International Trade in Nigeria
Content
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.
Removal of external credit due to breakdown of economy & mounting debts Exchange controls introduced to achieve internal balance
Nigerian FX (cont‟d)
CISS introduced in 1979 –pres shipment decree no. 36 Import licensing Exchange Control Memorandum (CBN-9th January 1984 Reconciliation of Trade Bills
SAP
1986 - 1992
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 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
Banks/Importers pressurize CBN
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 TO EXPORTER - Open Account - Bills for Collection -D/A -D/P - Letter of Credit -Unconfirmed -Confirmed - Advance Payment LEAST RISK TO IMPORTER
LEAST RISK TO EXPORTER
HIGHEST RISK 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
Buyer‟s banker
Advising Bank
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 Contravene FX guidelines
Regulatory Discrepancies
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 (9) Goods (2) Docs (8) Debit (7) (4)
SELLER Docs (5) Paymt (6) (3) BUYER'S BANK Letter of Credit
L/C Application
©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
Financing Charges Confirmation Charges „pure‟ sight confirmation Sight with usance option
Pricing
Structure
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.
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.
Removal of external credit due to breakdown of economy & mounting debts Exchange controls introduced to achieve internal balance
Nigerian FX (cont‟d)
CISS introduced in 1979 –pres shipment decree no. 36 Import licensing Exchange Control Memorandum (CBN-9th January 1984 Reconciliation of Trade Bills
SAP
1986 - 1992
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 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
Banks/Importers pressurize CBN
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 TO EXPORTER - Open Account - Bills for Collection -D/A -D/P - Letter of Credit -Unconfirmed -Confirmed - Advance Payment LEAST RISK TO IMPORTER
LEAST RISK TO EXPORTER
HIGHEST RISK 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
Buyer‟s banker
Advising Bank
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 Contravene FX guidelines
Regulatory Discrepancies
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 (9) Goods (2) Docs (8) Debit (7) (4)
SELLER Docs (5) Paymt (6) (3) BUYER'S BANK Letter of Credit
L/C Application
©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
Financing Charges Confirmation Charges „pure‟ sight confirmation Sight with usance option
Pricing
Structure
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.
