the 113th
Congress‟‟ (April 15, 2013) analysis policy issues cover such areas as: U.S. trade
negotiations; tariffs; nontariff barriers; worker dislocation from trade liberalization,
trade remedy laws; import and export policies; international investment, economic
sanctions; and the trade policy functions of the federal government. Congress also
has an important role in international finance. It has the authority over U.S.
financial commitments to international financial institutions and oversight
responsibilities for trade- and finance-related agencies of the U.S. Government.


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Other researches mentioned mostly about international trade law such as
„‟International economic law‟‟ of Jean M. Wenger or about international trade
finance such as „‟New challenges for State-backed International Trade Finance‟‟ of
Erdal Yalcin - (19th January 2015).
In Vietnam, before this thesis, there is just only study about international trade

finance in commerce banks or study one law or policy relevant to international trade
finance such as „„Law on negotiable instruments the need to enact and some basic
legal issues‟‟ of Doan Son Thai, „‟Circular 07/2015/TT-NHNN and 9 points to
unlock the guarantee‟‟ of Ninh Giang and especially, textbook „‟Legal environment
in international trade finance‟‟ of Dr. Dang Thi Nhan (2015).
In comparison with recent researches on the relevant topic, the thesis provides
some new contributions:
 Analysing the current status of Vietnam‟s laws and policies system on
international trade finance, compare with relevant international laws and policies
 Giving the overall assessment on compatibility of current laws and policies
system on international trade finance in Vietnam commerce banks.
Suggest solutions for improvement of policies and laws system to promote
international trade finance in Vietnam commercial banks
4.

The scope of the study

The studying object of the thesis is the status of laws and policies system on
international trade finance and it is impact to international trade finance in
commercial banks.
The thesis mainly analyses the impact of laws and policies systems on
international trade finance services in Vietnam commercial banks within the period
of recent 5 years. Therefrom the thesis give recommendations for development of
Vietnam‟s laws and policies system on international trade finance, promote
international trade finance in commercial banks.


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5.

Research methodology

The thesis uses qualitative research method: observe phenomena, analysis situations
and therefrom give appraisal about objective „‟laws and policies system on
international trade finance‟‟
6.

The structure of the thesis

With the aforementioned research topic, this thesis is divided into three
chapters:
Chapter 1. General theory of policy and law in the international trade finance
activity of commercial banks
Chapter 2: Reality of policy and law in the trade finance activity of Vietnam
commercial banks
Chapter 3: Orientation and solution to complete of policy and law system to
promote the trade finance activity of Vietnam commercial banks


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CHAPTER 1: GENERAL THEORY OF POLICY AND LAW IN THE
INTERNATIONAL TRADE FINANCE OF COMMERCIAL BANKS
1.1 International trade finance
1.1.1 International trade
International trade can be simply understood as a transnational trafficking,
whether it is cross-border sale or spot trade with foreigners. For example: Vietnam
exports rice to South Africa; Japan imports labors from Malaysia, US enterprises
outsource the Vietnam companies for garments processing...

Goods in international trade can be divided into 3 categories:
a. The tangible goods, such as: materials, machinery, food, consumer goods of
all kinds.
This is a key component and plays important role in the economic
development of each country. The activity of purchasing and saling of such
commodities is called “trade in goods”.
b. The intangible goods, such as: the technological know-how, patents,
inventions, computer software, technical designs, assembling services of equipment
and machinery, tourism services. These are components that their proportions are
increasing in line with the explosion of scientific and technological revolution and
the development of the service sector in the economy. The trading activity of such
objects is called “trade in services”.
c. International processing: this type is necessary in the development of the
international division of labor and because of the differences in reproductive
conditions between countries. There are 2 main types of processing:
c1) Processing for oversea party: when the level of development of a country
is low, due to the lack of capital, technology, and market, enterprises often process
for foreign party.
c2) Outsourcing the oversea processing party: when a country has reached a
certain level of development, it will apply this method.
One problem posed to international trade is that how the payment is made
when parties trade with each other. Indeed, the value of each deal is in a certain


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currency, but it will be in a foreign currency for at least one of the trading parties.
For example, Indonesia imports oil from Venezuela and will pay for it in US
dollars. In this deal, the payment currency (US dollars) is foreign currency for both
the buyer and seller. In another case, a Japanese enterprise exports automobile to

Vietnam and receives payments in Japanese Yen, then the payment currency is the
domestic currency for Japanese enterprise but is the foreign currency for Vietnam.
Obviously, the party receiving payment in foreign currency needs to convert the
foreign currency into local currency for domestic consumption expenditure purpose.
In contrast, importer needs to exchange the local currency into foreign currency for
payment. Thus, international trade is inevitably accompanied by the currency
exchange. This exchange takes place in a market known as forex market. But not
every currency is possibly involved in international trade. In order to be accepted as
a payment currency in cross-border transactions, such currency must be able to be
easily converted and often must be backed by a strong economy such as the United
State dollar of US, Japanese Yen of Japan or EUR of the European Union...
Accordingly, international trade is not just the pure exchange of goods and
services between countries but also involves in the exchange of currency as the
payment currency is usually the foreign currency for at least one of the parties.
Hereby, we are able to draw a number of key characteristics of international
trade as follows:
a. Large-scale, rapid growth: the exchange of goods, services or processing is
no longer confined within a country and is constantly developed along with the
growth in the opening up of world-wide‟s economy.
b. The industrialized countries maintain the dominant roles in international trade.
c. The position of the developing countries is also becoming more important.
d. International trade is growing more complex, demonstrated by the
appearance of new business methods such as e-commerce, buying and selling
commercial debt, and leasing ... and more closely linked, but also more aggressively
competitive.


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e. Many controversial issues: trade protectionism, discrimination … (causing

damage to poor countries).
f. The diversity of multilateral trade negotiation - the trend of globalization
and regionalization is irreversible.
1.1.2 International trade finance
Commercial activity has always been a highly competitive field and very
attractive, in which international trade is becoming more vibrant, derived from the
growth in productivity, from the development of the means of communication. This
requires the simplicity and convenience in the procedure, the faster circulation of
cash flow, and the faster circulation of the goods flow.
The competition is derived from the deeper economic liberalization, the
increase in the number of partners both domestically and externally. Suppliers of
products and services have been constantly seeking strategies to meet client's needs
which are very demanding and diverse. Moreover, clients are also very demanding
on the incentives regarding price and payment period. Thus, the flexible terms of
payment has become a fundamental part of any commercial transaction.
Besides, risk is a factor that enterprises involved in trade must inevitably face,
and especially in international trade with a multitude of risks derived from
geographical distance, currency, the abnormal fluctuations in commodity prices, the
differences in laws and business practices,… Therefore, trade finance has become
an indispensable part of international trade, and when trade finance is mentioned, it
is often referred to international trade finance.
As such, when participating in commercial activities, businesses always desire
to get the multiple support to improve their competitiveness. Therefore, the
launching of international trade finance is an objective necessity to meet the
market's development needs.
Definition: International trade finance is a set of measures and forms of
financial assistance, directly or indirectly, to businesses units in the commercial
sector in the stages of the investment process, production, consumption, or
provision of services.

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Considering the form of financing, the international trade finance is
categorized into two forms: direct international trade finance and indirect
international trade finance.
- Direct international trade finance: is a set of measures or forms of financial
support which has a direct impact on the business operations and usually carried out
through making short, medium and long term loans to finance for importing and
exporting of materials and consumer goods, changing the technology, assembling
chain, and machinery ... or is carried out through the provision of monetary
services, credit and banking, such as international payment services (letter of credit
and collection), guarantees, factoring, forfaiting, and leasing ...
- Indirect international trade finance : is a set of effective measures or forms to
create a favorable business environment for enterprises, such as interest rate policies
on import and export; exchange rate policy; stable legal environment which is in
line with commercial practice; fees for collection; fees for using prestige; …
In summary: International Trade Finance includes the well preparation of the
financial means and the financial replacement (credit) to fulfill the payment
obligations and the production in the external relations as well as the guarantee for
the related payment process. Basically, sponsored by commercial banks is the credit
granted by banks. However, commercial banks just sponsor a certain portion of
capital per the total fund needed for the project or business, the remaining portion
must be the enterprise's owner‟s equity. However, compared with the lending
function, financing by commercial banks also includes the distinguish
characteristics, such as the responsibility of the financing recipient is higher than the
borrower as in addition to the funding from banks, they must have a certain
percentage of capital involved and the financed objects are the projects or
businesses, thus, the financing objects can only be the legal entities with business
registering.

1.1.3 The entities involved in international trade finance
As mentioned in the definition section, international trade finance is basically
the financial supports to promote the international commercial activity to be carried


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out quickly and efficiently. This is also the goal of many politicians, economic
planners, financial and credit financial institutions. Participating in international
trade finance includes the following subjects:
a. Government
Planning and controlling of macroeconomic policies to finance the
commercial activities with the desire to promote the development of domestic trade,
create favorable environment for the business of domestic enterprises, protect for
domestic enterprises participating in international trade activities.
b. Central bank
Central bank implements the financing activities in various forms such as loan
refinancing, re-discounted, state guarantees and also the subject who makes the
indirect trade finance policy of the State such as: pricing policies, interest rates, the
exchange offers, currency devaluation. With such an important role, the central
bank becomes a major object of trade finance of each country.
c. The credit institutions (in this thesis scope, I focus on commercial banks)
The credit institutions, especially commercial banks, often carry out the
international trade finance in the forms of loans, guarantees, discounting, factoring,
leasing, documentary letter of credit, documentary collection, demand draft.
d. Enterprises
Enterprises also involve in trade finance activities under the forms of deferred
payment, payment book, red clause letter of credit, advance payment... The typical
characteristic of this form is that enterprises provide short-term loans to partners.
1.2 International trade finance of commercial banks

1.2.1 Definition
International trade finance of commercial banks is a set of measures and
forms of financial assistance of commercial banks, directly or indirectly, to
businesses units in the commercial sector in the stages of the investment process,
production, consumption, or provision of services.


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1.2.2 Main types of international trade finance of commercial banks
1.2.2.1 Directly international trade finance
Definition1: Direct international trade finance: is a set of measures or forms
of financial support which has a direct impact on the business operations and
usually carried out through making short, medium and long term loans to finance
for importing and exporting of goods/services such as factoring, import-export
loans, secured credit, discounting, forfaiting, leasing, …
a. Factoring:
a1) Definition:
Factoring is a contract signed between the suppliers (exporters) and the
sponsor (the Factor, factoring organizations), under which the providers can and
will assign (sell) for sponsor organizations of receivables arising from export
contracts.
Sponsor organizations perform at least 2 of the following functions:
- Financing for suppliers, including loans and cash advances
- Providing records management services and debt collection related to
accounts receivable.
- Accept the risk of non-payment by the debtor.
From a financing perspective, it is understood that factoring is a form of
financing by the acquisition of short-term receivables from exporters. With such
functions and features, factoring can help exporter to receive the payment

immediately after delivery, not worry about the risk of payment from the buyer as
well as reducing the bookkeeping workload and foreign debt collection. Factor will
have the right to claim payment from the importer with the cost and risk that the
two sides have agreed in advance.
Factoring transactions usually include three main subjects: the exporter; the
sponsor in export country (the export factorer); and foreign importers.

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Professor. Trinh Dinh Xuan: International payment and trade finance, Publisher of Statistics, 2012


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a2) The main types of factoring:
In reality, there are 3 main types of factoring: tenor factoring; ordinary
factoring; tenor recourse factoring:
- Tenor factoring: The export factorer does not make the payment to the
exporter at the time of purchasing of receivables. Instead, the two sides agree the
average payment period (term) for accounts receivables.
- Ordinary factoring: In addition to 2 functions of managing and undertaking
the payment risk in ordinary factoring, the Factor of export also performs the
functions of advance financing for exporters a certain portion of account receivables
in accordance with a certain percentage (75% - 85%). The interest of this advanced
financing amount is calculated based on the actual number of days with the interest
rate usually being higher than the market interest rates. After an agreed period, the
Factor will return the remaining, after deducting financing costs and interest.
- Tenor recourse factoring: This type of financing is identical to receivables
financing of commercial banks. Accordingly, the Factor of export does not
completely buy the receivables but only bases on that for financing for exporters

with recourse conditions, for example: the exporter shall repay the loan for Factor if
it fails in collecting the revenue. Thus, the export Factor perform 2 functions, which
are financing and providing the debt collection service for exporters.
a3) Basic functions of factoring:
- The function of monitoring and collecting debts for goods: Organizations
sponsored Modular factoring keep records of the exporter sales; the entire service
charge Claiming importers with costs and risks borne importers; processing
invoices and track payments for goods when due. The liquidation of this Factoring
grants negotiated by the two parties.
- Pure financing function: Immediately after receiving the bill of exporters,
donors will immediately pay factoring exporters a percentage of the invoice value
(typically from 75% -85%). The rest will be funded organizations committed to pay
after a certain period (after deduction of expenses, interest and commissions).


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a4) Scope of application of factoring financing
- Overall, factoring financing is particularly suitable for the application of
exporting transactions applying the book payment method that allows the buyer to
be entitled to supply credit or facing difficulty in collecting debts or payments from
overseas buyers.
- Factoring financing also contains risks: due to the commitment of factoring,
all risks of non-payment from the importers are borne by the Factor, so factoring
interest rates are usually higher than market rates.
b. Import-export loans
The practice of direct lending to exporting and importing enterprises is the
traditional service of banks. Banks often provide direct credit in local currency or in
foreign currency for enterprises implementing export and import activities as a
means of financial support to import and export materials, machines, equipment,

consumer goods... In terms of maturity, loans can be classified into 2 categories:
short-term loans with the maturity less than 1 year; medium and long term loans
with the maturity from 1 to 10 years. In terms of lending purpose, there are 2 kinds:
b1) Import Credit: Banks can provide short-term or medium-term credit to
importers depending on imported objects. Short-term import credit is applied in
case of importing materials or consumer goods. Medium-term or long-term loan is
provided in case of importing machines and equipment, depending on the kind of
goods. Basically, the terms of loans have to be compatible with the value of the
imported goods.
Import credit is an important additional source of working capital for
importers, because normally, the value of the contract is much larger than the
working capital of the importers. Import credit is needed when the importers have to
pay the contract value but the goods have not arrived yet, or when the goods have
arrived but have not been sold, or when machines and equipment are in the
installation or testing process thus are not put into production to produce goods and
generate revenue…


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The advantages of import credit are: high profits, high revenue in lending
activity, increased revenue in export-import credit due to higher service fee
(payment service, opening L/C) and developing more products thanks to exportimport payment.
However, import credit also has some drawbacks: Firstly, regarding the
currency used in payment. Normally, importers make payment in foreign currency
but sell the goods in local currency. The lending bank is therefore exposed to
exchange rate risk. To minimize this risk, based on the assessment of inflation and
changes in the future interest rates, banks can offer loans in foreign or local
currency. Secondly, import credit is influenced by factors related to foreign trade
and international payments, thus an import project is normally exposed to greater

risks than a domestic credit contract of the same value.
b2) Export credit: Depending on the nature of the goods exported, credit is
granted with different terms. Export credit can be classified into 2 types, namely
pre-shipment credit and post-shipment credit
+ Pre-shipment Credit: Technically, it is the activity where banks offer
working capital loan for companies to purchase, produce, process goods prior to
export. The lending activity occurs before goods delivery. Possible risks lie in the
situation where the goods cannot be exported, or exported but exposed to risk in
delivery or payment, or in case borrowers do not use the loan for the purpose agreed
with the bank.
+ Post-shipment credit: is granting credit to exporter when they have export
documents. After offering loans for exporter to purchase goods, banks can continue
to offer loans for exporters when they have delivery note to collect the payment for
the previous loans. Post-shipment loan is collected from payment of overseas
export-import contract. Post-shipment credit is normally conducted by banks
discounting or purchasing delivery documents. By this method, exporters can offset
their capital contribution to continue business operation during the time from
delivering goods to collecting payment. The basis of this method is that banks have
total control over exporting documents which can be used to claim money and the


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attached bills. Conditions to receive this loan are the ability to recourse exporters or
the person making advance payment and a report on the exporting documents.
These documents have to be valid and are not allowed to transfer to the 3rd party.
Banks usually make agreement on credit line with their customers (exporters) for
their lending purposes.
The loan ratio depends on exported goods and payment ability of customers,
in which 70-80% depends on the value of the goods. Per conditions of this loan,

banks have the right to recourse towards exporters when it cannot collect money
from importers. Whether it is export or import credit, order papers or primary
documents bills of lading, invoices of import goods, insurance contracts... are
collateral to the bank. Therefore all valuable documents must have fraudulent
transfer clause or a clause for advanced transfer payment to the bank providing
credit. If these documents do not allowed transferring, the borrower has to use other
forms of collateral.
c. Secured credit
Secured credit is to ensure the safety of bank loans. Businesses which want to
get a loan from the bank must have properties, assets pledged or must be guaranteed
by a 3rd party for the loan. These assets are the basis for banks to ensure the
recoverability of the loan in case the business fails to repay the loan. Besides
promising to make repayment, customers are required to provide sufficient
collateral in case problems arise with the loan. There are many types of guarantees
for a bank loan, but there are three mandatory requirements for any kind of
guarantee: ease of valuation; legal ownership for bank; ease of consumption. When
loans have collateral, it should not be considered a source of repayment, but only
something to rely on when the scheduled repayment source defaults.
d. Discounting
Commercial banks provides financing for business by discounting commercial
papers - which is a payment method widely used in international trade.
- Commercial paper discounting


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Discounting commercial papers is a type of short-term funding that bank
offers to the beneficiary of the commercial paper. This is conducted by the
beneficiary transferring the ownership of the commercial paper (which has not
reached maturity) to the bank and receive an amount equivalent to the face value of

the commercial paper minus the interest rate and the commission fee. In
international trade, the beneficiary is normally the exporter.
Advantages: This type of financing enables exporters to collect capital quickly
for daily business activity instead of waiting for the commercial paper matured.
Financing commercial paper discount in international trade is normally applied
for export-import activities in which payment is made by open account or
collection method.
The technique of discounting commercial paper is simple. The bank will buy
the right to receive value of the commercial paper from the legitimate beneficiary
prescribed on the commercial paper. The money used to buy this right is the
financing discount and is calculated by the remaining value of the commercial paper
after subtracted by interests and commission.
e. Forfaiting
Forfaiting is a buying debt or payment liability of exporter when the debt is
not paid at maturity by the debtor or the guarantor. Essentially, forfaiting is using
open market fund to grant credits to goods suppliers with a fixed interest rate. This
method is to finance for projects or the export of material with time of payment in
the future. There are normally 4 parties in forfaiting transaction: exporter, importer,
guaranteeing bank which is normally in the importer‟s country and forfaitor. The
importer make payment to the exporter by debentures with terms from 5 to 7 years
which have been guaranteed for payment by the importer‟s bank. This guarantee is
irrevocable, unconditional and transferable. The exporter sell these debentures to the
forfaitor, which will ask the guaranteeing bank to collect payment from the importer.
In case the importer do not make payment, it will force payment from the
guaranteeing bank. The forfaitor can sell these debentures in secondary credit market.


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Advantages: forfaitors issue this type of credit on the basis of irrevocability.

Hence, the exporters do not bear payment risks but transfer them to forfaitor even
when importers or guaranteeing banks go bankrupt. Forfaiting is a kind of financing
which have greatest advantage for exporters as they can avoid:
- Credit risk of non-payment by guaranteeing banks or importers
- Political risk (war, coup) causing guaranteeing banks or importers to lose
payment ability
- Risks in transferring money when the government in the importing country
imposes limit on transferring money overseas
However, forfaiting has certain disadvantages such as: the forfaiting rate can
be very high (possibly 7-10%/year), importers have to pay high fee for the
guaranteeing bank (2-3%/year) and make deposit of at least 10% during the life of
the debenture.
f. Leasing
Leasing is a form of financing in which the property‟s owner (the lessor)
permits another person (the lessee) to use his/her property in a certain amount of
time (term of the lease) following prescribed regulations that both parties have
previously agreed in the lease, and the lessee has to pay the lessor a certain amount,
called rent.
Leasing is an international industry and any tangible properties that can be
traded can become leasing objects. Properties that are commonly used for leasing
include: transportation vehicles, machinery and equipment, real estate… The lessors
are usually manufacturers, banks, or financial leasing companies. Regarding
financing in the form of leasing, international financial leasing is the most
developed. International financial lease is a contractual agreement that allows one
party (the lessee) to use the property owned by the leasing company (the lessor) and
make periodic payments that are specified. The lessee can rent from local leasing
company, with this company importing leasing objects from foreign manufacturers,
or can rent directly from foreign leasing company.

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The crux of the international financial leasing contract is that the legal
ownership of such property (of the leasing company) is separated from the
economic use of such property (held by the lessee). The leasing company focuses
on considering the capability of the lessee in generating revenues sufficient to pay
rent, not based on credit history, asset or capital of the lessee. This type of
agreement is very suitable for small and medium business that are newly established
and have not had financial statements for several years.
In summary, financial leasing business brings a lot of benefits for the
economy, the lessors and the lessees comparing to the traditional credit business:
- For the economy:
This is a medium and long term source of fund for the economy in creating
basic sources of investment, whether it is a small business or an aircraft
manufacturer that needs a huge capital. This business contributed a lot in providing
information about capital markets and is a very efficient means of allocating limited
capital for new investments in capital construction. Leasing business supports for
the modernization of industry and small businesses.
- For the lessor:
 Property ownership gives the lessor a solid guarantee. In countries where
ineffective mortgage laws interfere with the lending of banks, the leasing business
provides the advantage of not requiring any collaterals other than the property itself
rentals and the procedure of asset recovery is also simpler because property
ownership remains in the hands of the lessor.
 Use the capital for the right purpose, because the lessor purchase the
equipment directly from the supplier, there should be no loopholes to the lessee to
use the capital for other purposes.
 The relatively simple system of documentation helps to reduce transaction
costs and allows leasing companies to achieve higher rental revenues effectively.

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- For the lessee:
 The mortgage method is simpler and requirements for the balance sheet are
less stringent, which means that small and medium enterprises are more likely to
receive financial support through leasing rather than bank loans.
 Low transaction costs because there is no need for collateral, the collateral
is the leasing property itself.
 Just need a small amount of money to counterpart. Lease purchase can
finance for machinery costs at a higher rate than bank loans, often only require a
small deposit.
 The leasing contracts can be established in accordance with the financial
needs of the lessee.
 The tax incentives. In many countries, the lessee may charge the full
amount of tax payable on the taxable expense compared to just charge banks
interest on expenses. In addition, the lessor can transfer the tax benefits associated
with their depreciation to the lessee through the reduction of financing costs.
Governments allow leasing business to be granted the tax incentives because
governments are aware that leasing allows small and medium-sized companies to
access to investment.
1.2.2.2. Indirectly international trade finance
Definition2: Indirect international trade finance : is a set of effective measures
or forms to create a favorable business environment for enterprises, such as interest
rate policies on import and export; exchange rate policy; stable legal environment
which is in line with commercial practice; fees for collection; fees for using
prestige; …
a. Remittance
a1) Definition
Remittance methods are methods in which the customer (the applicant)

requests his/her bank to transfer a certain amount of money to another person (the
beneficiary) in a certain place by a remittance method specified by the customer.
2

Professor. Trinh Dinh Xuan: International payment and trade finance, Publisher of Statistics, 2012


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a2) Involving parties:
- Party requesting to remit (Applicant):
- The Payer: importer, drawee, payer of cost of services, payer of dividends,
coupons, bank interest, payer of fines and compensations...
- The Remitter: investors, oversea nationals sending money back home, person
transferring operational funds for non-governmental and foreign non-governmental
organizations, person transferring remittance arising from factor income.
- The Beneficiary: is the recipient, assigned by the Applicant.
- The Remitting Bank: is a bank in the country assigned by the Applicant.
- The Intermediary Bank, also known as the Paying Bank: the correspondent
banks of the Remitting Bank in the Beneficiary‟s country.
a3) Case of application:
Legal documents adjusting the remittance method: currently there is no
international law as well as international practices of the ICC that adjust this
payment method. The transfer of money, of course, will be governed by the national
laws of the remitter countries and the correspondent agreement between the Bank
and the country, if any.
Remittance method is a part of other payment methods, usually the end of the
other methods such as the method of collection, recording, bank guarantee,
documentary credit, standby credit, letter of authority for purchase. However, this
method is also applied independently.

As an independent payment method, this method is often applied in noncommercial payments:
- Transfer payments to service providers abroad,
- Transfer of remittances, money for students abroad,
- Transfer money for investment abroad,
- Transfer funds for activities of governmental and non-governmental
organizations abroad,
- Transfer money arising from factor income,
- Transfer bank loan interest, dividends, coupon abroad,