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Making Sense of Letters of Credit Rules

When exporting and importing, your company likely works with letters of credit (LCs). For many credit professionals, however, the documents continue to be problematic.

Bob Ronai, managing director at Import-Export Services Pty Ltd, identified LCs as one of the three top issues that small- and medium-sized enterprises (SMEs) and banking specialists face regarding international trade rules, in his opinion piece, On a Wing and a Prayer—How SMEs Sail on in Blissful Ignorance, for Trade Finance Global.

He identified a couple of resources that could help credit departments. “The International Chamber of Commerce’s Banking Commission’s publication Uniform Customs and Practice for Documentary Credits has been the set of rules banks follow for documentary credits, commonly called letters of credit or LCs, since the first version in 1933,” Ronai explained. “Now in its sixth version as UCP600 issued in 2007, these rules should by now be widely known in the SME trading community. And yet, they are not.”

However, the SME trading community knows even less about the ICC’s International Standard Banking Practices for the Examination of Documents under UCP600 (ISBP745), Ronai added. It has “a huge impact on what is allowed and what is not allowed in their shipping documents,” he said.

Fred Dons, a director with Deutsche Bank, agrees that LCs continue to be problematic for many credit professionals. LC discrepancies “cause delays and wreak havoc with your account planning,” Dons said. “Quite a lot of discrepancies and subsequent late payment can be prevented by more actively using the ISPB. The ISBP is the manual on how to work with the UCP and LCs.”

For example, it will explain “when something required under an LC should be a copy or a photocopy or when to present what document at what latest date when the LC and the UCP are silent on this subject,” he explained. “Companies that actively use the ISBP when dealing with letters of credit will experience fewer discrepancies and will be much better equipped in discussing discrepancies with their bank.”(On Oct. 31, Dons will explain how to use the ISBP during the webinar, Understanding the ISBP. He will highlight the main clauses and discuss in detail how credit professionals can use it to benefit their companies.)

Ronai shared a couple of examples for why SMEs worldwide should familiarize themselves with rules such as these. In one situation, he recalled an LC that had numerous problems.“Had that finance person had knowledge of the rules, they would have avoided having their payment in jeopardy by requesting an amendment to the LC and presenting correct documents,” Ronai said.In another case, he discovered documents that were sent to a transferring bank as fully compliant, which actually had errors that could have impeded import clearance.

“SME traders will greatly benefit from having an increased knowledge of these aspects involved in their trading,” he wrote. “If the arrangements they make between themselves reflect an understanding of the various rules and procedures then they often will avoid disputes and disasters, avoid expensive arbitration and litigation, and get on with their business with increased confidence.”

What Happened to U.K. Productivity?

Chris Kuehl, Ph.D.

A country’s rate of productivity is the driver for economic growth. The measure is simple enough, but that simplicity hides a great deal of complexity. It is the output per hour of a worker. The challenge is that the concept was developed in a different era when the majority of the workers produced tangible things. It has become a lot harder to accurately assess output in a service-dominated economy. There have been many who agree with Google Economist Hal Verian. He says that we really don’t do a good job of measuring the levels of productivity connected to technology, but until there is an adjustment to this system, the world’s economies are held to the current standard. The U.K. is one country watching its levels slide much more dramatically than would be preferred.

Analysts suggest four reasons the levels have been tumbling in the U.K. These same factors play a role in other countries as well. The levels in Great Britain are trending 20% lower than they were prior to the recession. After seven years of promising that productivity would recover, the government has been forced to lower expectations significantly.

The first issue is lack of business investment in the technology and machines that would add to that worker productivity. In the 1980s, there was a 60% increase in investment after the recession at the start of the decade. In the 1990s, the increase was 30% after the downturn. This time, the levels of investment have risen by a paltry 5%. This recession recovery has been fundamentally different than the others. There was no sharp rebound. Instead the recovery has been slow and plodding, described as a “check mark” recovery as opposed to a “V” or “U” rebound.

The second issue is the existence of a great many “zombie” companies that should have been cleared away by a more profound recession and recovery. The good part of a recession is that it eliminates the companies that are not run well. As they vanish from the scene, they free up market share for the better companies. These are the ones that grow. This time, the bad companies have been able to hang on as the growth has not been fast enough to put much stress on them. They continue to have access to cheap loans. In a normal recovery the central banks would be worried about inflation by now and would have hiked rates to contend with it. The bad companies would lose their access to cheap capital and would fall by the wayside. Now they stumble along like the business equivalent of the walking dead.

The third issue has been referred to as “labor hoarding.” The fact is, business has struggled for years to find and keep the workers they need and are now very reluctant to dismiss them. Even with a recession and pressure to cut costs, the majority of business has held on to many more employees than would have been the norm. They knew that finding qualified workers would be very hard when the recovery started and they are hoarding. That means that labor mobility has been significantly reduced.

The fourth issue is the one we started with: the inefficient manner used to compute productivity. The real situation may well be obscured by the measuring system used, with its dependence on often unreliable GDP measures, and the failure to accurately assess the productivity in the service sector.

Fintech Projects Make Bold Promises

The Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) signed on Oct. 25 an agreement to strengthen cooperation on fintech between the two cities as well as foster its development within the region.

“Hong Kong and Singapore’s de facto central banks unveiled plans … to link trade finance platforms they are developing with blockchain technology, to reduce potential fraud and errors in the multitrillion-dollar funding of international trade,” Reuters reported. “Hong Kong’s project can digitize trade documents, automate processes, allow sharing of required documentation among authorized participants, and reduce human errors and the risk of fraud.”

The trade finance cross-border infrastructure project, based on distributed ledger technology, also known as blockchain, is their first collaborative initiative. The two monetary authorities also plan to collaborate on other fintech initiatives, facilitate referrals of innovative businesses, share information and exchange expertise to facilitate financial innovation in Singapore and Hong Kong.

In other blockchain technology news, IBM announced its solution to improve the speed in which banks clear and settle payments on a single network in near real time. It is already processing live transactions in 12 currency corridors across the Pacific Islands and Australia, New Zealand and the United Kingdom. Using a blockchain distributed ledger, all appropriate parties have access and insight into the clearing and settlement of financial transactions. It is designed to augment financial flows worldwide, for all payment types and values, and allows financial institutions to choose the settlement network of their choice for the exchange of central bank-issued digital assets.

For example, in the future, the new IBM network could make it possible for a farmer in Samoa to enter into a trade contract with a buyer in Indonesia. The blockchain would be used to record the terms of the contract, manage trade documentation, allow the farmer to put up collateral, obtain letters of credit, and finalize transaction terms with immediate payment, conducting global trade with transparency and relative ease.

IBM has convened an initial group of diverse banking leaders as part of the development and deployment process, including Banco Bilbao Vizcaya Argentaria, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank Permata, Bank Rakyat Indonesia, Kasikornbank Thailand, Mizuho Financial Group, National Australia Bank, Rizal Commercial Banking Corp. (RCBC) Philippines, Sumitomo Mitsui Financial Group, TD Bank, Wizdraw (HK) of WorldCom Finance, and other financial institutions.

Election Calendar

Nov. 19 – Chile, Chilean Chamber of Deputies

Nov. 19 – Kyrgyzstan, President

Nov. 19 – Chile, Chilean Senate

Nov. 19 – Chile, President

Nov. 26 – Honduras, Honduran National Congress

Nov. 26 – Honduras, President

Global Roundup

Catalonia declares independence from Spain, direct Madrid rule looms. The Spanish government moved to impose direct rule over Catalonia on Oct. 27, stripping the region of its autonomy less than an hour after its parliament declared independence in a stunning show of defiance. (Reuters)

Macri's coalition sweeps Argentina's midterm vote. Candidates allied with Argentine President Mauricio Macri enjoyed sweeping victories in the Oct. 21 midterm election, strengthening his position in Congress while dimming prospects for a political comeback by his predecessor Cristina Fernandez. (CNBC)

Brazil's President Temer avoids corruption trial. Brazil's President Michel Temer has secured enough votes in the lower house of Congress to avoid facing trial on corruption charges. Prosecutors had accused Mr. Temer of obstructing justice and racketeering, which he has repeatedly denied. (BBC)

EU preparing for no-deal Brexit. The European Union is preparing for the U.K. to leave without a deal, a senior official has said. Stefaan De Rynck said Brussels did not want a "no deal" scenario, but it was braced for one. Mr. De Rynck is an adviser to EU chief Brexit negotiator Michel Barnier. (BBC)

Wells Fargo: U.S. economy likely to have grown 2.1% in Q3. According to a Wells Fargo research report, the U.S. economy is likely to have expanded 2.1% in the third quarter and is expected to grow 2.5% in the December quarter. This is likely to amount to full-year economic growth of 2.1% in 2017. (EconoTimes)

France to ratify CETA next year, seeks ‘green veto’. On Oct. 25, the French government tabled an action plan on CETA’s health and environmental issues. But the French proposal can only be applied with the agreement of the EU and Canada. (EurActiv)

Burundi takes steps to extend president's rule as crisis deepens. Burundi’s cabinet backed a constitutional change that would allow its president to stay in office until 2034, widening a political rift that has driven the country progressively deeper into crisis. (Reuters)

German elections: The collapse of consensus. It is unusual for a major party to assume a “great responsibility” by being relegated to opposition. But this is precisely the situation facing the German Social Democrats (SPD) following its disastrous election performance. (Interpreter)

Kenya president ahead with 96 pct support: partial tally. Kenya’s President Uhuru Kenyatta has won over 96% of the votes counted so far from the Oct. 26 re-run election, according to a local media tally of numbers released at the constituency level by the election commission. (Reuters)

Saudi Arabia’s new economy: Projecting power in an unstable region. Saudi Arabia is well into its generational transformation of the economy and society. Vision 2030, an ambitious reform plan aiming to diversify the country away from oil dependency, was launched in 2016 and has been executed by a framework and targets set out in the enabling National Transformation Plan. Since then, reforms have been announced and carried out at breakneck speed. But will regional conflicts put everything at risk? (Global Risk Insights)

Dubai launches sharia-compliant receivables financing program. Dubai Economy, a government body, is launching a new sharia-compliant receivables financing program to offer working capital to private-sector businesses working with government agencies in Dubai. The announcement comes after the entity signed an agreement with Dar Al Tawreeq, a subsidiary of Tawreeq Holdings, which provides sharia-compliant factoring and forfaiting services. (Global Trade Review)

China’s Silk Road cuts through some of the world’s riskiest countries. Chinese President Xi Jinping’s new Silk Road to Europe traverses territory where most bond investors fear to tread. Of the 68 nations China lists as partners in its Belt and Road Initiative, the sovereign debt of 27 are rated as junk, or below investment grade, by the top three international rating firms. Another 14, including Afghanistan, Iran and Syria, are either not rated or have withdrawn their requests for ratings. (HSN)

Exporting to Canada: What you need to know. Canada is often the first place many U.S. exporters look to share their goods. This article looks at the history of U.S. trade with Canada; the process of exporting to Canada, including documentation and compliance requirements; and the benefits and considerations for U.S. companies looking to break into the Canadian market. (Shipping Solutions)

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations