Wednesday, September 18, 2024
Home Blog Page 27

Letter of Credit Currencies

By
Ozgur Eker (CDCS)
-
0

Used as a medium of exchange for goods and services, currency is the basis of the trade.

It is expected that each country has its own currency.

As an example the United States Dollar is the official currency of the United States, the Japanese Yen is the official currency of Japan, the Renminbi is the official currency of the People’s Republic of China, the United Arab Emirates Dirham is the official currency of the United Arab Emirates.

EURO is an exception to national currencies, which is the currency of European Union member states.

Please keep in mind that some EU states still using their domestic currencies instead of EURO.

These countries are: Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Lithuania, Poland, Romania, Sweden, United Kingdom.

Today I would like to write about the currencies used in letters of credit transactions.

It turns out that it is both easy and hard to write about today’s post.

It is an easy to write post, because on the operational side the rules are very straightforward: You can use any currency in a letter of credit transaction as long as you are agreed on with your seller or buyer.

On the financial side, however, we should expect nothing less than a financial war between the nations, as each nation would like to use its own currency as much as possible to maximize its own benefits.

Operational Side : Choosing the Currency of the Letter of Credit

Letter of credit rules are silent in regards to which currency should be used in a specific documentary credit transaction.

As a result the buyer and seller can freely decide on which currency will be used in a specific l/c payment.

There are some points that should be take into account on operational side. Let me write down couple of them below:

  • Currency stated in the credit should be the one which is agreed by both parties on the sales contract.
  • Documents such as commercial invoice, insurance policy etc., must be issued in the same currency as that shown in the credit.
  • Especially when you issue the draft or bill of exchange, you should write the amount both in words and figures. On these occasions the amount in words is to accurately reflect the amount in figures when both are shown, and indicate the currency as stated in the credit.
  • Currencies in letters of credit should be shown in ISO 4217 format. ISO 4217 is the International Standard for currency codes. The most recent edition is ISO 4217:2008. The purpose of ISO 4217:2008 is to establish internationally recognized codes for the representation of currencies.

Financial Side : Dealing With the Currency Risk

In international trade one country’s currency is another country’s foreign currency. As a result at last one party in an international trade transaction has to work with a foreign currency.

In fact, in some cases both parties may have to be using a foreign currency.

Let me try to explain you what I mean with an example.

USD is the leading global trade finance currency for decades. Just in year 2012 USD is used as a currency more than 80% of all documentary credit transactions.

If an exporter from China selling machines to Saudi Arabia with a letter of credit issued in USD, then both parties have to bear currency exposure risk.

What Can Be Done to Prevent or Limit Foreign Exchange Risks?

  1. Try to determine the volatility of foreign exchange rates. Are there any political or financial risks on the horizon?
  2. Follow major central bank decisions. FED (The Federal Reserve), ECB (European Central Bank), BOJ (Bank of Japan) and BoE (Bank of England) decisions may fluctuate Forex markets widely.
  3. Be aware of not-fully convertible foreign currencies. Indian rupee and the Renminbi are not-fully convertible at the moment. You may have to pay extra charges when exchanging not-fully convertible currencies to your local currency.
  4. If your company is both exporting and importing at the same time you better try to make both transaction with the same currency. By doing so the matching of inflows and outflows will significantly reduce foreign exchange exposures of your company.
  5. Forward contracts, futures contracts and options are the most common techniques that used in international trade to prevent foreign exchange risks. Try to learn them.

Language of Letter of Credit Documents

By
Ozgur Eker (CDCS)
-
0

Banks decide whether a presentation is complying or not by only checking the documents under the letters of credit transactions.

Banks should be able to read the documents, which have been presented to them. Otherwise they can not check them.

As a result issuance of the documents with the correct language is the first requirement for a complying presentation.

On this post I will explain the language of the documents according to the ICC rules and regulations.

What Does the UCP 600 Tell Us About the Language of the Documents?

Surprisingly, latest letter of credit rules are silent in regards to the language of the documents.

For this reason, we have to look at the international standard banking practices to understand ICC Banking Commission’s perspective on this matter.

ISBP 2007 Regulations

ISBP 2007 has a very limited coverage about the language of the documents.

We can see related regulation only in article 23.

Article 23 of ISBP 2007 tells us that “it is expected that documents issued by the beneficiary will be in the language of the credit” and “when a credit states that documents in two or more languages are acceptable, a nominated bank may, in its advice of the credit, limit the number of acceptable languages as a condition of its engagement in the credit.”

It is understand from the practice that these statements are not enough to clarify the language of the documents subject.

As a result ICC banking Commission has made a significant change on this subject, when they were renewing the international standard banking practices.

ISBP 2013 Regulations

ISBP 2013 is the revised version of ISBP 2007. It has been effective since the beginning of June 2013.

Unlike previous versions, the new international standard banking practices has a detailed explanation about the language of the documents.

  • ISBP 2013 encourages issuing banks to specify the language of the credit with these wordings “when a credit stipulates the language of the documents to be presented, the data required by the credit or UCP 600 are to be in that language.” If the issuing bank would not specify the language of the credit, then the documents may be issued in any language.
  • Even if the issuing bank allows presentation of documents issued more than one language, the nominated bank or confirming bank may restrict the number of acceptable languages as a condition of their engagements in the credit.
  • For example issuing bank may allow presentation of documents issued either English or French, but the confirming bank can restrict the letter of credit for the documents only issued in English language. In such a case only the data written in English will be acceptable.
  • ISBP 2013 also states that banks do not examine data that have been inserted in a language that is additional to that required or allowed in the credit. As an example, let us assume that the credit calls for documents issued in English language only. If the exporter presents a commercial invoice issued in English language, but having additional Arabic information, banks do not control the Arabic written parts. They check the English parts only.

There is one more sub-article exists in ISBP 2013, which is clarifying the language of stamps, legalization and endorsements, however I would like to write about this subject in the near future with an example.

Case Study : What Does Commerzbank Think About the Language of the Documents?

Before finalizing this post, let me give you a real life example from Commerzbank:

“Thus it is essential that the participating banks are able to determine that the documents are complying.

Commerzbank does not believe it is reasonable to expect them to have documents translated before their conformity can be checked, a process that might result in deadlines for checking documents being exceeded.

It is for that reason that Commerzbank rejects documents which language cannot be checked or honors them under reserve only.”

How to Handle a Letter of Credit Which Contains a Joker Clause?

By
Ozgur Eker (CDCS)
-
0

“A credit should not require presentation of documents that are to be issued, signed or countersigned by the applicant” says International Standard Banking Practice (ISBP 745) in its preliminary conditions section.

Sometimes importers or importers’ banks attempt to include such clauses in letters of credit.

On this page I will examine the letters of credit that request a document to be issued, signed or countersigned by the applicants.

Structure of the Letter of Credit and Why It Matters:

A letter of credit is issued by the issuing bank with the request of and instructions given by the importer. Importer also known as the applicant.

The letter of credit is issuing banks irrevocable and conditional payment undertaking.

Which means that the beneficiary of the credit will be getting paid by the issuing bank against the presentation of required documents and provided that all terms and conditions of the credit are complied with.

Under normal circumstances a beneficiary should be able to collect all of the stipulated documents without the intervention of the applicant.

This is how a reasonable and decent letter of credit works.

However, the importers include some clauses in to the credits and manipulating them in a way that they require a document which can not be presented without an action of the applicant.

In letter of credit terminology, these clauses are called as “Joker Clauses”.*

joker clause infographic

Joker Clauses can be seen either in Field 46-A Documents Required or Field 47-A Additional Conditions.

Below you can find some examples of so called Joker Clauses.

Joker Clause Examples:

Some examples of “Joker clauses” which makes presentations dependent on applicants participation:

  • Example 1: Certificate of acceptance signed by the authorized stuff of applicant
  • Example 2: Certificate of acceptance issued by the applicant
  • Example 3: Certificate of acceptance issued by the applicant’ agent
  • Example 4: Original beneficiary’s invoice duly endorsed on reverse by two authorized official’s of the applicant.
  • Example 5: Certificate of acceptance countersigned by authorized applicant’s agent.
  • Example 6: Payments can be effected only after goods have been cleared from import customs.
  • Example 7: Inspection certificate showing that goods have been inspected and delivered in good manner by an inspection company to be named by applicant after shipment.

What Should an Exporter Do After Finding One of These Joker Clauses in its Letter of Credit?

Joker Clauses disrupt the structure of the letter of credit.

ICC discourage issuing banks to include any Joker Clauses in to the credits. Despite all of these efforts, it is possible to see joker clauses in the letters of credit.

Let me try to create a road map for these situations for the beneficiaries.

  • Step 1: Read the credit very well. If you can not determine whether any joker clause have been added to the credit or not, apply for a professional assistance.
  • Step 2: If you find a Joker clause in the credit, reach to your customer. Explain your customer that the Joker clause is unacceptable for you. Demand an amendment.
  • Step 3: The amendment should be advised to you within 3-10 days, after your customer gives necessary amendment request to the issuing bank. Amendment will be advised through the same advising bank, which had advised the original credit to you.
  • Step 4: Once you received the amendment from the advising bank, you need to re-check it in order to make sure that the Joker Clause has eliminated.

Summary:

If the letter of credit contains conditions that the beneficiary (exporter) cannot fulfill without cooperation with the applicant (importer) or a party contracted by the applicant, then this is known as a conditional letter of credit or a “Joker Clause”.

Beneficiaries should delete these kind of clauses from the credits. Otherwise they will be facing a non-payment.

Top 10 Letter of Credit Discrepancies

By
Ozgur Eker (CDCS)
-
0

Discrepancy can be defined as an error or defect, according to the issuing bank, in the presented documents compared to the documentary credit, the UCP 600 rules or other documents that have been presented under the same letter of credit.

According to the LC Market Intelligence Survey conducted by DC-Pro in year 2005 the average discrepancy rate on first time presentations under export letters of credit is 56%.

Although the report is quite out-dated, the figures are presumably almost identical today.

Discrepancies create problems especially for the exporters.

Once the documents are rejected, the issuing banks can only pay the credit amount, if and only if the importers accept the discrepancies.

Leaving the payment decision to the importers’ hands is a great deal of frustration for the exporters.

There are many reasons why exporters present discrepant documents, but the most important ones are:

  • lack of knowledge,
  • could not understand the letter of credit mechanism and
  • underestimating the risk factors associated with the letter of credit transaction.

On this page, you can find 10 most frequently seen discrepancies with examples in letters of credit.

Discrepancy Number 1 : Inconsistency in Documents

UCP 600 states that “Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.”

So if banks find inconsistency between documents, they raise a discrepancy.

Discrepancy Number 2 : Incorrect Data

Information any one of the document presented is not comply with the letter of credit terms and conditions.

Banks examine the documents under a letter of credit according to the letter of credit rules in order to determine whether the presentation is complying or not.

According to Article 2, a complying presentation means a presentation in accordance with the terms and conditions of the credit, the applicable provisions of the UCP 600 and international standard banking practice.

As a result if banks find out that at least one of the letter of credit condition is not indicated on the presented documents, they raise a discrepancy.

Discrepancy Number 3 : Late Shipment

Goods shipped after the permitted shipment date or period.

If date of the transport document such as the bill of lading date corresponds to a later date than the latest date of shipment stipulated in the credit, then banks raise the late shipment discrepancy.

Example: Multimodal Bill of Lading Late Shipment Discrepancy

Discrepancy Number 4 : Late Presentation

Documents presented later than 21 days after shipment or after the number of dates stipulated in the letter of credit.

If the credit is silent on the latest date of presentation, then you have to present your letter of credit documents within 21 days after “the date of shipment”.

But please keep in mind that this period can be shorten by the credit. As a result you need to read your credit very carefully in order to determine your presentation period.

Discrepancy Number 5 : Letter of Credit Expired

Documents presented after the letter of credit has expired.

Normally banks should not accept any documents that have been presented after the expiry date of the credit.

However, banks left the final decision to the applicants on this regard by evaluating the late presentation as a discrepancy.

Discrepancy Number 6 : Absence of Documents

Documents required by the letters credit is missing. Missing document discrepancy may also cover insufficient number of original documents presentation.

For example, the UCP 600 demands presentation of all original insurance documents if the insurance document states that it is issued more than one original.

If it is clear on the insurance document that it is issued in two originals, then the beneficiary has to present both originals of the insurance documents. If the beneficiary presents only one original instead of two originals, then the issuing bank raises absence of documents discrepancy.

Example: All Originals of Insurance Policies Have Not Been Presented Discrepancy

Discrepancy Number 7 : Carrier Not Defined on the Bill of Lading

The name of the carrier on the bill of lading is not defined and bill of lading is not signed by the master, the carrier or an agent on behalf of the carrier or master.

UCP 600 Article 20 indicates that:

A bill of lading, however named, must appear to:
i. indicate the name of the carrier and be signed by:
– the carrier or a named agent for or on behalf of the carrier, or
– the master or a named agent for or on behalf of the master.

Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent.

Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master.

If banks could not locate the name of the carrier on the face of the bill of lading, then they mention this point as a discrepancy.

Example: Carrier Not Identified and Bill of Lading Not Signed As Per UCP 600 Discrepancy

Discrepancy Number 8 : Incorrect Description of Goods

Description of goods indicated on the invoice and other trade documents differs from the description of goods stated in the credit.

According to the international standard banking practice, the description of the goods, services or performance shown on the invoice is to correspond with the description shown in the credit.

There is no requirement for a mirror image. For example, details of the goods may be stated in a number of areas within the invoice which, when read together, represent a
description of the goods corresponding to that in the credit.

A goods description indicated on any other document may be in general terms not in conflict with the goods description in the credit.

If banks determine that the description of the goods not corresponding to the letter of credit, they raise incorrect description of goods discrepancy.

Example: Description of Goods Discrepancy

Discrepancy Number 9 : Incorrect Endorsement / Absence of Endorsement

Bill of lading, insurance policy or draft (bill of exchange) not endorsed by the beneficiary of the credit.

Discrepancy Number 10 : Partial Shipment or Transshipment Effected Despite L/C Terms

Exporters have to be very careful with the partial shipments and transshipments.

Please read credit text and determine if credit allowed or not allowed partial shipments and transshipments.

Example: Partial Shipment Discrepancy

5 Biggest Letter of Credit Mistakes

By
Ozgur Eker (CDCS)
-
0

In international trade, there are couple of payment options available such as cash against documents, open account, advance payment and letter of credit.

Letter of credit is not the first payment option for most of the importers and exporter, because it is expensive and requires advanced operational skills.

Generally, an exporter accepts to use the letter of credit when other payment options do not work. This happens very seldom.

When exporters have to use the letter of credit payment, they tend to make mistakes for various reasons, but may be the most importantly lack of knowledge and experience.

On this article, I would like to explain 5 most costly mistakes that exporters repeatedly make in their letter of credit operations.

letter of credit mistakes
Image Credit: Designed by Freepik

Mistake 1: Doing Business with an Importer to Whom You Have No Real Information

Business is not a virtual thing. An exporter should have a real knowledge about his counter part, before starting any kind of transaction.

An exporter, who tries to finish a transaction without having a decent information about his buyer by just trusting a letter of credit, makes a great mistake.

The letter of credit does not protect you against any immoral buyer.

Please answer below questions to understand how much you know about your buyer.

How much do you know about your buyer?

  1. Did I find this customer from a trade exhibition or a customer visit? Yes / No
  2. Does my customer have any proven business relationship in my sector? Yes / No
  3. Does my customer visit me before the business was initiated? Yes / No
  4. Are there any positive feedback that I have gathered about my customer? Yes / No
  5. Does the transaction doable in regards to my buyer’s perspective? Yes / No

If you can not answer “yes” to all of these questions immediately, then you should be starting to rethink about the whole business.

If you answered more than 1 question negatively, then you should be very careful about the trade transaction in terms of risk issues.

Mistake 2: Business Offers, Which Are Too Good To Be True…

In most cases scammers seduce exporters with unbelievable proposals.

They do not bargain for the prices, they order big quantities, they promise to pay “at sight” not “usance” terms.

As a buyer, if you do not intend to pay anything, then the sky would be the limit for you. You can propose whatever you think would be necessary to seal the deal.

These proposals can be sum up as “too good to be true” type business offers.

If you meet a buyer one day, who is promising very favorable conditions to you, please keep in mind that you might be losing money at the end.

Mistake 3: Underestimating the Risk Factors Associated With the Transaction

Business is a risk and profit game, more you take the risks, more you can get the profit. But some exporters lost their common sense and take too much risks to make more profit in a short period of time.

This is associated with an extreme risk taking behavior.

Normally you have to understand your risks very well before signing any contract with your buyer.

Accordingly you should take preventive steps to reduce each risk level to acceptable degrees.

If you would like to learn more about risk factors in a letter of credit transaction please follow this link.

Mistake 4: Could Not Understand the Letter of Credit Mechanism

As I have mentioned earlier on this post, letter of credit is not only expensive comparing to other payment methods in international trade, but also requires special expertise.

The letter of credit rules are created by ICC Banking Commission and strictly followed by the banks throughout the letter of credit transaction.

As a result exporters have to prepare the required documents according to the letter of credit terms, latest letter of credit rules and standard banking practices.

Exporters, who have submitted non-complying documents, are punished by banks via discrepancies.

Discrepant documents means late payment in the simplest term. In some situations things could get ugly very quickly and non-payment may occur.

Mistake 5: Lack of Knowledge

Letter of credit transactions are governed by one of the most complicated rules in international trade.

In order to complete a letter of credit without experiencing a negative result, an exporter needs to understand how the letter of credit rules apply to the documents.

For example, getting a bill of lading would not be enough under the letter of credit transaction. You need to present the bill of lading evidencing that all terms and conditions of the credit have been met.

Additionally, the exporter must know how to read the letter of credit. Lack of knowledge increases the chances of unexpected results for the exporters.

Summary:

  1. Learn who your buyer is. Try to get references of your buyer from your sector. If needed make a financial investigation.
  2. Be careful about too good business opportunities. Be aware of scammers.
  3. Understand risk factors associated with your transaction
  4. Accept the fact that letter of credit is not flexible in terms of regulations.
  5. Learn the rules. Read the credit well. Eliminate all gray areas.

How Does an Import Letter of Credit Work in International Trade Transactions?

By
Ozgur Eker (CDCS)
-
0

On this page, I will try to answer the question “How Does an Import Letter of Credit Work?” by explaining the import letter of credit process in detail with examples.

Also you can find a flow chart in regards to the import letter of credit process with explanations.

After reading this article, you should understand the working mechanism of an import letter of credit in general terms.

What is an Import Letter of Credit?

A letter of credit is a payment method in international trade. Just like other payment methods, the money goes from the importer to the exporter.

If you are looking at the letter of credit transaction from the exporter’s perspective you see an “Export Letter of Credit”; on the other hand if you are looking at the letter of credit transaction from the importer’s perspective you see an “Import Letter of Credit”

With the help of the import letter of credit, the importer pays to his supplier of the goods he agrees to buy.

Basic Import Letter of Credit Transaction Flow Chart:

Basic import letter of credit transaction flow chart

Step 1 : Sales Contract: In letters of credit terminology, the importer called as the applicant. The applicant plays a key role in a letter of credit transactions from beginning to end.

At the very first step as an importer I need to find myself a supplier. Then I need to sign a sales contract.

On the sales contract, the importer has to indicate the terms and conditions of the sale including but not limited to the delivery term, description of goods, delivery date, price and quantity of the goods, package type, insurance coverage, legal details etc..

Step 2: Letter of Credit Application: After the signature of the sales contract, the importer applies his bank to have the letter of credit issued in favor of the exporter.

The importer has to make sure that the letter of credit application must be in accordance with the terms of the sales agreement.

Step 3: Letter of Credit Issuance: At this point issuing bank prepares the letter of credit in swift message format and transmits it to the exporter’s bank.

Advising bank is the formal name of the exporter’s bank in letter of credit terminology

Step 4: Advising the Letter of Credit: The advising bank advises the letter of credit to the exporter without any undertaking to honor or negotiate.

The advising bank has two responsibilities against to the beneficiary.

The advising bank’s first responsibility is satisfy itself as to the apparent authenticity of the credit and its second responsibility is to make sure that the advice accurately reflects the terms and conditions of the credit received.

Step 5: Shipment: The exporter should check the conditions of the letter of credit as soon as he has received it from the advising bank.

If the exporter finds out that some of the terms of the credit is not acceptable, then he should get in touch with the importer for an amendment.

If the exporter finds out that the terms of the credit is acceptable, then he should start producing the goods and make the shipment on or before the latest date of shipment stated in the L/C.

The exporter ships the goods in accordance with the terms and conditions stated in the credit.

Step 6: Presentation of the Documents: As soon as the goods are loaded, the exporter should collect the shipment documents, which are requested by the letter of credit and hands them out to the advising bank.

Step 7: Dispatching the Documents to the Issuing Bank: The advising bank dispatches the documents to the issuing bank on behalf of the beneficiary.

Step 8: Document Control and Payment Release: The issuing bank checks the documents according to terms and conditions of the credit and the letter of credit rules.

If the documents are found to be complying after the examination, then the issuing bank honors its payment obligation and transmits the payment to the exporter through the advising bank.

How to Open a Letter of Credit?

By
Ozgur Eker (CDCS)
-
0

On this page, I will try to answer the question “How to open a letter of credit?” by explaining the lc application process  in detail with examples.

Also you can find the explanations belong to some of the most frequently used letter of credit application terms such as letter of credit application form, draft letter of credit, MT 700 issue of a documentary credit swift message etc on this post.

Whatever sector you might be located, if your dealing with international trade, sooner or later you may have to open a letter of credit throughout your professional career.

Letter of credit is a payment method in international trade, which is used by almost all sectors from textile to machinery, food manufacturing to construction, oil trading to customer goods.

You may assume that there are big differences exist on letter of credit application processes for all these different sectors. However, this is not correct. The process is almost the same.

You have to follow similar procedures when opening a letter of credit regardless of the sector you may be located.

Who Opens the Letter of Credit?

The issuing banks are opening the letters of credit according to the instructions they have received from the importers.

We can say that letters of credit are opened by importers’ banks in favor of the exporters according to the instructions they have received from the importers.

Importers define the terms and conditions of the letters of credit.

Step-by-Step Procedures to Open a Letter of Credit:

Step-by-Step Procedures to Open a Letter of Credit

Step 1: Signature of the Sales Contract: In letters of credit terminology, the importer called as the applicant. The applicant plays a key role in a letter of credit transactions from beginning to end.

Let me start explaining the letter of credit issuance process. Please keep in mind that I will be explaining letter of credit issuance process through the eyes of the importers.

At the very first step as an importer I need to find myself a supplier. Then I need to sign a sales contract with my supplier.

On the sales contract, the importer has to indicate the terms and conditions of the sale including but not limited to the delivery term, description of goods, delivery date, price and quantity of the goods, package type, insurance coverage, legal details etc..

Please keep in mind that a proforma invoice could be used instead of a sales contract.

Important Note: Letter of credit is not a sales contract. Actually, the letter of credit is an independent structure from the sales or other contract on which it may be based. Therefore, it should be keep in mind that a well-structured sales contract protects the party, which behaves in goodwill against various kinds of risks.

Step 2: Letter of Credit Application: After the signature of the sales contract, the importer applies his bank to have the letter of credit issued in favor of the exporter.

The importer has to make sure that the letter of credit application must be in accordance with the terms of the sales agreement.

Step 3: Completing the Letter of Credit Application Form: After the importer applies to his bank for issuance of an import letter of credit, the issuing banks requests him to fill an application form, which is called “Letter of Credit Application Form” or “Documentary Letter of Credit – Application From”.

The letter of credit application form could be in electronic or hard copy format.

In general, the application forms are similar to each other whether they are offline or online. Because of the fact that they follow the swift message body of issuance of letter of credit.

Banks use MT 700 – Issue of a Documentary Credit swift messages when issuing a letter of credit.

The issuing bank may request the importer attached the proforma invoice or sales contract to the application form in order to make sure that the letter of credit application form reflects the correct data stated on the proforma invoice.

Step 4 : Evaluation of the Application: At this stage the issuing bank evaluates the letter of credit application.

If the issuing bank decides to issue the letter of credit, then the issuing bank takes action to secure its payment from the importer.

Step 5: Approval of the Application and Issuance: The issuing bank creates the letter of credit and sends it to the importer for approval.

At that point it would be a good idea have the draft l/c checked by the exporter. This will eliminate costly possibly future amendments.

The draft letter of credit will be also in swift message format and reflects all the details of final letter of credit.

Once draft letter of credit will be confirmed by the exporter, the importer I can give final approval to the issuing bank for the issuance of the lc.

Key Letter of Credit Issuance Terms:*

  • Applicant: The person or company on behalf of whom the documentary credit is issued.
  • Application: The applicant’s request to the issuing bank to issue a documentary credit.
  • Beneficiary: The party in whose favor a documentary credit is issued. For a commercial documentary credit this will typically be the exporter. The beneficiary must present the documents stipulated.
  • Contract: Binding agreement between two (or more) parties. In connection with a documentary credit the agreement will typically be made between the buyer and the seller. The terms and conditions of the contract have no effect on the terms and conditions of the documentary credit or on their interpretation.
  • Issuing Bank: The bank that issues a credit at the request of an applicant or on its own behalf.
  • Swift: A generally used abbreviation of Society for Worldwide Interbank Financial Telecommunication, headquartered in Brussels. SWIFT constitutes the international telecommunications network for banks and offers a very high degree of security.

References:

*Documentary Credits, Nordea Trade Finance, Page: 300-306

Shipment Advice

By
Ozgur Eker (CDCS)
-
0

A shipment advice is a commercial document , which is issued by the exporter, who is the beneficiary of the letter of credit, in order to give shipment details to the importer, who is the applicant of the letter of credit.

Who should issue shipment advice?

The shipment advice should be issued by the exporters.

When should the shipment advice be created and dispatched?

The shipment advice should be created as soon as the shipping details are available. In a letter of credit transaction, the shipment advice should be created and dispatched within 3 or 5 days after the date of shipment.

What is the function of a shipment advice or shipping advice in international trade transactions?

The main function of the shipment advice is to allow importers to arrange transport insurance in a timely manner.

Especially, this document is vital importance in situations where importers have to arrange the transport insurance, such as FCA, FOB, CFR, FAS, CPT and EXW deliveries.

A shipment advice informs the details of the shipments to the importer. By having the details of the shipment in advance,

  1. The importer could arrange the transport insurance. For example, if shipment has been made via sea shipment, the importer could arrange a marine insurance policy with the information he received from the shipment advice.
  2. The importer could track the shipment by using the necessary information that have been collected from the shipping advice. For example, the importer could track the container, if he knows either the container number or bill of lading number. Both of these two information could be gathered from the shipment advice.
  3. The importer could initiate import custom operations, if the exporter has supplied copy of shipment documents along with the shipment advice. In any case, the importer have to present original shipment documents to the custom authorities upon arrival of the goods.

What Sort of Information a Shipment Advice Should Contain?

A shipment advice should cover all the details of the shipment, so that the importer will be able to make the insurance coverage with the information provided by the advice of shipment only.

Below you can find the contents of the shipment advice along with explanations.

  • Introduction: At the beginning of the shipment advice, a brief introduction paragraph should be placed. On the introduction paragraph, it would be advisable to mention the information as required by the letter of credit.

shipment advice introduction paragraph

  • Description of Goods: Description of goods should be mentioned on the shipment advice in accordance with the description of goods stated on the commercial inoice.
  • Invoice Value of Goods: Total amount as shown on the commercial invoice should be mentioned on the shipment advice as well. This is an important part of the document, because this information is required for marine insurance coverage.
  • Letter of Credit Number: If payment term is L/C, then letter of credit number should be stated on the shipping advice along with L/C Date of issue.
  • Name of the Carrier: Irrespective of mode of transport, carrier’s name should be mentioned on the certificate of shipment.
  • Name of Vessel and Voyage Number: In case of sea shipment name of vessel and voyage number should be indicated. In case of air shipment flight number and in case of land shipment plate number should be added to the certificate of shipment.
  • Consignee and Notify Party: Consignee and notify party should be mentioned on the shipment advice as indicated on the transport document. (Bill of Lading, Air Waybill, CMR Transport Document etc.)
  • Bill of Lading No: Together with the container number, bill of lading no lets importer to track the consignment. (in case of air shipments air waybill no, in case of land shipments CMR no can be written)
  • Container Number: Together with the bill of lading no, container number lets importer to track the consignment.
  • Shipped on Board Date: Shipped on board date evidences shipment date, which is a vital information for the insurance companies. (sea shipments)
  • Seal Number: Seal number of the container. (sea shipments)
  • Gross Weight: Gross weight of the consignment.
  • Net Weight: Net weight of the consignment.
  • Packages: Total number of packages as seen on the transport document.
  • Shipper: Shipper company name as seen on the transport document.

Shipment Advice Example:

shipment advice sample

How Much Does It Cost to Open a Letter of Credit?

By
Ozgur Eker (CDCS)
-
0

On this page, I will try to explain the letter of credit issuance costs, and the main factors that are effecting them.

Letter of credit is a secure payment method comparing to other payment options in international trade.

However, letter of credit has one clear disadvantage. It is expensive.

There are multiple banks in action in a letter of credit transaction, and each bank demands a fee for its each action.

Typical letter of credit fees demanded by banks are as follows:

  • Letter of Credit Issuance Fee: This is the amount demanded by the issuing bank to open a letter of credit.
  • Advising Fee: A type of letter of credit fee, which is demanded by the advising bank to advise the credit to the beneficiary.
  • Discrepancy Fee: The issuing bank discount a certain sum of money from the proceeds of the letter of credit, if the beneficiary has presented discrepant documents.
  • Confirmation Fee: This is the fee, that is taken by the confirming bank to adding its confirmation to the credit.
  • Amendment Fee: If the letter of credit is amended, the issuing bank and/or the confirming bank may demand amendment fees.
  • Handling Fee: Handling fees are collected by banks for a variety of reasons, such as sending swift messages, holding documents, set of photocopy documents not presented etc.
  • Reimbursement Fee: Reimbursement bank’s fee to settle the credit amount between issuing bank and the confirming bank or the nominated bank.

Letter of credit opening cost change case per case, as the costs associated with the letter of credit issuance are effected from various factors.

What are the Main Factors Effecting Letter of Credit Issuance Costs?

  • Issuing Bank Charges: Issuing a letter of credit is a commercial act and banks open L/Cs in order to make profit.
  • Letter of Credit Amount: Banks determine letter of credit issuance charges in percentage of the letter of credit amount. Higher the L/C amounts, higher the charges.
  • How Letter of Credit is Financed? Importers can finance the letter of credit amount either via cash or trade finance loans. Cash backed letter of credit is expected to be cheaper than the loan backed letter of credit.
  • Payment Term: As the payment period is getting longer, the letter of credit issuance fees are getting higher. The longer the payment due, higher the fees.
  • How Letter of Credit Charges are Shared Between the Importer and the Exporter: How total letter of credit cost is shared between the importer and exporter may differ from one letter of credit to another.

How Letter of Credit Charges are Shared Between the Importer and the Exporter

How Much Does It Cost to Open a Letter of Credit?

Example: A German food importer wants to import cacao from Ivory Coast via an at sight letter of credit.

The German importer applies his bank, which is Deutsche Bank, to open a letter of credit in favor of the exporter.

Deutsche Bank’s import letter of credit issuance cost can be found on this document.

Letter of credit amount is 100.000 Euro and the time between the issuance of the letter of credit and the payment to the exporter is 3 months.

The letter of credit is issued in irrevocable format and all fees outside of the Germany will be paid by the exporter.

Minimum letter of credit issuance cost to the importer for this example is 625 Euro. (Irrevocability fee 200 Euro + Issuance of a letter of credit fee 125 Euro + Acceptance of documents fee 300 Euro)

Pre-Export Verification of Conformity (PVoC) Certificate

By
Ozgur Eker (CDCS)
-
0

PVoC is a conformity assessment programme lunched by some African states with the aim of controlling the quality of imported goods in order to minimize the risk of unsafe and substandard goods entering into their markets.

Pre-Export Verification of Conformity or Conformity Assessment Programmes are put into action in accordance with the Article 5 of World Trade Organization’s Technical Barriers to Trade agreement.

Pre-Export Verification of Conformity or Conformity Assessment Programmes are administered by The Standards Body of each country on behalf of so called country’s Government.

All inspections and tests are carried out by the appointed independent verification partners on regulated goods in the country of supply.

Some well-known independent international inspection companies are Bureau Veritas, Intertek, Société Générale de Surveillance (SGS) etc.

What are the Benefits of Pre-Export Verification of Conformity Programmes:

  • Only good quality products will be imported by eliminating the unsafe ones.
  • Importation of poor quality and sub-standard products is prevented. This will lead to a more fair competition between local manufacturers and the global ones.
  • Pre-Export Verification of Conformity Programmes are usually compensated by exporters. This means that costs are not borne by the government, or importers.
  • If local standards are not existed international standards are utilized. This means that the reputable manufacturers will be able to comply with a very little effort.

Which Countries are Using Pre-Export Verification of Conformity or Conformity Assessment Programmes:

As of November 2014 below countries are found to be using Pre-Export Verification of Conformity Programmes. Please keep in mind that this list may have been changed.

  • Kingdom of Saudi Arabia
  • Nigeria
  • Kuwait
  • Tanzania
  • Uganda
  • Kenya

How Does a Pre-Export Verification of Conformity Programme Work Under Standard Circumstances?

  • Each country’s Government instructs its local National Standards Body to apply Pre-Export Verification of Conformity Programme on imports and defines the list of products which must comply.
  • National Standards Body appoints independent inspection companies to handle the testing.
  • These approved independent inspection companies provide test services to exporters, and issues certificates of conformity for products that pass the tests.
  • Certificate of Conformity is a mandatory document required by the customs of the countries stated above which apply Pre-Export Verification of Conformity Programme.

How Does a PVoC Certificate Work in Letters of Credit?

  • Letters of Credit deal with the documents only, not the actual work:

There is a very clear distinction exists between the letter of credit and other payment methods in international trade:

Letter of credit transactions are executed by banks according to internationally accepted rules. When banks handle letter of credit transactions they deal with the documents only.

As an example, banks are not interested in an actual shipment, but they check the transportation documents in order to determine whether shipment has been made according to the letter of credit terms or not.

This example is also true for PVoC programme.

Banks deal with the Certificate of Conformity, which is issued by an approved independent inspection company after carrying out necessary tests.

  • Understanding Certificate of Conformity Under PVoC Programmes:

“Certificate of Conformity” which is also known as “Type Approval” is granted to a product that meets a minimum set of regulatory, technical and safety requirements.

Generally, type approval is required before a product is allowed to be sold in a particular country. In order to get the Certificate of Conformity you should follow these steps :

  • Step 1: Make sure that Certificate of Conformity (COC) is a must on your export. You have to verify that you are exporting to one of the countries that apply PVoC programmes and your product is covered by these regulations. In simple words you have to make a country and product verification to understand whether or not you have to supply a Certificate of Conformity.
  • Step 2: Apply to one of the independent inspection companies which is authorized to carry out tests under PVoC programmes by the importer country’s National Standards Body.
  • Step 3: If your product pass the required tests, the independent inspection company will be issuing the Certificate of Conformity.
  • Understanding Letter of Credit Rules Regarding the Certificate of Conformity Under PVoC Programmes:

Certificate of Conformity is explained in ISBP 745 under the title “Analysis, Inspection, Health, Phytosanitary, Quantity Quality And Other Certificates (“Certificate”)”.

Here are the important points of consideration;

  • According to ISBP 745 title of the document is not important. ISBP states that “…titled as called for in the credit, or bearing a similar title or untitled…”. According to ISBP 745 the important point is the function of the document as ISBP states “…that fulfills its function by certifying the outcome of the required action…”.
  • Inspection of goods must take place before shipment and this must be indicated on the certificate one of the following methods,
    • issuance date of the certificate is no later than the date of shipment
    • even if the issuance date of the certificate is after the date of shipment a statement must indicate that inspection took place before shipment or similar effect.
    • title of the certificate must be indicating the event, for example, certificate titled as “Pre-shipment Inspection Certificate”.
  • A certificate is to be issued by the entity stated in the credit.
  • When a credit does not indicate the name of an issuer, any entity including the beneficiary may issue a certificate.
  • When a credit makes reference to an issuer of a certificate in the context of its being “independent”, “official”, “qualified” or words of similar effect, a certificate may be issued by any entity except the beneficiary.
  • The consignor or exporter indicated on the certificate may be an entity other than the beneficiary of the credit or the shipper as shown on any other stipulated document.
1...262728...36Page 27 of 36

MOST POPULAR

Load more

LATEST POSTS

EDITOR PICKS

POPULAR POSTS

POPULAR CATEGORY

ABOUT US

Newspaper is your news, entertainment, music fashion website. We provide you with the latest breaking news and videos straight from the entertainment industry.

Contact us: [email protected]

FOLLOW US

© Newspaper WordPress Theme by TagDiv