International Trade Payment & Finance Practice of Bangladesh

planetary conduct is the postb wizard of our modern, commercial knowledge domain. Producers in assorted nations try to profit from an expanded grocery store, rather than be limited to interchange within their own borders. There ar m each reasons that trade crosswise national borders occurs, including lower production costs in one argonna versus a nonher, specialized industries, lack or surplus of natural resources and consumer tastes. This trend is acknowledgemented(predicate) to the increased globalization of the world economies and the availability of trade hire and buckle under from the opposed shoreing community.Although verifys similarly finance interior(prenominal) trade, their role in financial support multinational trade is more(prenominal) critical due to the additional complications entangled. First, the merchandiseationer expertness question the upshoters ability to make watcharium. Second, even if the aftermather is creditworthy, the governm ent might impose exchange controls that prevent charter overment to the exportationer. Third, the writeer might not cuss the exporter to ship the goods ordered. Fourth, even if the exporter does ship the goods, trade barriers or time lags in multinational transportation might delay arrival time. There argon a number of modes of trade defrayal.Before merchandiseers and exporters decide to do business with severally other they need to understand and adopt a rule fitted to meet their specific needs. The contract amongst buyer and marketer pass on specify the way in which cedement is to be made. Certain methods of earnings be less adventurey than others. It is up to the buyer and vender to contain on a method that suits them both. The choice of defrayment method is affected by several factors like wantments of the seller and buyer, relationships between the trading partners, the run environment and associated risks, object of act and market conditions etc. Once unexceptionable risks spend a penny been determined thus the closely stamp down allowance method rotter be selected. exportingers use opposite methods of finance multinational trade, depending upon the resources they scram available and the exploital risk they ar able to absorb. The ability to access international markets is an significanceant strategic opportunity for manufacturers and sellers because it expands a companys customer base exponentially. multinational trading is much more complicated than qualification domestic gross revenue, and comes with intimate and external stress factors that often determine whether a company clear effectively operate in the global argonna.The assignment has two objectives1) To discuss conceptual issues of international trade stipend and finance 2) To discuss international trade payment and finance practice of BangladeshConceptual Issues of International Trade pay and Financing Methods To succeed in todays global grocery an d win sales against foreign competitors, exporters mustiness offer their customers attractive sales cost supported by the appropriate payment methods. Because getting salaried in full and on time is the ultimate goal for for each one export sale, an appropriate payment method must be elect c arefully to minimize the payment risk while also meet the needs of the buyer.Financing methods use a variety of trade finance products that are available to exporters to increase hard notes flow and reduce the risk associated with cargo ships products overseas. Importers and exporters unremarkably need to resort to trade payment and support mechanisms, coursed hold oute third parties such as brinks or specialized financial institutions that military service guarantee both the payment to exporters and the delivery of products to importers.There are four ballpark methods of payment available to firms engaged in International trade bullion in bring home the bacon, receptive Accou nt / Supplier credit, docudrama Collection, and enrolmental character / letter of citation LC. Cash in patterned advance means payment in advance, or advance payment, refers to a situation in which the seller requests payment from the buyer forward he will ship the goods. The seller only ships out the goods to the buyer after receiving the payment. With specie in advance payment toll, an exporter can avoid credit risk because payment is stock before the ownership of the goods is transferred.Payment is usually made in the pee of an international wire transfer to the exporters imprecate account or foreign shore draft. As technology progresses, electronic commerce will rent firms engaged in international trade to make electronic ascribe and debits done an intermediary bank. In cash in advance outgrowth, at first, there will be a purchase sale placement between exporter and importer. In payment procedure there will be three steps, first, importer makes payment to the exp orter. Second, exporter will make the consignment of goods and third, exporter will channelise the documents to the importer.1. Purchase Sale Agreement 2. Payment 3. Shipment of Goods 4. DocumentsFigure 1 impact of Cash-in-Advance There are some features of this method interest of exporter is fully saved and interest of importer is not protected. brims are involved in the cognitive process of transferring payment. Documents and onuss are directly handled by the exporters. There is no universally accepted regularisation to guide cash-in-advance. It is guided by the purchase or sale agreement. It is one of the cheapest forms of trade payment method but it is the least popular form of trade payment method in the world. It is utilize in the world less than 1%.Cash-in-Advance should be used only under the next conditions The importer is a new customer and/or has a less-established operating history. The importers creditworthiness is doubtful, unsatisfactory, or unverifiable. The political and commercial risks of the importers home country are very high. The exporters product is unique, not available elsewhere, or in heavy demand. The exporter operates an Internet-based business where the acceptance of credit card payments is a must to remain emulous. readable account is the reverse of cash-in-advance, in which the goods, along with all the undeniable documents, are shipped directly to the importer who has agreed to pay the exporters invoice at a specified date, which is usually in 30, 60 or 90 days. The exporter should be absolutely confident that the importer will accept freight and pay at the agreed time and that the importing country is commercially and politically dear.1. Purchase Sale Agreement 2. Shipment of goods 3. Documents 4. PaymentFigure 2 bear upon of free AccountIn plainspoken account method, interest of importer is fully protected and interest of exporter is not protected. Banks are involved in the process of transferring payment. Doc uments and shipments are directly handled by the exporters. There is no universally accepted regulation to guide splay account. It is guided by the purchase or sale agreement. It is also the cheapest forms of trade payment methods. It is the some popular form of trade payment method in the world. It is used in the world more than 85%. Open account terms may help win customers in competitive markets and may be used with one or more of the appropriate trade finance techniques that mitigate the risk of non-payment. It helps to establish and maintain a successful trade relationship.Involvement of bank is insignificant and thus its not costly for the traders. Documentary solicitation (D/C) is the process of wrap upion of payment by a bank on behalf of exporter from importer against documents. The importer is not get to pay for goods before shipment. It offers some protection to the seller. It is more fearless than shipping on an open account basis but less secure than utilise a letter of credit or an advance payment. In documentary collecting process, the very initial step is contract between exporter and importer where it is decided that payment will be collected against documents.Next step is shipment of the goods and preparation or collection of the documents by the exporter. subsequently collection and preparation of documents exporter is supposed to accede documents along with a primed(p) of collection instruction at the proceeds of Remitting Bank. Remitting Bank is the bank at the counter of which documents are submitted by exporter to collect payment from importer on its behalf. Remitting Bank generally collects payment and forward documents using the service of collecting and/or presenting bank.Presenting bank is the bank that presents documents to the importer. And collecting bank is the bank that is involved in the process of documentary collection. and thence as per the collection instruction importer receives documents either DP (Document s against payment) or DA (Documents against acceptance). Then the importer will release the goods against documents and exporter will receive payment either at present or as per the accepted terms by means of banking channels.Figure 3 Process of Documentary CollectionIn this method, interest of importer is protected and interest of exporter is better protected than Open account. It is guided by the purchase-sale agreement and URC 522 (Uniform Rules for Collections). URC is published by International bedroom of Commerce (ICC) under the document number 522 (URC 522). All the banks involved in the documentary collection are the agent of exporters. Documentary Collection process could be risky for the exporter, if documents are not received by the importer. The exporters bank (remitting bank) and the importers bank (collecting bank) play an essential role in Documentary Collection process. Although the banks control the flow of documents, they neither verify the documents nor take an y risks.It is pick outed to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipu belatedd via the banking system. With documentary collection transactions, the exporter has little recourse against the importer in carapace of non-payment. Thus, documentary collection should be used only under the undermentioned conditions The exporter and importer have a well-established relationship. The exporter is confident that the importing country is politically and economically stable. An open account sale is considered too risky, and an LC is unacceptable to the importer.Documentary Credit or earns of Credit (L/C) is the commitment, guaranty or undertaking by a bank on behalf of importer to the exporter about the payment of certain amount theatre to the fulfillment of certain documentary condition. This method is a compromise between buyer and seller because it affords certain advantages to both parties. The exporter is assured of receiv ing payment from the way out bank as long as it presents documents in accordance with the L/C. An important feature of an L/C is that the bare bank is obligated to honor drawings under the L/C regardless of the buyers ability or willingness to pay. On the other hand, the importerdoes not have to pay for the goods until shipment has been made and the documents are presented in good order.Documentary credit are recommended for new or less established trade relationships because the buyers bank is there to guarantee for both exporters (that payment will be made) and importers (that the terms of the contract are met). First step of Documentary Credit process is contract between buyer and seller where it is decided that payment will be made through L/C. Then the importer approaches to a bank (Issuing Bank) to issue L/C. Issuing bank is a bank that issues letters of credit (L/C).If the bank agrees on financing terms then L/C is issued by the put out bank and sends to the exporter (Bene ficiary). While move L/C, issuing bank generally uses the services of a bank known as Advising Bank. Advising Bank is the bank using the service of which issuing bank advices credit to the exporter on behalf of importer. Advising Bank is selected by the Issuing Bank.After receiving L/C exporter makes shipment and prepare documents to submit to the issuing bank or its agent ( propose Bank). Nominated Bank is the bank nominated by the issuing bank at the counter of which documents may be submitted by the exporter in addition to the counter of issuing bank. Nominated bank is selected by the preference of exporter. After the submission of documents to the Nominated Bank or Issuing Bank, documents are run intod to a certain Complying Presentation. Complying Presentation means the documents submitted are in order. Documents are approveing if these are in accordance with L/C terms and conditions, UCP 600 and ISBP 681.The concept of Complying Presentation is particularly important for t he examination of documents by the bank and also for the exporter for preparation of the documents. If the documents are in order, there could be dialog or honor. Negotiation is performed by the Nominated Bank through purchasing or discounting of documents without the consent of Issuing Bank which is a financing technique. When Nominated Bank negotiate documents it is known as Negotiating Bank. innocence means payment. If payment is occurred by issuing bank then it will be honor. Honor could be at sight, deferred basis, or acceptance basis.Following negotiation or honor documents are forwarded to the Issuing Bank for reimbursement. Issuing Bank is supposed to examine documents and makes arrangement for making payment. Issuing Bank makes reimbursement to the Nominated Bank by using the service of Reimbursing Bank. Then finally, documents are handled to the importer andthen, goods are released by the importer. After that importer make payment to the issuing bank for settlement.From above discussion we can find some responsibilities of issuing bank Issuance of L/C and making arrangement for advising. Amendment of L/C if required. Examination of documents and honoring document. making reimbursement to the nominated bank.In international trade transaction there are heterogeneous types of garners of credit (L/C) is used. Broadly there are two types of Letters of credit.i. Revocable Letters of credit ii. Ir rescindable Letters of credit.If any Letter of Credit can be amendment or changed of any clause or canceled by consent of the exporter and importer, it is known as Revocable Letter of Credit. In event of seller (beneficiary), revocable credit involves risk, as the credit may be revise or cancelled while the goods are in transit and before the documents are presented, or although presented before payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it ca n be amended or cancelled without prior notice to the seller up to the min of payment buy the issuing bank at which the issuing bank has made the credit available. In the modern banking the use of revocable credit is not widespread.If any Letter of Credit cannot be amendment or changed ofany clause without the consent of all concern parties importer (applicant), exporter (beneficiary), Issuing Bank, and Confirming Bank (in case of confirmed L/C), is known as Irrevocable Letter of Credit. An Irrevocable Letter of Credit constitutes a firm undertaking by the issuing bank to make payment. It, therefore, gives the beneficiary a high microscope stage of assurance that he/she will pay to his/her goods or services provided he/she complies with terms of the credit. There are also some special types of L/C such as Transferable L/C, Back to back L/C, Revolving L/C, Confirm L/C, Red clause L/C, and Standby L/C.The main modes of international trade are export and import. Both of them require d financing in order to complete the export and import process properly. Trade financing is financing either to the exporters or to the importers. exportingers use different methods of financing international trade, depending upon the resources they have available and the transactional risk they are able to absorb. Broadly financing is two types Export financing and Import financing. Export financing means financing facilities to the exporter and financing facilities to the importer is called import financing. Exporters need financing facilities at two stages i. Pre shipment stageii. Post shipment stage Pre-shipment finance for exporters is the finance required to bring an export transaction to the point of shipment either to manufacture, process, or purchase merchandise and commodities for shipment overseas. Pre Shipment Finance is issued by a financial institution when the sellers urgency the payment of the goods before shipment. The main objectives behind Pre-shipment finance or Pre-export finance is to enable exporter to Procure raw materials.Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business. Pre-shipment financing is especially important to smaller enterprises because the international sales cycle is usually longer than the domestic salescycle. Pre-shipment financing can take in the form of short term loans, overdrafts and cash credits. wadding credit, back to back L/C, red clause L/C etc. are the voice of pre shipment export financing. Packing Credit is a pre shipment credit offer to the exporters to meet expenses associate to the preparation of goods and transportation. It is especially needed when inputs for production must be imported. It also provides additional working capital for the exporter.Post Shipment Finance is a winsome of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is allow from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters dont wait for the importer to deposit the funds. Negotiation or purchasing is the representative of post shipment export financing. As like as export financing, import financing also two types i. Pre import financingii. Post import financing. Pre import financing means financing before buying goods from exporter. L/C is the example of pre import financing which is not covered by the margin. Post Import Financing means financing after shipment of goods arrived. Once shipment of goods arrived, importer may lack the necessary liquidity to pay their issuing bank immediately. The bank can provide them the post import financing facilities. aggrandize (Payment Against Document), LIM (Loan against Imported Merchandise), LTR (Loan against Trust Receipt), all are the example of post import fina ncing. PAD is created by the issuing bank at the time of making payment to the exporter on behalf of importer. If PAD is not clear(p) in due time then bank canceled it and convert PAD to LIM.International Trade Payment and Finance Practice of Bangladesh In the context of Bangladesh, Documentary Credit is the most popular and widely used for making import payments from Bangladesh. In 2012, 85% of import payments from the country are made through letter of credit. The other two methods- open account and documentary collection are used 3% and 10% for international trade payment respectively.Because of domestic regulation (Import policy order 2009-2012) on import of Bangladesh cash in advance is less used in Bangladesh. It is used 2% in our country for make payment againstinternational trade. In case of export, 30% of payments were received through Documentary Collection, and 65% of payments were received through Documentary Credit. Cash in advanced is used to make domestic trade payme nt in Bangladesh. As like other countries cash in advance is the least popular method of trade payment in Bangladesh in international trade payment. It is used 2% in our country for make payment against international trade. Open account is the most popular method of trade payment around the world. It is used more than 85% in international transaction. But in case of Bangladesh it is used only 3% of total received payment of export. Bangladesh Trade 2012Import Export Cash In Advance 2% Cash In Advance 2% Open Account 3% Open Account 3% Documentary Collection 10%Documentary Collection 30% Documentary Credit 85% Documentary Credit 65%Source BIBM radical 2012 So it can be said that most of the export and import transactions of Bangladesh are dominantly settled by documentary credit. The result is that the businesses are paying high for their transaction settlement. As documentary credit has involvements of different parties namely the nominating bank, the reimbursing bank, the confirmi ng bank etc. Some of them are involved only to ensure the creditworthiness of the issuing bank against a certain section of commission. Another reason could be that the sovereign rating is lower than that in some countries in LDC group.Although there is specific guidelines published by the International Chamber of Commerce (Such as UCP-600, ISP98), documentary credit is an in competent process in terms of time. As a result the businesses of our country are losing their advantage over those of some countries under the class ofdeveloping countries. As any L/C opened in our country has to comply with domestic regulations, guidelines on foreign exchange transactions along with alien Exchange (FE) circulars issued by Bangladesh Bank and the Import Policy Order and the Export Policy Order of the country are followed, these issues effect scrutinizing of import documents.However, it is to be remembered that whenever an L/C is established only the L/C terms are terms and only they are to b e 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 division 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 ascertained to approach to the importers to get their opinion before rejecting the documents. In regard to discrepancies, late shipment, late presentation, expiry of the L/C are very common. other than some exception, whatever we import, we have to follow L/C for making payment. But the margin of L/C is very high for importer in Bangladesh. Margin means the amount of money paid by importer against inauguration a L/C. More over the repayment of L/C financing is also satisfactory. L/C is a paymen t technique but it also has financing component. Banks in Bangladesh also provide finance to importer through L/C to facilitate international business.In the financial twelvemonth July 2010 June 2011 the total amount of L/C opened in Bangladesh was Taka 38,582.35. issue forth import payments of Bangladesh in the financial year July 2010 June 2011 were Tk. 240,027.90. Total export tax revenue of Bangladesh (including exports of EPZ) during the financial years, 2010-2011 and 2009-2010 amounted to Tk. 145,007.60 and Tk. 102,148.2 respectively. Total import payments of Bangladesh (including EPZ) during the quarter July 2010-June 2011 stood at Tk. 240,027.9 (or US$ 8,788.5 million).Concluding Remarks superstar of the most important challenges for traders involved in a transaction is to secure financing so that the transaction may actually take place. So Bangladesh Bank imposed regulation to import through LC but most of the export payment is done by documentary collection.The faster and easier theprocess of financing an international transaction, the more trade will be facilitated. Traders require working capital (i.e., short-term financing) to support their trading activities. Exporters will usually require financing to process or manufacture products for the export market before receiving payment. In Bangladesh the trade finance is depend upon bankers and importers relationship. Therefore, Bangladesh governments should provide avail and support in terms of export financing and development of an efficient financial infrastructure.