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Facilitation of payment and finance in international business with

special references to Bangladesh

Prepared For
Dr. Shah Md. Ahsan Habib
BRAC Business School, BRAC University

Prepared By
Sabit Rahman Tanim
ID: 12264021, Sec.-02
MBA Program

BRAC University

Date of Submission: 25 August 2014

Introduction:
Performance of cross borders business activities is known as international business.
International business is the backbone of our modern commercial world, as producers in
various nations try to maximize profit within an expanded market, rather than within their
own borders. For that reasons the volume of trade transactions is gradually increasing in
the international arena. There are many reasons for increasing international transactions
including lower production costs in one region versus another, specialized industries, use
of surplus of natural resources and consumer tastes. As due to trade liberalization, the
volume of trade transactions is increased tremendously over last two decades. Now the
question become in front of us how this huge trade take place and how it make
settlement. This process has two sides one side is import and another side is export. One
country makes export which becomes import for another country. Based on these
transactions there are few ways to settle this two parties involvement. Importer wants
proper goods as well as exporter wants guarantee of making payment. On this ground two
parties look for different ways for settlement. Different countries follow different
methods for transactions. An appropriate payment method must be chosen carefully to
minimize the payment risk and cost that the exporters and the importers are willing to
face or share between them. Once acceptable risks and costs have been determined then
the most appropriate payment method can be selected.

Objectives of the study:


The objectives of the study are:
1. To discuss theoretical aspects of international trade payment and finance.
2. To discuss international trade payment and finance in the context of Bangladesh.

Theoretical Aspects:
Payment methods: There are so many factors that may affect the matter of securing
payment for an international transaction. Most important among them are the potential
risk and cost that the exporters and the importers are willing to face. There are four
methods in international trade payment, they are:
1. Cash in Advance.
2. Open Account.
3. Documentary collection.
4. Documentary Credit / Letters of Credit L/C.

1. Cash in Advance: Cash in advance method, the buyer places the fund at the
disposal of seller (exporter) prior to shipment of goods in accordance with the
sales or purchase contract, which is certainly to be concluded between an exporter
and importer before the trade transactions. This method of payment contains a lot
of risks on the part of buyer (because they have no assurance that what they
contracted for will be supplied and received in appropriate manner), they may not
be willing to accept such terms of payments. Here interest of seller or exporter is
protected not the interest of buyer or importer. It is guided by purchase sales
agreement and there is no universally accepted regulation to guide purchase sales
agreement. It is rarely used in Bangladesh and it is the least popular methods of
payment all over the world.
2. Open Account: In this system, an arrangement takes place between the buyer and
seller (purchase sales agreement) whereby the goods are manufactured and
delivered before payment is required. Open account provides for payment at some
stated specific future date and without requiring the buyer to issue any negotiable
instrument evidencing his legal commitment. The seller must have absolute trust
that he will be paid at the agreed day. Though the seller can avoid a lot of banking
charges and other cost, but he has no security that he will be receiving payment in
due course. For this reason, the exporter may not be willing to accept this sort of
mode of payment. This system is also uncommon in Bangladesh but it is the most

popular methods of payment all over the world. Around 80% of payment is done
through this system becausei.

Buyer is more powerful than seller.

ii.

It represent the most popular mode of credit transaction in business that is


supplier credit.

3. Documentary collection: Documentary collection is the process of collection of


payment by a bank on behalf of exporter from importer against documents. In this
method of payment in international trade the exporter entrusts the handling of
commercial and often financial documents to banks and gives the banks necessary
instructions concerning the release of these documents to the Importer. Here
interest of buyer or importer is protected and interest of seller or exporter is not
fully protected especially if documents are not accepted by importer. Here banks
are responsible to collect payment not to make payment and all banks perform as
the agent of exporter. It is guided by URC-522 and purchase-sales agreement.
There are two terms of payment in documentary collection:
i.

Documents Against Payment (D/P):

In this case documents are released to the importer only when the payment has
been done. This is sometimes also referred as Cash against Documents/Cash on
Delivery. In effect D/P means payable at sight (on demand). The collecting bank
hands over the shipping documents including the document of title (bill of lading)
only when the importer has paid the bill. The drawee is usually expected to pay
within 3 working days of presentation.

ii.

Documents Against Acceptance (D/A):

In this case documents are released to the importer only against acceptance of a
draft. Under Documents Against Acceptance, the Exporter allows credit to
Importer, the period of credit is referred to as Usance, The importer/ drawee is
required to accept the bill to make a signed promise to pay the bill at a set date in
the future. When he has signed the bill in acceptance, he can take the documents
and clear his goods.

The following is a list of documents often used in international trade:

Air Waybills:
Air Waybills make sure that goods have been received for shipment by air. A
typical air waybill sample consists of three originals and nine copies.

Bill of Lading (B/L):


Bill of Lading is a document given by the shipping agency for the goods shipped
for transportation form one destination to another and is signed by the
representatives of the carrying vessel.

Certificate of Origin:
The Certificate of Origin is required by the custom authority of the importing
country for the purpose of imposing import duty. It is usually issued by the
Chamber of Commerce and contains information like seal of the chamber, details
of the good to be transported and so on.

Combined Transport Document:


Combined Transport Document is also known as Multimodal Transport
Document, and is used when goods are transported using more than one mode of
transportation. In the case of multimodal transport document, the contract of
carriage is meant for a combined transport from the place of shipping to the place
of delivery.

Commercial Invoice:
Commercial Invoice document is provided by the seller to the buyer. Also known
as export invoice or import invoice, commercial invoice is finally used by the
custom authorities of the importer's country to evaluate the good for the purpose
of taxation.

Bill of Exchange:
A Bill of Exchange is a special type of written document under which an exporter
ask importer a certain amount of money in future and the importer also agrees to
pay the importer that amount of money on or before the future date.

Insurance Certificate:

Also known as Insurance Policy, it certifies that goods transported have been
insured under an open policy and is not actionable with little details about the risk
covered.

Inspection Certificate:
Certificate of Inspection is a document prepared on the request of seller when he
wants the consignment to be checked by a third party at the port of shipment
before the goods are sealed for final transportation.

Process of Documentary Collection:


A documentary collection (D/C) is a transaction whereby the exporter entrusts the
collection of a payment to the remitting bank (exporters bank), which sends documents
to a collecting bank (importers bank), along with instructions for payment. Collecting
bank can engage presenting bank or present document itself to the importer. Funds are
received from the importer and remitted to the exporter through the banks involved in the
collection in exchange for those documents. D/Cs involve using a draft that requires the
importer to pay the face amount either at sight (document against payment) or on a
specified date (document against acceptance). The draft gives instructions that specify the
documents required for the transfer of title to the goods. Although banks do act as
facilitators for their clients, D/Cs offers no verification process and limited recourse in
the event of non-payment. Drafts are generally less expensive than L/Cs.
4. Documentary Credit / Letter of Credit:
Letters of credit (L/Cs) are one of the most secure instruments available to international
traders. An LC is a commitment by a bank on behalf of the importer or on its own behalf
to the exporter about the payment of certain amount subject to certain documentary
collections. The buyer pays his or her bank to render this service. An LC is useful when
reliable credit information about a foreign buyer is difficult to obtain, but the exporter is
satisfied with the creditworthiness of the buyers foreign bank. An LC also protects the
buyer because no payment obligation arises until the goods have been shipped or
delivered as promised. It is published and guided by the International Chamber of
Commerce under the provision of Uniform Custom and Practices (UCP) brochure
number 600.

Types of Letter of Credit:


There are different types of L/C used in international trade. These are:

Broad Types:

1. Revocable Letter of Credit: It is the L/C that can any time be amended or canceled by
the issuing bank without the consent of the beneficiary.
2. Irrevocable Letter of Credit: It is the L/C that cannot be amended or canceled by the
issuing bank without the consent of the main parties.Under UCP-600 L/C means
irrevocable L/C.

Special Types:

1. Confirmed Letter of Credit: It is the credit with double undertaking, one is by issuing
bank and another is by confirming bank.
2. Back to Back Letter of Credit: It is the credit that is issued by a bank on behalf
exporter against an export L/C which is known as master L/C.
3. Transferable Letter of Credit: It is used in case of middleman scenario under which the
L/C can be transferred to one or more than one second beneficiary.
4. Standby Letter of Credit: It offers secondary guaranty under which bank is responsible
to pay if importer fails.
5. Red Clause Letter of Credit: It is the credit with the arrangement of export financing at
the guaranty of issuing bank.
Process of payment through L/C method:
There are nine steps in L/C process:
1. Buyer and seller agree to terms including means of transport, period of credit offered
(if any), and latest date of shipment acceptable.
2. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer's credit
standing, and may require cash cover and/or reduction of other lending limits.
3. Issuing bank issues L/C, sending it to the Advising bank by airmail or electronic means
such as telex or SWIFT.
4. Advising bank establishes authenticity of the letter of credit using signature books or
test codes, then informs seller (beneficiary).
5. Seller should now check that L/C matches commercial agreement and that all its terms
and conditions can be satisfied.

6. Seller ships the goods, then assembles the documents called for in the LC (invoice,
transport document, etc.) and submit the documents in order and in time to the
Nominated bank.
7. The Nominated bank checks the documents against the LC. If the documents are
compliant, the bank pays the seller and forwards the documents to the Issuing bank.
8. The Issuing bank now checks the documents itself. If they are in order, it reimburses
the Nominated bank immediately.
9. The Issuing bank debits the buyer and releases the documents (including transport
document), so the buyer can claim the goods from the carrier.

Trade Financing Instruments:


In international business exporters and importers need financing facilities.
a) Export Financing:
Export financing means financing facilities to the exporter. These are:
1. Pre Shipment Financing or Packing Credit:
This is financing for the period prior to the shipment of goods, to support pre-export
activities like wages and overhead costs. It is especially needed when inputs for
production must be imported. It also provides additional working capital for the exporter.
Pre-shipment financing is especially important to smaller enterprises because the
international sales cycle is usually longer than the domestic sales cycle. Pre-shipment
financing can take in the form of short term loans, overdrafts and cash credits.
2. Post Shipment Financing:
Post shipment financing to the exporter for the period following shipment is important.
The ability to be competitive often depends on the traders credit term offered to buyers.
Post-shipment financing ensures adequate liquidity until the purchaser receives the
products and the exporter receives payment. Post-shipment financing is usually shortterm. Negotiation, purchasing of documents under documentary collection are the
example of post shipment credit to the exporter.
b) Import Financing:
Financing facilities to the importer is called import financing. These are:
1. Pre Import Financing

Example of pre import financing is L/C not covered by the margin.


2. Post Import Financing
Once shipment of goods arrived, importer may not the necessary liquidity to pay their
issuing bank immediately. Then the bank can provide them the following financing
facilities:

Payment against Documents (PAD): It is the financing that is created by the


issuing bank for importer to make payment to the exporter.

Loan against Imported Merchandise (LIM): When the importer requests the bank
for clearance of goods or fails to retire the documents on payment, the liabilities
under PAD or bill of exchange are converted to LIM account where the imported
goods are in the control of bank.

Loans against Trust Receipt (LTR): Letter of Trust Receipt is a document duly
stamped and signed in banks prescribed format by the importer before getting
delivery of the import shipping documents. In the Trust Receipt the importer
specifies the goods and agrees that he is holding the goods not as their owner but
as an agent for the bank until the goods are sold or used for the express purpose for
which they were released to him. Thus the imported goods are in the control of
importer so that alter selling the goods he can repay the bank loan.

Bangladesh Aspect:
Like most other countries in the world, in Bangladesh, Documentary Letter of Credit is
the most popular and widely used for making import and export payment settlement. In
more than 80% cases documentary letter of credit is used to make import payments. In a
very few cases and in some cases of export proceeds realization, especially in exporters
retention quota accounts, Cash in Advance method is used to import accessories.

It is found in a survey that in more than 65% cases L/C method is used for getting export
proceeds whereas only in 30% cases Documentary Collection is used. Although Cash in
Advance method is used to some extent, Open Account is completely absent. This
absence may be due to the superior bargaining power of the foreign exporters and the
lack of credibility of our importers and the greater use of L/C in Bangladesh as main

method of payment. Moreover, another discouraging factor is the existence of


Bangladesh Banks requirement that export receipts must enter into the country within a
period of 4 months from the date of export, failing of which, the exporter as well as the
AD and its officials certifying the export forms becomes liable to punitive action under
FER Act.
Table 4.1: Methods of Payment used in Making and Getting Payment
Methods used

Import Payment(no of cases)

Export Payment(no of cases)

Documentary credit

84%

67%

Documentary Collection

14.5%

29%

Cash in Advance

1.5%

4%

Open Account

Source: Based on data collected from sampled banks


In Bangladesh, all letter of credits opened and received are irrevocable in nature as
required by the domestic regulation of the country as well as UCPDC 600. Considering
LC establishment about 42% out of the total credits are Deferred Payment Back-to-Back
in nature due to the garments sector import raw materials to meet up their export orders.
Whereas only about 3% LCs are Confirmed and 55% are Irrevocable at sight L/C. Even
though Revolving LCs are rare, there is not a single case of Red Clause LC as there are
some restrictions imposed by the Central Bank i.e. Bangladesh Bank.

On the other hand in cases of Export LCs about 72% is transferable in nature due to the
existence of a large number of Buying Houses as they require to transfer the LCs to the
manufacturers. Moreover the practices of subcontracting by the garments manufacturers
are also very common for which LC is transferred. In contrast to import LC, back-to-back
letter of credit is completely absent in case of export LC. Very insignificantly (only 1%)
Bangladeshi exporters receive confirmed LC.

Table 4.2: Forms of LC opened and received


Forms

Import LC

Export LC

Irrevocable

55%

27%

Confirmed

3%

1%

Back-to-Back

42%

Transferable

72%

Red Clause

Source: Based on data collected from sampled banks


No import License will be necessary for import of any item in Bangladesh. However,
registration to the Authorized Dealer is a requirement to import into the country.
Before 2003, there were some restrictions by the Ministry of Commerce on LC margin in
some specific items. However, this restriction of margin requirement becomes open from
the year 2003 and now this LC margin is determined or negotiated by the relationship
between the AD and the LC applicant.

Concluding Remarks:
In some countries of tight control on foreign trade operations, documentary credit is a
very strong device in the governments control and supervisory mechanism. In our
country, this controlling over imports and exports are seen in a liberal ways but still some
considerable changes in import and export policy and re-structuring and up-to-date
foreign exchange guideline is required for our countrys smooth growth.

References:

Class lectures

http://en.wikipedia.org/w/index.php?title=Special%3ASearch&search=Importanc
e+of+International+trade&fulltext=Search&ns0=1&redirs=1&profile=advanced

http://www.bb.org.bd/pub/publictn.php?cat_id=0&pub_id=2#

http://www.bb.org.bd/pub/annual/expreceipt/exp1011/index1011.php

http://www.bb.org.bd/econdata/import/imp_pay_overall.ph

http://edupedia.educarnival.com/letter-of-credit-operation-in
bangladesh/#Payment_Methods_used_in_Foreign_Exchange_Transactions_in_Ba
ngladesh