Chapter 4

SETTLEMENT OF
INTERNATIONAL TRADE
Introduction
When an importer buys goods from abroad or an exporter sells
goods internationally, the transactions are settled through the
banking system,
It involves offsetting one account with another
Thus it means that, we need to exchange local currency to foreign
currency in order to make payment.
The method of payment can often frustrate the relationship
between buyer and seller due to their own priorities.
The method of payment that is widely accepted are; advance
payments, open account, documentary credit, and documentary
collection.
 Method of Payment

1. Open Account
Sale on credit
Seller sends the goods first and collect the payment on predetermined
date after each shipment.
The payment can be made by cheque, bank draft, telex or SWIFT.
Characteristics of the arrangement:
1. The buyer credit status and general reputation is good
2. The seller has absolute trust on buyer
3. They have long-term trading partnership
4. The buyer’s country must be economically and politically stable.
Risk : seller may not get his payment at all.
Open Account Payment
Method
 2. Advance Payment
The exporter does not deliver the goods until payment has been
received in advance from the buyer
Advantages:
1. Good for seller’ cash flow
2. Buyer may get discount and fast delivery of the goods.
Characteristics of the arrangement
1. The buyer here must have absolute trust that the seller will deliver
the goods as ordered.
2. The buyer’s country is politically unstable
3. It is custom-made goods
4. The market is seller’s market
Risk: buyer may not get the goods.
Advance Payment Method
 3. Consignment
Like sale on credit
The consignor shipped the goods to consignee
Consignor collects the payment when the consignee had sold the
goods.
During the consigning period, the consignor retains the title to
the goods
This method is commonly practice in domestic trade.
 4. Countertrade
Goods are exchanged for goods, rather than hard currency
There are various forms of counter trade;
1. Barter - involves the direct exchange of goods and services having an equivalent
value, but with no cash settlements.
2. Compensation – the settlements are party in goods and partly in hard currency.
3. Buyback - occurs when a firm builds a plant in a country to the other country and
agrees to take a certain percentage of the plant's output as partial payment for the
contract.
4. Counter purchase - Sale of goods and services to one company in other country and
promises to make a future purchase of a specific product from the same company in
that country.
5. Offset - Agreement by one nation to buy a product, components and raw materials
from the buyer of the finished product, or the assembly of such product in the buyer
nation.
 5. Bilateral Payment Arrangement
•B N M E N T E R S I N T O B PA W I T H T H E O T H E R C E N T RA L B A N K S O F
D E V E LO P I N G C O U N T R I E S
•P U R P O S E - T O E F F E C T A N D G U A RA N T E E T H E S E T T L E M E N T S
O F F I N A N C I A L C L A I M S A R I S I N G F R O M E X P O RT S A N D I M P O RT S
O F G O O D S B E T W E E N M A L AY S I A A N D T H E S E D E V E LO P I N G
COUNTRIES
•O B J E C T I V E S
1. T O P R O M O T E T RA D E B E T W E E N M A L AY S I A A N D T H E
C O U N T RY C O N C E R N E D
2. T O E N C O U RAG E B A N K I N G I N S T I T U T I O N S T O F I N A N C E S U C H
T RA D E .
• A D VA N TAG E S –
1. O P P O RT U N I T Y T O E X PA N D T O N O N -T RA D I T I O N A L M A R K E T S .
2. PAY M E N T G U A RA N T E E D BY R E S P E C T I V E C E N T RA L B A N K S .
3. P E AC E O F M I N D K N O W I N G T H AT W E A R E G U A RA N T E E D
PAY M E N T O N E X P O RT E D G O O D S .
4. PAY M E N T P R O T E C T I O N O N E X P O RT S C R E D I T U P T O 3 6 0
DAY S
 METHOD OF FUNDS REMITTANCE
The methods of transferring payment from one country to
another may take in the form of a cheque, mail transfer,
telegraphic transfer or bank draft.
There are normally done through international and local
banking system.
These activities are very important source of income to the
banks through fees charged on every transaction.
 1. Telegraphic Transfer
•I t i s a n e l e c t ro n i c m e a n s o f t r a n s f e rr i n g f u n d s o v e r s e a s .
•" T / t , " m e a n t a c a b l e m e s s a g e f ro m o n e b a n k t o a n o t h e r i n
t r a n s f e rr i n g m o n e y.
•A b a n k o n t h e i n s t r u c t i o n o f a n i m p o r t e r i s s u e s
a u t h e n t i c a t e d o rd e r , a d d re s s e d t o i t s c o rre s p o n d e n t b a n k
l o c a t e d i n ex p o r t e r ’ s c o u n t r y.
• T h e o rd e r c o n t a i n s a n i n s t r u c t i o n t o t h e c o rre s p o n d e n t
b a n k t o p a y t h e s t a t e d a m o u n t o f m o n e y t o t h e ex p o r t e r.
• T h e o rd e r i s n o rm a l l y s e n t e l e c t ro n i c a l l y t h ro u g h t e l ex ,
f a x , t e l e p h o n e , s w i ft o r c a b l e , a n d
•T h e y a re v e r y c o n fi d e n t i a l i n s t r u c t i o n w i t h s p e c i fi c
security code.  
•T h e i m p o r t e r t h e n m u s t p a y h i s l o c a l b a n k i n l o c a l
c u rre n c y e q u i v a l e n t t o t h e s u m i n f o re i g n c u rre n c y t h a t
t h e c o rre s p o n d e n t b a n k p a y s t o t h e ex p o r t e r.
 2. Mail Transfers

MTs are issued by any of the bank branches for transfer of funds between
branches
It is done through the medium of post offices either for credit of an account
holder or for payment to a certain beneficiary.
The issuing branch directly sends the mail transfer to the drawee branch on
the same day by Post.
Disadvantages – Longer period
 3. Demand draft
A banker’s draft is a cheque issued by a bank on the request by importer and
addressed to its drawee bank, instructing the drawee bank to pay the amount
stated in the draft to the exporter.
The drawee bank can be local or oversea.
When the exporter receives the draft, he may present it to the drawee bank,
which will pay him in cash or credit into his account, if he is the bank’s
customer.
The banker’s cheque is safe because the issuing bank guarantees the payment.
2 types :-
1. Local DD is drawn in local currency and payable in local currency.
2. Foreign DD is drawn in local currency and payable in foreign currency.
 4. SWIFT
Known as society for worldwide interbank financial telecommunication
It is a cooperative telecommunication company that provides a network that enables financial
institutions worldwide to send and receive financial information
The service is provided for banks only
The services provided by SWIFT are:
1. Financial trading,
2. Financial collections,
3. Fund transfer,
4. FOREX confirmation,
5. Debit/credit confirmation,
6. Documentary credits, statements, and securities.
7. Sells software and services to financial institutions, much of it for use on the SWIFTNET
network, and ISO 9362
Malaysian banking system joined SWIFT in 1989.
 6. NOSTRO & VOSTRO ACCOUNT

Nostro" and "vostro" are derived from latin terms meaning "ours" and "yours”
A nostro account is our account in a different country
A vostro account is a foreigner's account in our country.
A nostro account is always in foreign currency
A vostro account is in home currency.
 Nostro Account: Our Account with you
Nostro account is a current account maintain by domestic
bank with a foreign bank in foreign currency.
For example current account of KL Bank with Swiss Bank in
Swiss Franc (CHF) is a Nostro account
 Vostro Account : Your Account with us
Vostro account is a current account maintained by a foreign bank with
domestic bank in local currency (RM)
For example: Account of Swiss bank in Malaysia with KL Bank in Ringgit.
The way we choose to see the world
creates the world we see.