When Issuing Bank is also Applicant of a Letter of Credit: Islamic Finance, Leasing and Issuing Bank’s Own Imports

Ozgur Eker (CDCS) Applicant, Banks, Islamic Finance, Issuing Bank, Issuing Bank, Letter of Credit Parties , , , ,
When Issuing Bank is also Applicant of a Letter of Credit: Islamic Finance, Leasing and Issuing Bank’s Own Imports

Applicant means the party on whose request the credit is issued. Applicant is the importer in a typical international commercial letter of credit.

Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.

Generally issuing banks issue letters of credit with the request of the importers and mentioning their names in the letters of credit under Field 50: Applicant of MT 700 Swift Messages.

But in some situations issuing banks issue letters of credit on their behalf. Please keep in mind that this is totally alright according to the letters of credit rules.

Below you can find some situations under which you can see the issuing bank as an applicant.

Letters of Credit Issued from Islamic Banks

According to the modern economic theories an interest rate is the cost of borrowing money, however Islam prohibits interest rates.

Which means that Islamic Banks in some Arab and Asian countries can not buy or sell money based on interest rates. Instead they buy and resell the goods to the importers to finance import letters of credit transactions.

This type of Islamic Trade Finance is known as Murabaha Financing.

According to the Murabaha Financing the issuing bank and the importer signs a sales contract.

According to this sales contract the issuing declares the importer as its agent and the importer agrees to pay the goods from the issuing bank on higher amount than the original contract amount that was determined between the importer and the exporter previously.

The issuing bank requests all shipping documents to be under its name, at the same time appointing the importer as its agent, which means all formalities outside of the letter of credit will be made by the importer as an agent of the issuing bank.

Later on, when the issuing bank receives the documents complying the terms and conditions of the letter of credit:

  1. Pay proceeds to beneficiary.
  2. Endorse and release documents to the real buyer against Murabaha Financing.

Issuing Bank Open a Letter of Credit for Its Own Procurement

It is also possible that the issuing bank is procuring goods for its own consumption (IT equipment, furniture, etc), it may well designate itself as the applicant under its own Letter of credit.

Letter of Credit Issued under a Leasing Agreement:

It is also possible that the issuing bank is a part of an international leasing operation.

The actual buyer may be using “leasing” as the financial instrument for purchasing the equipment, machinery or other assets where the bank is lessor (owner) and the end-buyer (the actual buyer) is the lessee (user) in this method.

References:

  1. UCP 600, Uniform Customs and Practice for Documentary Credits
  2. How does Trade Based (Murabaha) Financing Work?, Amana Bank Youtube Channel

Shipper of a Bill of Lading

Ozgur Eker (CDCS) Bill of Lading, Letter of Credit Documents , ,
Shipper of a Bill of Lading

What Does the Shipper Mean?

Shipper means a person that enters into a contract of carriage with a carrier. Shipper also known as consignor.

In most cases shipper is the exporter.

What are the Roles and Responsibilities of the Shipper?

Shipper prepares the goods for sea carriage, makes sure that the goods are packed in seaworthy manner, loads the goods into containers if needed and send them to the carrier’s warehouse or terminals located at the port of loading.

All details regarding the shipment are given to the carrier by the shipper via Shipping Instructions.

Carriers can issue bills of lading with the data they have received from the shippers.

Under some certain incoterms shippers also arrange and pay for the sea freight (such as CFR, CPT) and cargo insurance (such as CIF, CIP).

Shipper Example:

Shipper is the Exporter:

Under a cash against documents payment a Greek olive oil exporter makes a shipment to an importer located in Australia.

The importer agrees to pay the contract amount in full against presentation of documents.

The goods have been shipped under CFR trade terms and shipment takes place between Thessaloniki Port, Greece and Melbourne Port, Australia.

As freight will be paid by the seller the freight notation that is mentioned on the bill of lading is Freight Prepaid.

The bill of lading consigned to order of the importer’s bank in Australia, which is ANZ (The Australia and New Zealand Banking Group Limited). The bill of lading is issued in negotiable form.

After production stage, shipper gets freight quotations from several container lines and freight forwarding companies in Greece, books the container and prepares the Shipping Instructions document.

Carrier states description of goods, number and kind of packages, consignee field, notify party field, shipping marks and remaining details as per shipper’s instructions.

Export formalities also are handled by the shipper.

Points of Consideration When Filling Out Shipper Field:
  1. Shipper enters into a contract of carriage with the carrier.
  2. Shipper informs almost all of the details stated on the bill of lading to the carrier. Any mistake at this stage may create painful problems.

Related Articles:

What are the Differences Between Consignee and Shipper Fields of Bills of Lading?

Ozgur Eker (CDCS) Bill of Lading, Letter of Credit Documents , , , ,
What are the Differences Between Consignee and Shipper Fields of Bills of Lading?

Bill of lading is a transport document covering the carriage of goods by sea.

Consignee means a person entitled to take delivery of the goods under a contract of carriage indicated on a bill of lading.

Shipper means a person that enters into a contract of carriage with a carrier. Shipper also known as consignor.

On today’s post I explain the main differences between the consignee and shipper fields of bills of lading.

Differences Between Consignee and Shipper

Seller versus Buyer:

Usually consignor is the exporter and consignee is the importer in any shipping document used in international trade. Bill of lading is not an exception.

Position Against Goods:

Consignor hands out the goods to the carrier at the port of loading. Consignee takes delivery of the goods from the carrier at the port of discharge.

Title of Goods:

Consignee field determines how title of goods will be delivered from the shipper to the consignee.

  • Consignee field determines if the bill of lading issued in straight, negotiable or bearer format.

Shipper determines how consignee field is completed by giving necessary instructions to the carrier.

Related Articles:

What Happens if Letter of Credit is Silent in Regards to the Period of Presentation

Ozgur Eker (CDCS) Bill of Lading, How to Work With a Letter of Credit, Letter of Credit Basics, Letter of Credit Documents ,
What Happens if Letter of Credit is Silent in Regards to the Period of Presentation

Documents must be presented to the nominated banks within allowed time frame under letters of credit payments.

Otherwise issuing banks or confirming banks raise late presentation discrepancy.

According to the letters of credit rules a presentation consists of a transport document should be presented to the nominated bank within 21 days after the date of shipment, but not later than the expiry date of the letter of credit.

Presentation Period of a Letter of Credit

If the letter of credit does not require presentation of a transport document, then the presentation period does not become effective.

Under such a scenario, the documents must be presented to the nominated bank before the expiry date.

presentation period under letter of credit

If the letter of credit is silent in regards to the period of presentation, the documents must be presented to the nominated bank before the expiry date, when the letter of credit does not ask for a transport document.

Example:

A Serbian food exporter signs a proforma invoice with in importer located in Kuwait. The letter of credit amount is 75.000 EUR and partial shipments are not allowed.

Expiry date of the letter of credit is 15.February.2019.

The letter of credit is silent in regards to the presentation period, which means that there is no Field 48 -Period for Presentation indicated in the letter of credit.

Option 1: Letter of credit does not ask for a presentation of a transport document:

  • The beneficiary must present the document to the nominated bank before the expiry date of the letter of credit.

Option 2: Letter of credit asks for a presentation of a transport document:

Under the same scenario, please assume that selected transportation mode is sea shipment and transport document is a bill of lading and latest date of shipment is 10.January.2019.

  • The beneficiary must complete the shipment before 10.January.2019 and presents the document to the nominated bank within 21 days after the date of shipment, but not later than the expiry date of the letter of credit.

Related Articles:

Stale Bill of Lading

Ozgur Eker (CDCS) Bill of Lading, Letter of Credit Documents , , , , ,
Stale Bill of Lading

According to the letter of credit rules a presentation consists of a transport document should be presented to the nominated bank within 21 days after the date of shipment, but not later than the expiry date of the letter of credit.

Bill of lading is a transport document covering the carriage of goods by sea.

If a set of documents, which consists of a bill of lading as a transport document, could not be presented to the nominated bank within 21 days after the date of shipment by the beneficiary, then late presentation discrepancy is emerged.

A bill of lading that is not presented within 21 days after shipment is called a Stale Bill of Lading.

In other words, stale bill of lading is a type of bill of lading which is presented to the nominated bank after the presentation period.

Stale Bill of Lading Example:

Let us try to understand the stale bill of lading term with an example.

An exporter in Malaysia signs a sales contract with an US importer for the sale of refined palm oil. The payment term is letter of credit. The importer have issued the letter of credit in favor of the exporter.

Letter of Credit Conditions:

  1. Latest Date of Shipment: 10.March.2019
  2. Expiry Date: 31.March.2019
  3. Presentation Period: 21 days after shipment but withing expiry date

Date of Shipment and Presentation Date:

The exporter completes the production and makes the shipment. Shipped on board date indicated on the bill of lading is 01.March.2019.

The exporter presents the documents to the nominated bank on 25.March.2019.

Conclusion:

The exporter could not complete the presentation within allowed time frame after shipment. Late presentation discrepancy condition has been fulfilled.

The shipping documents and also bill of lading is stale.

Related Articles:

Letter of Credit Condition: Bill of Lading with Multiple Notify Party

Ozgur Eker (CDCS) Bill of Lading, Letter of Credit Documents , ,
Letter of Credit Condition: Bill of Lading with Multiple Notify Party

Letter of credit, in a broad perspective, is one of the payment methods in international trade.

Bill of lading is a transport document covering the carriage of goods by sea.

Notify party means a person that should be notified by the carrier along with the consignee when the shipment arrives at port of discharge.

Letter of credit is a conditional payment method.

The beneficiary of a letter of credit will receive the payment as long as he presents documents in comply with the terms and conditions of the letter of credit.

Some letters of credit especially the ones issued in Bangladesh request bills of lading that contain not one but multiple notify parties.

On my previous post I have explained that multiple notify parties on a single bill of lading is possible.

Let me explain the situation with an example.

Multiple Notify Party Example:

A textile fabric paint exporter in Italy signs a trade deal with an importer in Bangladesh.

According to the national law of Bangladesh all imports must be paid by letters of credit. As a result an issuing bank in Bangladesh issues a letter of credit against the proforma invoice of the Italian exporter.

The letter of credit contains a condition as below:

Full set original clean on board ocean bills of lading, plus three non-negotiable copies issued by the carrier or its agent drawn or endorsed to the order of Bangladesh Islamic Bank showing ”Freight Prepaid” marked notify applicant and the issuing bank.

The bill of lading must show two notify parties:

  • Notify 1: Applicant (importer company)
  • Notify 2: Issuing bank

Related Articles:

What are the Differences Between Consignee and Notify Party Fields of Bills of Lading?

Ozgur Eker (CDCS) Bill of Lading, Letter of Credit Documents , , ,
What are the Differences Between Consignee and Notify Party Fields of Bills of Lading?

Bill of lading is a transport document covering the carriage of goods by sea.

Consignee means a person entitled to take delivery of the goods under a contract of carriage indicated on a bill of lading.

Notify party means a person that should be notified by the carrier along with the consignee when the shipment arrives at port of discharge.

On today’s post I explain the main differences between the consignee and notify party fields of bills of lading.

Differences Between Consignee and Notify Party

Delivery of Goods:

Carriers hand over goods to the entity stated on the consignee field. Notify party can not claim goods from the carrier under sea shipments.

Optional versus Mandatory Field:

Notify party can also be used as an optional field and need not to be completed. On the other hand consignee field is mandatory and needs to be completed in all occasions.

Title of Goods:

Consignee field determines how title of goods will be delivered from the shipper to the consignee. Notify party has no connection with the title of goods.

  • Consignee field determines if the bill of lading issued in straight, negotiable or bearer format.

Single versus Multiple Entries:

It is possible to enter multiple company names under the notify party field. On the other hand consignee field always completed with single entities.

Related Articles:

Notify Party of a Bill of Lading

Ozgur Eker (CDCS) Bill of Lading, Letter of Credit Documents , ,
Notify Party of a Bill of Lading

What Does Notify Party Mean?

Notify party means a person that should be notified by the carrier along with the consignee when the shipment arrives at port of discharge.

Notify party has no effect on the title of goods, which determines delivery of the goods to the consignee.

Notify party is mostly importer, importer’s forwarder or importer’s customs broker.

Notify Party Examples:

Notify Party is the Importer:

Under an advance payment terms a Belgium dessert exporter makes a shipment to an importer located in Saudi Arabia.

The importer pays the contract amount full in advance before shipment takes place.

The goods have been shipped under FOB trade terms and shipment takes place between Antwerp Port, Belgium and Dammam Port, Saudi Arabia.

As freight will be paid by the buyer the freight notation that is mentioned on the bill of lading is Freight Collect.

The bill of lading consigned to the importer company. The bill of lading is not issued in negotiable form, but in straight form.

Notify Party is the Importer’s Forwarder:

Under a letter of credit payment a German machinery exporter makes a shipment to an importer located in Hong Kong.

The letter of credit is payable at sight.

The goods have been shipped under CFR trade terms and shipment takes place between Hamburg Port, Germany and Hong Kong Port, Hong Kong.

As freight will be paid by the seller the freight notation that is mentioned on the bill of lading is Freight Prepaid.

The bill of lading consigned to order of the issuing bank. The bill of lading is issued in negotiable form.

Points of Consideration When Filling Out Notify Party Field:
  1. Notify party has no connection with the title of goods.
  2. Selected payment method may affect notify party field completion.
  3. Under open account, cash in advance and cash against documents payment methods notify party field is usually filled out by the shippers without any restrictions.
  4. Under letters of credit payment methods notify party field must be completed according to the letter of credit terms and conditions.

Related Articles:

Kenya Export Letter of Credit Consultancy

Ozgur Eker (CDCS) Countries, Export Letter of Credit Consultancy, Kenya, Letter of Credit Consultancy , , ,
Kenya Export Letter of Credit Consultancy

Letter of Credit References:

We have completed our export letter of credit consultancy services with success in regards to a letter of credit which is issued by Standard Chartered Bank Kenya Limited on 20.December.2018.

The letter of credit number was 201010061093S. Letter of credit issued in English language.

Total letter of credit amount was EUR 57.605,67. The beneficiary shipped goods in a single shipment for full letter of credit amount. Partial shipment has not been utilized.

Documents have been accepted by the issuing bank on first presentation.

Documents Required:

Specific Conditions:

  • Nothing special in this letter of credit. Standard procedures have applied.

Our Work:

  • The exporter has supplied us the draft letter of credit.
  • We have checked the letter of credit and changed the delivery term from CFR to CPT and corrected port of loading field.
  • Once the letter of credit was issued, it was rechecked and approved by us.
  • The beneficiary had started to the production and made the shipment.
  • After the beneficiary supplied us the shipment details we have prepared the commercial invoice, packing list, weight list and draft (bill of exchange) .
  • We also completed the shipping instructions for the bill of lading document and filled out the draft version of certificate of origin.
  • After shipment, the beneficiary has sent us all of the documents for final evaluation.
  • The documents have been presented to the issuing bank through the advising bank located in beneficiary’s country.

Conclusion:

  • Documents have been accepted by the issuing bank on first presentation.

Morocco Export Letter of Credit Consultancy

Ozgur Eker (CDCS) Countries, Export Letter of Credit Consultancy, Letter of Credit Consultancy, Morocco , , , ,
Morocco Export Letter of Credit Consultancy

Letter of Credit References:

We have completed our export letter of credit consultancy services with success in regards to a letter of credit which is issued by Banque Marocaine du Commerce Extérieur on 05.Dec.2018.

The letter of credit number was ILC18A003477. Letter of credit issued in English language.

Total letter of credit amount was USD 46.620,00. The beneficiary dispatched goods in a single shipment.

All presentations have been accepted by the issuing bank on first presentation.

Documents Required:

Specific Conditions:

  • USD 19.980,00 has been paid in advance outside of the letter of credit.
  • USD 46.620,00 has been paid against shipping documents.
  • Total invoice amount was USD 66.000,00.

Our Work:

  • The exporter has supplied us the draft letter of credit.
  • We have checked the draft letter of credit and corrected the points that may create problem at the presentation period.
  • Once the beneficiary supplied us the shipment details we have prepared the commercial invoice, packing list and weight .
  • We also completed the shipping instructions for the Bill of Lading and filled out the draft version of EUR1 certificate.
  • After shipment, the beneficiary has sent us all of the documents for final evaluation.
  • The documents have been presented to the advising bank and have been checked once again to eliminate possible discrepancies.

Conclusion:

  • All presentations have been accepted by the issuing bank on first presentation.