MINISTER OF EDUCATION AND TRAINING
FOREIGN TRADE UNIVERSITY

MASTER THESIS

A study on instruments of Trade financing in Vietnamese
commercial banks
Major: International Trade Policy and Law

Full name

: Duong Thuy An

SUPERVISOR

: Asso. Prof, Dr. Nguyen Thu Thuy

Hanoi - 2016


ACKNOWLEDGEMENT
Firstly, I would like to send my profound regards to my supervisor, Asso.
Prof, Dr. Nguyen Thu Thuy, for all of her remarks and guidance so that I can
continue doing my research and complete this on time.
I also would like to thank my friends working with me in trade financing field
for their strong support. Without them, the study would not be accomplished.
Lastly, I would like to take this chance to express my deepest gratitude to my
dear family, who always supports me no matter what happens for all the time I
study. I would like to sincerely thank my parents, for giving me unconditionally
loving and encouraging me through my hardest time; my sister, for truly
understanding and sympathizing with me. I would never have finished this without

3.1.1. General law ........................................................................................... 31
3.1.2. Specific law for each kind of trade financing instrument .................... 32

3.2. International law ........................................................................................ 35
3.3. Relationship between national law and international law of trade financing
instruments

........................................................................................................... 38

3.4. Effect of law in trade financing instruments ............................................. 39
CHAPTER 4: DEVELOPMENT AND IMPACT OF TRADE FINANCING
INSTRUMENTS TO VIETNAMESE COMMERCIAL BANKS .......................... 43
4.1. Development of Trade financing instruments in Vietnamese commercial
bank………… ........................................................................................................... 43
4.1.1. Financing by issuing or confirming Letter of credit ............................. 43
4.1.2. Discount/negotiation .............................................................................. 44
4.1.3. Guarantee/Standby L/C .......................................................................... 46
4.1.4. Express discount ..................................................................................... 47


4.1.5. L/C used for financial purpose ............................................................... 48
4.1.6. Usance L/C at sight basis ....................................................................... 50
4.1.7. Internal L/C ............................................................................................ 58
4.1.8. Products for loaning purpose between banks ........................................ 61
4.1.9. Factoring ................................................................................................ 62
4.1.10. Forfaiting .............................................................................................. 65
4.1.11. Supply chain ......................................................................................... 69
4.2. Impact of trade financing instruments to banking business ...................... 74
CHAPTER 5: ANALYSIS ON THE CURRENT SITUATION OF
TRADE FINANCING INSTRUMENTS AND RECOMMENDATIONS FOR


Bank payment obligation

CCC

Commodity Credit Corporation

CDCS

The Certificate for Documentary Credit Specialists

DOCDEX

Documentary Instruments Dispute Resolution Expertise

Exim bank

Vietnam Export Import Commercial Joint - Stock Bank

EPLC

Early payment letter of credit

FMCG

Fast moving consumer goods

GSM 102

Export Credit Guarantee Program 102

L/C

Letter of credit

MB

Military Bank

OCR

Optical character recognition


RM

Relationship Manager

RMA

Relationship Management Application

SCF

Supply chain finance

SCM

Supply chain management

SLA


URC522

Uniform rules for collection 522

URDG 758

Uniform Rules for Demand Guarantees 758

URF 800

ICC Uniform Rules for Forfaiting 800

URR725

Uniform rules for bank to bank reimbursement 725

USDA

U.S. Department of Agriculture

Vietcombank

Joint Stock Commercial Bank for Foreign Trade of Vietnam

Vietinbank

Vietnam Joint Stock Commercial Bank for Industry and Trade

VP bank

financing products on business of Vietnamese commercial banks, the study also
points out success and shortcomings of trade financing activities in Vietnamese
banking business and proposes suggestions to increase trade finance in Vietnamese
banking system.
Moreover, this dissertation would like to mention all recent national laws and
international rules for each product and also indicates their affect to trade financing
processes in Vietnamese commercial banks. So that, bankers can get a whole view
on a legal aspect of trade financing instruments.
This paper will approach a different view with previous researches by deeply
focusing on specific trade finance products and study with the scope in Vietnamese
commercial banks like Vietcombank, Techcombank, MB, VP bank,… in
comparison with international banks. Thus, this paper would like to be a useful
source for bankers, especially trade financing officers, RM to develop trade
financing procedures as well as operate them efficiently.


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CHAPTER 1: INTRODUCTION
1.1.

Relevance of study
Nowadays, trade finance business has become one of the most important

portfolios in Vietnamese commercial banks. According to the ICC Global Survey
on Trade finance 2016, Growth in trade finance transactions both in volume and
value terms is no longer predominantly driven by China. An increase in activity in
South-East Asian countries is noticeable, with Vietnam in particular powering
ahead. As per Vietcombank’s the first six-month business report in 2016,
Vietcombank’s Trade finance value reached 24.802 million USD, Vietinbank

However, although used in other countries long time ago (i.e. Korea), at the time of
2011, UPAS L/C was an exclusive product of Techcombank. It took almost five
years for this kind of L/C become popular in Vietnamese commercial banks. The
same situation applied with Draft by back L/C which has same mechanism with
UPAS L/C but the issuing bank has the role of reimbursement bank. Till now, only
Techcombank and MB offer this product. Moreover, some products like Supply
chain, Forfaiting have not been developed in Vietnam.
Since Vietnamese legal structure is so complex with a lot of Circulars,
Decisions, Official notices… which are revised or replaced in each period of time, it
is required that banks must update new rules governing their trade financing
products. So that, they are able to build up or update their procedures in compliance
with new regulations.
Researches on trade financing instruments are done in various ways from
theoretical view and practical view. For example, Mustafa (2010), Ahn & JaeBin
(2011) and Grath (2013) provide all theories of trade finance. There are some
papers in a practical aspect like Henri (2013) indicating practical process in trade
financing unit from the perspective of corporate banking employees or Sindberg
(2011) and Oramah (2016) providing financing activities in international trade. In
the financial crisis, trade financing activities were researched increasingly like
Rochet (2010), Chauffour & Malouche (2011), Chor & Manova (2012), all of which
shown the fact that because of crisis, bank-intermediated trade finance fell in value
significantly. In addition, analyses on development of trade finance are also
mentioned by many authors namely Clark (2014) and Garralda& Vasishtha (2015).
Moreover, the importance of trade finance in trading activities is also proved in a
variety of researches namely Wandhöfer (2012) and Prete & Federico (2014).


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As to categorical aspect, ICC have annually issued ICC Global Survey on



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This paper would like to provide bankers, in view of a trade finance officer, detailed
process of new trade financing instruments like L/C for financing purpose,
Forfaiting, Supply chain. With this information, the research would like to be a
useful source for bankers to develop trade financing procedures as well as operate
them efficiently.
In legal aspect, although Vietnamese legal framework is quite complex, there
is no previous research analyzing national laws and international rules governing
each trade financing instruments. Therefore, this dissertation would like to mention
all recent national laws and international rules for each product and also approach
their affect to trade financing process in banks. Thus, trade financing officers can
have a whole view on legal regulations which govern and guide trade financing
activities.
Moreover, unlike other researches which only analyze development of trade
finance field as a whole, the paper will get a close look on the impact of trade
financing instruments to commercial banks’ business and aim to give
recommendations to develop trade financing products in Vietnamese banking
systems. With that purpose, the paper will indicate newest information of benefits
which trade financing instruments create, limitation of some trade financing
procedures in different banks.
1.2.

Research questions
To shed light to the above mentioned issues, the study will be answers for the

following questions:
 How do banks offer and use their trade financing products for their

main sections. Firstly, Chapter 1 will be Introduction giving an overview on the
study. Following Chapter 2 will be Theoretical framework of trade financing
instruments, showing mechanisms of trade financing instruments. Chapter 3 will be
Legal framework of trade financing instruments, providing update regulations for
trade financing instruments and effect of them. Furthermore, Chapter 4 is
Development and impact of Trade financing instruments to Vietnamese commercial
banks, aiming to provide a practical view of each product in Vietnamese
commercial banks in comparison with that of foreign ones. Chapter 5 Analysis on
the current situation of trade financing instruments and recommendations for
developing trade financing instruments in Vietnamese commercial banks will point


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out current situations and some recommendations for developing trade financing
products in Vietnamese banking system. Finally, Conclusions will be drawn and
recommendation for further research will be presented in the last Chapter 6, along
with the limitations of this study.


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CHAPTER

2:

THEORETICAL

FRAMEWORK


URC 522 (ICC, 1995) sub-article 2 (a) defines a collection as being: handling
by banks of documents . . . in accordance with instructions received, in order to:
(I) obtain payment and / or acceptance, or
(II) deliver documents against payment and / or against acceptance, or
(III) deliver documents on other terms and conditions.


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More commonly, collections are described as being ‘D/P’ - documents release
against payment, ‘D/A’ - documents release against acceptance, with payment due
at a future date or ‘D/OT’ - documents release against other terms and conditions
namely promissory notes, trust receipts, letters of under taking to pay,…
Enterprises can get finance from this kind of payment method like negotiation
for exporters and a loan for importers to effect payment. In D/A transactions,
exporters may require Guarantee/Standby L/C to reduce risks of non payment at
maturity from importers.


Bank payment obligation:

URBPO 750, article 3 defines that BPO (bank payment obligation) is an
irrevocable undertaking given by one bank (Obligor bank) to another bank
(Recipient bank) that payment will be made on a specified date after a successful
electronic matching of data.
BPO is a new tool for international trade finance. It will be located somewhere
between open account and letter of credit. Based on standardized messaging and
advanced transaction matching, this new instrument will accelerate financial supply
chain.
The process flow of a basic BPO transaction is illustrated in Figure 1 below.

(5) The seller presents shipment data and invoice data to its bank (the recipient
bank), which submits them to Transaction Matching Application for matching.
(6) The buyer receives a match report from its bank (the obligor bank). The
buyer is invited to accept any mismatches if any.
(7) The recipient bank informs the seller about the successful dataset match.
(8) The seller sends trade documents directly to the buyer. The buyer will clear
goods from the customs with these documents.
(9) On the due date, the obligor bank debits the proceeds from the buyer's
account to effect payment for the recipient bank.
It is noticeable that, unlike an LC, where the seller in the underlying trade
transaction is the beneficiary, the party entitled to payment under a BPO is the
recipient bank (the seller's bank). This is because a BPO creates a bank-to-bank
payment obligation, not a bank-to-customer obligation. Therefore, a BPO offers
assurance of payment, risk mitigation for all parties, and is possibly used as
collateral for finance. In addition, the obligor and recipient banks need separate
agreed documents with their customers in respect of a BPO since the actual parties
of this payment method are the seller and the buyer.


Letter of credit:

The definition of letter of credit, offered in UCP 600, article 2, is a short and
definitive statement: “Credit means any arrangement, however named or described,
that is irrevocable and thereby constitutes a definite undertaking of the issuing bank
to honor a complying presentation”
The structure of a basic documentary credit transaction is highlighted in
Figure 2.
(1) The contract is agreed between the buyer (‘applicant’) and the seller
(‘beneficiary’) indicating a documentary credit as the method of settlement.


efficient features which are presentation of

documents to prove transactions,


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independent parties like the issuing bank/the confirming bank giving irrevocable
undertaking, or the nominated bank/the reimbursing bank effecting payment.
Figure 2. Documentary credit without confirmation of advising bank4



Payment in advance:

With this method of payment, the buyer pays the money in advance. Once the
seller is in receipt of the funds, it arranges for the goods to be shipped or dispatched.
From the seller’s point of view, receiving payment in advance of the shipment is an

4

Gary Collyer. (2015), Guide to Documentary Credits, 5th edition, ifs University College


14

ideal situation, as it appears to eliminate all risks associated with nonpayment.
However, from the buyer’s point of view, payment in advance carries
the greatest risk, as it is wholly dependent on the seller shipping the correct goods
in accordance with the contract. In addition, payment in advance can create cashflow problems for the buyer, as it has to wait to receive the goods. Therefore, the

terms and conditions that have been stated in the application form, the bank issues
the guarantee and advises it through a bank in the country in which the beneficiary
is located, known as the ‘advising bank’.
(4) The advising bank issues its advice of the guarantee and sends it to the
beneficiary.
(5) The beneficiary, if in agreement with the terms and conditions of the
guarantee, arranges shipment of the goods. Having shipped the goods, the

5

Gary Collyer. (2015), Guide to Documentary Credits, 5th edition, ifs University College


16

beneficiary issues, collates and presents its documents directly to the buyer (open
account terms) or to the remitting bank (if documentary collection terms) for
sending to the collecting bank.
(6) If the open account transaction, or the documentary collection, is honored,
the guarantee is not utilized. If there is a payment default by the buyer, the seller
issues a demand in accordance with the requirements of the guarantee and presents
it to the advising bank.
(7) The advising bank sends the demand to the issuing bank.
(8) The issuing bank determines that the demand complies and arranges to
debit the applicant’s account for the value of the drawing. In return, the demand is
handed over to the applicant. At the same time, the issuing bank reimburses the
advising bank.
(9) The advising bank, upon receipt of the proceeds from the issuing bank,
effects settlement to the beneficiary in the manner requested.
The two instruments are not only used to finance enterprises by banks’ credit

(4) The bank reviews the application and the documents as per their policy
then agrees or disagrees the discount offer.
(5) When agreeing to discount, the bank pays the seller a percentage of
invoice value.
(6) The bank sends the documents to the buyer or the buyer’s bank and claims
for value of goods.
(7) The bank receives payment from overseas party and off balance the
amount with the seller.
(8) If The bank does not receive payment at maturity, it will recourse the seller
(in discount with recourse) or it will claim reimbursement from the buyer or buyer’s
bank (in discount without recourse).
As mentioned above, discount with recourse and discount without recourse are
two kinds of discount. In discount with recourse, the client is legally responsible for
repayment of the funds and the finance will be shown in the client’s balance sheet
as a liability. In discount without recourse, the client is not legally responsible for
repayment of the funds; banks have agreed to look to someone other than the client
for repayment (i.e. buyers or buyer’s bank) and the finance will not appear on the


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client’s balance sheet as a liability provided that the client’s auditors are in
agreement.
Discount without recourse has higher risks for banks because it is easier for
banks to get repayment from their customers than from overseas parties. So that, to
get discount without recourse , there are requirement of higher interest and more
conditions like documents must be under L/C transactions, documents must be
accepted by issuing banks or confirming bank and credit line of issuing banks and
confirming banks and country risks must be complied with banks’ policy. The
requirement on overseas parties are difficult to get since they are changeable and