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Foreign Exchange - Basic-1

This document provides information about a trade services module prepared by the Bangladesh Institute of Bank Management (BIBM). It lists the module advisors and preparation team which includes several professors and lecturers from BIBM. It also lists the support team from AB Bank, including various management personnel. The document contains a table of contents that outlines the chapters to be covered in the module, including basics of international trade, trade service products and processes in global context, rules and guidelines followed, commonly used documents, Bangladesh's regulatory environment, international trade payment methods in Bangladesh, and trade finance services by banks in Bangladesh.

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Nusrat Jahan
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0% found this document useful (0 votes)
357 views120 pages

Foreign Exchange - Basic-1

This document provides information about a trade services module prepared by the Bangladesh Institute of Bank Management (BIBM). It lists the module advisors and preparation team which includes several professors and lecturers from BIBM. It also lists the support team from AB Bank, including various management personnel. The document contains a table of contents that outlines the chapters to be covered in the module, including basics of international trade, trade service products and processes in global context, rules and guidelines followed, commonly used documents, Bangladesh's regulatory environment, international trade payment methods in Bangladesh, and trade finance services by banks in Bangladesh.

Uploaded by

Nusrat Jahan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 120

Module: Trade Services (Basic Level)

Advisor Dr. Toufic Ahmad Choudhury


Director General

Coordinators Dr. Shah Md. Ahsan Habib


Professor & Director (Training)
Ashraf Al Mamun
Associate Professor

Module Preparation Team Dr. Shah Md. Ahsan Habib


Professor & Director (Training)
Antara Zareen
Assistant Professor
Tofayel Ahmed
Lecturer

AB Bank Support Team M.A. Abdullah


Deputy Managing Director and Head of HR
Sarfuddin Ahmed
Executive Vice President
M.Enamul Huq
Senior Vice President
Md. Mahfuz-ul-Islam
Vice President
Abu Hamid Mohd. Rakib Uddin
Assistant Vice President

Bangladesh Institute of Bank Management (BIBM)


Plot No.4, Main Road No. 1 (South), Section No. 2
Mirpur, Dhaka-121,5, Bangladesh
PABX: 9003031-5, 9003051-2
Fax: 88-02-9006756
E-mail : [email protected]
Web: www.bibm.org.bd
Table of Contents

Contents
List of Abbreviations v
Chapter One: Introduction
1 1 Background J

1.2 Specific Objectives of the Manual 6

1.3 Methodology of Preparing the Manual 6

1.4 Coverage and Limitation of the Report 6

1.5 Organization of the Manual 7

Chapter Two : Basics of International Trade


2.1 Background of International Trade t1

2.2 Gains from Trade 11

2.3 Trade Theories t2

2.4 Trade Barriers t4


2.5 Recording of International Trade Transaction: Balance of Payment (BOP) 14

2.6 Role of Banks in Trade Facilitation t6

Questions and Answers Indications


1,7

Chapter Three: Trade Services Products and Process- Global Context


3.1 Trade Service Products 2t
3.1.1 Cash In Advance 2l
3.1.2 Open Account 22

3.1.3 Documentary Collection 22

2.1.4 Documentary Credit (Letter of Credit or LC) 23

3.l.4.1Types of Documentary Credit 25

3.1.5 Standby LC 27

3.1.6 International Bank Guarantees 28

3.1.7 Bank Payment Obligation (BPO) and Supply Chain Finance (SCF) 28

3.1.8 Factoring and Forfaiting 29

3.1.9 Buyer's Credit and Supplier's Credit 29

Questions and Answers Indications 30

Trade Services (Basic Level) i

August 2016 Confidential


Chapter Four: Rules/Guidelines followed in Internafional Trade Services-Global Context

4.1: Regulatory Framework for International Trade Facilitation


E
E
4.1.1 Purchase/Sale Agreement and Some Relevant Formalities 33
4.1.2 The United Nations Convention on Contracts for the International Sale of Goods
[CISG] 34
4.1.3 Uniform Customs and Practice for Documentary Credits (UCp 600) 34
4.1.4 International Standard Banking Practice (ISBP 745) 36
4.1.5 Uniform Rules for Bank-to-Bank Reimbursements for Documentary Credits (URR i25) 36
4.1.6 Uniform Rules for Collections (URC 522) 5t
4.1.7 International Standby Practices (ISP98) 37
4.1.8 Uniform Rules for Demand Guarantees (URDG 758) 38
4.1.9 Incoterms 2010 38
4.1.10 Uniform Rules for Bank Payment Obligation (URBPO) 38
4.1.11DOCDEX Rules and ICC Arbitration 39
4.1.12 Laws of International Carriage of Goods 39
Questions and Answers lndications 40
Chapter Five: Documents in Trade Facilitation
5.1 Documents Commonly in Use in Trade Facilitation 43
5. 1. 1 Commercial Invoice 44
5.1.1.1 Forms of Invoice 45
5. 1.2 Transport Documents 46
5.1.2.1 Types of Transport Documents 47
5.I.2.2 Transshipment 48
5. 1.3 Insurance Documents 49
5.1.4 Bill of Exchange 51
5.1.5 Other Documents 52

Questions and Answers Indications 55


chapter Six: Regulatory Environment of rrade Services in Bangladesh
6.1: Regulatory Framework for Trade Services in Bangladesh 59
6.1 .I Purchase/Sale Agreement in the Context of Bangladesh 60
6.1.2 Foreign Exchange Regulation (Amendment 2015) Act 1947 60

Trade Services (Basic Level) ii

August 2016 Confidential


6.1.3 BB Guidelines for Foreign Exchange Transactions, 2009 6l
6.1.4 Import Policy Order 2015- l8 61

6.1.5 Export Policy 2015-18 62

6.1.6 Customs Act 1969 and Pre-shipment Inspection Rules 2002 63

6.1.7 International Rules Applicable for Bangladesh 65

Questions and Answers Indications 67

Chapter Seven: International Trade Payment Methods in Bangladesh


7.1 Trade Payment Methods in Use and Procedures 7l
7.1 I Cash in Advance 7l
7.1.2 OpenAccount 73

7. 1.3 Documentary Collection 75

7. 1.4 Documentary Credit 77

7.2. Documents in Use in International Trade in Bangladesh 81

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

8.2 Credit to the Importers by Banks in Bangladesh 88

8.3 Available Facilities/lncentives in Trade Facilitation 88

8.3.1 Export Development Fund 88

8.3.1.1 Eligibility for EDF loans 89

8.3.2 Bonded Warehouse Facility 90

8.3.3 Cash Incentives 90

Questions and Answers Indications 9l


Chapter Nine: International Bank Guarantees and Offshore Banking in Bangladesh
9.1 Use of International Bank Guarantees and Standby LC 95

9.2 Trade Facilitation through Off-shore Banking in Bangladesh 98

9.2.1 Governance and Market Structure of Offshore Banking in Bangladesh 98


9.2.2 UPAS through OBU 101

Questions and Answers Indications 104

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August 2016 Confidential


I
Treasury and Reporting Fundamentals of Trade
10.1 Foreign Remittance Services
Services ___] tr
r
10.1.1 Schemes and Savings facilities offered by BB to Migrants
E
r
10.2 Maintenance of Foreign Currency Accounts by Banks
10.2.1 Private Foreign Currency Account

10.2.2 Resident Foreign Currency Deposit (RFCD) Account


rr
10.2.3 Non- Resident Foreign Currency Deposit (NFCD) Account

10.2.4 Exporter's Retention Quota


E
E
10.2.5 Non-Resident investor's Taka Account

10.3 Treasury Operations in Trade Services


(NITA)
E
rE4
10.3.1 Exchange Rate Quotation

10.3.2 Applicable Rates in Trade Services


10.3.3 Foreign Exchange and Commodity Derivatives for the Traders
E
rr
1 0.3.3. 1 Foreign Exchange Derivatives

!4
10.3.3.2 Foreign Exchange Derivatives in Bangladesh

I 0.3.3.3 Commodity Derivatives


10.4 Reporting Fundamental of Trade Services
rr
Questions and Answer Indications
Reference

Appendix Table-l
r@
@

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August 2016 Confidential


List of Abbreviations
ACU Asian Clearing Union
AD Authorized Dealer
ADB Asian DeveloPment Bank
AML Anti-Money Laundering
AMLD Anti-Money Laundering Department
APG Asia Pacific GrouP
AWB Air Waybill
B/E Bill of Entry
BB Bangladesh Bank
BC Bills for Collection
BDT Bangladesh Taka
BEFTN Bangladesh Electronic Fund Transfer Network
BEPZA Bangladesh Export Processing Zones Authority
BFIU Bangladesh Financial Intelligence Unit
BGApMEA Bangladesh Garment's Accessories & Packaging Manufacturers &
Exporters Association
BGMEA Bangladesh Garment Manufacturers & Exporters Association
BIBM Bangladesh Institute of Bank Management
BIN Business Identification Number
BKMEA Bangladesh Knitwear Manufacturers & Exporters Association
BOE Bill of Exchange
BPO Bank PaYment Obligation
BpGMEA Bangladesh Plastic Goods Manufacturers & Exporters Association
BTMA Bangladesh Textile Mills Association
C&F Clearing and Forwarding
CCI&E Chief Controller of Import and Export
CD Current DePosit
CDCS Certified Documentary Credit Specialist
CFR Cost and Freight
CFT Combating the Financing of Terrorism
CGFS Committee on the Global Financial System
CIB Credit Information Bureau
CIF Cost, Insurance and Freight
CIP Carriage and Insurance Paid To
CITF Certificate in Intemational Trade and Finance
COTIF Convention Conceming International Carriage by Rail
CPT Carriage Paid To
CY Calendar Year
DA Documents Against Acceptance

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DAP Delivered at Place
DAT Delivered at Terminal
DBI Department of Banking Inspection
DDP Delivered Duty Paid
DocDEx DocumentaryInstrumentsDisputeResolutionExpertise
DOS Department of Offsite Supervision
DP Documents Against Payment
EDF Export Development Fund
EPZ Export Processing Zones
ERC Export Registration Certificate
ERQ Exporters Retention Quota
EXP Form Export Form
EXW EX Works
FAS Free Alongside Ship
FATF Financial Action Task Force
FC Foreign Currency
FCA Free Carrier
FCB Foreign Commercial Bank
FDBP Foreign Documentary Bill purchase
FE Foreign Exchange
FEOD Foreign Exchange Operation Department
FEPD Foreign Exchange Policy Department
FERA Foreign Exchange Regulation Act
FIT Finance of Intemational Trade
FOB Free on Board
GFET Guidelines for Foreign Exchange Transactions
ICC Intemational Chamber of Commerce
ICC Institute Cargo Clauses
IDA Intemational Development Association
IFC International Finance Corporation
IMP Form Import Form
IRC Import Registration Certificate
ISBP Intemational Standard Banking Practice
ISP International Standby Practices
ITC International Trade Center
KYC Know Your Customer
LC Letter of Credit
LCAF Letter of Credit Authorization Form
LDBP Local Documentary Bill Purchase
LIM Loan Against Imported Merchandise
LTR Loan Against Trust Receipt

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MFI Microfinance Institution
MLPA Money Laundering Prevention Act
MOF Ministry of Finance
MT Message Type
NBR National Board of Revenue
NFCD Non-Resident Foreign Currency Deposit
OBU Offshore Banking Unit
OD On Demand
PAD Payment Against Documents
PCB Private Commercial Bank
PI Pro-forma Invoice
PRC Proceed Realization Certificate
PSI Pre Shipment InsPection
RFCD Resident Foreign Currency Deposit
RIT Rationalize InPut TemPlate
RMG Ready Made Garments
RRI Road Rail and Inland Waterway
SCB State Controlled Bank
SCF Supply Chain Finance
SME Small and Medium EnterPrise
SOD Secured Overdraft
SWIFT Society for Worldwide Interbank Financial Telecommunication
TIN Tax Identification Number
TM Travel and Miscellaneous
UCPDC Uniform Customs and Practice for Documentary Credit
UN United Nations
LINCITRAL United Nations Commission on International Trade Law
LINSCR United Nations Security Council Resolution
UPAS LC Usance Pay at Sight Letter of Credit
URC Uniform Rules for Collection
URDG Uniform Rules for Demand Guarantee
URF Uniform Rules for Forfeiting
URR Uniform Rules for Bank to Bank Reimbursements under
Documentary Credits
VAT Value Added Tax
WTO World Trade Organization

Trade Services (Basic Level) vii

August 2016 Confidential


Chapter One
Introduction
Chapter One: Introduction

1.1 Background

Understanding process, operations, drivers and challenges of trade services become

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

facilitation by banks and financial institutions is a crucial determinant of overall trade


efficiency in developing countries.

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

knowledge and understanding to handle these challenges. It is well-known that most of


these trade related regulations are enforced in the process of trade facilitations by banks
and financial institutions. Thus, bankers must have adequate knowledge and capacity to
overcome the challenges and thus to facilitate trade efficiently.

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

August 2016 Confidential


transactions and developing countries are facing difficulties with their less developed
national financial markets and having limited access to international financial markets.
The non-availability of trade finance is a notable obstacle to international trade in most
developing countries that impedes sustainable development (GDI, 2015). The most recent
ICC survey (2015) provided us encouraging data with the indication of increasing trade
services by banks and access, however, also reported increasing legal and regulatory
hurdles for the trade finance business by banks and financial institutions especially in the
developing countries. For banks and financial institutions, it is to be remembered that
alongside safe features, challenges are to be kept in mind while offering trade services. A
critical challenge of trade financing, malpractices that take the form of irregularities or
non-compliance of regulation and fraudulent activities became a crucial concern of the
entire Globe. The malpractices could be particularly detrimental for banks that are widely
perceived to be more fragile than other firms. As a measure to handle the challenges of
malpractices and especially frauds, relevant regulations have been made stringent and
compliance requirements increased tremendously. Compliance of these increased costs of
banks and challenging, however, avoidance of the rules and compliance requirements in
international rade financing could prove to be very costly for banks and the concerned
parties. Hennah et al. (2014) rightly observed, until fairly recently, compliance in trade
services was limited to the examination of documents, nowadays, added to this is
extensive screening - against multiple country lists of numerous data elements embedded
in ancillary documents, regardless of their role in the letter of credit (LC) and international
guarantee. The changes demand higher required knowledge, capacity and skills on the part
of service providers i.e. banks.

In the context of Bangladesh, trade is the key component of international business


activities, and trade facilitation is directly connected with the country's global integration.
As part of trade facilitation, banks facilitate payment and finance services to the traders
and thus contribute in growing global trade integration of Bangladesh and other economies
of the world. Trade services are the lifeline of trade, and trade finance and related services
conffibute to international trade in four areas: payment facilitation, risk mitigation, and
financing and the provision of information about the status of payments or shipments
(ITC, 2009). Every trade service transaction by banks involves some combination of these
four elements, adjusted to suit the circumstances of a particular market or of a trading
relationship. In the context of Bangladesh, involvement of banks in trade facilitation is

Trade Services (Basic Level)4

August 2016 Confidential


particularly higher. Banks are engaged in facilitation of payment and handling of
documents almost in all trade payment methods that are in use in the country.
Enforcements of the country's relevant regulations and reporting to the regulatory
authority are among key responsibilities of banks in Bangladesh. Moreover, banks are also
required to take responsibility in several instances in case of non-compliance on the part of
traders even.

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.

Trade Services (Basic Level) 5

August 2016 Confidential


1.2 Specific Objectives of the Manual

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

domestic regulations of trade services operations in Bangladesh three, to offer relevant


information on the products and processes of trade services operations of banks in global
context; four, to familiarize with the products and processes of trade services operations of
banks in the context of Bangladesh;

1.3 Methodology of Preparing the Manual

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.

1.4 Coverage and Limitation of the Report


Broad areas of the manual are trade payment and trade finance activities of banks both in
global and Bangladesh context. As the most widely used trade payment method, letter of
credit draws most attentions of the manual. The basic level manual assigned special focus
on operational and product aspects. Procedural and regulatory aspects are placed briefly in
the manual. The manual also identifies other products of the trade services department that
include maintenance of foreign currency accounts and remittance services. Data on trade
payment and financing of the banks are simple averages.

Trade Services (Basic Level) 6

August 2016 Confidential


1.5 Organization of the Manual
The manual is organized under twelve chapters: after an introductory chapter with the
objectives and methodological issues, chapter 2 deals with the basis for international with
their operational procedures. Chapter 3 is about trade services products process in global
context. Rules and guidelines followed in international trade are described in chapter

4.Different documents and its concepts-commercial invoice, transport documents,


insurdnce documents, bill of exchange and other relevant documents in trade facilitation

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

exchange treasury and reporting fundamentals are discussed in chapter 10.

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August 2016 Confidential


Chapter Two
Basics of International Trade
Chapter Two: Basics of International Trade

2.1 Background of International Trade

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.

2.2 Gains from Trade

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
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August 2016 Confidential


Box 1.1 Trade gain from Export (with example on Steel)

- 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.

Trade Gain from Import(with example on Steel)


-Iftheworldpriceofsteelislowerthanthedomestic@
become an importer of steel when trade is permitted.
- Domestic consumers will want to buy steel at the lower world price.
- Domestic producers of steel will have to lower their output because the domestic
price moves to the world price.
- How Trade affects Welfare in Importing Country
- Domestic producers of the good are worse off, and domestic consumers of
the good are better off.
- Trade raises the economic well-being of the nation as a whole because the

gains ofconsumers exceed the losses ofproducers.

2.3 Trade Theories

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.

Trade Services (Basic Level) 12

August 2016 Confidential


But in 1776, Adam Smith published his famous book. The Wealth of Nations, in which he
attacked the mercantilist view on trade and advocated instead free trade as the best policy
for the nations of the world. Smith argued that with free trade, each nation could specialize
in the production of those commodities in which it had an absolute advantage (or could
produce more efficiently than other nations) and imports those commodities in which it
had an absolute disadvantage (or could produce less efficiently). This intemational
specialization of factors in production would result in an increase in world output which
would be shared by the trading nations. Thus a nation need not gain at the expenses of
other nations - all nations could gain simultaneously.

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.

The difference in pre-trade relative commodity prices (comparative advantage) between


the two nations is based on a difference in factor endowments, technology, or tastes
between the two nations. However, even if two nations have exactly the same factor
endowments and technology a difference in tastes can be the basis for mutually beneficial
trade.

Trade Services (Basic Level) 13

August 2016 Confidential


2.4 Trade Barriers

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.

2.5 Recording of International Trade Transaction: Balance of Payment (BOP)

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.

Trade Services (Basic Level) 14

August 2016 Confidential


The Bangladesh Bank has been following classification system for BOP presentation as

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

merchandise, non-monetary gold, manufacturing services on physical inputs, maintenance


and repair services, transportation, travel, construction services, insurance services,
telecommunications etc. Primary Income component is restricted to income eamed from
the provision of two factors of production viz, labor and capital. Accordingly income
eamed from the labour is called compensation of employees while income earned from the

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.

2) Capital Account includes the acquisition and disposal of non-produced, nonfinancial


assets between residents and non-residents and capital transfers receivable and payable

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.

3) The Financial Account is classified mainly by four functional categories: A) Direct


Investment, B) Portfolio Investment, C) Other Investment and D) Reserve Assets. Direct
Investment covers remittances received from foreign direct investors in their enterprises
and remiffance made abroad by Bangladeshi direct investors for equity participation.

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Portfolio investment covers remittances received from and paid to on account of equity
and debt securities in the form of bonds and notes, money market instrument and financial

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.

2.6 Role of Banks in Trade Facilitation

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.

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Chapter Two: Questions and Answer Indications
o What is intemational Trade? Who are the core parties in international trade? (2.1)
. Why do nations trade? (2.2)
o What are the gains of nations from trade? (2.2)
o Explain that trade benefits both the exporting and importing countries.(2.2)
o How two countries can be benefited by getting involved in international trade?
(2.2)
o Comparative advantage can enhance the world production - Explain. (2.3)
. Why comparative advantage is superior to absolute advantage? (2.3)
o What are the trade barriers in international trade? (2.4)
o What is Balance of Trade? (2.5)
o Can BOT of a country be positive and BOP of the same country is negative? (2.5)

o What are components of current account? (2.5)


o Define the components of capital account. (2.5)
o What is the role of banks in intemational trade? (2.6)

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Chapter Three
Trade Services Products and Process- Global Context
Chapter Three : Trade Services Products and Process- Global Context
3.1 Trade Service Products
Trade services products or sen'ices mainly include the products or services related to trade
it is hard to make distinction
payment and trade finance. There is no doubt that sometitnes
between trade payment and trade financing. Some commonly used trade services
techniques in intemational trade are:
o Cash in advance.
. Open account,
o Documentarycollection.
o Documentary credit (LC),
o Standby LC or other bank guarantees.
o Bank payment obligation,
. Supply chain financing,
o Factoring,
o Forleiting etc.
3.1.1 Cash In Advance
ln cash in advance method of payment, the buyer places the funds at the disposal of seller
(exporter) prior to shipment of goods in accordance with the sales/purchase contract,
which is certainly to be concluded between exporter and importer before the trade
(figure-3.1) transactions. If the exporter is not sure about the buyer's credit or there are
other circumstances which cast doubt on the certainty of getting paid, a last resort is to ask
for cash in advance. Since this method of payment contains a lot of risks on the parl of
buyers, they may not be willing to accept such terms of payments.
Figure-3.1: Operational Procedure of Cash in Advance

lmporter

E
Purchase/ Sales
Importer's Bank

Agreement Flow of
Goods &
Services

Exporter's Bank

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3.1.2 Open Account
Open account is the reverse of cash in advance. This is an arrangement between the buyer
and seller whereby the goods are manufactured and delivered before payment is required
(figure 3.2). Through using the method, seller can avoid a lot of banking charges and other
costs, but the seller has no security of receiving payment in due course. For this reason, the

exporter may not be willing to accept this sort of mode of payment.

Figure-3.2: Operational Procedure of Open Account

Importer's Bank

Purchase/ Sales
Agreement

Exporter's Bank

3.1.3 Documentary Collection


Collection method provides a means of payment whereby the exporter can ensure that the
buyer would not be able to take possession of the goods until s/he has paid or given a
payment undertaking. In return for this payment or payment undertaking, the importer
receives documents allowing possession of the goods. The system is appropriate to cases
in which the seller is unwilling to provide the merchandise on open account terms but does
not need a bank undertaking such as a documentary credit (figure-3.3).
In this method, the exporter hands over the shipping documents (financial documents such
as BiE and commercial documents such as transport documents, insurance documents etc.)
to hisitrer bank and asks it to forward the documents to the buyer's bank, with instructions
to release them to the buyer on payment of hisiher invoice. This is called document

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.

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This is called documentary collection against acceptance or documents against acceptance
(D/A).

Figure-3.3: Operational Procedure of Documentary Collection

Presenting Collecting
Importer
Bank Bank

1E ^Z\
Purchase/
Sales Dispatch of Payment
Agreement Documents I 2 FIow

\. -z
-
Remitting
Exporter
Bank

3.1.4 Documentary Credit (Letter of Credit or LC)


Documentary Credit is a classic form of international trade payment method that
substantially reduces risks for both exporter and importer. This is an alrangement whereby
the importer's or buyer's bank is committed to pay an agreed sum of money to the
exporter/ seller under some agreed conditions. Documentary credit or LC is an
undertaking or commitment issued generally by a bank to pay the exporter a certain
amount provided that the terms and conditions of the documentary credit are complied
with (figure 3.4). The conditions are about submission of certain documents in certain
form. Documents must be in order to receive payment. Documentary Credit is guided by a
classic form of set of rules known as Uniform Customs and Practice for Documentary
Credits [UCPDC] published by ICC. In the payment mechanism of LC, banks have a very
active role to play.

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Basic Letter of Credit Transaction
apF,!ir.rnt benef icrar-y
1 - Sale Contract

3
5 Shipment

P'
ET
3 cl E
rt
rl
a
t-
to
le ,
u ol -9.=
u.(,
I
o
-.ct
ji
Gt
o-l
=6
d@
od
eul
I
IEE
l05
E,*+t Eol
fl
loo
V-=
N .;
I - lssuing Letter of Credit

{,I r

8- docunrent control, payment release


iln
. .....:.
,-l

issuing bank advisinB bank

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

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(exporter) and issuing bank [or in case of confirmed credit also confirming bank] are the
main parties, the entire parties to Documentary Credit generally are:

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.

3.1.4.1 Types of Documentary Credit

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

consent of the Beneficiary (exporter). Irrevocable LC is the LC that cannot be amended or

cancelled without the concept of the main parties (Issuing Bank and Beneficiary). Under

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the current regulatory framework of LC (UCP 600), LC means lrrevocable. Other special

types of LC are:

ConJirmed Documentary Credit: A confirmation of a documentary credit by a bank


(confirming bank) upon the authorization or request of the issuing bank constitutes a

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

the original beneficiary's country.

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.

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3.1.5 Standby LC
The standby credit is to be distinguished from other types of letters of credit in that the
primary function of the standby is to serve as a security or guarantee ratherthan as a trade
payment mechanism. Under a typical standby. the beneficiary claims payment in the event
that the contract partner has failed to perform or fulfill certain obligations. The Standby
Credit is a Documentary Credit or similar arrangement, however named or described,
which represents an obligation to the Beneficiary on the part of the Issuing Bank to a)

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.

Table 3.1: Comparisons among different trade Payment Methods


Payment method Goods in hands of When paid Seller's Buyer's
contracted buyer For risk risk

Open account Before Payment As per Highest Lowest


Contract

Collection through Before Payment As per contract. The Medium to Low


DA Basis buyer will accept a bill high
of exchange payable
after a fixed number of
ays
Collection through After Payment On presentation of Low but if
DP Basis documents buyer
Refuses
payment,
goods will
need to be
stored. resold
or returned
Documentary Depends on u'hether After complying, Low (provided Low
credit the credit is Presentation made to Documents are
available by the bank or bank compliant)
payment or accepts waiver of the
deferred/acceptance applicant if
terms discrepancies found
Payment in After Payment Before None High
advance Shipment

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3.1.6 International Bank Guara4tees
Intemational Bank Guarantees are availed for commercial and non-commercial purposes.
Commercial guarantees are related to commercial contract between the supplier and the
customer. Non-commercial guarantees are not directly related to commercial contracts but
those are obligatory to be able to make a business. The demand guarantees may serve
several purposes from indefinite range of payment, performance or non-performance
obligation. Considering the structure, two types of guarantees are issued: direct and
indirect. A demand guarantee, as defined by the URDG, involves a minimum of three
parties: the principal; the guarantor and the beneficiary. Normally, the guarantor in the
three-party structure is the principal's bank and conducts business in the same country as

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,

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storage, cross-border relations between sellers and buyers, distribution, and final sales to
customers.

3.1.8 Factoring and For faiting


International factoring is the sale of assignments of short-term accounts receivable arising
from an international sale of goods or services. The technique is associated with handling
risk in open account trade. The international factoring business involves networks similar
to the use of correspondents in the banking industry. For faiting is used to denote the
purchase of obligations falling due at some future date, arising from deliveries of goods

and services. Factoring is suitable for financing smaller claims for consumer goods,
whereas for faiting is used to finance capital goods exports.

3.1.9 Buyer's Credit and Supplier's Credit


Buyer's credit is financing arrangement, where the seller's bank makes money available
for the buyer to pay the seller. It can in the form of a direct loan to the buyer or a loan via
an intermediary organization in the buyer's country. This type of finance is usually
without recourse to the seller, as it is the buyer that borrows the money. The seller also
avoids the need to pay interest, as the loan is made to the buyer. Buyer credit facilitates
benefit both parties to the transaction: the seller receives cash on delivery or acceptance of
the goods or service; and the buyer has affordable medium- or long-term finance that may
not have been readily available in its own country.

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.

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Chapter Three: Questions and Answer Indications

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 Stand by LC is related to Non-Perfornance. What does it mean? (3.1.5)


o Point out the liabilities and responsibilities of an issuing bank under UCP 600? (3.1.4)
. Show the flow chart of Documentary Credit. (3.1.4)
o What are the roles of a reimbursement bank in LC process? (3.1 .4)
o How many payment terms are available under documentary collection? Name these.
(3.1.3)
o Red clause LC is also a financing technique for the exporter. How? (3.1 .4.1)

o What are the uses of intemational bank guarantee? (3. I .6)


o Which trade payment method is most preferable in the context of the global trade
market? (3.1.2)
o How many parties are commonly engaged in intemational bank guarantees? Name
these. (3.1.6)

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)

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Chapter Four
Rutes/Guidelines followed in International
Trade Services-Global Context
Chapter Four: Rules/Guidelines followed in International Trade Services

4.1 Regulatory Framework for International Trade Facilitation


In performing international trade services operations. banks are required to follow both a

set of domestic regulations and international rules/guidelines. Among the international


rules and guidelines, International Chamber of Commerce (ICC) publications are the most
relevant. The major relevant regulations followed in performing trade services activities in
a country is shown in table 4.1 below.

Table-4.1 : International Regulations of International Trade Services


Dornertt. Rrt.YR.grt"tl*-
o Country specific Trade and/or Exchange Control or Foreign Exchange
ManagementiControl Regulations ;

o Trade Policy Documents;


o Rules/Regulations on Customs Formalities etc.
Key International Guidelines/Rules:
o Uniform Customs and Practice for Documentary Credit (UCP 600 including e

UCP); Uniform Rules for Collections (URC 522);


o Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits
(uRR 725);
r International Standard Banking Practice (ISBP 745);
o International Commercial Terms 2010,
o Intemational Standby Practices USP-98].
o Uniform Rules for Demand Guarantees IURDG 758], and
o Documentary Instruments Dispute Resolution Expertise Rules (DOCDEX);
o United Nations Vienna Convention on Contract of Sale of Goods etc.

4.1.1 Purchase/Sale Agreement and Some Relevant Formalities


Purchase/sale agreement is the contract between exporter and importer. In case of three
methods of payments (cash in advance. open account and documentary collection),
sales/purchase contract is the guiding document. Practically. for these three methods,
banking system needs a standard format for purchase/sale agreement, considering the risks
to protect the interests of the clients in a better manner. In case of LC. the contract mav be

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of the contract are
considered as relatively less important as the terms and conditions
expected to be in the LC itself. There is no doubt that terms and conditions of
purchase/sale contract would vary for different products, modes of payment or even
sources of imports. However, generally, a standard contract should have at least the
following components (box-4. I ):

Box-4.1: Components of a Standard Purchase/Sale Contract

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

commercial exchanges (LTNCITRAL 201 4).

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
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of UCPDC, compiles the best documentary credit practices that came into effect from July
01,2007 and is the sixth revision of the rules since they were first promulgated in 1933.
The 39 articles of UCP 600 mainly cover the liabilities and responsibilities of different
parties engaged in the process of LC which is meant for traders and bankers. Article ll of
UCP permits the user to modifu or exclude any of the provisions of the rules by stating on
the face of the credit. It offers flexibility of accommodating local regulations and
necessary changes in the rules. Considering the contents, the articles in UCP 600 may be

divided into seven broad heads:


o General Provisions and Definitions (articles l-6);
o Undertakings and Liabilities (articles 7 -13);

o Examination (article l4-16),


. Documents (articles 17-28),
. Miscellaneous Provisions (articles 29-33);
o Disclaimers (article 34-37),
o Transferable and Assignment (articles 38-39).

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

'Complying Presentation'2 in article 2 that obligates bankers to consider LC terms, rules


noted in UCP 600 and 'lnternational Standard Banking Practice' while examining
documents. Article 14 also identifies some specific issues connected with standard for
examination of documents. The universal acceptance of the UCP by practitioners in

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.

r........ They are binding on all parties thereto unless expressly


modified or excluded by the credit (UCP 600,
rcc, 2007).
r.......Complying presentation means presentation
a that is in accordance with the terms and conditions of
the credit, the applicable provisions of these rules and international standard banking practice (UCP 600,
tcc,2007).
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4.l.4International Standard Banking Practice (ISBP 745)
The ISBP is an ICC publication which provides important guidance to documentary credit
examiners and practitioners relating to the examination of documents presented against
Letters of Credit. It is important to note that the ISBP cannot, in any way, change the UCP
600 rules which apply to Letters of Credit, but the ISBP is a valuable supplementary guide
to UCP.As of July 2013 International Standard Banking Practice - ISBP 2013 is the latest
and the most comprehensive guide to handling and examining trade documents under
letters of credit. ISBP 2013 published by ICC with the ICC Publication No. 745. The first
draft was produced in May 2011 through to the 5th draft in November 2012. Approval was
finally achieved for the revised publication in April 2013, with the ICC publishing the
guide in June/July 2013. This revised guide is a substantial update to the former version
and includes a number of new interpretations and new chapters, so it is an absolutely
essential publication for anyone who is involved in Letters of Credit. There are now l5
sections/chapters in the revised version of ISBP that covers preliminary considerations,
general principles, drafts and calculation of maturity date, invoices, transport documents
covering at least two different modes of transport, Bills of Lading Charter Party Bill of
Lading, Air Transport Document, Road, Rail or Inland Waterway Transport Documents,
Insurance Document and coverage and Certificate of Origin with new sections relating to
guidance on practices relating to Non-Negotiable Sea Waybill, Packing List, Note or Slip,
weight List, Note or Slip, Beneficiary's certificate, Analysis, Inspection, Health,
Phytosanitary, Quantity Quality and Other Certificates. Use of ISBP has significantly
reduced discrepancies for documentary credits and is regularly used by banking, logistics,
insurance, legal and corporate professionals and academics worldwide.

4.1.5 Uniform Rules for Bank-to-Bank Reimbursements for Documentary Credits


(uRR 72s)
In most cases under LC, reimbursement by the issuing bank is made using the service of a

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
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rules. URR suggests two ways of making reimbursements: one, simply by authorizing
Reimbursing Bank to make reimbursement to the Claiming Bank; and two, by authorizing
Reimbursing Bank to issue a reimbursement undertaking to the Nominated Bank. The first
one is revocable whereas the second one is irrevocable. Reimbursement undertaking offers
greater security to reimbursement to the Nominated Bank and thus to the exporter. The
rules of URR assign liabilities and responsibilities of different parties involved in the
process of reimbursement.

4.1.6 Uniform Rules for Collections (URC 522)


Some of the main intemational rules and practices applicable to documentary collection
operations have been codified by the international chamber of commerce (ICC). These are
published in the form of the Uniform Rules for Collections (URC) and banks in countries
across the world incorporate them by reference in collection transactions. The latest
version of the URC was drawn up in 1995. To get coverage under ICC URC 522,inthe
operation of documentary collection, it is to be stated on the collection instruction that the
payment is as per Uniform Rules for Collection 522. The URC has 26 articles that are
divided under seven broad heads: General Provisions and Definitions; Form and Structure
of Collection; Form of Presentation; Liabilities and responsibilities; Payment, Interest,
Charges and Expenses; and Other Provisions. Different articles have asserted the
provisions and requirements of the documentary collection procedure; identified different
forms of documents and their release; and described roles of different parties

[principal/exporter, remitting bank, collecting bank, presenting bank, drawee/importer]


involved in the documentary collection process.

4.1.7 International Standby Practices (ISP98)


ISP 98 was designed specifically as a stand-alone set of Rules for standby letters of credit.
However, UCP is valid and still applies to standbys. Since ISP and UCP coexist and may
be applicable to standbys by incorporation, applicant, beneficiaries, and issuers have a
choice. ISP98 covers general rules for independent undertakings, recognizing that parties
wishing to provide for payment of the purchase price against documents evidencing the
It recognizes the critical distinction between undertakings that
sale and shipment of goods.
are 'independent' and ordinary promises and guarantees that are not. In performing
various rules, ISP98 is advantaged by its focus on payment against all types of documents

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as distinguished from UCP's focus on payment against documents evidencing the sale and

shipment of goods.

4.1.8 Uniform Rules for Demand Guarantees (UR-DG 758)


Uniform Rules for Demand Guarantees (URDG 758) is the guiding framework applicable
to the demand guarantee and counter -guarantee practices. The URDG help leveling the
playing field among demand guarantee issuers and users regardless of the legal, economic
and social system in which they operate. URDG 758 came into force on 1 July 2010,
whereupon a considerable number of demand guarantees and counter guarantees started
being issued all over the world subject to the new URDG 758. The new URDG 758 do not
merely update URDG 458; they are the result of an ambitious process that seeks to bring a

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.

4.1.10 Uniform Rules for Bank Payment Obligation (URBPO)


This is the first ever set of rules to facilitate open account trade. URBPO has been
launched as the standard for supply chain finance that is expected to facilitate international
trade. The rules were developed by the ICC with a partnership established with financial
messaging provider SWIFT to take into account the legitimate expectations of all relevant
sectors. The URBPO provides the benefits of a letter of credit in an automated and secured

Trade Services (Basic Level) 38

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environment, and enables banks to offer flexible risk mitigation and enhanced financing
services to their corporate customers.

4.l.ll DOCDEX Rules and ICC Arbitration


The purpose of the ICC DOCDEX Rules is to provide parties with a specific dispute
resolution procedure that leads to an independent, impartial and prompt expert decision for
settling disputes involving the UCP, URDG, URR and URC. The ICC Court is the leading
international arbitration institution in the world. ICC and Committee Maritime
International (CMI) offer separate arbitration rules to meet the special requirements of
maritime users. A committee for revision of existing DOCDEX rule is formed in 2013' A
committee for revision of the last DOCDEX rule was formed in 2013 and a new version of
DOCDEX rules was finalized in April 2015 that came into effect from May l, 2015.

4.1.12 Laws of International Carriage of Goods


International carriage has also been the subject of much discussion over the years. The
world-wide nature of international trade and the necessity for efficient transport have led
to a series of rules, covering carriage by sea, by road, by rail and by air. The Hague Rules
of 1924, and The Hague-Visby Rules of 1968, together with the Hamburg Rules 1978,

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.

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Chapter Four: Questions and Answer Indications
o What are the domestic regulations followed for international trade facilitation? (4.1)
o What are the international regulations available for trade facilitation? (4.l)
o What is a purchase sale agreement? (4. I .l )
o What should be the components under a firmed contract? (4.1.2)
o What is the purpose of CIGS?(4.1.3)
. Why should UCPDC be followed throughout the globe? (4.1.3)
o What is stand by LC? (4.1.7)
o How is presentation under ISP 98? (4.1.7)
o what are the standards for examination of documents under ISp98? (4.1.7)
. How can URDG be applied in issuing international bank guarantee? (4.1.g)
o What do incoterms tell about? (4.1.9)
o How many incoterms are there under INCOTERM 20lO? (4.1.9)
o What is the purpose of DOCDEX rules? (4.1.1l)

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Chapter Five
Documents in Trade Facilitation
Chapter Five: Documents in Trade Facilitation

5.1 Documents Commonly in Use in Trade Facilitation


Foreign trade documents are important for the exporters or importers in terms of
regulatory compliance and release of goods. The documents incomplete, faulty or not
given to the authorities on time may give rise to some risks in the products' delivery or
during collection of the product costs. This will generate a prudential risk for the bank's
business. Considering the need globally documents are categorized in five groups (table-
s.l).

Table-S.1:Documents in International Trade Transactions


Category Why its needed Examples of Documents
Transport Evidence of shipment Bill of Lading, Airway Bill, Truck
Documents Receipt, Courier Receipt etc.
Insurance Cover against risk to the Insurance Policy, Insurance
Documents goods during their carriage Certifi cate, Declaration under open
cover etc.
Financial Evidence of financial claims Bill of Exchange, Cheque,
Documents Promissory Note etc.
Commercial Describing the goods and Commercial Invoice, lnspection
Documents services Certificate, Packing list, Weight List
Official Documents Evidencing compliance with Certificate of Origin, Legalized
the requirements of the Invoice, Export License etc.
country ofexport or the
country of import

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.

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5.1.1 Commercial Invoice

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

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Figure-S.1: A Sample Commercial Invoice
JUKI SINGAPORE
SI\GAPORE

('()\l\I[-R( 1..\l- I\()\'I( la

A-ONE CO LTD- )io.JLIKIl2ll


PLOT NO-IOI. NORTH ZONE.
CEPZ- BANGLADESH

Devription (.)u;rnt t I nit Price (l SDt Arnorrrrr ( [ ISF))


5fi)SEWING \IACHINES -iTX) PCS +o.(x) 2(XXX).({)
('Tv ITH STADA RD ACCESSORIES )
f tXn0lr0

D T\A'ENTY THOL]SAND AND CE\ \GAPORF- DOLL{R THIRTY


THOLJSAND ONLY

TRADE TER}I: CFR CHITTAGONC

PROFORMA INVOICE NO-J I ]]SC,


CREDIT \O. DCCO lf3:1-s6

5.1.1.1 Forms of Invoice


Some other forms of invoice are in use in global trade transactions. These include

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.
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Legalized Invoice: It is issued by the beneficiary/ exporter, in terms similar to a

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.

5.1.2 Transport Documents


Transport documents give proof of shipmentlcaniage of goods from port of loading/place
of receipt to port of discharge/place of destination. Usually, transport documents are the
documents of title of goods and act as the evidence of contract for the carriage or
transportation of the goods between the shipper and the carrier. A full-fledged transport
document should carry certain information that noted in box5.2; and a sample of transport
document is given in figure 5.2.

Box-5.2: Common Contents of a Transport Document


- Name of the carrier and be signed
- On board notation
- Place of receipt, port of loading, port of discharge and place of delivery
- Description of goods consistent with that in the credit
- Identifying marks and numbers (if any)
- The name of the carrying vessel or the intended carrying vessel
- The names of shipper, consignee (if not made out 'to order') and the name and
address of any 'notify' party.
- Whether freight has been paid or is still to be paid.
- The number of originals issued to the consignor if issued in more than one original.
- Terms and conditions of the carriage
- Date of issuing the documents.

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Figure-S.2: A Sample Bill of Lading

l]/1, \o. .\l]( l)h[(;ll|].1


( ( )\st(; \(
ACB FOR\\'ARDERS
) R-/stl II'l,I: R :
\}-Z SHTPPI\(; (](). I-TD..
SINGAPORE

ItIl.l- ()I l-.\l)l\(;

( ()\sl(;\l:t-: \()TtII P\R'l\:


TO THE ORDER OF A.O\F, CO LTD PI.OT N() I(II
( IlI]"t.\(;( )\(; B.\\K CEPZ. BA}'GLADESH
1)H,\K..\ Bl)

PRE-CARRIF-D B\': PI-ACE OF RECEIPT

VESSEL N-\\IE/ \'C)YAGF- NL) PORT OF LO,\DI\G


TITANIC/ 0I SINGAP'JRF-
PORT OF DISCHARCE' PLACE OF FI\AL
CHITTAGO\G. 8,,\\GLADF-SH DF'S TJ N,{TI(.)\:

(()\T.\l\1.:R \(). t)l-s( RIPTI()\ ()l' (;()()l)s ( ;R( )SS I.t \st Rt-\tt \l-
\\ t.l(;Hl'

liBCtrI l l.t56v

IIXT) KCS

REC EI\'ED FOR SHIP\IE\T


SHIPPF,R'S I-OAD A)iD
COL'NT
SHIPPF:D ON BO,ARD FREIGHT PREPAID PI-ACE T\D DATE OF ISSL'E
:O.APR.\X AT SI\CAP()RE
SEAPORT O\ TITA}-ICi OI
t5-APR-:OXX AT COLO\tBa)
SEAPORT O\ ALBAI-ROSS/ (}I
DC NO DCC(II:]J56
FOR FREIGHT PREPAID BL, PR()FOR\IA I\\'C)ICE
DELryERY OF (ARGO IS SUB]ECT \(f J ll isc.
TO REALIZATION OF CHEQUE SIGNED FOR PQS SHIPPING AS AN
NO. OF ORlGls-.\L BL ISSL'ED AGENT FOR THE CARRIER OF BL TITLE
THRL-I:

5.1.2.1 Types of Transport Documents


Usually a transport document assumes the form of either:
o Single Modal Transport Document
o Multimodal /Combined Transport Document.
The former is that type of transport document which is normally applicable to a carriage of
goods only by one mode (such as air, rail, waterway etc.). The Multimodal Transport
document is applicable for the carriage of goods by more than one mode of transport. This
document may indicate either dispatch or taking in charge of the goods or loading on
board as the case may be. Transshipment is normally allowed for multimodal transport
document. The various forms of Single Modal Transport Documents are the followin"'-

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o Marine/Ocean B/L
o Charter Pafi BIL
o Air Transport Document
. Road, Rail or Inland Waterway Transport Document
o Courier and Post Receipts.
Some documents commonly used in relation to the transportation of goods, namely,
Delivery Order, Forwarder's Certificate of Receipt, Mate's Receipt etc. do not reflect a

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.

Box-5.3: Some Concepts Related to Transport Documents


Short Form/Blank Back B/L: BIL in which the detailed conditions of t.unsportutio, -u.e
not listed in full (on the back of the B/L).
Mate's Receipt: When the goods are handed over to the agent of the shipping company
for shipment by a specified vessel and the agent contracts to do so, he issues a receipt
known as Mate's Receipt. When the goods are actually shipped the Mate's Receipt is
exchanged for the regular B/L.
Nottfy Address: Address mentioned in the B/L or Airway Bill to which the carrier is to
give notice regarding the arrival of goods.
On Board B/L: It is issued after the goods have been shipped on board. A credit
requiring B/L must indicate that the goods have been shipped on board.
Received for Shipment B/L: This document merely confirms that the carrier has received
the goods for shipment and is holding the goods in its custody.
Clean Vs. Not Clean TD: A clean TD is one which bears no clause or notation which
expressly declares a defective condition of the goods and,/or the packaging. Otherwise, it
is not a clean TD. (Art.-27). A bank will only accept a "Clean" transport document.

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Negotiable Vs. Non-Negotiable B/L: Whether a BiL would be negotiable or non-
negotiable depends on the phraseology used in the TD under the space meant for
consignee which again depends on the decision of the shipper. If the words used are "to
order" or "or his or their assigns", then the TD is "negotiable". When such words are not
inserted, then the TD is "non-negotiable."
Liner Party B/L: Liner B/Ls are issued by shipping companies in respect of goods
carried on regular line vessels with scheduled runs, and reserved berths at destination.
Shipping lines serving the same routes may form a conference, within which agreements
are made over such matters as the terms and conditions of B/L, freight rates, times of
sailing, etc.
Charter Party B/L: A "Charter Party" is a contract under which a ship owner agrees to
place his ship, at the disposal of a merchant or other person (Charterer), for the carriage
of goods from one port to another (voyage charter) or to let his ship for a specified period
(time charter). There are basically two types of charter parties: demise (ship owner only
provides vessel) and non-demise (ship owner provides both vessel and crew). A banker
should also seek "sea-worthiness certificate" of the charter-party vessel.
Forwarder's CertiJicate of Receipt: It is the receipt issued by a freight forwarder as a
carrier or multimodal transport operator or as an agent of a carrier or multimodal
transport operator for received from shippers.

5.1.3 Insurance Document

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.

The document is which contract of indemnity (or, insurance) is embodied is called a

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.

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Box-5.4: Common Contents of Insurance Documents

- the name of the ship/carrier,


- the name of assured,
- the subject matter of insurance,
- the time and/or voyage insured,
- the peril(s) insured against,
- the date and subscription,
- the valuation,
- Coverage date
- Coveragejourney
- the stamp etc.

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Figure-S.3 : A Sample Insurance Document

ABC INSI.IRANCE LTD


I 10. Shlnehai. China.

('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:

GOODS AND IIERCHANDISES: \'t,rage fronr: Shanghai Sea port


FRESH FRUITS
\oruge To: Chittagon-e Sea Port.
(Valued atthe sanr as Anrcunt Insurcd) Banglidesh

1 lnstitute Cargo Clauses (At l/1/82


2 lnstitute Cargo Clauses (A I Risks) -/1/63
3 lnstitute Cargo Claus€s lB.llU82
4 lnstitute Car go Clauses (W.A.) 1/1,/63
5 lnstrtlrte Cargo Claus€s (C', L/7/82 This ccnil-rcate shall covcr suhj&'t kr thc
5 tnstitute Cargo Clauses (F.?.A.1 111/6J lollorvins lnstitute clauscs nunlhcred her:
7 lnstitute Cargo Clauses (A r) (Excluding serdrng by post es ou:
117/821 3, E, l0
E tnstrtute wAH clauses lLatBol Lll!al
9 lnstitute wAR Clauses (Air Cargo) ,[xcludirB sendrrg by post
111/8)\
lD- lnstitute Strike Clauses lCargol UU82

Exprry datc': ,\\l) D_{ l o}


Pl.,\ct- t lssl }- :
30-Sen-XX SHANGHAI. ?5-APR-XX
Condition:: I

1 Cover is sub;ect to a S% franchise


2 Ter r or i:rn r is[. i: excluded. .,kyt&"
Ior Shanghri [nsu'ance Brokers (iroup
-\s agenr for.ABC INST RANCE LTD.
T1r.r.l

5.1.4 Bill of Exchange


Bill of Exchange (draft) is a legal document evidencing claims for amounts owed. In some
countries, there is a distinction
- between bills of exchange in connection with the
settlement of debt within a country (inland bills) and bills of exchange in connection with
the settlement of debt between a buyer in one country (importer) and a seller (exporter) in
another country (foreign bills). A sample of Bill of Exchange is given in figure 5.4.

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A bill of exchange is an unconditional order in writing, addressed by one person to
another, signed by the person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain in money to or to the
order of a specified person or to bearer. Primarily, there are three parties
o Drawer: The Drawer is the person who draws the bill and he stands as the creditor to
whom the bill is drawn. By drawing the bill, the drawer engages himself to redeem
the bill and pay to the owner or holder of the bill
o Drawee: The drawee is the person (or firm) on whom the bill is drawn. That is, s/he is
the person on whom the payment order is addressed
. Payee: The Payee is the person to whom the bill is payable. The bill can be drawn
payable to the drawer or to his bank.
Figure 5.4: A Sample Bill of Exchange
Draft
Drawn under L/C no..... dated............ of issuing Bank

usD 53,000 Singapore, lO-Mar-XX

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

5.1.5 Other Documents


'Other documents' indicate the documents required in documentary credit operation other
than the transport documents, insurance documents and invoice. These are may be of
different types and natures depending on the objective conditions of the payment methods.
Some of the common 'other documents' are discussed below:

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lleight list/ packing list: lt is a document evidencing the weight of the goods to be carried

to the destination of importer by the carrier. It is mainly required in case of transportation

other than by sea. Weight list can be evidenced either by means of a separate document, or

by a weight stamp/declaration of weight superimposed on the transport document by the

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

which is the list of the dimensions of the individual loaded cases.

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

for a preferential rate of duty or no duty at all (Generalized System of Preference).

Sometimes a 'certificate of manufacture' is required which is the confirmation of a

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

not call at enemy ports.

Health CertiJicate/Phyto Sanitory Certificate/Certificate of Analysis: It is often necessary

for shipping documents to contain something more than a certified invoice as an evidence

of quality in order to meet health requirements in the country of destination or to satisfo

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

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'Phytosanitary certificate' is required for perishable items such as vegetables and a

'certificate of analysis' may be required concerning the strength of metals or chemical

content of some particular types of goods such as drugs.

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

assess the loss ofgoods).

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Chapter Five: Questions and Answer Indications
o What is commercial invoice? (5.1.1)
o What is the difference between commercial invoice and pro-forma invoice? (5.1.1)
o What is the difference between consular invoice and commercial invoice? (5.1.1)
o What is a transport document? (5. I . I )
o What should be the contents in a transport document? (5.1.2)
r What is a multimodal transport document? (5.1.2.1)
o What is transshipment in general? (5.1.2.3)
o Distinguish betreen charter party BL and liner party BL.(Box 5.3)
o Why mate's receipt is not a transport document under UCP 600? (Box 5.3)
o What does a clean B/L mean? (Box 5.3)
o What is insurance policy? (5.1.3)
o What should be the content of an insurance document? (5.1.3)
o What is a bill of exchange? (5.1.4)
o Who are the parties in a bill of exchange? (5.1.4)
o What are the other documents under UCP 600? (5.1.5)
o What specific requirements are supposed to be observed by issuing bank in regard to
"other documents", while opening an LC by issuing bank? What is the consequence, if
it is not followed? (5.1.5)

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Chapter Six
Regulatory Environment of Trade Services in
Bangladesh
Chapter Six: Regulatory Environment of Trade Services in Bangladesh

6.1 Regulatory Framework for Trade Services in Bangladesh


In performing international trade services operations, banks are required to follow both a

set of domestic regulations and international rules/guidelines. In this connection, our


exchange control regulation i.e., Foreign Exchange Regulations (with amendments up to
2015) Act 1947 [FERA 1947] is the key domestic regulation in regulating cross-border
banking transactions. Banks are also required to follow the trade policies issued by the
Ministry of Commerce of Bangladesh. Among the international rules and guidelines,
International Chamber of Commerce (ICC) publications are the most relevant. The major
relevant regulations followed in performing trade services activities in the country are
shown in Table 6.1 below:
Table-6.1: Regulatory Framework of International Trade Services in Bangladesh
[Key Relevant Rules/Guidelines]
Domestic Regulations/Rules :

o Foreign Exchange Regulations Act 1947(with latest amendment);


. Bangladesh Bank Guidelines on Foreign Exchange Transactions;
o Export Policy 2015-18;
o Import Policy Order 2015-18.
Key International Guidelines/Rules:
. Uniform Customs and Practice for Documentary Credit (UCP 600);
o Uniform Rules for Collections (URC 522);
o Uniform Rules for Bank-to-Bank Reimbursements for Documentary Credits (URR
72s);
o International Standard Banking Practice (ISBP 7a5);
o International Commercial Terms 2010 etc.

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:

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6.1.1 Purchase/Sale Agreement in the Context of Bangladesh
In the context of Bangladesh, importers are to obtain IRC to import from any sources and
exporters are to get ERC3. Practically, for the three methods (cash in advance, open
account, and documentary collection) banking system needs a standard format a for
purchase/sale agreement, considering the risks to protect the interests of the clients in a
better manner. In case of LC, the contract may be considered as relatively less important
as the terms and conditions of the contract are expected to be in the LC itself. In
Bangladesh, the use of standard sales/purchase contract is not so prominent which may be
due to the widespread use of documentary credit. In regard to uniform rules for the
contract, the major trading partners of Bangladesh like United States, UK, members of
EU, China are among the signatory countries of IIN Vienna Convention. However,
Bangladesh is yet to sign the treaty, and the country also does not have any national
regulation/guideline to cover cross-border purchase/sale contracts.

6.1.2 Foreign Exchange Regulation (Amendment 2015) Act 1947


In Bangladesh, Foreign Exchange Regulations Act, 1947 [FERA, lg47] is the most
important domestic regulation in the area of international banking. FERA, 1947 has
empowered Bangladesh Bank to regulate all kinds of foreign exchange dealings in
Bangladesh. Empowered by the Act, Bangladesh Bank issues Authorized Dealers licenses
to the selected bank branches for conducting trade payments, financing and other
intemational banking operations. Following the provisions of the Act, Bangladesh Bank
issues circulars/guidelines from time to time to regulate trade payment, financing,
remittance services etc. activities to be followed by the banks. These guidelines should
complement the ICC guidelines for smooth operations of international trade payment and
financing activities. The Act has 27 sections and a number of sub-sections which cover an
array of issues connected with trade services and foreign exchange. It focuses on the
maintenance of the proper accounting of foreign currency receipts and payments.
Bangladesh Bank is responsible for administration, supervision, monitoring as well as
framing of different guidelines governing all the transactions denominated in foreign
currencies under the Act. The authorized dealers must maintain adequate and proper

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.
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records for all foreign exchange transactions and fumish the particulars in the prescribed
formats in form of regular monthly submission of rerurns to the Bangladesh Bank. The Act
has given Bangladesh Bank the authority to call for information, power to inspect and
finally to draft rules based upon which Bangladesh Bank issues circulars/guidelines from
time to time to regulate trade payment and international banking activities to be followed
by the banks. Section 5, 8, and 12 of the FERA 1947 are specifically important and

relevant for trade services by banks.

6.1.3 BB Guidelines for Foreign Exchange Transactions, 2009


Authorized Dealers are required to follow Foreign Exchange (FE) circulars issued by the
Bangladesh Bank being empowered by FERA 1947. In this process, one cannot by-pass
the policy decisions and directives of the government in the form of Export Policy and
Import Policy Order issued by the Chief Controller of Export and Import of the Ministry
of Commerce of the country as empowered by the Imports and Exports (Control) Act,
1950. Bangladesh Bank compiled all the FE circulars in the guideline titled GFET. The
current [second edition] issue of GFET 2009 covers regulations upto May 31,2009. The
first volume offers the directives regarding the procedural modalities and the second one
contains the details of monthly reporting of FE transactions. From operational banking
point of view, the importance of the GFET is imperative and the officials working at
different desks of trade services departments in AD branches must know these rules well.
There are l9 chapters in GFET volume one.
o Licensing criteria and basic instructions to the ADs and Money (chapter 1,2,3 & 4)
o Inward and outward remittance (chapter 5, l0,l I & 12)
o Export and Import (chapter 6,7 & 8)
o Foreign Currency Account (chapter 13 & 14)
o Borrowings, Loans & Advances (chapter l5 & l6)
. Miscellaneous (chapter 17, l8 & l9)

6.1.4 Import Policy Order 2015-18


The existing Import Policy Order,20l5-18, has been formulated, keeping in mind the
market economy ideology for making the easy availability of the commodities to
consumers at fair prices through removing the barriers to movement of goods
intemationally. As noted in the policy document, the major objectives are liberalization of
imports in line with WTO and globalization; simplification of imports for export oriented
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industries; and improving quality of services to the importers. The present version of the
import policy order has got nine chapters that cover relevant definitions, general rules for
imports, fees related to imports, miscellaneous rules, and general rules for industrial
imports, provisions related to the importers of government sector, import trade control
committee, and recognized list of chamber of commerce and industry. In the Import
Policy Order, twenty commodities have been kept under the restricted list. The import
policy has allowed opening of LC for importing capital machinery even without IRC and
other flexible measures to keep up with the momentum of rapid industrialization through
ensuring required imports. The limit of import without LC has also been raised. For
enhancing easy availability of industrial raw materials and consumer goods at fair prices,
some commodities have been declared importable as raw materials.

6.1.5 Export Policy 2015-18


Export Policy 2015-18 primarily aims at encouraging production of exportable
commodities and promoting new exporters and helping the existing exporters. In the
policy document, strategies are mentioned to facilitate expansion of trade and taking
necessary steps to modemize and simpliff the country's trade policy in accordance with
WTO obligations and upholding the country's interest. Recently, pressure from the buyers
is mounting for improvement of quality of products, export of products free from any
hazardous and toxic substances, along with fulfillment of other standards and compliance-

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.

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6.1.6 Customs Act 1969 and Pre-shipment Inspection Rules 2002
Customs Act 1969 has consolidated the law relating to customs (the levy and collection of
customs duties) and to provide for other allied matters. The Act has covered some issues
connected withbill of entry and pre-shipment inspection that are related to trade services
by banks. Government of Bangladesh circulated a set of rules of pre-shipment inspection
known as Pre-shipment Inspection Rules 2002 under the Customs Act 1969. These rules
assigned specific responsibilitiess to the importers and the banks related to pre-shipment
inspection. Some Domestic Regulations and Rules for Importation and exportation in
Bangladesh are given in box-6.1, box-6.2 and box-6.3.

Box-6.1: Some Domestic Regulations/Rules for Importation in Bangladesh


Generally import license is not required to import in Bangladesh, no person can
commercially import in BD unless registered with the CCI&E
The ADs must deal only with known customers; in case the importer is a new customer,
the AD should ensure that no bill of entry is due /overdue for submission by the
importer.
The ADs are authorized to issue LCAFs in conformity with the IPO allowing imports
into Bangladesh; the ADs should be very careful about compliance with the instructions
of the IPO and relevant Pubtic Notices in the matters of issuance and disposal of
LCAFs; the ADs will not issue blank LCAFs to their clients. LCAFs remain valid for
remittances for one year subsequent to the month of issuance; Remittance in excess of
the value of the LCAF is not permissible without prior approval of the Bangladesh
Bank;
Other than some exceptions, imports are to be made using only LC under UCP 600;
some items with limited quantity may be imported only using LCAF; for some imports,
Import Permit or Clearance Permit is required.
All LCs for imports in Bangladesh must be documentary LCs; it is not permissible to
open clean or revolving LC or LC with realization clause. However, this is not
applicable for companies operating in the EPZs (A Type); All LCs must specifu
submission of signed invoice and certificate of origin.
Imports using CIF, CIP and DDP are allowed upon perrnission from ministry of
commerce.
NRBs may send importable by directly making payment abroad; Importable must be
shipped within l7 months from the issuance of LCAF for equipment and 9 months for
other item.

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).
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- ADs should obtain confidential report on exporters; the credit repon of tlre s-orne
suppliers collected from one importer may be used for other importers within the
validity period.
- ADs must allow remittance against documents received directly by the importers after
the goods have been cleared from the customs on the basis of LCAF, and authenticated
copy of the customs bill of entry.
- ADs may open back to back LCs for export-oriented industries operating under bonded
warehouse system; the back to back LC value shall not exceed the admissible
percentage ofnet FOB value; the usance period ofthe back to back LC shall not exceed
180 days

Source: Based on GEET 2009; Relevant FE Circulars; Import Policy order 2015-lB

Box-6.2: Some Domestic Regulations/Rules for Exportation from Bangladesh


- All items are exportable except for those noted in the prohibited or restricted list of the
Export Policy; all exports, to which the requirement of declaration applies, must be
declared on the EXP Form. These forms are supplied by the ADs to their exporter
clients; The ADs should, before certifying any EXP form, ensure that the exporter is
registered with the CCI & E under the Registration (Importers and Exporters) Order
1952; for delay in repatriation or non-realization of export proceeds, exporters and ADs
render themselves liable to punitive action under FERA.
- Exports are allowed under contract or advance payment subject to the submission of
EXP Form and Shipping bill; For Export, obtaining PSI Certificate is not compulsory. .

- 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
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of industries for import of raw materials; import of goods from the domestic tariff area
permissible; proceed realization clause facility in case of opening back to back LC is
permissible.
Source: Based on GEET 2009; Relevant FE Circulars; Export Policy 2015-2018

Box-6.3: Some Recent Changes in Regulations/Rules for Importation and Exportation


- In case of importation, the limits of Advance payment have been enhanced from USD
2,500 to USD 5,000 against import of all permissible items as per IPO; however, before
offering such facilities ADs must ensure certain issues.
- Business travel quota has been enhanced @ USD 400 per diem, subject to limits of USD
4,000 per trip and USD 10,000 over a calendar year.
- Foreign travel quota has been enhanced to USD 12,000 per adult passenger during a
calendar year with USD 5,000 or equivalent for travel to SAARC member countries and
Myanmar, and up to USD 7,000 or equivalent for travel to other countries.
- Limit for the Export Development Fund (EDF) has been increased from the existing
USD 1.00 million to USD 2.00 million for a single borrower applicable for the members
of BGAPMEA.
- LCs may be opened to import capital machinery on 360 days deferred payment basis
which is intended for use only where an importer is actually able and willing to settle
payments within 360 days without asking for farther rollover of debt.
- In order to ensure adequate measure of proper management, import delivery Challan, LC
must include the name, description, quantiry, HS code, price etc. of the imported
product.
- The limit for quarterly repayment of external financing for imports has been increased to
USD I million from 0.5 million; and some commodities were exempted from the
restrictions.
- ACU mechanism can be used only for the trade settlement.

6.1.7 International Rules Applicable for Bangladesh


In Bangladesh, ADs are advised to explicitly mention that UCP 600 shall apply for all LCs
to be opened since July 1, 2007. And for export, using LCs, the ADs must ensure that the
terms of the LCs are in conformity with the rules of UCP 6006. But in some cases our
domestic requirements are in conflict with the UCP 600 articles and that must be adjusted
at the time of issuance of an LC. Major such conflicts are shown in the box-6.4. Besides
this UCP 600, other ICC regulations, URR725, URC522, URDG758, ISp 98 etc. are also
followed in the country, though there is no explicit circular of the central bank on these

6.F8. Circular No. 01, June25,2007


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publications. But these guidelines are not prohibited to use. Incoterm 2010 has been
included in Trade Policy 2Ol5-18. In case of Import, only sevenT lncoterms are allowed.
But for CIP and CIF, permission from MOC is required. For export, ADs are allowed to
use any terms as EXW, FCA, FOB, CFR, CPT, CIP, CIF.ADs have to show FOB or its
equivalent value and cost of freights, insurance and other charges separately in the
reporting format.

Box 6.4: Domestic regulation in conflict with UCPDC


- UCPDC said commercial invoice needs not to be signed but in Bangladesh signed
invoice is required.
- After giving discrepancy notice, bankers cannot make payment without ensuring the Bill
of Entry. But if importer gives waiver and it is acceptable to the issuing bank, payment
must be made according to the payment terms of LC.
- Airway bill is non-negotiable document. But domestic regulation asked to make it to the
order offoreign issuing banks in case ofexport.
- Under back to back LC, payment can be made only after receiving Bill of entry. But
after complying presentation, banks need to make payment according to UCPDC.
- For payment under acceptance, payment will be done after physical verification of
goods. Under UCPDC bankers deals with document not with goods.
- According to UCPDC issuance date of a document may be dated prior to the issuance
date of the credit, but must not be dated later than its date of presentation. But in
Bangladesh Shipment date must be after the issuance date of credit.

7 poe. crR, cPT, cIP, cIF, DAT & DAP


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Chapter Six: Questions and Answer Indications
. Why sale purchase contract is important in Bangladesh? (6.1.1)
o What is FERA? (6.2)
o What is the implication of trade policies for trade services by banks? (6.1.4 and 6.1.5).
o How BB controls trade services and foreign exchange transactions? (6.2)
o What are the recent changes in the provisions of trade services in Bangladesh? (Box
63)
o How AD handles the new customer? (Box 6.2 and 6.3)
o Why LCAF is important in importation in to Bangladesh? (Box 6.1 )
o What are the key regulatory requirements in issuing LCAF? (Box 6.1)
o What are the major requirements to open back to back LC? (Box 6. 1)

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)

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Chapter Seven
International Trade Payment Methods in Bangladesh
Chapter Seven: International Trade Payment Methods in Bangladesh
7.1 Trade Payment Methods in Use and Procedures

Ideally four categories of trade payment methods are in use to facilitate and receive
payments in the country:
. Cash in advance.

o Open account,

o Documentary collection and


o Documentary credit.
In some cases, a mix-up of more than one is followed. The method of payment mode is
agreed upon in the purchase/sale agreement. At the operational level, two types of
payment processing mechanisms are followed: Branch Based and Centralized. Under
branch-based arrangement, AD branches of a particular bank conduct their trade service

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.

7.1.1 Cash in Advance


In Bangladesh, there are a few areas where cash in advance is used. In imports, the method
can be used for all items up to USD 5000: however. import against cash in advance upto
any limit is allowed in case of repayment guarantee by an overseas bank. In export there
is no such restriction. The operational procedures of cash in advance (steps involved)
followed in Bangladesh are elaborated in figure-7.1 (import) and figure-7.2 (export).

Figure-7.1: Operational Procedure of Import using Cash in Advance in Bangladesh


Steps Activities Involved

. obtaining PI/ quotations


Step-1: Purchase/ . negotiating the terms & conditions of the agreement, where the
Sale Agreement payment term is cash in advance
. signing the sales/purchase agreement
o verification of quoted prices by the banks

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application from the importer and verification of signature
Step-2: Advance obtaining undertaking from the importer according to GFET
Fund Transfer obtaining Bangladesh Bank's permission other than a few
exceptions8
outward remittance (using SWIFT -MT 103)

Step-3: Shipment a arranging shipment by the exporter and sending documents to


by the Foreign the importer
Exporter and
Sending Documents

o after receiving the documents, the importer approaches bank for


Step-4: Clearance obtaining LCAF and accomplishing other formalities
of the Consignment o the importer releases goods from the port and submit bill of
entry to the bank

Step-S: Reporting . reporting to Bangladesh Bank as per the directives of GFET and
to BB as per the requirement so central bank

Figure-7.2 : Operational Procedure of Export using Cash in Advance i" nangfaAestr


Steps Activities Involved
. obtaining export order
Step-1: o sending PI
Purchase/Sale . negotiating the terms & conditions of the agreement, where the
Agreement payment term is cash in advance
. signing the sales purchase agreement

,-
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).
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Shipping other documents to the Customs for clearance of goodsfor export
Documents o the Shipping Bill/Bill of Export.

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

7.1.2 Open Account


Though it is the most popular method of payment in the world, there are relatively less
instances of open account (excepting in EPZs) due to some implicit regulatory compulsion
in the country. In export, there is no explicit restriction, however, EXP signing
requiremente by the bank restrict banks to agree with open account. There are some cases
of direct handling of documents by clients (exporter and importer). In such a case though
bank is involved at the stage of issuing EXP, the operational procedure is in line with open
account method. The operational procedures of open account followed in Bangladesh
(steps involved) are elaborated in figure-7.3 (import) and figure-7.4 (export).

Figure-7.3: Operational Procedure of Import using Open Account in Bangladesh


Steps Activities Involved
. obtaining PI/ quotations
Step-1: Purchase/ o negotiating the terms & conditions of the agreement, where the
Sale Agreement payment term is open account
. signing the salesipurchase agreement
o verification of quoted prices by the banks

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).
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Step-3: Bank o
tL
after receiving the shipping documents, the importer approaches
Endorsement and bank for customs purpose copy of LCAF & other formalities
Clearance of the o the importer releases goods from the port and submits bill of
Consignment entry to the bank

Step-4: Fund o
l )7

the importer approaches bank with an application to remit fund


Transfer/Import according to sales/purchase agreement
Payment by the . process of outward remittance- using SWIFT (MT 103)
Local Importer

,7

Step-S: Reporting . reporting to Bangladesh Bank as per the directives of GFET and
to BB as per the requirement so central bank

Figure-7.4: Operational Procedure of Export using Open Account in Bangladesh


Steps Activities Involved
Step-l: o obtaining export order
Purchase/Sale . sending PI
Agreement o negotiating the terms & conditions of the agreement, where the
payment term is open account
. signing the sales/purchase agreement

- --
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

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--
Step-4: Receipt of a transfer of fund by the foreign importer through the banking
Export Proceeds channel after receiving the consignment as per the tenor
After Shipment mentioned in the sales purchase agreement
a process of inward remittance.

Step-S: o -
Reporting reporting to Bangladesh Bank as per the directives of GFET and
to BB as per the requirement so central bank

7.1.3 Documentary Collection


The system is appropriate to cases in which the seller is unwilling to provide the merchan-
dise on open account terms but does not need a bank undertaking such as a documentary
credit. Under the arrangement, the exporter hands over the documents (such as transport
documents, insurance documents, commercial invoice, bill of exchange etc.) to a bank
(remitting bank) and asks it to collect payment or acceptance on its behalf using the
service of one or more than one bank/banks (collecting and presenting bank). The method
is regulated by one ICC publication known as Uniform Rules for Collection (URC 522).
Purchase/sale contract is particularly important for the method. The operational procedures
of documentary collection followed in Bangladesh (steps involved) are elaborated in
figure-7.5 (import) and figure-7.6 (export).

Figure-7.5: Operational Procedure of Import using Documentary Collection in


Bangladesh
Steps Activities Involved

Step-l: Purchasei a obtaining PI/ quotations


Sale Agreement a negotiating the terms & conditions of the agreement,
a signing the sales purchase agreement
a verification of quoted prices by the banks

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

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Step-3: Fund o the documents are received by the bank which is operating as
Transfer either collecting or presenting bank as per the collection
instruction
o the bank presents the documents to the local importer and
collects the payment or acceptance as mentioned in the
collection order
o the importer collects the documents and affects payment (Dp)
or accepts the documents (DA)
e transfer of fund by the importer through the banking channel

Step-4: Reporting . reporting to Bangladesh Bank as per the directives of GFET and
to BB as per the requirement so central bank

Figure-7.6: Operational Procedure of Export using Documentary Collection in


Bangladesh
Steps Activities Involved

Step-l: Purchase/ a obtaining export order


Sale Agreement a sending PI
a negotiating the terms & conditions of the agreement
a signing the sales purchase agreement

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

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Step-4: Receipt of o transfer of fund by the foreign importer through the banking
Export Proceeds channel as per collection instructions.
o the remitting bank collects the export proceeds through the
collecting bank

T
Step-5: Reporting reporting to Bangladesh Bank as per the directives of GFET and as
to BB per the requirement so central bank

7.1.4 Documentary Credit


The operational procedures documentary credit followed in Bangladesh (steps
of
involved) are elaborated in figtre-7.7 (import) and figure-7.S (export). Trade services
departments also offer services related to issuance and settlement of local LC. These are
mainly connected with commodity trade within the national boundary.

Figure-7.7: Operational Procedure of Import using Documentary Credit in


Bangladesh
Steps Activities Involved
a obtaining PI/ quotations
Step-1: Purchase/Sale a negotiating the terms & conditions of the agreement
Agreement a signing the sales/purchase agreement
a verification of quoted prices by the banks
{_L
Step-2: Financing . opening of CD account and an FC account, if and when
Arrangement between necessary
the Importer and the o obtaining CIB report from Bangladesh Bank.
Bank . obtaining bank's internal approval regarding opening of LC,
margin requirement, financing option for retirement etc.
ra--J>
approaching bank by the importer to open LC along with the
Step-3: Importer followirtg documents:
approaches to Issue duly filled up LACF, LC application form, Imp form,
LC proforma invoice or indent, insurance cover note, valid IRC,
valid trade license, up to date TIN certificate, membership 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.

fL
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Step-4: Issuing of o issuance of LC according to PI or indent
letter of credit

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

Figure-7.8: Operational Procedure of Export using Documentary Credit in


Bangladesh
Steps Activities Involved
Step-1: Purchase Sale o sending PI/ quotations
Agreement a negotiating the terms & conditions of the agreement

+
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

Step-3: Shipment and


{L
the bank issues EXP when the shipment takes place
EXP issuing the exporter or its C & F agent submits the EXP along with
other documents to the Customs for clearance of goods for
export
customs issues shipping bill,,bill of export after assessment
and verification of EXP

Step-4: The Exporter o


U
exporter submits documents along with EXPs to the Bank.
submits export a bank goes for either negotiation or collection of export
documents after proceeds and forwards the documents
shipment

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Step-5: .
-l r
after receiving export proceeds, the bank alranges
Reimbursement from provisroning of the back to back liabilities as well as adjusts
the issuing Bank other pre-shipment liabilities.
o remaining amount encashed and credited to customer CD
account

__ ,7

Step-6: Reporting a reporting to Bangladesh Bank as per the directives of GFET


requirement to and as per the requirement so central bank
Bangladesh bank

Operational procedures of documentary credit in importation through land port is different


a bit in the country where in almost every cases goods are cleared against delivery order
before receiving the documents by the issuing bank through banking channel. The
operational procedure of the LC operation through land port in the country is elaborated in
figure-7. 9.
Figure-7.9: Operational Procedure of Import using Documentarv Credit through
Land Port in Bangladesh
Step-l : Purchase/Sale Agreementr

U
St.p-rt Frrr-ng Arrangement
u
between the lmporter and the Bank'

Step-3: Importer approaches to Issue LC'-

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
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Step-6 Issuance of Delivery order as per customer request.

Step-7: Lodgment and Retirement

Step-8: Reporting to Bangladesh Bank

-
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.

Step-2: o Advising bank advis-es Master LC to beneficiary.


o Beneficiary of Master Export LC requests to its bank to open an
LC, for execution of export order, in favor of the suppliers of
the yarn and accessories.
o lf exporter gets contract instead of LC, exporter's bank verifies
the genuineness of the contract by following bank's internal
operational guidelines.

Step-3: o Beneficiary's bank scrutinizes the request of exporter regarding


credit limit, terms and conditions of master export LC or
contract.
o To open LC, bank gives lien mark on the master export LC or
contract.

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
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a After being satisfied, bank issues an LC, which is known as
Back to Back LC, in favor of suppliers of yarn and accessories.

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.

Step-5: o Exporter of the master export LC or contract aranges shipment,


prepares documents and submits documents to its bank, which
has issued Back to Back LC.
o Issuer of Back to Back LC forwards documents to the issuing
bank of the master export LC or contract.
o When export proceeds are realized from the master export LC,
issuing bank of the Back to Back LC makes payment to its
suppliers ofyarn and accessories.

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

transfers to the second beneficiaries in BangladeshlT. This is an indigenous practice


generally not common in other economies. In a few cases, confirmed LC is issued from
Bangladesh. There are also some instances of receiving LC issued by reputed corporates
(corporate LC). These are very much within the framework of UCP. A bank is commonly

involved in the process of transmining LCs, documents and payments on behalf of an


issuing corporate. J C Penny is one of such issuers of corporate LC to Bangladesh.
7.2. Documents in Use in International Trade in Bangladesh
Commercial invoice, transport documents, insurance documents, bill of exchange etc. are
the most commonly used documents in trade transactions. The requirements and nature of
documents depends upon purchaseisale agreement. In case of LC, these documentary
requirements are noted in the LC itself. For selecting right documents, the trading parties

''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].
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should consider both domestic and international regulations carefully. In practice
sometimes commercial invoice may not be signed. UCP 600 does not require a
commercial invoice to be signed. But as per the domestic requirement of Bangladesh,
commercial invoice has to be signed. Bill of lading is the most commonly used transport
document or in of multimodal transport document ocean mode is the base. As per
case
domestic rules of Bangladesh, importable is to be released to the order of a bank. As per
the domestic requirement of Bangladesh, insurance coverage is to be given by domestic
insurance companies for imports. Traders are very familiar with the bill of exchange and
its format. In Bangladesh, traditionally customs authority asks for bill of exchange at the
time of releasing of goods. Under the Stamp Actr8 the amount accepted in the bill of
exchange for usance payment is dutiable. Considering the practice of Bangladesh, other
documents may include certificate of origin, PSI certificate, weight list, phyto-sanitary
certificate, health certificate, fumigation certificate, radiation certificate, quarantine
certificate etc. In case of import to Bangladesh, barring a few exceptionsle obtaining
certificate of origin is a regulatory requirement. The mandatory PSI requirement for
importation has been withdrawn since mid-2013. Phyto-sanitary or health certificates are
commonly required in connection with importation of foods.

'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.
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Chapter Seven: Questions and Answer Indications
o What is the operational procedure of cash in advance for exportation in Bangladesh?
(7.1.1)
o What are the transactions for which cash in advance are allowed in Bangladesh?
(7. 1 .1)

. 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)

o What is the operational procedure of documentary collection in importation in

Bangladesh(7.1.3)
o What is the operational procedure of documentary credit in exportation in Bangladesh?
(7 .1.4)

o What is the operational procedure of documentary credit in importation in


Bangladesh(7 .1.4)

o Show the operational procedure of LC in case of land port? (7.1.4)


. In export, documentary collection is getting popularity in Bangladesh Why? (7.3)
. How documentary collection process is different from that of the documentary credit
in exportation in Bangladesh? (7.1.3 and 7 '1.4)
o What is the status of the use of trade payment methods in Bangladesh? (7.3)
o What are the types of LC commonly used in exportation in Bangladesh? (Tab7.8)
o What are the types of LC commonly used in importation in Bangladesh? (Tab 1 .7)
o Write a note on the use of trade payment techniques in different sectors (Tab 7-5 and
7.6)
. Explain the procedure on back to back LC. (Figure 7. l0)

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Chapter Eight
Trade Finance Services by Banks in Bangladesh
chapter Eight: Trade Finance Services by Banks in Bangladesh

Exporters and importers need financing facilities to accomplish their cross-border


purchase and sale. At different stages of production and payment, traders obtain financing
facilities from banks. Financing pattem also vary in different methods of payments.
Financing to the exporters can be grouped under pre-shipment and post-shipment
financing; and financing to the importers can be categorized into pre-import and post-
import financing. The trade financing products used in Bangladesh are discussed below.

8.1 Pre-and Post-shipment Credit to the Exporter by Banks in Bangladesh


pre-shipment credit is obtained to meet expenses on purchasing raw materials, processing'

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

of RMG operating under bonded warehouse facility. Moreover, now


issued on behalf
member manufacturer-exporters of Leather goods & Footwear Manufacturers & Exporters
Association of Bangladesh (LFMEAB) and Bangladesh Ceramic Wares Manufacturers'

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.
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connected with the export in accordance with the rules and regulations in force. Banks in
our country extend post-shipment credit to the exports through Negotiation of documents
under LC, Purchase of DP & DA bills, and Advance against Export Bills surrendered for
collection. Under collection, documents submitted under DA or DP is also purchased by
banks (remitting bank). Banks generally accept export bills for collection of proceeds even
though documents drawn against an LC containing some discrepancies. Now a day, in post
shipment export financing, supplier's credit is getting popularity in Bangladesh. Supplier
credit applies when the exporter's bank lends the money direct to the seller.

8.2 Credits to the Importers by Banks in Bangladesh


For importation, banks have been offering credit facilities to the importers both at the pre-
import and post import stage. LC is a financing technique for importers under which banks
offer undertaking to make payment on behalf of importers. In Bangladesh the popular
post-shipment import financing techniques are termed as PAD, LIM and LTR. Under pAD
or Payment against Documents, an Issuing Bank makes payment against documents on
behalf of importer. Bank extends credit facility to the importer for retirement and
clearance of the consignment known as Loan against Imported Merchandise (LIM).
Advances against a Trust Receipt or LTR obtained from the Customer are allowed to only
first class tested parties when documents covering an import shipment of other goods
pledged to the Bank as scrutiny are given without payment. The Advance allowed against

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.

8.3 Available Facilities/Incentives in Trade Facilitation


8.3.1 Export Development Fund
Established in 1989, the EDF is intended to facilitate access to financing in foreign
exchange for input procurements by manufacturer-exporters. Authorized Dealer (AD)
banks can borrow US Dollar funds from the EDF against their foreign currency loans to
manufacturer-exporters for input procurements.

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
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member mills against past export performance); in all cases within 180 days from dates of
disbursement, extendable by BB up to 270 days upon application to BB explaining the
necessity oflonger period for repatriation ofexport proceeds.

8.3.1.1 Eligibility for EDF loans


. Input imports by manufacturer-exporters against which an AD seeks EDF loan must be
in full compliance with the value addition criterion and other requirements of the
government's Import Policy Order (IPO) in force; and of foreign exchange regulations

and instructions laid down in the GFET 2009 and subsequent circulars of BB.

o Input imports of a manufacturer-exporter defaulting in repatriation of export proceeds


within the statutory period (within 120 days from date of shipment, or such extension
as permitted by BB) will not be eligible for financing from the EDF besides other
usual regulatory penalties.

o The loans to manufacturer-exporters to be eligible for EDF financing must be within


the single borrower exposure limit prescribed by 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

Box-9.1: Eligible Business Entities to Apply for EDF

- 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.

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8.3.2 Bonded Warehouse

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.

8.3.3 Cash incentive

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.
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Chapter Eight: Questions and Answer Indications
o What are the pre-shipment export financing available in Bangladesh? (8.1)
o Why SOD is getting more popularity over packing credit? (8.1)
o What are the domestic regulatory requirements for providing packing credit in
Bangladesh? (8.1)

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)

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Chapter Nine
International Bank Guarantees and Offshore Banking in
Bangladesh
Chapter Nine: International Bank Guarantees and Off-shore Banking in
Bangladesh
9.1 Use of International Bank Guarantees and Standby LC
The bank guarantees operate in much the same way as documentary credits. Practically,
demand guarantees, standby letters of credit and commercial letters of credits are all
treated as autonomous contracts whose operation should not be interfered on grounds
immaterial to the guarantee or credit. However, these instruments have distinctive features
in terms of operational efficiency, use, preference and regulatory environment. There are

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

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loan is driven from foreign bank, one of the conditions is to provide standby LC or bank
guarantee from a bank in Bangladesh.

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).

Figure-9.1: Process Flow of Direct Bank guarantees Received from abroad


(for export contract)
Step 1 Contract details Executing sales contract to export under documen-
tary collection or open account; Submitting executed
sales contract to Bank; Bank asks for guarantee from
abroad [usually from the importer's bank] before
performing export under contract.
Step 2 Receiving Bank Received appropriate bank guarantee or as required
Guarantee from by the Bank either directly or advised by another
abroad bank in Bangladesh.
Step 3 Advising or Advice in case of guarantee received by exporter's
authentication of bank; Ensuring authentication in case of guarantee
guarantee advised by bank other than exporter's bank.
Step 4 Receiving Advice in case of amendment received by exporter,s
Amendment (if bank; Ensuring authentication in a case amendment
required) advised by bank other than exporter's bank
Step 5 Lodging Claim, if Lodging claim, in case of payment not received
arly under documentary collection or open account
Step 8 Record Keeping and Preservation of data, record related to FBG; Repor-
Reporting ting to HO and BB

Figure-9.2 Process Flow of Indirect Bank guarantees Received from abroad


Step I Receiving Counter guarantee received: Directly through SWIFT; or
Counter indirectly from other local bank
Guarantee
Step 2 Advising the Advise the guarantee to the beneficiary [in case of counter
Counter Guarantee Received directly]
Guarantee
Step 3 Issuance of Applicant request; Verifring the authenticity, in case of
Guarantee counter guarantee is advice by another bank; checking terms
and conditions of counter guarantee and comparing it with
the text proposed guarantee., If complying; approval of
credit limit for issuance bank guarantee
Step 4 Issuance of Issuing guarantee according to proposed text of the counter
Guarantee guarantee or any other format

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Step 5 Asking for If there is any mismatch between the terms & condition of
Amendment the counter guarantee and text ofthe proposed guarantee,
ask for necessary amendment.
Step 6 Amendment of If required, amend the guarantee.
guarantee
Step-7 Guarantee Claim If any complying claim received from beneficiary, effect
and counter payment and; claim the same from counter guarantor;
Guarantee Claim receive payment and adjust the loan account.
Step 8 Record Keeping Preservation of data, record related to FBG; reporting to HO
and Reporting and BB

Figure-9.3: Process Flow of Direct Bank guarantees Issued from Bangladesh


(Loans & Advances)
Step I Pre-issuance Obtain Bangladesh Bank approval, If required; Obtain Govt.
Phase approval, if required; Obtain management approval;
checking the terms and conditions, where the text of the
guarantee is prescribed format of the counterpart
Step 2 Issue and transmit Issue &transmit the guarantee through SWIFT
the guarantee
Step 3 Issue Amendment Issue and transmit amendment if required
Step 4 Received Loan or Receive loan or advance payment for export according to
Advance Payment MOA or sales contract
Step 5 Received Claim Receive claim against guarantee through presentation
Step 6 Examine and if presentation complying, effect payment
effect payment
Step 7 Adjustment of Adjustment of loan through reimbursement from the
loan applicant
Step 8 Record Keeping Preservation of data, record related to FBG; reporting to HO
and Reporting and BB
Figure-9.4: Process Flow of Indirect Bank guarantees Issued from Bangladesh
Step I Issue Counter Approval of credit limit; checking all required
Guarantee information and documents; Permission from
Bangladesh Bank; Permission from Govt. authority , if
required; Issuance of counter guarantee, in favor of
bank abroad
Step 2 Amendment of Receive amendment request, if any from guarantor;
Counter Guarantee Issue amendment
Step 3 Issuance of Issue guarantee in favor of the beneficiary either
guarantee by directly or through advising bank
guarantor
Step 4 Claim rece ved by Receive complying claim from the beneficiary and paid
guarantor, f any
Step 5 Record Keeping and Preservation of data. record related to FBG; Reporting
Reporting to HO and BB

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9,2Trade Facilitation through Offshore Banking in Bangladesh

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.

9.2.1 Governance and Market Structure of Offshore Banking in Bangladesh


Bangladesh Bank circulated detailed information on the 'Establishment of Off-shore
banking units in EPZs'22 where certain terms and condition have been set up while Off-
shore Banking Units (OBUs) are allowed. As per the decision of the government23 of the

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.
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bank whether incorporated in Bangladesh or outside Bangladesh, it has to maintain its
own separate accounts relating to off-shore banking business.
In regard to banking products, OBUs are allowed to offer banking services targeting
selected group of clients and non-residents. Offshore banks are free to accept deposits or
to borrow, from persons/institutions not residents in Bangladesh including Bangladesh
nationals working abroad. Offshore banks are also free to accept deposits from, or to
borrow from, Type - A (wholly foreign owned) units in the EPZs in Bangladesh. However,
such banks are not to accept deposits from persons/institutions residents in Bangladesh
including Type - B and Type - C units in the EPZs in the country. Local banks may also
maintain foreign currency accounts with OBUs in the manner they maintain such accounts
with their foreign correspondents. OBUs of the country are permitted to transact in the

following currencies: US Dollar, Pound Sterling, Canadian Dollar, Deutsch Mark,


Japanese Yen, Swiss Franc, Dutch Guilder, French Franc. Swedish Kroner and Singapore

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 ].

Table-9.1: Different Categories of Transactions by OBUs

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

Source: Authors' compilation based on various BB circulars and BEPZA guidelines.

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Some recent changes in regard to the offshore banking services (through different circulars
of Bangladesh Bank) have brought momentum in the activities of OBUs. In February,
2010, Bangladesh Bank permitted OBUs to discount bill against deferred LC issued by our
ADs.2a This is also an attempt to save foreign cuffency as we need to pay higher amount
of interest for usance period. On February 06 2012, Bangladesh Bank enhances the
interest ceiling from LIBOR to 6 percent for buyers and suppliers credit 2s . This
enhancement brought real opporfunity for the PCBs' and IBs' OBU to increases their asset
size. UPAS (Usance Pay at Sight) transactions for the importers expanded remarkably
since early 2013. The Central Bank allowed (FE Circular)26bill discounting in foreign
currency of direct and deemed exports using UPAS arrangement though their respective
ADs. For discounting, the foreign currencies may be obtained from a bank's own OBUs or
foreign correspondent banks located outside, or other intemational financial institutions.
The expenditure on discounting must not exceed 6 percent for the clients. The transactions
are required to be reported by the ADs to the Bangladesh Bank. It has been observed that
the most recent circular (of February, 2013) has been interpreted differently by the
practitioners that affected the OBU transactions in two ways: OBU itself discounting the
bills on request of the onshore; and AD's discounting the Bill by borrowing fund from the
OBU.

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

'o BRPD Circular no.28 dated September 05, 201 0.


25
FE Circular no.02, dated February 06,2012.
26
FE Circular no-03, February 04,2013.
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PCBs [including IBs]. Only one OBU license is granted to a state owned bank, and that
was the first OBU in the country in the year 1987. Most banks have only 1 OBU [53
percentl. Of the total OBUs. 65 percent are located within EPZ. There is no OBU located
outside the country owned by any domestic bank.
9.2.2 UPAS through OBU
Financing through OBUs under UPAS arrangement has become the main function of the
OBUs in the country. Practically, the major lending functions 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. The operational procedure (flow chart) of UPAS credit under OBU
arrangement is depicted below (figure-9.5). However, in recent time, OBUs started
discounting services to the ADs local export bill as well. Banks render UPAS credit
facilities to its valued customer in the following two ways: One, UPAS credit service
through own offshore banking unit (OBU); two, UPAS credit service through overseas
Correspondent Bank.

Figure-9.5: Operational Procedure of UPAS Documentary Credit by OBU in


Bangladesh
Steps Activities Involved
Step-1: Purchase/Sale a Obtaining PI/ quotations
Agreement a Prior agreement with OBU regarding discountine of bill.
{_L
Step-2: Financing . Opening ofCD account and an FC account, ifnecessary
Arrangement between o Obtaining CIB report from Bangladesh Bank.
the Importer and the o Obtaining bank's intemal approval regarding opening of LC,
Bank margin requirement, financing option for retirement etc.
ra--'
Approaching bank by the importer to open LC along with
Step-3: Importer selected documents like duly filled up LACF, LC application
approaches to Issue form, Imp form, PI or indent, insurance cover note, valid IRC,
LC valid trade license, up to date TIN certificate, membership of
relevant trade association/ certificate from chamber.
Obtaining of credit report of the supplier.
JL
Step-4: Issuing of o Issuance of LC according to PI or indent
letter of credit

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o
!
-L
Document received and found complying or waived
Step-S: Discounting discrepancy
by OBU o Sending required doc. For OBU along with acceptance
. OBU effect payment to the beneficiary according to
arrangement
E )7

Step-6: Lodgment a Complete retirement process


&Reporting to a Reporting to Bangladesh Bank
Bangladesh Bank a Collect Bill of Entry

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

maximum portion of these outstanding liabilities.

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.
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banks. Under the arrangement, the banks are allow-ed to swap maximum $20 million from
Bangladesh Bank (BB) against their BDT through their OBUs for maximum six months.
The interest rate for USD was 6month LIBOR+l% while that of taka was Reverse Repo
Rate. Later Bangladesh Bank withdraws that swap line.

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.

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Chapter Nine: Questions and Answer Indications
o How intemational bank guarantee is different from standby LC? (9.1)
. Why international bank guarantee is getting popularity in our trade business? (9.1)
. Draw the process flow of direct bank guarantee issued from Bangladesh. (Fig9.2)
. Draw the process flow of direct bank guarantee received in Bangladesh. (Fig 9.3)
o Explain the operational procedure of indirect bank guarantee received in Bangladesh.

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)

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Chapter Ten
Remittance, Foreign Currency Accounts, Foreign
Exchange Treasury and Reporting Fundamentals of
Trade Services
Chapter Ten: Remittances, Foreign Currency Accounts, Foreign
Exchange Treasury and Reporting Fundamentals of
Trade Services

10.1 Foreign Remittance Services

Foreign remittance means remittance of foreign currencies from one place/person to


another place/person. In broad sense, foreign remittances include all sale and purchase of
foreign currencies on account of Import, Export, Travel and other purposes. However,
specifically Foreign Remittance means sale and purchase of foreign currencies for the
purposes other than export and import. And these can be categorized into private, official

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.

10.1 Different Types of Private, official and Commercial Remittances


Family remittance facility: Foreign nationals working in Bangladesh with the approval of
the Government may remit through authorized dealer 75% of net mbnthly salary and
100% of leave salary as also actual savings and admissible pension benefits. Besides,
Bangladeshi nationals are allowed to remit moderate amount of foreign exchange for the
maintenance of family members working abroad.

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.

Remittance of consular fees: Consular fees collected by foreign embassies in Bangladesh


Taka and maintained in taka account with an AD solely for this purpose may be remitted
without prior approval of Bangladesh Bank.

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.

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Health/Medical.' ADs without prior approval of Bangladesh Bank may release foreign
exchange up to $ 10,000 for medical treatment abroad on the basis of the recommendation
of the medical board/specialist set up by the Health Directorate and the cost estimate of the
foreign medical institution.
Seminars and workshaps.' without prior approval of Bangladesh Bank, ADs may release
US$400 per diem for attending in the conferences, seminars and workshops.
Foreign nationals: ADs may issue foreign cuffency TC to foreign nationals without any
limit and foreign currency notes up to US$300 or equivalent per person against surrender
of equivalent in foreign currencies.
Remittance for Hajj: ADs may release foreign exchange to the intending pilgrims for
performing Hajj as per instructions of Bangladesh Bank.
Olftcial vr'sit.' For official visit abroad by the officials of government and other
organizations ADs may release foreign exchange as per entitlements fixed by the Ministry
of Finance.
Business travel for new exporters: Up to US$10,000 are allowed to carry by new
exporters, which may be issued by ADs without prior approval of Bangladesh Bank.

for importers and non-exporlers: Subject to annual upper limit of


Business travel quota
US$5,000 importers are entitled to carry business travel quota and non-exporting
producers qtota @ l%o of their imports/turnover settled during the previous yearldeclared
in their tax returns.
Exporters' retention quota: Merchandise exporters may retain up to 60% realized FOB
value of their exports in foreign currency accounts (for garments exporters, the quota is
l5o/o) may use for business visit abroad, participation in export fairs, seminars, office
maintenance abroad, import of raw materials.

Opening of branches or subsidiary companies abroad: Remittance of up to US$30,000 or


equivalent per annum may be released by ADs without prior approval of Bangladesh Bank
to meet current expenses ofoffices/branches opened abroad.

Remittance by shipping companies, airlines, and courier service:


ADs are allowed to remit surplus of foreign shipping, airlines and courier services after
meeting their operational costs including taxes.

Remittance of royalty, technical.,fees.' No prior permission is required for remitting


royalty, technical know-how, technical assistance fees, etc. if total fees and other expenses
connected with technology transfer do not exceed 6%o of the cost of imported machinery in
case of new projects and 60/o of the previous year's sales as declared in the income tax
returns.
Remittance of prolits/dividend of foreign Jirms: Foreign firms can remit post tax profit,
dividend income.
Source: Based on BB Guidelines and Circulars.

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Remittances - a portion of the wages of migrant workers earned in foreign countries and
sent back to their home country - are a strong source of foreign exchange for labour
sending countries used to pay import liabilities; improve the balance of payments; build
foreign exchange reserves; service extemal debt; and enhance the viability of the recipient
countries' external sector. On the domestic front, remittances increase the household
incomes of migrants' families; improve living standards; enhance savings; generally
contribute to national economic groMh.

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.

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-Incoming passengers may bring in any amount of foreign exchange with declaration in
FMJ at the time of arrival; no declaration is necessary for amounts up to USD 5000; for
non-resident, the entire amount brought in with declaration or up to USD 5000 brought in
without declaration may be freely taken out at the time of departure or may deposit the
amount in F.C Account or NFCD Account subject to submission of Form FMJ for excess
of USD 5000 or equivalent.

-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.

Source: Based on BB Guidelines and Circulars.

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.

10.1.1 Schemes and Savings facilities offered by BB to Migrants


Wage earners' Development Bond (llEDB): Any Bangladeshi migrant can invest the
Taka counterpart of their foreign currency in this Taka denominated bond. Interest earned
12 percent per annum and is tax-free. Bonds are convertible to foreign exchange and
proceeds are transferable abroad. Expatriate Bangladeshi Wage Earners may invest their
hard earnings in five years WEDB on renewable basis for denomination of Taka25,000l-
, BDT 50,000 and BDT 100,000 or any multiple of these amounts at attractive rate of
interest and the accrued interest is tax free in Bangladesh.

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US Dollar Investment Bond and US Dollar Premium Bond: The Government of the
People's Republic of Bangladesh has introduced US Dollar Investment Bond and US
Dollar Premium Bond to facilitate investment of hard earned foreign currency by the non-
resident Bangladeshis. Non-resident Bangladeshis are eligible to purchase US Dollar
Investment Bond and US Dollar Premium Bond with the foreign currency sent to his F. C.
account or with the cheque/draft in foreign currency (after collection of cheque/draft)

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

services of MFIs more extensively.

10.2 Maintenance of Foreign Currency Accounts by Banks


10.2.1 Private Foreign Currency Account
Bangladesh nationals Persons, Bangladesh nationals working/residing abroad, Foreign
nationals residing abroad or in Bangladesh, Foreign missions and their expatriate
employees, Foreign firms registered abroad and operating in Bangladesh or abroad and
Bangladesh nationals working in foreign/intemational organizations in Bangladesh with
entitlement to receive salary in foreign currency may open Private FC Account with
Authorized Dealer banks are eligible to open private foreign currency account.

10.2.2: Resident Foreign Currency Deposit (RFCD) Account

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
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equivalent can be deposited any time after return from abroad while amount exceeding
USD 5000 or equivalent (with declaration to customs authority in FMJ Form) can be
deposited within one month of return from abroad.

10.2.32 Non-resident Foreign Currency Deposit (NFCD) Account


Expatriate Bangladeshi Nationals and persons of Bangladesh origin including those having
dual nationality may open non- Resident Foreign Currency Fixed Deposit Account with
any authorized dealer branches in Bangladesh for a period of one month, three months,
six months or twelve months on renewable basis depositing minimum USD1,000/- or
GBP 500. The eligible persons may open this account at any time of their retum to
Bangladesh. Interest on NFCD Account is tax free in Bangladesh.

10.2.4 Exporters' Retention Quota Account


Merchandise exporters, direct exporters, deemed exporters and service exporters are
eligible to open ERQ Account.ERQ for exports of high domestic value added merchandise
is up to 60 percent of repatriated export receipts. ERQ for merchandise exports of high
import contents (like apparels using woven fabric) is up to 15 percent repatriated export
receipts ERQ for export of services is up to 60 percent of repatriated export receipts.
Balances in these accounts may be used by the exporters for bonafide business purposes,
in export fairs and seminars, establishment
such as business visits abroad, participation
and maintenance of offices abroad, import of raw materials, machineries and spares etc.
without prior approval of Bangladesh Bank. ADs may effect advance payment not
exceeding USD 10,000 or its equivalent from the Exporters' Retention Quota Account
against bonafide business purposes provided the relevant contract/pro-forma invoice
stipulates for such payment.

10.2.5 Non-Resident Investor's Taka Account (NITA)


Expatriate Bangladeshis may invest their hard earned money in the Stock Exchange for
purchase of Bangladeshi shares and securities. For this purpose, the expatriates may open
NITA account with any authorized dealer branches. Profits/dividends/gains can be
deposited in this account and are tax-free in Bangladesh. Balance of NITA account is
repatriable abroad at the prevailing rate of exchange. The nominee may operate NITA
account. The account holders may nominate concerned Bank to act as nominee also.

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10.3 Treasury Operations in Trade Services

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.

Box 10.3: Role of Treasury in International trade


- Adequate FX positions
- Forward cover facility for Importer / Exporters
- Market based pricing
- Spot sale for Import payments
- Spot purchase for export receipts
- Up to date Nostros reconciliation
- Prompt facilitation of transactions to & from foreign banks through Nostros /
Vostros

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
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foreign investments and loans. The "spot" exchange rate is the pnce for immediate
exchange. (Immediate usually means within two working days.

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.

103.f Exchange Rate Quotation


In foreign exchange literature we come across a variety of terminology to indicate
methods of expressing or quoting exchange rates. Sometimes exchange rate spot
quotations are grouped as direct and indirect quotations. In case of direct quotation,

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

generally a combination of a spot and a forward transaction.

10.3.2 Applicable Rates in Trade Services

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

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interest rates. Where SCBs charge around 7 percent, some PCBs use more than 10 percent.
Moreover some FCBs apply commercial rate in this purpose. According to our export
policy 2015-18, in all export financing, lower interest rate should be applied. But there is a

lack of uniformity in applying interest rate in purchasing usance export LC by different


banks. The range of exchange rates of sample banks in different trade services are shown
in the table-10.1 and figure 10.2.

Table-10.1: Exchange Rate used in Trade Facilitation in Bangladesh


Purpose Rate
Outward Remittance TT&OD Selling
Cash in Advance Export TT DOC Buying
Cash in Advance Import BC Selling
Open account Export TT DOC Buying
Open Account Import BC Selling
Documentary Collection Export TT DOC Buying
Documentary Collection Import BC Selling
Documentary Credit Export OD Sight Buying
Documentary Credit Import BC Selling
Source: Habib et. al,2015

10.3.3 Foreign Exchange and Commoditv Derivatives for the Traders


10.3.3.1 Foreign Exchange Derivatives

A foreign exchange derivative is a financial deril'ative whose payoff depends on the


foreign exchange rate(s) of two (or more) currencies. These instruments are commonly
used for currency speculation and arbitrage or for foreign exchange risk. FX Derivatives
can be used to mitigate the risk of economic loss arising from changes in the value of the

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

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spot transaction struck on Tuesday, delivery will take place on Thursday, provided both
Wednesday and Thursday are working days. However, the exchange rate applicable is the
rate prevailing at the time of striking the deal. In a spot transaction, the delivery date is
referred to as the spot date.

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.

Future: Futures are contracts of engaging currencies in the future at a predetermined


exchange rate. In this respect they are similar to forward contracts. But futures are
standardized contracts with standard contract sizes and maturity dates. Moreover, future
are traded on an organized exchange created for this purpose. The settlement of the deal
that is, the delivery of the currencies by the buyer and the seller is facilitated by the
clearing house ofthe exchange.

Options: A currency option contract is a derivative instrument. It is a contract that gives


the buyer of the option the right, not the obligation, to buy or sell a particular currency at a

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.

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10.3.3.2 Foreign Exchange Derivatives in Bangladesh
Foreign exchange derivative products are used in the bank to settle the foreign currency
demand and supply. Export earnings and remittances are the major source of foreign
culrency for the banks. Banks use spot, forward and swap products to deal in foreign
exchange. Inter-bank foreign exchange market of Bangladesh is still at its rudimentary
stage. The market is oligopolistic and it is dominated by a few relatively large banks,
which have remained only as dealers instead of developing themselves into buyers or
sellers. The most widely used practice is spot transaction. While there is no restriction for
interbank participants to transactin BDT against foreign currencies, clients can only
transact for valid commercial transactions. Bangladesh foreign exchange market is in
many respects very old-fashioned with almost all transactions done in the spot market at
spot exchange rates. While there is an active FX swap market, these are very short dated.
Most volumes are transacted within one week, which is used as a funding technique by the
banks. The outright forward is very popular among corporate entities, which have a
genuine underlying transaction. These are usually for 3-6 month tenors but longer tenors
of up to 2-3 years can also be undertaken for small ticket sizes. There is no regulatory
restriction for the forward tenors. There was already a surplus foreign cumency in the
commercial banks. So to hedge the future risk, forward products were used in a limited
volume.

I 0.3.3.3 Commodity Derivatives


Commodity derivatives markets have been in existence for centuries, driven by the efforts
of commodities producers, users and investors to manage their business and financial
risks. In 2008, BB allowed hedging the price risks of commodities in Bangladesh. Banks
can hedge the price risk of commodities that are traded on exchanges or over-the-counter
(OTC) of their customers through standard exchange traded fufures/options and OTC
derivatives on commodities subject to prior approval of Bangladesh Bank. The use of
commodity derivatives will only be permitted when customers have genuine underlying
commodity price risk exposure(s). This can be monitored by the Banks through checking
of the underlying risk exposure documents. Any kind of speculation through the use of
commodity derivative instruments will not be permissible by domestic regulators. Banks
must completely hedge the commodity price risk arising from the commodity hedge
transactions by booking back to back transactions with banks having international standing
or their branches operating in Bangladesh.

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10.4 Reporting Fundamental of Trade Services

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
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be web based only. Increased bandwidth and information integration with other systems
are crucial conditions for greater efficiency. While reporting trade related transactions,
ADs sometimes make some common mistakes that include misreporting of amount of LC
or contract; currency and its code number; H.S code; quantity, unit price and other related
information, as observed by BB. The new on-line reporting of BB has emerged as a great
achievement in banking system which helps monitoring and supervising day-to-day trade
transactions. This is also a great tool for data validation. It is good to see that introduction
of Dashboard and online integration between customs and BB has brought positive
changes in handling irregularities.

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Chapter Ten: Questions and Answer Indications
o What is remittance? (10.1)
. How is foreign inward remittance different from foreign outward remittance? (10.1)
o What are the major different initiatives Bangladesh Bank and government have taken?
(10.1)
o How long do all authorizations (excepting TM forms approved by the Bangladesh
Bank) by the ADs on behalf of the Bangladesh Bank remains valid? ( I 0. I .3)
o Name the common modes of foreign remittance. (10.1.2)
o What is foreign exchange market? (10.3)
o What are the functions of foreign exchange market? (10.3)
o What is exchange rate? (10.3.1)
o Explain the different methods of quoting foreign exchange rates. (10.3.1)
o For which foreign exchange transaction, usance rates, B.C selling, O.D Sight and
T.T& O.D are applicable? (10.3.1)
. Who can open RICD accounts, NFCD accounts, ERQ accounts and NITA? (10.2.2,
10.2.3 & 10.2.4)
o What is an ERQ account? (10.2.4)
o What is foreign exchange derivative? (10.3.1)
o What is the purpose of using foreign exchange derivatives? (10.3.1)
o How is currency forward contract different from currency future contract?10.3.1)
o Distinguish between call option and put option?(10.3.1)
o What is swap? (10.3.1)
. Explain the use of Foreign Exchange Derivatives in Bangladesh.(10.3.3.2)
o What is commodity derivative market? (10.3.3.3)
o Explain the reporting arrangement of trade services activities by banks? (Box 10.4)
. Why reporting is crucial for regulatory perspective? (10.4)
o How online reporting is helping the overall monitoring status of trade services? (10.4)
o What are the purposes of reporting of trade services transaction to Bangladesh Bank?
(10.4)

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of Trade Finance and Introduction to the Bank Payment Obligation", Educational report,
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Bangladesh, A Research Workshop Presented in 2015, Bangladesh Institute of Bank
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Hoque and Md. Shahjahan (2015), Offshore Banking in Bangladesh: Problems and
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Nesarul Hoque (2014), International Bank Guarantees: Practices and Potential of
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Habib Shah Md. Ahsan, Tofayel Ahmed, Rahat Banu, Md. Anisur Rahman, Kamal
Hossain and A. T. M. Nesearul Haque (2015), Review of the Trade Services Operations of
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ICC (2008), [Jniform Rules for Bank to Bank Reimbursements for Documentary Credits-
URR 725, Paris, France.

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Appendix
Appendix Table-l
Glossary of Technical Terms used in the Manual
o Acceptance. A time draft that the drawee (the payer) has accepted and acknowledged
in writing the unconditional obligation to pay it at maturity.
o Advising Bank. A bank, which receives a letter of credit, issued by the applicant's
bank and forwards it to the beneficiary after verification of authenticity.
o Air Way bill. A transport document/bill of lading, which serves as a receipt for
goods and contract to transport the goods by air.
. Applicant. The buyer/importer/account party who applies to its bank to issue a letter
of credit in favor of the beneficiary/seller/exporter.
o Assignment of Proceeds - Legal mechanism by which the beneficiary of a letter
of credit may pledge the proceeds of future drawings to a third party.
o At Sight. The tenor of a draft or availability term of a credit indicating that payment
is due upon presentation or demand.
o Back-to-Back Documentary Credit. A documentary credit issued on the basis of
another documentary credit that will constitute security for the back to back credit.
o Bank guarantee: Undertaking given by a bank on behalf of a customer to pay the
guaranteed party a sum of money if the customer cannot or will not paylperform.
o Beneficiary. The person or company in whose favor a letter of credit is issued.
Usually the beneficiary is the seller/exporter.
o Bill of Exchange. (See Draft.)
o Bill of Entry. A declaration by an importer or exporter of the exact nature, precise
quantity and value of goods that have landed or are being shipped out.
o Bill of Lading. A transport document, which serves as a receipt for goods and
contract to transport using ocean mode.
o Bonded W'arehouse - a warehouse authorized for storage of good on which payment
of duty is deferred until the goods are removed from the warehouse.
o Certificate of Analysis. A certificate issued regarding the quality and composition of
food products or pharmaceuticals.
o Certificate of Inspection. Adocument certiffing that merchandise was in good
condition immediately prior to its shipment.
o Certificate of Origin. A document, often issued by a Chamber of Commerce,
certifoing the origin of the goods being shipped. It is used to satisfo import
regulations and to determine customs duties.
o Certified Invoice-An importer may require a certified invoice, which is an invoice
bearing a singed statement by someone in the importer's country who have inspected
the goods and found them in accordance with those specified in the contract.
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o Charter-party An agreement wherein the ship owner hires his vessel to the charterer
subject to certain conditions.
o CIGS. It is a Contracts for the International Sale of Goods.(lIN convention on
contracts for the intemational sale of goods)
o Clean Bill of Lading. A receipt for goods issued by a carrier with no indication that
the goods or the packaging were in damaged condition when received.
o Clean Transport Document. A transport document that bears no clause or notation
that indicates that goods were received in apparent good order and were not damaged
or had other irregularities.
o Collecting Bank. Banks involved in the collection of a draft and/or documents.
o Commercial Invoice. A document issued by a seller listing goods being sold to a
named buyer including the price and shipping terms.
o Confirmation of a documentary Credit. Adding an additional undertaking in the LC
other than that of the issuing bank.
o Consignee. The person or firm named in a freight contract to whom merchandise is
to be delivered.
o Consular Invoice. A commercial invoice that has been reviewed by the Consulate of
the buyer's country to ensure that no indigenous laws or regulations are being broken.
o Contract of Carriage. This is an agreement between the shipper and the carrier.
o Country Risk. The risks inherent in doing business in a foreign country over and
above commercial risks, which are generally beyond the local company's ability to
control.
o Deferred Payment - Payment a set time after shipment or presentation of
shipping documents, as opposed to immediately or 'at sight'.
. Demand Guarantee. A guarantee usually issued by a bank, under which the
beneficiary is only required to make a demand in order to receive payment.
o Discrepancy. Error or defect, according to the bank, in the presented document
compared with the documentary credit, UCP 600 and ISBP.
o Dock Receipt. A receipt for goods issued by an ocean carrier or their agent at their
dock or warehouse; does not cover the loading on a vessel.
o Documents Against Acceptance (DA) - Instructions given by a shipper to his
or her acceptance bank that the documents attached to a time draft for collection
are deliverable to the drawee/payer against his or her acceptance of the draft.
o Documents Against Payment (DP) - Instructions given by a shipper to his or
her bank that the documents are deliverable to the drawee lpayer only against his
or her payment of the draft
o Draft. An unconditional order in writing from drawer (exporter) to drawee (importer)
directing the drawee to pay a specific amount of money to the payee on demand or at
a fixed or determinable future date.
o Drawback A repayment of dury on the exportation of goods previously imported.
o Drawee. The person, company or bank upon which a draft is drawn.
o Drawer. The person, company or bank that creates the draft and is generally entitled
to receive payment.
o Dutv. A tax on im the customs authorities in that country.
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o Entre-pot Trade. It means export of any imported goods into a third country with
minimum 5%o value addition.
o Exchange Rate. The value or price of one cuffency when used in relation to its value
in another cuffency.
o Expiry Date - Last date on which documents may be presented or corrected in
order to comply with a letter of credit.
o Export credit insurance. Special insurance coverage of exporters to protect against
commercial and political risks for making an international sale.
o Feeder Ship Vessel used in short sea trade to serve ports at which deep-sea container
ships do not call.
o Force Majeure. Conditions such as floods, earthquakes, hurricanes or other events
beyond the control of various parties involved in transporting goods.
o Foreign Exchange. The currency of a foreign country and/or the conversion from
one currency to another.
o Forwarder's Cargo Receipt - Document issued by a freight forwarder or freight
consolidator indicating goods have been received from the seller and are being
held on behalf of the buyer.
o Forwarding Agent. The agent or firm arranging transport on behalf of the seller.
o Free (Foreign) Trade Zone. An enclosed and secured area usually designated by a
port into which goods may be taken and customs duties may be deferred or waived
until such time as the goods are removed for domestic distribution or re-exported.
o Freight Forwarder. A private company that arranges cargo space on a carrier as
well as the logistics for delivering the goods to the carrier (e.9. ship, airplane etc.).
o GATT. "General Agreement on Tariffs and Trade." A multilateral treaty designed to
reduce trade barriers and to provide a forum for resolution of trade disputes.
o Groupage B/L. Forwarding agents are permitted to group together or consolidate
consignments from individual consignors and dispatch them as one consignment.
o Hague Visby Rules. Set of rules amending the Hauge rules, published in 1968,
which have not been implemented by as many countries as the predecessor Hague
Rules.
o House bill of lading. A bill of lading issued by freight forwarder.
e Insurance certificate: Document giving details of insurance cover for a
consignment. The certificate will cross-reference a master insurance policy and must
be countersigned.
o Insurance cover note:-Insurance document evidencing that insurance cover for a
consignment has been taken out, but not giving fulI details.
o Insurance policy: Document setting out full details of insurance in force.
o International Chamber of Commerce (ICC). An organization founded to promote
free trade, private enterprise, and to represent business interests at the national and
international level.
o Issuing Bank. The bank that issues a letter of credit; also called the opening bank
o Inspection certificate. A certificate generally issued by a respected independent
agency that generally verifies the quality, quantity or specifications of the good
shipped is in conformity with the sales contract.
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. Latest shipment date. Date on a letter of credit by which the goods must have been
shipped.
o Liner Party BL. Liner B/Ls are issued by shipping companies in respect of goods
carried on regular line vessels with scheduled runs, and reserved berths at destination.
o Maturity date: Date at which payment is due under a term bill of exchange.
o Mate's Receipt: When the goods are handed over to the agent of the shipping
company for shipment by a specified vessel and the agent contracts to do so, it issues
a receipt known as Mate's Receipt.
. Marine Risk Insurance. Insurance covering loss or damage while goods are at sea.
o Marks of Origin. Physical markings on a product indicating the country where the
merchandise was produced.
o Most-Favored-Nation Treatment. A commitment that a country will extend to
another country the lowest tariff rates or the most favorable nontariff policies.
o Multimodal Bill of Lading - Bill of lading covering shipment of goods by more
than one means of transportation but including an ocean leg.
o Nominated Bank. The bank ivith which the credit is available or any bank in the
case of a credit available with any bank.
r Notify party: the party who is to be notified when goods arrive at their destination.
o ON Board B/L: It is issued after the goods have been shipped on board. A credit
requiring B/L must indicate that the goods have been shipped on board.
o Open Insurance Policy. A marine insurance policy that applies to all shipments over
a period of time rather than on a single shipment.
o Packing List. A document that lists the various packages or cartons being shipped
and their contents.
o Partial Shipment: A shipment under a Letter of Credit representing only part of the
goods covered by the Letter of Credit.
. Payee: Parfy to whom payment is due.
. Phytosanitary Certificate. A certificate typically issued by a country's agricultural
department to satisff import regulations certifying that specified perishable food,
weed and plant items are free from contamination, pests and plant diseases.
o Pre Shipment Finance. The finance required for the period before goods have been
shipped.
o Pre-shipment Inspection. An inspection of contract goods prior to shipment to
ascertain their quality, quantity or price.
r Post Shipment Finance. The finance required for the period after goods have been
shipped before payment is received by the exporter.
o Presenting Bank. The Collecting Bank making presentation to the Importer
(drawee), usually the Importer's bank.
o Principal - Parry entrusting a draft and/or documents to a bank for collection of
payment; usually the seller of goods.
o Pro-Forma Invoice. A draft or sample of what the final invoice will look like which
is used by sellers in the negotiating process with a potential buyer in order to ensure
that all parties understand what costs are included in the quoted price.
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o Promissory Note: Financial document in which the buyer agrees to make payment to
the seller at a specified time
o Red Clause Credit: A red clause credit allows pre-shipment advances to be made to
the exporter at the risk and expense ofthe applicant.
o Remitting Bank. The bank that the Exporter authorizes to carry out the collection on
its behalf.
o Revolving Credit: The revolving credit is one, which under the terms and condition
thereof provides for restoring the credit to the original amount after it has been
utilized.
o Short Form/Blank Back BL: BL in which the detailed conditions of transportation
are not listed in full (on the back of the BL).
o Sight Draft. A draft which is payable by the drawee at the time of presentation.
o Straight BL. BIL issued to the name of a certain party and which cannot be
transferred by endorsement.
o Stale BL. A BL that has been presented later than 2l calendar days after the date of
shipment.
o Standby Letter of Credit. Letter of credit issued to back an obligation of the
applicant, but typically not intended to be the primary method of payment.
o SWIFT: Society for Worldwide Interbank Financial Telecommunication; an
organization that operates the major interbank electronic communication system for
financial messages (payments, letters of credit, securities transactions etc.)
o Through BL: BL covering goods being transshipped en route. It covers the whole
voyage from point of shipment to final destination.
o Transferable Letter of Credit. A Letter of Credit that allows the Beneficiary
(Exporter) to instruct its bank to transfer the credit in part or in whole to a Secondary
Beneficiary.
o Transferring Bank. The bank authorized by the Issuing Bank to transfer at the
Beneficiary's request all or part of the Letter of Credit to another parry.
o Trust Receipt: Release of merchandise by a bank to a buyer in which the bank
retains title to the goods.
o Warehouse Receipt. A receipt issued by a warehouse operator for goods received for
storage.
o Weight Certificate. It is a certificate evidencing the weight of the goods to be carried
to the destination of imoorter bv the carrier.

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