Foreign Exchange - Basic-1
Foreign Exchange - Basic-1
Contents
List of Abbreviations v
Chapter One: Introduction
1 1 Background J
3.1.5 Standby LC 27
3.1.7 Bank Payment Obligation (BPO) and Supply Chain Finance (SCF) 28
83
Questions and Answers Indications
Chapter Eight: Trade Finance Services by Banks in Bangladesh
8.1 Pre-and Post-Shipment Credit to the Exporter by Banks in Bangladesh 87
!4
10.3.3.2 Foreign Exchange Derivatives in Bangladesh
Appendix Table-l
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1.1 Background
important because of the fact that international trade is heavily dependent on trade
facilitation as it involves certain forms of commercial risks that are often assumed by
banks. These services by banks and financial institutions become essential since importers
and exporters are often unwilling to bear these trade related commercial risks (CGFS,
2Ol4).It is well recognized that expansion of trade service activities are connected with
the expansion of cross-border trade flows and both developed and developing countries
have been playing increasingly prominent role in this connection. Especially, trade
The cross-border trading activities are commonly regulated and guided by both domestic
and international regulations. Because of the potentially strong and broad negative
extemalities associated with bank failures and the widespread fear they ignite, bank safety
is a major public policy concem that appears amenable to be pursued through strong
domestic regulations. The rules and regulations of international trade services are in line
with a country's cross-border trade and investment policies. Adoption of international
rules and guidelines are particularly relevant for facilitation of cross border banking
services for harmonizing banking regulations among countries. Regulations and their
enforcement are particularly crucial for handling the challenges of uniform interpretations,
disputes and arbitrations of trade and financing parties, and the prevention of the
malpractices associated with trade services. All stakeholders are required to have adequate
With the expansion of trade flows and activities, newer products were introduced,
complexities increased, and trade service providers and traders have been coming access
increasing and fresh challenges. Trade finance is the mainstay of cross-border trade
Trade Services (Basic Level) 3
Like in every country, hade services operations of banks in Bangladesh are subject to
special regulations and restrictions. Alongside ensuring satisfaction of the clients, the
efficiency level of bankers in trade services in connected with the compliance of these
regulations and restrictions. Of the specific challenges, as in other countries developing
countries, access to trade finance is a common hurdle for the relatively small traders in the
country. There are alleged occurrences of non-compliance of regulations and some
instances of fraudulent practices in international trade services activities in the country.
Erosion ofconfidences on correspondent banks and other counter parties became apparent
in several instances. Capacity development of all concerned parties like banks and
financial institutions, regulatory authorities, and traders are matter to be considered for all
global economies for handling trade financing challenges effectively.
It is widely recognized that credibility of the traders and trade service providers or banks
are important factors that determine the availability, qualiry and efficiency of trade
services; and efficiency in trade services affects trade flows and bargaining power of the
traders. Adequate and reliable information are crucial in this connection. For improving
trade services, it is important to understand the operations, product processes, progress,
trends and challenges in different trade services activities by the bankers. More
specifically, banks must have a group of specialized people having adequate knowledge
base and skills fo facilitate trade services for trade effectiveness and for maximizing
revenue. Moreover, in a country like Bangladesh, traders heavily rely on bankers for
effectively accomplish trading activities. In such a circumstance, a customized information
manual for the service providing bankers could serve greatly.
With this background in mind, the trade services manual targets to create and enhance
knowledge and skills amongst the employees of AB Bank Limited. This manual is
designed to facilitate entry and junior level bank executives to understand the basics of
trade services. The specific objectives of the manual are: one, to discuss the conceptual
issues of trade and trade services; two,to provide information on the status and changes in
Both primary and secondary data were collected to prepare the manual. Secondary data are
collected from different publications related to international trade payment and financing
practices. Domestic set of rules were summarized from the different publications of
Bangladesh Bank and relevant circulars of the Foreign Exchange Policy Departments
(FEPD) of the Central Bank. Publications of International Chamber of Commerce (ICC)
and research and review reports of Bangladesh Institute of Bank Management (BIBM)
were the other major secondary data source. A number of trade services experts were
consulted in the process of formulation of the manual. The manual is prepared keeping in
mind the knowledge and skill requirements of relatively junior level bank executives
(Trainee Officers to Principal Officers) of the AB Bank Limited.
are discussed in chapter 5. Chapter 6 deals with regulatory environment of trade services
in Bangladesh.
International trade payment methods, the major trade service in Bangladesh, are discussed
in chapter 7 with their operational procedures in the country. Chapter 8 is about the trade
financing services by banks in Bangladesh.
Trade services by the offshore banking units of banks and international bank guarantees
are the contents of chapter 9. Remittance services, foreign culrency accounts, foreign
International trade is the system by which countries exchange goods and services.
Countries trade with each other to obtain things that are better quality, less expensive or
simply different from goods and services produced at home. The goods and services that a
country buys from other countries are called imports, and goods and services that are sold
to other countries are called exports. Importers and exporters are the core parties in
international trade. In terms of international trade, the responsibility of exporter (seller) is
to send the goods and that of importer is to send/make payments.
International trade occurs because there are things that are produced in a particular country
that individuals, businesses and governments in other countries want to buy. Trade
provides people with a greater selection of goods and services to choose from, often at
lower costs than at home.
In order to become wealthier, countries want to use their resources-labor, land and
capital-as efficiently as possible. However, there are large differences in quantity, quality
and cost ofdifferent countries'resources. Some countries have natural advantages, such as
abundant minerals or a climate suited to agriculture. Others have a well-trained workforce
or highly developed infrastructure, like good roads, advanced telecommunications systems
and reliable electric utilities, which help the production and distribution of goods and
services. Instead of trying to produce everything by themselves, which would be
inefficient, counffies often concentrate on producing those things that they can produce
best, and then trade for other goods and services. By doing so both countries and the world
become wealthier.
International trade brings mutual gains by redistributing product in such a way that both
parties end up holding a combination of goods which is better suited to their preferences
than the goods they held before. When nation exports, producers are better off and when
import consumers' surplus enhanced. The gain from trade is shown in the following Box-
l.l
Trade Services (Basic Level) 11
- If the world price of steel is higher than the domestic price, the corntry *ill become
an exporter of steel when trade is permitted.
- Domestic producers of steel will like to increase their output because the domestic
price moves to the world price.
- As a result, domestic consumers will have to buy steel at the higher world price.
- How Trade affects Welfare in Exporting Country:
- Domestic producers of the good are better off, and domestic consumers of the
good are worse off.
- Trade raises the economic well-being of the nation.
The most important way for a nation to become rich and powerful is to export more than it
imports. This economic philosophy is known as Mercantilism (from l6th to mid-l3th
century). The difference would be settled by an inflow of precious metal mostly gold. The
more gold a nation had the richer and more powerful it was. Thus mercantilists advocated
that the govemment should stimulate exports and restrict imports. Since not all nations
could have an export surplus simultaneously and the amount of gold in existence was
fixed at one time, a nation could only gain at the expense of the other nations.
Smith explained that if each nation specialized in (or produced more than it wanted to
consume domestically of) the commodity in which it was more efficient, and exchanged
this excess for the commodity in which it was less efficient, the output of all commodities
entering trade would increase. This increase would be shared by all nations that
voluntarily engaged in trade. Thus, the gains from trade would arise from specialization in
production and trade. These gains would be maximized when the government interfered as
little as possible with the operation of the domestic economy (laissez faire) and with
international trade (free trade).
Ricardo writing after 40 years than Smith stated that even if a nation has an absolute
disadvantage in the production of both commodities with respect to the other nation,
mutually advantageous trade could still take place. The less efficient nation should
specializein the production of and export of the commodity in which its absolute
disadvantage is iess. This is the commodity in which the nation has a comparative
advantage. On the other hand, the nation should import the commodity in which its
absolute disadvantage is greater. This is the area of its comparative disadvantage. This is
known as the Law of comparative advantage - one of the most famous and still
unchallenged laws of economics.
International trade increases the number of goods that domestic consumers can choose from,
decreases the cost of those goods through increased competition. It allows domestic industries
to ship their products abroad. While all of these seem beneficial, free trade isn't widely
accepted as completely beneficial to all parties. Here comes the concept of trade barriers.
These barriers are measures that governments or public authorities introduce to make imported
goods or services less competitive than locally produced goods and services. The most
common barriers to trade are tariffs, quotas, and nontariff barriers. A tariff is a tax on imports,
which is collected by the government and which raises the price of the good to the consumer.
A quota is a limit on the amount of a certain type of good that may be imported into the
country. A quota can be either voluntary or legally enforced. While tariffs and quotas are
traditional tools for the purpose mainly to protect domestic industries, there are other barriers
which have become more important in the world of today. These trade barriers are seen as 'the
tools of new protectionism'. The tools of new protectionism are Voluntary export restraints,
Technical, administrative, and other regulations, International cartels, Dumping, Export
Subsidies etc.
The Balance of Payment (BOP) is a statistical statement designed to provide, for a specific
period of time, a systematic record of an economy's transactions with the rest of the world.
The basic convention of a BOP statement is the double entry accounting system in which
every transaction is represented by two entries of equal value. A credit-entry records the
provision of real resources denoting exports of goods and services and a decrease in
holding of foreign financial assets or an increase in foreign financial liabilities.
Conversely, a debit-entry records the provision of real resources denoting imports of
goods and services and an increase in holding of foreign financial assets or a decrease in
foreign financial liabilities. The two major classifications of transactions in the BOP
statement are the current account and the capital and financial account. In brief, the current
account shows transactions in real resources (goods, services, income) and current
transfers; the capital and financial account shows the financing (generally by way of
capital transfers or transactions in financial instruments) of real resource flows.
per 6th edition of IMF's Balance of Payments Manual (BPM6). The main source
documents for compilation of Bangladesh BOP are the records of the Authorized Dealers,
supplemented by information obtained from Bangladesh Bank, and Economic Relations
Division (ERD) of the Ministry of Finance. To compile export and import data, customs
records have been accessed. As per Balance of Payment Manual (BPM6), the standard
components incorporated in the Bangladesh BOP statements are grouped under three
major categories:
l) Current Account includes: (A) Goods and Services (B) Primary Income and (c)
Secondary Income. The Current Account Goods and services include general
capital is called investment income. Secondary Income includes official grants in food and
commodity for immediate consumption and technical assistance. It also includes workers'
remittances, other gifts and donations.
between residents and non-residents. The financial account shows transactions in financial
assets and liabilities. Capital transfer consists of transfer of ownership of fixed assets or
forgiveness of financial liabilities between residents and non-residents without quid pro
quo. It includes mainly official foreign grants (excluding technical assistance) data which
are collected from the ERD. Financial account records all transactions associated with
changes of ownership in foreign financial'assets and liabilities.
derivatives. Other investment includes all financial transactions that are not covered in the
categories for direct investment, portfolio investment or reserve asset. Under other
investment, the instrument classified under assets and liabilities, comprises trade credits,
culrency and deposits etc. Reserve Assets consist of monetary gold, Special Drawing
Rights (sDR) reserve position in IMF and foreign exchange of Bangladesh Bank.
In international trade, traders have to decide how to settle transaction and, thereby, how to
manage associated risk. And in many cases traders need financing assistance. To support
these needs arisen in trade transaction, banks play a vital role. Banks are important
facilitators of international trade. Banks act as the intermediary agent between exporter
and importer. Its role in intemational trade is to facilitate payment; and to provide finance
to exporter and importer. Banks also offer risk management services. Globally four
international trade payment methods are used. These are: Cash in Advance; Open
Account; Documentary Collection; and Documentary Credit. In cash in advance and open
account payment methods, banks role is not mandatory. They only facilitate the payment
by transferring fund from importers account to exporter's account as per the importer's
instruction. But in documentary collection and documentary credit banks play an active
role. Under documentary collection banks act as an agent of exporter to collect payment
from importer against delivery of documents. Here bank has no payment obligation. But in
documentary credit bank provide irrevocable undertaking to pay against complying
presentation. Here bank holds the primary liability to pay. Besides offering payment
facility, banks also provide finance to both importer and exporter. Finance or credit
provided to the exporters is known as export finance which is generally offered at pre-
shipment and post-shipment stage. Importers are provided financing facilities at pre-
import and post import stage. Banks shoulder risks for their clients in the process of the
facilitation of trade payments and financing services. Moreover, banks offer some foreign
exchange and commodity derivatives to minimize different risks associated with
international trade transactions.
lmporter
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Purchase/ Sales
Importer's Bank
Agreement Flow of
Goods &
Services
Exporter's Bank
Importer's Bank
Purchase/ Sales
Agreement
Exporter's Bank
against payment (D/P). The exporter can also give the buyer trade credit by drawing a bill
of exchange on him and requiring him to accept the bill when s,/he collects the documents.
Presenting Collecting
Importer
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7 Presentation of docunrents
In the payment mechanism of LlC, banks have a very active role to play and the banks
deal with documents only. Hence the payment, acceptance or negotiation under
documentary credit is made upon presentation by the seller of all stipulated documents.
These documents (e.g., bill of lading, invoice, inspection certificate etc.) provide a basic
level of proof that the right merchandise has been properly sent to the imporrer- although,
of course, there is always the chance that the documents may prove inaccurate or even
fraudulent.
Although one of the costliest, it is often considered as the most secure because the buyer is
assured that the seller will be paid only when the documents representing goods have been
delivered. Conversely, the seller is assured that the buyer will receive the documents for
ultimate delivery of the goods only when payment has been made. The security of the
transaction is assured by one or more third parties. This is normally the buyer's bank
(isstting bank), which issues the letter of credit (LlC) and the seller's bank
(advising/confirming bank), which informs the seller that the L/C has been issued and
perhaps adds its conl.rrmation to the LIC (in other words, guarantees the payment if the
seller wants to be sure the issuing bank will not default). Though legally beneficiary
Importer (Buyer/ Applicant).' Importer is the person who submits an application to the
issuing bank to open a letter of credit and thereby creates an account relationship with the
bank.
Exporter (Seller/ BeneJiciary/ Shipper/ Consignor).' Seller is the party in whose favour
the L/C is established. The seller will ship the goods and receive payments from the
nominated bank after submission of compliant documents.
Issuing Bank: The bank that issues L/C as per request/instructions of the applicant. The
issuing bank is generally, but not necessarily located in the importer's country.
Advising Bank: A bank that notifies or advises the exporter that a credit has been opened
in exporter's favour. The advising bank does not take any further risk, and has the only
responsibility of taking reasonable care that the credit is an authentic one.
Contirming Bank: The bank which adds its own undertaking (known as confirmation) in
addition to that given by the issuing bank at the request of the issuing bank.
Nominated Bank: The bank at the counter of which the credit is available in addition to
the counter of an Issuing Bank; if Nominated Bank negotiates then it is called as
Nominated Bank.; if Nominated Bank negotiates the documents then it is also called as
Negotiating Bank.
Reimbursing Bank: This is the bank, which would reimburse the negotiating bank. It is to
be nominated by the issuing bank.
Broadly documentary credits are divided into Revocable and Irrevocable LC. Revocable
LC is the credit that can any time be amended or cancelled by an Issuing Bank without the
cancelled without the concept of the main parties (Issuing Bank and Beneficiary). Under
types of LC are:
definite undertaking of the confirming bank, in addition to that of the issuing bank,
provided that the stipulated documents are presented to the confirming bank or to any
other nominated bank on or before the expiry date and the terms and conditions of the
documentary credit are compiled with either to honour or to negotiate.
Revolving Credit: A Revolving Documentary Credit is one by which, under the terms and
conditions thereof, the amount is renewed or reinstated without specific amendments to
the documentary credit being required. The Revolving Documentary Credit may revolve
in relation to time or value. A documentary credit of this nature may be cumulative or non-
cumulative.
Transferable Credit and Trunsferred CrediL' Transferable credit means a credit that
specifically states it is "transferable". A transferable credit may be made available in
whole or in part to another beneficiary ("second beneficiary") at the request of the
beneficiary ("first beneficiary").Transferued credit means a credit that has been made
available by the transferring bank to a second beneficiary.
Back to Back Credif.' The back to back credit is a new credit opened on the basis of an
original credit in favor of another beneficiary. Under the back to back concept, the seller
as the beneficiary of the first credit offers it as 'security' to his bank for the issuance of the
second credit. The beneficiary of the back to back credit may be located inside or outside
Red Clause Credit: A Red Clause Credit is a credit with a special condition incorporated
into it that authorizes the confirming Bank or any other Nominated Bank to make
advances to the beneficiary before presentation of the documents. Under the above credit,
the issuing bank is liable for the pre-shipment advances made by the nominated bank, in
case the beneficiary fails to repay or present the documents for settlement.
repay money borrowed by the Applicant, or advanced to or for the account of the
Applicant; b) make payment on account of any indebtedness undertaken by the Applicant;
or c) make payment on account of any default by the Applicant in the performance of an
obligation.
the principal, while the beneficiary conducts business in a foreign country. Such three-
party demand guarantees are known as 'direct guarantees'. On the other hand an indirect
guarantee is a four-party demand guarantee, and there is an additional contract, that is, the
contract between the instructing party (principal's bank) and the guarantor (local bank in
the country of the beneficiary). This contract has two aspects: one, the mandate from the
instructing party to the guarantor regarding the instruction to issue the demand guarantee,
which the guarantor as mandatory must comply with if he accepts the instruction; and two
the counter-guarantee (or counter-indemnity) that the guarantor requires from the
instructing parry as a pre-condition for issuing the guarantee and that is distinct from the
mandate. In indirect transactions the principal's contract (mandate) is with the instructing
party, not with the guarantor.
3.1.7 Bank Payment Obligation (BPO) and Supply Chain Finance (SCF)
BPO is a payment tool offering a level of security similar to that of a letter of credit. The
BPO is an irrevocable undertaking on the part of an obligor bank (typically that of a
buyer) to recipient bank (typically that of a seller) to pay a specified amount on agreed
date on condition of a successful matching of electronic data according to rules adopted by
the ICC.
Using SCF banks provide technology and other services to facilitate payments and
financing within supply chain of enterprises. The services within a SCF platform include
typical elements of financing for intemational trade (like pre-shipment and post-shipment
financing, purchases and discounting of receivables, etc.) but not LCs. The objective of
such a platform is to bring within a single unit of bank financial services related to supply,
and services. Factoring is suitable for financing smaller claims for consumer goods,
whereas for faiting is used to finance capital goods exports.
Suppliers' credit applies when the exporter's bank lends the money direct to the seller. It is
a form of posrshipment finance. Supplier's credit may also be defined as a financial credit
facility that is extended to a local buyer by the foreign Seller/ bank/ financial instirutions,
preferably of seller's Country. The local bank will issue usance bills under the LC for the
Importer and in retum the foreign bank will discount this LC.
o How many trade payments methods are available globally? Name these. (3.1)
o Under cash in advance, exporter's risk is completely protected. Justify. (3.1.1)
o What is role of banks under documentary collection? (3.1.3)
o How many parties are there in documentary collection? Name these. (3.1.3)
o Documentary Credit offers protection to both exporters and importers. How? (3.1.4)
. Why LC needs confirmation? Name the core parties of ConfirmedLc? (3.1.4.1)
o What are the roles of an advising bank? (3.1.4)
o Confirming bank's liability is secondary. Is it true? Explain. (3.1.4)
o Differentiate between transferrable LC and transferred LC. (3.1.4.1)
o what is a back to back LC? why back to back LC could be risky? (3. I .4. r )
o Distineiuish between direct bank guarantee and indirect bank guarantee. (3.1.6)
o What is factoring? How it is different from forfaiting? (3.1.8)
o What is the objective of supply chain finance? (3.1.7)
o What is bank payment obligation? (3.1 .7)
o What is Supplier's credit? (3.1.8)
o Def,rne global concept of buyer's credit. (3.1.8)
o Name and address of applicant, the applicant's bank/ collecting/ presenting/ buyer's
bank
o Name and address of the beneficiary's bank /nominated/ remitting/ seller's bank
o Total value and full description of goods (specification, quantity, unit price, etc.)
o Last date of shipment, date of expiry and documents required
o Payment terms: method, tenor, trade terms etc.; and wanantyl guarantee/
undertaking
o Dispute settlement process (arbitration or litigation and the goveming laws)
o Retention of title
o Liquidated damage clause; and force majeure.
4.1.2 The United Nations Convention on Contracts for the International Sale of
Goods [CISG]
The CISG, which is popularly known as Vienna Convention provides a uniform
framework for contracts of sale of goods. The CISG was developed by the United Nations
Commission on International Trade Law ITINCITRAL], and was signed in Vienna in
1980. The CISG allows exporters to avoid choice of law issues, as the CISG offers
acceptable substantive rules on which contracting parties. courts, and arbitrators may rely.
As of September 2014, it has been ratified by 83 countries, which account for a significant
proportion of world trade. Under the treaty, the parties, which come from all legal
traditions, having different economies together account for over two thirds of global
4.1.3 Uniform Customs and Practice for Documentary Credits (UCP 600)
UCP 600, the current version of UCPDC, is the collection of rules governing the issuance
and execution of letters of credit in the cross border exportation and importation in the
global economy. The rules of the UCP have been formulated in a manner that has almost
equally protected the interests of both the exporters and importers. UCP, the popular title
Trade Services (Basic Level) 34
It asserts generic provisions for other documents. UCP focuses particularly on uniformity
in the examination of documents by banks. Here matters of particular interest to the cross-
border trade include the basic responsibilities of banks when examining documents
tendered for payment under documentary credit governed under UCP 600, and the
requirements pertaining to different types of documents. UCP 600 defined the term
countries with widely divergent economic and judicial systems is a testament to the rules'
success. In Bangladesh, LC can only be opened and received within the framework of
UCP 600 since July 2007. This electronic supplement came into force on April I ,2002.
third bank known as 'Reimbursing Bank'. And the process of making reimbursement
using the service of the Reimbursing Bank is known as Bank-to-Bank Reimbursement
Arrangement. It has been referred to in article l3 of UCP 600; however, the process is
guided by a separate ICC set of rules titled, The Uniform Rules for Bank-to-Bank
Reimbursements under Documentary Credits, (ICC publication No 725) which came into
effect from October 1,2008 containing 17 articles. To get coverage of the rules, it must
be stated on the face of reimbursement authorization issued by the Issuing Bank. As in the
case of UCP 600, the URR 725 permits modification and exclusion of any provision of the
Trade Services (Basic Level) 36
shipment of goods.
new set of rules for demand guarantees into the 2lst century: rules that are clearer, more
precise and more comprehensive.
4.l.9Incoterms 2010
From the lst January 2011, the ICC's Incoterms 2010 came into force. This is the eighth
revision of the Incoterms Rules, with the last revision dating back to 2000. The
introduction to the new 2010 rules stresses the need to use the terms appropriate to the
goods, to the chosen means of transport and to whether or not the parties intend to impose
additional obligations on the seller or buyer. In addition, there are guidance notes (and a
diagram) at the front of each incoterm rule containing information to assist in making a
choice on which rule to use. The new rules have been separated into two classes: rules for
use in relation to any mode or modes of transport; and rules for sea and inland waterway
transport, where the point of delivery and the place to which the goods are carried to the
buyer are both ports. Incoterms 2000 had 13 terms whereas Incoterms 2010 has ll terms.
Four D terms (DAF, DES, DEQ, DUP) of the Incoterms 2000 have been replaced by two
D terms (DAT, DAP) in the most recent version.
now provide the basis for carriage of goods by sea. The Warsaw Rules 1929 exist for air
transport and there have been variations, most notably in Montreal rules adopted in 1975'
Since rail/road does not link the continents, as do sea and air transport, it should not be
surprising that railiroad transports lacks a global, multilateral set of rules. Nonetheless, in
Europe and in certain contiguous countries linked to European rail network, rail transport
is governed by the 1980 Convention conceming International Carriage by Rail [COTIF],
which entered into force in 1985 and applies in around 40 countries. Similar to the rail
transport, a number of countries-mostly European- have signed CMR 1956 convention on
the Contract for the Intemational Carriage of Goods by Road. Other than these, UN
Convention on the Intemational Multimodal Transport of Goods [980] covers
multimodal transport.
In documentary collection and documentary credit payment methods, banks are directly
related with documents. Under documentary collection, documents are two types;
commercial documents and financial documents. Under financial documents, documents
which show the financial claim are included like bill of exchange, cheque, and promissory
note etc. And commercial documents include all documents like bill of lading, insurance
policy, commercial invoice, certificate of origin etc. except the financial documents. On
the other side in documentary credit. documents are divided in four groups; transport
documents, commercial invoice, insurance documents and other documents. The
requirements and nature of documents depend upon purchase/sale agreement. In case of
LC, these documentary requirements are noted in the LC itself.
The invoice/commercial invoice, in ultimate sense, 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. Invoice shows the description of shipped goods. Commercial invoice
cannot be replaced by pro-forma invoice or provisional invoice, as these two show the
description of offered goods.
The importer may require several copies of the invoice to satisff his/trer own needs and
also those of customs and other authorities in his country. The authorities may also require
the invoice to bear other details such as the name of the vesseVcarrier, the ports of dispatch
and destination, freight, insurance, origin of goods etc. There is no standard form for
commercial invoice. Each exporter designs its own commercial invoice form. Basic
contents of a commercial invoice are noted in Box-5.1; and a sample of commercial
invoice is given in figure 5.1.
Table-S.1: Basic Contents of a Commercial Invoice
- Name and address of the Buyer and
- Shipped Goods description
- Unit price (if any) and total price
- LClContract Currency
Trade Terms and source of Trade Terms
Date and Sign are not mandatory as per UCP 600
Advance Payment , discount, transportation and insurance charges can be
mentioned
Consular Invoice, Customs Invoice, Certified Invoice, Tax Invoice, and Legalized Invoice.
Consular Invoice: Consular Invoice is required by some countries for their imports. It is
made out on a prescribed format certified by the consulate of the importing country
stationed in the exporter's country. It serves the purpose of authenticating the particulars
of the goods that are to be imported into their country. But in some cases it is also seen
that exporter's own invoice are authenticated by the embassy or consulate (instead of
issuing consular invoice). then these invoices are to be called'Legalized invoices'.
Customs Invoice: Some countries require custom invoices. These are the specific forms
supplied by the consular office of the respective importer. duly filled and signed by the
shipper and serve the purpose of making easy entry of the merchandise into the importing
country usually at pref-erential tariff rates.
Certijied Invoice: An importer may require a certifled invoice. which an invoice. bearing
a signed statement by someone in the importer's country u,ho hal'e inspected the goods
and fbund them in accordance u,ith those specified in the contract.
Trade Services (Basic Level) 45
commercial invoice and in terms of the documentary credit. In addition, the invoice must
show that it has been legalized by the embassy or consulate of the country of import in the
country of export or as specified in the documentary credit, or notarized by a notary
public.
Tax Invoice: A tax invoice is an invoice issued by a registered dealer to the purchaser,
showing the amount of tax payable.
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liBCtrI l l.t56v
IIXT) KCS
contract of carriage and are not transport documents according to UCP-600 rules (19-25).
5.1.2.2 Transshipment
Transshipment generally means transfer and reloading from one mode of transport to
another mode of transport or from one vessel to another vessel within the same mode of
transport.
A transport document indicating that the goods will or may be transshipped is accepted
provided that the entire carriage is covered by one and the same T/D. Moreover, even after
prohibiting transshipment under BlL, a transshipped B/L is acceptable, if the goods are
shipped in a container, trailer or LASH barge. Some concepts related to transport
documents are important to understand by banks Box-5.3.
International trade is very much risk ridden. So, it is necessary to insure the goods against
the risks of loss or damage. Insurance is a contract whereby the insurer is undertaking to
indemnifu the assured to the agreed manner and extent against fortuitous losses. Insurance
is, therefore, a contract of indemnity.
policy. The man (or firm) who undertakes to insure is called insurer. When the insurer will
subscribe his name in the policy then he will be called an underwriter. The owner of the
goods (which are insured) 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 interest. The payment for which insurer undertakes to indemnify is
termed as premium. An insurance document should carry certain information that is noted
in Box-5.4; and a sample of insurance document is given in figure 5.3.
('ERTIF'l('.\TL \().(n) I
This is to certlft that insurane of interesl as spcified txlou and so r.alued has httn effecled subject lo lhr'terms
and condition slrciFtcd overleaf aod to tlr sptcial corxliliont staled tx-lou.
Assurcd( s),: Amounl Insured:
USD5O.0m.00 {USD Fitiy
To bearer Thou*rrrd Orrli )
I\SI.]R{NCE CERTIFICATE
Clainr payablc at destinatiott:
At from Bill of Lading Date Pay to the Order of f,'ancy Goods Sin Ltd
120 days
Fifty three thousand US Dollars
Bill of Lading Date-l1 March XX
For value received
To Shapphire Bank,
Honk Kong Fancy Goods Sin Ltd.
(Signed/-)
John Smith
other than by sea. Weight list can be evidenced either by means of a separate document, or
carrier or his agent. It can take the form of 'weight list' and /or 'packing list'. The former
is the list of the weights of the individual parcels and the latter is the list showing details of
the goods contained in each case or packet. Sometimes, measurement list' is also required
Certiticate of Origin: For goods imported to some countries, especially those which have
a reciprocal tariff agreement with the exporter's country, a certificate of origin is required.
This certifies that the goods are produced in a particular country and may thus be eligible
producer that the goods have actually been produced by him/trer in his/her factory.
Similar Certificates requiring additional information (than certificate of origin) are often
required where there is conflict between countries and imports from the enemy
country(ies) are 'blacklisted'. 'Blacklist Certificates' are the evidence that all parties
involved, including the bank and shipping line, are not Blacklisted and that the ship will
for shipping documents to contain something more than a certified invoice as an evidence
the importer about the precise strength or chemical composition of the goods. A 'health
certificate' may be required in respect of live animals, meat, hides etc.; while a
Inspection Certiftcate: It is a confirmation that the goods have been inspected prior to
shipment and found as per requirements of the client (importer) and generally issued by a
neutral organization. It is also called survey report (unlike the insurance survey report to
Other than the above mentioned key rules/guidelines, some other domestic regulations/acts
like Customs Act 1969, Pre-shipment Inspection Act, 2002 are indirectly related. A few
other ICC publications like International Standby Practices [ISP-98], Uniform Rules for
Demand Guarantee [URDG 758], and Documentary Instruments Dispute Resolution
Expertise Rules (DOCDEX) etc. are also relevant. Some of these relevant rules and
guidelines have been summarized below:
3In practice, importers and exporters are to submit a diverse set of documents like Receipt of the deposited
fees, TIN, VAT, Nationality Certificate, Bank Solvency Certificate, Trade License; Certificate from
Chamber/ Registered Trade Association, Certificate from Board of Investment, Rent Receipt; Partnership
Deed/ Memorandum of Association/ Article of Association, etc. to the CCI&E of the Ministry of Commerce.
It is to be mentioned that govemment ministries do not require IRC for importation.
aFor
example ICC and UNCITRAL designed formats of standard purchase/sale agreement.
Trade Services (Basic Level) 50
related conditions. The Export Policy of 2015-18 has considered software and ICT
products, agro-products and agro-processing products, light engineering products
(including auto-parts & bicycles), shoes and leather products, pharmaceuticals products,
textile, shipbuilding, toiletries products as the thrust sectors for our export development. In
addition, electronic products, handicrafts, herbal medicine and medicinal plants,
production of finished leather, frozen fish production and processing, natural flowers, jute
products, plastic products, ceramic products, service export, fumiture, uncut diamond etc.
have been considered as special development sectors. The document is divided into seven
chapters covering broad strategies, general rules for exports, steps for development and
decentralization of exports. It includes lists of the restricted and conditional exportable
items. The current export policy has accommodated fiscal, financial and other incentives
in line with the requirements of globalization.
5lmporter
must get information about the requirement of PSI for a product and name of the PSI agencies
appointed for the purpose for different regions. According to the rules, Issuing Bank must add condition
related to (where applicable) pre-shipment inspection in the LC; and must send an attested copy of the LC,
insurance cover note, TIN certificate and VAT certificate to the concemed inspection office at Dhaka. In
case of import through LCAF (without LC) the copy of the LCAF along with other documents must be sent
(PSI Rules 2002).
Trade Services (Basic Level) 63
Source: Based on GEET 2009; Relevant FE Circulars; Import Policy order 2015-lB
- Transport documents should be drawn to the order of a bank; all shipping documents
must be passed through AD within 14 days of shipment; Commission, brokerage or
other trade charges to be paid to foreign importers may be deducted from sale proceeds
up to a maximum of 5 percent of value.
- Exports are allowed using EXW, FCA, FoB, FAS, cFR, cIF, cpr and clp provided
those are stipulated in the relevant LC or sales contract; Export proceeds must be
received by the exporters within four months; ADs may issue PRC only after being
confirmed about the realization of such proceeds.
- ADs are allowed to remit up to USD 10000 from Exporters Retention Quota Account
subject to some conditions; Advance payment by ADs are allowed from Exporters
Retention Quota not exceeding USD 10000; Exporter may get up to 90 percent credit of
the amount against LC or confirmed contract.
- Exports from EPZs are subject to the usual requirement of declaration of exports in EXP
Form and repatriation of export proceeds; for identification, EXP forms for these exports
should be rubber stamped or printed with words "EXPORT FROM EPZ" inbold letters.
- EPZs enjoy freedom from national import policy restrictions; import of raw materials are
also allowed on Documentary Acceptance (DA) basis; no restriction on using letter of
credit as trade payment method; advantage of opening back to back LC for certain fypes
Trade Services (Basic Level) 64
r What are the permitted incoterms in case of exports and imports in Bangladesh? (Box
6.1)
o How the Export Retention Quota account can be used in trade service? (Box 6.2)
o Why bankers should be cautious in issuing EXP Form? (Box 6.2)
o What information must be mentioned in delivery chalan under import? (Box 6.3)
o What are the domestic regulations creating conflict with UCPDC? (Box 6.4)
Ideally four categories of trade payment methods are in use to facilitate and receive
payments in the country:
. Cash in advance.
o Open account,
operation not only for their own customers but also for the customer of Non-AD branches.
Under centralized arrangement, trade services are offered through a centrally managed
department or unit. Sometimes a hybrid alrangement is followed under which customers
of non-AD branches are served from a centralized unit and AD branches serve their own
customers.
Step-S: Reporting . reporting to Bangladesh Bank as per the directives of GFET and
to BB as per the requirement so central bank
,-
Step-2: Receipt of o transfer of fund by the foreign importer through the banking
Export Proceeds in channel
Advance
Step-3: EXP a
-
the customs after assessment and verification authenticates the
Issuing and Bank EXP and issues exporter's bank issues EXP
Endorsement of a the exporter or its C & F agent submits the EXp along with
8Books, joumal, import under repayment guarantee and import using ERQ (GFET 2009).
Trade Services (Basic Level) 72
Step-4: Shipment local exporter arranges shipment and sends the shipping
by the Local documents to the foreign importer either through banking
Exporter and channel or directly.
Sending Shipping
Documents
o
l
reporting to Bangladesh Bank as per the directives of GFET and
Step-S: Reporting as per the requirement so central bank.
to BB
Step-2: Shipment
I
exporter arranges t6Eshipment and sends the shipping
by the Foreign documents to the local importer
Exporter and
Sending Shipping
Documents
eBanker
and exporter will be considered equally liabte if export proceeds are not received within 4 months
following the date of shipment (GFET 2009).
Trade Services (Basic Level) 73
Step-4: Fund o
l )7
,7
Step-S: Reporting . reporting to Bangladesh Bank as per the directives of GFET and
to BB as per the requirement so central bank
- --
Step-2: EXP the bank issues EXP
Issuing and Bank & F agent submits the EXP along with
the exporter or its C
Endorsement of other documents to the customs for clearance of goods for
Shipping export
Documents the customs after assessment and verification authenticates the
EXP and issues shipping bill,/bill of export.
the exporter submits documents along with EXPs to the bank
,-
Step-3: Shipment o -
local exporter arranges shipment and sends the shipping
by the Local documents to the foreign importer through the banking channel
Exporter and
Sending Shipping
Documents
Step-S: o -
Reporting reporting to Bangladesh Bank as per the directives of GFET and
to BB as per the requirement so central bank
Step-2: Shipment exporter arranges the shipment and sends the shipping
by the Foreign documents either to the bank of the local importer or to its
Exporter and correspondent agent, as mentioned in the agreement
Sending Shipping
Documents on
Documentary
Collection Basis
Step-4: Reporting . reporting to Bangladesh Bank as per the directives of GFET and
to BB as per the requirement so central bank
Z:
Step-2: EXP o when the shipment takes place, the respective bank issues EXp
Issuing, Shipment o the exporter or its C & F agent submits the EXp along with
by the Local other documents to the customs for clearance of goods for
Exporter and export
Procurement of o The Customs after assessment and verification authenticates the
Shipping Document EXP and issues shipping bill/bill of exporr
o The exporter submits documents along with EXPs to the Bank.
_l 7
Step-3: Submission . as exporter sends the shipping documents to the foreign
of Shipping importer through banking channel so approaches a bank
Documents to a (remitting bank)with collection order/instruction.
Bank with o Remitting Bank forwards documents to its corresponded bank
Collection Icollecting bank]
Order/Instruction o The importer collects the documents either on DA or DP basis
T
Step-5: Reporting reporting to Bangladesh Bank as per the directives of GFET and as
to BB per the requirement so central bank
fL
Trade Services (Basic Level) 77
o
{-r
intimation about the receipt of document to the customer
Step-S: Lodgment o effect payment through creation of PAD
and Retirement o retirement of documents through adjustment of PAD as per
arrangement
J.!
Step-6: Reporting to o reporting to Bangladesh Bank as per the directives of GFET
Bangladesh Bank and as per the requirement so central bank
+
a signing the sales/purchase agreement
Step-2: Advising and a bank receives an export LC, sends a notification letter to the
Lien of export LC exporter and advise the same accordingly
a bank lien marks the respective export LC being requested by
the exporter
__ ,7
U
St.p-rt Frrr-ng Arrangement
u
between the lmporter and the Bank'
U
Step-4: Issuance of letter of creditrr
IT
Step-S: Send Copies of LC to Land Por-t
'n Obtaining PI/ quotations; negotiating the tenrs & conditions of the agrecmenti signing the sales/purchase
agreement; v'erification of quoted prices by the banks
" Opening of CD account and an FC account. iland u'hen necessary: obtaining CIB report from Bangladesh
Bank.; obtaining bank's internal approval regarding opening of LC, margin requirement, financing option
for retirement etc.
rr
Approaching bank by the importer to open LC along u'ith the follou'ing documents: duly filled up LCAF,
LC application form, Imp form. proforma invoice or indent. insurance cover note. valid IRC, valid trade
license, up to date TIN certificate. mernbership of relevant trade association/ certificate from chamber of
commerce. declaration from the importer regarding income tax submission and any other permission like
import permit etc.: obtaining of credit report of the supplier
't Issuance ofLC according to PI or indcnt
Trade Services (Basic Level) 79
-
Different types of LC are there in practice that includes transferable, confirmed, back-to-
back, revolving, red clause and standby letter of credit. Of the different types, transferable
and back-to-back are commonly observed in Bangladesh. Back-to-back is basically a
financing technique. The operational procedure of back to back L is given in figure 7. 10.
Figure 7.10: Operational Procedure of Back to Back LC in Bangladesh
Steps Activities Involved
. Buyer and seller make a contract to do intemational trade.
Step-1: o Buyer (Applicant) requests to its bank (Issuing Bank) to open
an LC in favor of the exporter (Beneficiary) if the method of
payment is documentary credit.
o Buyer's bank (lssuing Bank) issues LC, usually this is known as
Master Export LC, in favor of the beneficiary.
ra
Issuing Bank issue delivery order as per customer request along with duly certifies commercial invoice,
packing list and truck receipt. Custom purpose LCAF copy, Profonna invoice, lnsurance Cover note, Money
receipt and copy ofLC may also require taking delivery ofgoods from land port authority.
rs
Intimation about the receipt of document to the iustomer; effect payment through creation of pAD;
retirement of documents through adjustment of PAD as per arrangement
l6Reporting
LCAF, IMP form, proforma invoice and commercial invoice to the Bangladesh Bank along with
monthly return
Trade Services (Basic Level) 80
u
Step-4: Suppliers of yam and accessories submit documents to the
issuing bank of Back to Back LC.
Issuing Bank of Back to Back LC examines documents and
gives the maturity date to the beneficiary of the Back to Back
LC.
In connection with the operation of transferable LC, banks of Bangladesh and exporters
have been facing some difficulties. It is mainly connected with the practice of 100 percent
''As per UCP 600, article 38 (k), the documents presented by the second beneficiaries must be submitted at
the counter of transferring bank for substitution. For 100 percent transfer, it is not needed. It simply
lengthens the settlement process. Later on, the commentary of UCP 600 released by ICC came up with some
solution according to which First Beneficiary/Transferring Bank should inform second beneficiary and
Issuing Bank that the documents can directly be sent to the counter oflssuing Bank in case of 100 percent
transfer. ICC already published an opinion on the issue [official opinion R-653].
Trade Services (Basic Level) 81
'8....every bill of exchange payable otherwise than on demand or promissory note drawn or made out of
Bangladesh on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed,
transferred, or otherwise negotiated, in Bangladesh. . ... [Chap II, section 3 (b) Stamp Act 1899].
Ie
Import of lime stone, coal and 100 percent export oriented industries.
Trade Services (Basic Level) 82
. Explain the operational procedure of open account for exports and imports in
Bangladesh . (7 .1.2)
o In Bangladesh, unless otherwise specified, import must be done using LC. Why?
(7 .t.4)
o What is the operational procedure of documentary collection in exportation in
Bangladesh? (7.1.3)
Bangladesh(7.1.3)
o What is the operational procedure of documentary credit in exportation in Bangladesh?
(7 .1.4)
transportation, insurance etc. These cash credit facilities are commonly provided against
hypothecation, and against pledge. Packing Credit, the most popular form of pre-shipment
credit, is extended against transport documents evidencing transportation of goods. Back-
to-Back Letter of Credit is a financing arrangement between bank and exporter commonly
to import raw materials for preparing exportable. Exporter obtains Export Development
Fund (EDF)20 facilities to meet foreign currency requirements mainly to import raw
materials under back-to-back arrangement. EDF faciliry is now faster and bigger in terms
ofprocessing and fund availability as compared to any recent past. The facility is now
expanded to export oriented manufacturing units in certain sectors like BTMA member
mills, BGAPMEA and BPGMEA member accessories/packaging material manufacturer-
exporrers can access for input imports in bulk based in addition to import under BTB
LC
Association (BCWMA) are also allowed to draw EDF finance for bulk imports'
Necessity of post-shipment credit arises as the exporter cannot afford to wait for a long
time without paying manufacturers/suppliers or remain out of fund for long. Before
extending such credit, it is necessary for banks to look carefully into the financial
soundness of exporters and importers/buyers as well as other relevant documents
r0To promote non-traditional manufactured items export business of Bangladesh, lnternational Development
Association (lDA) in 1989 arranged an Export Development Fund (EDF) initially. The main objectives of
creating an dxport Development Fund (EDF) at the Bangladesh Bank is assure a continuous availability of
foreig[exchange to meet the import requirements of non-traditional manufactured items.
Trade Services (Basic Level) 87
Trust Receipt must be adjusted within the stipulated period. Practice of LTR as an import
financing technique through ocean mode has now become very popular. Banks also offer
shipping guarantee/ delivery order/airway releases to facilitate releasing of goods when
goods arrived prior to the documents.
EDF loans from BB are repayable by the ADs upon receipt of proceeds of the relative
exports (except in case of loans for bulk import of cotton and other textile fiber by BTMA
Trade Services (Basic Level) 88
and instructions laid down in the GFET 2009 and subsequent circulars of BB.
o EDF financing will be admissible for input procurements against back to back import
LCs/inland back to back LCs in foreign exchange; by manufacturers producing final
output for direct export, and also by producers of local deliveries of intermediate
outputs to manufacturers of the final export
- BTMA mills to make bulk import of raw cotton and other fibres.
- Member mills of the Bangladesh Garments Accessories& Packaging Manufacturers &
Exporters Association (BGAPMEA) making bulk import of raw materials for local
deliveries of garment accessories
- Member mills of the Bangladesh Plastic Goods Manufacturers and Exporters
Association (BPGMEA) making bulk import of raw materials for local deliveries of
garment accessories
- Member manufacturer-exporters Leather goods & Footwear Manufacturers
of
&Exporters Association of Bangladesh (LFMEAB) and Bangladesh Ceramic Wares
Manufacturers' Association (BCWMA).
- Members of Bangladesh Dyed Yarn Exporters'Association
- For input procurements by Type C industries in Export Processing Zones against back
to back import LCs.
Govemment of Bangladesh has given Bonded Warehouse benefit for wide range of
industries to expedite the export. A 100% export oriented manufacturing unit can get
bonded warehouse. It is a secured facility supervised by custom authorities, where dutiable
imports are stored to be used in producing export products and the import materials are
free of import duties, taxes, and other charges. It is also called customs warehouse. Four
Types of Bonded Warehouse Licenses are available; Direct Export industry, Deemed
Export industry, Diplomatic and Duty free EPZ. Only recognized export oriented
industrial units operating under bonded warehouse system will be allowed to open back to
back LC facility. The unit requesting for the facility should possess valid registration with
the CCI&E and valid bonded warehouse license.
Cash incentive is the assistance in the form of the 'Cash' given to any party on the
fulfillment of some certain conditions. Only one party among the manufacturer, fabrics
supplier and exporter will get cash incentive. Applicant for cash incentive will submit his
application to the negotiating bank or exporters'bank or beneficiaries'bank within 180
days from the realization of export proceeds. Cash incentive will be payable only the
export price is received in foreign currency. Back to Back LC must clearly indicate who
will be the beneficiary of the cash incentive. If the name and address of the applicant as
cash incentive is not mentioned in the Back to Back LC. Applicant of cash incentive will
be rejected immediately.
Authorized Dealers, after necessary information and certificates, will compute payable
amount as cash incentive to applicant. ADs will also issue Proceeds Realization Certificate
(PRC) after reporting EXP repatriation in BB retum. After calculation of the payable
amount, ADs will send cash incentives files to BB enlisted audit firm of cash incentive for
necessary scrutinization or certification. After receiving certificate from audit firm, cash
incentive claim by ADs will be sent to BB for repatriation through respective departments
of head office. As soon as the cash incentive is approved from BB, PRC will be sealed
with 'Cash Incentive Paid 'and signed by the very person who has approved the payment.
It is done so that PRC cannot be misused otherwise. All the cases of cash incentive will be
examined by Intemal Control and Compliance Department (ICCD) of concerned bank.
Apart from this, all the documents will have to be preserved by banks for further inquiry
ofBB.
Trade Services (8asic Level) 90
o What are the available post shipment export financing facilities in Bangladesh? (8.1)
o What are the available import financing products in Bangladesh? (8.2)
o Why LIM is not popular trade financing tool for the banks in Bangladesh? (8.2)
. Why LTR is getting more popularity over LIM in banks? (8.2)
o What is the purpose of EDF? (8.3)
o What are the eligibility criteria for getting EDF facility in Bangladesh? (8.3.1)
o What is bonded warehouse? (8.3.2)
o Who can issue the bonded warehouse license? (8.3.2)
o What is the purpose of issuing bonded warehouse license? (8.3.2)
o What is a cash incentive? (8.3.3)
o Explain the operational procedure of cash incentive? (8.3.3)
growing instances of offering international demand guarantee services by banks, and a few
instances of standby LC in the country. Constant growth of business activities and
complexity of business connections between distant clients results in a growing use of the
instruments for securing receivables and unstable business. This is true for Bangladesh as
well as most of the other economies of the world. In Bangladesh, most of bank guarantees
received are indirect or counter guarantees. Government sector is the main recipients of
international bank guarantees in Bangladesh.
In Bangladesh, most of the bank guarantees issued are direct guarantees. Most of the direct
bank guarantees issued are performance guarantees. And other major type of bank
guarantee is advance payment guarantee for trade purposes. Indirect guarantees are issued
mainly to support government sectors. Bank guarantees issued to obtain foreign loans is a
relatively recent development and a potential area for the future. In the wake of the recent
financial crisis, the foreign banks, foreign FIs, multilateral institutions/development
organizations (IFC, IDB, ADB, DEG, FOM and various foreign banks), are moving
toward emerging economies like Bangladesh to invest their ample unemployed fund ,as
the lending rate is very much higher as compare to the same in the developed countries.
On the other hand, the applicable interest rate of foreign currency loan offered by the
foreign investors is also attractive to our medium and gigantic private sector enterprises
due to upper trend of interest rate in the local market. In recent time, this trend has got a
new paradigm due to direct patronization of the Bangladesh Bank as the foreign culrency
inflow in the form of loan, has overall positive impact of Balance of payment of the
country. Previously, only a few big corporates availed of this facility, but now it has
become cornmon phenomena for medium size industry as well. There are cases, when the
In regard to the operational procedures, the following process flow figures reveal different
steps in case of both direct and indirect bank guarantees (figures-g.1 to 9.4).
Under section 14, of the Bangladesh Export Processing Zones Authority (BEPZA) Act2l,
1980, Bangladesh bank provides offshore license to the banks in Bangladesh. Offshore
banking units are allowed to offer services in foreign currencies. The banking unit opened
up banking facilities for the Type-A, industry situated at EPZ area and extending
discounting facilities to the ADs in order to meet up their obligations abroad at relatively
lower interest rate. However, enterprise in the country may also enjoy foreign currency
loan from the Offshore Banking Unit at lower interest rate subject to the approval of the
Board of Investment. Practically, the major lending function as a part of core banking
activities are basically captured by the OBUs belonging to foreign banks due to
availability of low cost fund and global network. OBUs of the local banks are basically
concentrating on discounting business of its different ADs import bills under UPAS credit
arrangement.
country, the operations of the OBUs have been exempted from certain provisions of
banking laws of the country; and OBUs regardless of their location in Bangladesh, would
get coverage under BEPZA Act, 1980. OBU license is given by the Bangladesh Bank and
the bank applying for license for off-shore banking unit are expected to have well
established links with important international financial center. There is no restriction on
the physical location of OBUs i.e. these may be located both in the Export Processing
Zones or any other convenient location outside. Even existing branches of banks may be
allowed to operate such units through a completely separate counter. However, as part of a
2r
The authority may, with the approval of Bangladesh Bank, permit Banks, foreign and local to operate in a
zone and to have as their constituents persons not resident in Bangladesh and accept deposits on current
account or otherwise from such persons.
"r3lnBCD CircularNo.(p)144(27), dated 7 December, 1985.
exercise of the powers conferred by section 93 of the Banking Companies Ordinance, 1962 (LVI of
1962), the Govemment, on the recommendation of the Bangladesh Bank, is pleased to declare that the
provisions ofthe said ordinance except those ofsections 21,28,32(2),33,40,41,42,83(l),83(3),83(5),
85,93 and 94 shall not apply to a bank permitted to operate in a zone under section 14 ofthe Bangladesh
Export Processing Zones Authority Act, 1 980 (XXXU of 1980), until further orders.
Trade Services (Basic Level) 98
Dollar. Considering the counterparties, the transactions of OBUs can be categorized into:
Offshore to offshore; Offshore to Onshore; OBU with EPZ entities; OBU with Entities
outside EPZ [table-9. 1 ].
Offshore to offshore
o Treasury function- foreign currency buy and sell
o Borrowing from another offshore outside the country
Offshore to onshore
o Treasury function- foreign currency buy and sell
o Discounting of import and export bills of own ADs
o Discounting of other AD"s import bill
OBU activities with EPZ Industries
o Institutional Deposit especially from Type-A industry
o Lending to Type A Industry including import and export formalities
o Lending to Type B and Type C industries subject to prior approval from BOI
OBU with Entities outside EPZ
o Lending to the enterprise in Bangladesh subject to prior approval from BOI
OBUs have been given certain exemptions related to reporting and tax. OBUs records can
only be accessed by the central bank of the country. OBUs are required to submit
reports/returns to the Bangladesh Bank as and when asked for, Interest payables on foreign
currency loans/deposits obtained by OBUs from outside Bangladesh are exempted from
payment of income tax. In Bangladesh, there is a ten-year period of tax holiday for
companies based inEPZ, which is not applicable for OBUs of the country. Thus, this tax
exemption benefits the clients of the OBUs. In the country, OBUs income is merged with
the income of the bank and very much within the corporate tax rate applicable for the
income of the banking institutions of the country.
Currently, the country has 51 OBUs those are ownedby 32 banks of the country i.e.57
percent banks of the country have been awarded OBU licenses that are mainly awarded
following the year 2000. In terms of number, 42 i.e. around 82 percent are owned by the
Step-7: . - -
Reimburse OBU as per agreement along with agreed interest.
Reimbursement to
OBU
Few Banks in our country started providing UPAS facility early 2008.. During that time,
these types of LC issuance were very limited among the big corporate of our country.
Following some policy changes, the use of UPAS expanded. However, it is mentionable
that although OBUs [especially PCBs and IBs] has increased capacity to accommodate
UPAS transactions, major exposure is still lying in foreign books. A few OBUs of FCBs
hold around 50 percent of the UPAS market share. With the expansion of the use of UPAS
In between April 13 and April 2014,the volume increased from around USD 520 million
to USD 3355 million (BB information). This is over 60 percent of the total import finance
and around 30 percent of the total trade finance volume of the country. Two FCBs hold the
It can be observed (in 20lD that Bangladesh Bank has already addressed the issue by
allocating the liabilities on quarterly basis to minimize the potential impact of sudden high
outflows of foreign currency in near future27. There are a few examples of using SWAPs
by the OBUs. To inject liquidity, Bangladesh Bank developed a USD/BDT swap line
facility for OBUs of Bangladesh in November,2073. The maximum amount of swap for
each bank was USD 20 million. The central bank of Bangladesh has introduced US dollar
(US$) and Bangladesh Taka (BDT) swap arrangement through OBUs of the commercial
27
FE Circular No 22, dated June l, 2014, and FE Circular No-27, dated July 1,2014.
Trade Services (Basic Level) 102
One important observation in connection with import finance was the huge increase in the
buyers' credit (discounting through OBU/correspondent bank) under deferred payment
credit popularly known as UPAS. Bangladesh Bank addressed the issue by allocating the
liabilities on quarterly basis to minimize the potential impact of sudden high outflows of
foreign currency in near future.
Gig e.a)
o What is the guiding framework for intemational bank guarantee in Bangladesh? (9.1)
o Define the market structure of offshore banking in Bangladesh. (9.2)
e What is the regulatory framework available for offshore banking in Bangladesh? (9.2)
o What are the major functions of offshore banking? (9.2.1)
o What is the regulatory conflict in guiding OBU in Bangladesh? (9.2.1)
o What are the transactions done by the OBUs in Bangladesh? (9.2.1)
o What is UPAS LC? (9.2.2)
. Why UPAS LC is getting popularity in Bangladesh? (9.2.2)
o Explain the operational procedure of UPAS LC. (9.2.2)
o Who are the major players in using UPAS and why? (9.2.2)
. Why buyer's credit is increasing over the years? (9.2.2)
o What are the regulatory measures to be taken to mitigate the risk of buyer's credit?
(e.2.2)
and commercial remittances (Box-10.1). All foreign remittances are grouped into two
broad categories and guided by the Foreign Exchange Regulation Act,1947 and guidelines
for Foreign Exchange Transactions of Bangladesh Bank: Foreign Inward Remittance;
Foreign Outward Remittance.
Membership fee and registration fee: AD may remit without prior approval of
Bangladesh Bank, the membership fees of foreign professional/scientific organizations or
fees for examination (TOEFL, SAT etc.)
Education: Without prior permission of Bangladesh Bank, ADs are allowed to release
foreign exchange on behalf of students studying abroad.
Travel: ADs may release foreign currencies for traveling under the travel quota. The quota
is set at $7000 per year for visit in countries other than SAARC countries. Quota For
SAARC member countries and Myanmar is $5000 for travel by air and by overland route.
In case of minor the admissibility is just half.
The government and banks have created a number of bonds and special saving accounts
aimed at migrants. Bangladesh bank made vigorous efforts for preventing flow of
remittances through unofficial channels. These include- expansion of activities of drawing
arrangements; review of statements received from foreign banks/exchange houses; close
monitoring and supervision of banks etc. Besides, the concerned scheduled banks had
ensured quick delivery of remittances by reducing lead-time to the beneficiaries in
Bangladesh, which brought substantial development in the delivery system. Drawing
arrangements have been made between Bangladeshi banks and around 300 foreign
banks/exchange houses situated throughout the globe. Certain rules and provisions are
prescribed for remittance services (Box 10.2)
Box-l0.2: Certain Rules and Provisions of Bangladesh Bank for remittance services
-As per Guidelines for Foreign Exchange Transactions of Bangladesh Bank, the term
'Inward Remittances' includes remittance by T.T., M.T., Drafts etc., but also purchase of
bills, drafts, Traveler's cheques and foreign currency notes and coins, Cheques issued on
foreign banks in favour of beneficiaries in Bangladesh etc. The ADs may freely purchase
foreign currencies; Remittances equivalent to USD 10000 and above should be reported
on Form C attached to the appropriate schedule; however, declaration on Form C by the
beneficiary is not required against remittances sent by Bangladesh nationals working
abroad; the purpose of remittances should be clearly stated on the Form C.
-Only authorized Dealers and authorized moneychangers may freely buy foreign currency
notes, coins and T.Cs from the incoming passengers regardless of nationality and
regardless of whether or not a declaration on Form FMJ is produced at the time of
encashment; If this Form is produced, the amount encashed should be endorsed on it; The
ADs may also purchase foreign currency notes, coins and other travel instruments freely
from Authorized moneychangers without the production of Form FMJ.
-The ADs are permitted to dispose of foreign currency notes etc. by way of sale to other
ADs and general public in accordance with the instructions of the Bangladesh Bank; they
may also dispatch to agents or correspondents abroad for credit to their Foreign Currency
Accounts with the approval of the Bangladesh Bank. Application for Bangladesh Bank's
permission should be made in duplicate; Bangladesh Bank's permission will be given in
the duplicate copy.
-In addition to normal purchases from the public, authorized moneychangers and other
authorized dealers, an AD may supplement their holdings of foreign currency notes from
abroad with approval from the Bangladesh Bank.
All the foreign exchange transactions of each month on inward remittances have to be
reported to Bangladesh Bank through statements along with schedules before a stipulated
date. All authorizations (excepting TM forms approved by the Bangladesh Bank) by the
ADs on behalf of the Bangladesh Bank remain valid for a period of not exceeding 30 days
from the date of approval unless they are expressly stated as valid for a specified longer
period or unless they have been revalidated for a further period. TM Form approved by the
Bangladesh Bank will, however, remain valid for a period of three calendar months from
the date of approval by the Bangladesh Bank.
Common facilities of both USD Investment and Premium Bonds: Period: 3 years;
Interest is payable on 6 months basis; Principal amount is repatriable abroad or may be re-
invested for further one term; Both interest and principal amount is income tax free in
Bangladesh; Commercially Important Person (CIP) facility to the purchaser of Bonds for
USDl0, 00,000/- (One million); Duplicate Bond will be issued in case of lost, stolen and
destroy of original Bonds ;Non-resident Bangladeshis may purchase Bonds for any
amount in multiply of USD.500.Use of ICT in the remittance flows has brought notable
changes in the remittance services of banks. Other than the branch networks, a number of
banks use online network, mobile network, and money transfer organizations in the
process of faster channeling funds to the rural areas. Alongside using ICT tools and mobile
technologies, banks have started using the services of each other networks/branches and
Persons ordinarily resident in Bangladesh may open RFCD account with foreign exchange
brought in at the time of their return from travel abroad. Resident Bangladesh nationals
can open RFCD account any time after return to Bangladesh. However, upto USD 5000 or
Trade Services (Basic Level) 111
Foreign exchange market participation is one of the major tasks in international banking.
And the treasury department of a bank deals with the foreign exchange risk in
international banking with some different foreign exchange products. The greatest volume
of currency is traded in the interbank market. By using effective sffategies to manage
foreign exchange, bank can help itself to mitigate risks and expand opportunities. The
most common cause of foreign exchange (FX) risk arises from making overseas payments
for your imports that are priced in a foreign currency and Receiving foreign currency for
your exports. Beside this banks can participate in the foreign exchange trade for
speculative motive. The major activities of treasury in international trade are given in box
10.3.
Foreign exchange market is the organizational framework where the various national
currencies are bought and sold. Practically it is a worldwide market, which is made up of
individuals, commercial banks and other authorized agents. The foreign exchange market
performs some important functions:
- Foreign exchange market transfers funds or purchasing power from one nation and
curency to another.
- Foreign exchange market facilitates financing of International trade.
- Foreign exchange market facilitates avoiding foreign exchange.
The exchange rate is the price of one country's money in terms of another country's
money. This is the rate at which two national currencies are exchanged. The exchange rate
is determined by the intersection of the market demand curve and supply curves of foreign
currency. The demand for foreign exchange arises primarily in the course of importing
goods and services from abroad and making foreign investments and loans. The supply of
foreign exchange arises in the course of exporting goods and services and receiving
Trade Services (Basic Level) 113
Banks normally quote a "two way price" in the currency i.e. both buying (bid) and selling
(ask or offer)rates. The maxims for finding out buying and selling rates in two different
quotation systems are different.
domestic currency is expressed in variable units for a fixed unit of foreign cuffency; and in
indirect quotation foreign currency is expressed in variable units for a fixed unit of the
domestic currency. Quoted cuffency means the currency that is variable in an exchange
rate quotation. Base currency means the currency that is fixed. Thus if fl : Tk.130.00,
sterling is the base currency and the BDT is the quoted currency.
Quotations sometimes also defined as European terms and American terms. European
quotation is expressed as number of currency units per dollar, and American quotation is
expressed as number of dollars per currency unit. In American Terms, base currency is
any currency other than USD and the quoted Currency is USD (Tk.l: $0.0144).
In European terms, base currency is the USD and the quoted Currency is any currency
other than USD ($l: Tk.79.50).
Depending upon the time elapsed between the transaction date and the settlement date,
foreign exchange transactions can be categorized into spot transactions (spot market) and
forward transactions (forward market). A third category called swap Transaction is
Some operational exchange rates are in use in facilitation of trade services. For inward
remittance, bank use TT clean buying rate. This rate is only used for the private remittance
i.e. worker's remittance. But for outward remittance TT and OD selling rate is used. For
all import payment, banks useBC selling rate. In the case of export, for contract based
receipts, like cash in advance, open account and documentary collection, TT DOC buying
rate is applied for proceeds realization. For sight export LC, banks apply OD Sight buying
rate. But in case of purchasing usance export LC, different bank group exercise different
underlying currency transaction. The basic derivative strategies are hedging, speculation
and arbitration. The main use of FX derivatives is to minimize risk for one party while
offering the potential for a high return (at increased risk) to another. The foreign exchange
derivatives are traded (and privately negotiated) directly between two parlies or via
specialized derivatives exchanges or other exchanges. In the foreign exchange market,
beside spot contract other currency derivatives, forward, future, option and swap, are
traded.
Spof.' A spot transaction is one in which the actual exchange of currencies takes place
immediately. In a spot transaction, delivery of the currencies takes place on the second
working day after the day of the contract-this is the international convention. Thus, for a
Forward: A forward exchange contract is one in which a party enters into a contract with
a bank to buy or sell a fixed amount of foreign currency at a specified future date at a
predetermined rate of exchange. Under this contract, a buyer and seller agree on an
exchange rate for exchange of currencies on a future date. The actual delivery of
currencies takes place only on such future date at the rate already agreed upon, regardless
of the market rates prevalent then. Thus, in a forward contract, currencies are bought and
sold for delivery on a future date.
pre-agreed exchange rate, known as the strike rate, within a specified period. The option
that gives the right to buy a particular currency is referred to as call option, while the
option that gives the right to sell a particular currency is referred to as put option. Option
are purchased by paying a price known as option premium.
Swaps: In a foreign currency swap transaction, two parties exchange a pair of currencies
for a certain length of time and agree to reverse the transaction at a later date. It is the
purchase of one curency against another currency for one value date (i.e., delivery date)
and the simultaneous reversal of that exchange contract for a different value date.
Currency swaps may be affected for different time frames as spot against future basis,
future against future basis or spot against spot basis.
The returns/statements are crucial tools for monitoring and reporting which are of great
importance to the Bangladesh Bank that includes both on-line and off-line reporting. By
applying reported data, BB conducts its monitoring and supervision mechanism. BB may
monitor the day to day transaction of head offices, international divisions, and bank
branches using the reports. Supervisory teams of DOS and DBI can use the reported data
in their on-site and off-site supervision to identify irregularities in AD branches. Reporting
by ADs to BB helps the central bank to prepare BOP, research publications, and policy
formulations.
ADs being responsible for dealings in foreign exchange are required to keep proper
records. It is also a requirement that they submit to the Bangladesh Bank in prescribed
periodic returns and statements of all foreign exchange transactions. It should be noted
that besides the returns/schedules/ statements prescribed in GFET Vol-II, certain other
statements like daily/weekly/monthly foreign exchange position reporting are also
required.
AD branches are required to report online (daily basis) to the FEOD (foreign exchange
operation department) of BB (Foreign exchange transaction monitoring Dashboard).
Offline statements are sent to the respective area offices of BB/FEOD (by the 5th day of
the following month). Head offices of banks are also required to send a summary
statement (by the 12th day of the following month) of all transactions (monthly) directly to
the FEOD. For monitoring purpose, the central bank generally cross-check the branch
level and summary data.
From January 2013 BB has launched On-line reporting of all inward and outward
remittance of ADs. ADs are to report transaction in on-line which helps BB, EPB, HO of
Banks, NBR and different ministries to establish greater co-ordination in formulating
policy. BB can easily identiff and instruct banks to rectiff their anomalies instantly. As
the survey data (Habib et al,20l5) reveal, bankers also aglee that on-line reporting system
is a great achievement of BB but at the same time they are facing some difficulties, as they
noted. These include network disruptions to get access to BB's on-line monitoring system,
lack of adequate manpower with proper training etc. Bankers suggest all reporting should
Trade Services (Basic Level) 118
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