Bank, being one of financial institutions, facilitates payment for merchandise shipped and services rendered, layouts funds for buyer and seller, and gives its professional advices to traders. Bank payment are very significant procedures of international trade. Applicable modes of bank payments are;
Advance Payment – ensures that payment is cleared before the goods are shipped. A bank transfer is the quickest method of clearing funds.
Cash Against Document – this is raised by the exporter and made out to the customer’s bank. It is then sent to the customer for acceptance and can be guaranteed by the bank for additional safety.
Open Account – credit terms can be 30, 60 days or more. This method of payment is recommended only when none of the above methods are suitable. Payments should be by bank transfer rather than cheque that could take months to clear.
Letters of Credit (LC)
For any company entering the international market, Letters of Credit are important payment mechanisms which help eliminate certain risks.
Types of Letter of Credit
An irrevocable letter of credit can neither be amended nor cancelled without the agreement of all parties (traders) to the credit.
The advising bank forwards an unconfirmed letter of credit directly to the exporter without adding its own undertaking to make payment or accept responsibility for payment at a future date, but confirming its authenticity.
A confirmed letter of credit is one in which the advising bank, on the instructions of the issuing bank, has added a confirmation that payment will be made as long as compliant documents are presented. A bank will make an additional charge for confirming a letter of credit. In many cases, the confirming bank is located in Beneficiary’s country.
Standby Letters of Credit
A standby letter of credit is used as support where an alternative, less secure, method of payment has been agreed. They are also used in the United States of America in place of bank guarantees. Should the exporter fail to receive payment from the importer he may claim under the standby letter of credit? Certain documents are likely to be required to obtain payment including: the standby letter of credit itself; a sight draft for the amount due; a copy of the unpaid invoice; proof of dispatch and a signed declaration from the beneficiary stating that payment has not been received by the due date and therefore reimbursement is claimed by letter of credit.
Revolving Letter of Credit
The revolving credit is used for regular shipments of the same commodity to the same importer. It can revolve in relation to time or value. If the credit is time revolving once utilized it is re-instated for further regular shipments until the credit is fully drawn. If the credit revolves in relation to value once utilized and paid the value can be reinstated for further drawings. The credit must state that it is a revolving letter of credit and it may revolve either automatically or subject to certain provisions. Revolving letters of credit are useful to avoid the need for repetitious arrangements for opening or amending letters of credit.
Transferable Letter of Credit
A transferable letter of credit is one in which the exporter has the right to request the paying, or negotiating bank to make either part, or all, of the credit value available to one or more third parties. This type of credit is useful for those acting as middlemen especially where there is a need to finance purchases from third party suppliers.
Back-to-Back Letter of Credit
A back-to-back letter of credit can be used as an alternative to the transferable letter of credit. Rather than transferring the original letter of credit to the supplier, once the letter of credit is received by the exporter from the opening bank, that letter of credit is used as security to establish a second letter of credit drawn on the exporter in favor of his importer. Many banks are reluctant to issue back-to-back letters of credit due to the level of risk to which they are exposed, whereas a transferable credit will not expose them to higher risk than under the original credit.
Parties involved in Letter of Credit
- The Applicant is the party that arranges for the letter of credit to be issued.
- The Beneficiary is the party named in the letter of credit in whose favor the letter of credit is issued.
- The Issuing or Opening Bank is the applicant’s bank that issues or opens the letter of credit in favor of the beneficiary and substitutes its creditworthiness for that of the applicant.
- An Advising Bank may be named in the letter of credit to advise the beneficiary that the letter of credit was issued. The role of the Advising Bank is limited to establish apparent authenticity of the credit, which it advises.
- The Paying Bank is the bank nominated in the letter of credit that makes payment to the beneficiary, after determining that documents conform, and upon receipt of funds from the issuing bank or another intermediary bank nominated by the issuing bank.
- The Confirming Bank is the bank, which, under instruction from the issuing bank, substitutes its creditworthiness for that of the issuing bank. It ultimately assumes the issuing bank’s commitment to pay.
Letter of Credit Flow
- Applicant approaches Issuing/ Opening Bank with LC application form duly filled and requests Issuing Bank to issue a Letter of Credit in favor of Beneficiary.
- Issuing Bank issues a Letter of Credit as per the application submitted by an Applicant and send it to the Advising Bank, which is located in Beneficiary’s country, to formally advise the LC to the beneficiary,
- Advising Bank advises the LC to the Beneficiary,
- Once Beneficiary receives the LC and if it suits his/ her requirements, he/ she prepares the goods and hands over them to the carrier for dispatching to the Applicant
- The exporter then hands over the documents along with the Transport Document as per LC to the Negotiating Bank to be forwarded to the Issuing Bank.
- Issuing Bank reimburses the Negotiating Bank with the amount of the LC post Negotiating Bank’s confirmation that they have negotiated the documents in strict conformity of the LC terms.
- Negotiating Bank makes the payment to the Beneficiary.
- Simultaneously, the Negotiating Bank forwards the documents to the Issuing Bank to be released to the Applicant to claim the goods from the carrier.
- Applicant reimburses the Issuing Bank for the amount, which it had paid to the Negotiating Bank.
- Issuing Bank releases all documents along with the titled Transport Documents to the Applicant
Settlements under a Letter of Credit
Sight payment, the commercial letter of credit is payable when the beneficiary presents the complying documents and if the presentation takes place on or before the expiration of the commercial letter of credit.
Deferred payment, the commercial letter of credit is payable on a specified future date. The beneficiary may present the complying documents at an earlier date, but the commercial letter of credit is payable only on the specified future date.
Acceptance is a time draft drawn on, and accepted by, a banking institution, which promises to honor the draft at a specified future date. The act of acceptance is without recourse as it is a commitment to pay the face amount of the accepted draft. Under negotiation, the negotiating bank, a third party negotiator, expedites payment to the beneficiary upon the beneficiary’s presentation of the complying documents to the negotiating bank.
The bank pays the beneficiary, normally at a discount of the face amount of the value of the documents, and then presents the complying documents, including a sight or time draft, to the issuing bank to receive full payment at sight or at a specified future date.
Advantages of Letter of Credit
- The beneficiary is assured of payment as long as it complies with the terms and conditions of the letter of credit. The letter of credit identifies which documents must be presented and the data content of those documents. The credit risk is transferred from the applicant to the issuing bank.
- The beneficiary can enjoy the advantage of mitigating the issuing bank’s country risk by requiring that a bank in its own country confirm the letter of credit. That bank then takes on the country and commercial risk of the issuing bank and protects the beneficiary.
- The beneficiary minimizes collection time as the letter of credit accelerates payment of the receivables.
- The beneficiary’s foreign exchange risk is eliminated with a letter of credit issued in the currency of the beneficiary’s country
Verification of Commercial invoice with terms in Letter of Credit
- The merchandise description- including weight, quantity and price conform exactly with the Letter of Credit and other documents,
- The name and address of the Importer and Exporter are exactly as shown in the Letter of Credit,
- The correct number of originals and copies have been presented and signed if required,
- It is made out in the same currency as the Letter of Credit?
- The trade term is listed per the Letter of Credit, e.g. C.I.F. C&F, FOB etc.
Verification of bill of loading with terms in Letter of Credit
- It has been submitted with all the required originals
- The merchandise description is consistent with the Letter of Credit
- The points of loading and discharge are consistent with the Letter of Credit?
- The Bill of Lading are consigned to the order of the party specified in the Letter of Credit
- It is dated on or before the latest shipment date stipulated in the Letter of Credit
- The Bill of Lading is endorsed correctly
- The Letter of Credit states freight is to be prepaid, if this is clearly indicated on the Bill of Lading
Verification of Insurance document with terms in Letter of Credit
- Does the insurance document cover all risks specified in the Letter of Credit?
- Does the insured amount meet the percentage requirement of the Letter of Credit and is it in the currency of the Letter of Credit?
- Is the issue date of the insurance document prior to the shipment date of the goods?
- Is the insurance document signed by or endorsed in blank by the insured or endorsed to the order of the party designated in credit?
- Is the insurance document signed by the insurance company, underwriter or agent?
- Is the merchandise described as per the Letter of Credit?
Verification of Certificates of Origin Inspection
- The documents are dated as of or before the Bill of Lading date.
- The contents meet the requirements of the Letter of Credit
- Verification of packing and weight Lists
- The quantity of units/weight match that which is indicated in the Commercial Invoice
- The breakdown of merchandise/weight per carton shown if requested in the Letter of Credit
Risks involved in Letter of Credit
- Since all the parties involved in Letter of Credit deal with the documents and not with the goods, the risk of Beneficiary not shipping goods as mentioned in the LC is still persists.
- The Letter of Credit as a payment method is costlier than other methods of payment such as Cash Against Document
- Open Account or Collection
- The Beneficiary’s documents must comply with the terms and conditions of the Letter of Credit for Issuing Bank to make the payment.
- The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political risk on the Issuing Bank’s country and Foreign Exchange Risk in case of issuance Letter of Credits.
Document required by banks to export goods
- Valid foreign trade, industry or investment license for export,
- Copy of authenticated letter of credit or confirmation for advance payment
- Bank permit for export of the goods duly completed, signed and sealed
- 2 original invoices duly completed, signed and sealed. The invoices could be chamberized as the case may be
- A copy of sales or purchase contract.
Major mode of payments applicable in export
- Letter of Credit (at sight and on acceptance)
- Cash Against Document ( at sight and on acceptance)
- The maximum allowable amount for a single permit does not exceed USD 30,000 (Thirty Thousand); however, commercial Banks may allow up to USD 200,000(Two Hundred Thousand) depending on the sales terms, the buyers dependability and credibility
- Consignment for specific goods
The consignment sales are only applicable to perishable items such as fruits, cut flowers, un-frozen meat, live animals, molasses and others as may be approved by NBE
- Advance Payment received in the form of:-
- bank transfers;
- travelers cheques bought by the purchaser from abroad;
- Credit card/debit card; and
- cash notes
Verification of L/C document by exporter
- Is the L/C issuing bank reliable and reputable one that can be relied on for payment? If not, does the Letter of Credit allow for confirmation by another bank?(field 49)
- Is the Letter of Credit irrevocable? (Field 40A) If it is not stated, the L/C is irrevocable.
- Are the Importer’s (Applicant’s) name and address spelled correctly? (Field 50)
- Are your name and address spelled correctly? (Field 59)
- Are the dollar amount and currency of the Letter of Credit correct? (Field 32B)
- Does the payment term agree with the sales contract? (Field 42C)
- If necessary, are partial shipments allowed? (Field 43P)
- Are the point of shipment (Field 44 A) and destination (Field 44B) as agreed?
- Is it possible for you to meet the latest shipping date? (Field 44C)
- Are enough days allowed to present documents? (Field 48) You may need to check with the freight forwarder handling the shipment and preparing documents for you.
- Is the merchandise description correct and, if needed, does it include unit price, weight and quantities? (Field 45A )
- If necessary, does the Letter of Credit allow for any variance on the quantity and/or dollar amount?
- Are the terms of the sale regarding insurance and freight charges as agreed? (Field 45A)
- Can all documents listed in the Letter of Credit be obtained? (Field 46 A)
- Which party is responsible for banking charges? (Field 71b)
- Where is the Letter of Credit payable? (Field 41D) this will affect the length of time required to receive your funds.
Major discrepancies frequently seen on export documents
- Credit has expired;
- Shipment is late;
- Partial shipment is effected, not allowed by credit;
- Clauses on bill of lading- indicating that there is something wrong with the goods or their packing;
- Not marks and numbers differ between documents;
- Typing errors or misspellings;
- Required signatures have been omitted;
- Description of goods differs from credit and
- Insurance cover is insufficient
Export permit applications
The export permit issued by banks shall be valid up to the end of the issuing month only.
In Ethiopia export tax Is levied only on raw and semi-processed hides and skins, and wet-blue cow hide, pickled sheep skins with wet-blue sheep and wet-blue goat skins at a flat rate of 150%
Any investor who exports or supplies to an exporter as production or service input, at least 60% of his products or services shall be entitled to income tax exemption for 2 years in addition to the exemption period provided.
Duty Drawback Scheme
It offers manufacturers an exemption from the payment of customs duties and other taxes levied on imported and locally purchased raw materials used in the production of export goods. Duties and other taxes paid are drawn back 100 percent at the time of the export of the finished goods;
A voucher is a printed document having monetary value which is used in lieu of duties and taxes payable on imported raw materials. The beneficiaries of the voucher scheme are also exporters; and
Bonded Manufacturing Warehouse Scheme
Producers not eligible for voucher scheme but having licensed for bonded are entitled to operate such warehouse in importing of raw materials duty free.