CHAPTER ONE: INTRODUCTION

BACKGROUND

The volume of trade transactions is gradually increasing in the international arena. To secure the international trade payment is particularly very crucial. 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 or share between them. There are four methods in international trade payment: Cash in Advance or prepayment; Open Account; Documentary Collection; and Documentary Credit. Under Cash in Advance or prepayment method payment is expected by the exporter, in full, prior to goods being shipped. This is the most secure method of payment for the exporters and consequently the least attractive for importers. On the other hand, open account is the least secure method of payment for the exporters. But it is the most attractive method for the importers. Documentary collection is more secure method for an exporter than open account trading, as the exporter’s documents are sent from the exporter’s bank to the importer’s bank. However, among all the mentioned methods, documentary credit method distributes risks in most balanced way in which both importers and exporters are almost equally protected.
Letter of Credit (L/C) or the Documentary Letter of Credit is the most popular international trade payment method in Bangladesh, which covers the issues like potential risk that the parties in international trade namely the importers and exporters wish to face or share between them. Choudhury and Habib (2006) noted that Documentary Credit method distributes risks in most balanced way in which both exporters and importers are almost equally protected. They indicated the Documentary Credit process as “the life blood of international commerce” that is governed by a widely recognized and popular guiding framework of ICC known as ‘Uniform Customs and Practices for Documentary Credit’ publication number 600.
 
Although Documentary Credit method distributes risks in most balanced way for exporters and importers; it is facing challenge since the method requires huge documentation and cost. Furthermore, electronic payment system is evolving which could be a major threat for the Letter of Credit method. Notwithstanding, it is still highly reliable method of payment.
 
Bangladesh is basically a seller’s market since it is an import-based country. Therefore, on the basis of our traders’ credibility, relative bargaining power, banks and regulatory requirements Documentary Letter of Credit is deemed to be the best fitted as the international trade payment method. The government of a developing country like Bangladesh tends to retain stringent control on foreign trade operations and thus Documentary Credit has a widespread use in our country as it provides useful additional weapon in the government’s control and supervisory mechanism. In more than 97% cases of import payment and in more than 65% cases of export payment, Letter of Credit method is used for the settlement ( Choudhury and habib;2006 ).
 
The ongoing globalization process has bought considerable changes in international trade transactions and practices. Greater involvement of costs in documentary credit operations is one of the main reasons of switching to other modes of payment. Declining reliance on documentary may raise payment related risks. It is well known that in some cases, disagreement relating to trade payment through Letter of Credit method arises. So it is a timely issue to explore the reasons behind this. Currently, the cost of issuing L/C is increasing. It is increasing the expenses of the traders. Although operation of L/C is guided by UCPDC 600, Bangladesh government has its own domestic Foreign Exchange Regulations, Import and Export Policy. So on the basis of the above background, the questions that would be investigated include: How cost-risk tradeoff could be balanced? What attributes make the L/C method reliable and acceptable than other trade payment method?  Are there discrepancies between these two international and domestic rules?
 

 OBJECTIVES OF THE STUDY

 
Based on the above background, the specific objectives of the study are:
 
1)      To discuss the operational procedures of Letter of Credit operation and a comparison of L/C with other methods.
 
2)      To review the regulatory and legal aspects of Letter of Credit as an international trade payment method.
 
3)      To discuss the Letter of Credit operation in the context of Bangladesh.

METHODOLOGY

 
For attaining the objectives, both primary and secondary data have been collected. Secondary data sources are related to practices of Letter of Credit operation, various documents of ICC and domestic laws and provisions. A questionnaire survey has been conducted for collecting primary data. The survey area is the AD branch of some selected commercial banks. Furthermore, interview method has been used to have a clear view about the bankers’ expertise and traders’ knowledge on Documentary Credit operations.
 
Dealing Officers of foreign trade divisions of the selected banks were interviewed. Six major AD branches of three commercial banks were selected on the basis of convenience. All the branches are located within Dhaka city.
 

LIMITATION OF THE STUDY

Time limitation is a great factor for researching on such a vast topic. As this study has been accomplished on the basis of the data collected from only 3 commercial banks which may not reveal the real scenario of the operations and practices of L/C in Bangladesh.
 

ORGANIZATION OF THE STUDY

This report has five chapters. First chapter includes background, objectives of the study, methodology and limitation of the study. Chapter two covers sales and purchase contracts in international trade, international trade payment methods, benefits of the documentary credit, types of documentary credit, parties to a letter of credit, operations of letter of credit and common documents required for documentary letter of credit. Under chapter three Domestic Regulations/Guidelines/Policies, Uniform Customs and Practices for Documentary Credit (UCP 600), Uniform Rules for Bank to Bank Reimbursement (URR 525), Incoterms-2000 and ISBP (International Standard Banking Practices) have been covered. Chapter four includes import procedure, import financing, export procedure, export financing, methods of payment used in making and getting payment, formalities and margin requirement while opening letter of credit, forms of letter of credit in use, documentary requirements, examination of documents, availability of credit, charges and commissions. Chapter five covers observation and conclusion.

CHAPTER TWO: SALES AND PURCHASE CONTRACT, TRADE PAYMENT METHODS AND OTHER ASPECTS OF LETTER OF CREDIT

Sales And Purchase Contracts in International Trade

 
In the contract, there will be an offer from the seller and purchaser will have to accept it. The contents of the contract will be determined by both the buyer and seller. The influence in determining the terms and conditions of the contract will be manipulated by buyers/sellers bargaining power/strength. The developing countries buyers/sellers strength is lesser than the strength of developed countries. Quality of product is also important factor in International Trade. The country, which has comparative advantage, has more bargaining power. Or volume of products produced by the country also important in International Trade.
 
Without documentary credit, the international trade is being done by contracts. These contracts have the following features:
 
1)      Offer and Acceptance: There must be direct or indirect offer and acceptance. Buying house or Indenting firms act on behalf of the Principal buyer and enter into indirect Offer & Acceptance.
2)      Proforma Invoice and Indent.
3)      General Terms and Conditions:
Contract terms and conditions may differ from one buying/selling operation to another, depending on the nature of goods and services relative bargaining strength of the buyer and seller and market conditions at the time of buying/selling.
 
The following are most common clauses on a contract:
1)      Which conditions to apply.
2)      Definition of the terms- No ambiguous should be included in the contract. But if used it should be clearly defined.
3)      Conclusion of the contract- either agreed or disagreed.
4)      Assignment- right given by the one party to another party to the interest of concerns parties. Without the consent of the buyer assignment is not be established.
5)      Trade Terms- Incoterms is to be identified.
6)      Quality and Quantity- vital terms in the contract. Because the buyer has the right to refuse goods if it is not as per the specified terms.
7)      Pre-shipment Inspection (PSI).
8)      Price and payment & expenditure: ICC- Institute of Cargo Clause & Marine Insurance clause.
9)      Third party claim- there should not be any third party claim.
10)  Delivery and liquidity damages.
11)  Warranty/ Guarantee
12)  Force Majeure (Act of God) like political hazards, natural calamity etc.
13)  Transfer of risk- who will bear insurance expense.
14)  Shipping documents- a copy of shipping documents must be sent to the seller  alongwith the transport documents before claiming any payment.
15)  Dispute settlement.
16)  Acceptance (acceptance of goods).
17)  Packing and Marking.
 

International Trade Payment Methods

 
In International Trade, there are a number of modes of payment which are being used for receiving trade proceeds. They are:
1)      Cash in Advance
2)      Open Account
3)      Documentary Collection; And
4)      Documentary Credit ( L/C )
 
Among these, documentary credit has been observed to be used mostly in our country. The procedures and pros and cons of each of the payment methods have been discussed in this chapter.
 

Cash in Advance

 
In 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 is expensive and 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. Thus it is rarely used in Bangladesh.
 
Cash in Advance
 
 

 
This method of payment is used

• When the buyer’s credit is doubtful.
• When there is an unstable political or economic environment in the buyer’s country.
• If there is a potential delay in the receipt of funds from the buyer, perhaps due to events beyond his control.

Advantage to the seller

• Immediate use of funds.

Disadvantage to the Buyer

• He pays in advance, tying up his capital prior to receipt of the goods or services.
• He has no assurance that what he contracted for will be:

▫ Supplied
▫ Received
▫ Received in timely fashion
▫ Received in the quality or quantity ordered
 

Open Account System

 
In this system, an arrangement takes place between the buyer and seller (sales/ purchase contract) 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 Bangladesh.
 
Advantage to the Buyer

• He pays for the goods or services only when they are received and/or inspected.
• Payment is conditioned on the basis of political, legal and economic issues.

 
Disadvantages to the Seller

• He releases the title to the goods without having assurance of payment.
• There is possibility that political events will impose regulations which defer or block the movement of funds to him.
• His own capital is tied up until the goods are received and/ or inspected by the buyer or until the services are found to be acceptable and payment is made.

Documentary Collection

 
This is an arrangement (sales/ purchase contract) whereby the goods are shipped and the relevant bill of exchange or draft is drawn by the seller on the buyer and documents are sent to the seller’s bank with clear instructions for collection through one of its correspondent bank’s located in the buyer’s domicile. Normally, title to the goods does not pass to the buyer (unless the buyer named consignee on the transport document) until the Draft is paid or accepted by the buyer. Collection provide the parties with an alternative arrangement other than open account or cash in advance. Collections are usually connected with the sale of goods rather than with the provision of services.
 
Though documentary collection is inexpensive and simple to arrange, exporter is required     to ship the goods without an unconditional guarantee or promise of payment by the buyer. However, as compared to cash in advance and open account, documentary collection is a much more common means of payment.
 
Documentary Collection
 
Advantage to the seller

• Documentary Collections are uncomplicated and inexpensive
• Documents of value, i.e. title documents, are not released to the buyer until payment or acceptance has been affected. In the event of non payment or non acceptance the collecting bank, if properly authorized, may arrange for the goods released, and ware housing, insurance or even reshipment to the seller.
• Collections may facilitate pre-export or post export financing.

 
Disadvantage to the seller

• He ships the goods without an unconditional promise of payment by the buyer
• There is no guarantee of payment or immediate payment by the buyer.
• He ties up his capital until the funds are received.

Advantage for the buyer

• Collections may favor the buyer since payment is deferred by him until the goods arrive or even later if delayed payment arrangements are agreed to.

Disadvantages to the buyer

• By defaulting on a bill of exchange he may become legally liable.
• His trade reputation may be damaged if the collection remains unpaid.

Documentary Credit

 
Documentary Credit or Letter of Credit can be defined as an   ‘undertaking’ whereby the buyer’s bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller’s disposal under some agreed conditions. Since the agreed conditions include, amongst other things, the presentation of some specified documents, the letter of credit is called Documentary Letter of Credit. The Uniform Customs and Practices for Documentary Credit (UCPDC) published by International Chamber of Commerce (2007) Revision; Publication No. 600 defines Documentary Credit.
 
“Credit means any arrangement, however named or described, that is irrevocable and thereby constitute a definite undertaking of the issuing bank to honor a complying presentation.”
Complying presentation means a presentation that is in accordance with the terms and conditions of the credit ( ISBP-2007 ), the applicable provisions of these rules ( UCP-600)  and international standard banking practice. According to the definition of ‘Credit’, when an issuing bank determines that a presentation is complying, it must honor.
Honor means,

• 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.

 
Documentary Credit
 
This documentary credit arrangement usually satisfies the seller’s desire for cash and the importer’s desire for credit. This financial instrument serves the interest of both parties independently. The documentary credit offers a unique and universally used method of achieving a commercially acceptable undertaking by providing for payment to be made against complying documents that represent the goods and making possible the transfer of title to those goods.
Under a documentary credit operation, there exists a distinct triangular contractual arrangement:
∆ First, the sales contract between seller and buyer.
∆ Second, the “Application and Security Agreement” or the “Reimbursing Agreement” between the buyer ( the Applicant ) and the issuer ( the issuing Bank ), and
∆ Third, the documentary credit between the issuing bank and the beneficiary. If the documentary credit is confirmed by another bank, then such bank undertakes it’s own contractual agreement, in addition to that of the issuing bank, to the beneficiary.
 
Each contract is independent and controls the respective relationship between the parties. The UCP 600 in Sub-Article 4 (a) recognizes that relationship and states:
“A credit by its nature is a separate transaction from the sale or other contact on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently the undertaking of a bank to honour or negotiate or to fulfill any other obligation under the credit is not subject to claims or defences by the applicant resulting from his relationships with the issuing bank or the beneficiary.”
  

Benefits of the Documentary Credit

 
Facilitates Financing
 
The Documentary Credit
v  provides a specific transaction with an independent credit backing and a clear cut promise of payment
v  satisfies the financing needs of the seller and the buyer by placing the bank credit standing, distinguished from the bank’s funds, at the disposal of the both the parties
v  may allow the buyer to obtain a lower purchase price for the goods as well as longer payment terms than would open account terms or a collection
v  reduces or eliminates the commercial credit risk single payment is assured by the bank which issues an irrevocable letter of credit. The seller no longer needs to rely on the willingness and capability of the buyer to make payment
v  reduces certain exchange and political risks while not necessarily eliminating them
v  may not require actual segregation of cash, since the buyer is not always required to collateralized his credit obligation to the issuing bank. And
v  expands sources of supply for the buyers since certain sellers are willing to sell only against cash in advance or documentary credit.
 
Provides Legal Protection
Documentary Credits are supported by a wide variety of laws and regulations, such as:
legislative and semi-legislative law
codified law- in most countries the law for the Documentary Credit has been codified, e.g. in
civil law code countries , and in
common law code countries
decisional law- statutory laws governing Documentary Credits are found in various jurisdictions. There are extensive legal cases that have interpreted this provisions and are well known in judicial circles
contractual law/ customary law- in addition to codified and case law, documentary credits are governed by the ICC’s UCPDC-600. These rules , which are periodically revised, have been in effect since 1933 and are the set of universally recognized rules governing documentary credit operations.
Assures expert examination of documents
Through The Documentary Credit:

• The buyer is assured that the documents required by the documentary credit ( if issued subject to the UCP ) must be presented in compliance with the terms and conditions of  the documentary credit and UCP rules.
• The buyer is assured that the documents presented will be examined by banking personnel knowledgeable in documentary credit operations, and
• The buyer is confident that the payment will only be made to the seller after the terms and conditions of documentary credit and UCP rules are complied with.

Parties to a Letter of Credit

The parties are:

• The issuing bank
• The confirming bank, if any, and
• The beneficiary

 
Other parties which facilitate the Documentary Credit are:
ü  The applicant
ü  The advising bank
ü  The nominated bank
ü  The reimbursing bank
ü  The claiming bank
ü  The presenter
ü  The transferring bank
 
ISSUING BANK: It is the bank that issues a credit at the request of an applicant or on its own behalf.
 
CONFIRMING BANK: Confirming Bank means the bank that adds it’s confirmation to a credit upon the issuing bank’s authorization or request. Confirmation means a definite undertaking of a confirming bank in addition to that of the issuing bank to honor or negotiate a complying presentation.
 
BENEFICIARY: It is the party in whose favor a credit is issued.
 
APPLICANT: Applicant means the party in whose request the credit is issued.
 
ADVISING BANK: Advising Bank means the bank that advises the credit at the request of the issuing bank. However, an advising bank may utilize the services of another bank (2^nd Advising Bank) to advise the credit and any amendment to the beneficiary.
 
NOMINATED BANK: It means the bank with which the credit is available or any bank in the case of a credit available with any bank.
 
REIMBURSING BANK: It means the bank , appointed by the issuing bank, to reimburse the claims of payment of the claiming bank.
 
CLAIMING BANK: It means the nominated bank which claims the payment from the reimbursing bank.
 
PRESENTER: It means a beneficiary, a bank or other party that makes a presentation.
 
TRANSFERRING BANK: Transferring Bank is a nominated bank that transfers the credit. In case of credit available with any bank, transferring bank is specially authorized by issuing bank. An issuing bank may also be a transferring bank.
 

Types of Documentary Credit

 
Article 3 of UCP 600 says that a credit is irrevocable even if there is no indication to that effect. It therefore, indicates that (under UCP 600) there is only one type of credit, named irrevocable letter of credit.
 
Other Documentary Credits:
 
Confirmed Documentary Credit: A confirmation of a documentary credit by a bank (confirming bank) upon the authorization or request of the issuing bank constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank, provided that the stipulated documents are presented to the confirming bank or to any other nominated bank on before the expiry date and the terms and conditions of the documentary credit are compiled with either to negotiate or to honour.
Revolving Credit: A revolving documentary credit is one by which, under the terms and conditions thereof, the amount is renewed or reinstated without specific amendments to the documentary credit being required. The revolving documentary credit may revolve in relation to time or value. A documentary credit of this nature may be cumulative or non-cumulative.
Transferable Credit and Transferred Credit: Transferable credit means a credit that specifically states it is “transferable”. It may be made available in whole or in part to another beneficiary (second beneficiary) at the request of the first beneficiary. Transferred Credit means a credit that has been available by the transferring bank to the second beneficiary.
Back to Back Credit: The Back to Back credit is a new credit opened on the basis of the original credit in favour of another beneficiary. Under back to back concept, the seller as the beneficiary of the first credit offers it as security to his bank for the issuance of the second credit. The beneficiary of the back to back credit may be located inside or outside the original beneficiary’s country.
Red Clause Credit : A red clause credit is a credit with a special condition incorporated into it that authorizes the confirming bank or any other nominated bank to make advance to the beneficiary before presentation of the documents. Under the above credit, the issuing is liable for pre-shipment advances made by the nominated bank, in case the beneficiary fails to repay or present the documents for settlement.
Standby Credits: The Standby Credit is a documentary credit or similar arrangement, however named or described, which represents an obligation to the beneficiary on the part of the issuing bank to
a)      Repay money borrowed by the applicant, or advanced to or for the account of the applicant;
b)     Make payment on account of any indebtedness undertaken by the applicant; or
c)      Make payment on account of any default by the applicant in the performance of an obligation.
   

Operations of Documentary Letter of Credit

 
The following five major steps are involved in the operation of Documentary letter of Credit.
 
ü  Issuing
ü  Advising
ü  Confirmation and Amendment ( if necessary )
ü  Presentation, And
ü  Settlement
Issuing a Letter of credit: Before issuing L/C, the buyer and seller located in different countries conclude a ‘sales contract’ providing for payment by documentary credit. As per requirement of the seller, the buyer then instructs he bank-the issuing bank-to issue a credit in favor of the seller or beneficiary. Instruction/Application for issuing a credit should be made by the buyer (importer) in the issuing bank’s standard form. The credit application which contains the full details of the proposed credit, also serve as an agreement between the bank and the buyer. After being convinced about the conditions contained in the application form the issuing then proceeds for opening the credit to be addressed to the beneficiary.
 
Advising a Letter of Credit: Advising through a bank is proof of apparent authenticity of the credit to the seller. The process of advising the credit consists of forwarding the original credit to the beneficiary to whom it is addressed. Before forwarding, the advising bank has to verify the signatures of the officers of the issuing bank and ensures that the terms and conditions of the credit are not in violation of the existing exchange control regulations and other regulations relating to export. In such act of advising, the advising bank does not undertake any liability. However, the advising bank may utilize the services of another bank ( second advising bank ) to advise the credit and any amendment to the beneficiary.
 
Confirmation and Amendment of Credit: The beneficiaries are not always willing to rely on the credit standing of the issuing bank- particularly when the bank is unknown to the beneficiary. Consequently, the beneficiary ma y request that the applicant instruct the issuing bank to have it’s credit confirmed by a confirming bank, usually in the beneficiaries country. Moreover parties involved in L/C particularly the seller and the buyer can not always satisfy the terms and conditions full as expected due to some genuine and obvious reasons. In such a situation, the credit should be amended. However, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank ( if any ) and the beneficiary.
 
Presentation of Documents: The seller being satisfied with the terms and conditions of the credit proceeds to dispatch the required goods to the buyer and after that, has to present the documents evidencing dispatch of goods and fulfilling other terms and conditions of L/C to the issuing or nominated bank on or before the stipulated expire date of the credit. After receiving all the documents, the issuing or nominated bank examines the documents against the credit. If the documents are found complying, the bank will honor or negotiate.
 
Settlement: Settlement means fulfilling the commitments of the issuing bank in regard to effecting payment subject to satisfying the credit terms fully. This settlement may be done under three separate arrangements as stipulated in the credit. These are:
 
Settlement by payment: Here the presenter/beneficiary presents the documents to the nominated or issuing bank and the bank then scrutinizes the documents. If satisfied, the nominated or issuing bank makes payment to the beneficiary and in case this bank is other than the issuing bank, then sends the documents to the issuing bank. If the issuing bank is satisfied with the requirements, payment is obtained by the nominated bank from the issuing bank.
Settlements by Acceptance:  Under this arrangement, the beneficiary/ presenter submits the documents to the nominated/issuing bank accompanied by a draft drawn on the bank ( where the credit is available ) at the specified tenor. After being satisfied with the documents, the bank accepts the documents and the draft and if the bank is other than the issuing bank, then sends the documents to the issuing bank stating that it has accepted the draft and at maturity the reimbursement will be obtained in the pre-agreed manner.
 
Settlement by Negotiation: This settlement procedure starts with the submission of the documents by the beneficiary/presenter to the nominated bank accompanied by a draft drawn on the issuing bank or any other drawee, at sight or at the tenor, as specified in the credit. After scrutinizing that the documents meet the credit requirements, the bank will purchase the drafts and/or documents, advance or agree to advance funds on or before reimbursement is due. This bank then sends the documents and the drafts to the issuing bank. As usual reimbursement will be obtained in the pre-agreed manner.
 

Common Documents under Documentary Letter of Credit

Bill of exchange/Draft:

• The draft must bear the correct Documentary reference number.
• The draft must be date before expiry of the L/C and within the stipulated period for negotiation.
• It must be dawn or endorsed to the order of the bank.
• It is drawn by the party indicated as the beneficiary of the credit.
• It is drawn on the party indicated as the draw of the credit.
• It is market as drawn under the proper L/C of the bank quoting the L/C number.
• The tenor is in conformity with that stipulated in the L/C.
• The amount is identical with the amount mentioned in terms of the credit.

 
Bill of Lading (B/L)

• The full set of B/L is submitted including original copy.
• It is marked “Shipped on Board”
• It is drawn in favor of the bank endorsed to the order off the bank and dated after issuance of the L/C
• The B/L is clean
• If the terms of sale is C& F, B/L is to be marked “Freight Prepaid”.
• Short from B/L is not acceptable
• Charter party B/L is not allowed unless specified in the L/C
• B/L is not stale
• Other (if any) as per L/C terms.

 
Commercial invoice

• The invoice is signed by the exporter / beneficiary
• The required numbers of copies of the invoice are placed as per L/C terms.
• Description of the goods with measurement / weight is mentioned in full.
• The value and price of the goods to be tallied with L/C terms
• The L/C number, name of the ship with shipping mark, shipments date L.C.A.F/ license numbers of the importer, indent number etc. are to be quoted in the invoice properly.
• The quality and quantity of the goods as mentioned in the invoice must agree with that of L/C terms.
• The name of the importer and the L/C issuing bank is mentioned in the invoice.

 
Certificate of origin

• The certificate of origin may be issued by the chamber of commerce & Industry of exporter’s locality or by the supplier as stipulated in the L/C.
• The goods must be originated from the country as per indication given in the L/C.

 
Inspection Certificate

• The certificate must comply with the inspection requirements of the Documentary Credit.
• It contains no detrimental statement as to the goods, specifications, quality, packing etc. unless authorized by the documentary credit.

 
Packing List

• A detailed packing list requires a listing of the contents of each package, carton, etc. and other relevant information. It corresponds with the requirements of the Documentary Credit.

 
Insurance Document

• It is the policy/ certificate/declaration under cover note, as required by the Documentary Credit.
• It covers the specified risks as stated in the Documentary Credit and that the risks are clearly defined.

CHAPTER THREE: LEGAL AND REGULATORY FRAMEWORK OF LETTER OF CREDIT

Domestic Regulations/ Guidelines/ Policies

 
ICC guidelines are not complete set of rules in regulating and guiding international trade payment transactions. Since the payment guidelines do not provide for comprehensive and complete rules for international trade payment transactions, national laws play an important role. This is particularly true for the issues that are not addressed by the UCP intentionally. For example the legal nature of the credit itself and legal nature of the relationship between different parties have not be addressed in the UCP. For effective international trade payment operation, it is required that national laws be capable of providing solutions to any issues of international trade payment procedure open to interpretation.
 
In Bangladesh, Foreign Exchange Regulation Act, 1947 [FERA, 1947] is the most important domestic regulation in the area if international banking. FERA, 1947 has empowered Bangladesh Bank to regulate all kinds of foreign exchange dealings in Bangladesh. Empowered by the act, Bangladesh Bank issues Authorized Dealers licenses to the selected bank branches for conducting trade payments and other international banking operation. Following the provisions of the act, Bangladesh Bank issues circulars/ guidelines time to time to regulate trade payment and international banking activities to be followed by the banks.
 
While dealing in international trade payment, other than FERA, 1947 and Bangladesh Bank circulars/ Guidelines, bank are required to follow trade policies issued form the Ministry of Commerce of the country empowered by Import and Exports { Control } Act, 1950. The export and import policies specifically prescribe the policies/ rules of the government in regard to the export and import transactions and procedure and operation of making and receiving trade payment. Importer, exporters and indenters are required to be registered in Bangladesh under Importers, Exporters and Indenters Registration Order 1981. Moreover, Customs Act 1969 is also applicable to trade transactions that deal with levy and collection of customs duties and other allied matters.
 
The prime objective of the trade policy of Bangladesh is to maintain a favorable balance of trade through adopting an export led development strategy, focusing on expansion and diversification export, ensuring availability of imported raw materials for expanding export oriented industries and increasing share of the country in global trade. Bangladesh has been able to open up its economy substantially through undertaking trade liberalization measures since 1980s. However, GOB has taken into consideration the sensitive areas like public health, security and religious bindings, while pursuing trade liberalization measures. Simultaneously, more liberal import and export policies and programs have been adopted including reduction of tariff slabs.
 
Bangladesh pursued one year export and import policies in the first half of eighties and two year policies in the first half of eighties and first half of the nineties. Five year export-import policies (1997-2002) were formulated and implemented during 1997-2002. After that, GOB pursued three year export-import policies during 2003-2006. The current import and export policies (2006-2009) have been made effective from May 14 and 31, 2007 respectively.
 
The new Import Policy Order, 2006-2009, has been formulated, keeping in mind the market economy ideology, to make available the commodities to the consumers at fair prices through removing the barriers to movement of goods inter nationally, to ensure availability of quality and health compliant goods, to create a congenial environment for Foreign Direct Investment through expansion and growth of export oriented industries, expansion and consolidation of domestic industrial base so as to make Bangladesh economy active and vibrant. At this moment the number of commodities kept under restricted list is only 25. The new import policy has allowed opening of LC for importing capital machinery even without IRC. The limit of import without LC has raised from $5000 to $ 35000. For enhancing easy availability of industrial raw materials and consumer goods at fair prices, some commodities have been declared importable as raw materials.
 
In order to sustain the level of exports of Bangladesh, productive capacity of domestic export oriented industries should be increased along with ensuring quality of exportable products and its market diversification. For this reason, all efforts should be taken for converting our comparative advantage of human resources to competitive advantage. The Export Policy of 2006-2009 has considered agro-products, light engineering products, leathers goods, pharmaceuticals commodities, ICT products and home textiles as the thrust sectors of our export development. In addition, finished leather, frozen fish foods, cottage industry products, electronic products, fresh flower etc. have been considered as special development sectors in the current export policy. The current export policy has accommodated fiscal, financial and general policies/incentives in line with requirements of globalization, with a view to facing the challenges of post-MFA and increasing the competitive capacities of all domestic stakeholders. Bangladesh has adopted a number of projects under technical assistance of donors for enhancing the quality of exportable products, new market exploration, offering new products to world markets according to market demand. GOB has also taken a lot of measures such as simplification of disposal of goods, waiver of utility bills, loan rescheduling, cash incentives, tariff-free import etc. for development of Ready Made Garments and Textile sector. One of the important aspects of export strategy of Bangladesh is to put equal emphasis on both bilateral and regional trade. Bangladesh is playing an active role in a number of regional trading blocs including SAFTA.
 
Foreign Exchange Regulation Act, 1947 was adapted in Bangladesh immediately after the independence. However a few provisions have been added under the foreign exchange regulation (Amendment) ordinance, 1976. Actually this Act empowered Bangladesh Bank to regulate certain payments, dealings in foreign exchange and securities and the import and export of currency. Foreign Exchange Regulation Act 1947 was basically passed on 11^th March in the year 1947. After 1947, the act was adopted by Pakistan. And after 1971, Bangladesh adopted the same act. The act has 27 sections and a number of sub sections. The major section related with the international trade payment and foreign exchange are depicted below :


Authorized dealers in foreign exchange
 
(1) The Bangladesh Bank may, on application made to it in this behalf, authorize any person to deal in foreign exchange.
(2) An authorization under this section­
(i) May authorize dealings in all foreign currencies or may be restricted to authorizing dealings in specified foreign currencies only;
(ii) May authorize transactions of all descriptions in foreign currencies or may be restricted to authorizing specified transactions only;
(iii)  May be granted to be effective for a specified period, or within specified amounts, and may in all cases be revoked for reasons appearing to it sufficient by the Bangladesh Bank.
(3) An authorized dealer shall in all his dealings, in foreign exchange comply with such general or special directions or instructions as the Bangladesh Bank may from time to time think fit to give, and, except with the previous permission of the Bangladesh Bank an authorized dealer shall not engage in any transaction involving any foreign exchange which is not in conformity with the terms of his authorization under this section.
(4) An authorized dealer shall, before undertaking any transaction in foreign exchange on behalf of any person, require that person to make such declarations and to give such information as will reasonably satisfy him that the transaction will not involve, and is not designed for the purpose of, any contravention or evasion of the provisions of this Act or of any rules, directions or orders made there under and where the said person refuses to comply with any such requirement or makes only unsatisfactory compliance therewith, the authorized dealer shall refuse to undertake the transaction and shall, if he has reason to believe that any such contravention or evasion as aforesaid is contemplated by the person, report the matter to the Bangladesh Bank.
Restrictions on dealing in foreign exchange:
 
(1) Except with the previous general or special permission of  the Bangladesh Bank, no person other than an authorized dealer shall in Bangladesh and no person resident in Bangladesh other than an authorized dealer shall outside Bangladesh, buy or borrow from, or sell or lend to, or exchange with, any person not being an authorized dealer, any foreign exchange.
 
(2) Except with the previous general or special permission of the Bangladesh Bank, no person whether an authorized dealer or otherwise, shall enter into any transaction which provides for the conversion of Bangladesh currency into foreign currency or foreign currency into Bangladesh currency at rates of exchange other than the rates for the time being authorized by the Bangladesh Bank.
 
(3) Where any foreign exchange is acquired by any person other than an authorised dealer for any particular purpose, or where any person has been permitted conditionally to acquire foreign exchange, the said person shall not use the foreign exchange so acquired otherwise than for that purpose or, as the case may be, fail to comply with any condition to which the permission granted to him is subject, and where any foreign exchange so acquired cannot be so used or, as the case may be, the conditions cannot be complied with, the said person shall without delay sell the foreign exchange to an authorised dealer.
 
(4) Nothing in this section shall be deemed to prevent a person from buying from any post office, in accordance with any law or rules made there under for the time being in force, any foreign exchange in the form of postal orders or money orders.
 
Restrictions on payments:
 
(1) Save as may be provided in and in accordance with any general or special exemption from the provisions of this sub‑section which may be granted conditionally or unconditionally by the Bangladesh Bank, no person in or resident in Bangladesh shall‑­
(a) make any payment to or for the credit of any person resident outside Bangladesh;
(b) Draw, issue or negotiate any bill or exchange or promissory note or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favour of any person resident outside Bangladesh;
(c) make any payment  to or for the credit of any person by order or on behalf of any person resident outside Bangladesh;
(d) place any sum to the credit of any person resident outside Bangladesh;
(e) make any payment to or for the credit of any person as consideration for or in association with­¾
(i)  the receipt by any person of a payment or the acquisition by any person of property outside Bangladesh;
(ii) the creation or transfer in favour of any person of a right whether actual or contingent to receive a payment or acquire property outside Bangladesh;
(f) draw, issue or negotiate any bill of exchange or promissory note transfer any security or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favour of any person as consideration for or in association with any matter referred to in clause (e).
(2) Nothing in sub‑section (1) shall render unlawful­¾
(a) the making of any payment already authorised either with foreign exchange obtained from an authorised dealer under section 4 or with foreign exchange retained by a person in pursuance of an authorisation granted by the Bangladesh Bank;
(b) the making of any payment with foreign exchange received by way of salary or payment for services not arising from business in, or anything done while in Bangladesh.
(3) Nothing in this section shall restrict the doing by any person of anything within the scope of any authorisation or exemption granted under this Act.
(4) For the purposes of this section “security” also includes coupons or warrants representing dividends or interest and life or endowment insurance policies.
 
(1) Where an exemption from the provisions of section 5 is granted by the Bangladesh Bank in respect of payment of any sum to any person resident outside Bangladesh and the exemption is made subject to the condition that the payment is made to a blocked account­
(a) the payment shall be made to a blocked account in tile name of that person in such manner as the Bangladesh Bank may by general or special order direct, and
(b) the crediting of that sum to that account shall, to the extent of the sum credited, be a good discharge to the person making tile payment.
(2) No sum standing at the credit of a blocked account shall be drawn on except in accordance with any general or special permission which may be granted conditionally or otherwise by the Bangladesh Bank.
Restrictions on import and export of certain currency and bullion.
 
(1) The Government may, by notification in the official Gazette, order that subject to such exemptions, if any, as may be contained in the notification, no person shall, except with the general or special permission of the Bangladesh Bank and on payment of the fee, if any, prescribed bring or send into Bangladesh any gold or silver or any currency notes or bank notes or coins whether Bangladesh or foreign.
 
 Explanation: The bringing or sending into any part or place in the territories of Bangladesh of any such article as aforesaid, intended to be taken out of the territories of Bangladesh without being removed from the ship or conveyance in which it is being carried. Shall nonetheless be deemed to be bringing or as the case may be, sending, into the territories of Bangladesh of that article for the purposes of this section.
 
(2) No person shall, except with the general or special permission of the Bangladesh Bank or the written permission of a person authorised in this behalf by the Bangladesh Bank, take or send out of Bangladesh any gold, jewellery or precious stones, or Bangladesh currency notes, bank notes or coins or foreign exchange.
 

Guidelines for Foreign Exchange Transactions

• Authorized Dealers (ADs) must deal only with known customers having a place of business in Bangladesh and can be traced easily should any occasion arise for this purpose.
• ADs may issue ‘Letter of Credit Authorization Form’ in conformity with the current IPO allowing imports into Bangladesh.
• ADs must not issue blank LCAF to the clients.
• LCAF remain valid for shipment of goods nine months subsequent to the month of issue. Therefore ADs should not make remittance against any LCAF after the expiry of the prescribed validity period without first obtaining revalidation of the LCAF.
• ADs must take all precautions to quote the correct ITC number (HS CODE) of the goods to be imported, in the LCAF and the LC. Because, failure to do so may lead to imposition of penalties by the Customs Authorities.
• When LCs are opened, full particulars thereof must be endorsed on the back of the exchange control copy of the LCAF under our stamp and signature. The Taka equivalent of the LC opened must be endorsed on the LCAF at the ruling BC selling rate.
• Before delivering the import documents to the importers, ADs must invariably endorse on the invoices accompanying the bill amount both in figures and words which have been remitted from Bangladesh. The endorsement should be under our stamp and signature.
• On expiry of an LC unutilized partly or wholly, or on cancellation or reversal of a sale of foreign exchange, the endorsements made on the back of the LCAF may be cancelled with appropriate remarks under our seal and signature.
• In case an endorsement is made mistakenly on a wrong LCAF, ADs may cancel the endorsement provided the endorsement is transferred simultaneously to the appropriate valid LCAF

• The aggregate amount of foreign exchange sold against an LCAF whether under LC or otherwise, should not exceed the value mentioned in the LCAF.
• ADs may report to the Bangladesh Bank the remittance of normal bank charges as usual with TM form and necessary supporting documents.
• LCAFs can normally be utilized on CFR basis. Full LCAF value is therefore not remittable as FOB value of goods. As such freight charges payable on imports on FOB basis are to be adjusted against the relative LCAF value. In case of FOB imports we should endorse, beside FOB value, the freight payable in Taka as indicated in the Bill of Lading etc. In cases where miscellaneous charges i.e. handling charges, cartage/surface transportation, documentation charge etc., are required to be paid by the importers on arrival of goods through the Airlines, the ADs should also endorse on the Exchange Control copy of the LCAFs the amount of such charges as indicated in the Airway bill along with the freight in Bangladesh Taka. ADs should also give a certificate to Importers in the form given in Appendix 5/11 of Guidelines for foreign exchange transactions to the effect that the amount of freight, handling charges etc. have been endorsed on the relative LCAF. The issue of this certificate is essential as the shipping companies etc. are under instructions not to accept payment of freight in Taka unless the above mentioned certificate is produced to them. In cases where the FOB value and the amount of freight payable in Taka exceeds the value of the LCAF the application should be referred to the Bangladesh Bank for consideration with full particulars and supporting documentary evidence.

• ADs should establish LCs against specific authorization only on behalf of our own customers who maintain accounts with us and are known to be participating in the trade. Payments in retirement of the bills drawn under LCs must be received by us by debit to the account of the concerned customer or by means of a crossed cheque drawn on the drawee’s other bankers.

• · All LCs and similar undertaking covering imports into Bangladesh must be documentary LCs and should provide for payment to be made against full sets of on board (shipped) bills of landing, air consignment notes, railway receipts, post parcel receipts showing dispatch of goods covered by the Credit to a destination in Bangladesh. All LCs must specify submission of signed invoices and certificates of origin. If any particular LCAF require submission of any other document or the remittance of exchange at certain periodical intervals or in any other manner, the LC should incorporate those instructions of the LCAF.
• It is not permissible to open clean or revolving or packing credits. Applications for opening such LCs should be referred to the Bangladesh Bank with full particulars.
• It is not permissible to open import LCs in favor of beneficiaries in countries from which import into Bangladesh are banned by the competent authority.
• The ADs should, before opening an LC, see documentary evidence that a firm order for the goods to be imported has been placed and accepted. ADs should ensure while opening an LC that full description of the goods to be imported are given in each Credit along with the unit price of the merchandise.
• ADs may establish LC to make payment to the country of origin of goods or any other country except those countries import from which are prohibited.
• In case of import by post, we may make remittance without prior approval of the Bangladesh Bank only if the parcel is addressed directly to our Bank.
• ADs may allow remittance against discrepant documents/documents received directly by the importers after the goods have been cleared from the Customs, on the basis of the relative LCAF, the exchange control copy of the Customs Bill Of Entry for consumption or Customs Certified Invoice in the case of import by post, and the relative invoices.
• All application for payment for import should be made on IMP form by the importer and we have to endorse on the reverse of the IMP form in the space provided for us.
• In all cases of import, the importer must submit within 4 months from the dates of remittance the relevant Exchange Control Copy of the customs Bill of Entry.
• In case of import by post, the importer must submit the invoice certified by the Customs authorities in lieu of the exchange control copy of the bill of entry.
• ADs have to obtain the invoice in duplicate, both of which have to be certified by us as usual. After recording in the IMP form the particulars of the remittance effected, the original copy of the IMP form alongwith the copy of the certified invoice have to be forwarded to the Bangladesh Bank with the usual monthly returns.
• The duplicate copy of IMP form will be retained by ADs. Subsequently when the exchange control copy of the bill of entry/customs certified invoice is submitted by the importer, the particulars therein should be matched and checked with those in the IMP form and invoice filed earlier, to see if the merchandise for which remittance was made has been duly received in Bangladesh. If no material discrepancy is detected, the case should be considered closed, with the duplicate IMP form, invoice and custom bill of entry/custom certified invoice field together for eventual inspection and disposal instruction from inspection team from the Foreign Investment and Inspection Department of Bangladesh Bank.

• Cases with material discrepancy between the particulars of merchandise for which remittance was made and the merchandise actually received as evidenced by the exchange control copy of bill of entry/customs certified invoice within four month of remittance should be reported to the area office of Bangladesh Bank quarterly, in proformas given at Appendices 5/14 and 5/15, by 15^th day of the month following the quarters ended March, June, September and December. ADs  should also follow up with the importers the cases material discrepancies and of non-submission of bills of entry/customs certified invoices within due time.

Uniform Customs and Practices for Documentary Credit (UCPDC 600)

 
Uniform Customs and Practices for Documentary Credit (UCPDC) is a set of rules formulated by International Chamber of Commerce (ICC) to apply to all transactions in Letters of Credit carried out by banks. The purpose of the rules is to bring about uniformity in the form of letter of credit and the practice and procedures adopted by banks in handling the instruments. In order to provide common understanding about the interpretation of the terms and terminology, a uniform code is very essential. These uniform customs and practice is universally accepted and letters of credit transactions everywhere are subject to this set of rules.
 
The UCPDC formulated by ICC is a set of rules but it has no force of law and should not be construed as law applicable to all cases, unless the parties to a transaction voluntarily agree to apply the codes. If a party to a credit by express reference wishes to exclude the applicability of uniform customs from the LC contract, it can do so and in such cases it is not bound by the uniform customs. Bank regulate their operations in respect of issuing, advising and confirming credits in accordance with this code and accept all obligations arising under that. In some countries, even courts of all have based their decisions regarding letters of credit on these rules. The rules have made uniform both the forms of letters of credit and all practices and procedures observed by banks in relation to them.   
 
The ICC UCP does not have legislative force but today it is accepted by the world banking community as universal codification of best practice. Moreover, banks everywhere incorporate the UCP by reference into virtually every documentary credit and other letter of credit. It covers most practical aspects of credit operations including issuance, confirmation and payment, the nature and extent of bank undertakings and banking responsibilities, the requirements to be met by documents presented in credit operations, and rules applicable to transferable credit.
 
The UCP rules are creatures of contract that apply when the parties have voluntarily incorporated them. The LC application forms generally contain a statement to the effect that the credit will be subject to the UCP 600 which is considered legally to represent the parties’ willingness to submit interpretation of credit to the rules of the UCP. However, there is an arrangement between ICC authority and SWIFT authority according to which the LC advised through SWIFT or received through SWIFT is automatically within the framework of UCPDC. Even where the UCP is applicable, the provisions can not cover all cases, and national regulations and guidelines are required to cover the cases/areas.
 
The revision process of UCP 500 actively began in April 2003 at the International Chamber of Commerce, Paris, and the new revision i.e. UCPDC 600 [ 2007 revision ] was adopted in November 2006 and published for the global trade and banking communities for implementation from July 1 2007. The new version of UCP 600 are the result of more than three years of intensive work by the Banking Commission. The new version of UCP 600 has been reorganized and comprises 39 articles without having any sub-head in contrast to UCP500 that has 49 articles grouped under seven broad heads. UCP 600 represents improved clarity in terms of language
 
In general, the articles that are stated in future form in UCP 500 are restructured into present form in UCP 600. Important definitions of the UCP and all interpretive issues that are placed in scattered form under UCP 500 have been accumulated into two separate articles in the beginning of the draft version of UCP 600. The term ‘parties’ has been replaced by ‘banks’. The 2007 revision dropped the common phrase ‘unless otherwise expressly stipulated in the credit’ used in different articles of UCP 500.
 
The definition of letters of credit in UCP 600 is having in a new shape. Revocable letter of credit has been dropped out of the scope of the new UCP and L/C means irrevocable letter of credit or definite undertaking only. Dropping revocable LC out of the scope of UCP draft seems to be correct. The revocable LC violates the basic protective feature of letter of credit i.e., it cannot provide necessary protection to the beneficiary in connection with receiving payments.
 
The UCP 600 has brought in the concept of ‘Second Advising Bank’ in line with the practice in different countries. In addition to the normal responsibility of checking the authenticity of the credit, it enforces additional responsibility to the advising bank in connection with giving notification about acceptance and rejection of amendments. Remarkable changes have been made in the article number 14 on ‘Standard for Examination of Documents’ of the UCP 600; which deals with examination of documents. The maximum period allowed to examine the documents has been reduced to five banking days from seven banking days, and the term ‘reasonable time’ is removed in connection with time required for examination of documents. The text of the article 16 of UCP 600 in regard to discrepant documents, waiver and notice has been placed in modified from in the new version of UCP. The article comes out explicitly with the contents of the refusal notice that was absent in UCP 500. Notice of refusal must be given by telecommunication or if that is not possible, by other expeditious means and it must be given not later than the close of fifth banking day following the day of presentation.
 
The UCP 600 offers shift in the procedure of determining shipment date in case of a few transport documents in certain scenarios. A major change has been made in connection with determining shipment date in case of ‘Marine Bill of lading’ at the presence of both pre-printed wordings and on-board notation on the bill of lading. In contrast to the UCP 500, in such a scenario, the date of on- board notation is to be considered as shipment date. In regard to determining the date of shipment of the air transport document, in the presence of a notation of actual date of shipment, the date would be the shipment date if no such indication calls for in the credit.
 
UCP 600 has 39 articles which clearly states different aspects of international trade payment under letter of credit method. Article 1 states about the application of UCP as:
 
“The Uniform Customs and Practice for Documentary Credit, 2007 Revision, ICC Publication No. 600 are rules that apply to any documentary credit (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by the credit.”
 
Article 2 and 3 provide the definitions and interpretations of various parties and key terms under letter of credit. Credits v. Contracts has been indicated in Article 4 where it has been stated that
 
“A Credit by it’s nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with o bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfill any other obligation under the credit is not subject to claims or defences by the applicant resulting from it’s relationships with the issuing bank or the beneficiary.”
 
 Article 7 and 8 clearly state the undertaking of issuing and confirming bank whereas article 9 and 10 provide a guideline regarding advising of credits and its amendments. One of the very important aspects of international trade payment under LC method is the matter of bank to bank reimbursement which has been stated in article 13 where it is inscribed that:
 
“If a credit states that reimbursement is to be obtained by a nominated bank (claiming bank) claiming on another party (reimbursing bank)the credit must state if the reimbursement is subject to the ICC rules for bank to bank reimbursement in effect on the date of issuance of the credit.”
 
A very significant aspect of UCPDC 600 is its article 14 where ‘standard for examination of documents’ has been extensively stated. At the inception of the article it has been said that “A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.”
 
Article 16 has said about discrepant documents, their waiver and notice which very astutely states “When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate.”
 
From article 18 to 28 the matter of various documents has been discussed. Among the required documents commercial invoice, transport documents, bill of lading, insurance documents are important. The rest articles emphasize on Extensions of expiry date or last day of presentation, Tolerance in credit amount, quantity and unit prices, Partial drawings or shipments, Installment drawings or shipments, Hours of presentation, Disclaimer on effectiveness of documents, Disclaimer on Transmission and Translation, Force Majeure, Disclaimer for acts of an instructed party, Transferable credits and Assignment of proceeds. All these articles provide necessary guidelines for international trade.
 

Uniform Rules for Bank to Bank Reimbursement [ URR 525]

 
The Uniform rules from Bank to Bank reimbursements [URR], ICC publication no 725 deals with bank-to-Bank reimbursements arrangement. This arrangement involves a third bank in the process of documentary credit in making reimbursement to the claiming bank. As the third bank is not a party to the credit, the relationship between issuing bank and reimbursing bank is not within the framework of UCPDC. In UCP, the first specific reference to reimbursement from a third bank was contained in UCP 290 [ article 13] 1974 revision. The current revision of UCP 600 refers about the arrangement. With the implementation of URR 725, the documentary credit arrangement for the first time got a set of international rules on bank-to- bank reimbursement arrangement. To get coverage under URR, banks are to incorporate in their reimbursement instructions that the reimbursements are subject to URR publication no – 525.

 Incoterms 2000

 
In the trade operation, the ownership and risk in the movement of goods from seller to buyer are usually linked to transport operation. It is vital for the exporter and the importer to determine with precision, matters such as which party arranges and pays for the carriage of the goods, who takes out the cargo insurance, whether the goods travel at the risk of the seller or the buyer and who affects custom clearance. Over the years, traders operating internationally evolved standard definitions known as trade terms covering the main alternative arrangements that buyers and sellers may make with regard to shipment of the goods. The current ICC version of trade terms is known as ‘Incoterms-2000’ that includes 13 items placed under four groups : E Group (Departure), F Group (main carriage unpaid), C Group (Main carriage paid) and D Group (Arrival). E Group includes EXW or Ex works. “Ex works” means that the seller delivers when he places the goods at the disposal of the buyer at seller’s premises or another name place not cleared for export and not loaded on any collecting vehicle. The F terms (FCA- Free Carrier, FAS- Free Alongside Ship, FOB- Free on Board) require the seller to deliver the goods for carriage as instructed by the buyer. The C terms (CFR- Cost and Freight, CIF- Cost, Insurance and Freight, CPT- Carriage Paid to, CIP- Carriage and Insurance paid to) require the seller to contract for carriage at his own expense. According to the D terms (DAF- Delivered At Frontier, DES- Delivered Ex Ship, DEQ- Delivered Ex Quay, DDU- delivered Duty Unpaid, DDP- Delivered Duty Paid); the sellers are responsible for the arrival of the goods at the agreed place or point of destination at the border or within the country of import.
 

International standard Banking Practice (ISBP)- A Practical Complement of UCP600

ISBP is acronym for International Standard Banking Practice for the Examination of Documents under Documentary Credits. It is widely acclaimed by letter of credit practitioners worldwide. It provides an intelligent checklist of items; document checkers can refer to in determine how ICC’s rules on documentary credits known as UCP600 apply in daily practice. It fills a needed gap in the market between the general principles in the UCP and the daily job of practitioners. It is not the substitute for the UCP, but it demonstrates how the UCP is to be integrated into everyday practice.
UCP600 incorporates international standard banking practice, which includes the practices described in it. ISBP covers the terms commonly seen on a day-to-day basis and the documents most often presented under documentary credit. It also explains how the practices articulated in UCP600 are applied by documentary practitioners. The ISBP and the UCP600 should be read in their entirely and not in isolation in order to avoid ambiguity.
 
In the latest version of ISBP there are explicit guidance on how to deal with documents covering at least two modes of transport (UCP600, Article19), insurance documents and coverage (UCP600, Article 28); transferable credits (UCP600, Article 38 ) and a broad range of other issues. However, the incorporation of ISBP into the terms of a documentary credit is being discouraged.
 
ISBP at a glance

• The latest revision of ISBP is composed of 185 articles under 11 broad categories.
• Articles 1-5 articulate the limitation of incorporating terms in the documentary credit and encourages the applicants’ acquaintance with some articles of UCP600
• Articles 6-42 provide guidelines and interpretations explicitly those are not articulated in UCP600 to determine that the documents fulfilled required terms and conditions of the credit.
• Articles 43-56 constitute composite guidance in respect of making endorsing and determining payment date of drafts under documentary credits.
• Articles 57-67 indicates contents including different issues related to invoices and also clarify tolerance in amount and quantity.
• Articles 68-90 form a set of directives in relation to multimodal or combined transport documents.
• Articles 91-114 constitute a set of directives in relation to bill of lading.
• Articles 115-133 constitute a set of directives in relation to charter party bill of lading
• Articles 134-156 constitute a set of directives in relation to air transport documents
• Articles 157-169 constitute a set of directives in relation to road, rail or inland waterway transport documents.
• Articles 170-180 constitute a set of directives in relation to insurance documents and coverage.
• Articles 181-185 provide guidance in relation to issuance and particulars of certificate of origin.

CHAPTER FOUR: LETTER OF CREDIT OPERATION IN BANGLADESH

Import Procedure

One of the important functions of the commercial banks in the world is to undertake import of merchandise into the country and payment of foreign exchange towards the cost of the merchandise to foreign suppliers. In almost all the countries of the world there is import trade control in one form or the other which supervises the import into the country and controls certain items of exports depending upon national exigencies. The main object of the import trade control is to conserve the scarce foreign exchange resources of the country with a view to meeting the needs of development of its expanding economy. In Bangladesh, the import of goods is regulated by the Ministry of Commerce in terms of the Import and Export (Control) act, 1950; with Import Policy Orders, and Public Notices issued from time to time by the Chief Controller of Imports and Exports (C.C.I.& E), while payments for these imports are regulated by Central Bank, i.e. Bangladesh Bank, through its Exchange Control Department.
 
According to the Imports and Exports Act, 1950 as adopted in Bangladesh, any one willing to carry import business needs registration with the licensing authority, i.e., Chief Controller of Imports Exports and its offices at the important trade centers of the country.
 
The following documents are required to be submitted to the licensing authority for registration as importers.
i)                    Questionnaire form duly filled in and signed
ii)                  Income tax registration certificate
iii)                Trade License from the Municipal or Local Authority
iv)                Bank certificate
v)                  Nationality certificate
vi)                Partnership Deed where applicable
vii)              Certificate of Registration with the Register of Joint Stock Companies and Memorandum and Articles of Association in case of Private and Public Limited Company.
viii)            Certificate from the Chamber of Commerce / registered Trade Association
ix)                Ownership documents or rent receipts of the place of business
x)                  Any other documents required under the relevant import policy
On receipt of the application along with relative documents, the Chief Controller of Imports and Exports and its regional offices scrutinizes the documents and conducts physical verification (if considered necessary) and on being satisfied, requests the applicant to pay fees towards registration through treasury challan.
 
After submission of the above documents and payment of requisite fees, if the documents are found in order and the C.C.I & E is satisfied, the Import Registration Certificate (IRC) is issued to the applicant-importer.
 
The IRC is a security document issued under embossing seal and duly signed by authorized officials of C.C.I & E and to be kept safe custody. The IRC is required to be renewed every year on payment of usual fees.
 
Import in Bangladesh can take place in two ways
(1)   By way of opening L/C
(2)   Without opening L/C.
(I) Import by way of opening L/C requires fulfilling following criteria of private sector importer;
a) Registered importer having valid IRC
b) Trade license (valid)
c) Membership certificate from local chamber of commerce of related association (valid).
d) Income tax clearance/ declaration in case of new comer.
e) VAT registration certificate.
If a private sector importer fulfils above requirements, a banker can process an L/C for import of goods & services from abroad but following papers/documents are to be obtained before opening of LC in addition it the above mentioned papers/documents:
1.         L/C application.
2.         Indent / Performa invoice / purchase order / contract / agreement.
3.         Charge documents duly & properly executed.
4.         Letter of Credit Authorization Form (LCAF) duly sealed & signed.
5.         Insurance cover note
 
The importer must be a customer of the L/C issuing bank / branch & the L/C may be opened after sanction by the competent authority.
 
Liability vouchers
Debit- Customer’s Liability for L/C
Credit-  Banker’s Liability for L/C
Other vouchers
Debit- Party’s account
Credit- Marginal Deposit
Credit- Commission
Credit- Postage
Credit- Vat
Credit – Other Charges
 
(2) Import into Bangladesh without opening L/C may be made in the following cases against LCAF:
 
a)      Books, journals, magazines, periodicals against sight draft or usance bills. Any importable item by making payment from Bangladesh to the tune of maximum USD. 2500/ -in a year
b)  The items allowed by the credit, Loan, Grant.
c)      International chemical reference by registered allopathic industrial unit with the approval of  Director, Drug Administration.
 

Scrutiny of Documents

The letter of credit constitutes one of the most important methods of financing trade. Under a banker’s letter of credit, the issuing bank gives a undertaking on behalf of the buyer that the bank will honor the obligation of payment on presentation of stipulated documents. Thus letter of credit provides security if the beneficiary observes its terms and conditions. The beneficiary of the documentary letter of credit when presents the stipulated documents to the negotiating bank, he expects the bank to honor its obligation under the credit in return. The negotiating bank scrutinizes the document in strict accordance with the L/C terms and negotiates the bill if the documents are in order. After negotiation, the bank claims reimbursement as per L/C terms. The L/C issuing bank / draw bank, after receiving of the above documents, scrutinizes all the documents before lodgment of the same in their books / registers.
 
After completion of careful scrutiny of the documents steps should be taken to lodge the documents. If minor discrepancies are detected, acceptance/nonacceptance in writing from the party concerned should be obtained. While writing letter to the party the discrepancies should be pointed out specifically.
 

Steps for Lodgment

 
Following steps are maintained for lodge the documents.

1. Intimation is given to the party in time
2. Conversion of foreign currency in to Bangladesh currency.
3. Entry in to PAD register, along with PAD number
4. Entry in to L/C opening register by rounding the L/C no with date
5. Relative LCAF is to be endorsed showing the utilization of credit amount. The utilized amount also to be noted in L/C file.
6. IMP forms duly signed by the importer are to be filled in.
7. Passing of vouchers

a)      Reversal of contra liability vouchers
Debit- Bankers Liability for L/C
Credit- Customer’s Liability for L/C
b)       Lodgement voucher i.e.,
Debit PAD(Payment Against Document)      (At BC selling rate)
Credit ID, Head Office                                  (name of Foreign bank, T.T/OD rate)
Credit I/A Exchange Earnings                        (Difference amount)
 

Retirement of Documents

 
After the arrival of goods in the port the party comes to retire the documents. Then the following entry is passed.

1. Calculation of Interest
2. Determination of other Charges
3. Passing of Vouchers:

Dr. Party’s A!C
Dr. Marginal Deposit A/C
Cr. PAD
Cr. Interest A!C; Interest and other charges

4. Entry into the register
5. After retirement, document along with custom purpose copy of LCAF to be delivered to the importer giving following endorsement:

a)      Draft/Bill of Exchange is to be endorsed as “Receive payment”
b)      The invoice value is to be certified as “certified (the amount-Foreign Currency) converted @ …………. Dated………………Tk…………

6. The Bill of Lading / Transport document is to be endorsed for taking delivering of goods as “Please deliver to ………………. Or to the order of M/S………….”.

 
           
Interest is calculated on be amount from the date of reimbursement to the date of retirement. If the margin is kept with the bank a minimum 30 days, then interest is paid to the party at the savings rate and following vouchers are passed.
 
Dr. Expense control A!C Interest paid on margin L/C cash.
Cr. Party’s A!C.
 
Original documents are handed over to the importer after proper endorsement along with original LCA. The importer clears the goods on showing all these documents. The customs authority gives a bill of entry as a document of entering the importer goods in the country. The importer surrenders this bill of entry to the bank and forwards the bill of entry to Bangladesh bank along with the duplicate of IMP from.
 

Import Financing

 
Banks are playing a very important role in financing foreign trade of a country. Basic task in case of foreign trade is the same as in the home trade, i.e., to receive payments from the buyers and to make payments to the sellers. In our country import financing is made by the way of Payment Against Documents (PAD), Loan Against Imported Merchandise (LIM), Loan Against Trust Receipt (LTR).
 

Payment Against Documents (PAD)

 
When an import bill is received under a letter of credit, issuing bank carefully examine the documents as these are in accordance with the terms of the letter of credit. If the documents received in order, the bank lodge the shipping documents in their book and the debit entry originated there against by the negotiating bank / reimbursement bank is responded to the debit of advance portfolio “Payment Against Documents” or “Bill of Exchange” as the case may be and intimation is sent to the importer asking him to retire the import bills immediately. Thus, liability under the letter of credit is converted to bank’s advance. It is a practice that allows the importer to retire the documents until ship carrying the goods arrives. Normally, outstanding under “PAD” should not take more than 21 days for adjustment. When the importer retires the bill, the transaction ends there.
 

Loan Against Imported Merchandise (LIM)

When the importer requests the bank for clearance of goods or the importer fails to retire the documents on payment, the liabilities under PAD or Bill of Exchange are converted to LIM account and the overdue interest from the date of accompanying Bill of Exchange or negotiation date to the date of transfer to LIM account is charged and incorporated to LIM. The advance against merchandise account is a loan account and only amounts for clearance charges, such as, custom duty, sales tax or VAT etc are allowed to be debited to the LIM account. A definite repayment schedule is also given to the importer to take delivery of the goods from bank’s custody against payment. Usually this loan is granted for 90 days within which importer should repay the loan and take delivery of the goods.
 

Loan Against Trust Receipt (LTR)

 
Letter of Trust Receipt is a document duly stamped and signed in bank’s 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 bank continues to have the rights of the pledge. In getting such facility, the importer is to offer sufficient tangible securities acceptable to the bank equivalent to loan account.

Export Procedure

 
The general framework for control of exports is similar to that of imports but the objectives of import and export control are quite different. While import control is aimed at curbing imports to the extent possible, export control mainly aims at regulating the flow of foreign exchange into the country. Our Government always encourages exports to the extent possible so as to earn valuable foreign exchange for the country.
 
Any firms / parties desirous of undertaking export trade are required to obtain Export Registration Certificate (ERC) from the offices of the Chief Controller of Imports and Exports (C.C.I & E), Government of Bangladesh. No person is allowed to export any goods from Bangladesh to any other country without obtaining such a certificate. Authorised Dealer should, therefore, ensure before certifying any export form, as required that the person is so registered. The registration number should be quoted on the relative EXP form.
 
For the purpose of registration, an application in the prescribed form is required to be submitted to the  C.C.I & E authority along with the following documents:

1. Nationality certificate from the local authority
2. Trade License from the Municipal authority
3. Bank certificate
4. Income Tax certificate
5. Registered partnership deed in case of Partnership concerns, memorandum and Articles of Association and Certificate of Incorporation in case of Limited Company.
6. Copy of rent receipt of the business premises.

 
An exporter has to obtain a firm contract or an export L/C/Firm contract he has to make the goods ready and necessary arrangement for shipment particularly the following arrangements have to be done:

• Booking of shipping space.
• Packing of the goods with shipping makes as per instruction of Export L/C/contract.
• Booking of space for storage of export cargo at the port of loading.
• Arrangement for transportation of goods to the port.
• Approaching bank (A.D) for issuing EXP.
• Whenever an exporter approaches the branch for issuing and certifying EXP. Branch is to satisfy that he maintains a CD A/c with the branch. He is a manufacturer, producers or supplier of the goods to be exported. Market reputation is satisfactory. Being satisfied following papers and documents are to be obtained:
• Application for the exporter.
• Valid export Registration certificate (ERC).
  •   Original copy of export L/C/Firm contract.

Examination of papers and documents by the branch

i. Application:

• Items are permissible for export.
• Arrangement made for realization of Export Proceeds within 4(Four) months.
• Arrangement has been made for receipt of title of the goods like Bill of Lading (B/L), Air Way Bill etc.

ii. Export L/C:

• Irrevocable / Confirmed L/C issued by an internationally reputed bank under UCPDC in force and transfer made (if transferable) as per provision of article 48 of ICC- 500.
• Genuineness of Advising or Transferring the L/C is to be verified.
• Time for shipment is sufficient.
• Negotiation authority is provided therein.
• Reimbursement clause is definite.
• B/L clause conforms to the provision of Guidelines for foreign Exchange Transactions.
• All other terms and conditions are favorable.

 
iii) Contract:

• Contract is confirmed and duly signed by the seller and the purchaser.
• Buyer consignee is bonafide (Branch has to obtain credentials of the buyer through Foreign Correspondence).
• Full description of the goods to be exported with quantity, quality, price and unite price are given.
• Mode of transport with port of shipment and destination.
• Date of shipment.
• Delivery Term-FOB, CRE, CIF etc. mentioned clearly.
• Payment clause at Sight DC/ DP/ USANCE.
• Validity of the Contract.
• Being satisfied branch is to issue a set of EXP. Duly recorded in Export Register as per specification given in appendix in 5/65 of Guidelines For Foreign Exchange Transaction Volume-1 published by Bangladesh Bank.
• Exporter is to fill up and sign EXP. Under his seal. Branch is to check that all the copies EXP have correctly been filled in as per particulars of export L/C/contract. Signature of the export is to be verified and certify under seal and signature of the branch manager on the space provided.

 
Papers and documents are to be handed over to C& F Agent:

• EXP duly signed by Export and certified by the bank.
• Copy of Export L/C Contract.
• Commercial invoice duly issued and signed by the exporter.
• Packing List.
• Insurance cover note in case of Export on CIF basis.
• From VBF-9 (Prescribed by Custom Authority for declaration of Export Cargo).
• Detail instructions regarding shipment:
• Date by which the goods should be put on board.
• Name of the bank in Bangladesh to whose order BL/air way duty Bill should be drawn.
• Number of original and non-negotiable B.L to be obtained.
• A proof of export from the Custom Authority for claiming duty draw back (wherever admissible).

 
C & F Agent has to arrange:

• Booking of shipping space.
• Storage of Export Cargo at the port.
• Marking the shipping marks on each packet / container.
• Issue instruction to the carrier regarding the date by which goods are to be shipped on board and shipping documents to be issue with necessary clauses and number of copies to be supplied.

 
After shipment Exporter will submit the following documents to the branch:

• All negotiable copies of B/L
• Commercial Invoice duly signed.
• Bill of Exchange.
• Consular invoice (If required).
• Packing list.
• Certificate of Origin.(If required).
• Pre-shipment inspection certificate (If required).
• GSP certificate (wherever necessary).
• Original copy of export L/C/Contract.
• EXP duly certified by the custom authority.
• Any other documents required as per export L/C Contract.
• Exporter is to submit the export documents under cover of a letter mentioning a number of documents submitted and detail instructions regarding payment and delivery of documents.

 
Branch is to verify that–
The number of the documents mentioned in the forwarding letter is found intact.
Instruction regarding payment and delivery of documents are in confirming with the terms and conditions of Export L/C contract.
i) Sight Documents are to be delivered against payment at sight of the draft.
ii) D.A Documents to be delivered against acceptance of the draft by the 1                              drawee and documents are to presented on due date for payments.
iii) D-P-Documents are to be delivered against payment.
iv) All the documents required as per terms and conditions of L/C contract are
submitted.
 
Documents submitted are to be scrutinized and the discrepancies are to be noted on                               the scrutiny sheet. Exporter is to be informed of the discrepancies immediately. Export will rectify the discrepancies which are rectifiable by them.
 

Export Financing

Financing of exports constitutes an important part of a bank’s activities. Exporters require financial services at different stages of their export operation. During each of these phase exporters need different types of financial assistance depending on the nature of the export contract. Export financing can be classified into two categories.
1)      Pre-shipment credit
2)      Post-shipment credit
 

Pre-shipment credit

Pre-shipment credit, as the name suggests, given to finance the activities of an exporter prior to the actual shipment of goods for export. The purpose of such credit is to meet working capital needs starting from the point of purchasing of raw materials to transportation of goods for export to foreign country. Pre-shipment credit takes place the following forms:
1)      Export Cash Credit (Hypothecation)
2)      Export Cash Credit (Pledge)
3)      Export Cash Credit against Trust Receipt
4)      Packing Credit
5)      Back to Back letter of credit
6)      Credit against Red-Clause letter of credit
 

Export Cash Credit (Hypothecation)

Under this arrangement a credit is sanctioned against hypothecation of the raw materials or finished goods intended for export. Such facility is allowed to the first class exporters. As the bank has got no security in this case, except charge documents and lien of export L/C or contract, bank normally insists on the exporter in furnishing collateral security. The letter of credit creates a charge against the merchandise in favor of the bank but neither the ownership nor the possession is passed to it.
 

Export Cash Credit (Pledge)

Such credit facility is allowed against pledge of exportable goods or raw materials. In this case, cash credit facilities are extended against pledge of goods to be stored in the godown under bank’s control by signing letter of pledge and other pledge documents. The exporter surrenders the physical possession of the goods under bank’s effective control as security for payment of bank dues.
 

Export Cash Credit against Trust Receipt

In this case, credit limit is sanctioned against Trust Receipt. The exportable goods remain in the custody of the exporter. He is required to execute a stamped export trust receipt in favor of the bank. This facility is allowed only to the first class party and aollateral security is generally obtained in this case.
 

Packing Credit

In this cash credit, facilities are extended against security of Railway Receipt / Steamer Receipt / Barge Receipt / Truck Receipt evidencing transportation of goods to the port for shipment of the goods in addition to the usual charge documents and lien of export letter of credit. This type of credit is sanctioned for the transitional period from dispatch of the goods till negotiation of the export documents. The drawings under Export cash credit (Hypothecation/Pledge) limit are generally adjusted by drawings in packing credit limit which in turn, liquidated by negotiation of export documents.
 

Back to Back Letter of Credit

Under this arrangement, the bank finances export by opening a letter of credit on behalf of the exporter who has received a letter of credit from the overseas buyer. Since the second letter of credit is opened on the strength of and backed by another letter of credit it is called Back to Back Letter of credit. The need for a back to back letter of credit arise because the beneficiary of the original (export) letter of credit may have to procure the goods from the actual producer who may not supply the goods unless its payment is guaranteed by the bank in the form of letter of credit. The bank’s credit related to back to back letter of credit is realized subsequently from export proceeds.
 

Credit against Red-Clause letter of credit

Under Red clause letter of credit, the opening bank authorizes the advising bank/Negotiating bank to make advance to the beneficiary prior to shipment to enable him to procure and store the exportable goods in anticipation of his effecting the shipment and submitting a bill under the L/C. as the clause containing such authority is printed /typed in red ink the L/C is called Red clause and Green Clause L/C respectively. Though it is not prohibited, it is very rare in Bangladesh.
 

Post-shipment credit

This type of credit facilities extended to the exporters by the banks after shipment of the goods against export documents. Necessity for such credit arises as the exporter can not afford to wait for a long time for without paying manufacturers / suppliers. Banks in our country extend post-shipment credit to the exporters through:
1)      Negotiation of documents under L/C
2)      Purchase of DP and DA bill’s
3)      Advance against Export Bills surrendered for collection

Negotiation of documents under L/C

Under this arrangement, after the goods are shipped, the exporter submits the concerned documents to the negotiating bank for negotiation. The documents should be negotiated strictly in accordance with the terms and conditions and within the period mentioned in the letter of credit. If the documents are found complying the terms and conditions of L/C, the bank may purchase/discount the drafts/documents.
 

Purchase of DP and DA bill’s

In such case, the banks purchase/discount the DP (Documents against Payment) and DA (Documents against Acceptance) bills operated under the payment method of documentary collection. While doing so, the banks scrutinize all the export documents separately and minutely.  Clear instructions is to be obtained from the drawer of the bill in regard to all important issues related to the negotiation of the bills.
 

Advance against Export Bills surrendered for collection

Banks generally accept export bills for collection of proceeds when they are not drawn under a L/C or when the documents, even though drawn against an L/C contains some discrepancies. Bills drawn under L/C, without any discrepancy in the documents, are generally negotiated by the bank and the exporter gets the money from the bank immediately. However, if the bill is not eligible for negotiation, the exporter may obtain advance from the bank against the security of export bills. In addition to the export bills, banks usually ask for collateral security like a guarantee by a third party and equitable / registered mortgage of property.
 

Payment Methods used in Foreign Exchange Transactions in Bangladesh

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 exporter’s 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. According to Choudhury and Habib (2006), 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 Bank’s 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 it’s 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

Source: Based on data collected from sampled banks
 

Formalities and Margin Requirement while Opening L/C

Unless otherwise specified, no import License will be necessary for import of any item in Bangladesh. However, registration to the Authorised Dealer is a requirement to import into the country. Other than filling up L/C application form, submission of the copy of proforma invoice and insurance cover note along with LCAF to the bank is a regulatory requirement. Issuing Bank has an agreement with the applicant while opening a Letter of Credit on his or her behalf.
 
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/negotiated by the relationship between the AD and the LC applicant.
 

Forms of L/C in Use

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

Source: Based on data collected from sampled banks
 

Documents Called for by a Credit

 
For Import L/C, issuing bank asks for
a)      Bill of Exchange or Draft
b)      Transport Documents like Bill of Lading, Airway Bill, Truck Receipt etc.
c)      Commercial Invoice
d)     Certificate of Origin and
e)      Others as required by Bangladesh Bank Guideline or Import Policy Order (IPO).
 
Even though transport documents (title documents), commercial invoice (sellers bill) and insurance documents are essential as per UCP 600, insurance documents are rarely asked in Bangladesh. According to the country’s Import Policy Order, insurance is to be covered through domestic Insurance companies. Therefore, there will be no CIF LC in our country.
 
Submission of signed commercial invoice is another regulatory requirement. Under UCP 600, commercial invoice needs not to be signed. But as per BB Guidelines, all LCs must ask for submission of signed invoices. Submission of certificate of origin is a must in Bangladesh according to the Import Policy. Besides these, Packing List is another very frequently asked documents with Weight List, PSI certified Invoice, various Beneficiary’s Certificate are also asked less frequently or depending of case basis.
 
It is worth mentioning here that if the import is made from India through land customs, a Custom House Certified Invoice and/or Indian Application for Export Bills are asked with the original documents.
 
For Export L/C, exporters in our country are asked for the documents like
a)      Bill of Exchange
b)      Transport Documents
c)      Commercial Invoices
d)     Packing List and
e)      Certificate of Origin.
It has been observed that insurance documents are less frequently asked in the export LCs. Weight list and PSI certificates are also asked but less frequently based of case to case basis.
 
Table 4.3: Documentary Requirements

Source: Based on data collected from sampled banks

Examination of Documents

 
In connection with examination of documents ‘Standard For Examination Of Documents’ reflected in the article 14 of UCP 600 is the guideline.
 
As any LC opened in our country has to comply with domestic regulations, guidelines on foreign exchange transactions along with 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 LC is established only the ‘LC 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 banks 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 observed 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.
 

Availability of Credit

 
A letter of credit must point out whether the credit is available at sight, deferred, acceptance or negotiation basis. The issuing bank is also required to mention that whether the payment will be made from the counter of the issuing bank or a nominated bank (negotiating bank). In most cases, LC issued from the country are freely negotiable which means any bank is negotiating or nominated bank at the counter of which documents are submitted by the foreign exporter or beneficiary. In such a case, exporter can submit documents at the counter of it’s bank in the country of his or domicile. In most cases (68%) payments are designated on negotiation basis from the counter of the nominated bank.  Another 20% cases use acceptance basis payment and 12% deferred payment.
 

Charges and Commissions

 
Charges in documentary credit are much higher as compared to other forms of payment as involvement of banks is significant in this mode. At different stages of involvement, banks charge different rates of commissions as issuing bank, advising bank, negotiating bank, confirming bank, reimbursing bank etc. Commissions vary from bank to bank and in some cases also from client to client.
 

CHAPTER FIVE: OBSERVATION AND CONCLUSION

 
 
In Bangladesh, international trade and foreign exchange transactions are generally made through Letter of Credit. It is the most popular method out of many others described earlier for importing and exporting goods and for making and receiving payments to and from abroad. It is also notable that the Import and Export policy of the country and Foreign Exchange Guideline provided by the Central Bank are also encourage this Documentary Credit system. For example import without LC is restricted for upto $35000/per year and to some restricted items like books, journals etc. (Import Policy Order 2006-2009) and import against advanced payment is comparatively complex (Foreign Exchange Guideline Vol – 1).
 
From our above dissertation the following findings are worth noting:
 
1)      Due to regulations and policies of the country, there are great differences in the documentary requirements of export and import LCs in Bangladesh. LCs issued from abroad i.e. export LC asks for fewer documents than the LCs issued from our country. However, both import and export LCs, submission of insurance documents are rarely asked for their requirement to be covered by domestic insurance companies.
 
2)      As both Bangladeshi Importer and Exporters are dominated by the foreign suppliers and buyers respectively, imports are made on CNF basis and exports are made on FOB. Due to this our country losses a substantial amount of Foreign Currency.
 
3)      About one third of the cases collection method is used in export transactions. However, in recent times, trend of the use of documentary collection is increasing both in export and import payment transactions. Though open account is widely used in trades among developed countries, its use in Bangladesh is completely absent. Absence or insignificant cases of use of cash in advance and open account might be attributed to the regulatory requirement of the country, relative bargaining power, reputation of the country’s traders and mutual trust and relationship of the domestic traders with their counterparts.
 
4)      The beneficiary of an irrevocable documentary credit enjoys maximum protection against commercial risks since it is assured that the buyer’s bank will pay the value even if the buyer defaults to meet it’s payment obligation. If the credit is confirmed by a bank in the seller’s country, the seller also obtains protection against transfer risks since the confirming bank is obliged to pay even if the buyer’s bank is unable to transfer funds out of the country. However, of the four methods documentary letter of credit is the most expensive.
 
5)      All letter of credits issued and received in Bangladesh are irrevocable in nature as opening or receiving revocable credit is completely banned by regulations of the country as well as by the UCPDC 600.
 
6)      In the Garments Sector imports are made through back-to-back DP LCs to meet up the requirements for complete production and export in due time.
 
7)      In our country garment exports are financed by the banks making lien and pledge on Export LC commonly called as Master LC. But as our exporters in many times become unable to make the shipment within validity the documents becomes discrepant. Therefore repatriation of the related proceeds becomes risky and vulnerable. Sometimes exporters can not ship the goods or due to discrepancies repatriation of proceeds fails and thus the goods become ‘stock lot’ and this way the exporter lost its business and the Bank falls in trouble.
 
8)       Absence of Red Clause and Revolving LCs in the trade payment is mainly due to the country’s regulatory barriers.
 
9)      In cases of LC advising banks generally prefer to select those banks available by their correspondent relationship. However, some banks also try to accommodate exporters’ choice but in doing so some banks avail the services of a second advising bank. This actually imposes additional cost burden on the trading parties.
 
10)  Almost in all cases, confirming banks are selected by the issuing bank though in some cases banks try to accommodate exporters’ choice if they have arrangement with that bank.
 
11)  For amendment of letter of credit, generally importers approach to the bank on behalf of the exporters. An amendment can only be made if all 3 (three ) prime parties i.e. the importer, the export and the LC issuing bank agrees to do so. But in our country it is observed that the banks without receiving any request from the beneficiary make amendment to an LC only receiving an amendment application from the importer.
 
12)  Some banks are found to have practices to give a deadline for notification of acceptance or rejection of amendment, and note that if they do not receive any message within the given period from the beneficiary, the amendment deemed to be accepted.
 
13)  Banks in our country tends to send discrepancy notice on each and every import documents even based on negligible discrepancies to safe-guard its position on making its confirmed foreign payment. This makes payments against import documents delayed and surely hampers the good will of the country. This is one of the reasons why UCPDC 500 year 1993 was rectified as UCPDC 600 year 2007. But these commercial banks more or less become bound to do so due to less effective legal structure in our country.
 

CONCLUDING REMARKS

 
Even at this real time communication world, letter of credit is considered to be the one of the safest way to remit and get proceeds. But still there are some factors to be re-considered like:
a)      Restructure of legal enforcement against defaulter importers and exporters in Bangladesh.
b)      Necessary changes in import policy to permit imports to be made without LC to reduce import cost and subsequently reduce prices on essential and consumable goods.
c)      Financing in the garments sector by the banks should be made more secure etc.
 
In some countries of tight control on foreign trade operations, documentary credit is a very strong device in the government’s 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 country’s smooth growth.

BIBLIOGRAPHY

 
Awasthi, G. S ( 1997 ), Trade Payments, International Chamber of Commerce, Paris.
 
Bangladesh Bank (1997), Guidelines for Foreign Exchange Transactions, Volume 1 and 2, Bangladesh Bank, Dhaka, Bangladesh.
 
Byrne, James E. ( 2001 ), “ Overview of Letter of Credit Law and Practice’’ in Byrne, James E and Christopher S. Byrnes ( eds. ) Annual Survey of Letter of Credit Law and Practice, Institute of International Banking Law and Practice, USA.
 
Choudhury, Toufic A. and Shah Md. Ahsan Habib ( 2006 ), ‘ An evaluation of the Operations of International Trade Payment Methods in Bangladesh  Presented in the seminar organized by ICC, Bangladesh.
 
Chowdhury, L. R. (2000), A Textbook on Foreign Exchange.
 
Government of Bangladesh (1972), Foreign Exchange Regulation Act, 1947
 
International Chamber of Commerce (2006) Uniform Customs and Practices for Documentary Credit; Publication No. 600, The International Chamber of Commerce, Paris.
 
Mann, Ronald ( 2001 ), “ Role of Letter of Credit in Payment Transactions” in Byrne, James E. and Christopher S. Byrnes ( eds. ), Annual Survey of Letter of Credit Law and Prcitce, Institute of International Banking Law and Practice, USA.
 
Ministry of Commerce ( 2006 ), Export Policy 2006-09, Government of Bangladesh, Dhaka.
 
Ministry of Commerce (2006), Import Policy 2006-09, Government of Bangladesh, Dhaka