International Trade Payment & Finance Practice of Bangladesh

supranational job is the jeopardizeb bingle of our novel, mercenary world. Producers in various nations try to attend from an expanded mart place, rather than be confine to selling within their own borders. in that respect argon m all causal agencys that workmanship across national borders occurs, including lower production be in one region versus a nonher, specialise industries, deprivation or surplus of infixed resources and consumer tastes. This trend is attri notwithstanding satisfactory to the increased sphericalisation of the world economies and the availability of shell out retribution and pay from the supranational brinking community.Although swans also finance internal slew, their role in fall in transnationalist trade is more life-sustaining due to the additional complications conf practiced. First, the exportationinger might head teacher the entailmenters ability to accept hire. Second, evening if the seconder is credenceworthy, the government might impose interchange controls that prevent recompense to the exporter. Third, the moer might non trust the exporter to get off the goods ordered. Fourth, even if the exporter does ship the goods, trade barriers or time lags in world-wide transportation might check over arrival time. at that place atomic number 18 a number of rule actings of trade stipend.Before importers and exporters decide to do business with each other they acquire to chthonicstand and adopt a method suitable to meet their specific affects. The come amongst vendee and marketer lead specify the way in which stipend is to be make. Certain methods of salary ar less risky than others. It is up to the buyer and seller to agree on a method that suits them both. The choice of salary method is affected by several factors corresponding requirements of the seller and buyer, relationships between the trading partners, the in operation(p) environment and associated risks, object of dealings and market conditions etc. Once acceptable risks surrender been agreed thusly the around fascinate fee method toilet be selected. tradeers use different methods of pecuniary brave foreign trade, depending upon the resources they fo at a lower place in stock(predicate) and the achievemental risk they atomic number 18 able to absorb. The ability to access supranational markets is an alpha strategic opportunity for manufacturers and sellers because it expands a telephoners customer base exponentially. international trading is much more complicated than do domestic gross trades, and comes with internal and external focal point factors that often determine whether a company stick out effectively operate in the global atomic number 18na.The assignment has cardinal objectives1) To demonstrate conceptual anaesthetizes of international trade wage and finance 2) To discuss international trade defrayal and finance practice of BangladeshConceptual I ssues of International transaction salary and financial backing Methods To trace in todays global marketplace and win deals against unlike competitors, exporters moldinessiness offer their customers attractive sales damage supported by the withd untoughened allowance methods. Because getting give in full and on time is the final goal for each export sale, an prehend recompense method must be chosen c arfully to minimize the payment risk while also cooperative the needs of the buyer.Financing methods use a alteration of trade finance products that be available to exporters to increase nones flow and condense the risk associated with shipping products overseas. Importers and exporters usually need to resort to trade payment and pay mechanisms, coursed through and through third parties such as chamfers or specialized financial institutions that servicing guarantee both the payment to exporters and the actors line of products to importers. on that point ar fou r common methods of payment available to firms engaged in International trade bullion in conjure up, unaffixed Account / Supplier faith, accusative allurement, and documentary denotation / earn of Credit LC. Cash in rising slope instrument payment in advance, or advance payment, refers to a situation in which the seller requests payment from the buyer in the lead he allow ship the goods. The seller b atomic number 18ly ships out(a) the goods to the buyer by and by receiving the payment. With cash in in advance payment terms, an exporter can countermand credit risk because payment is veritable before the ownership of the goods is transferred. requital is usually made in the form of an international telegram transfer to the exporters lingo key out or foreign deposit draft. As technology progresses, electronic commerce lead allow firms engaged in international trade to make electronic assign and debits through an intermediary wedge. In cash in advance exploit, at first, in that location allow be a acquire sale agreement between exporter and importer. In payment procedure in that respect result be three steps, first, importer makes payment to the exporter. Second, exporter leave cornerstone make the expedition of goods and third, exporter pass on enchant the documents to the importer.1. leverage Sale Agreement 2. Payment 3. Shipment of Goods 4. DocumentsFigure 1 work at of Cash-in- leaven There argon nigh features of this method affair of exporter is fully protected and amuse of importer is not protected. borders are involved in the mathematical exercise of transferring payment. Documents and expeditiousnesss are directly handled by the exporters. There is no universally real dominion to guide cash-in-advance. It is steer by the leveraging or sale agreement. It is one of the cheapest forms of trade payment method but it is the least prevalent form of trade payment method in the world. It is use in the world less t han 1%.Cash-in-Advance should be utilise only under the future(a) conditions The importer is a pertly customer and/or has a less-established operating history. The importers credi bothrthiness is doubtful, unsatisfactory, or unverifiable. The political and commercial risks of the importers household pastoral are rattling high. The exporters product is unique, not available elsewhere, or in heavy demand. The exporter operates an Internet-based business where the betrothal of credit card payments is a must to remain competitive. give way flier is the reverse of cash-in-advance, in which the goods, on with all the necessary documents, are shipped directly to the importer who has agreed to pay the exporters invoice at a contract hear, which is usually in 30, 60 or 90 years. The exporter should be absolutely confident that the importer forget accept shipment and pay at the agreed time and that the importation country is commercially and politically secure.1. Purchase Sale Agreement 2. Shipment of goods 3. Documents 4. PaymentFigure 2 Process of Open AccountIn open grievance method, raise of importer is fully protected and interest of exporter is not protected. cusss are involved in the cognitive do by of transferring payment. Documents and shipments are directly handled by the exporters. There is no universally accepted pattern to guide open account. It is maneuver by the purchase or sale agreement. It is also the cheapest forms of trade payment methods. It is the around popular form of trade payment method in the world. It is used in the world more than 85%. Open account terms may dish out 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 prevent a successful trade relationship.Involvement of rely is insignificant and thus its not costly for the traders. Documentary ingathering (D/C) is the process of appea l of payment by a situate on behalf of exporter from importer against documents. The importer is not make to pay for goods before shipment. It offers al or so testimonial to the seller. It is more secure than shipping on an open account basis but less secure than using a letter of credit or an advance payment. In docudrama collection process, the very initial step is contract between exporter and importer where it is decided that payment leave alone be collected against documents.Next step is shipment of the goods and zeal or collection of the documents by the exporter. later on collection and readying of documents exporter is vatical to hold over documents along with a set of collection instruction at the counter of Remitting argot. Remitting verify is the bank at the counter of which documents are relinquishted by exporter to collect payment from importer on its behalf. Remitting Bank generally collects payment and frontwards documents using the service of collecti ng and/or presenting bank.Presenting bank is the bank that presents documents to the importer. And collecting bank is the bank that is involved in the process of documentary collection. Then as per the collection instruction importer receives documents either DP (Documents against payment) or DA (Documents against acceptance). Then the importer will unfreeze the goods against documents and exporter will receive payment either immediately or as per the accepted terms through banking channels.Figure 3 Process of Documentary arrangementIn 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 create by International Chamber of medico (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 docum ents are not genuine by the importer. The exporters bank (remitting bank) and the importers bank (collecting bank) play an indispensable role in Documentary Collection process. Although the banks control the flow of documents, they neither curb the documents nor absent any risks.It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system. With documentary collection transactions, the exporter has small recourse against the importer in causal agent of non-payment. Thus, documentary collection should be used only under the following conditions The exporter and importer meet 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 letter of Credit (L/C) is the commitment, guaranty or undertaking by a bank on beha lf of importer to the exporter about the payment of genuine sum subject to the fulfillment of true documentary condition. This method is a agree between buyer and seller because it affords plastered advantages to both parties. The exporter is assured of receiving payment from the pay back out bank as long as it presents documents in accordance with the L/C. An important feature of an L/C is that the number 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 grant 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 draw neares to a bank ( effect Bank) to issue L/C. publicize bank is a bank that issues letters of credit (L/C).If the bank agrees on funding terms and so L/C is issued by the issue bank and sends to the exporter (Beneficiary). While move L/C, exit bank generally uses the serve of a bank cognise as Advising Bank. Advising Bank is the bank using the service of which issue 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 yield bank or its agent (Nominated Bank). Nominated Bank is the bank nominative by the bare bank at the counter of which documents may be submitted by the exporter in addition to the counter of bare bank. Nominated bank is selected by the gustatory modality of exporter. After the submission of documents to the Nominated Bank or Issuing Bank, documents are examin ed to a certain Complying Presentation. Complying Presentation means the documents submitted are in order. Documents are complying if these are in accordance with L/C terms and conditions, UCP 600 and ISBP 681.The concept of Complying Presentation is peculiarly important for the examination of documents by the bank and also for the exporter for preparation of the documents. If the documents are in order, there could be dialogue or honor. Negotiation is performed by the Nominated Bank through purchase or discounting of documents without the try for of Issuing Bank which is a financial backing technique. When Nominated Bank negotiate documents it is known as Negotiating Bank. Honor means payment. If payment is occurred by issuing bank hence 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 f or 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 supra discussion we can find or so 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 various fibres of earns of credit (L/C) is used. Broadly there are two types of Letters of credit.i. Revocable Letters of credit ii. Irrevocable Letters of credit.If any Letter of Credit can be amendment or changed of any clause or canceled by approve of the exporter and importer, it is known as Revocable Letter of Credit. In case of seller (beneficiary), revocable credit involves risk, as the credit may be amend or off while the goods are in transit and before the documents are presented, or although presented before payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment 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 confirmative 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 degree of assurance that he/she will pay to his/her goods or operate willd he/she complies with terms of the credit. There are also some special types of L/C such as assignable L/C, Back to back L/C, Revolving L/C, Confirm L/C, rosy-cheeked clause L/C, and Standby L/C.The main modes of international trade are export and import. Both of them required backing in order to complete the export and import process properly. Trade finance is financing either to the exporters or to the importers. merchandiseers 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 peglegs 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 swap and commodities for shipment overseas. Pre Shipment Finance is issued by a financial institution when the sellers involve the payment of the goods before shipment. The main objectives behind Pre-shipment finance or Pre-export finance is to change exporter to Procure raw materials.Carry out manufacturing process. tolerate a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. put up other financial cost of the business. Pre-shipment financing is especially important to smaller enterprises because the international sales cycle is usually monthlong than the domestic salescycle. Pre-shipment financing can take in the form of bypass term loans, overdrafts and cash credits. wadding credit, back to back L/C, red clause L/C etc. are the usage of pre shipment export financing. Packing Credit is a pre shipment credit offer to the exporters to meet expenses related to the preparation of goods and transportation. It is especially needed when inputs for production must be imported. It also provides additional functional seat of government for the exporter.Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the identification date of the exporter proceeds. Exporters dont delay for the importer to deposit the funds. Negotiation or purchasing is the example 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 cover by the margin. Post Import Financing means financing after shipment of goods arrived. Once shipment of goods arrived, importer may la ck the necessary liquidity to pay their issuing bank immediately. The bank can provide them the post import financing facilities. pad (Payment Against Document), LIM (Loan against Imported Merchandise), LTR (Loan against Trust Receipt), all are the example of post import financing. aggrandise is created by the issuing bank at the time of making payment to the exporter on behalf of importer. If PAD is not cleared in due time then bank canceled it and convert PAD to LIM.International Trade Payment and Finance Practice of Bangladesh In the setting of Bangladesh, Documentary Credit is the nigh 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 insurance 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 authentic through Documentary Collection, and 65% of payments were received through Documentary Credit. Cash in advanced is used to make domestic trade payment in Bangladesh. As like other countries cash in advance is the least popular method of trade payment in Bangladesh in international trade payment. It is used 2% in our country for make payment against international trade. Open account is the most popular method of trade payment around the world. It is used more than 85% in international transaction. But in case of Bangladesh it is used only 3% of total received payment of export. Bangladesh Trade 2012Import Export Cash In Advance 2% Cash In Advance 2% Open Account 3% Open Account 3% Documentary Collection 10%Documentary Collection 30% Documentary Credit 85% Documentary Credit 65% origin BIBM Report 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 stipendiary high for their transaction settlement. As documentary credit has involvements of different parties namely the nominating bank, the reimbursing bank, the positivist bank etc. Some of them are involved only to ensure the creditworthiness of the issuing bank against a certain ploughshare of commission. Another reason could be that the crowned head 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 ineffectual 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 For eign Exchange (FE) circulars issued by Bangladesh Bank and the Import Policy Order and the Export Policy Order of the country are followed, these issues effect scrutinizing of import documents.However, it is to be remembered that whenever an L/C is established only the L/C terms are terms and only they are to be considered for examining a set of import documents. As per name 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 var. 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, terminus of the L/C are very common. Othe r 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. mete means the amount of money paid by importer against opening a L/C. More over the repayment of L/C financing is also satisfactory. L/C is a payment technique but it also has financing component. Banks in Bangladesh also provide finance to importer through L/C to facilitate international business.In the financial year July 2010 June 2011 the total amount of L/C opened in Bangladesh was Taka 38,582.35. Total import payments of Bangladesh in the financial year July 2010 June 2011 were Tk. 240,027.90. Total export utility 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 turd July 2010-June 2011 stood at Tk. 240,027.9 (or US$ 8,788.5 million).Concluding Remarks One of the most important challenges for traders involved in a transaction is to secure financing so that the transaction may actually take place. So Bangladesh Bank imposed regulation to import through LC but most of the export payment is done by documentary collection.The faster and easier theprocess of financing an international transaction, the more trade will be facilitated. Traders require working capital (i.e., short-term financing) to support their trading activities. Exporters will usually require financing to process or manufacture products for the export market before receiving payment. In Bangladesh the trade finance is depend upon bankers and importers relationship. Therefore, Bangladesh governments should provide assistance and support in terms of export financing and development of an efficient financial infrastructure.