International Trade in

Nigeria

Presented By:
Ernest Dio
International Banking

©2003 Ernest Dio. All rights reserved.

What is Int‟l Trade
 Trade b/w Nations
 Visible Trade
 Imports
 Exports
 Invisible Trade
 Services
 Education
 Medical
 Intelectual property rights
 Etc.


©2003 Ernest Dio. All rights reserved.

Why Countries Trade
 Natural endowments
 Economies of Scale
 Transfer of Technologies
 Transfer of Cultural/social values
 Political tool
 Capital flight
 Comparative advantage
©2003 Ernest Dio. All rights reserved.
Major Parties to Int‟l Trade
 Importers
 Exporters
 Banks
 Regulators
 Insurance Companies
 Shipping Companies
 Inspection Agencies

©2003 Ernest Dio. All rights reserved.

 Other Parties to Int‟l Trade
 Multilateral Institutions – WTO, World
Bank, IMF, OECD, WAMA, etc.
 Chambers of Commerce
 Freight Forwarders
 Clearing Agents
 Commodity Traders
 etc
©2003 Ernest Dio. All rights reserved.
 Risks of Int‟l Trade
 Political Risks
 Country Risks
 Language barrier
 Laws, Rules & Regulations

 Commercial Risks
 Trade customs & practices
 Documentation requirements
 Solvency

 Financial Risks
 Inflation
 Currencies & currency mgt systems
 Payment systems

©2003 Ernest Dio. All rights reserved.

 Foreign Exchange
 Foreign currency is any currency, notes & coins
other than the Naira & TC denominated in any
currency other than in Naira.

 FX is any foreign currency and checks, drafts,

deposits, promissory notes, credits & balances
expressed or drawn in any foreign currency

 Foreign Exchange facilitates trade amongst

nations
©2003 Ernest Dio. All rights reserved.
Features of Int‟l Trade in Nigeria
 Mono-product economy
 Poor attempts to develop other Export areas e.g Iron &
Steel, Solid minerals, food stuff
 Decay of the Agric sector
 Export Incentive schemes
 Foreign Exchange Controls
 Poor administration of ports
 Cumbersome Clearing Procedures

©2003 Ernest Dio. All rights reserved.

 Nigerian FX - Issues
 Mono Product Economy-Oil is major FX earner
 Up to early 80s –Nigeria highly rated with access
to offshore credit
 By 1982 FX crisis set in
 Oil boom of early 70s increased demand for imports
 Capital flight (importation of sand)
 White elephant/big brother projects
 Shrinking supply of FX due to reduced oil prices

 Mismatch b/w supply & demand of FX led to

growth of a „black‟ market

©2003 Ernest Dio. All rights reserved.

 Nigerian FX (cont‟d)
 Removal of external credit due to breakdown of economy
& mounting debts
 Exchange controls introduced to achieve internal balance
 CISS introduced in 1979 –pres shipment decree no. 36
 Import licensing
 Exchange Control Memorandum (CBN-9th January 1984
 Reconciliation of Trade Bills
 1986 - 1992
 SAP
 SFEM/Deregulation
 Bidding for FX

 1992 – 2002
 „Free for all „ FX allocation
 Breakdown in CBN‟s ability to meet demand
 RE-Regulation
 Fixed exchange rate
 Guided Deregulation
 INTERVENTION
©2003 Ernest Dio. All rights reserved.
 Nigerian FX (cont‟d)
 2002 TO DATE
 DUTCH AUCTION SYSTEM introduced on 19th July 2002
 CBN intervenes twice a week
 Customers bid directly through their Bankers
 CBN determines amount available for „auction‟

 VALUE OF NAIRA OVER TIME

 1973 =N=0.64/$1
 1980 =N=0.55/$1
 1985 =N=0.89/$1
 1986 =N=1.00/$1
 1987 =N=4.64/$1
 2004 =N=133/$1
 2005 =N=131/$1
 2006 ?

©2003 Ernest Dio. All rights reserved.

FX (Other Issues)
 Actors in the Market
 CBN
 FMF
 Authorized dealers
 Authorized Buyers
 Oil Companies
 Non-Oil Exporting companies
 Bureaux de change

 Principal Regulatory Guidelines

 FX decree no. 17 of 1995
 Foreign Exchange control manual
 Exchange control guidelines

©2003 Ernest Dio. All rights reserved.

Int‟l Trade in Nigeria
(Regulatory Framework)
 Exchange Control Requirements
 Trade Registration – Forms „M‟ & NXP
 Comprehensive Import Supervision –CISS
 shipment inspection
 Inspection exemption list
 Import & Export Prohibition Lists
 Trade Arrears & L/C collateralization
©2003 Ernest Dio. All rights reserved.
 The Form “M”
 An Exchange Control Document
 Vital for operation of CISS
 A statistical tool
 Documentation requirements:
 Proforma Invoice
 Local insurance Certificate
 License to practise as a chemist –for pharmaceuticals
 Cert. Of Registration of BIZ premises-pharmaceuticals
 NAFDAC Permit - Chemicals
 NEPA approval - Generators
 Life span of 3 months
©2003 Ernest Dio. All rights reserved.
 Detailed Description of Goods on The PFI
 Required under Destination Inspection
 Generic product name
 Mark/Brand name (where applicable)
 Model name
 model/reference No.
 Color of the product (where applicable)
 Description of Quality/ Grade/ capacity/ size/
specification of the product
 Quantity and packaging and /or
packing, measure of content.
 Year of manufacture where applicable.

©2003 Ernest Dio. All rights reserved.

 Other issues on The PFI
 Must not be more than 3 months old
 Must not contradict the Form M
 Must be signed
 Country of Origin and supply indicated
 Must be on CFR basis
 All items must be listed individually
 items like paper must state the grams

©2003 Ernest Dio. All rights reserved.

 NAFDAC CONTROLLED
GOODS
 Finished Drugs and cosmetics
 Food/food related items
 All types of Chemicals.

©2003 Ernest Dio. All rights reserved.

 soncap

 RETURN

©2003 Ernest Dio. All rights reserved.

 The Form “M” (Cont‟d)
 All imports must be supported by Form M
 Form M has a life span of 6 months except
machinery & capital goods which is 1 year
 Extension requires CBN approval
 Incoterm used must be CFR or CPT
 110% Local insurance must be taken
 Procedure for Form M Approval
©2003 Ernest Dio. All rights reserved.
Int’l Trade in Nigeria (Trade Arrears &
L/C collateralization)
 Large Imports + Small FX = Trade arrears
 Large Foreign Debt
 Nigeria losses foreign Credit rating
 CBN insists on FCY backed L/Cs
 CBN bans Bills for collection & Open A/C
 Banks/Importers pressurize CBN
 CBN allows uncollaterized L/Cs for importation of
Raw materials by „1st Class‟ Manuf. companies
 CBN grants conditional approval for Bills for Collection transactions
 Allows max of 25% advance pymt on L/Cs for machinery
 CBN fully liberalizes issuance of uncollateralized L/Cs

©2003 Ernest Dio. All rights reserved.

Int‟l Trade (Incoterms)
 Int‟l Commercial Terms
 Used by actors in Int‟l Trade
 Define who:
 pays cost of each transport segment
 Is responsible for loading & unloading of goods
 Bears risk of loss at any point

 Determines Customs valuation basis

©2003 Ernest Dio. All rights reserved.

Settlement of Int‟l Trade
(Payment Options)
 Advance Payment*
 Open Account**
 Bills for collection (Documentary)
 Letters of Credit
 Cash on Delivery.etc**

©2003 Ernest Dio. All rights reserved.

Settlement of Int‟l Trade Trxns
HIGHEST RISK LEAST RISK
TO EXPORTER TO IMPORTER
- Open Account
- Bills for Collection
-D/A
-D/P
- Letter of Credit
-Unconfirmed
-Confirmed
- Advance Payment

LEAST RISK HIGHEST RISK

TO EXPORTER TO IMPORTER
©2003 Ernest Dio. All rights reserved.
Letters of Credit (An Intro)
 This is the mode of payment by which the
majority of international transactions occur. It is
a letter written to the seller, signed by the buyer‟s
bank. It promises to honor drafts drawn on the
bank, if the seller follows the rules set in the
letter.
 A conditional undertaking by a Bank
 Is a payment method, not a sales agreement
 Payment for documents not goods or services
 Is normally subject to the UCP

©2003 Ernest Dio. All rights reserved.

Letters of Credit (Cont‟d)
 Advantages to the Buyer
 Seller will only get payment on performance
 The buyer may get import financing
 Sellers may grant extended payment terms
 Docs aid Buyer to minimize risk of getting wrong goods

 Risks to the Buyer

 Banks deal in documents not goods
 The L/C is distinct from the underlying sales contract

©2003 Ernest Dio. All rights reserved.

Letters of Credit (Cont‟d)
 Advantages to the Seller
 Seller does not have to worry about Credit worthiness of buyer
 Element of cross border/political risk is reduced
 Financing may more easily be obtained
 Seller may get immediate Credit thro Negotiation

 Risks to the Seller

 Discrepant documents may lead to non payment
 Exposure to commercial risk on Issuing/confirming Bank

 Risks to the Bank

 Default by Applicant
 Operational Risk

©2003 Ernest Dio. All rights reserved.

Letters of Credit (Parties Involved)
 Applicant
 The Buyer/Importer

 Beneficiary
 Supplier/Exporter

 Issuing Bank
 Applicant‟s banker
 Advising Bank
 Buyer‟s banker

 Confirming Bank
 Bank that adds it‟s guarantee to that of the Issuing Bank

 Negotiating Bank
 Bank that discounts docs drawn
©2003 Ernest Dio. All rights reserved.
Letters of Credit (Types)
 Revocable/Irrevocable
 Confirmed/unconfirmed
 In Both cases the issuing bank has an obligation to pay
 Transferrable/Non-transferrable
 Red Clause
 Stand by
 Back to back
 Revolving

©2003 Ernest Dio. All rights reserved.

Letters of Credit (Terms & Conditions)
 Drafts
 LC Opening Date
 Expiration Date
 Latest shipment date
 Ship from – to
 Documents required
 Partial shipments
 Transhipments
 Drafts drawn on
©2003 Ernest Dio. All rights reserved.
Letters of Credit - Amendments
 A change to the terms & conditions of the
L/C after issuance
 At instance of Applicant or Bene
 Must be acceptable to all parties –
Irrevocable – L/Cs
 Must not contravene FX Control
regulations

©2003 Ernest Dio. All rights reserved.

L/Cs - negotiation & pymt
 Bene ships goods & presents docs
 Docs may be negotiated by bene‟s bank
 Neg. bank checks docs for discrepancies
 Neg. Bank fwds docs to issuing bank
 Neg bank claims pymt from paying bank
 Issuing bank must review docs & revert
within 7 days in case of discrepancies
©2003 Ernest Dio. All rights reserved.
Letters of Credit - Discrepancies
 When Docs do not conform with L/C
 Bene Can correct docs
 Docs can be sent in Trust
 Issuing Bank to reject docs
 Issuing Bank to get Applicants consent to pay
 Regulatory Discrepancies
 Contravene FX guidelines
 Non Regulatory guidelines
 Issuing Bank must revert to paying bank within 7
days
©2003 Ernest Dio. All rights reserved.
Endorsement of shipping Docs
 Docs consigned to order of the Bank
 Applicant requests for endorsement
 Must use standard format
 Passing on of title
 Docs endorsed to applicant
 Credit approval
 Unaccepted discrepancies ?
 Final exchange control docs to be submitted
within 90 days
©2003 Ernest Dio. All rights reserved.
Final Exchange Control docs
 Evidence that goods arrived Nigeria
 Issued by customs & port authorities
 Gate pass
 Tally sheet
 Terminal delivery order
 Payment schedule
 SGD Form

 Must be submitted within 90 days of pymt

 Defaulters reported to CBN
 Defaulters embargoed by CBN
©2003 Ernest Dio. All rights reserved.
 Letters of Credit –Principles &
Theory
(1) Contract

BUYER SELLER
(9) Goods (4)
(2) Docs Docs
(8) Debit (5)
(7) Paymt
L/C (6) Letter of
Application Credit
(3)

BUYER'S BANK

©2003 Ernest Dio. All rights reserved.

L/C Principles & Theory
 Step 1.
 The buyer agrees to purchase goods from the seller.
 A purchase order
 Accepted pro-forma invoice,
 A formal contract,
 An informal exchange of messages,
 Agreement indicates type of goods, how and when they
are to be shipped, and how and when payment is to be
effected. (In this case, the agreement is to use a letter of
credit as the mechanism of payment.)

©2003 Ernest Dio. All rights reserved.

L/C Principles & Theory (cont‟d)
 Step 2.
 The buyer applies to his bank for a letter of
credit, signing the bank‟s letter of credit
application/agreement form.
 1st Principle of Letters of Credit: Letters of
Credit are documentary.

©2003 Ernest Dio. All rights reserved.

L/C Principles & Theory (Cont‟d)
 Step 3.
 After approving the application, the issuing bank issues
the actual L/C instrument and sends it to the beneficiary
(the seller).
 Note: There are 3 separate contracts in a letter of credit
transaction:
 1. The contract of sale
 2. The L/C application/agreement
 3. The L/C itself.
 Step 4.
 Having received the issuing bank‟s assurance of payment,
the seller ships the goods to the buyer.

©2003 Ernest Dio. All rights reserved.

L/C Principles & Theory (Cont‟d)
 Step 5.
 The seller prepares the documents called for in
the letter of credit and presents them to the
issuing bank.
 Step 6.
 The issuing bank examines the documents. If it
determines that the documents comply with the
letter of credit, the issuing bank pays the
beneficiary (seller).
 2nd Principle of Letters of Credit: Letters of Credit
are independent of any other contract or obligation.
©2003 Ernest Dio. All rights reserved.
L/C Principles & Theory (Cont‟d)
 Steps 7 & 8.
 The issuing bank obtains payment from the
applicant (buyer) in accordance with the
terms of the applicant‟s L/C agreement and
forwards the docs to the applicant. **
 Step 9.
 The applicant (buyer) uses the documents
to pick up the goods from the carrier.
©2003 Ernest Dio. All rights reserved.
Unconfirmed L/Cs - Last Words
 Uncollateralised L/Cs
 Unconfirmed
 Confirmed with Offshore Lines
 Pricing
 Financing Charges
 Confirmation Charges
 Structure
 „pure‟ sight confirmation
 Sight with usance option
 Highest exposure by the Bank

©2003 Ernest Dio. All rights reserved.

Risk issues
 Over Trading
 Over invoicing
 Fictitious transport documents
 Perishable items
 Operational risk
 Documentation issues

©2003 Ernest Dio. All rights reserved.

Other Common Trade Finance
Sources
 Technical Services fees
 Personal Home Remittance
 School fees
 Capital Repatriation
 BDC Sales
 Direct sales
 PTA/BTA
 BDC Funds Transfers
 Monthly Mortgage Payment
 School Fees abroad
 Medical Fees abroad
 Credit Card Payments
 Utility Bills
 Life Insurance Premium payment

©2003 Ernest Dio. All rights reserved.

 How to improve TAT
 Advise customer on Documentation requirements
 Check documentation at branch before dispatch
 Ensure that funds/Credit approvals are in place and
updated on Finacle
 Ensure that documents are dispatched to Head Office on
Time and follow up for evidence of submission
 Review daily Reports
 Form M ; LC; Funds Transfer; Bills
 Note that same day L/C issuance (12 hours) is possible

©2003 Ernest Dio. All rights reserved.

The RAR process

©2003 Ernest Dio. All rights reserved.

The E Form M

©2003 Ernest Dio. All rights reserved.

THANK YOU
©2003 Ernest Dio. All rights reserved.