International settlement operation A case study of Agribank Cho Lon Luận văn thạc sĩ

The thesis’s structure: ...4 Chapter 1: International settlement operation of commercial banks in context of international economic integration ...5 1.1 Integration into the world econo

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PHAN MANH HA

INTERNATIONAL SETTLEMENT OPERATION: A CASE STUDY OF

AGRIBANK CHO LON

In Banking and Finacial Ology code: 60.31.12

MASTER’S THESIS

Supervisor : Dr.TRAN HUY HOANG

Ho Chi Minh City – 2010

Acknowledgment

The process of this master thesis writing was a wonderful learning experience on

my academic life which was filled with challenges and rewards The completion of the present study leads a new beginning and a step forward towards my future This preface provides a welcomed opportunity and chance to acknowledge the help and assistance of the people who with their intellectual insights or constructive criticism, other times in the form of friendship have helped

me to develop this research Specially, I would like to extend my appreciation to

Mr Jerry and Mr.Gary for their valuable and enthusiastic support of English

First, I would like to express my sincere gratitude to supervisor, Associate Professor Ph.D Tran Huy Hoang at the Faculty of Banking, for his valuable supervision, never-ending support and encouragement during this process I am very thankful to him, that he has given me this pleasure to use his valuable comments, feedbacks and suggestions during the time that I have been working on this thesis and he has presented a new world for my further academic research Outside of academia, I would like to thank all my friends and colleagues for their fully support and finally, the great thanks are directed to my family; My father; that have taught me to get the priorities straight and to focus on the whole instead of getting lost in the details; My mother who has meant me the real meaning of patience and helped me by her advices to have this thesis finished on schedule and finally; my brothers and sisters for continues support along the way Finally warm thanks go to University of Economic HoChiMinh City for having developed this post-graduate course in English the first time and sharing consideration during this period of hard work

Phan Manh Ha August 2010 HoChiMinh City, Vietnam

Table of Contents

Acknowledgment i

Table of contens ii

List of tables vii

List of diagrams .vii

List of charts viii

Introduction 1

1 Rationale of thesis 1

2 The thesis’s research questions and research objectives: 2

2.1 Research questions 2

2.2 Research objectives 2

3 Scope and limitation of thesis: 3

4 Research Methodology 3

5 The thesis’s structure: 4

Chapter 1: International settlement operation of commercial banks in context of international economic integration 5

1.1 Integration into the world economy in field of banking and finance 5

1.1.1 Common issues of integration into the world economy 5

1.1.2 Economic integration in field of banking and finance 6

1.2 The international settlement operation of commercial banks 9

1.2.1 Concepts 9

1.2.2 Role and the objective necessity of developing and improving international settlement operation of commercial banks 10

1.2.2.1 For the economy 11

1.2.2.2 For the enterprises 11

1.2.2.3 For the state management 12

1.2.2.4 For commercial banks 12

1.2.3 Means of international settlement operation 13

1.2.3.1 Bill of exchange 13

1.2.3.2 Promissory Note Payment: 15

1.2.3.3 Check 15

1.2.3.4 Payment card 16

1.2.4 Common methods of international settlement operation 16

1.2.4.1 Remittance 16

1.2.4.2 Collections 18

1.2.4.3 Documentary credit 21

1.3 Factors influencing international settlement operation of commercial banks 26 1.3.1 Objective factors 26

1.3.1.1 Globalization and economic integration .26

1.3.1.2 Development of information technology .26

1.3.1.3 Practices and standards of international settlement operation .26

1.3.1.4 Level of development and open of economy 28

1.3.1.5 Macro economic policies of government 28

1.3.1.6 Competition of other commercial banks 28

1.3.2 Subjective factors 29

1.3.2.1 Policy of customer care and developing products, services of commercial banks 29

1.3.2.2 Policy of foreign affairs 30

1.3.2.3 Development level of banking technology 31

1.3.2.4 Structure of organization and management for international settlement operation 31

1.3.2.5 Knowledge, ability of dealers in international settlement operation31 1.3.2.6 Other activities in relation with international settlement operation of commercial banks 31

1.4 Some standards to evaluate the performance in international settlement operation of commercial banks 32

1.4.1 Security and exactness 32

1.4.2 Quickness and Timeliness 33

1.4.3 Logic settlement process 33

1.4.4 Satisfaction of Customer 34

1.5 Some experience of developing and improving international settlement operation of other commercial banks in the world 34

1.5.1 Citi Bank 34

1.5.2 Hongkong and Shanghai Banking Corporation 36

Conclusion of Chapter 1 37

Chapter 2: Research Methodology 38

2.1 Research design 38

2.2 Data collection 40

2.3 Data Analysis 44

Conclusion of Chapter 2 47

Chapter 3: Current status of international settlement operation at Agribank Cho Lon 48

3.1 Overview of organization and activities at Agribank Cho Lon 48

3.1.1 History of foundation and development 48

3.1.2 Organizational structure 49

3.1.3 Review of some main business activities of Agribank Cho Lon 49

3.1.3.1 Capital Mobilization 49

3.1.3.2 Loan 51

3.1.3.3 Foreign exchange trading and international settlement operation 53

3.2 Current status of international settlement operation at Agribank Cho Lon 55

3.2.1 Legal basis of international settlement operation at this branch 55

3.1.1.1 International legal documents 55

3.1.1.2 National legal documents 56

3.2.1.3 Agribank’s documents of internal regulations of international settlement operation 56

3.2.2 Current status of international settlement operation at Agribank Cho

Lon 57

3.2.2.1 Customers of international settlement operation at this branch 57

3.2.2.2 Current status of some main methods of international settlement operation deployed at the branch 62

Remittance 62

Collection 65

Letter of credit 66

3.3 General comments of international settlement operation at Agribank Cho Lon .68

3.3.1 The results 68

3.3.2 Shortcomings 71

3.3.3 Causes of shortcomings 74

3.3.3.1 Objective causes 74

3.3.3.2 Subjective causes 77

Conclusion of Chapter 3 80

Chapter 4: Solutions for developing and improving international settlement operation at Agribank Cho Lon 81

4.1 Some orientation of international settlement operation at Agribank Cho Lon81 4.1.1 Some orientation of foreign economic development of Vietnam from 2006 to 2010 81

4.1.2 Main orientation of international settlement operation at Agribank Cho Lon 82

4.2 Some viewpoint of international settlement operation 83

4.3 Solutions for developing and improving international settlement operation at Agribank Cho Lon 84

4.3.1 Establishing customer policy and marketing policy suitable for diffusion of products and services of the branch 84

4.3.2 Modernization of banking technology 86

4.3.3 Proposing a policy of service diversification 88

4.3.4 Improving management model, procedure of international settlement operation 90

4.3.5 Well organizing foreign exchange trading, acting on initiative to have foreign currency source suitable for requirement of the international settlement operation at the branch 93

4.3.6 Solution for increasing quality of human resource 94

4.3.7 Increasing quality of control and internal audit 96

4.3.8 Constantly paying attention to establishment of business culture style at the branch 96

4.4 Recommendations 98

4.4.1 For the government, ministries, departments and industries concerned 98 4.4.2 For State bank 99

4.4.3 For customers 100

4.4.4 For Agribank 100

Conclusion of Chapter 4 101

Conclusion 102

Appendices 103

List of References 110

List of Tables

1 Table 2.1 Exhibition of payment sales under method of remittance 45

2 Table 3.1 Capital source of Agribank Cho Lon in recent years 50

3 Table 3.2 Some items of outstanding debts at Agribank Cho Lon 2006-2009 52

4 Table 3.3 Some main items of foreign exchange trading and international settlement operation at Agribank Cho Lon .54

5 Table 3.4 Sales of some main customers in international settlement operation at the branch in 2009 58

6 Table 3.5 Sales of some main import export commodities at the branch 61

7 Table 3.6 Payment sales under method of remittance .63

8 Table 3.7 Payment sales under method of collection .65

9 Table 3.8 Payment sales under method of letter of credit .67

10 Table 3.9 Some indicators of loans for import and export at the branch 70

11 Table 3.10 Some key indicators for comparison .72

12 Table 3.11 Comparison of export payment and import payment at the branch 73 List of Diagrams 1 Diagram 1.1 Process of remittance operation .17

2 Diagram 1.2 Process of collection operation .19

3 Diagram 1.3 Process of documentary credit .23

List of Charts

1 Chart 3.1 Capital source of Agribank Cho Lon 2006-2009 51

2 Chart 3.2 Outstanding debts at Agribank Cho Lon 2006-2009 53

3 Chart 3.3 Main items of foreign exchange trading and international settlement operation at Agribank Cho Lon .54

4 Chart 3.4 Sales of some main customers in international settlement operation at the branch in 2009 59

5 Chart 3.5 Customer’s assessment of international settlement operation 60

6 Chart 3.6 Sales of some main import export commodities at the branch 62

7 Chart 3.7 Payment sales under method of remittance .64

8 Chart 3.8 Payment sales under method of collection .66

9 Chart 3.9 Payment sales under method of letter of credit .67

10 Chart 3.10 Some key indicators for comparison .72

11 Chart 3.11 Comparison of export payment and import payment at the branch 73

I NTRODUCTION

1 Rationale of thesis

Vietnamese economy has widely integrated itself into the regional and world economy Along with other activities, foreign trade has constantly affirmed to an important role in Vietnam economic development Commercial banks, by launching the international settlement operation have, according to the “Open Door Policy”

on integration, become undeniably essential to the development of the economy of this country In addition, to better promote their role and position in speeding up foreign trade activities, the system of commercial banks in Vietnam have continuously worked to develope and improve the international settlement operation In these recent years, the efforts of the system of Vietnam commercial banks have fostered advantageous conditions for the international settlement operation to become increasingly enhanced day by day, fulfilling the basic requirement of open process and integration of economy

However, international settlement operation must undergo legal systems and complicated overseas practices, if it was not to be fully understood, risks that include economic, politic and social losses would inevitably arise Lessons learned from the past strongly suggest that the working of Vietnam commercial banks are not to be ignored

The international settlement operation of Agribank has now been deployed for 10 years, yet Agribank has been encountering countless difficulties and insufficiencies

in the widening of its active market share In the context of integration into the world economy alongside tough competition, commercial banks must incessantly develop and widen their trade activities Among those banks, the international settlement operation was utilized in order to broaden and improve to meet customer needs Furthermore, the operation helped increase the bank’s income and enhance

the availability of competition Now, however, all banks in Vietnam and Agribank Cho Lon in particular are facing a great deal of difficulty as they put forth their efforts to overcome this obstacle Evaluating the efficiency of the international settlement operation at Agribank Cho Lon leads to the realization that improvements to this operation must be scientifically based

From above mentioned practical issues, subject of this thesis “International Settlement Operation – A case study of Agribank Cho Lon” was taken into consideration for more in-depth research This research evaluates the performance

of international settlement operation at Agribank Cho Lon, and proposes possible solutions for the development and improvement of the operation

2 The Research Questions and Objectives:

2.1 Research questions

A research question is the researcher’s translation of the business problem into the need for inquiry (Zikmund 1997, p.88) Based on this definition of research problem leads to the following research questions:

- How can we evaluate the current status of the international settlement operation

at Cho Lon branch during the past few years?

- What were the achievements and shortcomings of the international settlement operation at Cho Lon branch?

- How can we develop and improve the international settlement operation at Cho Lon branch?

2.2 Research objectives

The research objective is the researcher’s version of a business problem Once the research questions have been stated, the research objectives are derived from the problem definition These objectives explain the purpose of the research in measurable terms and define standards of what the research should accomplish

(Zikmund 1997, p.89) To solve the research problem delineated, this study has the following objectives :

- To make clear literature of international settlement operation

- To point out factors influencing the international settlement operation

as well as standards for evaluating the quality of the international settlement operation

- To analyze actual efficiency of the international settlement operation applied at Agribank Cho Lon in period of time between 2006 and

2009

- To suggest solutions for developing and improving the international settlement operation

3 Scope and limitation of the thesis:

The thesis mainly focuses on development and improvement of the international settlement operation at one bank, Agribank Cho Lon in period of time between

2006 and 2009

4 Research Methodology

The exploratory research has been conducted for this research to clarify and define the nature of problem In this research, survey and secondary data methods were applied in combination

Survey was chosen as a research tool in this study to investigate, describe the performance and identify the appropriate performance measurement of the international settlement operation at Agribank Cho Lon The questionnaires were designed to collect data related to international settlement operation at Agribank Cho Lon Also discussions with experts were taken to identify the appropriate performance measurement of the international settlement operation at Agribank Cho Lon Surveys by questionnaires were used because they provide quick, efficient and accurate means of accessing information about the population and the subject of study In addition, they are more appropriate in cases where there is a lack of

secondary data In this case, secondary data concerning performance and performance measurement of the international settlement operation at Agribank Cho Lon was insufficient, making it necessary to conduct a survey to gather the needed information

The secondary data method was also used to investigate the performance of the international settlement operation at Agribank Cho Lon Variables such as ratios of import export payment, ratios of commodities, and ratios of payment methods were derived from annual reports from Agribank Some comparisons were depicted in tables Procedures of the international settlement operation were outlined by diagrams

Source of information: Source of data was collected from banking magazines and annual reports from the State bank of Vietnam, annual reports from Agribank

Limitations of data source: Data was mainly collected from a period of 4 years:

2006, 2007, 2008 and 2009

5 The thesis’s structure:

Along with introduction, conclusion, list of tables and diagrams, list of charts, list of references, the main body of the thesis was constructed into 4 chapters detailed as follows:

Chapter 1: International settlement operation of commercial banks in context of international economic integration

Chapter 2: Research Methodology

Chapter 3: Current status of international settlement operation at Agribank Cho Lon Chapter 4: Solutions for developing and improving international settlement operation at Agribank Cho Lon

C hapter 1: Intern a tional set lement operation of commercial banks in context of internati o nal economic integration

1.1 Integration into the world economy in field of banking and finance

1.1.1 Common issues of integration into the world economy

Today, the globalization makes the international economic integration become a reality It attracts all countries, from rich ones to poor ones and large ones to small ones without exception This integration is regarded as a key factor for a country’s development If the integration were done well, there would be extensive opportunities for favorable social and economic development; on the contrary, any country that fails to integrate would have little chance for economic development International economic integration involves a high level of international economic cooperation It is a process in which a country participates in a common organization, a generally international trend It is this process that incorporates each country into the world economy Integration is a global tendency which influences all countries, even to countries that have not yet taken part in integration As a matter of fact, the influence of integration is very strong, not only affecting the economy but also politics, culture and society Any country implementing integration must adjust its policies and laws to implement the integration process successfully and efficiently

This matter clearly shows that integration is a factor to development but it is only a potential one To turn it into the truth in strategy of economic development, countries always have to have an art of combination between external and internal strength to make a propulsive force for economic growth

In fact, many countries execute open policy more deeply and obtain more economic achievements and vice versa; however, it doesn’t imply that any country carries on the process of open door policy and integration will achieve success immediately The results mainly depend on the way and art of integration of each country after

preparing the premises and internal conditions of the economy maturely Theories

of international commerce from the past up to now affirm the benefit of each country when participating in international trade However if a country enters the global playing-field only for the benefit of buying goods and services with good prices, but fail to find the way to sell its goods and services, it will gain low profit in comparison to the cost it pays The payment balance will always be deficient, unstable issues will always appear

For developing countries, economic integration is a good chance to find the opportunities to speed up their underdeveloped economy; however, because of being poor country means that the economy of these countries will have insufficiencies These things limit the ability of attraction and utilization of external sources as a target for development Sometimes, the cost of executing the integrative strategy is simply too expensive Therefore, to integrate effectively, these countries have to find the solutions for their internal problems The process can not be shortened, it may even have to be lengthened if there is no alternative However, if the internal insufficiencies were solved quickly and effectively, the integration process would bring these countries with many opportunities to speed up their economy, shorten the lead-time of industrialization, and keep up with developed countries

1.1.2 Economic integration in field of banking and finance

International economic integration happens in different fields, in which the fields of banking and finance are both the premises and results of other fields The nature of integration in the field of banking and finance is a process in which countries gradually open the door for one another to participate in the banking and financial activities of each participating country Because the banking and finance section is the pharynx in economic body of each country, opening the door in this area is always an important and sensitive problem Activities of banking and financial services have organic relations with other economic fields, they are also fields that

bring back much profit, therefore countries must always be cautious about how they handle opening the door of this economic field

In comparison with other economic fields, integration of banking and finance is characteristic as follows:

First, this is the process of capital source movement among financial markets This can become stronger and stronger and is many times larger than the commercial scale among countries

Second, integration of banking and finance is both the result and motivation of the development of technological science in the world The development of technological science is a factor that enhances fast and efficient integration of banking and finance Nowadays, transactions are effected quickly and safely: Billions of US Dollar are dealt with among semi-global distant markets in a matter

of 30 seconds with a high level of security Transactions can be thousands of miles away but customers feel very close here…Obviously, technological science

“shortens” distance among people, boundaries among countries have become faint

in the age of technological scientific revolution It is this thing that makes financial markets very close in all aspects

On the contrary, integration of banking and finance create the motivation for the development of technological science day by day Opportunities for trading in the exchange market can happen very fast, so timing is always the key problem in exchange trade Customer demands in international trade always require efficiency, accuracy and security…these requirements can only be met with using developed technological science The development of technological science is the premises for banking development of traditional services as well as new service, and it increases customer convenience in the open economy

Third, integration of banking and finance changes the practice of monetary trade Because activities of banking and finance have relationships with other economic activities, integration in this field forms a stable basis for the effective integration of other fields If so, regulations, laws and monetary financial standards need to be

modified so that they are similar to international custom and practice, by conforming to an identical competitive environment Trading practices in different markets need to be changed so that they make opportunities for capital flows to move easily across the globe

Fourth, integration of banking and finance leads to the tendency that countries will depend more on one another Along with the open-door tendency of the monetary financial market, any economy turbulence happens in one countries will in turn affect the economics of the others The benefit of a complete dependence among countries is that economic development of a group of countries or of an area lead to the development of the others This is the result of monetary financial integration that involves compromises between investment liberalization and free trade However, this also brings up some unwanted impacts: such as the situation of inflation import, an economic crisis import that has often been termed a phenomenon in recent years This is the unavoidable consequence of stage of globalization, international economic integration

Integration in the field of banking and finance is rendering competition in this field fiercer all the time Unlike competition in other fields, competition in the field of banking and finance has specific characteristics: (1) Rivals both compete and cooperate together in the sensitive business; rivals must direct their attention to one common sound environment to avoid a system risk which could lead to the collapse

of serial banks; (3) Competition in the environment under the control of the Central Bank in each country or in area; (4) Competition depends not only on internal factors but also on external ones ( business environment, country custom, financial infrastructure,…)

For the Vietnam banking system, international integration will open opportunities for cooperation as well as an exchange of experience These things will help to propose solutions and apply efficient tools in businesses to prevent risk and enhance the prestige and position of the Vietnamese commercial banks in international financial transactions, they will also make good conditions for capital, technology

and management experience Along with the integration process, legal environment and monetary policies of Vietnam will be improved quickly, commercial banks will have to specialize more deeply in modern banking profession and deploy new banking products and services for wider market share at home and abroad

1.2 The international settlement operation of commercial banks

1.2.1 Concepts

* Settlement: There are many concepts of settlement but generally settlement is the payment of a party to another for having used or possessed goods and services, or some specific rights

Settlement is the payment following each trade or exchange of goods and/or service Settlement is the final stage of relation between goods and money that is built on the basis of each party’s satisfaction

* International settlement: Terms of international settlement are expressed in many different ways:

- International settlement is the method of settlement by bank for import and export enterprises in different countries

- International settlement is the settlement of money in relation with trading or the supplying of goods and/or services between organizations or individuals in this country and those of other countries, between one country and other international organizations This is put into effect by banking relations of the countries involved

In general, international settlement is the settlement of monetary obligations and monetary requirements generating from relations between economy, commerce, finance, and credit among international economic organizations, enterprises, and individuals in different countries It ends an operation process in the field of external economy under different forms

The nature of international settlement is an operation in which the banks are intermediary institutions which use their experience, knowledge, and professional

skills make the payment safe and efficient, and also to protect the client’s benefit in transactions of payment as well as increase the bank’s profit

Ultimately, international settlement arises from world trade activities, it is the last stage in the process of trading and exchanging goods and services among organizations and individuals in different countries If the international settlement operation were well organized and performed quickly, safely, efficiently and precisely, it would make an active effect to foreign trade activity of a country

International settlement is different from domestic payment (inland operation), it often relates closely to currency exchange among different countries The domestic currency with functions as means of circulation, means of payment will not excess its value if two parties in the contract do not reach to a specific agreement Hence , the currencies of foreign transaction are normally stated with precision in international credit agreements and foreign commercial contracts by negotiating parties Currencies used frequently in international settlement are ones with the ability to participate in free exchange, such as USD, GBP, JPY, and EUR However, USD still plays a key role in international settlement by its convenience and efficiency in transactions performed Now, most payments in international settlement are by telex, SWIFT, order for collection, or order for payment among banks concerned, therefore the ratio of cash payment is very small

1.2.2 Role and the objective necessity of developing and improving international settlement operation of commercial banks

Because international integration is happening intensely, each country that wants to develop also has to have complicated and diversified international relations concerning its economy, politics, society, culture, etc…Among them, economic integration always plays a key role and maintains an influential position in other fields The process of economic integration indispensably develops demand for payment The more economic integration progresses, the higher the need of international settlement The international settlement operation has an important

role in ensuring the circulation of international economic relations, and promoting the development of import and export enterprises as well as the growth of commercial banks

1.2.2.1 For the economy

The international settlement may be the last stage in the international exchange of goods and services, but it is certainly one of the most important stages of all If not for the international settlement operations, the international commercial operations

in particular and the external economic operations in general would hardly exist, and much less have room for development Therefore, the development and improvement of the international settlement operation is an objective requirement, thereby it sets the stage for the external economy to develop If foreign trade develops, a country could utilize the advantages efficiently, and thus promote good and stable economic growth, all resources would be explored and used efficiently

1.2.2.2 For the enterprises

The international settlement is a factor directly affecting business outcomes Development and improvement of international settlement makes opportunities for enterprises to participate in international commercial operations, because:

(1) If payment were effected quickly, the time for capital turnover would be shortened, efficiency of capital would increase along with growth of sale and profit

consolidated and widely opened Like linking a chain, these payments can be processed more quickly, which will not only increase overall capital turnover and business outcomes, but also will pull other links of the chain toward its orbit and strengthen the motivational power for the development of the economic machine

1.2.2.3 For the state management

First, through the control and management of the international settlement operation, the government could regulate the inflow and outflow of foreign exchanges, and make a basis on which to propose fiscal policies and effectuate them By controlling the international settlement operation in commercial banks, the government could manage the import-export operation, forming the basis on which to regulate current balance Moreover, through these, the government could propose appropriate policies of foreign trade to maximize the benefit from international settlement operation World trade is not only a commercial instrument but also a tool that can

be used to implement social and political intrigues of other countries, bloc of countries, and the forces in the world Therefore, the international settlement is very important in macro-management of government The government could control foreign loans, and use of these loans to understand all parties’ purposes

Second, through practical matters of international settlement, the government could adjust inadequacies in the ruling system, policies relating to international settlement, so that they would be suitable for the new situation, and ensure the lifting of all barriers, and promote the foreign trade development

1.2.2.4 For commercial banks

In the context of integration, a vast field of operation for commercial banks has been opened due to international commercial activities becoming more popular and the need for international settlement, loan in foreign currency, and foreign exchange trade increasing If commercial banks utilize the international settlement operation efficiently, they will obtain means to attract more clients and affirm their brand

name in business Therefore, the development and improvement of the international settlement operation has become an objective for the commercial banks to execute their customer strategies

The international settlement operation is a banking activity that makes income with fewer risks in comparison with traditional banking products Through the development of the international settlement operation, banks have received more income from many kinds of charges and fees Moreover, as mentioned, the development and improvement of the international settlement operation is an efficient way to up prestige and trade name of the banks in market, attract more potential clients, and develop new kinds of products to increase income These help

to diversify banking activities and minimize risks in business

The international settlement operation is different from other activities in that banks have relations with not only their clients but also a network of corresponding banks

in the world, and through it, commercial banks gain opportunities to approach oversea customers as well as make an image in the worldwide economy This promises a firm basis for the developing market in the future

As in above mentioned analysis, the development and improvement of the international settlement operation is an objective requirement of commercial banks

in context of world integration of economy It helps banks to properly execute their customer strategies, and affirm their trade names in the world community step by step

1.2.3 Means of international settlement operation

person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to the bearer

A bill of exchange must be in writing It must contain an order to pay The order to pay must be unconditional If it is subject to the happening of some events, it will not be considered a bill of exchange It must be signed by the drawer and properly stamped The parties to the bill, the drawer and the drawee and payee must be certain and definite individuals The amount payable must be certain The payment must be made in money and not in other kind

From above mentioned definition of bill of exchange, we can deduce three main characteristics from it:

Abstract: There must not be content of credit relation on the bill of exchange; it terminates obligation implying from causal relation; the bill of exchange only contains an order to pay The amount payable must be certain

Obligatory to pay: The payee must pay the sum payable as stated on the bill of exchange and cannot quote private reason to reject payment for the drawer or endorser, unless the bill of exchange is made illegally The order to pay must be unconditional

Transferable: Bill of exchange could be negotiated one time or many times in its maturity

A bill of exchange must comply with regulations of appearance and content to be legally valid

+ For appearance: The bill of exchange must be in writing The bill of exchange is often made in two copies with the same legal value

+ For content: The bill of exchange must have the title, specific place, and date of issue of the bill, unconditional order, specific amount in digits and in words, specific names of both the payer and the payee

With the obligation to pay and abstract, the bill of exchange can be used as a convenient means of circulation in the foreign exchange market

1.2.3.2 Promissory Note Payment:

A promissory note is an unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to the bearer

In general, legal principles of bill of exchange are often used to explain the specified factors of promissory note, such as: endorsement, time of payment, sum of money, way of making, etc However, a promissory note has some main differences from a bill of exchange, as follows:

- Drawn by one or many people in order to promise to pay

- Presented for payment without any prior acceptance by the maker

- Set into one copy

- Used in both commercial and non-commercial deals, but rarely in the former

1.2.3.3 Check

A bill of exchange is made on the basis of commodity circulation when check is on the basis of banking credit circulation Check is written order by one person to his bank to pay the bearer, the person designated in it or to the order of presenter a specific sum on a definite date sometime in the future

Check is a means of payment used for many years; it is not only used popularly in internal payment of countries but also used in international settlements of commodity, service, and non-trade payment Because check is an unconditional order of payment, bank will honor a check if the funds of the drawer are sufficient and the check is properly presented

In general, countries using checks as means of international settlement must meet the following regulations : Geneva Convention and Uniform law check ULC 1931

According to the convention, to be in conformity with legal regulations, a check must have title, clearly sum of money in digits and in words, date and place of issuance, name and address of drawer, account with institution, name and address of beneficiary and the signature of drawer To issue a check, the drawer must have sufficient funds in their bank account; amount on check must not exceed its account balance The time of payment must be mentioned clearly on the face of check

Because it is characteristic of check payment to depend on a time-limit and the drawer’s account balance, check is used much more often in non-trade activities than in trade activities

1.2.3.4 Payment card

Payment card used in international settlement is mostly employed in non-trade activities This means of payment is more and more developed in stage of modern science and technology, especially when means of communication is more and more perfect

This tool requires specialized modern electronic machines Payment card depends

on the time of validity and initial account balance at issuing place It is often used to settle small sum of money in travel

1.2.4 Common methods of international settlement operation

Method of payment is the most important condition in sale contracts Method of payment is used to clear the way the sellers collect money and how the buyers effect payment In commercial relations, people may choose many different methods of payment to pay and receive money Some common methods of international

settlement are hereunder mentioned:

1.2.4.1 Remittance

* Concept: remittance is a method of payment in which a customer (buyer, payer,

importer) asks his or her bank to transfer a sum of money to a defined place in favor

of a beneficiary (seller, service supplier, exporter) by means of money transfer that

the customer requests Remitting bank must be through its correspondent banks in foreign countries, and in the beneficiary’s country to apply the funds

* Parties concerned in method of remittance:

- Remitter: person who asks his bank to transfer money to beneficiary

- Beneficiary: person who receives money that the bank transferred to

- Remitting bank: bank that serves the remitter

- Paying bank: bank that directly applies fund for beneficiary

Method of remittance is hereunder shown in diagram (Diagram 1.1)

Diagram 1.1 Process of remittance operation

(1) Exporter delivery goods and documents to importer

(2) After importer checks goods and/or documents, if they meet requirements of parties, importer will apply for money transfer order

(3) Remitting bank effects payment through its correspondent banks and debit remitter’s account

(4) Paying bank applies funds for beneficiary

Remitter

(Import)

Beneficiary (Export)

(1)

(2)

(4)

(3)

* Types of remittance include:

- Telegraphic transfer (TT):

Remitting bank puts the money transfers into effect by electronic order in correspondent banks in foreign countries to pay to the beneficiary This mode of payment is beneficial to the seller for obtaining money quickly, but the cost is high Today , most money transfers are made through the SWIFT network

If buyers effect payment after receiving goods, they will certainly control these goods Thus, sellers are not only in dud capital but also in risk because the payment depends on buyer’s goodwill and seller’s interests are not guaranteed

Therefore, the method of remittance is often applied for payment of debt, payment

in advance for deposit, redemption of spare cash, claim settlement, or trade expenses concerning import-export activities

1.2.4.2 Collections

* Concept: A collection is the handling of documents by banks, on instructions

received, in order to:

- obtain acceptance and/or, as the case may be, payment; or,

- deliver commercial documents against acceptance and/or payment as the case may be; or,

- deliver documents on other terms and conditions

International regulations which relate to collection have been formulated by the International Chamber of Commerce under “Uniform Rules for Collection (URC) 522”

* Participants concerned in method of collections:

- Principal: Party submits the collection instruction (seller/ exporter / party providing the service), party entrusts the handling of a collection to a bank

- Remitting bank: The bank to which the principal has entrusted the handling of a collection, the bank remits the documents in accordance with the terms of the collection instructions to the importer’s bank

- Collecting bank: Any bank, other than the remitting bank, entrusted with the execution of the collection; also called the collecting bank It is responsible for actually collecting payment from the importer

- Presenting bank: the collecting bank making presentation to the drawee

- Drawee: Recipient of a service to whom the collection documents are presented in accordance with the collection instruction

Method of collection is hereunder shown in diagram (Diagram 1.2)

Diagram 1.2 Process of collection operation

(3) Remitting

Bank

Collecting/

Presenting Bank

Drawer (Exporter/Seller)

Drawee (Importer/Buyer) (1)

(2)

(6) (7)

(5) (4)

(1) The seller/exporter forwards the goods or performs the service and prepares the required documents to comply with the regulations of the importing country and the requirements of the contract

(2) The seller/exporter lodges the documents at the remitting bank, signs the draft after it is made up, and completes a collection instruction

(3) The remitting bank sends documents to the presenting bank asking for money collection from the buyer/importer

(4) On receiving the documents the presenting bank advices the drawee and requests him to make payment

(5) The buyer/importer takes up the documents when draft is paid or accepted to pay by the buyer/importer ; or the buyer/importer rejects the draft

(6) The presenting bank will effect payment to the remitting bank; or return the documents to the remitting bank when the draft is refused to honor by buyer/importer

(7) The remitting bank will credit the seller/exporter’s account; or return the documents to the seller/exporter when the draft is refused to honor by importer

* Common types of collection:

- Clean collection: documentary collection whereby only the financial document

(draft or bill of exchange) is sent through the banks without a bill of lading and/or other shipping documents (which are sent separately by the consignor to the consignee) Clean collection allows a consignee to take delivery of the shipment without paying and without making a firm commitment to pay on a fixed date

This method of settlement is applied when there is a relationship of trust between the exporter and the importer There must be no doubt as to the importer’s willingness and ability to pay It is also used when there is a relationship of joint venture between the parent company and the subsidiary company, or among branches together to pay charges and expenses of service concerning to import and export of goods In general, this method is rarely applied due to the separation of commodity receipt from payment

- Documentary collection: a method of settlement whereby a bank in the importer's

country acts on behalf of an exporter for collecting and remitting payment for a shipment The exporter presents the shipping and collection documents to remitting bank which sends them to its correspondent bank in the importer's country The presenting bank hands over shipping and title documents to the importer in exchange for cash payment (in case of 'documents against payment' instructions) or

a firm commitment to pay on a fixed date (in case of 'documents against acceptance' instructions) The banks involved in the transaction act only in a fiduciary capacity

to collect the payment but make no guaranties They are liable only for correctly carrying out the exporter's collection instructions

Documentary collection is more secure than clean collection because the collecting bank controls the consignment on behalf of the exporter However, there are still some problems with documentary collection, it does not cover the risk of non-payment of the documents; for example, the importer could reject a commodity owing to the downturn of price, or failure to honor the draft at maturity

1.2.4.3 Documentary credit

* Concept: documentary credit is a method of payment that the bank gives an

undertaking under a letter of credit arrangement (on behalf of buyer and at the request of applicant ) to pay the shipper ( beneficiary ) the value of the goods shipped if certain documents are submitted and if the stipulated terms and conditions are strictly complied with

* Participants concerned in documentary credit:

- Applicant: Entity (usually an importer) who applies to a bank to establish a letter

of credit in favor of another entity (the 'accredited party' or 'beneficiary,' usually an exporter) However, where a finance company applies for a letter of credit on behalf

of an importer, the finance company is usually called the 'applicant' and the importer is called the 'account party.' Also called accountee or applicant

- Beneficiary: Party named in a letter of credit that can demand or draw payment under it

- Issuing bank: Buyer’s or importer's bank which establishes (opens) a letter of credit in favor of a beneficiary (seller or exporter), forwards it to an advising bank for delivery to the beneficiary, and commits itself to honor demand drafts drawn by the beneficiary against the amount specified in the letter of credit Also called opening bank

- Advising bank: Correspondent bank (usually in the exporter's country) of an issuing bank (usually in the importer's country) that receives a letter of credit from the issuing bank for authenticating it and informing ('advising') the exporter (the letter of credit's beneficiary) that a letter of credit has been opened by the importer

in the exporter's favor The advising bank usually also takes on other roles in the transaction, such as (1) confirming the letter of credit (playing the role of the 'confirming bank'), (2) accepting a bill of exchange by endorsing it (becoming the 'accepting bank') and/or, (3) paying the exporter on presentation of documents (becoming the 'paying bank' or 'negotiating bank') Also called adviser bank or nominated bank

Moreover, depending on the circumstances there are some other banks concerning

in the process of payment, such as:

Confirming bank: Bank in an exporter's country which guarantees that the letter of credit established by the importer (for the benefit of the exporter) will be honored once the conditions therein are fully complied with The confirming bank (Also called the advising bank) undertakes this responsibility on an arrangement (called confirmation) with the importer's bank which issued the letter of credit (called the issuing bank)

Nominated bank: the bank with which the credit is available or any bank in the case

of the credit available with any bank

Reimbursing bank: In letter of credit arrangements, the bank (often, but not always the issuing bank) that serves as a source of funds for payment to the letter of credit's beneficiary

Method of documentary credit is hereunder shown in diagram (Diagram 1.3)

Diagram 1.3 Process of documentary credit

(1) After entering into a commercial contract, importer will approach issuing bank and ask the bank to issue a letter of credit in favor of the exporter

(2) The issuing bank will open a letter of credit as the application called for and contact its correspondent in the exporter’s country to send details of the credit to the exporter

(3) Advising bank inspects the letter of credit received, authorizes and advise the exporter

(4) The exporter will manufacture the goods called for under the letter of credit and then take the goods to the docks to have them shipped

(5) The exporter will then gather together all the documentation called for under the credit The set of documents will be taken to the negotiating bank and the exporter asks the bank to pay or negotiate the documentation

(6) The negotiating bank staff will inspect the documentation and if it is satisfied the draft will be accepted by the bank The bank makes payment or negotiates the documents under letter of credit

(7) Negotiating bank will forward the documents to the issuing bank

(8) Upon receipt, this bank will inspect them and if they are in order, it will effect payment under instructions of negotiating bank

(9) The issuing bank will debit the importer’s account and make the documents available to the importer receiving goods

Common types of documentary credit:

Irrevocable letter of credit: Firm commitment by an issuing bank to pay an

accepting bank a specified sum in a specified currency, provided the conditions included in the letter of credit document are met within a specified timeframe This letter of credit cannot be canceled (or its terms amended) without the seller's (beneficiary's) prior written approval

Revocable letter of credit: letter of credit that may be amended or canceled any time by the buyer (the account party) without the approval of the seller (the beneficiary) Since it does not provide any protection to the seller, it is rarely used Some banks even refuse to issue such letter of credits for fear of getting involved in the possible litigation between the buyer and the seller

Revolving letter of credit: Single letter of credit that covers multiple-shipments over a long period of time Instead of arranging a new letter of credit for each separate shipment, the buyer establishes a letter of credit that revolves either in value (a fixed amount is available which is replenished when exhausted) or in time (an amount is available in fixed installments over a period such as week, month, or year) letter of credits revolving in time is of two types: in the

cumulative type, the sum unutilized in a period is carried over to be utilized in the next period; whereas in the non-cumulative type, it is not carried over

Red clause letter of credit: letter of credit that carries a provision (traditionally written or typed in red ink) which allows a seller to draw up to a fixed sum from the advising or paying-bank, in advance of the shipment or before presenting the prescribed documents It is normally used only where the buyer and seller have close working relationship because, the buyer is essentially extending an unsecured loan to the seller (and bears the financial risk and the currency risk)

Standby letter of credit: Primarily a substitute for a performance bond or payment guaranty, this letter of credit is used mainly where banks are legally barred from issuing certain types of guaranties It serves as a parallel (collateral) payment source in case the primary source fails to meet its obligations in part or

in full

Transferable letter of credit: Irrevocable letter of credit with two (and only two) successive beneficiaries In this arrangement, the first beneficiary (an intermediary or importer's foreign representative) can assign part or whole of the letter of credit amount to a second beneficiary (the supplier or manufacturer) To

be transferable, the letter of credit must be so marked by the issuing bank on the instructions of the buyer or importer (the account-party) On the instructions of the first beneficiary the advising bank can transfer it to the second beneficiary but not any further

Back to back letter of credit: Arrangement in which one irrevocable letter of credit serves as the collateral for another; the advising bank of the first letter of credit becomes the issuing bank of the second letter of credit In contrast to a 'transferable letter of credit,' permission of the ultimate buyer (the applicant or account party of the first letter of credit) or that of the issuing bank is not

required in a back-to-back letter of credit It is used mainly by middlemen (intermediaries) to hide the identity of the actual supplier or manufacturer Also called counter credit or reciprocal letter of credit

1.3 Factors influencing the international settlement operation of commercial banks

1.3.1 Objective factors

1.3.1.1 Globalization and economic integration

Now that globalization has become an objective reality, it attracts many countries to enter All of them become aware that they cannot stand outside if they want to develop, and they must follow a reasonable route to successful development Through that process, activities of international investment and commerce will increase quickly without a doubt; fostering good conditions for the development of the international settlement operation Globalization and economic integration both open up opportunities for commercial banks and issue generous challenges, especially to commercial banks in developing countries that primarily concentrate

on traditional activities

1.3.1.2 Development of information technology

Nowadays, revolution in information technology science happens very quickly, and information technology has seen great progress Its development has affected the activities of the commercial banks in general, the operation of international settlement in particular The international settlement operation has basic changes in comparison to past traditional payment Many centers of clearing payment have been established in Europe and America The appearance of Society for worldwide interbank financial telecommunication (SWIFT) allows the international settlement operation to be carried out quickly and safely

1.3.1.3 Practices and standards of international settlement operation

The international settlement operation will be affected or governed by national laws first, then by a system of customs, international practices that are very complicated

and frequently amended to adapt to the development of international commerce Some of the basic regulations concerning the international settlement operation directly:

- UCP: The Uniform Customs and Practice for Documentary Credits (UCP) is a set

of rules on the issuance and use of letters of credit Historically, the commercial parties, particularly banks, have developed the techniques and methods for handling letters of credit in international trade finance This practice has been standardized by the ICC (International Chamber of Commerce) by publishing the UCP in 1933 and subsequently updating it throughout the years The ICC has developed and molded the UCP in regular revisions, the current version being the UCP600

- URR: The Uniform Rules for Bank to Bank Reimbursements under Documentary Credits ICC Publication No 725 shall apply to all Bank to Bank reimbursements where they are incorporated into the text of the reimbursement authorization They are binding on all parties thereto unless otherwise expressly stipulated in the reimbursement authorization The issuing bank is responsible for indicating in the documentary credit that reimbursement claims are subject to these rules

- URC: The Uniform Rules for Collections are a practical set of rules to aid bankers, buyers, and sellers in the collections process The rules have been prepared to resolve problems that practitioners have experienced in their everyday operations since 1979

URC 522 underlines the need for the principal and/or the remitting bank to attach a separate document, the collection instruction, to every collection subject to the rules

- makes it very clear that banks will not examine documents, particularly not to look for instructions - addresses problems banks experience in respect of documents against acceptance (D/A) and documents against payment (D/P) - clearly indicates that banks have no obligation to store and insure goods when instructed

- Incoterm: International Commercial Terms are a series of international sales terms, published by International Chamber of Commerce (ICC) and widely used in international commercial transactions They are used to divide transaction costs and responsibilities between buyer and seller and reflect state-of-the-art transportation practices The first version was introduced in 1936 and the most recent dates from

2000 Incoterms make international trade easier and help traders in different countries to understand one another

1.3.1.4 Level of development and open of economy

The level of development of the economy will strongly impact the international settlement operation of a country When the economy grows, activities of production and domestic investment will be enhanced and will attract foreign investment …These make the inland activities of import and export more eventful All of those will stimulate the international settlement operation to develop to meet the economy’s requirements

1.3.1.5 Macro economic policies of government

The international settlement operation is adjusted by macro economic policies of government, such as:

- Foreign trade policy There are two main trends of international commercial policies Those are trade protection policy and free trade policy If trade protection policy is much more applied, foreign trade will have many difficulties, and international settlement operation will be reduced; and vice versa

- Foreign exchange control policy Related to looseness or tightness of foreign exchange If the policy is loose, the advanced conditions for international settlement operation develop, and vice versa

- Exchange rate policy Related to the assessment of the domestic currency value If domestic currency is quoted at a low price, export will increase but import will decrease, and vice versa Exchange rate also has an effect on cash flow of tourism,

overseas remittance, and even on exchange risk…All of these influence international settlement operation

1.3.1.6 Competition of other commercial banks

Competition between commercial banks constitutes an important factor to perfection of the international settlement operation A commercial bank will win in

a struggle, increase of its variety of customers and boost the scale of the international settlement operation if it can serve the customers of the international settlement operation with high security, low cost, and short processing time That is the issue which makes advantageous conditions for international settlement operation to improve

in developing new customers but also in maintaining traditional ones For that reason, a right customer policy is a combination between improvement of traditional products and services, and the development of new ones, a combination

of applying many kinds of products, services and general customer’s needs, a combination of increasing qualities of customer service and strengthening marketing policy If so, the bank would win in fierce competition, and attract more and more customers

1.3.2.2 Policy of foreign affairs

The policy of foreign affairs includes general orientations of extending relations of foreign affairs, and relations of correspondents between foreign banks Those things help to bring about good results in serving customers, diversifying business activity and increasing banking profits in the context of integration A good policy of foreign affairs would attract increasingly more customers at home and abroad, making reliable relations with foreign banks, raise the effects of serving the customer, and help banks run and grow steadily in the midst of fierce competition in banking and finance A right foreign policy will make a sound basis on which to consolidate and raise prestige, a trade mark of commercial banks in the world community

1.3.2.3 Development level of banking technology

Banking technology includes whole material facilities and network for management, and also the operation of the banking business The international settlement operation would hardly develop under the pressure of obsolete technology According to new practices, transactions and payments are processed

by telegraphic transfer through SWIFT; settlements are treated on accounts at clearing payment centers Therefore, outdated technology will create difficulties for foreign banks, and the bank will lose its prestige in the world banking community as

it drops in the number of customers day by day Approaching modern technology can not only help improve the process of the international settlement operation but also make a good basis for the development of new products and services, making the international settlement operation progressively develop more effectively

1.3.2.4 Structure of organization and management for international settlement operation

This includes the system of organization, function, mission, authority of each division, regulations, and process of the international settlement operation … A consistent system of management under a reasonable process will minimize risks, shorten payment time, increase effectiveness of the international settlement operation, and raise the bank’s prestige among customers

1.3.2.5 Knowledge, ability of dealers in international settlement operation

The international settlement operation requires having a thorough grasp of international practice; the process of the international settlement operation by which risks are reduced for customers and bank itself That is why officers of the international settlement operation must be fluent in a foreign language, and also fluent in international payments They must often analyze market’s fluctuations that influence exchange rates and propose quick decisions to obtain the best results in business Then, they could consult customers from the stage of signing contract to the stage of selecting safe and suitable payment method These are very important premises on which to attract customers