CHAPTER 2

INTERNATIONAL COMMERCIAL
BANKING
 Chapter Outlines
2.0 Introduction to international commercial
banking
2.1 Functions of international commercial banks
2.2 Facilities offered by international
commercial banks
2.3 The effects of international foreign
commercial banks
2.4 International retail banking, branchless
banking and private banking
2.0 Introduction to International
Commercial Banking
 International commercial banking
• The intermediaries that move money from the
capital markets to businesses & institutions
• Offer services such as:
 Trade finance
 Project finance/joint venture
 Payroll
 Foreign exchange transactions & trading
 Lock boxes for collecting payments
 general corporate finance
 International commercial banking
• Commercial banking play important role in
supporting international finance/trade
• Commercial bank specialize in transferring
funds/debts & translation of business practices
between different countries & different customs
• It global nature makes possible the distribution of
valuable economic & business information
among customers & the capital markets of all
countries
• Serves as a worldwide benchmark of economic
health & business trends
2.1 Functions of International Commercial
Banks
 Functions
1. Provide facilities for saving (savings, current &
fixed deposit account & other financial
instruments
2. Provide facilities to effects payment
3. Provide credit/loan/advance facilities
4. Financing government (purchasing
government securities
5. Other banking services (remittances, FOREX,
financing both domestic & international trade)
 International commercial banks
• Also arrange deals between their customers
globally including strategic
partnerships/mudharabah & project fulfilment
agreements/Musharakah
• List of commercial banks in Malaysia (Page 52 –
textbook)
• Besides foreign banks in our financial system –
our domestic banks also going global. Ex:
MBB,CIMB
2.2 Facilities offered by international
commercial banks
 Facilities

1. Trade finance
2. Deposit facilities
3. FOREX/Currency market
4. Corporate finance
 1. Trade finance
• By issuing letter of credit (LOC)
• The seller company can feel assured of being
paid if it ships goods to its offshore customers.
• LOC transaction (refer to page 54-textbook)
 2. Deposit facilities

• Demand deposit
• Checking account
• Savings deposits
• Time deposits
• Negotiable certificate of deposit (NCD).
 3. FOREX/Currency Market
• To facilitate international trade & development
• The largest market in the world
• Main participants – larger international banks
• FOREX arrangement would be in the forms of
cross border transactions & foreign investments
• It assists in the implementation of risk
management under hedging exchange rate risk
 4. Corporate finance
1. Companies need to borrow money to purchase raw
materials, machine parts, inventory, and or payroll
2. Also involves borrowing/lending in the Eurocurrency
market,
3. participating in the international loan syndicate by
lending to MNCs,
4. venture in project financing & to sovereign government
for the sake of economic development, and
5. Participating in the underwriting of Eurobonds &
foreign bond issues
6. Other banking services (Ex: Checking accounts,
consultancy & advisory)
2.3 The effects of international foreign
commercial banks
 The effects
• Managerial & marketing advantage
• Knowledge advantage
• Home nation information services
• Large multinational banks -
(prestige/image/reputation) can attract
potential clients
• Regulatory advantage
• Foreign markets may offer opportunities
 The effects
• Risk reduction & greater stability of earnings
• Diverse choices
• Advantages through international transaction:
risk sharing, liquidity & information
 Negative effects of international
transaction
• Information asymmetry (information imbalance)
• Moral hazard – happened when party that have
supreme power over other forces borrower to
extend more credit than is optimal.
• Free rider problems in resolution of crises
• Some rely much more on equity than deposits
• Problems regarding international regulations in
certain countries
2.4 International retail banking, branchless
banking & private banking
 Types of International banking offices
1. Correspondent bank
2. Representative office
3. Foreign branches
4. Subsidiary & affiliate bank
5. Offshore banking centres
 1. Correspondent bank
• Considered as the lowest possible of banking
exposure to the foreign market
• Provide trade-related & FOREX services fro its
MNC customers in the foreign market without
to establish its own physical presence
 2. Representative office
• Establishes a physical presence in the foreign
market but has very limited function
• They assist MNC clients with information
about local business practices, economic
information, credit evaluation of customers
etc.
 3. Foreign branches
• Operate like a local bank but is legally part of
the parent bank, not a separate entity.
• Acts as a functional arm of the head office
• Subject to both the banking regulations of
Home Country & Foreign Country
• More independent than rep office
 Reason for foreign branches
1. To offer more extensive range of services
2. To take advantage on the situations not
subject to local reserve requirement/deposit
insurance
3. To compete with host country banks at the
local level
4. To internationalizing bank operations
 4. Subsidiary & affiliate bank
• Subsidiary bank – a locally incorporated bank
that is either wholly owned / owned in major
part by a foreign parent.
• Engages in full banking activities as permitted
by host country regulations
• May established as a new entity of
organization/ through the M&A activity of an
existing bank
 4. Subsidiary & affiliate bank
• Affiliate bank – partially owned but not
controlled by its foreign parent
• Both (sub. & affi.) operate under the banking
laws of the country in which they are
incorporated.
• Both allowed to underwrite securities
• Major disadv. of a subsidiary bank – must be
separately capitalized from its parent.
 5. Offshore banking centres
• A country whose banking system is organized
to permit external accounts beyond the
normal scope of local economic activity
• Host country grants complete freedom from
its governmental banking regulations.
• Operate as branches/subsidiaries of the
parent bank.
 5. Offshore banking centres

• Primary credit services – in Foreign currency

• Primary activities – to seek deposits & grant

loans in different currency from the host/local
government
 5. Offshore banking centres
Function with lower spreads:
1.Low reserve requirements & no deposit
insurance
2.Not subject to interest rate ceiling
3.Take advantage of low tax location
4.Low margins, low overhead etc due to high
degree of competitiveness
5.No pressure from domestic government
 5. Offshore banking centres
Reasons for offshore banks:
1.Low / no taxes
2.Services provided for non-resident clients
3.Few / no FOREX controls
4.Legal regime that upholds bank secrecy
 IMF recognizes – Bahamas, Bahrain, the
Cayman Islands, Hong Kong, the Netherlands
Antilles, Panama, & Singapore – major
offshore banking centres.
 Types of banking distribution
strategies

1. Branchless Banking
2. Private Banking
3. Retail Banking
 1. Branchless Banking
 Used for delivering financial services without
relying on bank branches
 Complement an existing bank branch network
 Example mediums of transactions:
 Internet
 ATM
 POS devices
 EFTPOS devices
 Mobile phones
 Advantages of mobile phone
branchless banking
• Very mobile
• Open 24 hours a day
• Small fees for the agents
• May withdraw/deposit a small amount of
money such as RM1
• No need account – only mobile phone number
• Almost no paperwork
 Advantages of mobile phone
branchless banking
• Generate low income for agents
• Very small bank overhead
• Suitable for people with low income
• Suitable for people with low literacy
• Reduced transportation costs & time
 2. Private Banking
• Banking, investment, acquisition & other
financial services provided by banks to private
individuals (those enjoy high levels of income /
invest a huge amount of assets)
• Rendered on more personal basis
• Consists of banking services, discretionary asset
management, brokerage, limited tax advisory
services & some basic concierge-type services,
offered by a single designated relationship
manager.
 2. Private Banking
• Traditionally – private banks were linked to
families for several generations
• Example: first banks in Venice- focused on
managing personal finance for wealthy
families for a specific period of time.
 3. Retail banking
• Also termed as personal banking services
• A bank performs transactions directly with
end customers
• Services offered: savings account, mortgages,
personal loans, debit cards & credit cards,
current accounts, ATM cards, traveller check,
home equity loan & certificates of
deposit/term deposits