Who the bank is really taking risk on

The same question, asked three ways

Two structures have now been priced on almost the same facts, and one costs about twenty-four times the other. That is not a quirk of the tariff. It is the only honest summary of what each one asks a bank to do.

One sentence explains the whole price difference

Almasa's promise to Chenglin is independent of everything else.

If Sakhra's floor burns down in May, Chenglin still presents its documents in April and is still paid. If Northgate refuses Sakhra's documents in July over a fault in a certificate of origin, Almasa still pays Chenglin in September. If Wrenfield goes into administration in August, Chenglin is still paid. Nothing in the rulebook connects the credit Almasa issued to the credit Almasa is relying on. They are separate promises that happen to sit in the same file.

So Almasa is not financing a fabric purchase. It is guaranteeing Sakhra's performance. It prices that the way it prices an unsecured loan: a commission per month, a settlement fee, and a fifth of the value in cash it can seize.

In a transfer, Almasa promises nothing to anybody. Selmiya presents documents. If they match the transferred credit, Northgate pays out of Wrenfield's money. If Sakhra disappears entirely, Selmiya is still paid. Almasa's risk is the cost of a SWIFT message.

That is the whole of it. Whenever a trade finance product looks expensive, do not ask what the bank is charging for. Ask what the bank has promised, and to whom.

Assignment of proceeds, and why it is not a smaller transfer

The third column above is the one most often offered by mistake.

A credit that is not transferable can still have its proceeds assigned. The two are genuinely different things, and the difference is not a matter of degree.

• A transfer passes the right to perform — to ship the goods, present the documents, and be paid for doing so.
• An assignment passes the right to receive money if somebody else performs.

An assignment gives Chenglin nothing at all until Sakhra has cut, sewn, shipped, presented a correct set of documents and been paid by Northgate. That is exactly the risk Chenglin refused in February, when it asked for cash before the cloth left the mill.

So a mill that will accept a back-to-back will usually refuse an assignment, and it is right to. Offering one as though it were the same thing is offering nothing while appearing to offer something. That is worse than saying you cannot pay in advance.

The substitution that failed, and nobody was careless

Back to the transferred credit on PO WM-8390.

24 November. Selmiya Garments presents its documents to Almasa on the last day of its presentation period. The vessel sailed two days late and the period exists to be used. Nothing is wrong.

Almasa telephones Sakhra the same morning and asks for the substitute invoice and draft on first demand, which it is entitled to do.

Sakhra's documentation clerk is at Alexandria that day with the originals for a different shipment. That is where she is supposed to be on a sailing day. She is the only person authorised to sign a draft.

Almasa cannot hold Selmiya's documents. Holding them past the credit's own presentation deadline would make the entire USD 212,760 presentation late, and a late presentation is a fault Northgate may refuse outright.

So Almasa does what a transferring bank may do when the first beneficiary does not substitute on first demand. It delivers the second beneficiary's documents to the issuing bank as they stand, with no further duty to Sakhra.

Wrenfield's file now contains a commercial invoice from Selmiya Garments for USD 8.90 a piece.