A publication of Marketing, Branding & Communications Division Issue No: 14/13, Publication Date: 07.04.

2013

Principal Branch

Principal Branch

TUTORIAL-2 IMPORT AND EXPORT UNDER LC

Introduction International trade refers to trade between the residents of two different countries. It includes both exports and imports. Import means procurements of goods or services in to Bangladesh from abroad. On the other hand, export means sale of goods or services to other countries. Exports and Imports involve a lot of technicalities because this takes place between two countries, under different situations, rules and regulations and culture. The difference in the nationality of the exporter and the importer presents certain problems in the conduct of international trade and settlement of the transactions arising there from. Important among such problem are: 1. 2. 3. 4. Different countries have different monetary units; Restrictions imposed by countries on import and export of goods; Restrictions imposed by nations on payment from and into their countries; and Differences in legal practices in different countries. Advantages for the seller : Secured payment Quick payment Documentary Credits a payment form enabling business with markets where trade otherwise hardly would be feasible. Documentary Credits are governed by international rules. Settlements under Documentary Credits give improved cash flow control. Advantages for the buyer : The ability to control delivery time A way to avoid advance payment Documentary credits a payment form enabling business with markets where trade otherwise hardly would be feasible Documentary Credits are governed by international rules Documentary Credits offer buyers reasonable security that the seller has fulfilled his part of the agreement Risk in Letters of Credit : Although letters of credit are a balanced payment method in terms of risk issues for both exports and importers, each letters of credit party bears some amount of risk. As letters of credit transactions are handled by banks. This responsibility makes the banks one of the parties that bears risks in a letter of credit transaction. Risk to the Applicant: In a letter of credit transaction, main risk factors for the applicants are non- delivery, goods received with inferior quality, exchange rate risk and the issuing banks bankruptcy risk. Risk to the Beneficiary: In a letter of credits transaction, main risk factors for the beneficiaries are unable to comply with letter of credit conditions, issuing banks country risk. Risk of the Banks: Every bank L/C transaction bears risks more or less. The risk amount increases as responsibility of the bank increases. Documents most frequently transactions: used in letters of credit

As such, exporters and importers are required to know global market environment, International and Bangladesh Rules, Shipping Procedure, Custom Formalities etc. Whenever an international sales contract is entered into, sellers and buyers in different countries face a number of risks that they do not face in domestic sales. Some of the risks are: 1. 2. 3. 4. 5. 6. Information Risk Communication Risk Exchange Risk Political Risk Credit Risk Quality Risk

What is a Letter of Credit (LC)? A Letter of Credit (also Known as documentary Credit or Credit) is an undertaking by the issuing bank on instruction from the buyer (applicant) to pay the seller (beneficiary) at sight or at a fixed date in the future a specified sum of money within a prescribed time limit and against stipulated documents or other conditions. Meaning of LC (As per UCP Article 2) Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. Honour means: a. b. c. to pay at sight if the credit is available by sight payment. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. to accept a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

The importance of the documentation is stated in UCP 600 article 5 as follows : Banks deal with documents and not with goods, services or performance to which the documents may relate In addition, every condition started on the letter of credit form must be connected to a document. This point is also clearly indicated UCP 600 article 14. If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it. Transport Documents: Transport Document Covering at Least Two Different Modes of Transport (multimodal or combined transport document) Bill of Lading Non- Negotiable sea Waybill Charter party Bill of Lading Air Transport Document Road, Rail or Inland Waterway Transport Documents Insurance Documents : Insurance Policy Insurance Certificate Open Cover Financial Documents: Bill of exchange (Draft) Commercial Documents: Commercial Invoice Packing List; Weight List Inspection certificate Certificate of Analysis Official Documents: Certificate of Origin Health Certificate Consular Invoice, Legalized Invoice Documents usually required for opening LC: While requesting for opening of LCs; documents required to be submitted by the Public and Private sector importers to their nominated banks are: 1. L/C application From duly filled in & signed. 2. Indent issued by the Registered indenter or pro-forma invoice (PI) issued by the for high supplier, as the case, may be. 3. Letter of Credit Authorisation From (LCAF) 4. Insurance Cover note/policy 5. Valid IRC 6. IMP form 7. Any other documents, if required, as per IPO In addition, the importers in the private sector are required to submit the following additional papers/ documents: Valid membership certificate from the local trade association of Chamber. Importers declaration in triplicate as to the payment of income tax or submission of income tax return for the preceding year. Any other papers/ documents if required, as per the IPO

Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules (UCP-600) and international standard banking practice (ISBP). Parties to a letter of credit: Applicant Advising Bank Beneficiary Confirming Bank Claiming Bank Issuing Bank Nominated Bank Negotiating Bank Reimbursing Bank : Applicant means the party on whose request the credit is issued. : Advising bank means the bank that advises the credit at the request of the issuing bank. : Beneficiary means the party in whose favour a credit is issued. : Confirming bank means the bank that adds its confirmation to a credit upon the issuing banks authorization or request : Claiming bank is the bank instructed and/or authorized to claim reimbursement from another bank under the credit. : Issuing Bank means the bank that issues a credit at the request of an applicant or on its own behalf. : Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank. : The negotiating bank shall mean the bank authorized to negotiate under a negotiation credit. : Reimbursing Bank shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

Types of LC: As per Art.6 (b) of UCP, a credit must state whether it is available by sight payment, deferred payment acceptance or negotiation. Thus a credit may be - Sight Payment Credit - Deferred Payment Credit, - Acceptance Credit or - Negotiation credit Other Types of L/C: - Transferable Credit - Back to Back LC Payment Risks: Letter of credit, in a broad perspective, is one of the payment methods in international trade. Some of the other payment methods in international trade are Cash-in-Advance, Documentary Collections and Open Account. All of these payment methods inherit different risk levels for exporters and importers. Letters of credit is the only payment method, which has a balanced risk structure for both parties.

Important documentary credits : When imports of goods or services are made into Bangladesh, using Letters of credit as the payment vehicle, it offers several advantages to the importer. For example, Banks are under no obligation to pay unless all the conditions of the documentary credit are complied with. Export documentary credits Using documentary credits when export of goods or services are made from Bangladesh, the importers bank commits itself to paying the exporter when the conditions of the credit have been met. This offers a number of advantages. For example, payment is guaranteed by the importers bank prior to shipment.

Writer: Md. Azhar Ali Miah, Former Executive Vice President, Bank Asia Ltd.