Foreign Exchange & Foreign Trade:

Modes, Documentation, Compliance

of Shariah & relative issues

Prepared by

Sk. Bashirul Islam

Executive Vice President
EXIM Bank
International Division,
Head Office, Dhaka.
Foreign Exchange

Foreign Exchange defined as the exchange of one currency for

another or the conversion of one currency into another currency.
Foreign exchange also refers to the global market where
currencies are traded virtually around-the-clock. The term foreign
exchange is usually abbreviated as "forex" and occasionally as
"FX."

Foreign exchange transactions encompass everything from the

conversion of currencies by a traveler at an airport kiosk to
billion-dollar payments made by corporate giants and
governments for goods and services purchased overseas.
Increasing globalization has led to a massive increase in the
number of foreign exchange transactions in recent decades. The
global foreign exchange market is by far the largest financial
market, with average daily volumes in the trillions of dollars.

Foreign Trade

Foreign Trade means the exchange of goods and services between

countries. The inclination for one country to trade with another is
based in large part on the idea of comparative advantage--which
says that any country, no matter how technologically
disadvantaged it might be, can always find some sort of good that
will let it enter the game of foreign trade. In this sense, foreign
trade is just an extension of the production, exchange, and
consumption that's a fundamental part of life. The only difference
with foreign trade is that producers and consumers reside in
separate countries.
Import Financing:

Import financing basically refer to post import financing. There

are several modes of import financing and they are:

i) Murabaha Import Bills (MIB)

ii) Murabaha Trust Receipt (MTR)
iii) Murabaha Post Import (MPI) and
iv) Izara Bill Baia (IBB) etc.

In conventional Banks these are termed as PAD, TR, LIM and Term
Loan respectively. Before entering into such type of post import
financing an importer is required to open a Letter of credit (L/C)
by way of applying to bank in the prescribed format widely known
as L/C Application Form and this form is also an agreement
between the bank the importer for establishment of an L/C with a
view to import desired goods. Before opening of L/C an importer
is required to fulfill certain terms and condition set by the bank as
per law of the land. After fulfillment of all the requisites, bank
establishes a L/C for importing goods as per requirement of
importer described in Pro-forma Invoice or Indent.

When a L/C is established bank enters into a commitment of

making payment upon submission of credit conform shipping
documents towards the counter of L/C issuing Bank.

When such documents received by the issuing bank, it is the duty

of the issuing bank to carefully scrutinize/examine the shipping
documents whether all terms and conditions of L/C are complied
with according to the law of the land as well as international law.
If the documents are in order the bank will lodge and retire the
documents and the process is done in MIB stage by following the
under mentioned procedure:
 a. For sight L/C
i. Document Intimation to the Importer
ii. Office note for MIB (Murabaha Import Bill)
iii. MIB creation

b. For Deferred L/C

i. Document Intimation to the Importer
ii. Acceptance Letter from Importer
iii. Office not for ABP
iv. Maturity Date Confirmation to Negotiating Bank
v. Document Endorse favoring the Importer

Retirement of documents

a. Documents retired by Cash

i. Application of the client

ii. Document Endorse favoring the Importer

b. Documents retired by availing post import finance:

i. Murabaha Trust Receipt (MTR):

This is one of the modes of post import finance where an

importer can’t take delivery of shipping documents by cash
payment to release goods from port. Letter of Trust Receipt is
a document dully stamped and signed in bank’s prescribed
format by the importer before getting delivery of shipping
documents. In Trust Receipt the importer specifies the goods
and agrees that he is holding the goods not as owner but as
an agent for the bank until the goods are sold or used for the
express purpose for which they were released to them. Thus,
the bank continues to have the rights of pledge. In getting
 such facility, the importer has to offer sufficient tangible
securities (most often cheque is taken) accepted by the bank
covering the entire amount of investment.

i. Verify the sanction limit

ii. Office note
iii. Document Endorse favoring the Importer

ii. Murabaha Post Import : (MPI)

When the imported goods are cleared by the bank due to fund
crisis or bank may also clear the goods from the port due to
non-retirement of import documents by the importer to avoid
further financial loss on the part of the bank, the facility is
provided to importer by the bank as per arrangement or on
force situation. In this cases bank may charges further margin
from the importer in addition to the L/C margin to cover
custom duty, VAT, sales Tax etc. or these duties are also be
paid by the bank.

In both cases, whether the importer request the bank for

clearance of goods fails for retirement of import document,
the liabilities under MIB are converted to MPI except for the
profit amount. In case of profit element, the unrealized profit
in MIB A/C to be carried forward to MPI A/C as charge with a
view to avoid compounding as per Shariah.

i. Verify the sanction limit

ii. Office note
iii. Document Endorse favoring the Importer
Single Deal concept as per Shariah

Based on Shariah principle goods once sold cannot be resold. It

means that the sale price of the goods can’t be changed. Sales
price are defined as cost price + profit margin. According to
Shariah once it is declared then in can’t be changed. Therefore the
price of the goods must be ascertained at the very beginning.
Thus this concept of Shariah emerged with a new methodology in
lodgment and retirement of Import document referred to a Single
Deal Concept. According to Single Deal Concept if MPI is allowed
to a importer and if the customs duty, VAT and other Taxes are
borne by the bank then it is to ascertain at the MIB Stage and be
loaded on MIB to avoid compounding of profit.

In this type of investment goods are kept under effective control

of bank either in bank’s own godown or in party’s godown under
bank’s effective control.

iii. Izara Bill Baia:

This sort of facility is being provided to the importer for the

importation of the capital machinery having the sanction limit
set by the Head Office on long term basis due to shortage of
fund.

i. Verify the sanction limit

ii. Office note
iii. Document Endorse favoring the Importer

Payment Instruction/Reimbursement Authority issued to

Reimbursing Bank.
Export Financing:

Export plays a dominant role in the economy of our country.

Bangladesh particularly being one of the industrially developing
having balance of payment problems with consequent
dependencies on foreign aids/loans/grants considers export all
the more important. Exports for obvious reasons are listed in the
priority sector in all developing economies. There is no dispute in
the fact that export trade constitutes the most sustaining the
long-term development prospects of a country’s economy. This is
all the more true for a country like Bangladesh whose import is
alarmingly outweighs its export and quite naturally Bangladesh is
very much keen to boost up its export. But the most stumblic bloc
in the process is the non-availability of finance. Keeping the end in
view, government of Bangladesh and Bangladesh Bank have
issued directives to the commercial banks (the authorized
dealers) to pay special attention for handling of export finance
application with urgency and on liberal terms and conditions.
Bangladesh Bank has also introduced the concession rate of
interest/profit and treated exports in the priority sector. Banks in
Bangladesh normally provide 75% to 90% pre shipment finance
against export orders and 100% post shipment finance.

In the export trade, exporter needs the finance at different stages right
from the stage he gets an export order to supply the goods from an
overseas buyer. The finance is required for procuring, processing,
manufacturing, assembling and packaging the goods for export in the pre
shipment stage. After the shipment is made, exporters sometimes will
have to give credit to the importer for an agreed period and he has to wait
for the value till the expiry of the credit period (maturity of export bill).
Even if no credit is allowed to importer, the capital of the exporter is
blocked till documents reach the importer, he makes the payment and the
amount is collected by the exporter’s bank.
Thus the post shipment credit is required during the intervening period
between the shipments of goods till receipt of payment there against.
Therefore, these are two stages in export financing:

1. Pre Shipment Finance and

2. Post Shipment Finance.

The advance allowed for arranging goods falls into the category of pre
shipment finance and the advance made against the shipping documents
i.e. negotiation of foreign bills falls under the category of post shipment
finance.

Pre Shipment Finance

Pre Shipment finance is a short term working capital finance specially

provided to an exporter against the documentary evidence of having
entered into export commitment. Pre Shipment Finance is granted at the
stage prior to the shipment of goods and such finance is given to procure
raw material, for paying manufacturing and packing charges and payment
of insurance premium and freight. As and when the goods are shipped and
shipping documents are obtained the pre shipment finance is to be
liquidated against the proceeds of export documents tendered.

The banks grant pre shipment finance against documentary evidence

either by way of an export letter of credit or a contract. Letter of Credit
constitutes the most frequently used instrument for export of goods from
Bangladesh. Readymade garments, which comprise a large chunk of
Bangladesh’s export are invariably exported against L/C because the
underlying L/C constitutes the basis for opening Back to Back L/C (both
local and foreign) for procuring fabric and accessories.
The Pre Shipment finance is categorized broadly as per following:

1. Back to Back L/C (Inland and Foreign)

2. Export Cash Credit (ECC)
3. Packing Credit (PC)

1. Back to Back L/C: Under this arrangement the Bank finance an

exporter by way of opening L/C for procuring raw material with a view
to manufacture exportable goods as stated in the L/C received by the
exporter from an overseas buyer. When an L/C is opened for procuring
raw material with the back of an Export L/C or contract (an
L/C/contract received from overseas buyer), the former on is termed
as Back to Back letter of credit. In other words, the payment of an
Import L/C (for procuring raw materials) is settled by the proceeds of
Export L/C is called Back to Back L/C.

2. Export Cash Credit: This type of facility is allowed to exporter for

procuring and processing of goods. For export of traditional item like
jute, tea and leather the facility can be extended up to 90% of the
value of export L/C as contract. For garments industry this can be
allowed between 10% - 15% based on the category of unit because
the main raw material is procured through Back to Back L/C.

3. Packing Credit: Packing Credit is allowed for making necessary

preparation for shipment of goods. This finance generally covers cost of
packing, transportation from godown to the port for shipment ware
housing, insurance etc.
For traditional item like Jute, Tea, Leather etc. packing credit may be
allowed up to 90% of invoice value against rail receipt/steamer
receipt/Barge receipt. This credit is thus extended against submission
of documents of title to goods showing loading of goods from the place
of railment/shipment to port for ultimate shipment to abroad.
Post Shipment Finance

The advance made against the shipping documents till the export
proceeds are realized falls under the category of “Post Shipment Finance”
(Finance provided after the goods have been shipped). The need for post
shipment finance arises because exporters who sell the goods abroad
have to wait for a long time before payment is received from overseas
buyer. The actual period of waiting depends on the payment terms. In the
meantime, the exporter needs funds to carry on his normal activities. Bank
are the main source for the exporters to seek finance to tide over their
temporary need. In this stage, Bank negotiate the credit conform
documents under export L/C or contract after verification of the
creditworthiness and financial soundness of both the buyers and the
sellers. After shipment of the goods in terms of L/C, the exporter presents
the relative documents to the negotiating bank and gets the documents
negotiated. Here Negotiation means the purchase by the nominated bank
of drafts (drawn on a bank other than the nominated bank) and/or
documents under a complying presentation, by advancing or agreeing to
advance funds to the beneficiary on or before the banking day on which
reimbursement is due to the nominated bank. But in case of restricted
credit, the bills must be negotiated with the nominated bank named in the
letter of credit and not with any one else.

Here complying presentation refers to the concept that presentation is

made in conformity with the terms and conditions of the credit, applicable
provisions of these rules and international standard banking practice.
Nominated bank means the bank with which the credit is available or any
bank in the case of a credit available with any bank.
THANK YOU