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FOREIGN EXCHANGE :

What is meaning of Foreign Exchange ?

Foreign exchange means a bank converts currency of one country into the currency of another
country.

Foreign exchange refers to the process or mechanism by which the currency of one country is
converted into the currency of another country.

What is Rate of Exchange :

The rate of exchange is the price at which a currency can be exchange for money in terms of another
currency.

The rate of exchange at which one currency is exchanged for another currency.

Foreign Trade :
The foreign trade of a country refers to its imports and exports of merchandise from and to other
countries under contract of sale. No country in the world produces all the commodities it requires.
Foreign trade constitutes a sizable portion of international transaction of a country.

Authorized Dealers :
In exercise of the powers conferred by the Foreign Exchange Regulation Act – 1947 on certain
schedule banks, who are authorised to deal in foreign exchange by Bangladesh Bank, the selected
branches of the bank can transact such business. They are known as ‘Authorized Dealers’.

Supplier’s/Seller’s Credit :
Medium export credits are customarily extended by the suppliers direct to the overseas buyers. This
type of credit is usually granted in cases where the goods are sold on deferred payment basis. If the
exporter is providing the deferred payment credit facilities to the buyers, giving him facilities to
spread over his payment schedule in more than one instalment and over a longer period of time, such
credits are known as ‘Supplier’s of Seller’s Credit’.

What is L/C ?
L/C is a conditional undertaking given by the issuing bank to the seller on behalf of the buyer to pay
a certain sum of money under some agreed condition/fulfillment of some condition.

All commercial letters of credit (issuing for financing foreign trade) are documentary credits.
Therefore, the UCPDC deals with only documentary credits. In such credits, the draft have to be
accompanied by listed documents stated in the letter of credit. The opening bank is in secured
position because it has the additional security of the documents, which, if endorsed in its favour, give
ownership in the goods. Documentary credits have advantage from the exporter also, for he finds
negotiation of his drafts easier and can obtain payment for his merchandise immediately it is ready
for shipment.

Types of Letter of Credit :

UCPDC consisting of the rules unifying banking practices regarding documentary credits says that
all credit may be either (01) Revocable and (02) Irrevocable.

All credits should clearly indicate whether they are revocable or irrevocable and in the absence of
such indication the credit shall be deemed to be irrevocable.
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Revocable L/C :
A revocable credit is a credit which can be amended or cancelled by the issuing bank at any time
without prior notification to the seller. Since it offers little security to the seller, it is hardly ever used
in foreign trade.

Irrevocable L/C:
An irrevocable credit constitutes a definite undertaking of the issuing bank (since it cannot be
amended or cancelled without the agreement of all parties thereto), provided that the stipulated
documents are presented and the terms and conditions are satisfied by the seller. Since it gives the
seller greater assurance of payment, it (irrevocable letter of credit) is always preferred to revocable
letter of credit.
How number of party involve in the L/C.
There are minimum 3 party’s and maximum 7 party are involve for opening the L/C.

Importer
Exporter
L/C Issuing Bank
L/C Advising Bank
Reimbursement Bank
Add-Confirmation Bank
Negotiating Bank

Initial payment made by Negotiating Bank.

Documents are required for opening Import L/C.

Valid Trade Licence
Valid IRC
Valid Membership Certificate from Association
TIN/Vat Registration Certificate
Indent/Proforma Invoice
Insurance Cover Note
L/C Application
L/C Authorization Form
IMP
Charge documents

Revocable L/C :
A revocable credit may be amended or cancelled by the issuing bank at any moment and without
prior notice to the beneficiary.

Irrevocable L/C :
An irrevocable credit constitutes a definite undertaking of the issuing bank, provided the stipulated
documents are presented to the nominated bank or the issuing bank and that the terms and conditions
of the credit are complied with.
Confirmed L/C :
A confirmed L/C is one which has been confirmed by the advising bank. The bank issuing L/C send
the same through its branch or correspondent bank in the beneficiary’s country with a request to add
its confirmation to the credit. If the advising bank adds confirmation to the credit it becomes a
confirmed L/C.
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Revolving L/C :
To suit the special requirements of importers who require regular and continuous payments to their
suppliers, revolving credits are issued by banks. For trade taking place on a regular and repeat basis,
the opening of revolving credits will obviate the need to establish a new credit for each shipment.

Restricted L/C :
The issuing bank may restrict the negotiation of documents under the L/C to a specified bank in the
exporter’s country. The L/C contains a provision “Negotiation restricted to ….Bank”. The exporter
may submit the documents for negotiation to the bank specified in the credit.

Transferable L/C :
Credit are made transferable when the original beneficiary is a middleman and does not supply the
merchandise himself but procures goods from the suppliers and arranges them to be sent to the
buyer. A transferable credit is one under which the exporter has the right to make the credit available
to one or more subsequent beneficiaries.

With Recourse L/C :

In a “with recourse” bill, in the event of refusal by the drawee to honour the bill, the negotiating bank
may demand refund of money from the drawer. So, in a “with recourse” credit, the beneficiary may
have to face the possibility of repaying the money to the bank which has negotiated his bill if the
importer and the opening bank refuse to meet the bill.

Without Recourse L/C :

A credit “without recourse” is one in which the beneficiary, in drawing drafts under it, does not make
himself liable on the draft, in the event of their being dishonoured by the drawee (opener of the
credit) to the holder thereof, i.e. the intermediary or the issuing bank or any other banker negotiating
such drafts. Such credit derive from the principle that once the paying bankers has paid the contract
is completed and there is no re-opening of it.

Sight or Payment Letter of Credit :

When the credit stipulates that drafts (bill of exchange) should be drawn under it on DP terms
involving payment to the beneficiary on presentation of documents, it is known as a “Sight or
Payment Credit”.

Deferred Payment Letter of Credit :

The term “Deferred” means postponed to a future period or date. When a credits does not require the
payment to the beneficiary immediately on presentation of the documents but after a specified period
has elapsed, it is known as “Deferred Payment Credit”.

Red Clause L/C :

It is documentary credit with a special clause incorporated into it which authorizes the negotiating
bank to make pre-shipment advances to the beneficiary of the credit to enable him to manufacture or
purchase goods from local suppliers. These pre-shipment advances are made in anticipation of the
exporter effecting shipment and submitting the relative documents under the credit at a later date.
The ‘Red Clause’ is called so because this is printed or typed in red ink to draw attention to the
peculiar nature of credit. The Red Clause is incorporated only in irrevocable credit.
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Green Clause L/C :

This is another type of pre-shipment credit and used mainly in Australian wool trade. The ‘Green
Clause” (printed/types in green) is an improvement over the ‘Red Clause’ credit, and permits not
only pre-shipment advances but also authorizes negotiating bank to cover storage of goods at the port
in the name of the opening bank. For any reason, if there is a delay in taking delivery of finished
goods due to want of shipping space, the exporter will not be saddled with huge storage charges as
his funds under green clause L/C will not be blocked up towards storage charges.

Required documents/formalities for opening L/C :

 Valid Trade Licence
 Valid IRC
 Valid Membership Certificate (CCI & Trade Association)
 TIN/VAT Registration Certificate
 L/C application form duly filled-in and signed by the importer.
 Indent/Performa Invoice issued by the supplier (duly accepted by the importer)
 L/C Authorization Form duly filled-in and signed by the importer for onward registration
from CCI&E.
 One set of IMP Form duly signed by the importer.
 Insurance Cover Note with money receipt for covering the risks.
 Undertaking regarding exchange rate fluctuation.

Important papers/documents required to be scrutinized while negotiating

export documents :
Bill of Exchange
Export L/C
Commercial Invoice
Bill of Lading/Truck Receipt/Airway Bill
Packing List
Insurance Cover Note
Certificate of Origin
All other documents/papers that are specified in the Export L/C

Commercial Documents :
Invoice (a. Proforma, b. Commercial Invoice).
Certificate of Origin
Weight or Measurement Certificates
Packing List
Quality of Inspection Certificates.

Official Documents :
Consular Invoice
Legalised Invoice
Black-listed Certificate
Health
Veterinary and Sanitary Certificate/Phyato Sanitary Certificate
Certificate of Analysis.
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Insurance Documents :
Marine Cargo Insurance
Marine Hull Insurance
Freight
Perils covered under Marine Cargo Policies.

Transport Documents :
Airway Bill/Air Consignment Note
Mate’s Receipt
Bill of Lading
House Bill of Lading
Railway Receipt/Railway Consignment Note.
Roadway Bill.
Post Parcel Documents

Importer/Buyer :
Importer/buyer is the person who request/instructs the opening bank to open a L/C. He is also called
opener or applicant of the Credit.
Opening/Issuing Bank :
Opening/Issuing bank is the bank which open/issues a L/C on behalf of the importer. It is also called
importer’s/buyer’s bank.

Exporter/Seller/Beneficiary :
Exporter/Seller/Beneficiary is the party in whose favour the L/C is established. That is the exporter is
the addressee of the L/C. The advantage that the exporter can enjoy by being addressed in the L/C is
the assurance of the opening bank to honour the bills of exchange drawn by him in terms of the
credit if such bills are drawn according to the requirements of the credit.

Advising/Notifying Bank :
Advising/Notifying Bank is that bank through which the L/C is advised to the exporter. It is a bank
situated in the exporting country and it may be a branch of the opening bank or a correspondent
bank. To the opening bank, advising through a bank is an assurance of reaching the credit to proper
party and to the beneficiary if is a proof of authenticity for the credit.

Confirming Bank :
Confirming Bank is a bank which adds its confirmation to the credit and it is done at the request of
the issuing bank. Such confirmation constitutes a definite undertaking on the part of the confirming
bank, in addition to that of the issuing bank. The liability of the confirming bank is a primary one
and it also stands as a principal obligator alongwith the issuing bank to honour the bill drawn by the
beneficiary satisfying the terms and conditions of the credit.

Negotiating Bank :
Negotiating bank is the bank which negotiates the bill and pays the amount to the beneficiary. It will
carefully scrutinizes the documentary credit before negotiation (send the documents to the opening
bank and claim reimbursement) in order to see whether the documents apparently are in order or not.
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Packing Credit :
Packing credit is essentially a short-term advance with a fixed repayment date granted by the bank to
an eligible exporter for the purpose of buying, processing, manufacturing, packing and shipping etc.
of the goods meant for export. Such facility is allowed to an exporter just at a time when he has the
foreign buyer’s order. When the order is executed, the packing credit gets paid out of the proceeds of
bill drawn on the foreign buyer.

What is Nostro A/c.

Nostro is Latin word means (Ours). Nostro A/c means our account maintained with them. In order to
follow the exact position of foreign currency, account maintained by the bank in Bangladesh or
aboard is called Nostro A/c.

What is Vostro A/c.

Vostro is a Latin word means (yours). Foreign banks maintain current account in domestic currency
in local banks and such accounts are called Vostro A/c.

Loro A/c.
Loro is derived from the Latin term “Theirs”. These are the accounts of third party maintained in
domestic or foreign currency.

Loro is a Latin word means (their). These are the accounts maintained by the banks abroad on behalf
of their customers. Such types of accounts are very useful to facilitate foreign exchange transactions
of the customers.

Loro is a Latin word means (their). A foreign bank’s account of any third party, whether in foreign
currency or in home currency, is referred to as a ‘Loro’ Account.

What is BB L/C.
The BB L/C is an import L/C against Export L/C received by export oriented industrial units
operating under bonded warehouse systems – subject to observance of domestic value addition
requirement prescribed by the Ministry of Commerce from time to time.

Bill of Entry :
Bill of Entry becomes the proof for payment of import duty to the government and lawful receipt of
goods. Bill of Entry is a big size printed form containing columns for details particulars of the
imported goods. Bill of Entry is three copy.

What is LIM :
Whether the importer fails to retirement of documents on payment and request the bank for clearance
of goods, the liabilities under PAD are converted to LIM A/c.

Accounting Procedure :

Debit : LIM or LAM account (in the name of importer)

Credit : PAD or Bill of Exchange
Credit : Interest/Commission etc. (if any).

What is PAD :
When an import bill is received by a Bank under a Letter of Credit, it is the duty of opening bank to
examine the documents drawn in accordance with the terms of L/C. If the documents are in order,
the bank lodge the documents in their book that is PAD. The bank inform the importer asking him to
retire the documents immediately.
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PAD lodgement within 48 hours. PAD retires by the importer within 30 days i.e. PAD validity 30
days. If not otherwise mentioned, payment of import bill should be made within 21 days.

The exporter are required to repatriate the export proceeds within 120 days or 4 months from the date
of shipment. Otherwise penalty is imposed upon them.

At sight L/C, payment settlement must be done within 07 working days from the date of receipt of
documents.

In case of any discrepancies in L/C documents, the issuing bank must be protest the Advising Bank
within 05(five) working days (working days mean respective countries working days).

If thereby any discrepancy in the documents, the bank should immediately advise the importer to
seek his acceptance of the documents despite the discrepancy. If the importer refuses to accept the
documents, the bank should advise the negotiating bank for instruction with regard to disposal of the
goods and the documents. If no reply is received regarding disposal of dishonoured documents, the
same should be returned to the concerned bank with the instruction to reverse the entry if the issuing
bank is debited with the value of the goods.

Lodgement and Retirement Vouchers of PAD :

Debit : Payment Against Documents (PAD) or Bill of Exchange
Credit : Balance with other bank (responding the debit entry originated by foreign
negotiating bank)
Credit : Exchange Account

Confirming Bank :
Sometimes, an exporter stipulates that a L/C issued in his favour be confirmed by a bank in his own
country. The opening bank then arranges with a bank in the beneficiary’s country to add its
confirmation to the credit. The bank confirming the credit is known as the ‘Confirming Bank’.

Correspondent Bank :
A bank in one country which acts as agent for a bank of another country by signing/establishing
agency agreement/arrangement. Such arrangement is made on the basis of status of the bank and
business may take place between the countries on the basis of business already taken place between
the two banks.

Reimbursing Bank :
The issuing bank may indicate in the credit the name of a bank, from whom the paying/negotiating
bank can obtain reimbursement. After negotiation and payment against the documents, the
negotiating/paying bank simultaneously makes a claim with the reimbursing bank for the payment
effected by them against the credit.

Balance of Trade :
Balance of trade refers to the net difference between the value of export and import of commodities
from/into a country. The movement of goods or commodities between countries is known as the
‘visible trade’. Therefore, balance of trade refers to the net balance of the visible trade of the country.
Accounting of visible items.
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Balance of Payment :
Balance of payment is a systematic record of all monetary transactions between a country and rest of
the world. Accounting of visible and invisible items.

Foreign trade, in its broad sense, includes not only visible trade involving import and export of
commodities but invisible items also. These ‘invisible items’ include shipping, banking, insurance,
tourist traffic, gifts, investment, interest on investment, technical know-how, consultancy etc. The
balance arrived at taking into account both the visible and invisible items in foreign trade is known
as the ‘balance of payments’.

Traveler’s Cheque (Book of Debnath Sir).

These are financial instruments issued by the banks. The customers can buy those to avoid large
amount of money in cash while traveling. These are of various denominations and can be encashed at
any branch of the bank. Travelers cheques may be only for use within the country or may be also for
use aboard.

Traveler’s Cheque (Book of L.R. Chowdhury) :

Traveler’s cheques are the universally accepted method of payment for overseas travelers. Travellers
cheques are issued by banks and organization of international repute. Travelers cheques are available
in leading currency of the world and in convenient denominations.

Credit Cards :
The Credit Cards have an element of free credit granted to card holders because the accounts are sent
out monthly, covering purchases of goods or services. The credit cards may be used when buying
goods at shops and cash may be drawn at bank upto a certain limit.

Credit Cards (Book of Debnath Sir) :

Also called plastic money. It is an instrument which provides credit to shop variety of goods and
services at the designated outlet/shops of the traders. All the famous banks have their own credit
cards. IFIC Bank recently introduced IFIC Bank VISA Credit Card.

Value Date :
The actual date on which funds are available or credited to the accounts maintained by the banks
abroad. In the case of many foreign exchange transactions, ‘value date’ is agreed upon between the
parties to the transaction. The ‘value date’ is the date on which delivery of currency under a foreign
exchange deal is to take place.

Call Money :
Interest bearing deposits repayable either on demand or after a period of notice, depending upon the
terms of the contract.

Maxim :
Maxim means the general rules for quotation of currency.

Direct Quotation :
Foreign currency fixed – local currency variable.
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1 dollar = Tk.72.50
1 dollar = Tk.73.00

Indirect Quotation :
Local currency fixed – foreign currency variable.

Tk.1/- = JPY=39/-

Exchange Rate Maxim :

Buy Low – Sell High (Direct Quotation).

This is used for direct quotation. The maxim means that it is advantageous for the banks to purchase
foreign currency at a lower rate and sell at the higher rate.

Buy High – Sell Low (Indirect Quotation).

This maxim is applicable for indirect quotation. The maxim means that it is advantageous for the
banks to buy at higher rate and sell at the lower rate.

Cross Rate :
An exchange rate is called cross rate when a third currency is involved to calculate the exchange
rates between the two currencies.
Spot Rates :
The normal rate quoted in the foreign exchange market is the spot rate. This rate is quoted for
transaction for the nearest standard settlement day for purchase or sale of the currency against one
another. This is the basic rate of exchange.

Forward Rates :
The forward rate for a currency is the price at which the currency can be bought or sold for delivery
on a future date. These types of transactions involve an agreement today to buy or sell a specified
amount of a foreign currency at a specified future date. The typical forward contract can be for one
month, three months or six months.

Floating or Free Exchange Rate :

The floating exchange rate means that the value of one currency in terms of another is determined by
the conditions of demand for and supply of foreign exchange in the markets. The rates are free to
fluctuate according to the changes in the demand and supply forces with no restrictions on buying
and selling of foreign currencies in the exchange market.

Buying Rate :
The buying rate is the rate at which banks are prepared to buy the foreign currency.

Selling Rate :
The selling rate is the rate of exchange at which banks are prepared to sell.

TT Buying Rate :
This is the rate at which a banker buys a TT issued on him by an overseas branch or correspondent. It
is the rate at which the foreign currency, in which the TT is drawn, is converted into the home
currency before making payment thereof.
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TT (Clean) Rate :
This is applicable to TT (Clean) in which the handling of documents is not involved.
TT (Documentary) Rate :
This is application in which the handling of documents is involved. Bank recovers handling charges
on the transactions.
OD (On Demand) Buying Rate :
It is the TT (Clean) buying rate loaded with interest for the transit period. It is quoted by the bank for
foreign exchange transactions which arise out of purchase of ‘Demand’ bills or clean instruments,
such as, a personal cheque in a foreign bank. This rate applies to transactions, such as purchased or
negotiation of export bills, in which there is a time lag between the giving out of the value at one end
and being compensated therefore at the other end, thereby entitling the purchasing/negotiating bank
to interest for the transit period.
B.C. (Bills for Collection) Sales Rates :
Sales arising out of import bills. It is to be used for transactions which involve handling of
documents by the bank viz. payment against import bills.

TT (Clean) Sales :
TT Selling rate is applicable to clean sales. It is to be used for all transactions which do not involve
handling of documents by the bank and for which no special rates are prescribed. Examples of sales
for which this rate can be quoted are issue of drafts and mail transfers etc. In short TT selling rate is
applied for all sale transactions other than for imports, issue of travelers cheques, sale of foreign
currency notes and coins.
Devaluation :
With a fixed exchange rate, as under some forms of gold standard or under an exchange control
system, a currency may be revalued or devalued. A currency is said to be revalued or devalued where
there is a change in the declared value against gold or U.S. Dollar with IMF. A currency is said to be
devalued when its gold parity is reduced or the price of gold in terms of currency is raised.
Revaluation :
Revaluation is the opposite of devaluation. It is an upward revision of the gold parity of a currency.
When a currency is undervalued, the prices and costs in the country are low in relation to world
prices. The country has a strong competitive advantage in the world markets for its exports., while its
own demand for imports is comparatively low. The balance of payments surplus of the country
grows, which makes the currency more undervalued. The country may, therefore, decide to revalue
its currency.

LIBOR (London Inter Bank Offered Rate) :

It is the rate at which money is offered to other banks in the London Inter Bank market for a given
period of time. Funds are available for any period upto 5 years, but most deals are for period of less
than one year. Rates are determined simply by supply and demand of funds in the market.
SIBOR (Singapore Inter Bank Offered Rate) :
It is the rate at which principal banks in Singapore offer to lend Asian Dollars and other currencies to
other banks. SIBOR forms the basis for interest rate on Asian Dollar and syndicated loans.
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Value Date :
The ‘Value Date’ is the date on which delivery of currency under a foreign exchange deal is to take
place. In the event of funds not being forthcoming, the amount becomes subject to interest from the
value date to the actual date of payment, The date, usually two or three days ahead, is fixed when a
bargain is made and is mentioned in the documents made out by the contracting parties to confirm
the transactions.
Arbitrage :
Arbitrage in foreign exchange consists in simultaneous buying and selling of foreign exchange for
the sake of realizing profits from exchange rates prevailing at the same time at different centers, or
between forward margins for different maturities, or between interest rates prevailing at the same
time at different centers and in different currencies.

The foreign exchange market is not limited to a particular locality, rather it is an international market
where national currencies are traded. The force which keeps the various financial centers around the
world united into a single market is known as arbitrage. Arbitrage can be defined as simultaneous
buying and selling of foreign currencies with the object of making profit from difference in exchange
rates at various centers at the same time. The rate between two currencies is normally the same at
any two centers. But sometimes market conditions may make the rates to be different, and dealers
who specialize in arbitrage operations take advantage of this situation by simultaneously dealing at
two centers. The transactions then help in bringing the rates to stability at both the places. Such
transactions play an important role in comparatively free exchange market.

SWAP Transactions :
The traders cover their exchange rate risk by signing forward contracts with their banks. The
question now arises as to how do the banks cover the risk they assume as they sign the forward
contracts? Ordinarily, forward purchases and sales of a currency by a bank match to a great extent
offsetting largely the exchange risk involved in such transactions. If the forward purchases and sales
of a particular currency do not exactly match there is a residual amount of either forward sales or
forward purchases to be covered.
In Foreign Exchange operation, swap means a spot sale against a forward purchase or a spot
purchase against a forward sale. ‘Swap agreements’ or swap arrangements’ are devices to increase
international liquidity.
A swap transaction means the simultaneous buying and selling of foreign currencies for different
delivery dates and in opposite directions. The word ‘swap’ is used because spot currency is swapped
against the forward exchange. In a swap deal, one transaction is a spot transaction which has been
matched with reverse cover operation of booking forward done on the same day in the inter bank
market.

Swap takes place between commercial customers and their bankers; or between banks, or between
central banks, when it is desired to move out of one currency into another for a limited period and
without incurring the exchange risk.
Hedging :
Hedging means covering exchange risks. Such risks are inherent in forward transactions since there
is always a likelihood of an adverse movement in the rate of exchange. Hedging is done through
banks. It may be done through the spot market if the trader has sufficient cash or credit facilities, but
it is usually done through a forward contract.
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Speculation :
Speculation is opposite of hedging. While a hedger seeks to cover a foreign exchange risk, a
speculator buys a foreign exchange not because they have to make payments but because they expect
the price of the currency to rise and want to make a profit by selling it when the price will move up.
Similarly, even when they do not have to receive payments, they sell a foreign currency which they
do not possess when they expect its price to fall and which they may subsequently buy when the
price has actually fallen.

Trust Receipt :
Trust Receipt is a document signed by a person to whom goods are released, admitting the bank’s
sole property in the goods, and undertaking to hold the goods and the full proceeds of any sale of
them in trust for the bank until due payment of the bill is made. The trustee also undertakes to keep
the goods fully insured against all risks and ensure overall safety of the goods entrusted to him.

A banker holding documents of title is sometimes requested by his customer (an importer) to release
them on the customer accepting the bill which is otherwise drawn on D/P terms, to enable the latter
to sell the goods and pay off the bill out of proceeds. The banker may release the documents of title
to goods against acknowledgement what is known as a ‘Trust Receipt’.

CFR (Cost and Freight) :

CFR stands for Cost and Freight. The price quoted under this contract includes the cost of the goods
and freight charges upto the names destination.

CIF (Cost, Insurance and Freight) :

It means ‘Cost, Insurance and Freight’ in a contract of sale. A ‘Cost, Insurance and Freight’ contract
is the most commonly used type in international trade. In this case, the price quoted by the seller
includes original cost of the goods in his own country including placing them on board the carrying
vessel, freight charges upto the named port of destination, insurance charges covering the voyage. In
other words, all expenses incurred upto the port of destination are borne by the seller.

FAS (Free Alongside Ship) :

The seller is responsible for the delivery of the goods alongside the ship which will carry them to
their destination, and that the expenses incurred in placing the goods on board the ship are on
account of the buyer and insurance is to be arranged and premium, freight etc. are also to be paid by
the buyer.

FOB (Free on Board) :

‘Free on Board’ most common and popular Incoterm under which seller’s primary duties and
responsibilities are to deliver the goods on board a ship at a port of shipment names in the sale of
contract/letter of credit at his own cost and risk. Seller is to provide a clean bill of lading under this
contract. Buyer’s primary responsibility is to take delivery of the goods after payment of freight,
duty and taxes, port duties etc. and bring the goods in his own premises at his own cost and
responsibility.

FOR (Free on Rail) :

Means ‘Free on Rail’ under this Incoterm seller’s responsibility is to load the goods on rail and
buyer’s risk and responsibility start from this point to the railway station as named in the
contract/letter of credit. From the destination rail station buyer takes delivery of goods by paying
freight, duty and taxes and other charges and carry the goods to his premises at his own cost and risk.
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Trans-Shipment :
Transhipment has been defined as a transfer of cargo out of one ship and reloading it in another
during the course of carriage from the port of loading or place of dispatch or taking in charge, to the
port of discharge or place of destination, either from one conveyance or vessel to another conveyance
or vessel within the same mode of transport or from one mode of transport to another mode of
transport.
Export Financing :
01. Pre-shipment Finance
02. Post-shipment Finance

01. Pre-shipment finance

Packing Credit
Advance under Red Clause Letter of Credit
Back to Back Credit
Packing Credit :
Packing credit is essentially a short term advance with a fixed repayment date granted by the bank to
an eligible exporter for the purpose of buying, processing, manufacturing, packing and shipping of
the goods meant for export. Such facility is allowed to an exporter just at a time when he has the
foreign buyer’s order by way of confirmed export L/C or a firm contract. When the order is
executed, the packing credit gets paid out of the proceeds of the bill drawn on the foreign buyer.
Advance under Red Clause Letter of Credit :
In a “Red Clause” Letter of Credit, a special clause is incorporated into it which authorizes the
negotiating bank to make pre-shipment advances to the exporter of the credit to enable him to
manufacture or buy goods from local suppliers.
What is BB L/C.
The BB L/C is an import L/C against Export L/C received by export oriented industrial units
operating under bonded warehouse systems – subject to observance of domestic value addition
requirement prescribed by the Ministry of Commerce from time to time.
[

How Back to Back L/C is operated in our Country :

In our country in export of garments, this method of finance is widely used and is well known to the
manufacturers of garments. Suppose, a Bangladeshi exporter received an irrevocable L/C from an
American Bank for supply of ready made shirts. For manufacture of the ordered shirts, the exporter
does not have the required materials and cloths. To execute the order he is to import materials and
cloths from Japan. Then, the Bangladeshi exporter will have to open an import L/C favouring the
Japanese supplier for import of cloth and other materials. This L/C opened by the Bangladeshi
Bank, keeping the American Bank L/C in the ‘Back” is called “Back to Back L/C”.
Post-Shipment Finance :
The advance made against the shipping documents till the export proceeds are realised falls under the
category of Post Shipment Finance i.e. finance provided after the goods have been shipped.
The need for post shipment finance arises because exporters who sell goods abroad have to wait for a
long time before payment is received from overseas buyers. The actual period of waiting depends on
the payment terms. In the meantime, the exporter needs funds to carry on his normal export
activities. Banks are the main source for the exporters to seek the finance to tide over their temporary
need. Normally, while allowing packing credit facilities to exporters, banks also fixed up a limit for
purchase of bills.
 14

Post Shipment credit ordinarily takes the following shape :

Negotiation of documents under L/Cs
Purchase of Foreign Bill under D.P. and D.A. Bills.
Advance against Foreign Bills under Collection
Import Financing :
Import trade through L/C – bank finance
PAD
LIM – Document.

Pre-Shipment Credit :
Pre-shipment credit, as its names itself suggests, covers the credits extended by the banks to
exporters prior to shipment of goods.
Packing Credit
L/C under Red Clause
Back to Back L/C

Shipping Guarantee :
It is a guarantee cum indemnity issued by the bank in favour of the shipping company. When
shipping documents against L/C are not received by the bank but the ship carrying the goods arrives
at the port of destination and the shipping company is not willing to release the goods without the
relative shipping documents but the importer may like to take delivery of the goods to avoid
warehousing cost and demurrage charge against an agreement indemnifying the shipping company
for any loss which it may sustain for delivery of goods without the relative bill of lading.

Guarantees given by bank to shipping companies for release of goods in the absence of Shipping
Documents in case of goods arrive before receipt of the documents.

Shipping Documents :
These are documents evidencing the shipment of the goods exported to a foreign country, and should
strictly speaking, mean the bill of lading only, but for all practical purposes include invoice for the
goods shipped. Bill of Lading converting the shipment, marine insurance policy, certificate of origin,
certificate of quality/inspection/analysis, consular invoice, packing list etc.

Performance Guarantee :
Guarantee which are extended in consideration of specific performance of contract are called
performance guarantee. Performance guarantee are issued by a bank to Government or the
Corporation on behalf of contractors undertaking to make payment of penalty in the event of non-
fulfillment of their performance of contract or supplying goods as per contract.

S.D.R (Special Drawing Rights) :

SDR, special drawing rights, a new type of international money devised in early 1970 to try to assist
world trade. Under the scheme, SDRs were created by IMF. SDRs are entitlements granted to
member countries enabling them to draw from IMF apart from the quotas for settlement of
international indebtedness. The existing drawing rights are, by and large, conditional and represent
credit facilities subject to repayment while SDR are of the nature of international money, resemble
owned reserves and are neither conditional nor subject to any outright repayment obligation. SDR is
not a currency and it is merely an asset created out of book entries.
 15

Duty Drawback Scheme :

Duty Drawback Scheme has been evolved as an export promotion measure under which advance is
made to exporters against their duty drawback entitlements, provisionally certified by customs
authorities pending final sanction and payments.
For export products, some components or raw materials have to be imported on which import duty is
paid. The import duty thus paid as well as the excise duty paid on items indigenously produced for
export are refunded to the exporter on completion of export.

Demand Bills :
When a bill is payable ‘at sight’ or ‘on demand’ or ‘on presentation’, it is called a ‘demand bill’.

Usance Bills :

When a bill matures for payment after a certain period of time, say 30, 60 or 90 days after date or
after sight, it is called ‘Usance Bill’.
Clean and Documentary Bills :
When the drawer of a bill encloses the documents of title to goods, such as, Railway Receipt or Bill
of Lading, the bill is called a documentary bill. Such a bill may be a D/A (Document against
Acceptance) or D/P (Documents against Payment) bill.

29 Nostro A/c maintaining by IFIC Bank in different countries. 4 Nostro A/c

maintaining at Bangladesh Bank at USD, EURO, GBP, JPY.

Export/Import Business operating :

Import/Export Policy Order (2007 – 2009).

UCDPC – 600 (w.e.f. 1st July, 2007).
Guidelines for Foreign Exchange Transaction – 1996 (Vol-I & II)
URR (Uniform Rules for Reimbursement).
Others (Public Notice, Circulars etc.)

Documents used for International Trade :

Bill of Exchange
Commercial Invoice
Packing List
Weight & Measurement List
Transport Documents (B/L, Railway Receipt/Truck Receipt).
PSI (Pre Shipment Inspection)/CRF (Clean Report Finding) – if goods are in order.
Certificate of origin (issued by Chamber of Commerce)
Customs certified invoice
Others

For Import 4 (four) kinds of documents :

Transport documents
Commercial invoice
Insurance documents
Others
 16

Deferred Payment L/C : (In case of deferred payment LIBOR charge will be
applicable).
01. Capital machinery - 360 days
02. Coastal vessel - 360 days
03. Industrial raw materials - 180 days
04. Agricultural implement & chemical fertilizer - 180 days
05. Life saving drug - 90 days

What is GSP ? How does it help boost up export in Bangladesh.

The Generalized System of Preferential tariff system granted by the developed countries to the
developing countries continues to be a viable instrument for trade cooperation between the
developed and developing countries.

Under GSP the developed countries allowed import of goods from the developing countries without
tariff. As such, the enhanced export earnings encourages the exporters to expand export business by
setting new for more foreign exchange industry earnings.
Characteristics of Bill of Exchange :
It must be a written order
The drawer must sign it
The drawer, drawee and payee must be certain (specific)
The sum payable must also be certain (specific)
It should be stamped properly
It must be an order to pay money and money alone.
What is Bill of Lading :
A bill of lading evidencing the carriage of goods by sea. A bill of lading issued by the shipping
company or its agent.

Clean Bill of Lading :

A clean bill of lading is one which either states that the goods are received in good condition or does
not make any remark about the defective condition of the goods or packing.

Claused/Dirty/Foul Bill of Lading :

A Claused/Dirty/Foul Bill of Lading contains an adverse remark about the goods or packing, such as
package torn or drum leaking.

House Bill of Lading :

The bill of lading which is issued by freight forwarder is called House Bill of Lading.
‘Shipped on Board’ Bill of Lading :
When Bill of Lading is issued after the goods boarded on the ship is called shipped on board Bill of
Lading. When goods are received or held on the quay for shipment in next available vessel it is
termed as ‘Shipped Bill of Lading’.
Stale Bill of Lading :
A bill of lading is said to be ‘stale’ if it bears a date subsequent to the expiry date of the credit under
which the goods are shipped. It shows that the goods were put on board the vessel on a date later
 17

than that authorized by the credit. A bill of lading may also be considered ‘stale’ if it is presented
long after the sailing of the carrying vessel. The main problem that arises in such a case is that the
goods may reach the foreign destination long before the arrival of the relative documents and since
they cannot be cleared without the relative documents they will invariably be put to demurrage.
Charter Party Bill of Lading :
For the movement of bulk cargoes, it may be more advantageous for a shipper or group of shippers
to lease a vessel for a particular trip or a round of trips or for a specified period of time. When it is
leased it is said that the vessel is chartered. The document of contract which sets out the terms and
conditions of the lease of the whole or part of a vessel is known as the ‘Charter Party’. The person
whose goods are carried is called the ‘Charterer’ .
What is Custom Invoice :
An invoice which is made out on a special format to comply with the requirement of the importing
country. Such invoice is submitted by the exporter.
Commercial Invoice :
This document is prepared by the shipper giving description and price of the goods, quantity shipped,
quality, marks, number of packages, name of the buyer, L/C & contract numbers, grades, size, name
of the vessel, the date of shipment, number of bills of lading.
Consular Invoice :
The L/C from some countries in the Gulf region and Eastern Europe usually calls for the submission
of a Consular Invoice to fulfill the requirements in the importing country regarding the correctness of
the details of the merchandise stated in the invoice.
Packing List :
This documents contains full particulars of the goods, viz. number of cases, bales, pieces or
packages, net and gross weights, shipping marks, numbers etc. to enable the buyers and shipping
companies to locate, identify and clear the consignment.
Airway Bill :
This documents contains full particulars of the goods dispatched by air.
Marine Insurance Policy :
A marine insurance policy is a form of agreement whereby the insurer undertakes to indemnify the
insured against marine losses.
Certificate of Origin :
This is a document certifying the country of origin of the goods, and is usually issued by an approved
chamber of commerce.
Inspection Certificate :
This is usually issued by an independent inspection company located in the exporting country
certifying or describing the quality, specification or other aspects of the goods, as called for in the
contract and/or the L/C. The inspection company is usually nominated by the buyer.
Phyto-Sanitary Certificate :
This certificate may be called for in contracts for the sale of plants, herbs, seeds, fresh fruit and
vegetables.
Landed Cost :
Landed cost means the cost which includes invoice price, custom duty, sales tax, VAT, clearing and
 18

transportation charges etc.

C & F Agent :
They are specialized agents in facilitating the shippers in fulfilling the formalities relating to booking
space in ship and complying with the formalities of the customs, port and shipping company
authorities both in booking and getting release of goods. The clearing agents employed to get goods
cleared and delivered at the godown of the customer and while secured under pledge to the bank, act
as agent of the bank during the transit.
Wage Earner’s Scheme :
With a view to providing an incentive to overseas Bangladesh nationals to transfer their savings to
Bangladesh through official channel, government introduced a scheme in the year 1973 which was
enlarged in the later part of 1974 known as Wage Earner’s Scheme. The idea behind the scheme is to
create impetus so that Bangladesh nationals/people of Bangladesh origins living abroad find it
lucrative to remit their earnings to Bangladesh under the scheme.
With Recourse :
Where a bank discounts or negotiates a bill of exchange for a customer it does so ‘with recourse’,
that is, if the bill is dishonoured at maturity the bank is able to claim the amount of the bill from the
customer.
SWIFT : Society for Worldwide Interbank Financial Telecommunication.
This society is a co-operative organization set up under Belgian Law and registered in Brussels. The
main objectives of SWIFT are to enable the subscribers to transmit among themselves International
Monetary payments, statement and other messages connected with international banking. SWIFT has
become most dependable and speedy system for international money transfers. Messages previous
sent by cable or telex are not transmitted by an urgent ‘SWIFT’.
CHIPS : Clearing House Interbank Payments
FEDWRE : Federal Reserve Communication System.
EFT : Electronic Fund Transfer.
MICR : Magnetic Ink Character Recognition.
OCR : Optical Character Recognition.
World Bank :
World Bank is also known as International Bank for Reconstruction and Development, the sister
organization of the International Monetary Fund.

The World Bank was set up in the year 1944 with the task and responsibility to find a new world
monetary order. It works in close conjunction with the International Monetary Fund.
The bank is now world’s biggest financial house for providing long-term loan for development in
poor countries.
IMF (International Monetary Fund) :
The IMF was established in December, 1945 under an agreement signed by a number of countries at
Bretton Woods, New Hampshire (USA) on July, 14, 1944. It started its operation in March, 1947. Its
intentions were to develop some method of economizing in the use of gold and currency reserves, to
establish free convertibility between the currencies of the participating nations, and to set up a
scheme for giving temporary assistance to member countries in short or medium term balance of
payment difficulties.
 19

IDA (International Development Association) :

The World Bank and the IFC are commercial institutions and they can not grant loans for many
useful projects as a matter of policy. So, the IDA came into existence in September, 1960 as a soft
lending agency to meet the special needs of developing countries with serious balance of payment
problems. These countries are either too poor to borrow on conventional terms or can not afford a
debt servicing burden in the short period.

IFC (International Finance Corporation) :

The IFC was established in 1956 with the specific purpose of financing private enterprise. It was set
up to overcome the short comings of the World Bank. The main purpose of the IFC is to promote
economic development by encouraging the growth of productive private enterprise in its member
countries, particularly in less developed areas, thus supplementing the activities of the IBRD.
OFF-Shore Banking :
Off-shore banking refers to the international banking business involving non-resident foreign
currency denominated assets and liabilities. It refers to the banking operations that cover only non-
residents and do not mix with domestic banking. An offshore banking center is a place where
deliberate attempt is made to attract international banking by offering many concessions in the form
of taxes and levies being imposed at lower rates or not being charged. A more important relaxation is
the exemption of the offshore banks from restrictions on operations. Offshore banking units in these
centers can carry on their activities of deposit taking and lending from/to international enterprises or
investors without conflict with the domestic fiscal and monetary policies. In short, offshore banking
is international banking kept separate from domestic banking coupled with free functioning.
What is Merchant Bank :

Merchant Bank is a traditional term for an Investment Bank. Merchant Banks work as a financial
intermediary, offering such services as takeover, merger, acquisition advice/assistance, financial
restructurings & associated finance (raising necessary funds), equity investments in companies and
the placing of new share and bond issues, but do not offer usual banking services to the general
public.

A full fledged merchant bank provides diversified services for the capital market to investors. The
offered services are :

Portfolio Management.
Issue Management.
Underwriting.
Corporate Advisory
Banker to the Issue

Export Processing Zone (EPZ) :

Export Processing Zone have been established by an Act namely, Bangladesh Export Processing
Zone Authority Act – 1980. The following types of industrial units operate in the EPZs :
01. Type-A : 100% foreign owned including Bangladeshi nationals resident abroad.
02. Type-B : Joint venture projects between foreign and Bangladeshi entrepreneurs
residing in Bangladesh.
03. Type-C : 100% Bangladeshi entrepreneurs resident in Bangladesh.
Exports from EPZ 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
 20

stamped or overprinted with words ‘EXPORT FROM EPZ’ in bold letters.

What is Dumping ?
Selling goods in overseas markets at cheaper rate than in the home market is called dumping.
When a company of a country exports commodities to other counties less than the market price or
less than the production cost of the commodities of his country, it is called Dumping.
What is Anti Dumping ?
When an importer country taking protective measures against dumping by increasing Tax, VAT etc.
on the said commodities, it is called Anti Dumping.

International Company who provide PSI Report :

Whole country divided into 5 category. Block-A, B, C, D, E.

SGS Societe General de Surveillance SA., Switzerland.

BIVAC International SA, France
INTERTEK Testing Services International Ltd., U.K.
COTECNA Inspection, SA, Switzerland. Licence cancelled by NBR on 20.03.2008.
INCOTERMS : (International Commercial Terms)-2000 w.e.f. 1st January, 2000.

These trade terms are key elements of international contract of sale, since they tell the parties what to
do with respect to :

carriage of goods from seller to buyer and

export and import clearance

They also explain the division of costs and risks between the parties.

Force Majeure :
Banks assume no liability or responsibility for the consequences arising out of the interruption of
their business by Acts of God, Riots, Civil Commotions, Insurrections, Wars or any other causes
beyond their control, or by any strikes or lockouts. Unless specifically authorized, banks will not,
upon resumption of their business, pay, incur a deferred payment undertaking, accept Draft(s) or
negotiate under Credits which expired during such interruption of their business.