Method of International Settlement

Chapter 2: Methods of International Trade Settlement
WBS 3013 ISLAMIC INTERNATIONAL TRADE AND FINANCING
Dayang Hasliza Muhd Yusuf

Learning objectives
By the end of this session, you should be able to:  Explain what are the risks involved in international trade  List and describe the various trade settlement methods being practiced i.e.:
   

Open account / Consignment Payment in advance Documentary collection Documentary credit

 Explain the mechanics of each trade settlement methods
 List the advantages and disadvantages of each trade settlement

methods

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Dayang Hasliza 2011

International Trade Settlement
 International trade - exchange of capital, goods, and services

across international borders or territories different countries

 International settlement –
 the money transfer via banks to settle accounts, debts and claims among

 fulfillment of contract on both parties i.e. seller delivers

goods/services and buyer make payment

 In the case of international trade – risks is higher  Risks to buyer  seller/exporter does not deliver goods/services

 Risks to seller  buyer does not pay
 So how to mitigate (reduce) the risks?
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Dayang Hasliza 2011

Risk Issues in International Trade
 In any business

transaction, there are risks.  However, these risks are emphasized when dealing internationally.  Added to the commercial risks present in a domestic transaction are foreign exchange as well as country risks.
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Country Risks

• • • •

Stable political climate? War? Revolution? Positive economic environment? Solid legal infrastructure? Foreign exchange restrictions?

Foreign Exchange Risks

• Volatile foreign currency?

Commercial Risks

• Reliable information concerning the company’s track record? Insolvency of your trading partner? • Default or termination on your contract?

Dayang Hasliza 2011

International Trade Risks to Seller/ Exporter
 Risks to seller  buyer