The primary purpose of this report is to get an idea about the operations of Foreign Trade and Foreign Exchange of Bangladesh which play an important role in the balance of trade and our economy.
In Foreign Trade and Foreign Exchange of Bangladesh, Banks plays an important role. The word “Bank” refers to the financial institution deals with money transaction.
This report is an attempt to reflect the position of Foreign Trade and Foreign Exchange of Bangladesh and industry procedures, policies and activities with emphasis on foreign exchange business
1.2 Origin of the Study
This report is prepared as a requirement of EMBA course “International Financial Management” and under supervision of our honorable teacher Dr.A.A Mahbub Uddin Chawdhury.
1.3 Objectives of the Study
1.3.1 Broad objective
The primary purpose of this report is to get an idea about the operations of Foreign Trade and Foreign Exchange of Bangladesh, and make an industry analysis on the banking sector of Bangladesh.
1.3.2 Specific Objectives:
- To find out how Foreign Trade and Foreign Exchange is operating in Bangladesh.
- To analyze the comparative Foreign Trade and Foreign Exchange performance of Bangladesh.
- To find out existing problems of Foreign Trade and Foreign Exchange of Bangladesh.
- To formulate alternative strategies for solving the problems.
- To recommend some better solutions for solving the problems.
- To formulate an implementation plan for the recommended steps.
- To relate the theoretical learning with the real life situation.
- To find out the past trend of Foreign Trade and Foreign Exchange of Bangladesh.
- To find out the strengths, weaknesses, opportunities and threats of Foreign Trade and Foreign Exchange of Bangladesh.
1.4.1 Sample Information
Information is mainly collected from different published articles, journals, brochures and web sites. The information incorporated in this report is also collected both from the primary sources and as well as from the secondary sources.
1.4.2 Primary Source of Data:
We collect data directly from the practical field is called primary source of data.
1 .4.3 Secondary Sources of Data:
The secondary data is also collected from the different conceptual matters, internet and different articles published in the journals & magazines is used.
Secondary Sources are:
- Annual Reports of different Bank.
- Other published documents of Bangladesh Bank.
1.5 Rationale of the Study:
Bangladesh is one of the underdeveloped countries in the world. The economy of the country has a lot left to be desired and there are lots of scopes for massive improvement. In an economy like this, Foreign Trade and Foreign Exchange can play a vital role to improve the overall economic condition of the country. The banks by playing the role of an intermediary can mobilize the excess fund of surplus sectors to provide necessary finance, to those sectors, which are needed to promote for the sound development of the economy.
This report is an effort to reflect a clear idea about the strategies, activities, and performance of Bangladesh regarding Foreign Exchange Business.
To prepare this report, We have faced some limitations, which are mentioned below.
- Limitation of time: It was one of the main constraints that hindered to cover all aspects of the study.
- Lack of Secondary Information: The secondary source of information was not enough to complete the report.
- Limitation of the Scope: Some confidential information was not disclosed by various personnel.
Foreign Trade and Foreign Exchange
2.2 Foreign Exchange Business
The Foreign Trade and foreign exchange are categorized as follows:
Remittance means sending or transfer money or money-worth from one place to another. Generally the process of remittance can be divided into two major categories:
- Inward Remittance
- Outward Remittance
2.2.2 Foreign Exchange:
Foreign Exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country. Foreign exchange is the means and methods by which rights to wealth in a country’s currency are converted into rights to wealth in another country’s currency.
2.2.3 Foreign Exchange Accounts:
- Nostro Account:
Nostro account means “our account with you”. A Nostro account is a foreign currency account of a bank maintained by its foreign correspondents abroad. For example, US Dollar Account of Southeast Bank Limited is maintained with Citibank, N.A, New York, USA is a Nostro account of Southeast Bank Limited i.e. from the point of view of Southeast Bank Limited, it is their Nostro Account.
- Vostro Account:
Vostro account means “your account with us”. The account maintained with foreign correspondent in a bank of a particular country is known as Vostro account. For example, State Bank of India’s Taka account maintained with Southeast Bank Limited Dhaka is the vostro a/c i.e. from the point of view of Southeast Bank Limited it is a vostro account held for state bank of India.
- Loro Account:
Loro account means “their account with you”. Account maintained by third party is known as Loro account; suppose Southeast Bank Limited is maintaining an account with Citi Bank N.A New York and at the same time Janata Bank is also maintaining a nostro account with Citi Bank N.A New York. From the point of view of Southeast Bank Limited Janata Bank’s account maintained with Citi Bank N.A New York is the Loro account.
- Foreign Exchange Buying Rates:
The rates at which the banks are willing to purchase foreign currencies are said to be buying rates, i.e. at these rates foreign currencies are converted into home currency. The various types of buying rates are:
(a) T. T. (Clean)
(b) T. T. (Documentary)
(c) O. D. sight (Export)
(d) O. D. Transfer
(e) Spot rate
(f) Forward rate
- T. T. (Clean): The T. T. clean buying rate is the basic rate of exchange from which other types of buying rates are computed, since in case of T. T.s fund are paid over at the other end on the same day involving no loss of interest, but may attract only small charges for Telex. The variations in other types of buying rates quoted from the basic T. T. buying rate are primarily dependant upon the nature of instruments to be purchased which indicate the extent of possible loss of interest, extra costs of collection or increased risk of capital loss.
- T.T. (Documentary): This rate is applicable in which the handling of document is involved.
- OD (Sight): This rate is applied for transaction resulting in the purchase or negotiating of export bills. OD sight (export) buying rates vary from TT buying rates
to the extent of loss of interest for the period the bank remains out of funds i.e. from the time the bank pays out cash at home.
2.2.4. Foreign remittance
In this section Foreign Exchange deals with:
Æ Inward foreign remittance
Æ Outward foreign remittance
Æ Opening Foreign Currency Accounts.
Æ Governing Wage Earner’s Bond.
Æ Opening Student File etc.
- Inward Foreign Remittance:
Normally, Inward Foreign Remittance comprises all incoming foreign currencies. Remittances issued by the correspondent banks situated in the foreign countries and thereby drawn on home country bank are considered to be its Inward Foreign Remittances. Followings are the instruments of Inward Foreign Remittances:
Encashment of foreign currencies endorsed in the passport.
Purchase of foreign currencies.
- Outward foreign Remittances:
Remittances issued by home country bank’s Branch to there foreign correspondents to fulfill there customers’ needs are considered to be the Outward Foreign Remittances. It comprises the followings:
Endorsement of foreign currencies in the passport.
Sale of foreign currencies.
- Foreign Demand Draft (FDD) Issued:
People used to send money abroad for various purposes. Banks issue most of the FDD for the purpose of payment of the application fees to the foreign universities. For the issuance of FDD; T/M Form has to be filled up duly. This form is filled up under the Foreign Exchange Regulation Act, 1947. This form contains:
$ The purpose of travel,
$ Name of the country where the applicant will go,
$ Name of the air or shipping company,
$ Passport number,
$ Signature, name & address of the applicant
This form has to be duly signed by the applicant. In case of application fee, the applicant has to mention the name of the university in whose favor the FDD is issued.
2.2.5 Traveler’s Cheque (TC) Issued:
Banks issue Traveler’s Cheque (TC). For TC, customer has to fill up T/M form. He has to fill up the purchase form also.
- Procedure for issuing TC
There are some requirements that are to be fulfilled by the Traveler’s Cheque purchaser. The requirements are:
i) The client must be an account holder or proper reference from the bank is required
ii) The passport must be a valid one
iii) Air ticket has to be confirmed
iv) Passport holder must be present physically
- Following Documents must be retained form the clients
/ Photocopy of passport
/ T/M form (Travel & Miscellaneous)
/ Others Copy of government order (in case of government employee)
Copy of invitation letter if issuance is against conference/training quota
- Endorsement of Cash:
Cash foreign currency can also be remitted through the cash endorsement in the passport. In case of endorsing cash in the passport, the requirements are similar to those of Traveler’s Cheque. But according to the foreign exchange Regulation Act, 1947 an individual cannot take more than $1500.00 in cash in a year.
- Foreign TT Payable:
Foreign remittance section also pays the claim of the foreign TT. After receiving TT payable, Banks performs the following functions:
1) Customer has to fill up a “C Form” if the amount exceeds $2000.00. “C Form” describes the purpose of sending the TT.
2) The dollar amount comes to the Head office of a bank through different Foreign Banks.
2.2.6 Student File Opening:
Student can endorse $200.00 at a time in his own name. But if the amount exceeds $200.00, then the student has to open a student file. For opening a student file, the following documents are required:
i) Preliminary application and information for admission.
ii) Letter of approval by the university of the student.
iii) A filled-in application form for foreign currency in abroad.
i) “Transcript of Records” given for the last degree by the university.
ii) Certificate given by the Board for S.S.C. / H.S.C. or equivalent examination.
iii) A photocopy of I-20 form.
In case of tuition fees, applicant must send the currency in favor of the institute. He cannot take the fees of the institute with him personally. Usually a student has to endorse at least one third of the fees of a year.
Import means purchase of goods or services form abroad. Normally consumers, firms and Government organizations import foreign goods or services to meet their various necessities. So, in brief, we can say that import is the flow of goods and services purchased by economic agent staying in the country from economic agent staying abroad.
188.8.131.52 Regulation of Import:
Import of goods into Bangladesh is regulated by the Ministry of Commerce in terms of the Import and Export (Control) Act, 1950 with Import Policy Order issued periodically and public notices issued from time to time by the office of the Chief Controller of Import and Export (CCI&E). At present, it is regulated by the Import Policy (1997-2002), which has come into effect on June14, 1998. And Import Policy directs certain Import Procedure, which administers the whole activity. Now the import is being made under Import Policy 2003-2006.
184.108.40.206 Import Procedure:
As an Authorized Dealer, banks always committed to facilitate import of different goods into Bangladesh from the foreign countries. Import Section, which is under Foreign Exchange Department of a bank, is assigned to perform this job. And to serve its client’s demand to import goods, it always maintains required formalities that are collectively termed as The Import Procedure.
a) At first, the importer must obtain Import Registration Certificate (IRC) from the CCI&E submitting the following papers:
, Up to date Trade License.
, Nationality and Asset Certificate.
, Income Tax Certificate.
, In case of company, Memorandum & Articles of Association and Certificate of Incorporation.
, Bank Solvency Certificate etc.
, Required amount of registration fee
b) Then the importer has to contact with the seller outside the country to obtain the Proforma Invoice. Usually an indenter, local agent of the seller or foreign agent of the buyer makes this communication. Other sources are:
8 Trade fair.
8 Chamber of Commerce.
8 Foreign Missions in Bangladesh.
8 Journals etc.
c) When the importer accepts the Proforma Invoice, he/she makes a purchase contract with the exporter detailing the terms and conditions of the import.
d) After making the purchase contract, importer settles the means of payment with the seller. An import procedure differs with different means of payment. The possible means are Cash in Advance, Open Account, Collection Method and Documentary Letter of Credit. In most cases, the Documentary Letter of Credit in our country makes import payment. Purchase Contract contains which payment procedure has to be applied.
Different Means of Payment:
- Cash in advance: Importer pays full, partial or progressive payment by a foreign DD, MT or TT. After receiving payment, exporter will send the goods and the transport receipt to the importer. Importer will take delivery of the goods from the transport company.
- Open Account: Exporter ships the goods and sends transport receipt to the importer. Importer will take delivery of the goods and makes payment by foreign DD, MT, or TT at some specified date.
- Collection Method:Collection methods are either clean collection or documentary collection. Again, Documentary Collection may be Document against Payment (D/P) or Document against Acceptance (D/A). The collection procedure is that the exporter ships the goods and draws a draft/ bill on the buyer. The exporter submits the draft/bill (only or with documents) to the remitting bank for collection and the bank acknowledges this. Then the remitting bank sends the draft/bill (with or without documents) and a collection instruction letter to the collecting bank. Acting as an agent of the remitting bank, the collecting bank notifies the importer upon receipt of the draft. The title of goods is released to the importer upon full payment or acceptance of the draft/bill.
- Letter of credit: Letter of credit is the well-accepted and most commonly used means of payment. It is an undertaking for payment by the issuing bank to the beneficiary, upon submission of some stipulated documents and fulfilling the terms and conditions mentioned in the letter of credit.
e) Requesting the concerned bank (importer’s bank /issuing bank) to open a L/C (irrevocable) on behalf of importer favoring the exporter/seller.
2.2.8 Letter of credit (L/C)
The method by which a Commercial Bank undertakes to make payment on behalf of the importer (buyer) to the seller (exporter) is known as Letter of Credit (L/C). On the other hand it is a credit contract where by, the buyers (importer) bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller’s (exporter) disposal under some agreed conditions. Since the agreed conditions include amongst other things, the presentation of some specified documents, the letter of credit is called Documentary
Letter of Credit.
An importer in a country requests his/her bank to open a credit in foreign currency in favor of the exporter at a bank in the letters country. The letter of credit is issued against payment of the amount by the importer or satisfactory security. The letter of credit authorized the exporter to draw a draft under its terms and sell to a specific bank in his/her country. The exporter has to hand over the bill of exchange, shipping documents and such other papers as may be agreed upon between the exporter and importer. The buyer wants to be assured of goods and the seller to be assured of payments. Commercial Banks, therefore, assure these things to happen simultaneously by opening Letter of Credit guaranteeing payment to seller and goods to buyer.
Forms of Letter of Credit:
Letter of Credit is basically classified in two forms:
a. Revocable Letter of Credit
b. Irrevocable Letter of Credit
a. Revocable Letter of Credit: If any Letter of Credit can be amendment or changed of any clause or canceled by consent of the exporter and importer, it is known as Revocable Letter of Credit.
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 payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of payment buy the issuing bank at which the issuing bank has made the credit available. In the modern banking the use of revocable credit is not widespread.
b. Irrevocable Letter of Credit: If any Letter of Credit cannot be amendment or changed of any clause without the consent of all concern parties – importer (applicant), exporter (beneficiary), Issuing Bank, and Confirming Bank (in case of confirmed L/C), is known as Irrevocable Letter of Credit.
An Irrevocable Letter of Credit constitutes a firm undertaking by the issuing bank to make payment. It, therefore, gives the beneficiary a high degree of assurance that he/she will pay to his/her goods or services provided he/she complies with terms of the credit.
220.127.116.11Types of Letter of credit:
Letter of credit is classified into various types according to the method of settlement employed.
i) Sight payment credit
ii) Deferred payment credit
iii) Acceptance credit
iv) Negotiation credit
v) Transferable credit
i) Sight Payment Credit: The most commonly used credits are sight payment credits. These provide for payment to be made to the beneficiary arrogantly after presentation of the stipulated documents on the condition that the terms of the credit have been complied properly. The banks are allowed reasonable time to examine the document.
ii) Differed Payment Credit: Under a deferred payment credit the beneficiary does not receive when he/she presents the documents but at a later date specified in the credit term. On presenting the required documents, he/she receives the authorized banks written undertaking to make payment of maturity.
iii) Acceptance Credit: With an acceptance credit, payment is made in the form of a term bill of exchange drawn on the buyer by the issuing bank. Once the importer fulfilled the credit requirement, the beneficiary can demand that the bill of exchange be accepted. Thus the accepted bill takes the place of cash payment.
The beneficiary can present the accepted bill to his own bank for payment at maturity or for discounting, depending on whether or not he/she wants cash immediately. For simplicities sake the beneficiary usually gives an instruction that the accepted bill should be kept in the safekeeping of one of the banks involved until it matures. Bill of exchange drawn under acceptance credit usually has term of 60 – 180 days.
The purpose of an acceptance is to give the importer time to make payment. If the importer sells the goods before payments fall due, he/she can use the proceed to meet the bill of exchange in this way; he/she does not have to borrow money to finance the transaction.
iv) Negotiation Credit: Negotiation means the purchase and sale of bill of exchange or other marketable instruments. A negotiation credit is commercial letter of credit opened by the issuing bank in the currency of its own country and addressed directly to the beneficiary. The letter is usually delivered to the address by a correspondent bank.
The letter of credit empowers the beneficiary to draw a bill of exchange on the issuing bank, on any other named drawer or on the applicant for the credit. The beneficiary can then present this bill to a bank for negotiation, together with the original latter of credit and the documents stipulated therein.
The issuing bank guarantees payment of the bill of exchange on the condition that the documents presented by the beneficiary are in order. The most common form of negotiation credit permits negotiation by any bank. In rare cases the choice is limited to specified banks.
v) Transferable Credit: Transferable credit is one under which the exporter has the write to make the credit available to one or more subsequent beneficiaries. When the credit is transferable, it is expressed sated as such by the issuing bank on the face of L/C. The credit is to be transferred only under the terms and conditions specified in the original L/C.
18.104.22.168 Parties Involved in Operation of Letter of Credit:
A letter of credit is issued by a bank at the request of an importer in favor of an exporter from whom the importer has contracted to purchases some commodity/commodities. The importer, the exporter and the issuing bank are the parties to the letter of credit. There are however one or more than one banks involved in various capacities and at various stages to play an important operation of the credit.
³ The Buyer (Importer) & The Beneficiary (Exporter)
³ The Opening Bank
³ The Advising Bank
³ The Negotiating Bank
³ The Reimbursing Bank.
- The Buyer (Importer) & The Beneficiary (Exporter): The importer at whose request a litter of credit is issued is known as the buyer. The exporter in whose favor the credit is opened and too whom the letter of credit is addressed is known as the beneficiary. As the seller of goods the exporter is entitled to the receive payment which he/she does by drawing bills under the letter of credit. As soon as the exporter shipped the goods and collected the required documents, the exporter draws a set of papers and presents it with the documents to the opening bank or other bank to mention in the L/C.
- The Issuing Bank (Opening Bank): The opening bank is one that issues the letter of credit at the request of the buyer. By issuing a letter of credit it takes upon itself the liability to pay the bills drawn under the credit.
- The Advising Bank: The letter of credit is transmitted to the beneficiary through a bank in the letters country. The bank may be a branch or a correspondent of the opening bank. The credit is some times advised to this bank by cable and then transmitted by it to the beneficiary on own its specified form. On the other occasion, the letter is sent to the bank by mail or telex and forwarded by it to the beneficiary. The bank providing this service is known as the Advising Bank. The advising bank undertakes the responsibility of prompt advice of credit to the beneficiary and has to be careful in communicating all its details.
- The Negotiating Bank: This the bank that honored the documents presented as per letter of credit. The negotiating bank has to be careful in scrutinize that the draft and the documents attached there to are in conformity with the condition laid down in the letter of credit. Any discrepancy may result in refused on the part of the opening bank to honor the instruments is such an eventually the negotiating bank has to look back to the beneficiary for refund of the amount paid to the beneficiary.
- The Reimbursing Bank: It is the bank in which the Issuing Bank maintains a Nostro account and this bank will make the payment to the beneficiary.
22.214.171.124 Documents Used in operation of L/C
- Indent or Proforma Invoice:
Indent or Proforma Invoice is the sale contract between seller and buyer in import- export business. There is slight difference between indent and Proforma invoice. The sales contract, which is direct correspondence between importer and exporter, is called Proforma invoice. There is no intermediary between them. On the other hand, there may be an agent of exporter in importer’s country. In this regard, if the sale contract is occurred between the agent of exporter and importer then it is called indent.
- Import Registration Certificate (IRC):
The importer collects from the C.C.I.& E office by submitting required documents and payment of requests fees.
- Bill of exchange:
The bill of exchange is a negotiable instrument through which payment is effected in the trade deals. It is an unconditional order or writing, addressed by the buyer to seller by which the seller can obtain payment from the buyer for the invoiced value of the goods.
- Bill of lading:
It is the list of goods being shipped which the captain gives to the person sending the goods to show that the goods have been loaded.
- Airway Bill/Railway receipt:
Sometimes goods are transported through small bulk or those are perishable in nature then the mode of transport other that shipping may be resorted to far carriage of the goods, Airway bill/Railway receipt take place of loading depending on the nature of the carrier.
- Commercial Invoice:
It is the seller’s bill for the merchandise. It contains a description of goods, the price per unit, total value of the goods, packing specification etc. The seller under his own form and signature in the name of the buyer issues the invoice.
Insurance Policy: In the international trade insurance policy is a must to cover the risk of loss on consignments. The policy is must
- Certificate of origin:
This is the certificate issued by a recognized authority In the exporting country certifying the country of origin of the goods. It is usually by the Chamber of Commerce.
- Packing List:
The exporter prepares an accurate packing list showing item by item. The content of the consignment to enable the receiver of the shipment to check the contents of the goods and marks of the packages, quantity, weight etc of the goods exported.
- Bill of Entry:
It is a document, which contains the particulars of the imported goods as well as the amount of customs duty payable.
- Clean Report of Findings:
This certificate is provided by the Pre Shipment Inspection (PSI) Concerns. The entire world has been brought under the three supervision area of the three pre-shipment inspection concerns based on different territory. These are as follows
q Intertek Testing Service
q Bureau Veritas
126.96.36.199 Procedure of opening the Letter of Credit (L/C)
The importer after receiving the proforma invoices from the exporter, by applying for the issue of documentary credit, the importer requests his/her bank to make a promise of payment to the supplier. Obviously, the bank will only agree to this request if it can rely on reimbursement by the applicant. As a rule accepted as the sole security for the credit particularly if they are not the shorts of commodity that can be traded on an organized market, such an agreement would involve the bank in excessive risk outside its specialized field. The applicant must therefore have adequate fund in the bank account or a credit line sufficient to cover the required amount.
Banks deals with documents and not goods. Once the bank has issued the credit its obligation to pay is conditional on the presentation of the stipulated documents with in the prescribed time limit. The applicant cannot prevent a bank from honoring the documents on the grounds that the beneficiary has not delivered goods.
- The importer submit the following documents with the application for opening the L/C
- Tax Identification Number (TIN)
- Valid trade license
- Import registration certificate (IRC)
- The bank will supply the following documents before opening the L/C
- LCA form
- IMP form
- Necessary charger documents for documentation
The above documents/papers must be completed duly signed and filled by the parties according to the instruction of the concern banker.
After scrutinizing above-mentioned documents carefully, bank delivers the following forms to be filled up by importer and banker then check it carefully:
q Whether the goods to be imported is permissible or not.
q Whether the goods to be imported is demanding or not.
- L/C Application Form (L/CAF)
L/C Application Form is a sort of an agreement between customer and bank on the basis of which letter of credit is opened. Bank provides a printed form for opening of L/C to the importer. A special adhesive stamp of value Tk.150 is affixed on the form in accordance with Stamp Act currently in force. While opening, the stamps are cancelled. Usually the importer expresses his decision to open the L/C quoting the amount of margin in percentage. Usually the importer gives the following information –
@ Full name and address of the importer
@ Full name and address of the beneficiary
@ Draft amount
@ Availability of the credit by sight payment/acceptance/negotiation/deferred payment
@ Time bar within which the documents should be presented
@ Sales type (CIF/FOB/C&F)
@ Brief specification of commodities, price, quantity, indent no. etc.
@ Country of origin
@ Bangladesh Bank registration no.
@ Import License/LCAF no.
@ IRC no.
@ Account no.
@ Documents no.
@ Insurance Cover Note/Policy no., date, amount
@ Name and address of Insurance Company
@ Whether the partial shipment is allowed or not
@ Whether the transshipment is allowed or not
@ Last date of shipment
@ Last date of negotiation
@ Other terms and conditions (if any)
@ Whether the confirmation of the credit is requested by the beneficiary or not.
@ The L/C application must be completed/filled in properly and signed by the authorized person of the importer before it is submitted to the issuing bank.
- L/C Authorization Form (L/CAF):
The Letter of Credit Authorization Form (LCAF) is the form prescribed for the authorization of opening letter of credit/payment against import and used in lieu of import license. The authorized dealers are empowered to issue LCA Forms to the importers as per basis of licensing of the Import Policy Order in force to allow import into Bangladesh. If foreign exchange is intended to be bought from the Bangladesh Bank against an LCAF, it has to be registered with Bangladesh Bank’s Registration Unit located in the concerned area office of the CCI&E. The LCA Forms available with authorized dealers are issued in set of five (05) copies each. First Copy is exchange control copy, which is used for opening of LC and effecting remittance. Second Copy is the custom purpose copy, which is used for clearance of imported goods from custom authority. Triplicate and Quadruplicate Copy of LCAF are to be sent to concerned area of CCI&E office by authorized dealer/Registration Unit of Bangladesh Bank. Quintuplicate Copy is kept as office copy by authorized dealer/Registration Unit. The Letter of Credit Authorization Form (LCAF) contains the followings –
@ Name and address of the importer
@ IRC no. and year of renewal
@ Amount of L/C applied for (both in figure and in word)
@ Description of item(s) to be imported
@ HS Code No.
@ Signature of the importer with seal
@ List of goods to be imported
The L/C Confirming process:
Issue L/C & request to Add Confirm
- Forwarding Documentary Credit by Advising or Confirming Bank:
There are usually two banks involved in a documentary credit operation. The issuing bank and the 2nd bank, the advising bank, is usually a bank in the seller’s country. The issuing bank asks another bank to advise or confirm the credit.
If the 2nd bank is simply “advising the credit”, it will mention that when it forwards the credit to seller, such a bank is under no commitment or obligation to pay the seller.
If the advising bank is also “confirming the credit”, this mention that the confirming bank, regardless of any other consideration, must pay accept or negotiate without recourse to seller. Then the bank is called confirming bank also.
- Submission of Necessary Documents by Exporter to the Negotiating Bank:
As soon as the seller/exporter receives the credit and is satisfied that he can meet its terms and conditions, he is in a position to load the goods and dispatch them. The seller then sends the documents evidencing the shipment to the bank.
Exporter will submit those documents in accordance with the terms and conditions as mentioned in L/C. Generally the documents observed by the foreign exchange department are:
2 Bill of exchange
2 Commercial invoice
2 Bill of lading / Air way bill / Truck receipt
2 Certificate of origin
2 Packing list
2 Clean report of finding (CRF)
2 Insurance cover note
2 Pre-shipment certificate
- The negotiation process of import L/C:
- The Documents Sent To The Issuing Bank Through The Negotiating Bank:
The negotiating bank carefully checks the documents provided by the exporter against the credit, and if the documents meet all the requirement of the credit, the bank will pay, accept, or negotiate in accordance with the terms and conditions of the credit. Then the bank sends the documents to the L/C opening bank.
SENDING L/C DOCUMENTS
Making the Payment of Foreign Bill through the Reimbursing Bank:
The L/C issuing bank getting the documents checks immediately and if they are in order and meet the credit requirements; it will arrange to make payment against L/C through reimbursement bank and will send the importer the document arrival notice.
If there is no available in cash in importer’s hand, he can request the bank to grant loan against the documents for the purpose of post import finance. There are two following forms of post import finance available:
- LIM (Loan against imported merchandise).
- LTR (Loan against trust receipt).
Loan Against Imported Mercenary (LIM) is a facility provided by the bank to the importer who are in short of fund to retire the import bills and thus to clear the goods from the authority.
188.8.131.52 Flow Chart of L/C Operation Mechanism
Export is the process of selling goods and services to the other countries. Creation of wealth in any country depends on the expansion of production and increasing participation in international trade. By increasing production in the export sector we can improve the employment level of such a highly populated country like Bangladesh. Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both knitted and woven), Jute, Jute-made products, frozen shrimps, tea are the main goods that Bangladeshi exporters export to foreign countries. Garments sector is the largest sector that exports the lion share of the country’s export.
Export L/C operation is just reverse of the import L/C operation. For exporting goods by the local exporter, bank may act as advising banks and collecting bank (negotiable bank) for the exporter.
184.108.40.206 Export Policy:
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.
It has been decided to formulate these policies to cover a five-year period to make them contemporaneous with the five-year plans and to provide the policy regime.
The export-oriented private sector, through their representative bodies and chambers are consulted in the formulation of export policies and are also represented in the various export promotion bodies set up by the government.
220.127.116.11 Export Procedures:
The import and export trade in our country are regulated by the Import and Export (Control) Act, 1950.
Under the export policy of Bangladesh the exporter has to get valid Export registration Certificate (ERC) from Chief Controller of Import & Export (CCI&E). The ERC is required to renew every year. The ERC number is to incorporate on EXP forms and other papers connected with exports.
- Registration of Exporters:
For obtaining Export registration Certificate (ERC), intending Bangladeshi exporters are required to apply to the controller/ Joint Controller/ Deputy Controller/ Assistant Controller of Imports and Exports, Dhaka/ Chittagong/ Rajshahi/ Mymensingh/ Sylhet/ Comilla/ Barishal/ Bogra/ Rangpur/ Dinajpur in the prescribed form along with the following documents:
ü Nationality and Assets Certificate;
ü Memorandum and Article of Association and Certificate of Incorporation in case of Limited Company;
ü Bank Certificate;
ü Income Tax Certificate;
ü Trade License etc.
- Signing the Contract:
After communicating buyer, exporter has to get contracted (writing or oral) for exporting exportable items from Bangladesh detailing commodity, quantity, price, shipment, insurance and marks, inspection and arbitration etc.
- Receiving Letter of Credit:
After getting contract for sale, exporter should ask the buyer for Letter of Credit (L/C) clearly stating terms and conditions of export and payment.
The following are the main points to be looked into for receiving/ collecting export proceeds by means of Documentary Credit:
(1) The terms of the L/C are in conformity with those of the contract;
(2) The L/C is an irrevocable one, preferably confirmed by the advising bank;
(3) The L/C allows sufficient time for shipment and negotiation.
Terms and conditions should be stated in the contract clearly in case of other mode of payment:
I. Cash in advance;
II. Open account;
III. Collection basis (Documentary/ Clean)
- Shipment of goods:
Then the exporter should take the preparation for export arrangement for delivery of goods as per L/C and incoterms, prepare and submit shipping documents for Payment/ Acceptance/ Negotiation in due time.
Documents for shipment:
ü EXP form,
ü ERC (valid),
ü L/C copy,
ü Customer Duty Certificate,
ü Shipping Instruction,
ü Transport Documents,
ü Insurance Documents,
ü Bill of Exchange (if required)
ü Certificate of Origin,
ü Inspection Certificate,
ü Quality Control Certificate,
ü G.S.P. Certificate,
¨ Final Step:
Submission of the documents to the Bank for negotiation.
18.104.22.168 Export Financing:
Financing exports constitutes an important part of a bank’s activities. Exporters require financial services at four different stages of their export operation. During each of these phases exporters need different types of financial assistance depending on the nature of the export contract.
³ Pre-shipment credit
³ Post-shipment credit
¨ Pre-shipment credit:
Pre-shipment credit, as the name suggests, is given to finance the activities of an exporter prior to the actual shipment of the goods for export. The purpose of such credit is to meet working capital needs starting from the point of purchasing of raw materials to final shipment of goods for export to foreign country. Before allowing such credit to the exporters the bank takes into consideration about the credit worthiness, export performance of the exporters, together with all other necessary information required for sanctioning the credit in accordance with the existing rules and regulations. Pre-shipment credit is given for the following purposes:
ü Cash for local procurement and meeting related expenses.
ü Procuring and processing of goods for export.
ü Packing and transporting of goods for export.
ü Payment of insurance premium.
ü Inspection fees.
ü Freight charges etc.
An exporter can obtain credit facilities against lien on the irrevocable, confirmed and unrestricted export letter of credit in form of the followings:
ü Export cash credit (Hypothecation)
ü Export cash credit (Pledge)
ü Export cash credit against trust receipt.
ü Packing credit.
ü Back to back letter of credit.
ü Credit against Red-clause letter of credit.
¨ Post Shipment Credit:
This type of credit refers to the credit facilities extended to the exporters by the banks after shipment of the goods against export documents. Necessity for such credit arises, as the exporter cannot afford to wait for a long time for without paying manufacturers/suppliers. Before extending such credit, it is necessary on the part of banks to look into carefully the financial soundness of exporters and buyers as well as other relevant documents connected with the export in accordance with the rules and regulations in force. Banks in our country extend post shipment credit to the exporters through:
- Negotiation of documents under L/C;
- Foreign Documentary Bill Purchase (FDBP):
- Advances against Export Bills surrendered for collection;
¨ Negotiation of documents under L/C:
The exporter presents the relative documents to the negotiating bank after the shipment of the goods. A slight deviation of the documents from those specified in the L/C may raise an excuse to the issuing bank to refuse the reimbursement of the payment already made by the negotiating bank. So the negotiating bank must be careful, prompt, systematic and indifferent while scrutinizing the documents relating to the export.
Foreign Documentary Bill Purchase (FDBP):
Here the exporters are also made on the basis of contract between the buyer and the seller without the cover of a letter of credit. In such case, documents are delivered to the buyer through the intermediary of the foreign correspondent of the authorized dealer against payment/acceptance.
3.1 Major Findings
- The rules and regulations by which remittance, import and export are dealing is not modern and updated.
- Bangladeshi banks use back dated technologies and software.
- Lacking of professional expertise and efficient Human Resources in Bangladesh.
- Bangladesh is a developing country, so the foreign investment is small due to country risk.
- Political instability and corruption is an important barrier of smooth operation of import and export.
- There are no developed port facilities in Bangladesh.
- Import is higher than inward remittance and Export, so there is a problem of balance trade and balance of payment.
01. Bangladeshi banks should use modern technologies and software in international trade and foreign exchange.
02. Human Resources must be well educated and trained with modern technologies and software.
03. The foreign trade related rules and regulations must be updated with consistent of international rules.
04. Bangladesh Government has to take initiative to boost up export.
05. Export and import procedure to be simplified and easier.
06. Cash incentive and other incentives to be extended.
In conclusion, we can say that there are a lot of opportunities for increasing export in Bangladesh if stay political stability. The Human Resources are cheapest here which play an important role in any business. Bangladesh government has to take proper steps to maintain congenial atmosphere for sustainable foreign trade and foreign exchange business in the country.
1. Import and Export policy of Bangladesh 2003-2006.
2.Uniform Customs and Practice of Documentary Credit (UCPDC), ICC 1993 publication, Paris, France.
3. Bangladesh Bank Guidelines for Foreign Trade & Foreign Exchange, 1947.
3. A Text Book on Foreign Exchange, L. R. Chowdhury (3rd Edition 2002)
4. Financial Institutions Management, A Modern Perspective by Anthony Saunders.
5.Commercial Banking – Fourth Edition by Edward W Reed / Edward K. Gill
AD :Authorized Dealer
BB :Bangladesh Bank
BLC :Bills under letter of Credit
BIS :Bank for International Settlement
BL :Bill of Lading
ERC :Export Registration Certificate
FDD :Foreign Demand Draft
IRC :Import Registration Cerificate
L/C :Letter of Credit
LIM :Loan against Imported Merchandise
LTR :Loan against Trust Receipt
TT :Telegraphic Transfer
TIN :Tax Identification Number