AN ASSIGNMENT ON,

" INTERNATIONAL TRADE PAYMENT PRACTICE IN BANGLADESH

WITH REFERENCE TO

ONE BANK LTD"

REQUIREMENT FOR TRAINING COURSE ON

" INTERNATIONAL TRADE PAYMENT AND FINANCE "

SUBMITTED TO

HONORABLE COORDINATORS:

1. SK. HARUN-AR-RASHID

2. MAHMOOD-UR-RAHMAN

SUBMITTED BY

S M RASHED MIR

ONE BANK BANK LTD.

EXECUTIVE SUMMARY :

INTRODUCTION : world trade mostly in this continent has take a huge part of world
total trade.So this international apart has significant role in this universal.Base on
this international process the question become in front of us how this huge trade
take place and how it make settlement.This process has two sides one side is
import and another side is export.One country make export which becomes import
for another country. Base on this transactions thier are few ways to settle this two
parties involvement.Importer wants proper goods as well as exporters wants his
proceds guarantee.On this ground two parties look for differnt ways for
settlement .Differnt countries follow different methods for transactions. An
appropriate payment method must be choosen carefully to minimize the payment
risk while also accomodating the needs of the buyer. Securing payment for an
international transaction might be affected by a number of factors. Most important
among them are the potential risk and cost that the exporters and the importers
are willing to share between them.There are four payment method in international
trade and these are :

1. Cash in Advance

2. Open Account

3. Documentary Collection and

4. Documentary Credit

For exporter point of view cash advance is the most secure method of payment for
and least attractive for the buyer. Open account is the most attractive for the buyer
and least secure for the exporter. Documentary collection is more secure for
exporter than open account trading as the exporter's documents are sent from the
exporter's bank to the buyer's bank and the process is governed by a set of rules of
ICC called " Uniform Rules for Collections " publication number-522. Although one of
the costliest, documentary credit is considered as the most secure because in
documentary credit method both exportes and importers are equally protected.Thus
documentary credit process is generally described as " the life blood of international
commerce " that is governed by a very popular and widely recognized guiding
framework of ICC known as " Uniform Customs and Practice for Documentary
Credit" publication number- 600.
BANGLADESH SCENARIO :

In the international trade Bangladesh has insignificant focus though it has a large
population, To meet up the the basic need of this huge populations it needs huge
import. Bangladesh is import based countryon. The general perception about our
export-import market is that when we export it is buyer's market and when we
import it is seller's market. That is our counter parties are always stronger.This has
reflection on the use of methods of payments in the export and import of the
country. Credibility of the traders, banks and regulatory requirements are also
important factors that determine the method of payments used in any country. In
Bangladesh Foreign Exchange Regulation Act , 1947 is the most important domestic
regulation in the area of international banking. It has empowered Bangladesh Bank
to regulate all kind of foreign exchange dealing in Bangladesh. Empowered by the
act, Bangladesh Bank issues Authorized Dealers licenses to the selected bank
branches for conducting trade payments and other international banking
operations. Following the provision of the act, Bangladesh Bank issues
circulars/guidelines time to time to regulate trade payment and international
banking activities to be followed by the banks. While dealing in international trade
payment, other than Foreign Exchange Regulation Act , 1947 and Bangladesh Bank
issues circulars/guidelines, banks are required to follow trade policies issued by
Ministry of Commerce of the country empowered by Imports and Exports ( Control )
Act, 1950. The current policies are known as Import Policy Order 2009 - 2012, and
Export Policy Order 2009 - 2012. The export and import policies specifically
prescribed the policies / rules of the government in regard to the export and import
transactions and procedure and operations of making and receiving trade
payments. Importers , Exporters and Indenters are required to be registered in
Bangladesh under Importers, Exporters and Indenters Registration Order 1981.
Moreover, Customs Act 1969 is also applicable to trade transaction that deal with
levy and collection of customs duties and other allied matters.

Method of payments used in making payment against import from Bangladesh are
described below:

Letter of Credit :

In the context of Bangladesh documentary letter of credit is the most popular and
widely used for making import payment form Bangladesh. Practically exchange
control arrangements or guidelines ask to use documentary credit for imports. As
per Import Policy Order (2009 - 2012) of the country, unless specifically stated,
import transaction can only be made through irrevocable letter of credit. Some
specific kind of goods such as easily perishable goods, journals, books, magazines,
medicines etc. may be imported upto certain limit through registered LCA ( Letter of
Credit Authorization ) form without opening letter of credit. However under the
same arrangement capital machinery and industrious raw materials may be
imported without any limit.
Documentary credit is the most popular method because it provides the exporter
with a certainty of payment from an independent bank, and the buyer on the other
hand, knows that payment will not be made unless the seller presents documentray
evidence concerning the goods and their shipment. A confirming bank may also add
its confirmation to the credit. This gives the seller additional independent
undertaking of payment from a confirming bank usually in its own country.

Cash in Advance : Cash in advance is used in developed countries in situations

where the two companies concerned know each other. In these methods risk of
importers are high as payment has to be made in advance before shipment of
goods. In view of Bangladesh it is rarely used. As Bangladesh is a developing
country and reserve of foreign currency is not healthy enough. So Bangladesh Bank
guidelines restricted in outward payment. In case of outward payment Bangladesh
Bank permission is required and to be performed other formalities.

Open Account : Like as cash in advance open account is used in developed

countries in situations where the two companies concerned know each other. In
these methods risk of exporters are high as goods are delivered before payment is
made. In view of Bangladesh use of open account payment method is absent.
Absence of open account payment in case of imports in Bangladesh may indicate
the supplier bargaining power of the foreign exporters and the lack of credibility of
our importers.

Documentary Collection : Documentary collection is useful for short distance of

trade, where the goods typically arrive at destination quicker than the documents.
However, there is now renewed interest in some cases in using documentary
collections, as an alternative to documentary credits. Documentary collection is
inexpensive and simple to arrange . As compared to cash in advance and open
account, documentary collection is a much more common means of payment.

Methods of payments used for export from Bangladesh are described below:

Documentary Credit : Like as import payment method, documentary letter of credit

is the most popular and widely used method for export in Bangladesh as
documentary letter of credit safeguard the both importer and exporter.

Cash in Advance : In case of export payment method uses of cash in advance

method is higher than uses in import payment method. The credibility and
acceptibility of the expoter of Bangladesh is not storng enough to the buyer. So the
practice of cash in advance in Bangladesh is not common means.

Open Account : Practice of open account is completely absence because of

country's regulatory requirements. As per Bangladesh Bank requirement, export
proceed must enter into the country within the period of four (04) months of
sending goods. Requirement of signing EXP form by the bankers impose equal
obligation of export repatriation on both exporters and bankers. As per Bangladesh
Bank Guidelines on Foreign Exchange Transaction " for delay in repatriation or non
realization of export proceeds, the exporters as well as AD and its official certifying
the export forms render themselves liable to punitive action under FER Act ".
Practically such a requirement restricts use of open account under which it is very
difficult to ensure repatriation of export receipt within stipulated time period by the
banks.

Documentary Collection : The documentary collection transaction is another

intermediate option, cheaper but less less protective from the seller's point of view.
The banker channel the documents but they do not give any payment undertaking
themselves. Accordingly this device offers less security than a documentary credit.
In case of export this method is being used by the bank.

ONE BANK SCENARIO :

Data regarding Foreign Trade business of ONE Bank Ltd. in the year 2010 are
furnished below :

Value in US$ Number of LCs Value In Tk.

Import 774,000,000 6801(foreign) 56,115,000.000.00

236,650,000 7968(local) 17,157,125,000.00

Total 1,010,650,000 73,272,125,000.00

Export 334,710,000 24,266,475,000.00

Methods of payments used for import in perspective of One bank Ltd. :

Documentary Credit : In the mechanism of international trade Documentary Credit

(DC) is also known as Letter of Credit (LC).ONE Bank all most settle 99% of foreign
payments through documentry credit.The banks scenario is also the countrys
scenario.If we see the statistical datas of ONE bank ltd. it is observable that in the
international trade it make payment of imports three times bigger than that of
incomparison of export perspectives.So like this continental over view about trades
its very similar practises.All over the country regarding documentry credit
practises, ONE Bank has same portfoli.The documentry credit practises in ONE bank
is all most same scenario which stated bellow.

Documentary Credit is a conditional undertaking, given by the issuing bank at the

request of the applicant or on its own behalf to pay beneficiary against stipulated
documents provided that all the terms & condition of the credit is comlied with.
It is the most popular method used to make import payment from Bangladesh.
Procedure of Documentary Credit :

LC PROCEDURE

IMPORTER Contract of Reimbursement ISSUING

BANK

Purchase-Sale

Contract

ADVISING

EXPORTER BANK

NOMINATED

BANK

Confirming Bank, Reimbursing Bank may involve in addition to this.

Importer / Applicant means the party on whose request the credit is issued.

Exporter / Beneficiary means the party in whose favour a credit is issued.

Issuing Bank is the bank that issue the credit at the request of applicant or its own
behalf.

Advising Bank is the bank that advice the credit at request of the issuing bank.

Nominated Bank is the bank with which the credit is available or any bank in the
case of a credit is available with any bank.

Operational Mechanism :

1. First of all to obtain approach letter to open letter of credit from the applicant
along with

Proforma Invoice;

2. To verify the Proforma Invoince and its terms and condition;

3. To obtain LC opening approval and take sign on Letter of Credit Authorization
(LCA) form,

LC Agreement form, IMP form and others document ( charge document ) if

necessary;

4. Issuance of Letter of Credit by the issuing to advising bank with a request to

advise the same

to beneficiary.

5. As per terms and condition the exporter / beneficiary ships the goods to a port in
the

importer’s country and obtains bill of lading from the shipping company.

6. The exporter draws a bill of exchange on First Security Islami Bank Ltd. with the
bill of

Lading and other documents required, presents them to nominated bank.

7. The nominated bank may forward the document to the issuing bank for payment
or may

negotiate the document.

8. If negotiate then the negotiating bank verifies the documents to make sure that
they satisfy the

conditions stipulated in the letter of credit and pay the amount to the exporter.
Then the

documents are forwarded to issuing bank for payment.

9. On receipt of the documents and after verifying that they satisfy the requirement
of the credit,

the issuing bank makes payment to negotiating bank by creating MIB (Murabaha
Import

Bill)/PAD(Payment Against Document) Account. The amount of the bill would be

recovered

by the bank from the importer and the documents would be delivered to him.

10. Finally, after receiving Bill of Entry, which is the evidence of entry of goods to
the country

the operation will end.

ONE Bank scenario regarding Cash in Advance : Regarding cash advace payment it
is prohibited.Bangladesh Bank has proper guide lines for this type of transactions.In
the cases of special type it is permisible prior permision from Babngladesh
bank.Very few cases ONE Bank made payment cash in advance subject to
Bangladesh Bank permision.In percentage it may take place of 1% of total payment.

For the buyer, however, advance payment tends to create cash flow problems, as
well as increase risks. Buyers are often concerned that the goods may not be sent if
payment is made in advance. Exporters that insist on this method of payment as
their sole method of doing business may find themselves losing out to competitors
who offer more flexible payment terms.

Cash in advance payment against import is not as common in our country and
required Bangladesh Bank permission before doing so. This method is rarely used
by us after having received permission from Bangladesh Bank.

Open Account : This is an arrangement between the buyer and seller (sales /
purchase contract) whereby the goods are manufactured and delivered before
payment is required. Open account provides for payment at some stated specific
future date. The seller must have absolute trust that he will be paid at the agreed
date. This is cost effective but no security that seller will receiving payment in due
course. This method has no practice in ONE bank.

Documentary Collection : In case of import the practice of this payment method is

completely absent in the bank.

Methods of payments used for export in the bank :

Documentary Credit : Same as import, documentary credit payment method is the

first choice to the seller and buyer as this method safeguard the both party. In case
of 75% ( approximate )cases of export this payment method is being used by ONE
bank.

Cash in Advance : ONE Bank scenario regarding Receiving of payment by cash in

advance has a good percentage.All most 25% of total exports proceeds receive
through cash in advance mode.At the time of export Bangladesh always face
adverse situation.Most of the events we receive export proceeds after shipment of
the consinement.From earliar two years scenario is changing.Regarding ONE Bank.
It may reflect the total scenario of Bangladesh.In this situation, the exporter is
relieved of collection problems and has immediate use of the money.

Operational Machanism :
In our branch ( Agrabad Branch ) we also have few party's who receive payment in
advance against export of Recondition Ship Spare Parts, Ready Made Garment Item
and Frozen Fish then bank issue EXP form to them. After completing all the
fomalities they ship the goods and send a set of required (as per sales/purchase
contract) documents to the buyer and us along with three copies (out of four) of
original EXP form. Ist copy ( original ) of EXP form is preseved by the Custom
Authority and 2nd copy ( duplicate ) is sent to Bangladesh Bank within the 14 days
after shipment is effected and 3rd copy ( Triplicate) is also sent to Bangladesh Bank
along with monthly Return.

##table is required

Time of Payment *Prior to manufacturing and/or shipping of goods.

Goods Available

to Buyer *After payment is received.

Risks to Seller * No/ Very low.

Risks to Buyer *Extreme/Very high. Seller may not ship per the
order (quantity, product, quality).

*Seller may not ship when requested.

When Appropriate

to Quote or Use *When there is no established relationship between the

buyer and seller.

*Seller is confident that importing country will impose

regulations deferring or blocking transfer of
payment.

*Seller does not have sufficient liquidity or access to

outside financing to extend deferred payment
terms.

Documentary Collection :

Cash in advance mechanism-

Importer Presenting Collecting

Bank Bank
 Exporter Remitting

Bank

In documentary collection expoter refer to ‘principal’ who is the party entrusting the
handling of a collection to a bank;

Importer refer to ‘drawee’, is the one to whom presentation is to be made in

accordance with the collection instruction.

the ‘remitting bank’ which is the bank to which the principal has entrusted the
handling of a

collection;

the ‘collecting bank’ which is any bank, other than the remitting bank, involved in
processing

the collection;

.the ‘presenting bank’ which is the collecting bank making presentation to the
drawee.

Operational Mechanism :

After receiving sales/purchase contract we the remitting bank certify the EXP form.
Then the seller ship the goods according to contract and create a negotiable
document, usually a draft or bill of exchange. The draft and shipping documents are
then present to our bank (remitting bank). We then send the document to the buyer
bank ( collecting bank). Collecting bank either collect proceed from the buyer
directly or send the document to the presenting bank who then collect the proceed
from the buyer against document and transfer the same to collecting bank and then
we receive proceed from collecting bank.

There are two types of collection processes available to buyers and sellers:

1. D/P – Documents against Payment.

2. D/A – Documents against Acceptance

D/P – Documents against Payment

In case of documents against payment method the export documents and the bill of
exchange provided by us (remitting bank) to a collecting bank are only made
available to an buyer when payment is made.

D/A – Documents against Acceptance

In this case the export documents and a time/usance bill of exchange are sent to us
(remitting bank). The documents are then sent to a collecting bank with instructions
to release the documents against a buyer’s acceptance of the bill of exchange.

Open Account : In terms of export open account transactions are totally absent.

Conclusion : Like other common scenario ONE Bank trade practise is as like as other
conventional Banks.Bangladesh trade market is small in size but as a import base
country its import market is larger.This perspectives ONE Bank scenario is also
import base.As Bangladesh searching for new export market in new countries and
being part of this journey ONE Bank Ltd. start with new era of exports like Ship
building,untraditional items like rust,handi crafts in west Europe and other
countries.So it is new horizone for our exports side.

Bibliography :

1. Bank Parikrama Volume XXX & XXXI, September 2005 - December 2006 " An
Evaluation of the operation of International Trade Payment Methods in Bangladesh"

2. Reading Material for the Training Course on "International Trade Payment and
Finance "

3. http://en.wikipedia.org/wiki/International_trade

4. www.finmanagementsource.com/mechanism-of-letter-of-credit.html

5. http://en.wikiversity.org/wiki/Methods_of_Payment