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.

This is the risk that the government of the importing country will introduce measures, such as the introduction of capital controls, to prevent money leaving the country and hence from allowing the buyer to pay the exporter.
An importer faces the risk of non-delivery if they make payment in advance. Banks step in to break this impasse by providing guarantees of payment to exporters when the goods are delivered to the buyer.
The most basic and common form of this guarantee is the “letter of credit”, commonly referred to as an L /C. This is a highly standardized contract and is internationally recognized. It is treated as a contingent liability by the issuing bank as payment is conditional on a number of conditions being met.