On Trade Finance and Economic Development

LC VIEWS's Editor Ravi Mehta talks to the world-famous LC and trade finance specialist Soh Chee Seng, Technical Adviser to Association of Banks in Singapore, Singapore, on the role and problems of LC and trade finance in low-income countries.

Soh Chee Seng plays a vital consultancy role in trade finance management functions of the banks in Asian economies

The World's Great LC Specialist Soh Chee Seng

A1: Instead of being administered by the country, international trade finance by indigenous banks should be supported by the authority with incentive to encourage its use for planned economic development in low-income countries. One of the examples is to provide tax incentive or interest rate subsidy for export and pre-export finance.

Q2: The economists theorize that LC is suitable for low-income countries for their international trade. But, we see high percentage of discrepant presentations, undue document rejections. Is LC practically helpful in international trade promotion for economic development acceleration? How to improve trade documentation in low-income countries.

A2: LC is used only when the exporter requires a financial institution to secure the payment on behalf of the importer. It is suitable for all countries. LC may not be required when the exporter trusts its buyer-importer's integrity and financial ability. LC used in low-income countries is more for foreign exchange control purpose. It provides an assurance that the foreign exchange has been approved by the authority when the LC is issued. The high percentage of discrepant presentation is mainly due to lack of knowledge in documents preparation. This has not only happened in low-income countries, but also in some high-income countries. I believe LC is still practically helpful in international trade although the system may sometimes be abused. To improve trade documentation, the parties concerned must be aware of the international standard banking practice for LC operations. Banks and the ICC National Committee, if any, may provide training for their clients or members.

Q3: Is ISBP helping to minimize document rejection and to minimize overdue export payments?

A3: ISBP may help to minimize document rejection and as a result may minimize overdues.

Q4: How can low-income countries prevent/fix the problem of overdue export payments?

A4: Discrepant presentation may be used as an excuse to refuse or delay payment by the importers or the issuing banks. Overdue export payments to low-income countries are mainly due to wrong shipment, or poor quality of the products exported from the low-income countries. To prevent the problem of overdue export payments, other than presentation of non-discrepant documents, the exporters from low-income countries should ensure that the goods are shipped in accordance with the requirements in the sales agreement.

Q5: LC can serve the purpose of collateral. Still there is a tendency to obtain physical collateral in low-income countries for pre-shipment and post-shipment financing of international trade? Is physical collateral necessary? Physical collateralization may be deterrent to some exporters.

A5: Banks may require physical collateral for pre-shipment financing but not for post-export financing. The exporter may not be able to deliver or produce the goods as required in the LC after it obtains pre-shipment financing from its banker. With the exception of standby LC favoring the financing bank, commercial LC cannot serve the purpose of collateral as it is good for payment only on condition that the terms and conditions of the LC are complied with. The negotiating bank may not be reimbursed by the issuing bank if the documents are discrepant. Banks do not require physical collateral to provide post-shipment finance if compliant documents are presented and the LC is confirmed or issued by an reputable and financially strong issuing bank.

Q6: If LC is irrevocable and confirmed should LC-based trade finance still be credit insured? Is credit insurance necessary evil?

A6: It would only be fair to the export credit insurance company if all exports, including LC-based exports, from its client are insured. No one would run the credit insurance business if only exports that are considered high risk are covered.

Q7: International traders in low-income countries lack UCP knowledge. How to promote UCP knowledge and its use in low-income countries?

A7: Banks and ICC National Committee, if any, in low-income countries play an important role to promote UCP knowledge. However, it would also depend on the education level of the people in low-income countries. As most traders in low-income countries are not well educated, banks may also have difficulty to promote the UCP knowledge or train their customers.

Q8. LCs issued from low-income countries, for imports for economic development purposes, may be erratic, restrictive and bulky with so many documentary conditions, some of which may be the requirements of statutory trade regulations. Delivery of LCs to beneficiaries may not be expeditious. How to improve LC practice in the low-income countries in terms of efficiency, error-elimination and documentary conditions reduction?

A8: I don't think we can help to solve the problem if it is the requirement of government authority. It may help to improve the conditions if the importers in low-income countries agree that these bulky documents are to be forwarded directly by the exporters to the importers outside LC terms.

Q9: It is said low-income countries are artful in finding/fabricating discrepancies. Do you agree - how to improve document examination practice in low-income countries?

A9: I don't agree. If this is the case, the documents from low-income countries would have lesser discrepancy. I have seen similar problem from banks in high-income countries; the banks just find fault on documents to refuse payment as their applicant-customer has financial problem. The problem in low-income countries is mainly lack of UCP knowledge.

Q10. Should low-income countries develop indigenous LC/trade finance training skills or outsource or import training? Should training be a part of federal trade promotion policy, be funded by federal grants?

A10: If they have the resources, they can develop their own training skills but I am doubtful. They may also find it too costly to outsource or import training. I agree that the training should be part of the development programs in low-income countries. In most countries, the government provides grants or skill development fund to subsidize the training costs.

Q11. Should low-income countries set up indigenous ombudsman for resolving LC payment disputes in a more cost-effective manner? Is DOCDEX suitable for low-income countries?

A11: They may not have the resources to set up indigenous ombudsmen for resolving LC disputes. DOCDEX is more cost effective and suitable for them.

Q12: It is said low-income countries are main users of LC, but in UCP formulation developed countries are more involved, which use more open account method. Hence developed countries' advice in UCP formulation may not be in the interest of developing countries. For example, negotiation. The west does not want negotiation in UCP, while the east wants it in both rule and practice. Will the UCP revision take care of the needs, aspirations and problems of the low-income countries? What is the objective of UCP revision? Should the low-income countries have national law for LC?

A12: Though the UCP drafting group members are mainly from developed countries, members will consider the comments and views received from members of the Consultative Group and all National Committees. There will not be any discrimination as members will not differentiate whether the views or comments are from high-income countries or low-income countries. The UCP revision will take care of the needs, aspirations and problems of all countries in LC operations, if possible. I always believe that any requirement by the authority not included in the UCP can still be specified as part of the terms and conditions in the LC from low-income countries. The objective of UCP revision is to make the rules more up to date and easy to understand.

I don't really think that the banks in Asia prefer "negotiation" credits. If this is true, why is it that more than 80% of the banks in Asia do not actually negotiate a "negotiation" credit? They effect payment to the beneficiary only after they receive payment from the issuing bank. For what I know, lawyers from the west prefer to keep "negotiation" in the new UCP revision.

Some developed countries do not have a separate national law for LC. I don't think it is necessary to have that in low-income countries. LC could be viewed as an agreement and all parties concerned are bound by the terms and conditions specified therein.

Q13: Some developing economies, Middle East for example, may import LC specialists - may be as part of trade development policy. Indigenous banks in the Middle East have employed foreign LC specialists. Is this approach right for economic development purposes? What is ultimately more suitable for developing economies: indigenous LC specialist or immigrant LC specialist? Should LC specialist import substitution for indigenization follow the initial step of LC specialist immigration?

A13: Whether the approach is right or wrong, it all depends on the actual problem faced by the developing economy. If the country is really lack of LC specialists, it would be right for the country to import LC specialists. However, the country must also have a policy or plan to train its own local specialists.

Q14: In developing economies foreign trade- finance banks may also operate. Are these banks easily accessible and affordable to indigenous small exporters in particular? Do they show real concern for local economic development or they are manifestly concerned with only repatriation of profit? If there is a competition between indigenous banks and foreign banks in a developing economy, is the competitive environment conducive to indigenous economic development?

A14: Though foreign banks may operate in developing economies, there are often restrictions imposed by the central bank for foreign banks to deal with small enterprise. But in some developing countries, ie. Malaysia, foreign banks are easily accessible and affordable to indigenous small exporters. Foreign banks may be concerned with only repatriation of profit, but their contribution to local economic development must also be recognized. They bring in expertise and also create employment. If there is a competition between indigenous banks and foreign banks, it will force indigenous banks to improve their service and staff quality in order to compete with the foreign banks. In South East Asia, most senior management staff including LC specialists are trained in foreign banks and subsequently employed by indigenous banks. The competition is conducive to indigenous economic development.

He started his 25 years career in banking in 1976. He was Head of Export Bills Section with Overseas Chinese Banking Corporation Limited, Singapore, a position he held until 1981. In 1981, he moved to Sumitomo Bank Limited, Singapore Branch, where he was the Assistant Manager of Bills Department for one and half years until 1982.

Between 1982 and 1996, he was with United Overseas Bank Limited, Singapore, where he held the position of Vice President of Trade Services, dealing primarily in trade finance operations and marketing. In 1996, he was seconded to Chung Khiaw Bank (Malaysia) Bhd in Kuala Lumpur, Malaysia, where he held the position of Head of Trade Services until 1997.

In 1997, he joined Trade Services Department of Overseas Union Bank Limited, Singapore as Vice President and Head of Trade Services Department until December 2001. Altogether, he has about 25 years of experience in banking industry, at least 20 years of which he was primarily dealing with trade finance and documentary credit.

Soh is Singapore representative for the ICC Banking Commission and a member of the Task Force on International Standard Banking Practice (ISBP). He is also a member of the Task Force on UCP Review and the new UCP 600 Drafting Group. The ICC Banking Commission, which comprises international banking experts from various countries, acts to prepare new uniform rules, update existing uniform rules for documentary credits, collections and bank-to-bank reimbursements and to adapt international standard banking practices to automatic data processing techniques. It is responsible for drafting the revisions of the Uniform Customs and Practice for Documentary Credits ("UCP"), including the current version, UCP 500. It also provides definitive guidelines and opinions to bankers in different countries.

Among the 12 members of the Task Force on ISBP, he is the only member from Asia. He is also the only Asian member in the UCP 600 Drafting Group.

Apart from the ICC Banking Commission and the various working groups in which Soh is actively involved, he is also a technical consultant on trade finance issues to the Association of Banks in Singapore.

Soh has been invited by the institutions and banks to lecture on the subject of documentary credits, trade finance, trade frauds and risks management extensively in Asia. He has also been invited to lecture on the subject of International Standard Banking Practice as reflected in the UCP 500 for the judges from the Supreme People's Court of China. He is also frequently invited by the Institute of International Banking Law and Practice, Inc. as a panel speaker in the Annual LC Survey in Asia, America and Europe.

Currently, Soh practices under the name and style of DCTrade Consultants, providing his services as expert witness and as a technical consultant and trainer on trade finance matters.