INTERNATIONALBANKING

& FOREX

REGULATIONS

BUSINESS

A person or organization engaged in commerce with the aim of achieving a profit.

INTERNATIONAL BUSINESS

Relates to any situation where the production or distribution of goods or services crosses country borders.

Encompasses a full range of cross-border exchanges of goods, services, or resources between two or more nations.

These exchanges can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property (e.g., patents, copyrights, brand trademarks, and data), and contractual assets or liabilities (e.g., the right to use some foreign asset, provide some future service to foreign customers, or execute a complex financial instrument).

STRATEGIC MANAGEMENT & ENTREPRENEURSHIP

STRATEGY- The central, integrated, and externally oriented concept of how an organization will achieve its performance objectives.

STRATEGIC MANAGEMENT- The body of knowledge that answers questions about the development and implementation of good strategies; mainly concerned with the determinants of firm performance.

ENTREPRENEURSHIP- The recognition of opportunities (needs, wants, problems, and challenges) and the use or creation of resources to implement innovative ideas for new, thoughtfully planned ventures.

ENTREPRENEUR

A person who engages in entrepreneurship.

A person within an established business who takes direct responsibility for turning an idea into a profitable finished product through assertive risk taking and innovation.

THE STAKEHOLDERS

An individual or organization whose interests may be affected as the result of what another individual or organization does.

STAKEHOLDER ANALYSIS

A technique used to identify and assess the importance of key people, groups of people, or institutions that may significantly influence the success of an activity, project, or business.

INTERNATIONAL PART OF A FIRM’s BUSINESS

Importer - A person or organization that sells products and services that are sourced from other countries. Exporter - A person or organization that sells products and services in foreign countries that are sourced from the home country.

ORGANIZATIONS ESTABLISH THEIR SETUPS IN OTHER COUNTRIES

Forms setups by transferring the level foreign direct investments.

Foreign Direct Investment- The investment of foreign assets into domestic structures, equipment, and organizations. ADVANTAGE OF CHOICE OF FOREIGN LOCATION- Advantages due to choice of foreign markets and can include better access to raw materials, less costly labor, key suppliers, key customers, energy, and natural resources.

GLOBALIZATION

Flat-world- A metaphor for viewing the world as a level playing field in terms of commerce, where all competitors have an equal opportunity.

Multi-domestic view- A metaphor for viewing the world’s markets as being more different than similar, such that the playing field differs in respective markets.

We Live in a Multidomestic World, Not a Flat One!

If the world were flat, international business and global strategy would be easy.

According to Ghemawat, it would be domestic strategy applied to a bigger market. In the semiglobalized world, however, global strategy begins with noticing national differences. Pankaj Ghemawat,“Distance Still Matters,”

Ghemawat’s research suggests that to study “barriers to cross-border economic activity” you will use a “CAGE” analysis.

CAGE framework-The analytical framework used to understand country and regional differences along the distance dimensions of culture, administration, geography, and economics.

1- CULTURE People’s normsCommon beliefs andPractices

Some products have a strong national identification, like it is easier to sell genetically modified foods (GMOs) corn in the United States but impossible to sell in Germany.

2- ADMINISTRATION

Bilateral trade flows show that administratively similar countries trade much more with each other.

Having similarity among the sorts of laws, regulations, institutions, and policies.

Greater the administrative differences between nations, difficult to build trading relationship

3- GEOGRAPHY

Market for a product in one country is separated from the market for that same product in other country by thousands of miles.

Distance goes up, trade goes down (transportation cost)

Geographic differences also include time zones, access to ocean ports, shared borders, topography, and climate.

4- ECONOMICES

Refers to differences in demographic and socioeconomic conditions.Economic difference between countries is size (as compared by gross domestic product, or GDP, per capita income).Distance is likely to have the greatest effect when 1) the nature of demand varies with income level,2) economies of scale are limited, 3) cost differences are significant,4) the distribution or business systems are different, or 5) organizations have to be highly responsive to their customers’ concerns.

ETHICAL & INTERNATIONAL BUSINESS

The relationship between ethics and international business is a deep, natural one.

Ethics and ethical behavior seem to have strong historical and cultural roots that vary by country and region.

Business Ethics- The branch of ethics that examines various kinds of business activities and asks, “Is this business conduct ethically right or wrong?”

INTERNATIONAL TRADE & FOREIGN DIRECT INVESTMENT

WHAT IS INTERNATIONAL TRADE?

International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries. People or entities trade because they believe that they benefit from the exchange.

SPOT RATES AND FORWARD RATES

RATES OF EXCHANGE AND HOW THEY AREQUOTED:

RATE OF EXCHANGE - A rate of is the price of one currency in terms of another.Bank dealers normally quote two rates of exchange;

1- Buying rate2- Selling rate

The bank’s profit is the difference between two rates, if the rate quoted for US $ is Rs. 101.85 – Rs. 102.10

BUY HIGH : SELL LOW

The reason for this is quite logical. The bank wants to receive as many dollars for each rupee as possible when it buys and want to give out as few dollars as possible when it sells

E.g; For Rs100,000 buy =$ 100,000/101.85 = $ 981.836

For Rs100,000 selling= $ 100,000/102.10 =$ 979.432

SPOT RATES OF EXCHANGE AND THE EXCHANGE RISK:

A spot rate of exchange is a rate of exchange for a foreign currency transaction which is to be settled within two working days of agreeing the rate.Currency price or rate for something which is delivered immediately.

Exchange risk – The uncertainty as to exact ultimate rupee receipt or payment is called the exchange risk.The exchange risk runs from the moment a commercial contract is entered into which involves receipt or payment of foreign currency, and it lasts until the currency receipt / payment has been converted into rupee.

FORWARD EXCHANGE RATES AND FORWARD CONTRACTS

Forward Exchange Rate is a rate of exchange which is fixed now for a deal which will take place at a fixed date, or between two dates, in the future.

•Rate for purchase of foreign currency at a fixed price for delivery at a later date.

Forward Contract- One-off agreement to buy foreign currency or shares or commodities for delivery at a later date at a certain price.

A forward exchange contract is a binding contract between a bank and its customer for a purchase or sale of a specified amount of a particular foreign currency at an agreed future date, at a rate of exchange fixed at the time the contract is made.

For forward contracts the most common periods are of between 1week-12 months.

There are two types of forward contracts:

- Fixed Forward Exchange Contract

- Option Forward Exchange Contract

Fixed Forward Exchange Contract is the contract in which the future date at which the transaction will take place is a fixed date.

Option Forward Exchange Contract is the contract in which the time at which the transaction will take place is anytime within a specified future period.

The customer has the ‘option’ to choose which day within the specified future period he will complete the transaction, but apart from this particular aspect the ‘option’ contract is just as binding as is a fixed contract.

Fixed Forward Exchange Contract

Problem 1: Calculate the banks three months forward fixed buying and selling rates for US dollars ($).

Spot Rate 101.9483 102.24833 months 1.6746 pm 1.4746 pmFrom Bankers Point of View:Selling Rate Buying Rate

Spot (Sell Low) 102.2483 Spot (Buy High) 101.9483Less: 1 month pm 1.4746 Less: 1 month pm 1.6746

100.7737 100.2737Note: In case of selling, bank sells $992.32 (Rs. 100,000).

In case of buying, bank buys $997.27(Rs. 100,000).

From Customer’s Point of View:

Buying Rate Selling Rate

Spot (Sell Low) 101.9483 Spot (Buy High) 102.2483Add: 1 month pm 1.6746 Add: 1 month pm 1.4746

103.6229 103.7229

Note: In case of buying, customer buys $965.0376 (Rs. 100,000).In case of selling, customer sells $964.1072 (Rs. 100,000).

Problem: Calculate the banks three months forward fixed buying & selling rates for United Kingdom (£).

Spot Rate 152.3056 152.40831 month 0.7010 0.72152 months 1.2625 1.4744 months 1.9746 2.1072

Option Forward Exchange Contract

Problem: On January 01 an importer enters into a contract to buy goods costing a total of $1000000. Payment has to be made when the goods are shipped and the shipment is to be some time during March.

In case of Import:Spot 101.9483 102.25582 months 1.0608 pm 1.0303 pm3 months 1.5864 pm 1.4746 pm

From Bankers Point of View:

Selling RateSpot (Sell Low) 101.9483Less: 2 months pm 1.0608

100.8875

Spot (Sell Low) 101.9483Less: 3 months pm 1.5864

100.3619

If the shipment is expected after March 01, then the bank will choose Rs.100.3619. Since it is the most fovourable selling rate for the option period.

Calculate its option buying rate for the proceeds of export invoice in dollars ($).

Buying RateSpot (Buy High) 102.2558 Less: 2 months pm 1.0303

101.2255

Spot (Buy High) 102.2558 Less: 3 months pm 1.4746

100.7812

The bank will choose Rs.101.2255 because this is the most favourable

THE TERMS ‘PREMIUM’, ‘DISCOUNT’ AND ‘PAR’

PREMIUM- When a forward currency is more valuable than the spot currency, the forward is said to be ‘at a premium’.

Discount- When the forward currency is less valuable than the spot rate, it is said to be ‘at a discount’.

Par- In connection with forward exchange, means that the spot and forward currencies are of equal value, hence the spot and the forward rates are identical.

FACTORS WHICH INFLUENCE SPOT RATES AND FORWARD RATES

FACTORS WHICH AFFACT THE MOVEMENT OF SPOT RATES

International Interest Rate Differentials

If one currency raises its interest rates this could lead to increased short-term investment in the country, which will strengthen that country’s home currency.

FACTORS WHICH AFFACT THE MOVEMENT OF SPOT RATES…....

Leads and Lags

Leads and Lags apply when any trader has receipts or payments due in foreign currency which are not covered by forward contacts, or by some other cover against the exchange risk.

A business leads when it speeds up settlement of foreign currency transactions and it lags when it slows down settlements

Expected Regarding ActionForeign Currency

Pak Importer Expects Foreign Currency Leadsto appreciate against rupee

Pak Exporter Expects Foreign Currency Lagsto appreciate against rupee

Pak Importer Expects Foreign Currency Lagsto depreciate against rupee

Pak Exporter Expects Foreign Currency Leadsto depreciate against rupee

Leads by Pak Importers and Lags by Pak exporters will strengthen the foreign currency($)

FACTORS WHICH AFFACT THE MOVEMENT OF SPOT RATES…..

Political and Economic Trends

Balance of payments, money supply figures, forecast change of Government, Government policy changes, and industrial relation etc.

Affect the demand and supply for currency.

Lost of confidence.

Central Bank Actions

Central banks may purchase or sell a particular currency, in the interest of maintaining the Exchange Rate Mechanism.

Formal Arrangements

Government agrees that their currencies would not be allowed to fluctuate outside certain defined parameters.

THE FACTORS WHICH INFLUENCE FORWARD RATES

A forward rate is not the bank’s best guess as the likely spot rate on the date of maturity of the forward contract.

The premium or discount is based mainly on the differences on inter-bank interest rates obtainable on the currencies involved.

Example: For an importer- One month forward contract to sell US$10,000.

One method the bank could use to offset that risk would be to:

a. Purchase US$10,000 on the foreign exchange market at spot and place the dollars deposit for one month.

b. Borrow the equivalent amount in rupee for one month to pay for US$ purchase.

e.g;- Purchase US$10,000=Rs.1,021,000/-@102.10

- Borrow Rs.1,021,000/- for one month.

The one month Premium or discount is calculated on the cost to the bank for borrowing rupee for one month and interest received for placing US$ for one month.

Example: For an exporter- One month forward contract to buy US$10,000.Borrow US$10,000 for one month.Sell US$10,000 for rupee on the foreign exchange market at spot and place the rupee on deposit for one month.

Sell US$10,000=Rs.1,018,500/-@101.85

In one month’s time, when the forward contract matured the bank would:

Receive from the exporter US$10,000 & repay the borrowing.

Pay the exporter the rupee previously held for one month deposit.

The one month Premium or discount is calculated on the cost to the bank for borrowing US dollars for one month and interest received for placing rupee for one month.

OPTIONS

A contract giving the owner the right , but not the obligation, to buy or sell a given quantity of an asset at a specified price at some date in future.

CALL OPTIONAn option to buy to “buy” an underlying asset at a specified price. Importers normally require call option. In the money, out the money---- PUT OPTIONAn option to sell an underlying asset at a pre-specified price. Exporter normally require put option.

Writer or Grantor - Is the bank (or any organization) which in exchange for a fee know as the ‘option premium’ grants the right but not obligation for a purchaser to buy or sell the currency at the agreed rate during a specific period. American Option- holder can notify the writer of his intention to exercise the option on any business day, between the granting of the option and expiry date. European Option- there is a single expiry date and a single settlement date.

Option premium for American option is higher because of the greater flexibility.

If goods are exporter from Pakistan to USA, the invoice will be generated in US$:

Base or Counter Currency - would be Pak Rupee Underlying Currency - would US dollarsStrike Price - Rate of exchange applied if the currency option is exercised.

Problem 1: Jawad is a speculator who buys British pound call option with a strike price of $1.4870 and June 16, 2015 settlement date. The current spot price as of date is $1.4780. Jawad pays premium of $0.0143 per unit for the call option. Assume there no brokerage fees. Jawad before the expiration date, the spot rate of the British pound reaches $1.4995. At this time, Jawad exercise the call option and then immediately sells the pounds at spot rate to a bank. Calculate either the Jawad is loser or gainer after excising the option.Solution: Given: Spot Rate= $1.4780, Strike Price= $1.4870, Premium=$0.0143, Spot Rate at the time of option exercise =$1.4995

Per UnitSelling price of £ $1.4995-Purchase price of £ - 1.4780-Premium paid for option - 0.0143Net Profit/(Loss) $0.0072

METHODS OF INTERNATIONAL SETTLEMENT THROUGH BANKS

NOSTRO AND VOSTRO ACCOUNTS

The nostro means our and vostro means your.

NOSTRO

NOSTRO ACCOUNT- Account which a bank has with a correspondent bank in another country.

From the point of view of Pak Bank, a nostro account is our bank’s account in the books of an overseas bank, denomination in foreign currency.

From the point of view of Pak Bank, a nostro account is our bank’s account in the books of an overseas bank, denomination in foreign currency.

An example would be an account in the name of Muslim Bank, in the books of Chemical Bank New York, denominated in US $. Muslim Bank is a customer of Chemical Bank.

VOSTRO ACCOUNT- Account held by a correspondent bank for a foreign bank.

From the point of view of Pak bank, a vostro account is your bank’s account with us, denominated in rupee.

An example of a vostro account would be an account in the name of Chemical Bank maintained in the books of Muslim Bank. The account would be denominated in rupee and Chemical Bank would be a customer of Muslim Bank.

When funds are remitted from Pakistan:

Nostro accounts are used if the payment is denominated in foreign currency.Vostro accounts are used if payment is denominated in rupee.

Bank treat their nostro accounts in the same way as any other customer would treat his bank account.

The bank will maintain its own record of nostro account, known as a mirror account.

For accuracy, the bank tries to value date all transactions.

BOOK-KEEPING FOR TRANSFERS OF FUNDS

When a Pak bank customer wishes to transfer funds denominated in rupee to the bank of a beneficiary abroad, the book-keeping is as follow:

A-Debit-Pak customer with the rupee + charges

Credit-The rupee account of the overseas bank.

B-On the receipt of advice, the overseas bank will withdraw the rupee from vestro account, convert it to currency($)

Then Credit the beneficiary with the currency equivalent, less its charges.

If the transfer is denominated in foreign currency, the book-keeping is:

i)-Debit-Customer with the rupee equivalent + charges, of the required currency A/C.

Credit-the currency to the nostro account.

(If the Pak customer maintains a foreign currency account, then the appropriate currency amount can be debited to that account, and there will be no need to arrange for conversion into rupee)

ii)-Advise the overseas bank that it can debit the nostro account with requisite amount of currency and credit the funds to the account of the beneficiary.

INTERNATIONAL BANKING SERVICES BEYOND BORDERS

Customers global connectivity is as important as their global access to funds.

Travelling overseas, settling in a new country or investing overseas, customer require services to meet it’s financial needs, onshore and offshore.

Banks allow customers to enjoy the same recognition, whether they are living at home or overseas.

Designated International Banking Centres Worldwide

On presenting Banking cards at designated centres across Asia, Africa and the Middle East the customer enjoy:

Local and offshore banking information upon requestPreferential foreign currency exchange rates

Pre-Arrival Account Opening

Banks provide the services of Pre-Arrival Account Opening service to their customers in other countries.

Global Link – One Click Access To Your Worldwide Accounts

Global Link online banking feature instantly allows customers to have a consolidated view of all their Bank accounts as well as transfer funds in different currencies, even if customer accounts are in different countries.

Free International Fund Transfers

provide complimentary international inter bank fund transfers facility and online transferring money internationally between their bank accounts.

Free Worldwide ATM/Debit Card Network

ATM/Debit Card can be used to make cash withdrawals free of charge at their international branches and Visa/Plus/Cirrus ATMs is accepted worldwide.

International Financial Solutions – Local And Offshore

Banks facilitate their customer at their home, investing overseas or even relocating to other countries.

Providing comprehensive solutions to meet their international financial needs, both onshore and offshore.

Emergency Cash Services

Banks globally provide facility to their privilege customer at their step in case of emergency like lost of wallet on a simple call through their designated Priority Banking centres and Travelex outlets.

Foreign Exchange Discounts At Travelex Worldwide

Priority Banking cards holders receive special discounts on foreign exchange at Travelex outlets across glob.

Money Laundering

Legitimization (washing) of illegally obtained money to hide its true nature or source (typically the drug trade or terrorist activities).

Laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds. 

It is a world wide problem, with approximately $300 billion going through the process annually in the United States. The sale of illegal narcotics accounts for much of this money. 

Example of Money LaunderingWirken withdrew money from his law firm’s trust account, which was being held for the benefit of a client, and deposited the funds into his law firm’s operating account. Wirken wrote six checks between December 2009 and Jan. 13, 2010, totaling $116,730 and used the funds for his personal benefit. All of the transactions were conducted without the client’s consent. Wirken’s law firm was engaged in a long-term, unethical Ponzi-type business model that spanned over many years. As early as 2007, Wirken began improperly borrowing substantial amounts of money from clients, and then he refused to pay his clients back. Wirken borrowed over $800,000 from at least seven clients from 2007 to 2012. On Dec. 3, 2014, in Kansas City, Missouri, James C. Wirken, of Kansas City, was sentenced to 13 months in prison and ordered to pay a $4,000 fine.

Trade Based Money Laundering

TBML schemes include:Under and over-invoicing, Phantom shipments and other falsification of the value or quantity of a shipment including multiple invoicing of goods in order to justify the transfer of value from one jurisdiction to another.

CASE STUDIES

FOREIGN COMPANY REGISTRATION IN PAKISTAN

A company incorporated or formed outside Pakistan, wishing to establish its place of business in Pakistan needs to comply with following procedures:

A. OBTAIN PERMISSION FROM BOARD OF INVESTMENT (BOI) 1- Required to obtain a permission from the BOI, 2- GOP specific validity period for opening and maintaining of place of business in Pakistan. 3- Copy of such permission letter is required to be furnished with the documents meant for registration.

Approval of the ministries may be require before incorporation of such companies:

AUTHORITY COMPANIESMinistry of Finance/State Bank of Pakistan.

(1) Banking Company

Ministry of Commerce. (2) Insurance Company

(i) Ministry of Finance. (ii) State Bank of Pakistan.

(3) Investment Finance Company (Investment-Bank)

SECP (4) Leasing Company

SECP (5) Venture Capital Company

SECP (6) Asset Management Company

PROCEDURE Step 1: Send application in prescribed form and send along with six sets of following documents: 1. Application Form (duly filled in and signed with stamp) 2. Copy of registration of the foreign company duly attested by respective Pakistani Embassy; 3. Copy of Articles and Memorandum of Association duly attested by Respective Pakistan Mission; 4. Copy of Resolution / Authority letter of the company to establish Branch / Liaison Office in Pakistan; 5. Copy of contract / agreement (in case of Branch Office Only) 6. Company Profile; and 7. Designated person authorized to act on behalf of the companyOpening of Branch Office processing fee

Step 2:

On receipt of complete documents, BOI examines the documents and circulate the request to all concerned quarters for their views / comments.

Step-3:

Having received clearances from all concerned quarters / agencies, BOI grants permission to foreign company to open their Branch / Liaison office in Pakistan.

B. SEEK AVAILABILITY OF COMPANY NAME

A foreign company is required to seek “Availability of Name” of proposed company from Securities and Exchange Commission of Pakistan (SECP). The proposed name should not be:

• Inappropriate • Deceptive. • Designed to exploit or offend the religious susceptibilities of the people. • Identical or having close resemblance with already existing company. • Suggesting connection with any Government or its organization or any international organization.

C. DOCUMENTATION After seeking company name availability, next step is documentation. A foreign company is required to file the following documents, within thirty days of establishing a place of business in Pakistan, to the registrar concerned: I. Forms (38-43) as prescribed under the Rules

• Form 38: Certified copy of the charter, statute or Memorandum and Articles of the company. • Form 39: Address of registered office or principal office of the company. • Form 40: Particulars of directors, Chief Executive and Secretary, if any, of the company. • Form 41: Particulars of principal officer of the company in Pakistan. • Form 42: Particulars of person(s) resident in Pakistan authorized to accept service on behalf of the foreign company along with the certified copy of the appointment order, authority letter of board of directors’ resolution and consent of the principle officer. • Form 43: Address of principal place(s) of business in Pakistan of the foreign company. II. Authority letter in the name of authorized representative of the foreign company. III. Fee Challan to be filed to SECP

ESTABLISHMENT OF BRANCH OFFICE AND LIAISON OFFICE

BY FOREIGN COMPANIES IN PAKSITAN

Board of Investment (BOI) grants permission to foreign companies to open their Branch Office and Liaison Office in Pakistan.

BOI (Islamabad & Karachi Offices) have issued 551 permissions during 2007-2010 in respect of opening/extension of Branch and Liaison Offices in Pakistan.

Branch Office:

Branch Office is established by a foreign company to fulfill its contractual obligations with the public or private sector in Pakistan.

Liaison Office:

Liaison Office is established by a foreign company for promotion of products(s), provision of technical advice & assistance, exploring the possibility of Joint Collaboration and export promotion.

Guidelines for Opening of a Commercial Bank in Pakistan

Proposed bank should be a public limited company and listed on the stock exchange(s) in Pakistan. If not listed, the listing should be completed within a maximum period of two years from the date of commencement of business.

A minimum of 50% shares have to be offered to general public.

A minimum paid up capital (free of losses) of Rs. 10 billion or any other amount as prescribed by SBP from time to time.

Foreign banks desirous to conduct banking business in branch mode should have a minimum paid up capital (free of losses) of Rs 3 billion or any other amount as prescribed by SBP from time to time.

The foreign bank holds paid up capital(free of losses) of at least equivalent to US$ 300 million and have a CAR of at least 8% or minimum prescribed by their home regulator, whichever is higher

The bank will operate with a branch network of 5 branches; in case the bank intends to commence business with more than 5 branches or expands its operations in future,

MCR would be as follows;

MCR BRANCH NETWORK

Rs 6 billion or any other amount as prescribed by SBP from time to time.

From 6 to 50 branches

Rs 10 billion or any other amount as prescribed by SBP from time to time.

More than 50 Branches

*MCR- MINIMUM CAPITAL REQUIREMENT

Exchange Companies

Procedure for establishing the Exchange Companies:

1. Applicants interested in formation of Exchange Companies would, in the first instance apply on prescribed form to State Bank for obtaining a NOC.

2. On the receipt of this NOC from the SBP, the applicant will submit an application to SECP for incorporation under the Companies Ordinance.

3. After the Exchange Company is registered by SECP, the applicant would apply to SBP for issuance of licence for commencement of operations.

Annexure can be viewed from http://www.sbp.org.pk/epd/2002/FE9.htm

Role of International Banking in Crises