Risk management in Australian manufacturing exports : the case of letters of credit to ASEAN

Bergami, Roberto (2011) Risk management in Australian manufacturing exports : the case of letters of credit to ASEAN. PhD thesis, Victoria University.

Abstract

One of the fundamental considerations for exporters in international trade transactions is the aspect of payment. In the context of financial risk management, Letters of Credit enable the exporter to substitute the credit risk of the buyer with that of his bank. The Letter of Credit is a conditional payment guarantee, relying on one hundred per cent documentary accuracy to trigger the payment. Less than one hundred per cent compliance means the loss of the payment guarantee. Non-compliance is a significant problem as, according to the International Chamber of Commerce, worldwide documentary discrepancy rates against Letter of Credit transactions have been estimated to be between sixty to seventy per cent. The mechanics of Letter of Credit transactions comprise a complex web of interactions between banks, traders and their service providers, providing a fertile ground for discrepancies and existing literature acknowledges this world-wide problem. In the UK, in 2000, losses were estimated to be AUD 305 million (£ 113) through non-compliant documents being presented under Letters of Credit – this amount did not include lost opportunities and cash flow problems. In the same year, a separate USA study of Letter of Credit transactions confirmed the high discrepancy rate, but also claimed that as long as buyers want the goods discrepancies did not translate into financial losses. The findings were refuted by others. It is the potential loss of revenue caused by the mismanagement of risk that is foremost in this research. It is estimated that the annual value of Letter of Credit business for manufacturing exports to ASEAN is approximately AUD 3.5 billion, with losses estimated to be upwards of AUD 920 million. This research aims to assist in greater understanding of the usage of Letters of Credit and the dynamics that underpin these transactions leading to a greater understanding of the interactions between Australian exporters and ASEAN importers.

Item type Thesis (PhD thesis)
URI http://vuir.vu.edu.au/id/eprint/16043
Subjects Current > FOR Classification > 1502 Banking, Finance and Investment
Current > FOR Classification > 1501 Accounting, Auditing and Accountability
Historical > Faculty/School/Research Centre/Department > School of Accounting
Keywords letters of credit, ASEAN, financial risk management, credit risk, compliance, non-compliance, traders, manufacturing exports, international trade
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