Module: | MODULE A: INTERNATIONAL BANKING
Q140: Consider the following statements regarding the cost structures of Factoring versus Forfaiting:
1. In a forfaiting transaction, the discount fee is the interest charged by the forfaiter for the entire duration of the credit, calculated upfront on a discount to yield basis.
2. The commitment fee in forfaiting is a continuous monthly charge applied strictly to cover the cost of managing the ongoing domestic sales ledger of the exporter.
3. Factoring heavily involves continuous open account transactions, whereas forfaiting typically deals with one off, medium to long term capital goods transactions backed by negotiable instruments.
Which of the above statements is or are INCORRECT?
2. The commitment fee in forfaiting is a continuous monthly charge applied strictly to cover the cost of managing the ongoing domestic sales ledger of the exporter.
3. Factoring heavily involves continuous open account transactions, whereas forfaiting typically deals with one off, medium to long term capital goods transactions backed by negotiable instruments.
Which of the above statements is or are INCORRECT?
✅ Correct Answer: B
🎯 Quick Answer:
Statement 2 is the only incorrect statement.Structural Breakdown: Forfaiting deals with large, single transactions utilizing bills of exchange.
The forfaiter charges a discount fee representing the time value of money, and a commitment fee.
Factoring deals with a continuous flow of small invoices, where the factor charges a service fee for ledger management and a finance fee for the cash advance.
Historical Context: These financial products evolved independently.
Factoring grew in the textile and consumer goods industries for high volume ledger control, while forfaiting grew in the heavy machinery sector to guarantee large, highly risky cross border sales.
Causal Reasoning: Statement 2 is incorrect because the commitment fee in forfaiting has nothing to do with ledger management.
A commitment fee is strictly charged by the forfaiter for reserving the massive amount of funds needed for the transaction between the time the forfaiting agreement is signed and the time the physical bills are actually presented for discounting.
Ledger management is exclusively a core feature of Factoring.