International Trade Payment and Finance with Special Reference to Bangladesh Essay Example

risk, exporters require cash-in-advance payment terms before shipping the goods, as this ensures that payment is received prior to transferring ownership. Wire transfers and credit cards are the most commonly used cash-in-advance options for exporters, though requiring payment in advance may present cash-flow problems for the importer and raise concerns about non-delivery of goods.

Cash-in-advance is a popular method among buyers and sellers who have established mutual trust, as it eliminates risks and keeps transaction costs low by not involving financial intermediaries. Its guidance basis is often the purchase/sale agreement or mutual trust between exporter and importer, as there are no universally accepted regulations. Open Account is the least secure method for exporters but most attractive to buyers. Goods are shipped and documents are sent directly to the buyer with a request for payment at an agreed time, usually between 30 to 90 days.

The open account payment method only allows an exporter to set future trading terms and conditions for the buyer, leaving limited control. This benefits the importer by reducing costs and improving cash flow while exposing the exporter to all associated risks. The importer gains an advantage by not having to use their own resources or take responsibility for any goods-related risks. However, credit insurance can minimize financial risks by reimbursing up to a certain limit in case of customer insolvency.

The most popular method of international trade payment is through banks, which is also used for money transfers. This method gives the buyer more bargaining power over the seller and is similar to the tradition of supplier's credit in business. There are no universal regulations for this payment method, but the purchase/sale

agreement serves as a guide. Another method is Bills for Collection, also known as Documentary Collection. In this transaction, the exporter entrusts the collection of payment to their bank (remitting bank), which sends documents to the importer's bank (collecting bank) along with payment instructions.

When collecting payments for exports, banks are involved in the secure exchange of documents and transfer of funds from the importer to the exporter. This method offers greater security than Open Account trading as the exporter's documents are sent directly from their bank to the buyer's bank. Instructions must be strictly followed, and in certain cases, if the buyer fails to comply, the exporter may retain title to the goods, which can be recovered.

The exporter instructs their own bank and the buyer's bank will act on those instructions. Disputes can often be resolved through this communication route. Two types of Bill for Collection are determined by payment terms in a commercial contract. Exporters have different benefits under each type, which are discussed separately below. Documents against Payment (D/P) is used when immediate payment is expected from the buyer. This is often referred to as "Cash against Documents."

Instructions to the buyer's bank state release of the exporter's documents is only authorized upon payment. In cases where goods are transported by sea and fully covered by Bills of Lading, the exporter maintains title until the buyer's receipt of said documents. However, in instances involving airfreight, control over ownership cannot be upheld without consignment to the buyer's bank due to Air Waybills and Air Consignment Notes acting solely as "movement certificates" rather than "documents of title" (note: URC522 requires bank approval prior to consigning goods).

There

is no control available for road or rail transport in the same way as there is for sea transport. When a credit period is agreed upon between the exporter and buyer, the Documents against Acceptance (D/A) method is used. This allows the buyer to collect the documents with an agreement to pay on a future date, rather than immediately. Typically, a "Draft" or "Bill of Exchange" accompanies the exporter's documents and acts as a type of cheque that the buyer draws upon. The credit period can range from 30 to 90 days and can be calculated from either the date of shipment or the sight of the document.

The exporter retains control of the goods until the buyer signs the draft, indicating they agree to pay on a specific date. Documents are then released to the buyer based on their acceptance. Prior to acceptance in a D/P scenario, the exporter has control over the goods. However, once the draft is accepted, the exporter is financially at risk until the buyer initiates payment through their bank.

The use of Bills for Collection serves as a means to fulfill Exchange Control Regulations, primarily in Asian markets. This method is both cost-effective and provides evidence of a transaction for buyers as documents are managed and reported through the banking system. The International Chamber of Commerce (ICC) has issued a set of rules titled "Uniform Rules for Collections" (document number 522 - URC522) to govern the Bills for Collection process, which over 90% of the world's banks adhere to. Letters of Credit, on the other hand, provide international traders with the most secure instrument available to them. A

Letter of Credit, also known as a Documentary Credit, is a bank-to-bank commitment of payment made in favor of an exporter (the Beneficiary), ensuring that payment will be made upon presentation of specific documents that comply with the buyer's (the Applicant's) terms.

Letters of Credit (L/C) are a practical solution when gathering dependable credit information on a foreign buyer proves difficult. If the exporter is content with the buyer's foreign bank's creditworthiness, L/Cs effectively protect both parties. For buyers, payment obligations remain absent until goods are shipped or delivered according to agreed terms. Instead of dealing with goods themselves, L/Cs operate based on documents. Similar to Bills for Collections, International Chamber of Commerce (ICC) rules apply to Letters of Credit.

The document commonly known as UCP600, or "Uniform Customs and Practice," is the latest version and is identified as document number 600. Over 90% of the world's banks adhere to this document. There are two types of L/Cs, namely revocable and irrevocable. The former can be cancelled or modified without the exporter's consent and is no longer acceptable under any circumstances according to UCP600. On the other hand, an irrevocable L/C's terms and conditions cannot be changed without the beneficiary's express agreement, which has now become a defining characteristic of all types of L/Cs since UCP600 no longer recognizes irrevocable L/Cs.

There exist various categories of L/Cs, including confirmed and unconfirmed L/Cs. A confirmed L/C is an option for exporters who are worried about issues that might prevent payment from either the issuing bank or the buyer's country. Adding "Confirmation" to the L/C transfers the risk associated with the bank/country to the confirming or advising

bank. The bank that provides confirmation notifies the exporter about the DC. The cost of the confirmation will depend on the level of risk involved. Banks can provide indicative pricing for confirmations before the DC arrives. On the other hand, an unconfirmed L/C relies on the payment commitment provided by the applicant's issuing bank and does not require confirmation from another bank.

The use of a Transferable Credit can allow an exporter who acts as a middleman to provide access to the credit for one or more subsequent beneficiaries, rather than directly supplying merchandise to the buyer. This method permits procurement of goods from suppliers and delivery to the buyer without direct contact between parties. The substitution of the middleman's invoice for that of the supplier in a transferable letter of credit mechanism can result in profit from differences. It is important to note that permission for transfer must be explicitly stated as "transferable" by the initial beneficiary in order for a letter of credit to be transferred to a second beneficiary.

In international commerce, a transferable letter of credit allows for multiple transfers to second beneficiaries as long as partial shipments are allowed. However, a bank is not required to transfer credit. Conversely, a non-transferable letter of credit states that the seller cannot assign credit rights, either partially or completely, to any third party. Such non-transferability is necessary in international commerce.

Three different kinds of L/C can be used in international trade. The first is the Usance L/C, which requires an agreed upon duration for payment between the buyer and seller. In this case, the seller gives the buyer a chance to pay after receiving and

selling the goods. The second is the At Sight L/C, where the announcing bank pays immediately after verifying all documents related to shipping and selling. Lastly, the Red Clause L/C allows the seller to receive pre-paid or partial payment from the bank before goods are sent. The first part of this kind of credit is used to attract the attention of the acceptor bank when it is initially established by the assigner bank.

The terms and conditions, which gained fame under the name "red ink", were written that way. A Back-to-Back L/C comprises two distinct LC types. The first one benefits a seller who is unable to provide the necessary goods for reasons beyond their control. Based on this credit facility, no other seller is authorized to request or receive credit to supply the required goods. This type of L/C is primarily used in intermediary trade. Trading houses, for instance, are intermediate businesses that may be required to open L/Cs by suppliers and receive Export L/Cs from buyers.

SMBC will issue an L/C for the intermediate company, which will be secure by the Export L/C. The SBLCs, which are analogous to Bank Guarantees, will be activated only if the buyer does not pay in the routine course of business, which is typically Open Account. They can be beneficial to provide coverage for financial risks underlying multiple payments, often as part of an agreed schedule. However, they do not provide buyers with the documentary control of Letters of Credit and are therefore an unconditional guarantee scenario. In Bangladesh, Documentary Credit letters are the most prevalent and widely used for importing payments from Bangladesh.

The majority of import

payments in the country use letter of credit, with cash in advance and documentary collection being less common. Open account is not used for imports. Conversely, about 60% of export payments are made through letters of credit and 35% through documentary collection, with advance payments making up 2%. Recently, open account has been used for exports, but it remains the least used method. Therefore, documentary credit dominates both export and import transactions in Bangladesh.

Due to the involvement of multiple parties such as the nominating bank, reimbursing bank, confirming bank, etc., businesses are being charged a high amount for their transaction settlement in the case of documentary credit. Some of these parties are involved solely to ensure the creditworthiness of the issuing bank, for which they charge a commission. Additionally, the reason for such high charges could also be due to lower sovereign rating compared to certain countries in LDC group.

Despite the publication of specific guidelines by the International Chamber of Commerce, such as UCP-600 and ISP98, documentary credit remains an inefficient process that consumes significant amounts of time. Consequently, businesses in our country are losing their competitive edge compared to those in some developing countries. The guidelines established by the ICC are not a complete framework for regulating and guiding international trade payment transactions. Due to inadequate rules, national laws also play a vital role in this area.

The UCP intentionally does not address certain issues, such as the legal nature of credit and the relationship between parties. To ensure effective international trade payments, national laws must have the ability to resolve any ambiguous procedures. In Bangladesh, the Foreign Exchange Regulation Act of 1947

is the key domestic regulation governing international banking. Bangladesh Bank has been granted authority by FERA 1947 to regulate all foreign exchange transactions within Bangladesh.

Under the act, Bangladesh Bank issues Authorized Dealers licenses to bank branches chosen to conduct international banking operations and trade payments. The bank issues circulars/guidelines periodically to regulate such activities in accordance with the act. Along with FERA, 1947 and Bangladesh Bank circulars/guidelines, banks are required to follow trade policies from the Ministry of Commerce authorized by the Import and Exports { Control } Act, 1950 in international trade payment dealings. The export and import policies provide specific government rules regarding these transactions and the procedures involved in making and receiving trade payment. Importers, exporters and indenters must be registered under the Importers, Exporters and Indenters Registration Order 1981 in Bangladesh.

The Customs Act 1969 applies to trade operations that involve the collection and assessment of customs duties and related issues. The Import Policy Order 2006-2009 aims to establish a market economy by removing international trade barriers, providing consumers with affordable products, ensuring the availability of quality and health-compliant goods, creating a favorable environment for Foreign Direct Investment, expanding export-oriented industries, consolidating the domestic industrial base, and strengthening Bangladesh's economy. Currently, only 25 commodities are under restricted list. The new import policy allows the import of capital machinery without an Import Registration Certificate and increases the limit for import without a letter of credit from $5000 to $35000. Some commodities have been declared importable as raw materials to improve the accessibility of industrial raw materials and consumer goods at fair prices.

The report explores various payment methods for international business

and the regulations governing these processes in Bangladesh. The letter of credit is the prevalent payment process for both imports and exports, which leads to increased time and cost and limits the smooth operations of international trade, resulting in lost business opportunities. The authorities are working on reforming current regulations and policies to promote more effective payment practices in international trading.

Reference List: Mizan A. N. K.

, The use of factoring as an alternative method for international trade payments was discussed in a 2011 source retrieved from http://www.asaub.edu.bd, while the SITPRO International Trade Guides on methods of payment in international trade from 2007 can be accessed at http://www.iptu.

From http://edupedia.educarnival.com, the 2012 Letter of Credit Operation in Bangladesh by Soykot was retrieved at http://www.co.uk.

wouxun.com and http://www.lawyersnjurists.com