WELCOME

TO
Trade Service

IMPORT

SEMINAR
 OVER VIEW OF
INTERNATIONAL TRADE

INTRODUCTION
 International trade means cross-frontier
exchange of goods(merchandise and
services) between several political
economics.

 It involves the flow of goods from seller

to buyer in accordance with the contract
of sale and the consequential flow of
payment from buyer to seller.
 Payment

Sales contract
Seller
Shipment
Why International Trade?
 Uneven distribution of resources
– People maximizes their satisfaction by
exchanging goods and services for
another goods and services based on
the principle of comparative
advantages.
 The Sales Contract
 A sales contract
– The sales contract may be verbal, it is
advisable that it is written for ease of
reference in future
– It should be carefully worded as it
represents the ultimate fall back
position in case of any dispute
between the buyer and seller
 The sale contract
 A good sales contract have the following features
– Unambiguous
– Must clearly state the duties and liabilities of each
party
– Must state the price of arbitration/settlement in case
of dispute
 An agreed product or service
 Shipping and delivery details
 Required documentation
 Insurance cover
 Terms of payment
 Buyer’s Goals:
 Minimize cost of financing
 Maintain good relationship with
supplier
 Assure receipt of specified goods
previously contracted
 Seller’s Goals

 Maximize the price without losing

sale
 Assure payment from the buyer
 Assure that funds can be received
by the supplier
 The very important thing to traders
involved in international trade is managing
their risks, transportation risks and political
risks. Terms of payment are also important
thing that sellers and buyers should agree
on when concluding a contract.
 To meet needs of the buyer and the seller ,
the participation of international trade
facilitators is unquestionable.
 These facilitators can be categorized as:-
– Transport companies – to transport
goods
– Agents – like forwarding agents, clearing
agents and sales agents
– Financial institutions
 Insurance companies – gives cover to

risk of loss or damage of goods

 Banks – facilitates payment
 The

Documentary

Business
 Payment Methods

Bank
 Payment Methods
 There are at five alternatives a
seller has for obtaining payment for
goods shipped to buyer namely:

1. Advance payment
2. Open account
3. Consignment
4. Collections
5. Letter of credit
 [Link] in Advance

 This is the most basic payment

methods for goods. The supplier
receives cash from the buyer before
goods are shipped.
 This option has no advantage to the
buyer due to:-
– Lack of control over the goods
– Loss of the use of funds
– Supplier may refuse or be unable to ship
the goods
– Possible impact of political/country risk
– Possible transit risk implication
 Payment Methods
CASH IN ADVANCE

Description Risks Other Features

1. Buyer pays for goods before 1. Performance risk of 1. Goods shipped at

the seller ships seller sellers
2. Used when there is no trust in 2. Capital tied down by convenience
a market controlled sellers buyer 2. Buyer finance
 2. Open Account
 The supplier ships the goods and
documentation, and awaits payment from the
buyer
 Advantages for the buyer
– Can obtain control of the goods prior to
payment
– Has the ability to generate cash from sale
before payment is due
– Can exercise right not to pay if goods are
defective.
 Open Account (cont.)

 For the supplier there is no control over the

goods or the buyer’s willingness to pay
 May incur
– commercial or credit risk
– political/country risk
– foreign exchange risk
 Payment Methods
Open Account

Description Risks Other Features

1. Seller ships first and 1. Payment risk of 1. Buyer enjoys supplier’s

buyer pays later buyer credit.
2. Used when there is 2. Loss of control of
no trust in a market goods
controlled of buyers
 3. On consignment

 The supplier ships the goods to the

importer (known as the consignee)
whilst retaining ownership. The
consignee is the agent responsible for
paying the supplier if and when the
goods are sold.
 Why consignment?

 Buyer acts as agent and pays only when the

goods are sold
 Supplier retains only limited control of the
goods and uses services for the consignee to
intermediate the sale of goods to the ultimate
buyer
 Supplier has no control over the consignee's
willingness to pay
 Supplier incurs cross border risk(country risk)
and possible foreign exchange risk
 Payment Methods
consignment

Description Risks Other Features

The seller ships No risk for

goods to the buyer
buyer, but retains Limited control
ownership. of goods by seller
Payment is and payment
made if and when contingent
the buyer sells the
goods
 [Link] collection

 A process governed by international

rules by which the supplier is able to
collect from an overseas buyer through
an intermediary –i.e. banks. It is a
comprise between open account and
advance payment and simpler but less
secure than letter of credit.
 Two types of collection
– Clean collection
– Documentary collection
 Documentary collection (cont.)
 Clean collection – contain financial
documents only
– It is an alternate of open account where seller ships,
sends commercial documents to buyer but sends
financial documents I.e. draft through the banks for
collection
 Documentary Collection - contain financial
and commercial documents
– Seller ships and then sends all documents (both
financial and commercial) through the banks for
handling
 Why Documentary Collection?

 The buyer wants an assurance that on

payment or acceptance documents will
be released to obtain goods.

 The supplier wants assurance that

documents are only made available on
release of payment or acceptance.
 Documentary Collection (cont.)

 Advantages for the buyer

– Can refuse or delay payment
– Can refuse to accept a tenor or usance
draft/bill of exchange.
 The main disadvantage for the buyer is
that the documents and or shipment of
goods may not conform/match to the
agreed/requested specifications.
 Documentary Collection (cont.)
 Advantages for the supplier
– Documents are processed through the
banking system in accordance with the
supplier’s instruction under URC 522
(Uniform Rules for Collection)
– Documents are exchange for payment
(sight draft/bill of exchange)
– Documents are released against the
guarantee of the buyer to pay at a future
date (tenor/usance draft/bill of exchange)
 The main disadvantage for the supplier
is that the buyer can refuse or delay to
accept or pay.
 Payment Methods
Collections
Description Risks Other features
A. Clean Collections Payment risk 1. Some element of trust
 An alternate of open account where of buyer exists between buyer
seller ships, sends commercial though and seller
documents to buyer but sends accepted draft 2. Buyer still enjoys
financial documents I.e. draft constitute a supplier’s credit
through the banks for collection legal evidence
against buyer

B. Documentary Collections Same as in 1. Seller still retains a

 Seller ships and then sends all clear constructive control
documents (both financial and connections over goods through
commercial) through the banks for the banks
handling 2. Buyers still enjoys
supplier’s credit.
 5. Documentary Credit (L/C)
 A written undertaking by a bank at a
request of its customer (buyer or
applicant) , in which the bank
obligates itself to pay a supplier
(beneficiary) up to a stated amount
within a prescribed timeframe, upon
presentation of documents that
conform to all the terms and conditions
requested by the applicant.
 It is the most secure.
 Governed by the UCP600.
 The Letter of Credit

Definition:
A letter of credit is a written undertaking
of a bank on behalf of its customer (the
applicant) in favor of a named beneficiary
in which the bank obligates itself to pay
up to a certain sum of money before a
certain date upon the beneficiary
presenting documents as requested in
the credit.
 The Letter of Credit

OR
 A documentary credit is a written
undertaking by a bank given to the seller
at a request and on the instruction of the
buyer to pay at sight or at determinable
future date up to a stated some of
money within a prescribed time limit and
against presentation of stipulated
documents.
 Why Letter of Credit?

 Buyer wants assurance that

documents delivered meet all the
terms and conditions laid down in
the L/C
 Supplier wants to assurance that
settlement is made upon
presentation of complying
documents.
 Letter of credit (cont.)

 Advantages for the buyer

– Pays after shipment
– Payment made after supplier’s compliance
with terms and conditions of the L/C
– Risk of not receiving goods ordered can be
reduced through conditions and terms
imposed in the L/C.
 Disadvantage for the buyer
– Expensive
– Goods may not be as represented in the
documentation.
 Letter of credit (cont.)

 Advantages for the supplier

 Elimination of buyer risk (assumed by the
issuing bank)
 Elimination of country risk (if L/C is
confirmed)
 Disadvantages
 Expensive
 Payment Methods

Letter of Credit

Description Risks Other features

Seller ships goods to buyer 1. Political risk/FX risk 1. Serves to protect
and obtains payment based affecting issuing both buyer and seller
on agreed terms and bank’s obligations 2. Universally accepted
conditions 2. Documentary risk rule i.e. UCP600
3. Performance risk of 3. More than one bank
seller since bank's serving various roles
deal in documents may be involved.
only
 The Letter of Credit

 Parties and responsibilities

 Basic types of L/C

Components of letter of credit
 The basic components of L/C can be listed as
follows:-
– Advising bank name and address
– Beneficiary name and address
– Issue date
– Form and type of credit
– Amount
– Term of trade
– Mode of transport
 Components of L/C (cont.)

– Required documents
– Expiry date and place
– Date of shipment
– Description of goods/services
– Port/place of loading
– Port/place of discharge
– Allowance for partial shipment/transshipment
– Type of payment availability
– Accountability of bank charges
 Parties to the Documentary Credit
1. Applicant – is the buyer or an importer, who applies for
the issuance of a letter of credit in favor of a seller.
2. Beneficiary – is the seller, to whom a letter of credit is
issued.
3. Issuing bank – is the buyer’s bank who issues a letter of
credit.
4. Advising bank – is a bank, which advises a letter of
credit to a beneficiary.
5. Reimbursing bank – is correspondent bank to an issuing
bank and makes fund available to a paying bank for value
of the negotiated document under a specific letter of
credit.
6. Confirming bank – is a bank, which undertakes to a
seller to effect payment to that of issuing bank according
to the letter of credit terms and conditions.
 Types of Letters of Credit
 Per UCP 600 art. No. 10, all documentary credit are
irrevocable that can not be cancelled or amended
without the consent of the parties in the L/C, except
as otherwise provided by art.38.
 Unconfirmed versus Confirmed
– Unconfirmed LC
 Any LC that carries the payment obligation of just one

bank being the issuing bank

– Confirmed LC
 Any LC that carries an additional payment obligation of

another bank other than the issuing bank

 Confirmation mitigates against both the commercial risk

of the issuing bank and also the country risk

 confirmation comes at a cost depending on the source

of collateral (Cash) or Clean and sometimes silent.

 Special types of Letters of Credit
There are special letters of credit needed to
meet uncommon transactions.

These are:-

1. Revolving L/C
2. Transferable L/C
3. Back to Back L/C
4. Red clause L/C
1. Revolving LC
 LCs that are renewed or reinstated within their
overall validity without requiring specific
amendments.
 Commonly used by traders having regular
shipment from the same supplier over an extended
period.
 They may revolve around time or around value.
– Time: Established for fixed amounts that are
reinstated for each specific period within the overall
validity
 For example – Revolving DC available for up to

$1,000.- Per month for a fixed period of 6 months

is available for $1,000.- each month
– L/C of this nature could be cumulative or non-
cumulative
– In both cases the issuing bank’s liability under the
RVDC would be $6,000.-, however, if it is non
cumulative the liability could be reduced as each
month’s available drawing expires.
– Value: Re-instated to their original value, within a
given period of validity
– The L/C provides for automatic reinstatement upon
presentation of specified documents.
 Example- LC revolving around value for
$10,000 and valid for six month , the
supplier can present documents up to a value
of $10,000 during this six months.
 The liability of the issuing bank and the
applicant is infinite and are rarely used.
2. Transferable LC

 This derivative is also used to accommodate

scenarios involving middlemen.
 However, instead of having 2 LCs to cover a
single shipment, only one LC is issued which
must be designated as transferable.
 A credit which allows the beneficiary to
transfer part, or all, of the letter of credit
rights to a third party or parties if part
shipment are allowed.
 Article 38 of UCP 600 is the guiding rule for
transferable LCs.
 Transferable DC Cycle
18. B/L exchanged
for goods
8. Goods shipped

Seller [Link]
Middle Man 1. contract Importer
2nd Beneficiary 1st Beneficiary Applicant

9. Docs presented 2. TFDC

5. Transfer 16. Dr. Acc application
For $75,000 14.$25,000
request $100,000 For $100,000

11. Substitute [Link] 17. Docs

15. $75,000 Docs for Advised for
7. TFDC advised released
For $75,000 $100,000 $100,000

Advising/
2nd Advising 14. $75,000
Nominated Bank 13. $100,000
Issuing Bank
Bank 10. Docs Transferring 12. Docs

6. TFDC transferred
Bank [Link] issued
for $75,000 For $100,000

Transferred DC Transferable DC
3. Back to Back letter of credit
– LCs issued in favor of a supplier at the request of a
middleman against the security of a “Master” LC
issued by the ultimate buyer.
– This may involve parties domiciled in 3 different
countries.
– The terms and conditions of a back-to-back LC
should mirror the terms and conditions of the master
LC(Essentially 2 LCs to cover a single shipment of
goods)
– The following should be considered when issuing
Back-to-back LCs:
 The terms and conditions of the primary (or master)
LC must be thoroughly understood
 Considerable efforts must be made to mirror the above
terms to prevent material discrepancies
 Issues relating to third party documentation should be
addressed.
 Back to Back DC Cycle 19. B/L exchanged
or for goods
8. Goods shipped

Seller Applicant Beneficiary

[Link] 1. contract Importer
Beneficiary Applicant
Middle
Middleman

5. BBDC 2. DC
9. Docs presented
Application for 17. Dr. Acc application
For $75,000 16.$25,000
$75,000 $100,000 For $100,000

12.$75,000 13. Substitute [Link] 18. Docs

7. BBDC advised Docs for Advised for released
For $75,000 $100,000 $100,000

Advising/ 11. $75,000 Advising

15. $100,000
Issuing Nominated
Nominated Issuing Bank
10. Docs 14. Docs
Bank Bank Bank
6. BBDC issued [Link] issued
for $75,000 For $100,000

Baby DC Master DC
4. Red Clause LC
 LCs that incorporates a special clause enabling
the beneficiary to draw a pre-shipment advance
against a simple receipt and advance payment
guarantee(APG)
 Historically utilized for pre shipment finance in the
wool industry in commonwealth countries and in
other commodity businesses.
 Provides beneficiary with credit before shipment
 Proceeds of negotiations should be applied in
repayment of the advance plus interest which
should be settled in full before any further funds
are paid.
 In event of default from the beneficiary the bank
that issued the APG becomes liable.
 L/C Setup

The Process of L/C issuance can generally be

summarized as follows:-
 Commercial contract between buyer and seller
 Buyer applies to his bank to issue L/C in favor of
seller filling a detailed application form provided by
the bank,
 The issuing bank transmits the L/C to the advising
bank and advises the L/C to beneficiary adding
confirmation if asked to do so,
 Advising the L/C imposes a contractual obligation
on the issuing bank to pay the exporter for the
correct documents provided the documents are
presented within the stipulated time limit.
Graphical Representation of L/C Set Up

1. Sales Agreement Beneficiary or

Applicant or
(Importer) 5. Shipment (Exporter)

2. LC 6. Presentation
9. Payment/
Application of
Acceptance
documents
10. Release
of
Document [Link]
LC
7. Notification of Documents + Claim

3. Opening of LC
Opening Bank Advising Bank
8. Payment/Reimbursement
(Sight / Acceptance)
 Major contents of LC
 LC should have the following:-
– Advising bank name and address
– Beneficiary name and address
– Issue date
– Term of trade (FOB, C&F etc)
– Applicant name and address
– Amount of LC
– Mode of transport
– Required documents
– Expiry date and place, Date of shipment
– Shipment from and to if the LC is goods LC
– Methods of payments
– Payment at Sight
– Negotiation
– Deferred payments/Acceptance
– Acceptance of term draft (Bill of Exchange)etc
 Methods of Payment under Documentary Credit
1. Payment at sight – payment is made without
recourse(option) to exporter or beneficiary.
 means payment to the beneficiary is to be effected
immediately upon presentation of complying documents.
2. Negotiation – payment may be made by negotiating
bank(advising bank ) with recourse to the
exporter(beneficiary) unless the nominated bank
(advising bank ) has confirmed the L/C.
 Negotiation is the purchase by the nominated bank
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 (Art.2
UCP600).
 Methods of Payment under Documentary
Credit
3. Acceptance of Term Draft (Bill of Exchange) –
draft(s) is accepted by the nominated, confirming
or issuing bank. Whosoever accepts the draft,
there is no recourse to the exporter and the draft
must be paid at maturity.
* Draft (Bill of Exchange ) is unconditional order
written from one person (the drawer), to
another Person (the drawee). It directs the
drawee to pay a certain sum at “sight” or at a
fixed or future determinable date, to the order of
the party who is to receive payment (Payee).
 Methods of Payment under Documentary
Credit

4. Deferred Payment – the exporter receives an

undertaking, in return for the correct
documents, that payment will be made at the
date stated in the L/C. There is no draft
involved nor is there any recourse to the
exporter. Once issued, the undertaking must be
honored at the due date.
 Amendment
 After the L/C establishment, there may arise the
need to change some terms and conditions of the
letter of credit, initiated by the beneficiary or the
applicant.
 Of both parties agree on the change the applicant
submits an application to the issuing bank to
make the requested changes on the L/C – called
amendment
 Some types of amendment are:-
– Increase in L./C amount
– Extension of expiry date and shipment date
– Change in trade term
– Correction of misspellings,
– Change in origin of goods, etc
 L/C Settlement

 Exporter sends the required documents to

advising(nominated) bank.
 The advising bank, now becomes negotiating bank,
will then check the documents to ascertain whether
they are in accordance with the L/C will pay to the
beneficiary or agree to pay later in accordance with
the terms of the L/C.
 If the L/C is conformed, the advising (negotiating )
bank pays on its own account, then sends
documents claiming reimbursement.
 Documents
Financial or Commercial

Commercial Packing
Invoices List
Bill of Exchange
Certificate Insurance
of Origin Certificate

Promissory Note Transport

Documents
 Types of documents

 Financial documents
– Bill of exchange (draft), promissory note, cheque
 Commercial documents
– Invoices, packing list , certificate of analysis, insurance
certificate
 Transport document
– Bill of Lading, Airway bill, Rail road, Parcel receipt
 Official documents
– Certificate of origin, health certificate
 Article 14 UCP 600 is a guide for examination of
documents
 Article 18-25 also clearly states what are
included on the content of each document.
 Letters of Credit

Discrepancies

 Discrepancies are deviations from the terms

and conditions stated on the LC

 They could be Regulatory or Non regulatory

 Non regulatory discrepancies can be waived

by the importer, while regulatory
discrepancies can not be waived.
 Letters of Credit

Common Discrepancies

 Some examples are:-

– Late shipment
– LC expired
– Over shipment
– B/L not consigned as per LC terms
– B/L not dated
– L/C overdrawn
– Documents not marked as original
– Required document not presented
 Letters of Credit
 If advising(negotiating) bank finds
discrepancies, it should arrange for correction
or sends documents for collection or return
documents if they are very wrong.
 The advising bank may also contact the
issuing bank explaining the nature of
discrepancy and asking to negotiate the
document by message type MT750
 Discrepancies discovered by the issuing bank
should be informed to the negotiating bank
with in five bank working days stating the
discrepancies (Art.16d UCP 600).
 The option for the importer for discrepant
documents are either to accept or not to
accept.
 Risks and Advantages of Documentary Credits
for Applicant

Risk Mitigation Advantage

-Seller sends inferior goods -Obtain a status report -Applicant get the goods
-Country risk, e.g. Trade on the beneficiary, they want them, when
embargo imposed and/or ask for the pre- they want them, with
-Lack of finance if sight shipment inspection proper documentation
payment called for certificate with the -Finance can be time to
documents. coincide with the arrival
-make enquiries of of goods
banks, own government, -Credit can be obtained
trade agencies etc by arranging for terms of
-Arrange finance with bills of exchange.
bankers before
establishment of the
credit
Risks and Advantages of Documentary Credits
for Beneficiary

Risk Mitigation Advantages

-If L/C are unconfirmed -Ask for credit to be If they produce the right
there is the possibility confirmed documents at the right
of country risk holding time they will be paid
up remittance of funds irrevocably
-Immediate finance on
term bills of exchange
by having them
accepted by advising
banks and then
discounted.
 Risks and Advantages of Documentary Credits
for Issuing Banks

Risks Mitigation Advantage

-Applicant may -know the -Fees

be unable to pay customer, take
- Paying security and apply
documents the usual lending
containing criteria to L/C
discrepancies limits
-Check
documents
carefully
 Risks and Advantages of Documentary Credits
for Advising/Confirming Banks
Risks Mitigation Advantages
-Country risk -Know the -Fees ,charges are
of issuing customer take usually recovered from
bank/country security and applicants by
-Incorrect apply the usual reimbursement claims
paying lending criteria on issuing banks
documents to L/C limits .
 The following are to be considered before effecting
payment on LC transaction.

Payment and Re- Migrants Control issues

imbursement consideration

Regulatory requirements Adopting of Safety of shipping

Documentation international banking documents
requirements rules (The UCP 600) Inspection of goods
Authenticity of Knowledge of local Verification of shipping
underlying transaction regulations documents
Nature of discrepancies Insurance of goods Verification of the cost
A good document of goods involved against
review desk to put international prices to
together ensure no capital flight.
 Import procedures in Ethiopia
 Commercial banks are authorized
to facilitate import and provide
associated services against
required documents
 Three mode of payment to import
goods and services
– Documentary credit (LC)
– Documentary Collection (CAD)
– Advance payment (TT)
 the case of Letter of credit

1. Prior to LC establishment
 Approved foreign exchange permit for import
 Complete, signed and stamped foreign exchange application for
import
 Valid trade License for import, investment or industry and TIN
certificate
 Valid, signed and stamped Prforma invoice
 NBE account No and customer not listed delinquent
 Insurance certificate
 Additional requirements
– Letter from Road Transport Authority for Vehicle
– License from Ethiopian Drug Control & Admin. Authority for
Pharmaceuticals.
– License from Quality and Standard Authority for items which require
standardization License from Ministry of Agriculture for Agricultural
chemicals & veterinary medicines
– Copy of loan or grant agreement and No objection letter for grant
letter of credit
– International competitive bid with the relevant document is the amt is
more than $1 million.
 Import procedures in Ethiopia

2. For LC Opening
 Approved original Foreign exchange application
with 2 photocopies
 Filled, signed, stamped and verified LC application
 Proforma invoice stamped by CBE and its copy
 Insurance certificate, if LC facility is to be utilized
 Letter from Ethiopian shipping Lines if the delivery
term is C&F.
3. Amendment
 Signed and verified application letter with the
supplier’;s inquiry for amendment.
 Import procedures in Ethiopia
4. LC settlement
 Supplier send goods presenting documents
to its bank listed below with its covering
letter.
– Chamberized commercial invoice
– Certificate of origin
– Shipping documents, Packing list
– Freight invoice for delivery term C&F or CIF
– Original Libre for used car
– Beneficiary certificate, Carrier certificate
– Other documents may also be presented if it is
request in the LC.
 Import L/C Opening

1. Receives the following from customer

1. L/C application duly completed, signed
and verified
2. Supporting documents – approved
foreign exchange permit, proforma
invoice , insurance certificate etc
3. Checks against L/C application checking
form, puts initial, marks date and
register the necessary information on
register book.
4. Nominates advising bank, reimbursing
and confirming bank
5. Assign L/C no., prepare paper file and
prepare the L/C instrument
6. Calculate margin( if needed) charges and
commission per banks tariff, and prepares
tickets
7. Fills L/C history card , gets the L/C
instrument checked and signed.
8. Posts tickets on posting machine, transmits
the message by swift
9. Attach file copy of the instrument and file
copy of the tickets to the L/C file and give
cop of L/C instrument and debit advices to
customer.
 Accounting entries

1. Dr. Customer account

Cr. Exchange payable
Margin(allowed %of L/C value)
Service Charge
Swift Cost
Postage
Opening Commission
Confirmation commission (if any)
NB. One period is 90 days and exchange commission shall not be
taken from F/Cy account holders
2. Contingent Liability
Dr. Liability by bank
Cr. Liability by customer
 Import L/C Amendment

1. Check the content of the amendment and the

attached fax message from the supplier
2. Prepare amendment message, calculate the
related charges per banks tariff and prepares
tickets
3. Update the L/C history card, if needed
4. Get the amendment message and tickets checked
and signed
5. Post the ticket and transmit the message by swift
6. Attach file copy of the message .
 Account entries for amendment

1. Dr. Customer account

Cr. Exchange comm. (if amt increased)
Margin
Service charge
SWIFT charge

2. Pass the credit entry to the related contingent account by

increased amount, and pass a debit entry if the amount decreases
 Import L/C Settlement

Documents are received from our mail division or any courier

services
1. Record document’s arrival date and document amount in
the register book
2. Check documents received against L/C instrument for
compliance using L/C checking form.
3. If documents are discrepant, correspond with negotiating
bank and give advice to applicant
4. If documents are clean, prepare tickets for document value
and commission and charges if any
5. Get tickets checked and signed, and post
6. Advices applicant to collect the document
7. Get bill of lading endorsed by a signatory
8. Hand over documents with debit advices making the
customer sign on the covering letter of the document
 Accounting entries
 Without L/C facility
Dr. Margin held account
Cr. Handling commission
Cr. Correspondent bank
 With L/C facility
Dr. Marin held account
Cr. Advance on import bills
Cr. Correspondent bank
– When applicants authority is received to debit its acc
Dr. Customer account
Cr. Advance on import bills
Cr. Interest income/Handling commission
Issuance of Delivery order prior to
arrival of documents
 When the goods arrive at port before arrival of documents the
applicant may request for issuance of delivery order by writing an
undertaking letter attaching copy of documents (chamberzed invoice,
packing list, certificate of origin transport documents and official
documents.
 Then we will pass the following entry
1. With Facility
Dr. Customer Acc
Cr. Margin(for unpaid percentage amt.)
Cr. Guarantee commission
2. Without Facility
Dr. Customer Acc
Cr. Guarantee commission
 The

Documentary Collection
 COLLECTIONS
Definition:per URC 522
The Uniform Rules for Collection (URC) defines
collection as “the handling of documents (financial
and or commercial) by banks in accordance with
instructions received, in order to:
a. Obtain payment and/or acceptance, or
b. Deliver documents against payment and/or against
acceptance, or
c. Deliver documents on other terms and conditions”
Therefore:
Banks are only agents (of Exporter) in collections,
they are bound to follow the instruction of whoever
their principal is.
 COLLECTIONS
Types of collection

1. Clean Collection – collection of financial

documents not accompanied by commercial
documents (when financial documents are
presented for collection).

2. Documentary collection – when financial

documents accompanied by commercial
document or commercial documents not
accompanied by financial document.
 Collections
Parties to a Collection and their responsibilities .
1. Drawer (Principal ) – is the seller and
responsible:-
• Submits documents in good order
• Instruct the remitting bank clearly
2. Remitting Bank (Exporter’s Bank) – the
seller’s bank, which sends documents for
collection to a bank in buyer’s country,
and responsible: -
• To deal with documents quickly
• To check that its principal’s instructions can be
carried out
• To instruct collecting bank clearly.
 Collections
3. Collecting Bank/Presenting Bank – bank
that presents collection documents to buyer
for payment or acceptance and is responsible
to: -
• to carry out remitting bank’s instruction
• to keep the remitting bank informed of
all developments
• to keep the documents secure until
payment/acceptance
4. Drawee (Buyer ) – is the buyer and
responsible: -
• To pay ,or to accept and pay
 Collections

Collections – Process Flow

(1.)Sale Agreement
Buyer / Drawee Principal / Seller
(2) Shipment

(5) Payment or
Acceptance (3) Documents &
Collection order
(8) Payment or
Acceptance
(6) Release of doc. After payment
(DP)/Acceptance (DA

(4) Doc. & Collection Order

COLLECTING REMITTING
BANK BANK
(7) Payment or Acceptance
 Collections
Responsibilities of parties in Documentary Collection
1. Drawer (Principal ) –
• Submits documents in good order
• Instruct the remitting bank clearly
2. Remitting Bank (Exporter’s Bank) –
• deal with documents quickly
• check that its principal’s instructions can be carried out
• instruct collecting bank clearly.
3. Collecting Bank –
• carry out remitting bank’s instruction
• keep the remitting bank informed of all developments
• keep the documents secure until payment/acceptance
4. Drawee (Buyer ) –
• pay ,or to accept and pay
 Collection Instruction

 Remitting instruction

– Remitting bank should send documents

and collecting instructions to the collecting
or presenting bank
Collecting instructions should include:-

– Address of remitting bank

– Details of principal
– Drawee name and address
– Amount and currency of collection
– List of documents enclosed
– Terms of
payment(payment/acceptance/other)
– Charges to be collected indicating whether
they may be waived or not
– Method of payment – acceptance/sight.
– Instruction in case of non-payment, non-
acceptance.
 Collection Instruction
 Presenting bank
– Makes the document available to drawee as instructed by
drawer through remitting bank
– Has to present document to the drawee as received
without examination
– Inform any missing documents listed by the remitter
– Act upon instruction given in collection instruction
– Disregard any instruction from other party other than the
remitting bank
– Release document against payment or acceptance per
instruction of the remitting bank
– Will act in good faith and exercise reasonable care
– If drawee did not respond with in 60 days after
presentation of documents, the collecting/presenting
bank may return the documents to the remitting bank.
 Collections
– Banks have no obligation to take any action in
respond of the goods to which documentary
collection relates including storage and
insurance of goods even when specific
instruction are given to do so.
– Can take action if they are agreed to do so
but have no responsibility for any condition of
good and charge has to be covered by the
remitting bank.
– Banks assume no liability or responsibility for
consequences arising out of the interruption
of their business by Acts of God, riots, civil
commotions, wars, or any other causes
beyond their control.
 Collections
Methods of payment
1. Document Against Payment (D/P) –
documents are release to drawee against
payment.

2. Document Against Acceptance (D/A) –

documents are release to drawee against
acceptance of the time draft by drawee.

3. Acceptance D/P – drawee accepts the time

draft but does not get the documents until the
draft is due and paid.
 Risks and advantages of documentary collection
Principal Risk Advantage
/  Buyer may default by non  Retains control of
seller acceptance or non payment, the goods until
 country risk, payment or
acceptance by
 delay in payment
drawee
 expense of reshipment if
 less expensive.
goods not taken up.
Drawee  Goods may not arrive or are  May not pay/accept
/ damaged until goods arrive,
buyer  Non compliance with the  cheaper than
contract documentary credits,
 Import procedures in Ethiopia on CAD Basis
1. Purchase order (P/O) approval
– Documents required for P/O approval
 Valid, signed and sealed purchase order
– It should be addressed to importer
– It has to include at least
• Payment term Cash Against Payment
• Delivery term (FOB, C&F, CIF), it has to show
breakdown of cost and freight/insurance for C&F and
CIF
• Country of origin, Description of goods
• Hs code, Unit price
• Year of manufacture and model for used car
– NBE account number
– Insurance certificate
– Letter from ESL for delivery term C&F Djibouti
 Valid trade license for import, investment or industry
 Import procedures in Ethiopia on CAD Basis

 Additional requirements
– Letter from Road Transport Authority for Vehicle
– License from Ethiopian Drug Control & Admin.
Authority for Pharmaceuticals.
– License from Quality and Standard Authority for
items which require standardization License from
Ministry of Agriculture for Agricultural chemicals &
veterinary medicines
– Copy of loan or grant agreement and No objection
letter for grant letter of credit
– International competitive bid with the relevant
document is the amt is more than $1 million.
 Import procedures in Ethiopia on CAD Basis

 Once P/O approved the importer can fax it to

its supplier and the supplier will send the
goods to Ethiopia and present the relevant
document to Remitting Bank and the bank will
send it to the Collecting Bank or Presenting
bank. Upon arrival copy of documents with
advise given to the applicant then the importer
can apply for foreign exchange.
 Import procedures in Ethiopia on CAD Basis
 Documents required for foreign exchange
permit approval and settlement of
documents presented to the collecting
bank –CBE
– Original approved P/O
– Chamberzed commercial invoice
– Certificate of origin
– Shipping documents
– Packing list
– Freight invoice for delivery term C&F or CIF
– Original Libre (ownership certificate) for used
car.
 Collection

 The importer prepares and submits

purchase order for approval , once approved
faxes the p/o for the seller
 The banker
– Receives docs from courier service or mail
division
– Checks all documents listed in the covering letter
are enclosed
– Checks settlement instruction are operative and
insure the doc have approved p/o
– Assign a number to the documents and records
in cad register
– Prepare single entry ticket, and post
– Inform importer arrival of docs and gives
copies of documents to obtain foreign
exchange application
– When authorized calculate charges and
commissions per the banks tariff and
prepare payment order and completes cad
tickets
– Get tickets and payment order checked and
signed
– After collecting payment release documents
to drawee
– Records value of collection documents
settled and credit the sum to single entry
IBC account.
 Accounting entries
 On arrival of document
Dr. Inward bill for collection(memorandum acc.)
 On settlement
Dr. Customer’s Account

Cr. Correspondent bank

Exchange Commission
Service charge
Swift Charge
Photocopy
- pass credit entry to Memorandum account.
 Collections
Regulatory Considerations

 Local laws
– Central bank publications
– Exchange control laws
– Legal opinions
 International guidelines
– The URC
 In dispute situations, the local laws prevail

Mitigants
 Adoption of international banking rules (The URC 522)
Risk can be divided in three major
categories
ECONOMIC POLITICAL CURRENCY
RISK RISK RISK

Manufacturing risk Politicalmeasures Devaluation

Goods acceptance risk Revolution Exchange fluctuations
Refusal of payment War Exchange control
Payment inability Prohibition on
payment
 Regulatory Guidelines
 International trade is an aspect of
banking that is very much regulated
 Proper regulation is a must in view of
the aggregate figures of trade
transactions processed annually
 There are two basic categories of
regulations
– Local regulations
– International regulations
 Regulatory Guidelines

 Local Regulations:
 Varies from country to country depending
on the monetary policies of government
 The basics of the regulations would
include:
– Exchange control Regulations
– Documentation requirements
 Regulatory Guidelines
 International regulations:
 There are many regulation bodies but
the most widely accepted is the
International Chambers of Commerce
(ICC)
Regulatory Guidelines
 What happens where there is a
conflict between local and
international rules?

– Local rules prevail

– For issues of great importance, we

suggest that the matter be referred
to the local regulatory agencies
 Incoterms

 International commercial terms

 Provides a uniform set of rules for interpretation
of trade terms in international trade
 Reduces confusion and facilitates trade
negotiation between traders.
 Incoterms should be stated in commercial
contracts and can be included in the text of
documentary credit. Ex. FOB Hamburg
 Incoterms

 There are 13 incoterms

 Explains how functions, cost and risks
should be divided between parties in
connection with delivery of goods.
 The technique used to establish this division
is to indicate the pint where the goods to be
delivered from seller to buyer.
 incoterms
 Incoterms are described from the sellers
perspective.
 Eg. Fob – free on board – the seller is free
from any further costs, obligation and risk
once the goods have been delivered on
board in a vessel.
E EXW
F FCA, FAS, FOB
C CFR, CIF, CPT, CIP
D DAF, DES, DEQ, DDU, DDP
Always 3-lettercode plus a named place

For example: CIF Cairo or FOB Hamburg

 INCOTERMS 2000
DEFINE 13 TERMS WHICH ARE STRUCTURED INTO 4 GROUPS:

GROUP 'E‘ - Departure

GROUP 'F‘ - Main carriage unpaid
GROUP 'C‘ - Main carriage paid
GROUP 'D‘ – Arrival

The next revision is planned for 2010 (INCOTERMS 2010).

 OUTLINES

SELLER BUYER

transport
EXW risks
cost

transport
FCA risk
cost

transport
FAS risk
cost

transport
FOB risk
cost
 OUTLINES

SELLER BUYER

transport
CFR risk
cost

transport + insurance
CIF risk
cost

transport
CPT risk
cost

transport + insurance
CIP risk
cost
 OUTLINES

SELLER BUYER

transport + insurance
DAF risk
cost

transport + insurance
DES risk
cost

transport + insurance
DEQ risk
cost

transport + insurance
DDU risk
cost
 OUTLINES

SELLER BUYER

transport + insurance
DDP risk
cost