International Trade &

Foreign Exchange

BY:
Umair Niazi
International Trade

 Import & Export of Goods

 Foreign Exchange Reserves
 Expansion of Home Market
 Wider/ Global Market
 Production Techniques
 Higher Level of Employment
Advantages of Int’l Trade
 Improvement in World Out put
 Increase in Employment
 Quality Products
 Improvement in Technical Skills
 Generation of Forex
 Balance of Trade
 Lesser Dependence on Foreign Aid
Risks of Int’l Trade

 Country Risk
 Buyer Risk
 Transit Risk
 Foreign Exchange Risk
 Laws & Customs
 Government Regulations
Operational Mechanism
of Int’l Trade

Important Factors
A drive to find market
Assess potential of market
A sound market strategy
A one-off deal is better than a
longer term agreement
Operational Mechanism
of Int’l Trade
Market Players
 Exporters
 Importers
 Sales Agents
 Financial Institutions
The Basic Agreement
Preliminary Quotation
Commitment
The Merchandise
Packing & Marking
Shipping Instructions
The Sales Contract
1. Delivery Period, Place & mode
(Incoterm 2000 define how
responsibilities, costs & risks are
divided between parties
with the movement of goods.
Import is only allowed on CFR&
FOB basis FEM Para. 5 Ch.13)
2. Packing & Marking
3. Shipping Instructions
Payment Considerations

For the seller

1.Payment in advance
2.Payment at the time of
shipment
of goods
3. Payment after delivery of
shipment
4. Need Bank Finance
Payment Considerations

For the Buyer

1.Goods in advance
2.Payment at the time of receipt
of goods
3. Payment after receipt of shipment
4. Need Bank Finance
Methods of Settlement in
Trade

1. Clean Payment
2. Documentary Collection
3. Letter of Credit
 Clean Payment
Clean Payments are characterized by
trust. Either the Exporter sends the
goods and TRUSTS the Importer to pay
once the goods have been received, or
the Importer TRUSTS the Exporter to
send the goods after payment is
effected.
 Clean Payment
There are two types of Clean
Payments

1.Extended Terms /Open

Account
2. Payment in Advance.
Extended Terms /Open
Account

1. Timing of Dispatch of
goods
2. Timing of Payment
3. General use
4. Remittances
Pakistan Perspective
Export:
Import :
(Chapter-XIII Para 17(i) of
FEM -8th Edition-2002 Amended
vide F.E. Circular # 15 of
Aug.15 2003)
Documentary Requirements for
effecting settlement by the banks?
Advance Payment

1. Timing of Dispatch of
goods
2. Timing of Payment
3. General use
4. Remittances
 Pakistan Perspective
Export:
(Chapter-XII Para 24 of FEM -8th
Edition-2002)
Due diligence requirements
regarding the following ( EPD
Circular Letter 03/EPP1/51/Misc-2006
dated Jan-20,2006
1. Name & Address of the Remitter
2. Export Commodity Covered &
Shipment
 Pakistan Perspective
3. Nomination where shipment is
to be effected to a destination
other than from where
remittance has been received
4. Bonafide of the remitting party
trader / buying agent / importer
of the commodity concerned
 Pakistan Perspective
Import:
Allowed on advance Payment Basis.
 Chapter-XIII Amended Para 17(i) &
30(i) of FEM -8th Edition-2002
 F.E. Circular No. 4 dated April
25,2005
 Pakistan Perspective

1. Manufacturing/industrial sector
2. US$ 10,000/- or equivalent per
invoice
3. Intended Imports of Spare
Parts/consumables for own use
only.
 Pakistan Perspective
Banks to ensure :
1. Bona-fides of the underlying import
transaction.
2. Documents are submitted to them
within 4 months from remittance
and report to SBP all non-
submissions
 Pakistan Perspective
EPD Circular Letter no.13/Policy-2004
dated Nov.10,2004 50% Advance
Payment
1. Against LCs for Capital Goods
excluding spare parts
i. Duly filled Form-I
ii. Copy of LC
iii. Original Contract (Proforma Invoice)
iv. Undertaking on Appendix V-29
 Pakistan Perspective

2. Other Than Capital Goods Approval

From SBP Required On Case To Case
Basis Accompanied With Following
Documents
1. Form “I” duly signed and filled
2. Evidence of bona-fides of the import
transaction
3. Original Contract
4. Bank Guarantee from the supplier for the
amount paid in advance
5. Undertaking on Appendix V-29
 Governing Rules-Clean
Payments
International :
Due diligence in accordance with
various AML & KYC directives
Local :
1. FEM-2002
2. SBP Prudential Regulations M Series
3. Others i.e. CBR Directives , Trade Policy
etc.
Documentary Collections

A method of payment used in

international trade whereby the
Exporter entrusts the handling of
commercial and financial documents
to banks and gives the banks
instructions concerning the release
of these documents to the Importer.
 Characteristics
1.Dispatch of goods
2.Time of Payment
3.Collection Conditions (The Collection Order)
4.An arrangement whereby the goods are
shipped and the relevant bill of exchange
(Draft) is drawn by the seller on the buyer,
and/or documents are sent to the seller’s
bank with clear instructions for collection
through one of its correspondent banks
located in the domicile of the buyer.
 Sellers Perspective
Advantages to the seller:
• Documents of value
• May facilitate pre-export or post
export financing
Disadvantages to the seller
• Goods shipped without an
unconditional promise of payment/no
guarantee of payment
• Ties up capital until the funds are
received.
 Buyers Perspective
Advantages to the buyer
• Favors the buyer since the payment is
deferred by him un till the goods arrive or
agreed payment arrangements
Disadvantages to the buyer
• Legally liable by defaulting on B/E
• Trade reputation may be damaged if the bill
remains unpaid.
Parties to a Collection

Parties
1.Importer
2.Importer’s Bank
3.Bank in Exporter’s
Country
4.Exporter
Parties to a Collection

Universal Terminology
1.Drawee
2.Collecting Bank( Proceeds)
3.Remitting Bank ( Documents)
4.Drawer
Documentary Collections

The mechanics of a Documentary

Collection are easily understood
when
separated into the following three
steps:
1.Flow of Goods
2.Flow of documents
3.Flow of Payments
 1. Flow of Goods

Exporter/drawer sends
Goods through ship or by
air to the Importer/Drawee
to the agreed destination
2. Flow of Documents
1. Exporter/Drawer sends the
documents to Remitting Bank
2. Remitting Bank sends the
documents to
Collecting/Presenting Bank
3. Collecting Bank sends the
documents to Importer/Drawee
 3. Flow of Payment

1. Importer/Drawee makes payment to

Collecting/Presenting Bank
2. Collecting/Presenting Bank makes
payment to Remitting Bank
3. Remitting Bank makes payment to
Exporter/Drawer
Documentary Collection
Cycle
1. Commercial Contract
2. Shipment of Goods
3. Documents & Collection
Instructions
4. Documents & Collection order
5. Documents presented to
examined by Drawee
6. Bill of Exchange accepted by
Drawee
Documentary Collection
Cycle

7. Documents released to importer

8. Drawee exchanges Bill of Lading for
goods
9. Payment at maturity
10. Payment less Charges to Remitting
Bank
11. Payment less Charges to Exporter
Tenor in Documentary
Collection

1. DP
Documents against
payment
2. DA
Documents against
acceptance
Pakistan Perspective
Export Collections:
• D/A-Usance : Allowed
• D/P-Usance : Allowed
(Para 26 FEM-2002 Chapter-XII)

Import Collections:
• D/A-Usance : Allowed
• D/P-Usance : Allowed
(Para 23,21,18,17(i) FEM-2002 Chapter-
XIII)
Governing Rules-Collection

International :
• URC-522 (Uniform Rules for
Collections-ICC Publication
no. 522)
• INCOTERMS-
2000(International
Commercial Terms)
Governing Rules-Collection
Local :
1.FEM-2002
2.SBP Prudential Regulations M-Series
3.Others i.e.
–CBR Directives
– Trade Policy
– Contract Act
– Sale of Goods Act
– Negotiable Instruments/Bill of
Exchange Act
– Carriage of Goods by Sea Act
– Marine Insurance Act
Channels for Settlement
1. Open Account
2. Documentary Collection
3. Documentary Credit
4. Nostro Account
5. Vostro Account
6. Loro Account
7. Bank Drafts
Channels for Settlement
8. Mail Transfers
9. Telegraphic Transfers
10.SWIFT
11.Electronic Funds Transfer
12.Travelers Cheques
13.Credit Cards
14.FCY Notes & Coins
 Definition of DC
A Documentary Credit (DC) is a written
undertaking by a bank (Issuing Bank) given to
the exporter (Beneficiary) at the request of
the
importer (Applicant) to effect payment
(Reimbursement) up to a stated amount
(Credit Amount) within a stated time period
(Expiry
date) against presentation of compliant
documents (LC terms) .
In other words DC is a conditional payment
undertaking from a bank
Revocable Vs Irrevocable
Revocable Letter of Credit
A Revocable Letter of Credit can be
revoked without the consent of the
Exporter, meaning that it may be
canceled or changed up to the time
the documents are presented.
Revocable Letters of Credit are very
rarely used.
Revocable Vs Irrevocable

Irrevocable Letter of Credit

An Irrevocable Letter of Credit
cannot be cancelled or amended
without the consent of all parties
including the Exporter. Unless
otherwise stipulated, all Letters
of Credit are irrevocable.
 Sight Vs Usance
Sight L/C
If payment is to be made at the time
that documents are presented, this is
referred to as a sight Letter of Credit.
Usance L/C
If payment is to be made at a future
fixed time from the presentation of
documents, this is referred to as a
term/Usance Letter of Credit
Confirmed Vs Unconfirmed

Under a Confirmed Letter of Credit, a

bank, called the Confirming Bank, adds
its commitment to that of the Issuing
Bank to pay the Exporter under the Letter
of Credit provided all terms and
conditions of the Letter of Credit are met.
The Confirming Bank is usually located in
the same country as the Exporter.
 Parties to a L/C

Parties
1. Importer
2. Importer’s Bank
3. Bank in Exporter’s country
4. Exporter’s Other Bank
(Optional)
5. Exporter
 Parties to a L/C
Terminology as per UCP
1. L/C Applicant
2. L/C Issuing Bank
3. Advising/Negotiating/Nominati
ng/ Presenting Bank
4. Confirming Bank
5. Beneficiary
 Letters of Credit-
Mechanism

The mechanics of Letter of Credit

can be split into three steps.
1. Issuance
2. Flow of Goods
3. Flow of documents &
Payments
 Letter of Credit
1. Issuance:
 Contract Negotiations between Importer
( Applicant) & Exporter( Beneficiary)
 Importer applies to Issuing Bank for
Letter of Credit
 Issuing Bank requests to Advising
/Confirming Bank to advise & possibly
confirm the L/C
 Advising /Confirming Bank sends
confirmation to Exporter( Beneficiary)
 Letter of Credit
2. Flow of Goods:
 After receipt of Confirmation from
Advising Bank,
Exporter( Beneficiary ) makes
shipment to Importer as per terms
& conditions as laid down in Letter
of Credit.
 UCP terms & conditions are
applicable for International Trade
 Letter of Credit
3. Flow of Documents & Payment

Exporter( Beneficiary) sends goods to

Exporter(
Importer ( Applicant)
Exporter( Beneficiary) sends documents to
Exporter(
Advising /Confirming Bank
Advising /Confirming Bank makes payment
Advising
to Exporter( Beneficiary)
 Letter of Credit
3. Flow of Documents & Payment

 Advising /Confirming Bank sends documents to

Issuing Bank
 Issuing Bank makes payment to Advising
/Confirming Bank
 Importer ( Applicant) makes payment to
Issuing Bank
 Issuing Bank releases documents to Importer
( Applicant)
Documentary Credit Cycle
1. Commercial Contract
2. Application for D/C submitted
3. Documentary Credit issued
4. Documentary Credit advised
5. Shipment of goods
6. Documents presented to
Advising/Negotiated Bank
Documentary Credit Cycle
7. Documents negotiated ,if compliant
8. Documents sent to Issuing Bank
9. Reimbursement to Advising Bank ,if
compliant
10.Applicant’s Account debited
11.Documents released to Importer
12.Bill of Lading exchanged for goods
 Documentary Credit

Benefits:
1. Facilitates financing
2. Provides legal protection
3. Assures expert examination of
documents
4. Assures payment on maturity
or at sight
 Risk Analysis: L/C
Importer:
Advantages:
1. Importer is assured that, for the
Exporter to be paid, all terms and
conditions of the Letter of Credit must
be met.
2. Ability to negotiate more favorable trade
terms with the Exporter when payment
by Letter of Credit is offered.
 Risk Analysis: L/C
Importer:
Disadvantages:
1. A Letter Of Credit assures correct
documents but not necessarily
correct goods
2. Ties up Line of Credit
3. Letter of Credit gives no protection
against fraudulent or forged
documents
 Risk Analysis: L/C
Exporter:
Advantages:
1. An undertaking from the Issuing Bank
that you will receive payment under the
Letter of Credit provided that you meet all
terms and conditions of the Letter of Credit
2. Shifts credit risk from the Importer to the Issuing
bank
3. Easier access to Pre-Shipment & Post-Shipment
Finances
 Risk Analysis: L/C
Exporter:
Disadvantages:
1. Documents must be prepared
in strict compliance with the
requirements stipulated in
Letter of Credit
2. Any technical inaccuracy in
documents leaves Exporter exposed
to risk of Non Payment
 Pakistan Perspective
Types of L/C Export Import

Sight Allowed Allowed

Usance Allowed Allowed
Transferable Allowed Not Allowed
Revolving Allowed Not Allowed
Packing Allowed Not Allowed
Credit
Conversion of Allowed Not Allowed
Usance to Sight

Mix Payment Allowed Allowed

International Payments Risk
Spectrum
Risks to Importer:
( Highest to Least Risk)
1. Payment in Advance
2. Confirmed L/C
3. Unconfirmed L/C
4. Documents against Payment
5. Documents against Acceptance
6. Open Account
International Payments Risk
Spectrum
Risks to Exporter:
( Highest to Least Risk)
1. Open Account
2. Documents against Acceptance
3. Documents against Payment
4. Unconfirmed L/C
5. Confirmed L/C
6. Payment in Advance
 Risks Inherent in
International Trade

Risk of default by seller:

1. Not shipping the goods with in
the contracted period
2. Not shipping the goods of
correct quantity & quality
Solution:
Performance Guarantee &
Open Account Method
 Risks Inherent in
International Trade

Risk of default by Buyer:

1. Not effecting due to
unwillingness or inability
Solution:
Advance Payment &
Irrevocable L/C
 Risks Inherent in
International Trade

Country Risk :
1. Economic, political or Regulatory
risks in the country of importer
creating remittance problems
Solution:
Confirmed & Irrevocable L/C
 Risks Inherent in
International Trade

Exchange Risk :
1. Risk on one party or the other or
both if settlement in the buyer’s
currency, the seller’s currency or
currency of third country
Solution:
Forward Exchange Contracts
 Risks Inherent in
International Trade

Transit Risk :
1. Risk of loss or damage to the
goods in transit from the
seller’s warehouse to the
buyer’s warehouse
Solution:
Marine Insurance Policy
Thank You