Foreign Exchange Operation
Different modes of International Trade Payments
In International trade methods of payment could take any of the following forms:
1. Cash in advance
2. Open account
4. Documentary credit
The first three are traditional trade payment methods, which view the bank’s role as an agency for transmitting and receiving funds or documents. Under documentary credit, on the other hand, the bank assures payment subject to the completion of documentary conditions.
Cash in advance
Under this system the exporter may receive value of export in advance from the importer before the actual shipment of goods through cheque, draft or T.T. This practice though expensive and risky is resorted to in cases where either the buyer’s credit worthiness is doubtful or where there is an unstable political or economic environment in the buyer’s country or where manufacturing process or service delivered are specialized and capital intensive.
An open account method is an arrangement between the buyer and seller whereby the goods are manufactured and delivered before payment is made. Under this method, since the payment has to be made at some stated future date and there is no negotiable instrument in evidence of the buyer’s commitment to pay the seller faces the risk of release of goods without assurance of payment.
Collection is a method under which goods are shipped and the bills of exchange (Draft) is drawn by the seller on the buyer. The documents are sent to the bank with clear instruction for collection through on of its correspondent bank located in the buyer’s country. The documents are to be delivered only after the payment has been made or Draft is accepted.
Documentary credit is the classic form of international trade payment, especially in trade between distance partners. This method substantially reduces payment related risk for both exporter and importer.
Documentary credit is a conditional bank undertaking of payment. It is a conditional undertaking given by a bank (Issuing Bank) at the request of a customer (Applicant) or on its own behalf to pay a seller (Beneficiary) against stipulated documents provided all the terms and conditions of the credit are complied with.
These stipulated documents are likely to include those required for commercial, regulatory, insurance or transport purposes, such as commercial invoice, certificate of origin, insurance policy or certificate and a transport document of a type appropriate to the mode of transport used.
Incoterms simply means International commercial terms. These are also known as Contract Terms or Delivery terms or Sales Terms or Purchase. These terms have been prepared and named by the International Chamber of Commerce (ICC) Pans, France for use in the field of international trade or foreign trade. Some of them are mention below:
FCA “Free Carrier” means that the sellers deliver the goods, cleared for export, to the carrier nominated by the buyer.
FAS “Free Alongside Ship” means that the seller delivers when the goods
FOB “Free on Board” means that the sellers delivers when the good pass the ship’s rail at the named port of shipment. This means that the buyer has to bear all cost and risk of loss or damage to the goods from that point. This term can be used only for sea or inland waterway transport.
CFR “Cost and Freight” means the seller delivers when the goods pass the ship’s rail in the port of shipment.
CIF “Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier nominated by him, but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destinations.
DAF “Delivered at Frontier” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport not unloaded, cleared for export, but not cleared for import at the named point and placed at the frontier, but before the customs border of the adjoining country.
DES “Delivered Ex Ship” means the seller delivers when the goods are placed at the disposal of the buyer on board the ship not cleared for import at the named port of destination.
DEQ “Delivered Ex Quay” means that the seller delivers when the goods are placed at the disposal of the buyer not cleared for import on the quay at the named port of destination.
DDU “Delivered duty unpaid” means that the seller delivers the goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination.
DDP “Delivered duty paid” means the seller delivers the goods to the buyer, cleared for import, and not unloaded from any arriving means of transport at the named place of destination.
LETTER OF CREDIT – TYPES AND ANALYSIS
In international trade the seller wants to make sure that the buyer is able to pay in time once the goods have been shipped and that the risk of non-payment is minimized. He, therefore, wants to find out how a third party, i.e. the bank can help him in practical arrangements for these transactions. Similarly, the buyer is interested that he gets possession of goods before he pays for them and he is able to make sure that the goods are exactly those he ordered.
The solution resulted in evolution of Documentary credit method where a bank acts as a fiduciary agent to safeguard the interest of both the parties, namely, ensuring constructive delivery of goods by the seller to the buyer and payment being made by the buyer on presentation of documents complying with the terms and conditions of the Credit.
Documentary Letter of Credit:
In simple terms, a documentary credit is a conditional bank undertaking of payment.
Documentary credit is a conditional undertaking given by a bank (Issuing Bank) at the request of a customer (Applicant) or on its own behalf to pay a seller (Beneficiary) against stipulated documents provided all the terms and conditions of the credit is complied with.
Documentary credit offer both parties to a transactions a degree of security, combined with possibility, for creditworthy party, of securing financial assistance more easily.
Documentary credits therefore
– Are arrangements by banks for settling international commercial transactions
– Provide a form of security for the parties involved.
– Ensure payment provided that the terms and conditions of the credit have been fulfilled.
– Mean that payment by such mean is based on documents only, and not on merchandise or service involved.
are placed alongside the vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss or damage to the goods from that moment.
Types of Documentary Letter of Credit:
Documentary credits are basically two types; (i) Revocable
(i) Revocable credit
This type of credit can be revoked or cancel at any time without the consent of, or notice of the beneficiary. In case of seller (beneficiary), revocable credit involves risk, as the credit may be amended or cancelled while the goods are in transit and before the documents are presented, or , although presented, before payment has been made. In modern banking, the use of revocable credit is not widely spread.
(ii) Irrevocable Credit:
The irrevocable credit is a commonly used type of documentary credit. The credit which can not be revoked, varied or change / amended without the consent of all parties- buyer, seller, issuing bank, and confirming bank irrevocable credit gives the
seller grater assurance of payments, but he remains dependent on an undertaking of a foreign bank. Irrevocable credit may be confirmed or unconfirmed.
Special Types of Documentary
A revolving credit is one where, under the terms and conditions thereof, the amount of the credit is renewed or reinstated without specific amendment to the credit being needed.
Revocable credit may be revocable or irrevocable. It can revolve in relation to time or value.
Back to Back Credit:
One credit backs another. It may so happen that the beneficiary / seller of an L/C is unable to supply the goods direct as specified in the credit as a result of which he need to purchase the same and make payment to another supplier by opening a second letter of credit. In this case, the second credit called a “Back to back credit”. This concept involve opening of second credit on the strength of first credit, i.e.
mother L/C opened by foreign importers. Under back to back concept, the mother L/C stands as security for opening of second credit.
A transferable credit is one which can be transferred by the original beneficiary to a one or more parties. In transferable credit, the original beneficiary becomes the middleman and transferee becomes the actual supplier of goods. It is normally used when the first beneficiary does not supply the merchandise himself, but is a middleman and thus wishes to transfer part, or all, of his rights and obligations to the actual supplier as second beneficiary.
Red Clause Credit.
A Red clause credit is a credit with a special clause incorporated into it that authorized the advising bank or confirming bank to make advances to the beneficiary before presentation of documents.
Green Clause credit
A green clause credit is a credit with a special clause incorporated into it that which not only authorizes the advising bank to grant pre-shipment advances but also storage cost for storing the goods prior to shipment.
Standby Letter of Credit:
The standby credit is very similar in the nature to a guarantee. The beneficiary can claim payment in the event that the principal does not comply with its obligations to the beneficiary. Payment can usually be realized against presentation of a sight draft and written statement that the principal has failed to fulfill his obligation.
Opening of Letter of Credit
Opening a letter of credit means, at request of the applicant (Importer) issuance of an L/C in favour of the beneficiary (Exporter) by a bank. The bank which open or issue L/C is called L/C opening bank or Issuing Bank.
On receipt of the importer’s L/C application supported by the firm contract and insurance cover note, the bank scrutinize the same thoroughly and fix up a margin on the basis of banker-customer relationship.
Before opening an L/C, the issuing bank must check the following:
1. L/C application properly stamped, signature verified and margin approved and properly retained.
2. Indent/ Proforma Invoice signed by the Importer and Indentor/Supplier.
3. Ensure that the relevant particulars of L/C application correspond with those stipulated in Indent/Proforma Invoice
4. Validity of LCA entitlement of goods, amount etc. conform with the L/C application
5. Conversion and rate of exchange correctly applied.
6. Charges like commission, FCC, postage, telex charge, if any, recovered
7. Insurance cover note- in the name of issuing bank – A/C Importer covering required risks and voyage route.
8. Incorporation of instructions for negotiating bank as per bank’s existing arrangement.
9. Reimbursement instructions for reimbursing bank
10. If foreign bank bank’s confirmation is required, necessary permission should be obtained and accordingly advising bank is advised as per bank’s existing arrangement.
11. If add confirmation is required on account of the applicant – charges should be recovered from the applicant.
12. In case of usance L/C, mention rate of interest clearly in the letter of credit.
Liability of Issuing Bank
As per article 9 a of UCPDC 500, An irrevocable credit constitute a definite undertaking of the issuing bank, provided that the stipulated documents comply with the terms and conditions of the credit.
Advising of Letter of Credit;
Advising means forwarding of a documentary Letter of Credit received from the issuing bank to the Beneficiary (Exporter)
Advising Bank’s Liability:
Advising bank’s liability is fix up in Uniform Customs and Practice or Documentary Credit, Publication 500.
Amendments to Letter of Credit:
After issuance and advising of letter of credit, it may be felt necessary to delete, add or alter some of the clauses of the credit. All these modifications are communicated to the beneficiary through the same advising bank of the credit. Such modifications to a credit are termed as amendment to a letter of credit. L/C amendments are to be communicated by telex, SWIFT or mail.
The following clauses of L/C are generally amended:
1. Increase/ decrease value of L/C and Increase/decrease of quantity of goods.
- Extension of shipment / negotiation period
- Terms of delivery i.e.. FOB, CFR, CIF etc.
- Mode of shipment
5. Inspection clause
6. Name and address of the supplier
- Name of the reimbursing bank.
- Name of the shipping line, etc.
Definition / Concept/ Types of documents
Documents required in the documentary credit operation have been classified according to UCPDC into the following four types
(i) Transport Documents
(ii) Insurance Documents
(iii) Commercial Documents/ Invoices
(iv) Other Documents
All of the above documents are collectively known as shipping documents.
A transport document is a document issued by a Transport Company Authority or their authorized agents acknowledging the receipt of certain specified goods for carriage and embodying an undertaking that the goods will be delivered to the consignee name in the document or to his order.
Shipping plays a vital role in transportation of cargo from one country to another. More than 90°0 of export cargo of the world is transported by sea-route. In transportation of cargo by sea, contract of sale is the main factor, mainly, whether relevant cargo is shipped on C& F or FOB basis. ‘
C & F (Cost and Freight):
In this case, price is quoted/fixed by taking ocean freight into account. But the responsibility of transportation of goods on the exporter/ shipper. Hence he is to fix vessel on which cargo will be shipped.
FOB (Free on Board)
In this case, price is quoted to buyer or its representative without taking transport cost into account. The responsibility of transportation of goods is on the buyer or its local representatives who nominates vessels
(ii) Insurance Documents
International involves very high degree of risk. So, it is necessary to insure the goods against the risk of loss or damage. Insurance is a contract whereby the insurer is undertaking to indemnify the assured to the agreed manner and extent against fortuitous losses. Insurance is therefore a contract of indemnity. The document is which contract of indemnity is embodied is called a policy. The man who undertakes to insure is called insurer. When an insurer will subscribe his name in the policy then he will be called underwriter. The owner of the goods is called assured. The thing or property insured is called the subject matter of insurance. The interest, which the assured has in the subject matter, is known as his insurable insurance. The payment for which insurer undertakes to indemnify is termed as premium.
(iii) Commercial Documents/ Invoices
Another important document of documentary credit operation is the invoice/commercial invoice. The invoice/ commercial invoice is the seller’s bill for the merchandise. The document describes the goods which are the subject of contract of sale between the buyer and seller. It is dated and bears the names and addresses of both parties, shipping marks, total weight or quantity of goods etc. It may also
includes other details such as name of the carrier, the ports of dispatch and destination, freight, insurance, origin of goods etc.
There is no standard form for commercial invoice.
Types of invoices are as follows
a. Commercial Invoice
b. Customers Invoice
c. Pro Forma 3.Invoice
d. Certified Invoice
(iv) Other Documents
Other documents’ indicate the documents required in documentary credit operation other than the transport documents, insurance documents and invoice. These are may be of different types and natures depending on the
Objective conditions of the credit. Some of the common other documents are given below:
a. Weight certificate: It is a certificate evidencing the weight of the goods to be carried to the destination of importer by the carrier.
b. Certificate of origin: For goods imported into some countries, especially those which have a reciprocal tariff agreement with the exporter’s country, a certificate of origin is required.
c. Inspection Certificate: It is a confirmation that the goods have been inspected prior to shipment and found as per requirement of the client and generally issued by a neutral organization.
d. Health certificate/Certificate of Analysis: It is often necessary for shipping documents to contain something more than a certified invoice as evidence of quality in order to meet health requirement in the country of destination or to satisfy the importer about the precise strength or chemical composition of the goods.
Foreign Correspondent Relationship and Agency Arrangement
Correspondent Relationship (CR)
Correspondent relationship is a relationship established between two banks under which each bank act as agent bank of their counterpart bank to facilitate all sorts of foreign exchange business. No bank has its own branch network all over the world. To operate international banking business it must depend on other foreign banks in different countries.
Factor considering before establishment of CR
1. Selection of a bank to which relationship to be established:
First step towards establishment of correspondent relationship is to select a bank from the bankers almanac or other banking publications or sources. Banker’s almanac, Folks banking directory, Bankwatch etc. are available now via electronic medium, provides financial details, ownership, management, branch and subsidiary network and correspondents.
2. Rank and status of the bank
Then the banks are needed to be rank in the context of world rank and country rank from various banking publication.
3. Financial statement analysis:
Financial statement that must be scrutinized might include analysis of auditor’s report, accounts/balance sheet, interim statements/ prospectus etc.
4. Obtaining Credit Report
Which can be obtained from our embassies abroad as well as from other correspondents.
5. Country Risk Analysis
Risk analysis includes economic risk as well as political risk.
The arrangement under which correspondents relationship is to be established is called Agency arrangement. Agency arrangement may be formal or informal. In a formal arrangement a schedule of agency arrangement is to be prepared and signed by the both banks.
Import Policy and Procedure
Import: Import is flow of goods and services purchased by economic agents located in one country for example Bangladesh from economic agents of other countries.
Import Policy: Under the Import and Export (Control) Act 1950 the government of Bangladesh formulates the Import Policy through Ministry of Commerce.
General Conditions for Commodity Import:
- Using of eight-digit H S code (Harmonized System of Coding & Commodity Description) is compulsory according to import trade control schedule, 1988.
- No goods can be imported from Israel or produced in Israel and transportation bythe Israeli flag carrying ships is prohibited.
- Goods must be imported through Bangladesh flag carrying ships. For individual importers maximum 20 tons and for group importers maximum 100 tons is allowed to be transported through foreign ships. In other cases, if foreign ship is required, the certificate of waiver must betaken from Directorate of Sea Transportation.
- In case of export oriented industries, shipment is permitted through ship of other countries.
- Import must be made at highest competitive price.
- Import on CFR or FOB basis can be done by road, sea and air ways.
- Importers are bound to submit import-related documents at any time .o Chief Controller of import and export if required.
- Radioactivity certificate is compulsory for the import of food items
- Production and expire date is compulsory for food items
- Country of origin should be mentioned clearly in case of all imports
- Pre-shipment inspection is compulsory for all imports of goods and servicesexcluding public sector imports.
Import of goods into Bangladesh is regulated by the ministry of Commerce in terms of import and export (Control) act 1950.
- The Importer must obtain Import Registration Certificate (I RC) from the CCI&E.
- Then the importer has to contact with the seller outside the country to obtain the proforma invoice.
- After the importer accept the invoice, he makes a purchase contract with the exporter detailing the terms and conditions of the import.
- After making the purchase contract, import procedure differs with different means of payment. In most cases import payment is made by the documentary letter of credit in our country.
- Requesting the concerned bank to open an L/C on behalf of the importer favoring the exporter/seller.
Export Policy and Procedure
Export policies formulated by the ministry of commerce, GOB provide the overall guideline and incentives for promotion of exports in Bangladesh. Export policies also set out commodity-wise annual target.
Objectives of Export Policy (1997-2002)
1. To achieve higher growth rate by increasing export to regional and international markets
2. Reduction of trade deficit.
3. To assist the production of export-items in competitive price to protect existing market and explore new markets.
4. To make efforts for exploiting new opportunities offered by the liberalization and globalization process in world economy.
5. To diversify and improve the quality of exports items.
6. To increase value addition of export items by developing backward linkage industries and services.
7. To simplify the export procedures and rationalize the incentive structure to exporters
8. To develop the export trade related infrastructure and trained manpower.
A. Financial Incentives
i. Convertibility of Taka in current account
ii. Exporters can deposit 40% of FOB value of their export earnings inown accounts in dollar and pound sterling
iii. Expansion of export credit period from 180 days to 270 days.
iv. Insurance premium rebate for non-traditional exports
V. 50% tax rebate on export earnings
vi. Duty draw back facilities to 100% export oriented firms
vii. 25% cash incentives for RMG using local fabrics
viii. Bonded warehouse facilities to 100% export oriented firms
ix. Duty free import of capital equipment for 100% export oriented fines.
B. General Incentives
i Special rebate in air freight for export of perishable agricultural product and product under crash program
ii. Training course on external trade
iii. Arrangement of international trade fairs, commodity-based exhibitions in the country and participation in foreign trade fairs
iv. National Export Trophy to successful exporters
C. Other Incentives
i Assistance in improvement of quality and packaging of exportable items
iii. Simplification of export procedures
The import and export trade in our country are regulated by the Importers and Exports (Control) Act, 1950. Under the export policy of Bangladesh the exporter has to get the valid Export Registration Certificate (ERC) from Chief Controller of Import and Export (CCI&E).
Registration of Exporters
For obtaining ERG intending Bangladeshi exporters are required to apply to the concern authority to the respective region.
Securing the Order
After getting the ERG the exporter may proceed to secure the export order. He can do this by contracting the buyers directly or through agent.
Signing the Contract
After communicating with buyer exporter has to get contracted for exporting exportable item from Bangladesh detailing commodity, quality, price, shipment, insurance and marks, inspection, arbitration etc.
Receiving the Letter of Credit
After getting contract for sale, exporter should ask the buyer for letter of credit clearly stating terms and conditions of export and payment.
Procuring the materials
After making the deal and on having the L/C opened in his favor, the next step for the exporter is to set about the task of procuring or manufacturing the contracted merchandise.
Shipment of goods
Then the exporter should take the preparation for export arrange for delivery of goods as per L/C and inco-terms, prepare and submit shipping documents for payment /acceptance / negotiation in due time.
Submission of the documents to the bank for negotiation
1. Annual Report 2002, Southeast Bank Limited
2. Import policy order (1997-2002), Ministry of Commerce,
3, Syed Ashraf Ali, Foreign Exchange and Financing of Foreign Trade, Dhaka, 1995
4. Sk. Harun-ar-Rashid, Import Procedures/Formalities: steps involved (Talk Synopsis), BIBM, Dhaka, 1999
5. Export Policy (1997-2002), ministry of commerce, GOB, July. 1998, Dhaka
6. Dr Sujit R Saha. Export Procedure, BIBM, Dhaka, 1999
7. Citibank, An Introduction to Letters of Credit, USA
8.Export Promotion Bureau, Hand Book for Exporters in Bangladesh, Dhaka, 1986.
9.Chowdhury Rashid, International Trade, Finance and Foreign Exchange, BIBM, Dhaka, 2001.
10.Mr. Zahirul Huque. Principle officer Southeast Bank
Telephone : (88-02) 955081-5, (88-02) 9567271-2
Telex : 632425 SBANK BJ
Fax : 88-02-9550093
Postal Address : 1, Dilkhusha Commercial Area
(3rd Floor), Dhaka 1000
SWIFT : SEBDBDDH
E-mail : [email protected]
Website : www.southeastbank-bangladesh.com