International Trade Payment & Finance Practice of Bangladesh

internationalistic art is the backb atomic number 53 of our modern, commercial world. Producers in various nations try to gain from an expanded market, rather than be limited to selling within their own borders. There ar many reasons that trade across national borders occurs, including lower doing costs in one region versus a nonher, specialized industries, lack or surplus of natural resources and consumer tastes. This trend is attributable to the increased globalization of the world economies and the availableness of trade wages and finance from the foreign positing community.Although cambers alike finance interior(prenominal) trade, their role in backing international trade is more critical due(p) to the admittanceal complications involved. First, the exportinger might question the importers big businessman to concur hire. Second, even if the importer is confidenceworthy, the government might impose exchange controls that prevent recompense to the exporter. Thi rd, the importer might non trust the exporter to ship the goods ordered. Fourth, even if the exporter does ship the goods, trade barriers or time lags in international transportation might delay arrival time. There ar a number of methods of trade fee.Before importers and exporters decide to do business with each some other they contain to understand and adopt a method suitable to accommodate their specific needs. The contract amidst buyer and seller lead specify the way in which stomachment is to be made. Certain methods of defrayal are less(prenominal) happeny than others. It is up to the buyer and seller to agree on a method that suits them both. The choice of requital method is affected by several factors alike requirements of the seller and buyer, relationships between the trading partners, the operating environment and associated risks, object of consummation and market conditions etc. Once acceptable risks have been determined then the closely appropriate paym ent method arouse be selected.Exporters use different methods of backing international trade, depending upon the resources they have available and the transactional risk they are able to absorb. The ability to access international markets is an important strategic opportunity for manufacturers and sellers because it expands a companys guest base exponentially. International trading is much more complicated than making domestic help sales, and comes with internal and external stress factors that often determine whether a company can effectively operate in the global arena.The assignment has two objectives1) To contend conceptual issues of international trade payment and finance 2) To discuss international trade payment and finance practice of BangladeshConceptual Issues of International job Payment and backing Methods To succeed in todays global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales terms support by the app ropriate payment methods. Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk spell also accommodating the needs of the buyer.Financing methods use a manikin of trade finance products that are available to exporters to increase cash flow and reduce the risk associated with shipping products overseas. Importers and exporters usually need to resort to trade payment and financing mechanisms, coursed through third parties such as banks or specialized financial institutions that help guarantee both the payment to exporters and the delivery of products to importers.There are iv common methods of payment available to firms engaged in International trade Cash in Advance, Open Account / Supplier citation, Documentary Collection, and Documentary point of reference / Letters of Credit LC. Cash in advance content payment in advance, or advance payment, refers to a situation in which the seller requests payment from the buyer before he volition ship the goods. The seller only ships out the goods to the buyer after(prenominal) receiving the payment. With cash in advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred.Payment is usually made in the form of an international wire transfer to the exporters bank account or foreign bank draft. As technology progresses, electronic commerce will allow firms engaged in international trade to make electronic credits and debits through an intermediary bank. In cash in advance do by, at first, in that location will be a barter for sale agreement between exporter and importer. In payment procedure there will be three steps, first, importer makes payment to the exporter. Second, exporter will make the loading of goods and third, exporter will send the documents to the importer.1. Purchase Sale Agreement 2. Payment 3. Shipment of Goods 4. DocumentsFigure 1 Process of Cash-in-Advance There are some features of this method interest of exporter is fully protect and interest of importer is not protected. chamfers are involved in the process of transferring payment. Documents and onuss are directly extendled by the exporters. There is no universally accepted regulation to turn over cash-in-advance. It is guided by the purchase or sale agreement. It is one of the cheapest forms of trade payment method but it is the least popular form of trade payment method in the world. It is employ in the world less than 1%.Cash-in-Advance should be used only under the undermentioned conditions The importer is a new customer and/or has a less-established operating history. The importers creditworthiness is doubtful, unsatisfactory, or unverifiable. The political and commercial risks of the importers home sphere are very high. The exporters product is unique, not available elsewhere, or in heavy demand. The exporter operates a n Internet-based business where the acceptance of credit card payments is a must to re principal(prenominal) competitive.Open account is the reverse of cash-in-advance, in which the goods, on with all the necessary documents, are shipped directly to the importer who has agreed to pay the exporters invoice at a specified date, which is usually in 30, 60 or 90 days. The exporter should be absolutely confident that the importer will accept shipment and pay at the agreed time and that the importing country is commercially and politically secure.1. Purchase Sale Agreement 2. Shipment of goods 3. Documents 4. PaymentFigure 2 Process of Open AccountIn open account method, interest of importer is fully protected and interest of exporter is not protected. Banks are involved in the process of transferring payment. Documents and shipments are directly handled by the exporters. There is no universally accepted regulation to guide open account. It is guided by the purchase or sale agreement. It is also the cheapest forms of trade payment methods. It is the approximately popular form of trade payment method in the world. It is used in the world more than 85%. Open account terms may help win customers in competitive markets and may be used with one or more of the appropriate trade finance techniques that mitigate the risk of non-payment. It helps to establish and maintain a successful trade relationship.Involvement of bank is insignificant and frankincense its not costly for the traders. Documentary collection (D/C) is the process of collection of payment by a bank on behalf of exporter from importer against documents. The importer is not oblige to pay for goods before shipment. It offers some protection to the seller. It is more secure than shipping on an open account basis but less secure than using a letter of credit or an advance payment. In documentary film collection process, the very initial step is contract between exporter and importer where it is decided that p ayment will be collected against documents.Next step is shipment of the goods and preparation or collection of the documents by the exporter. After collection and preparation of documents exporter is supposed to submit documents along with a set of collection instruction at the counter of Remitting Bank. Remitting Bank is the bank at the counter of which documents are submitted by exporter to collect payment from importer on its behalf. Remitting Bank generally collects payment and forward documents using the usefulness of collecting and/or presenting bank.Presenting bank is the bank that presents documents to the importer. And collecting bank is the bank that is involved in the process of documentary collection. Then as per the collection instruction importer receives documents either DP (Documents against payment) or DA (Documents against acceptance). Then the importer will release the goods against documents and exporter will receive payment either immediately or as per the acce pted terms through banking channels.Figure 3 Process of Documentary CollectionIn this method, interest of importer is protected and interest of exporter is better protected than Open account. It is guided by the purchase-sale agreement and URC 522 (Uniform Rules for Collections). URC is published by International Chamber of Commerce (ICC) under the document number 522 (URC 522). All the banks involved in the documentary collection are the agent of exporters. Documentary Collection process could be risky for the exporter, if documents are not received by the importer. The exporters bank (remitting bank) and the importers bank (collecting bank) play an essential role in Documentary Collection process. Although the banks control the flow of documents, they neither verify the documents nor take any risks.It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system. With documentary collection tran sactions, the exporter has little recourse against the importer in case of non-payment. Thus, documentary collection should be used only under the following conditions The exporter and importer have a well-established relationship. The exporter is confident that the importing country is politically and economically stable. An open account sale is considered also risky, and an LC is unacceptable to the importer.Documentary Credit or Letters of Credit (L/C) is the commitment, guaranty or undertaking by a bank on behalf of importer to the exporter about the payment of original amount subject to the fulfillment of trusted documentary condition. This method is a compromise between buyer and seller because it affords indisputable advantages to both parties. The exporter is assured of receiving payment from the issuing bank as long as it presents documents in accordance with the L/C. An important feature of an L/C is that the issuing bank is obligated to honor drawings under the L/C re gardless of the buyers ability or willingness to pay. On the other hand, the importerdoes not have to pay for the goods until shipment has been made and the documents are presented in good order.Documentary credit are recommended for new or less established trade relationships because the buyers bank is there to guarantee for both exporters (that payment will be made) and importers (that the terms of the contract are met). First step of Documentary Credit process is contract between buyer and seller where it is decided that payment will be made through L/C. Then the importer approaches to a bank ( air Bank) to issue L/C. Issuing bank is a bank that issues letters of credit (L/C).If the bank agrees on financing terms then L/C is issued by the issuing bank and sends to the exporter (Beneficiary). While sending L/C, issuing bank generally uses the services of a bank known as Advising Bank. Advising Bank is the bank using the service of which issuing bank advices credit to the exporter on behalf of importer. Advising Bank is selected by the Issuing Bank.After receiving L/C exporter makes shipment and prepare documents to submit to the issuing bank or its agent ( nominate Bank). Nominated Bank is the bank nominated by the issuing bank at the counter of which documents may be submitted by the exporter in addition to the counter of issuing bank. Nominated bank is selected by the preference of exporter. After the submission of documents to the Nominated Bank or Issuing Bank, documents are examined to a certain Complying Presentation. Complying Presentation means the documents submitted are in order. Documents are complying if these are in accordance with L/C terms and conditions, UCP 600 and ISBP 681.The concept of Complying Presentation is curiously important for the examination of documents by the bank and also for the exporter for preparation of the documents. If the documents are in order, there could be negotiation or honor. Negotiation is performed by the Nomin ated Bank through purchasing or discounting of documents without the consent of Issuing Bank which is a financing technique. When Nominated Bank negotiate documents it is known as Negotiating Bank. pureness means payment. If payment is occurred by issuing bank then it will be honor. Honor could be at sight, deferred basis, or acceptance basis.Following negotiation or honor documents are forwarded to the Issuing Bank for reimbursement. Issuing Bank is supposed to examine documents and makes arrangement for making payment. Issuing Bank makes reimbursement to the Nominated Bank by using the service of Reimbursing Bank. Then finally, documents are handled to the importer andthen, goods are released by the importer. After that importer make payment to the issuing bank for settlement.From above discussion we can regain some responsibilities of issuing bank Issuance of L/C and making arrangement for advising. Amendment of L/C if required. Examination of documents and honoring document. M aking reimbursement to the nominated bank.In international trade transaction there are various types of Letters of credit (L/C) is used. Broadly there are two types of Letters of credit.i. Revocable Letters of credit ii. Irrevocable Letters of credit.If any Letter of Credit can be amendment or changed of any clause or canceled by consent of the exporter and importer, it is known as Revocable Letter of Credit. In case of seller (beneficiary), revocable credit involves risk, as the credit may be amended or cancelled while the goods are in transit and before the documents are presented, or although presented before payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the importation of payment buy the issuing bank at which the issuing bank has made the credit available. In the modern banking the use of revoca ble credit is not widespread.If any Letter of Credit cannot be amendment or changed ofany clause without the consent of all concern parties importer (applicant), exporter (beneficiary), Issuing Bank, and Confirming Bank (in case of affirm L/C), is known as Irrevocable Letter of Credit. An Irrevocable Letter of Credit constitutes a firm undertaking by the issuing bank to make payment. It, therefore, gives the beneficiary a high degree of assurance that he/she will pay to his/her goods or services provided he/she complies with terms of the credit. There are also some special types of L/C such as Transferable L/C, Back to back L/C, Revolving L/C, Confirm L/C, ruby clause L/C, and Standby L/C.The main modes of international trade are export and import. Both of them required financing in order to hit the export and import process properly. Trade financing is financing either to the exporters or to the importers. Exporters use different methods of financing international trade, depend ing upon the resources they have available and the transactional risk they are able to absorb. Broadly financing is two types Export financing and Import financing. Export financing means financing facilities to the exporter and financing facilities to the importer is called import financing. Exporters need financing facilities at two stages i. Pre shipment stageii. Post shipment stage Pre-shipment finance for exporters is the finance required to bring an export transaction to the point of shipment either to manufacture, process, or purchase merchandise and commodities for shipment overseas. Pre Shipment Finance is issued by a financial institution when the sellers want the payment of the goods before shipment. The main objectives behind Pre-shipment finance or Pre-export finance is to enable exporter to Procure raw materials.Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and bring the goods. Ship the goods to the buyers. Meet othe r financial cost of the business. Pre-shipment financing is especially important to smaller enterprises because the international sales cycle is usually longer than the domestic salescycle. Pre-shipment financing can take in the form of short term gives, overdrafts and cash credits. Packing credit, back to back L/C, red clause L/C etc. are the example of pre shipment export financing. Packing Credit is a pre shipment credit offer to the exporters to meet expenses related to the preparation of goods and transportation. It is especially needed when inputs for production must be imported. It also provides additional works capital for the exporter.Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters dont wait for the importer to d eposit the funds. Negotiation or purchasing is the example of short letter shipment export financing. As like as export financing, import financing also two types i. Pre import financingii. Post import financing. Pre import financing means financing before buying goods from exporter. L/C is the example of pre import financing which is not covered by the margin. Post Import Financing means financing after shipment of goods arrived. Once shipment of goods arrived, importer may lack the necessary liquidity to pay their issuing bank immediately. The bank can provide them the post import financing facilities. PAD (Payment Against Document), LIM (Loan against Imported Merchandise), LTR (Loan against Trust Receipt), all are the example of post import financing. PAD is created by the issuing bank at the time of making payment to the exporter on behalf of importer. If PAD is not cleared in due time then bank canceled it and convert PAD to LIM.International Trade Payment and Finance Practice of Bangladesh In the context of Bangladesh, Documentary Credit is the most popular and widely used for making import payments from Bangladesh. In 2012, 85% of import payments from the country are made through letter of credit. The other two methods- open account and documentary collection are used 3% and 10% for international trade payment respectively.Because of domestic regulation (Import policy order 2009-2012) on import of Bangladesh cash in advance is less used in Bangladesh. It is used 2% in our country for make payment againstinternational trade. In case of export, 30% of payments were received through Documentary Collection, and 65% of payments were received through Documentary Credit. Cash in advanced is used to make domestic trade payment in Bangladesh. As like other countries cash in advance is the least popular method of trade payment in Bangladesh in international trade payment. It is used 2% in our country for make payment against international trade. Open account is the most popular method of trade payment around the world. It is used more than 85% in international transaction. But in case of Bangladesh it is used only 3% of total received payment of export. Bangladesh Trade 2012Import Export Cash In Advance 2% Cash In Advance 2% Open Account 3% Open Account 3% Documentary Collection 10%Documentary Collection 30% Documentary Credit 85% Documentary Credit 65%Source BIBM Report 2012 So it can be tell that most of the export and import transactions of Bangladesh are dominantly settled by documentary credit. The result is that the businesses are paying high for their transaction settlement. As documentary credit has involvements of different parties namely the nominating bank, the reimbursing bank, the confirming bank etc. Some of them are involved only to ensure the creditworthiness of the issuing bank against a certain percentage of commission. Another reason could be that the sovereign rating is lower than that in some countries in LDC group.Al though there is specific guidelines published by the International Chamber of Commerce (Such as UCP-600, ISP98), documentary credit is an inefficient process in terms of time. As a result the businesses of our country are losing their advantage over those of some countries under the class ofdeveloping countries. As any L/C opened in our country has to comply with domestic regulations, guidelines on foreign exchange transactions along with Foreign Exchange (FE) circulars issued by Bangladesh Bank and the Import Policy Order and the Export Policy Order of the country are followed, these issues effect scrutinizing of import documents.However, it is to be remembered that whenever an L/C is established only the L/C terms are terms and only they are to be considered for examining a set of import documents. As per article 14 of the UCP 600 any bank shall have a maximum of five banking days following the day of receiving of the document to determine if a presentation is complying. In some b anks there is a practice of sending the discrepancy notices within 2-3 days after receiving the documents. Banks consider the act as a protective measure on their part. Charging of discrepancy fee appears to be another reason of such practice.Banks have been detect to approach to the importers to get their opinion before rejecting the documents. In regard to discrepancies, late shipment, late presentation, expiry of the L/C are very common. Other than some exception, whatever we import, we have to follow L/C for making payment. But the margin of L/C is very high for importer in Bangladesh. Margin means the amount of money paid by importer against opening a L/C. More over the repayment of L/C financing is also satisfactory. L/C is a payment technique but it also has financing component. Banks in Bangladesh also provide finance to importer through L/C to aid international business.In the financial year July 2010 June 2011 the total amount of L/C opened in Bangladesh was Taka 38,582 .35. full(a) import payments of Bangladesh in the financial year July 2010 June 2011 were Tk. 240,027.90. Total export receipts of Bangladesh (including exports of EPZ) during the financial years, 2010-2011 and 2009-2010 amounted to Tk. 145,007.60 and Tk. 102,148.2 respectively. Total import payments of Bangladesh (including EPZ) during the quarter July 2010-June 2011 stood at Tk. 240,027.9 (or US$ 8,788.5 million).Concluding Remarks One of the most important challenges for traders involved in a transaction is to secure financing so that the transaction may actually take place. So Bangladesh Bank imposed regulation to import through LC but most of the export payment is done by documentary collection.The faster and easier theprocess of financing an international transaction, the more trade will be facilitated. Traders require working capital (i.e., short-term financing) to support their trading activities. Exporters will usually require financing to process or manufacture products for the export market before receiving payment. In Bangladesh the trade finance is depend upon bankers and importers relationship. Therefore, Bangladesh governments should provide assistance and support in terms of export financing and development of an efficient financial infrastructure.