Presentation On International Trade Finance

(Import & Export Mechanism)

Presented By:
Mohammad Saifuddin Khan
Senior Manager, Import Originations
BRAC Bank Limited

What is Trade Finance?

While a seller (the exporter) can require the purchaser (an
importer) to prepay for goods shipped, the purchaser
(importer) may wish to reduce risk by requiring the seller to
document that the goods have been shipped. Banks may
assist by providing various forms of support. (For example,
the importer's bank may provide a L/C to the exporter (or the
exporter's bank) providing for payment upon presentation of
certain documents, such as a bill of lading. The exporter's
bank may make a loan (by advancing funds) to the exporter
on the basis of the export contract.)
Finance provided by banks as means of payment or
guarantee of payment) between importers and exporters.
Mitigation against commercial and political risks associated
with international trade.

Methods of Payment in International Trade

Exporters and importers tend to prevail on their banks to

obtain for them the most cost-effective methods of payment
and settlement. Banks and other financial institutions play
an important role in identifying from the existing financial
markets the most suitable instruments that could be used to
finance international trade.
Open Account
Full Advance Payment
Letter of Credit (L/Cs) also known as Documentary Credits
(DCs)
Kinds of settlement under Documentary Credit Method

Forex Risk Management

The Following are the major Risks in foreign Exchange
Transaction:
Open Position Risk:

The open position risk or the position risk refers to the risk of change in exchange
rates affecting the overbought or oversold position in foreign currency held by
bank. Hence this can also be called the rate risk. The risk can be avoided by
keeping the position in foreign exchange square. There is, however, a limit up to
which bank can keep open position. If the bank keeps a large open position and
its expectation about the movement of the currency fails, the result would be
disastrous.

Cash Balance Risk:

Cash balance refers to the actual balances maintained in nostro accounts at the
end of each day. Balances in nostro accounts usually do not earn interest; while
any overdraft involves payment of interest. The endeavour shuld therefore keep
the minimum requirement balance in nostro accounts. Reconciliation of
balances of nostro accounts almost on a continuous basis also helps in this
regard.

Methods of Payments
Methods of
Payments

Cash in
Advance

Goods
delivery/
dispatch

After Payment

Open
Account

Before
Payment

Documentary
Collection

Before
Payment

Documentary
Credit

Before
Payment

Role of Bank

Relative
Risk to
Buyer

Relative
Risk to
Seller

Before
Shipment

Passive: Sending the

funds form the Importers
A/C to the Exporters A/C
as requested by the
importer

Extreme/
Very High

No/Very
Low

After Shipment

Passive: Sending the

funds form the Importers
A/C to the Exporters A/C
as requested by the
Importer

No/Very
Low

Extreme/
Very High

After Shipment

Not Active, Moderate

being instructed by the
Exporter.

Low

Moderately
High due to
Dishonor

After Shipment

Very Active-being
approached by the
Importer

Low

Low

Time of
Payment

A Letter of Credit is: Definition

A substitution of the banks credit for the buyers (Importer)
A banks promise to pay upon the satisfactory compliance
With the L/Cs terms and conditions by the L/Cs
Beneficiary (Exporter)

A payment undertaking given by a bank (issuing bank)

On behalf of a buyer (applicant)

To pay a seller (beneficiary) for a given amount of money

On presentation of specified documents representing the

supply of goods

Within specified time limits

Documents must conform to terms and conditions set out in

the letter of credit & Documents to be presented at a
specified place
NoteBanks Deal in Documents ONLY

BENEFITS OF A LETTER OF CREDIT

To The Exporter/Seller

Letters of credit open doors to international trade by providing a

secure mechanism for payment upon fulfillment of contractual
obligations.

A bank is substituted for the buyer as the source of payment for

goods or services exported.

The issuing bank undertakes to make payment, provided all the

terms and conditions stipulated in the letter of credit are

complied with.

Financing opportunities, such as pre-shipment finance secured

by a letter of credit and/or discounting of accepted drafts drawn
under letters of credit, are available in many countries.

BENEFITS OF A LETTER OF CREDIT

CONTD.
To the Importer/Buyer
Payment will only be made to the seller when the terms

and conditions of the letter of credit are complied with.

The importer can control the shipping dates for the
goods being purchased.
Cash resources are not tied up.

Parties Involved in Letter of Credit

Importer:

Importer means a person or firm who is willing to imports

goods from abroad and applied to bank to open L/C in
favor of beneficiary. We may call importer as Buyer,
Applicant or Opener.
Exporter:

Exporter means parties who is engaged to sell and shipped

the consignment as per Proforma invoice stipulated in L/C
and received payments upon complying presentation. We
can also call exporter as Seller, Beneficiary, Shipper and
Consignor.

Definitions of parties Involved in Letter of Credit

Issuing Bank
The bank issuing the Letter of Credit on behalf of the Importer
(Buyer).
Advising Bank
The bank to which the Issuing Bank forwards the Letter of
Credit with instructions to notify the Exporter (Beneficiary).
available with Bank The bank authorized in the Letter of
Credit to effect payment under, accept or negotiate the L/C.
Drawee Bank
The bank named in the Letter of Credit on which the drafts are
to be drawn.

Definitions of parties Involved in Letter of Credit

Confirming Bank
The bank, which at the request of the Issuing Bank, adds its
confirmation to the Letter of Credit. In doing so, the Confirming
Bank undertakes to make payment to the Exporter upon
presentation of documents under the Letter of Credit. Advising
bank can also act as Confirming Bank.
Negotiating Bank
The bank, which negotiate/purchase the export documents
and makes payments to beneficiary of the L/C.
Reimbursing Bank
This is the bank, which would reimburse the negotiating bank.
It is to be nominated by the issuing bank.

Definitions of parties Involved in Letter of

Credit..Contd
Transferring Bank
The bank authorized by the Issuing Bank to transfer all or part
of the Letter of Credit to another party at the Beneficiarys
request.
Accepting Bank
The bank named in a term (usance) Letter of Credit on which
drafts are drawn that has agreed to accept the draft. By
accepting the draft, the Drawee Bank signifies its commitment
to pay the face amount at maturity to anyone who presents it at
maturity. After accepting the draft, the Drawee Bank becomes
the Accepting Bank.

Letter of Credits Types

Irrevocable:

It can be neither amended nor cancelled without the

agreement of all the parties to the credit.
The Issuing bank gives a binding undertaking to the
Beneficiary provided all the credit terms and conditions
are fulfilled.
Under UCP 600 all letters of credit are irrevocable.

Unconfirmed:

A letter of credit forwarded by the Advising bank

directly to the exporter without adding its own
undertaking to make payment or accept responsibility
for payment at a future date, but confirming its
authenticity.

Letter of Credits Types..Contd.

Confirmed:
Where a bank usually in the Beneficiary's country, adds its own
undertaking confirming that payment will be made as long as
compliant documents are presented.
This commitment holds even if the Issuing bank or the Applicant fails
to make payment.
Confirmation gives the exporter added security, particularly if the
standing of the Issuing bank is unknown or the current political and
economic state of the importer's country is uncertain.
Note: Banks may not wish to confirm letters of credit issued in certain
countries.
A bank will make an additional charge for confirming a letter of credit.
Confirmation costs will vary according to the country involved, but for
many countries considered a high risk it will be between 2%-8%.

Letter of Credits Types..Contd.

Standby letter of credit :
A secondary payment mechanism used as support
where an alternative, less secure, method of payment
has been agreed.
The parties involved with the transaction do not expect
that the letter of credit will ever be drawn upon.
In certain countries like US it is used in place of bank
guarantees.
Often used to guarantee performance or to strengthen
the credit-worthiness of a customer.
Should the exporter fail to receive payment from the
importer he may claim under the standby letter of credit.

Letter of Credits Types..Contd.

Revolving letter of credit:
Used for regular shipments of the same commodity
between the same exporter and importer
The credit must state that it is a revolving letter of credit
It may revolve either automatically or subject to certain
provisions
Avoids the need for repetitious arrangements for opening
or amending letters of credit can revolve in relation to time
or value
If the credit is time revolving once utilized it is re-instated
for further regular shipments until the credit is fully drawn
If the credit revolves in relation to value once utilized and
paid the value can be reinstated for further drawings

Letter of Credits Types..Contd.

Transferable letter of credit:
The exporter has the right to request the paying or
negotiating bank to make part (or all) of the credit value
available to third parties
Useful for those acting as middlemen, especially where
there is a need to finance purchases from third party
suppliers
At the request of the (first) Beneficiary, it may be made
available in whole or in part to another (second)
Beneficiary
A credit may be transferred in part to more than one
second Beneficiary

Letter of Credits Types..Contd.

Back to back letter of credit:
Back to Back Credit is a new credit opened against lien of
an Original Credit ( Master L/C) in favor of another
beneficiary. Under the BTB Credit a middle man beneficiary
use the LC as security for a second, separate credit in
favor of ultimate supplier.

Sight and Usance

Based on Payment terms:
Sight-If payment is to be made at the time
Documents are presented, this is referred to as a
Sight Letter of Credit.
Usance-Alternatively, if payment is to be made at
a future fixed time from presentation of documents
(e.g. 60 days after sight), this is referred to as a
term, usance or deferred payment Letter of
Credit.

IMPORT & EXPORT CYCLE

IMPORT
Buyer/
Applicant

Shipment

EXPORT
Seller/
Beneficiary

The issuing bank debits

Seller presents
the buyers account for
documents under
the payment and
the LC to its bank
releases the original
documents
After scrutinizing the documents negotiating
bank forwards them to the issuing bank

Issuing
Bank

On checking for compliance with LC terms the

issuing bank reimburses the negotiating bank
by debiting the buyers account

On receiving
the payment
Sellers
account is
credited

Negotiating
Bank

Step-by-step process:

Buyer and seller agree to conduct business. The seller

wants a letter of credit to guarantee payment.
Buyer applies to his bank for a letter of credit in favor of the
seller.
Buyer's bank approves the credit risk of the buyer, issues
and forwards the credit to its correspondent bank (advising
or confirming). The correspondent bank is usually located in
the same geographical location as the seller (beneficiary).
Advising bank will authenticate the credit and forward the
original credit to the seller (beneficiary).
Seller (beneficiary) ships the goods, then verifies and
develops the documentary requirements to support the letter
of credit. Documentary requirements may vary greatly
depending on the perceived risk involved in dealing with a
particular company.

Step-by-step process:

Seller presents the required documents to the advising or

confirming bank to be processed for payment.
Advising or confirming bank examines the documents for
compliance with the terms and conditions of the letter of
credit.
If the documents are correct, the advising or confirming
bank will claim the funds by:
Debiting the account of the issuing bank.
Waiting until the issuing bank remits, after receiving the
documents.
Reimburse on another bank as required in the credit.
Advising or confirming bank will forward the documents to
the issuing bank.
Issuing bank will examine the documents for compliance. If
they are in order, the issuing bank will debit the buyer's
account.
Issuing bank then forwards the documents to the buyer.

Common Documents

Draft
Transport Document (B/L)
Commercial invoice
Insurance policy or certificate
Packing list
Certificate of origin, weight
Beneficiary statements

Regulations & Guidelines

An Importer/ Exporter should follow bellow mentioned guidelines to
execute import & Export from Bangladesh.
i) Import Policy (2012-15, latest version) issued by Commerce
Ministry.
ii) Guidelines for Foreign Exchange Transactions (GFET, Volume-I,
2009) published by Bangladesh Bank.
iii) UCPDC-600 published by ICC, Paris
iv) URC-522, published by ICC, Paris.
v) Respective Associations Rules
vi) Circulars from various authorities/ministries.
vii) Incoterms-2010.
viii) URR-725 published by ICC, Paris.
ix) Export policy (2009-12, latest version) issued by Commerce
Ministry.

Uniform Customs and Practice for

Documentary Credits (UCPDC)
The Uniform Customs and Practice for Documentary Credits is
an internationally agreed upon set of rules for all parties
involved in all types of letter of credit transactions. The rules,
which were adopted by the International Chamber of
Commerce in Vienna in 1933, have been revised several times
and are used by banks in practically all countries.
The Uniform Customs and Practice for Documentary Credits,
currently applicable, is a set of rules which, when not in
contravention of local laws, are binding on the parties who have
adopted them. The authority of UCP lies in its universal
acceptance which is acknowledged by a statement on the letter
of credit itself.

General Principles of UCP

Letters of credit are separate transactions from the sales or
other contracts on which they may be based, and banks are
in no way involved with or bound by such contracts, even if
reference to them is included in the letter of credit.
In letters of credit transactions, all parties deal with
documents and not with the underlying contracts to which the
documents may relate.
Before payment or acceptance of drafts is effected, banks
bear the responsibility for examining the documents to ensure
that they appear on their face to be in accordance with the
terms and conditions of the letter of credit.
Banks bear no responsibility for: the form or genuineness of
documents; for the goods described in the documents; or the
performance of the seller of the goods.

INCOTERMS
Considerations to keep in mind
Who has what responsibility?
More importantly who pays for what?

Knowing the terms correctly can be very

beneficial
At the contract negotiation stage these
issues need to resolved

Documents required at Preliminary Stage of

Relationship with Bank as Importer & Exporter
Import Registration Certificate (IRC) & Export Registration
Certificate (ERC), which will be returned later. Proof of payment
of renewal fees for IRC/ERC for the concerned financial year
NOC from the nominated bank (where nominated bank in
IRC is other than BBL)
Valid TIN certificate.
Valid VAT certificate.
Valid and renewed Trade License
Copy of Board Resolution
A declaration in companys letterhead pad, that the importer
has paid income tax or submitted income tax return for the
preceding year. A new company can declare that the
requirement is not applicable or the company is enjoying tax
holiday.

Documents required at Preliminary Stage of

Relationship with Bank as Importer & Exporter
Valid and renewed membership certificate from registered
local chamber of commerce and industry or any trade
association established on all Bangladesh basis,
representing any special trade/business.
Certificate from previous banks confirming no overdue Bills
of Entry in their books in the name of the importer.
Valid Bonded Warehouse license showing BBL as lien bank
(applicable for Back to Back Letter of Credit and import
under bonded warehouse facility)
BOI permission and BOI Allocation letter (applicable for
Industrial Units)

THANKS
FOR YOUR TIME &
PATIENCE