Loans and money

In many countries, such as the Philippines, India and Mexico, large numbers of workers support their families by working abroad. In some Middle East countries foreign workers outnumber local residents. In countries such as Singapore and the Hong Kong SAR (Special Administrative Region) there are hundreds of thousands of foreign domestic workers from the Philippines and Indonesia.
This has created a retail demand from foreign workers to send funds to their families back home. Banks are just one of a number of financial institutions that provide remittance services. Banks effect this by means of electronic transfer.
There is also a large informal, lightly regulated business for transferring money home. A mainland Chinese worker in Singapore wanting to remit funds to his family in Shanghai will go to a moneychanger and hand over the cash. The moneychanger will then call, or send a fax, to instruct their counterpart in Shanghai to make payment to the named recipient.
This practice creates a number of problems. It leaves workers open to fraud and distorts published statistics on cross-border fund flows. It also facilitates money laundering. It is difficult to see how these businesses can be either better regulated or eliminated, however.

Most banks provide basic custody services to investors holding bonds and stocks. A small number of commercial banks also provide more sophisticated custody services to institutional clients such as fund managers. Specialist banks provide a service of collecting and remitting interest income from bonds and dividends from stocks. They are active in the stock lending business.
The whole business has changed dramatically with technology. In the past all securities were issued in paper form. Bonds, for example, had coupons attached to them that had to be clipped off and sent to the issuer’s bank in order to get payment. There are still vaults full of such paper that were issued many years ago but have not yet matured and have to be processed in this way.
Now most securities are issued and traded in scrip-less form, eliminating much of the paper trail. Now what custodian banks provide are computer interfaces to large numbers of incompatible clearing and settlement systems, obviating the need for the client to do so themselves.
The custody business is split into two distinct segments. Local custody services provided by banks providing services in individual countries and global custodians coordinating client holdings with local custodians and pulling these holdings together for their clients.
The global custody business has become highly concentrated, largely as a result of the high costs of investing in technology necessary to compete in this business segment. There are now only three or four global custodian banks still competing with one another. At present this still appears to be an attractive business segment with high barriers to entry and customer switching costs. In the long term this may change as more exchanges and clearing systems adopt open standards but that is a long way away.

In the second phase the exporter provides its shipper with the documentation, in particular the bill of lading, necessary for the buyer to collect the goods from the port of entry. The importer’s bank then makes the required payment to the exporter and debits its own customer’s account.
Bills of exchange and banker’s acceptances arise out of banks’ service to facilitate trade. When a buyer (importer) has to make payment on goods from a seller (exporter) that have been shipped it may do so by instructing its bank to pay the seller (exporter) with a bill of exchange or time draft, payable a specified number of days after presentation.
Once the exporter’s bank is satisfied that all the conditions of the L/C have been met it “accepts” the draft and it then becomes a banker’s acceptance. This provides a guarantee from the bank that it will pay the amount due on the due date. This is a negotiable instrument and the seller (exporter) can sell this at a discount to its face or redemption value in a secondary money market in order to get paid sooner.The entire process is documentation driven based on standardized international terms for documentary credits. The most important document is the bill of lading which the exporter passes to the shipper and is used to establish title to the shipped goods.
Banks do not perform these services for free. First, they are able to generate fees from the L/C issue. Second, they may provide short-term funding for the transaction. Third, they are able to obtain a spread on the actual FX transaction.
In the past this has been a highly paper-intensive activity requiring extensive clerical work and attention to detail. Advances in communications technology, the widespread expansion of the Internet and the adoption of Electronic Data Interchange (EDI) standards mean that the whole trade finance business is becoming increasingly automated and integrated with cash management services that banks provide to corporates. Letters of credit protect exporters from importer default but leave them open to the risk of default at the guarantor bank and to country risk. Getting a second guarantee reduces these risks. This may be either from a bank in its own country or from a specific state bank or agency. The original letter of credit is then known as a confirmed letter of credit. The second level of guarantee creates what is known as a standby letter of credit that only pays in the event that the primary guarantor defaults.
The matter of guarantors is more important at times than it might seem. In the aftermath of the Asian financial crisis there were still some successful exporters in business in Indonesia. They had actually benefited from the devaluation of the Indonesian currency, the rupiah (it fell from a level of around 2500 rupiah to the US$ to reach a low of 17 000 at one point). They had one huge problem, however, they needed to import various components and raw materials from abroad to remain in business but had no means to pay for them.
All of the domestic banks were technically insolvent and it was impossible for them to open letters of credit. The only way around this was for one of the few foreign banks still operating in Indonesia to open the L/C on behalf of the domestic bank and they were only prepared to do so if they could obtain guarantees from foreign state controlled import–export banks.