A publication of Marketing, Branding & Communications Division

Issue No: 14/13, Publication Date: 07.04.2013

Principal Branch

Principal Branch

IMPORT AND EXPORT

UNDER LC

Introduction International trade refers to trade between the residents of two dif-

ferent countries. It includes both exports and imports. Import means

procurements of goods or services in to Bangladesh from abroad. On the other hand, export means sale of goods or services to other

countries. Exports and Imports involve a lot of technicalities because this takes place between two countries, under different situations,

rules and regulations and culture. The difference in the nationality of

the exporter and the importer presents certain problems in the con-duct of international trade and settlement of the transactions arising

there from. Important among such problem are:

1. Different countries have different monetary units; 2. Restrictions imposed by countries on import and export of

goods;

3. Restrictions imposed by nations on payment from and into their countries; and

4. Differences in legal practices in different countries.

As such, exporters and importers are required to know global market environment, International and Bangladesh Rules, Shipping Proce-

dure, Custom Formalities etc.

Whenever an international sales contract is entered into, sellers and

buyers in different countries face a number of risks that they do not face in domestic sales. Some of the risks are:

1. Information Risk 2. Communication Risk

3. Exchange Risk 4. Political Risk

5. Credit Risk 6. Quality Risk

What is a Letter of Credit (LC)?

A Letter of Credit (also Known as documentary Credit or Credit) is an

undertaking by the issuing bank on instruction from the buyer

(applicant) to pay the seller (beneficiary) at sight or at a fixed date in the future a specified sum of money within a prescribed time limit

and against stipulated documents or other conditions.

Meaning of LC (As per UCP Article – 2)

Credit means any arrangement, however named or described, that is

irrevocable and thereby constitutes a definite undertaking of the issu-

ing bank to honour a complying presentation.

Honour means:

a. to pay at sight if the credit is available by sight payment.

b. to incur a deferred payment undertaking and pay at maturity if

the credit is available by deferred payment. c. to accept a bill of exchange (draft) drawn by the beneficiary

and pay at maturity if the credit is available by acceptance.

Complying presentation means a presentation that is in accordance

with the terms and conditions of the credit, the applicable provisions of these rules (UCP-600) and international standard banking practice

(ISBP).

Parties to a letter of credit:

Applicant : Applicant means the party on whose

request the credit is issued. Advising Bank : Advising bank means the bank that advises

the credit at the request of the issuing bank. Beneficiary : Beneficiary means the party in whose

favour a credit is issued.

Confirming Bank : Confirming bank means the bank that adds its confirmation to a credit upon the issuing

bank’s authorization or request Claiming Bank : Claiming bank is the bank instructed and/or

authorized to claim reimbursement from another bank under the credit.

Issuing Bank : Issuing Bank means the bank that issues a

credit at the request of an applicant or on its own behalf.

Nominated Bank : Nominated bank means the bank with which the credit is available or any bank in

the case of a credit available with any bank.

Negotiating Bank : The negotiating bank shall mean the bank authorized to negotiate under a negotiation

credit. Reimbursing Bank : Reimbursing Bank shall mean the bank

instructed and/or authorized to provide reimbursement pursuant to a reimbursement

authorization issued by the issuing bank.

Types of LC:

As per Art.6 (b) of UCP, a credit must state whether it is available by sight payment, deferred payment acceptance or negotiation. Thus a

credit may be –

- Sight Payment Credit - Deferred Payment Credit,

- Acceptance Credit or - Negotiation credit

Other Types of L/C: - Transferable Credit

- Back to Back LC

Payment Risks: Letter of credit, in a broad perspective, is one of the payment meth-

ods in international trade. Some of the other payment methods in

international trade are Cash-in-Advance, Documentary Collections and Open Account. All of these payment methods inherit different

risk levels for exporters and importers. Letters of credit is the only payment method, which has a balanced risk structure for both

parties.

Important documentary credits :

When imports of goods or services are made into Bangladesh, using Letters of credit as the payment vehicle, it offers several advantages

to the importer. For example, Banks are under no obligation to pay

unless all the conditions of the documentary credit are complied with.

Export documentary credits Using documentary credits when export of goods or services are

made from Bangladesh, the importer’s bank commits itself to paying the exporter when the conditions of the credit have been met. This

offers a number of advantages. For example, payment is guaranteed

by the importer’s bank prior to shipment.

Advantages for the seller : Secured payment

Quick payment

Documentary Credits a payment form enabling business with

markets where trade otherwise hardly would be feasible. Documentary Credits are governed by international rules.

Settlements under Documentary Credits give improved cash

flow control.

Advantages for the buyer : The ability to control delivery time

A way to avoid advance payment

Documentary credits a payment form enabling business with

markets where trade otherwise hardly would be feasible

Documentary Credits are governed by international rules

Documentary Credits offer buyers reasonable security that the

seller has fulfilled his part of the agreement

Risk in Letters of Credit :

Although letters of credit are a balanced payment method in terms of

risk issues for both exports and importers, each letters of credit party bears some amount of risk. As letters of credit transactions are han-

dled by banks. This responsibility makes the banks one of the parties that bears risks in a letter of credit transaction.

Risk to the Applicant:

In a letter of credit transaction, main risk factors for the applicants

are non- delivery, goods received with inferior quality, exchange rate risk and the issuing bank’s bankruptcy risk.

Risk to the Beneficiary:

In a letter of credits transaction, main risk factors for the beneficiar-

ies are unable to comply with letter of credit conditions, issuing bank’s country risk.

Risk of the Banks:

Every bank L/C transaction bears risks more or less. The risk amount increases as responsibility of the bank increases.

Documents most frequently used in letters of credit transactions:

The importance of the documentation is stated in UCP 600 article 5

as follows :

“ Banks deal with documents and not with goods, services or perfor-

mance to which the documents may relate”

In addition, every condition started on the letter of credit form must be connected to a document. This point is also clearly indicated UCP

600 article 14.

If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condi-

tion as not stated and will disregard it.

Transport Documents:

Transport Document Covering at Least Two Different Modes of

Transport (multimodal or combined transport document) Bill of Lading

Non- Negotiable sea Waybill

Charter party Bill of Lading

Air Transport Document

Road, Rail or Inland Waterway Transport Documents

Insurance Documents :

Insurance Policy

Insurance Certificate

Open Cover

Financial Documents: Bill of exchange (Draft)

Commercial Documents:

Commercial Invoice

Packing List; Weight List

Inspection certificate

Certificate of Analysis

Official Documents: Certificate of Origin

Health Certificate

Consular Invoice, Legalized Invoice

Documents usually required for opening LC:

While requesting for opening of LCs; documents required to be sub-mitted by the Public and Private sector importers to their nominated

banks are: 1. L/C application From duly filled in & signed.

2. Indent issued by the Registered indenter or pro-forma invoice (PI) issued by the for high supplier, as the case, may be.

3. Letter of Credit Authorisation From (LCAF)

4. Insurance Cover note/policy 5. Valid IRC

6. IMP form 7. Any other documents, if required, as per IPO

In addition, the importers in the private sector are required to submit the following additional papers/ documents:

Valid membership certificate from the local trade association of

Chamber.

Importers declaration in triplicate as to the payment of income

tax or submission of income tax return for the preceding year.

Any other papers/ documents if required, as per the IPO

Writer: Md. Azhar Ali Miah, Former Executive Vice President,

Bank Asia Ltd.

TUTORIAL-2