The vital objective of this report is to analysis Foreign Exchange Activities of IFIC Bank Limited. General objectives of this reports are to get an overall idea about the Foreign exchange dealings of this bank, analyze the financing systems of the bank to find out any contributing field. Here also examine the profitability and productivity of the bank and review the techniques used by the bank to make it lucrative and to assesses the decision undertaken by the top-level management to keep the rein with the competitiveness of the market.
Foreign exchange plays a very important role in the balance of payment of the country. Foreign exchange takes within its fold purchase (import), sale (export) of goods and services across the boarders. Although foreign remittance is a component of the Current Account Transaction and as such part of foreign trade, the area is being given special attention due to its immense contribution in national economy.
Bangladesh being one of the emerging economies, the import mix of the country is built of multifarious items from cookies to capital machinery. On the other hand the major items of export for more than a decade have been Readymade Garments which replaced the traditional items of jute, tea and leather in terms of value and volume. In this time of globalization, countries tend to export the items in which they have competitive advantage and import those items where they lack the advantage. Import meets the need of consumer goods, industrial inputs and other essentials causing outflow of foreign currency while Export business takes the role of minimizing the gap in balance of trade through inflow of foreign currency by remittance business.
Traditionally, import business of the country surpassed export business in terms of value. Same is the case for individual banks, which bridge the exporters and importers of the country with the rest of the world. The involvement of the bank in the industrial sector as well as in the commercial sector has raised the import business of the bank disproportionately with that export business. Foreign remittance and export business of the bank jointly maintains a precarious balance with import business. In this backdrop, in order to optimize the foreign trade business to maintain a good balance between the inflow and outflow of foreign currency, to extend the banks position in foreign trade of the country, to emerge as a major foreign exchange market player of the country and thereby ensuring the stability of foreign exchange market of the country, the need for a Further study of the bank is being felt very deeply. This study will help to focus the issue and may raise further steps of the same.
As an employee of IFIC I want to focus the convergence in managing Foreign Exchange Business of IFIC in Bangladesh.
Objective of the Study
The prime objective of this report is to achieve practical exposure to organizational environment as well as to understand the system and methodology adopted in conducting day to day banking by IFIC Bank especially in the field of Foreign Exchange. Besides this report has been composed to obtain the following objectives:
- To achieve practical knowledge and overall understanding about IFIC Bank.
- To get an overall idea about the Foreign exchange dealings of IFIC Bank.
- To analyze the financing systems of the bank to find out any contributing field.
- To examine the profitability and productivity of the bank.
- To get an overall idea of banking from banker’s point of view.
- To review the techniques used by the bank to make it lucrative.
- To assesses the decision undertaken by the top-level management to keep the rein with the competitiveness of the market.
- To describe the organizational structure, management, background, functions and objectives of the bank and its contribution to the national economy.
- To determine the factors those influence the planning & implementation to boost up Foreign Exchange department.
- To find out the challenges associated with the activities concerned with Foreign Exchange department.
- To gather knowledge & functions and transactions of Foreign Exchange department.
- To observe the working environment of Foreign Exchange department.
- To determine the drawbacks of the exiting systems of Foreign Exchange department.
- To recommend some guidelines to improve the effectiveness of the operation of Foreign Exchange department.
International Finance Investment and Commerce Bank Limited (IFIC Bank) is a banking company incorporated in the People’s Republic of Bangladesh with limited liability. It was set up at the instance of the Government in 1976 as a joint venture between the Government of Bangladesh and sponsors in the private sector with the objective of working as a finance company within the country and setting up joint venture banks/financial institutions abroad. The Government held 49 per cent shares and the rest 51 per cent were held by the sponsors and general public. In 1983 when the Government allowed banks in the private sector, IFIC was converted into a full-fledged commercial bank. The Government of the People’s Republic of Bangladesh now holds 35% of the share capital of the Bank. Leading industrialists of the country having vast experience in the field of trade and commerce own 34% of the share capital and the rest is held by the general public.
Key Function of the IFIC Bank
Like other commercial Banks IFIC Bank performs all traditional Banking business including of wide range of credit products, retail Banking and professional management. But the IFIC Bank of Bangladesh Ltd emphasizes its functions in financing of Investment oriented industries will enhance wealth, quotes more employment’s opportunities, helps formation of capital, and reduce in the balance in the balance of payment of the country.
It has another function like Receiving Deposit, Granting Loan, and Creation of Deposit by Loan, Transfer of Money, Discounting of Bill of Exchange, Export, and Import, Bill Collection (Electric Bill, Telephone Bill, and Gas Bill etc).
Concept about Foreign Exchange
Foreign Exchange means all types of foreign currency, securities, foreign bill, foreign check, foreign documents etc. A hale reserve position of foreign exchange is important for smoothing business. Bangladesh is an import-based country i.e. the number of imports of amenities is higher than the number of exports. The payment must occur in foreign currency. Exporters exchange foreign currencies with taka from the Bangladesh Bank. Therefore, Bangladesh Bank has to enough money for paying the imported goods. If otherwise the exporters will not export amenities to the importers because they believe the importers are not capable for payment of their goods. As a result the country will face famine that has a great impact on the economy. The economy may dormant and the society will suffer disorder.
Today’s world economic is totally dependent on the exports or import and the volume of the international transaction has grown enormously. Similarly, annual capital flows occur among the nations worldwide. So the international trade and investment of this magnitude would be possible because of availability of foreign currencies. Foreign exchange market makes it easy to accumulate foreign currencies at requires. The trading of foreign currencies takes place in foreign exchange market whose primary function is to facilitate international trade and investment.
Foreign Exchange Market
Most of the currency transactions are channeled through the worldwide inter-bank market, in which major bank trade with each another. Trading is generally done by the SWIFT (Society for Worldwide Inter-bank Financial Telecommunication) system. It is software of communication network that electronically links all international banks. Foreign exchange traders in each bank usually operate out of a separate foreign exchange trading room. Reuters monitor displaying up to the minute information and a computer with Internet connection surrounds each trader. In April 1992 Reuters, the news company supplies the foreign exchange market with the screen quotations used in internet trading introduce a new service, Dealing 2000-Phase 2. These services add automatic execution to the package, there by creating a genuine screen based market.
These electronic trading systems offer automated matching. Trading can enter buy and sell orders directly into there terminals on an anonymous basis and that price will visible to all market participants anywhere in the world and can execute a trade by simply hitting buttons. The foreign exchange market is not a physical place; rather it is an electronically linked network of banks whose functions are to bring together the buyers and sellers of foreign currencies.
There are Three Types of Market–
a) Spot Market in where currencies are traded for immediate delivery, which is actually with in two business days after the transaction has been concluded.
b) Forward Market in where contracts are made to buy or sell for future delivery.
c) Swap which involve a package of spot and forward contract.
Foreign Exchange any transaction in the foreign perspective needs foreign exchanges (currencies, bill, securities, check, draft etc). Foreign Exchange means convert the local currency into the foreign currencies for put an end to export essential goods and amenities or investment i.e.-local currency is exchanged with foreign currencies.
Foreign Exchange Products in Bangladesh
Sale or purchase a specified currency at a fixed rate for delivery after 2 working days.
Sale or purchase of a specified currency at a fixed rate for delivery for delivery on the next working day
Sale or purchase of a specified currency at a fixed rate for delivery on the same day.
Fwd (Beyond Spot)
Sale or purchase a specified currency at a fixed rate for delivery beyond 02 working days.
This is the settlement date of a transaction
- The date when actual placement of funds take place
- Nostro account gets debited or credited on the value date
- Can be a different date than the transaction date whereas funds come into or go out of the Net Open Position (NOP) after the entry is passed in HUB, NOSTRO account does not get debited or credited until the value date.
Two simulations opposite transaction with different value date. This is mainly for funding purposes.
Foreign Exchange Dealings of IFIC Bank Ltd.
Foreign Exchange Operation
Foreign Exchange means all types of foreign currency, securities, foreign bill, foreign check, foreign documents etc. A hale reserve position of foreign exchange is important for smoothing business. Bangladesh is an imported based country i.e. the number of imports of amenities is higher than the number of exports. The payment must occur in foreign currency. Exporters exchange foreign currencies with taka from the BB. Therefore, Bangladesh Bank has enough money for paying the imported goods. If otherwise the exporters will not export amenities to the importers because they believe the importers are not capable for payment of their goods. As a result the country will face famine that has a great impact on the economy. The economy may dormant and the society will suffer disorder.
Today’s world economy is totally dependent on the exports or import and the volume of the international transaction has grown enormously. Similarly, annual capital flows occur among the nations worldwide. So the international trade and investment of this magnitude would be possible because of availability of foreign currencies. Foreign exchange market makes it easy to accumulate foreign currencies at requires. The trading of foreign currencies take place in foreign exchange market whose primary function is to facilitate international trade and investment.
Some Basic Features of the Foreign Exchange Markets:
- Global Markets
- 24 hours market
- No Geographical location
- Trust and confidentiality
- Perfect market
Documents used in Foreign Exchange
Letter of Credit (L/C)
It is the most important and commonly used in connection with foreign trade. Letter of Credit is an undertaking by a banker of the importer to the exporter, to the effect that the amount of the L/C will be duly paid. The banker on behalf of the importer issues the L/C in favor of the exporter (beneficiary) and forwards the same to the exporter to the effect that the bill drawn by him shall be duly accepted and paid. It creates confidence in the mind of the exporter so far as payment of the bill is concerned. It is also facilitate the exporter to get the benefit of discounting the bill before the date if maturity.
Bill of Exchange
A Bill of Exchange is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay on demand or on fixed or determinable future time a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. From the definition – we get the features of bill of exchange. In generally there are three parties like- Drawer The person who prepares the bill Drawee The person who is ordered for the payment in future specified time; Payee: The person who is the amount of bill receiver as per the order of the drawer to the drawee.
Bill of Lading
A bill of lading is a document that is usually stipulated in a credit when the goods are dispatched by sea. It is evidence of a contract of carriage, is a receipt for the goods, and is a document of title to the goods. It also constitutes a document that is, or may be, needed to support an insurance claim. The detail on the bill of lading should include:
- A description of the goods in general terms not inconsistent with that in the credit.
- Identifying marks & numbers (if any).
- The name of the carrying vessel.
- Evidence that the goods have been loaded on broad.
- The ports of shipment & discharge.
- The names of shipper, consignee and name & address of notifying party.
- The number of original bills of lading issued.
- The date of issuance.
- A bill of lading specifically stating that goods are loaded for ultimate destination specifically mentioned in the credit.
A commercial invoice is the accounting document by which the seller charges the goods to the buyer. A commercial invoice normally including the following information:
- Name & address of buyer & seller.
- Order or contract number, quantity & description of the goods, unit price, and the total price.
- Weight of the goods, number of packages and shipping marks, & number.
- Terms of delivery & payment.
- Shipment details.
- Certificate of origin of goods:
- A certificate of origin is a signed statement providing evidence of the origin of the goods.
This is usually issued by an independent inspection company located in the exporting country certifying or describing the quality, specification or other aspects of the goods, as called for in the contract and / or the letter of credit. The buyer who also indicates the type of inspection usually nominates the inspection company he /she wish the company to undertake.
- Insurance policy or Certificate.
- The insurance certificate document must.
- Be that specified in the credit.
- Cover the risks specified in the credit.
- Be consistent with the other documents in its identification of the voyage and description of the goods.
Unless Otherwise Specified In the Credit
- Be a document issued and / or signed by an insurance company or its agent, or by underwriters.
- Be dated on or before the date of shipment as evidenced by the shipping documents or establish that cover is effective at the latest from such date of shipment.
- Be for an amount at least equal to the GIF value of the goods and in the currency of the credit.
Proforma Invoice or Indent
This is Seller’s Quotation or agreement between seller & buyer. In this-the seller declared the rate, quantity, quality, manufacturing, & other information about goods and that accepted by buyer.
G.S.P. Certificate (Generalized System of Preference)
When tariff concession is sought from those developed countries providing preferential treatment to exporters of the developing countries, a GSP certificate should be obtained from the EPB. In GSP scheme the tariff providing country is payer country & tariff consumer or receiver country is receiver country. Up to the period there are 16 developing countries under this scheme facility. From Bangladesh export development burro the industrialists may get necessary information & practical procedure.
Other Documents are: Packing list; Master’s receipt.
Letter of Credit (L/C)
Letter of Credit is an undertaking by a banker of the importer to the exporter, to the effect that the amount of the L/C will be duly paid. The banker on behalf of the importer issues the L/C in favor of the exporter (beneficiary) and forwards the same to the exporter to the effect that the bill drawn by him shall be duly accepted and paid. It creates confidence in the mind of the exporter so far as payment of the bill is concerned. It is also facilitate the exporter to get the benefit of discounting the bill before the date lf maturity.
Parties of Letter of Credit Transaction
- Issuing Bank: It is the buyer’s bank. The bank that agrees to the request of the applicant and issues its letter of credit in terms of the instructions of the applicant.
- Advising Bank: It is the seller’s or beneficiary’s Bank. The bank usually situated in the seller’s or beneficiary’s country (most of the time with which there exists corresponding relationship with the buyer or issuing bank), request to advice the credit to the beneficiary.
- Confirming Bank: Sometimes issuing bank request advising bank or another bank to add confirmation to the letter of credit. When that bank do this then such bank is called confirming bank. So advising bank can be act as confirming bank.
- Reimbursing Bank: This is the bank that is nominated by the issuing bank to pay (it is also known as paying bank) or to accept drafts. It can be situated in another country. In this connection it is to say that American Express Bank & Nat West Bank act as reimbursing bank in case of IFIC Bank. The account, which maintains IFIC Bank with Nat West Bank & American Express Bank, is called Nostro Account” and in rivers the account, which is maintained by Nat West Bank & American Express Bank with IFIC Bank, is called Vostro Account.
- Negotiating Bank: The bank, which makes payment to the exporter after Inspection, the documents submitted by the exporter with the original letter of credit then it is called Negotiating Bank.
- Nominated Bank: The bank that is nominated by the issuing bank to pay (nominated bank is known as paying bank) or to accept drafts (nominated bank is known as
- accepting bank) or to negotiate (nominated bank is known as negotiating bank). Usually the advising bank is request & authorized to be the nominated bank unless the credit allows negotiation by any bank.
- Seller: Beneficiary of the letter of credit is seller.
Classification of Letter of Credit
The letter of credit can be either revocable or irrevocable. It needs to be clearly indicated whether the letter of credit Revocable or Irrevocable. When there is no indication then the letter of credit will be deemed to be a revocable L.C. The details are as follows:
- Revocable letter of credit: A revocable credit is one, which can be amended or cancelled by the issuing bank. At any moment without “prior notice” to the beneficiary. So this is clear that revocable credit can be revoked any time without prior notice.
- Irrevocable letter of credit: An irrevocable credit is one, which cannot be cancelled or amendment able any time without the consent of each party. Through this letter of credit the issuing bank gives a definite, absolute, and irrevocable undertaking to honor its obligations, provided the beneficiary complies with all the terms & conditions of the credit.
- Government letter of credit: That letter of credits, which are done by the Defense Ministry and other Ministries of the government.
- Master or mother letter of credit: The L.C. which come from out side the country to the exporter from importer that is mother or master letter of credit.
Other Classes of Letter Of Credit:
- Revolving letter of credit: When the L.C. is used again & again in same amount for a specific period of time that is called revolving letter of credit.
- Transferable letter of credit: Exporter can transfer his / her right of letter of credit in full or partly to a third party. In generally, the exporter is not the supplier but act as a middleman with in the supplier & importer.
- Back-to-Back letter of credit: The letter of credit, which done by the security of mother letter of credit.
- Clean or open letter of credit: The letter of credit, which provides assurance of payment bill of exchange without submission, of any export documents that is called clean letter of credit.
- Confirmed letter of credit: When the Irrevocable letter of credit issued by issuing bank to the exporter as assurance of the L.C. then as per advice or documents the authorized representative or representative bank’s provide assurance or payment guarantee that is confirmed letter of credit.
- At sight letter of credit: That letter of credit which expires ninety days i.e. with in this period the documents must be sending to the negotiating bank.
- Deferred payment letter of credit: That letter of credit which expires one hundred & eighty days i.e. with in this period the documents must be send to the negotiating bank.
- Contract letter of credit.
- Refinance Letter of Credit.
- Marginal Letter of Credit and Traveler’s Letter of Credit.
Classification of Letter of credit as per function
- LC under cash
- LC under loan
- LC under grant
- LC under wage
- Back to back LC.
Approval Certificate of Bangladesh Bank on Behalf of the Importer
- Particulars involved in offering sheet:
- Name of the party, Sanctioned limit, Facility applied for letter of credit (amount & previous outstanding).
- Forward exchange
- Foreign bills
- Trust receipts.
- Clean packing credits.
- Advance against imported goods.
- Goods particulars
- Import license
- Margin already at credit.
- Margin to be obtained.
- Guaranteed by.
- Balance of current account.
- Average Balance of bank account.
- Net worth of the firm.
- Customs duty.
- Country of export.
Procedure for Opening Letter of Credit
After completion of the previous particulars, then the party take money and bank give letter of credit to the party by checking the declared particulars of the party. Then one copy sends to the Beneficiary / Negotiating bank. The beneficiary bank sends the document to exporter. The exporter & Beneficiary bank for shipment the goods. Then the beneficiary bank sends back to the letter of credit opening bank.
The LC opening bank scrutinizes the documents and sends to the importer. When the importer accepts the documents then LC opening bank do lodgment (it is the payment procedure in lodgment voucher).
Then the accounting treatment is:
PAD account ………………………………Dr.
IFIC Bank General A/c………………………..Cr.
Then the importer applies for endorsement as well as retirement. For retirement accounting treatment in retirement voucher is:
Importer or party’s account……………Dr.
P&T charges Account…………………………Cr.
Cost of Stationary Account…………………Cr.
Then the opening liability reversed by credit in liability voucher (FEF – 20 internal vouchers). Then the documents endorsed by the LC opening bank and send to the importer. The party goes for customs clearing. After clearing the importer submit the customs “Bill of entry” certificate with in four months to the LC opening bank. The LC opening bank matching the documents and report to the Bangladesh Bank within the month of retirement of LC. Then the letter of credit is fully closed.
Justification for Fitness of Opening Letter of Credit
- Application from importer.
- Bio-data of the applicant.
- Current account opened by the applicant in the branch.
- Supplier’s acceptance & rate of goods.
- Is it a brand item or not?
- Contract on prescribed form of bank
- Performa invoice from supplier.
Export Financing Sectors of IFIC Bank
Export financing can play a vital role in the development process of Bangladesh. With earning on export we can meet our import bills. The export trade is always encouraged because the major portion of foreign exchange earning is derived from export. Because of shortage of adequate capital exporters have to come in contact with commercial bank and financial institution to get finance from them. IFIC bank as a commercial bank provides certain facilities to the exporters to boost up export earnings.
The Traditional & Non-Traditional Sectors in Which IFIC Bank Provides Export-Financing Facilities are as Follows:
- Ready Made Garments In All Sorts.
- Jute Manufactures.
- Jute – Raw & Meshta.
- Fish & Prawns.
- Hides, Skins & Leather.
- Fertilizer etc.
Export Financing System of IFIC Bank
Bangladesh as a developing country depends mainly on foreign exchange earning for its development activities. The major portion of foreign exchange earnings is derived from export obviously, to boost export, government provide certain incentives to the exporters namely:
- Export Financing
- Development Financing
- Export Credit Guarantee Scheme
- Export Performance Benefits
- Duty Draw Back
- Rebate on Duty & Tax
- Income Tax Rebate
- Insurance Premium Rebate etc.
Pre-Shipment & Post-Shipment
In IFIC Bank export finance is required by the exports at two stages namely
Pre-shipment & Post-shipment stages:
It is required to purchase of raw materials, to meet cost of production, procurement of exportable goods, packing, transport, payment of insurance premium, inspection fee, freight charges, ware housing etc.
It is required by the exporters after actual shipment of goods in order to bridge the period between shipment of the goods and receipts of sales proceeds from abroad.
An exporter owns resource may not be adequate to meet all such expenses. So he / she have to come in contact with commercial bank and financial institutions to get finance from them. As a commercial bank IFIC Bank provides credits to exporters at a consideration rate of interest as an export promotion measure as per government directive.
Pre-Shipment Financing in Foreign Exchange
The classes of pre-shipment financing extended to the exporters by the IFIC Bank are as follows:
This facility is generally extended when the goods become ready for shipment for a very short period usually from the date of dispatch of the stock from the godown (Store Room) up to the date of actual shipment of the goods that is for the transit period of shipment for further purchase of raw materials or procurement of exportable goods by exporter.
Back To Back Letter of Credit
Pre-shipment facilities are also credited in the form of back- to-back letter of credit. When the beneficiary of an export letter of credit is not the actual manufacturer or producer of exportable goods mentioned in the relative export letter of credit as securities with his / her banker for procurement of exportable goods to enable him /her to execute the export letter of credit and such letter of credit is called inland back to back letter of credit.
Precautions Used By IFIC Bank To Sanction Pre-Shipment Credit
- Before making lien on the original export letter of credit all the terms and conditions should be scrutinized so that no detrimental clauses including violation of foreign exchange regulation and UPCDC terms are included there in.
- Expiry date of letter of credit should be properly recorded in the book and no drawing is to be allowed against expired letter of credit.
- The credit worthiness or solvency of the foreign buyer as well as the exporters must be ascertained before hand.
- In case of mortgage of properties as collateral securities, the bank by engaging lawyer together with valuation certificate from proper authority must scrutinize the relative
- The exporter should arrange forward sale of foreign exchange loss at the time of negotiation of export documents.
- In case of packing credit, the export letter of credit and relative documents have to submit in, such a way that the bank may not face any problem in negotiation of shipping documents in due course.
- To dispatch goods for shipment to post under packing credit the bank must verify the shipping mark on the each packet or cartoon and the relative invoice.
Post Shipment Financing in Foreign Exchange
Post shipment financing refers to the credit facilities extended to the exporters by IFIC Bank after actual shipment of the goods against export documents. IFIC Bank generally finance the exporters at post shipment stage after verifying the credit worthiness and export performances of the exporters as well as the reputation and financial soundness of the foreign buyers provided the shipping documents are drawn strictly in accordance with letter of credit terms and in accordance with foreign exchange regulation in force. Post shipment financing is extended to the exporters by the following terms:
- Negotiation of export documents under letter of credit.
- Discounting of export bills.
- Purchase of uses bills
Negotiation of Export Documents under Letter Of Credit
Most important and widely used method of financing export at post-shipment stage is negotiation of export documents. After the shipment of the goods the exporter generally submits the following documents to the bank for negotiation:
- Bill of exchange.
- Bill of lading or air way
- Commercial invoice – eight copies within these four original copies.
- Custom invoice of importer’s country.
- Certificate of origin-original copy.
- Packing list – eight copies within these four original copies.
- Weight certificate.
- Declaration of shipment to the insurance company.
- Pre-shipment inspection certificate.
- Quality control certificate when required.
- Acknowledgement letter indicating received sample / approval letter.
- Frightful letter.
- Any other document if called for letter of credit.
Risk of Export Financing
In the trade – there are so many risk factors involved. In banking sector – the bank face risk basically from loans & advances and foreign exchange. In this section I discuss the risk of Export Financing.
While there are many advantages to exporting it is not without risk. In deed there are often factors present in international market, which make foreign exchange substantially more risky than domestic ones, including the credit risk of non-payment or non-acceptance of the merchandise by the buyer. For international sales, these risks are far more pronounced than they are domestically.
For these reasons IFIC Bank also accompanied with elements of uncertainty some which are as follows:
- Insolvency of overseas buyer, which result in non-realization of export proceeds.
- Failure of the buyer to retire credit already accepted by him / her in case of askance bill within stipulated period.
- Willful negligence of the importer to accept of pay bill or to accept goods for no fault of the exporter.
- Sudden out break of war revolution or civil disobedience in buyer’s country.
- Imposition of restrictions on remittance on any government action in the buyer’s country which may block or delay payment.
- Imposition of trade embargo or blockade against any country.
- New import restriction on the buyer or cancellation of the license.
- Additional handling transport or insurance charges due to interruption or
diversion of voyage, which cannot be recovered from buyer.
- Bankrupt or closure of a bank or stoppage of operation of a bank may hamper repatriation of exports proceeds of letters of credit opened by such a bank.
- Any other cause of loss occurring outside the exporter’s country beyond the control of importer or exporter.
Often credit information on the importer is not available or at best sketchy because buyers and sellers live in different socio-economic & political environment. It is much harder to judge the financial strength, reputation, integrity of a buyer who is thousands of miles away and belongs to a different culture. Moreover, many importers may have good reputation in their own environment based on local value system; they may – never the less engage in some surprising business practices when judged by a different set of standard.
Pre-Shipment Export Credit Risk
- Pre-shipment export credit risk involves the following additional risks:
- There may be diversion of fund because of low interest rate.
- Uncertainties relating to non-availability of new materials may hamper processing of exportable products.
- The exporter may not be able to make shipment within the stipulated time due to power failure, strike, natural calamites etc.
- The materials under back-to-back letter of credit may not reach well in time to allow the exporter to process goods within the expiry date of original export letter of credit.
All over the world there is no country, which can meet its requirements from its own sources. Some imports raw materials, some finished goods & some food products or other commodities. As it is in export & import are invariably conducted through commercial banks. IFIC Bank is engaged to extend the facilities to the importers.
After getting the completed registration, application for opening letter of credit is made through a bank where applicant has a current account. An importer is required to fill up import application form & letter of credit authorization form & importer has to deposit margin money to the bank from 10% to 40% of the import value, depending on the credibility of the importer.
After the letter of credit is established the exporter after executing the export, submits the negotiable document through its bankers and in terms of exporter’s bank submit the documents to the corresponding bank of the importer’s bank in the country. If the documents are found correctly fulfilling all the terms & conditions stipulated in the letter of credit the corresponding bank of import’s bank will realize payment that will debited to the importer’s account. In banking term this is known as LATR and the importer has to pay the LATR amount in 90 days with the bank interest rate.
Import Financing Sectors of IFIC Bank
- IFIC Bank is the major financer of import business in our country. In extend credit, grant and other facilities SB finance to the following sectors:
- Machinery & transport equipment.
- Petroleum & petroleum products
- Textile, yarn, fabrics, article & related products
- Iron & steels
- Cereal & cereal preparations
- Dairy products & eggs
- Other including loans & grants.
Import Financing System of IFIC Bank
- Registration of import
- Income tax registration certificate
- Partnership deed in the cases of partnership concern
- Certificate of registration with the register of joint stock companies
- Articles & Memorandum of association in the case of limited companies.
- Nationality certificate & Bank certificate
- Ownership documents in place of business
- Trade license from the relevant authority.
- Survey clearance from the relevant authority
- Other documents prescribed in the import policy.
Import Registration Certificate (IRC)
In case of import IRC is the first necessity for the importer. The IRC is not required for import goods by government departments, Local authorities, statutory bodies, recognized educational institutes, Hospitals. In addition registration is not required for import goods, which do not involved remittance of foreign exchange like -medicine, reading materials etc. can be imported without IRC by the users within monetary limit.
Procedure for Obtaining IRC
For IRC the interested person / firm’s submit the application along with the following documents directly to the Chief controller of Import & Export respective zonal office (CCI&E):
- Income tax registration certificate.
- Nationality certificate.
- Certificate from chamber of commerce & industry registered trade association.
- Bank solvency certificate. .
- Copy of trade license.
- Any other document if required by CCI&E.
On receiving application the respective CCI&E office will scrutinize the documents, conduct physical verification, and issue demand note to the prospective importers to furnish the following documents through their nominated bank:
- Original copy of treasury deposited as IRC fees.
- Assets certificate.
- Affidavit from 1s‘class magistrate.
- Rent Receipts.
- Two passport size photograph.
- Partnership deed in case of partnership firms.
- Certificate of registration
- Memorandum & Articles of association in case of limited company.
After securitization and verification the nominated bank will forward the same to the respective CCI&E office with forwarding schedule in duplicate through banks representative. CCI & E then issues import registration certificate to the applicant.
- Imports & Exports (control) Act 1950 regulates the import & export trade of the country. There are a number of formalities, which on ‘importer has to fulfill before import goods. The importer follows the following steps:
- The buyer & the seller conclude a sales contract provided for payment by documentary credit.
- The buyer instructs his / her bank i.e. issuing bank to issue a credit in favor of the seller i.e. beneficiary.
- The issuing bank asks another bank usually in the country of the seller, the advice or confirms the credit.
- The advising or confirming bank informs the seller that the credit has been
- As soon as the seller receives the credit and is satisfied that he / she can meet its terms & conditions, he, / she are in a position to load the goods & dispatch them.
- The seller then sends the documents evidencing the shipment to the bank where the credit is available i.e. the nominated bank. This may be the issuing bank, or the confirming bank, bank named in the credit as the paying, accepting or negotiating bank.
- The bank if other than the issuing bank, sends the documents to the issuing bank,
- The issuing bank checks the documents and if they meet the credit requirement either
- Affect payment in accordance with the terms of the credit either to the seller if s/he has sent the documents directly to the issuing bank or to the bank that has made funds available to him/her in Or
- Reimburses in the pre-agreed manner the confirming bank or any bank that has paid, accepted, or negotiated under the credit.
- The bank checks the documents against the credit. If the documents meet the requirements of the credit, the bank then pay, accept or negotiate accordingly to, terms of credit. In case of a credit available by negotiation, issuing bank or the confirming bank will negotiate with recourse; another bank including the advising bank has not confirmed the credit, which negotiates will with recourse.
- When the documents have been checked by the issuing bank and found to meet the credit requirements, they are released to the buyer upon payment of the amount due or upon other terms agreed between importer & the issuing bank.
- The buyer sends transport documents to the carrier who will then proceed to deliver the goods.
The import bills consist of the following documents & the order of their Inspection should be as below:
- Forwarding Schedule of Negotiating Bank.
- Bill of Exchange.
- Bill of Lading
- Insurance Documents
- Certificate of Origin
- Any other Documents.
- Intimation should be given to the party in time.
- Conversion of foreign currency in to Bangladesh Currency.
- Entry in PAD (payment against document) register
- Entry in Letter of Credit opening register by rounding the letter of credit number with date.
- Scrutinize the shipping documents meticulously.
- Inform the importer to deposit balance amount of letter of credit and to release the necessary documents.
- Enter the shipping documents in inward foreign bills register.
Risk of Import Finance
In the trade – there are so many risk factors involved. In banking sector – the bank face risk basically from loans & advances and foreign exchange. In this section I discuss the risk of import financing.
In international trade transaction takes place between buyers and sellers living in different socio-economic and political environments. There may be abrupt changes in socio-economic or political situation in the buyer’s country or in the seller’s country. Even the exchange value of currencies of the two countries had gone so much down that they were not acceptable or exchangeable in international market. More over the importer or the exporter may not be able to comply with the terms of credit for some reasons. Therefore, risk inherent in all credits. The bank has to consider following risk in financing the import procedure:-
- Violation of the requirement of letter of credit authorization or letter of credit:
- Shipment effected before authentication of the letter of credit authorization from by the nominated bank and registration with the Bangladesh bank, whenever necessary and before opening of letter of credit or after expiry of the validity of the letter of credit authorization or letter of credit shall be treated as import in contravention of this order. Letter of credit authorization obtained in the basis of false or incorrect particulars or by adopting any fraudulent means shall be treated as invalid and void.
- Import against indent and Performa invoice: Letter of credit may be opened against and indent issued by a local registered indenter or against a Performa invoice issued by a foreign manufacturer or seller or supplier.
In addition to the credit and commercial risk we have outlined, international transaction such as import financing take on the whole new dimensions of political risk. They are as follows:
- Sudden outbreak of war, revolution, coups, or civil disobedience in the seller’s
- Imposition of restriction on remittance.
- Imposition of trade embargo or blockade.
- New import restriction on the buyer or cancellation of the license.
- Additional handing transport or issuance charges due to interruption or diversion of voyage, which can’t be recovered from the buyer.
There may be informational risk inherent in import financing on the importer because of shortage of required information. So it is much harder to judge the financial strength, reputation, and integrity of a seller or buyer who is thousands of miles away and belongs to a different culture.
Remittance is the sending of money etc. to a distance. Foreign remittance is the sums of foreign currency to a distance from one place another place i.e. country to country. The person who is the receiver of the remittance is remittee. The person who is the sender of the remittance is remitter or remiitor. There are two types of foreign remittance, which are as below:
- Foreign Inward Remittance
- Foreign Outward Remittance
Foreign Inward Remittances
The remittance of freely convertible foreign currencies which IFIC Bank Foreign Exchange Corporate branch is receiving from abroad against which the authorized dealers making payment in local currency to the beneficiaries may be termed as foreign inward remittance.
Mode of Inward Remittances
The term inward remittances includes not only remittances by TT., MT., Drafts etc. but also purchases of bills, purchases of drafts under travelers letter of credit and purchases of travelers cheques. Foreign currency notes against which payment is made to the beneficiary also a part of inward remittances. Thus the following are the Mode of inward remittances:
- TT: Telegraphic Transfer.
- Mail Transfer.
- FD: Foreign Drafts.
- TC: Travelers Cheque.
- Foreign currency notes.
Purpose of Inward Remittance
The purpose of remittance is of various reasons. Such as:
- For family maintenance.
- Realization of exports proceeds.
- Export brokers commission.
Payment Procedure of Telegraphic Transfer
- To verify the ‘test number’.
- To inform the beneficiary for submission of “Form – C”.
- To confirm from issuing bank or reimbursing bank.
- To covert of foreign currency into Bangladesh currency with T.T.
- To make entry in T.T.s, drafts, M.T.s, received registration.
- To prepare vouchers.
- To prepare FET schedule.
Purchase of Drafts & Cheques
Authorized dealer may purchase drafts & cheques which are not drawing on IFIC Bank at the request of the beneficiary. Procedures of purchase are as below:
- To obtain an application or undertaking from the beneficiary with ‘Form – C’
- To verify the signature of the drafts (if possible).
- To make entry in the register for drafts & T.C. purchased.
- To convert foreign currency into Bangladesh
- To prepare voucher.
- To prepare FET schedule.
- To send the instrument for collection.
Collection Procedure of Drafts & Cheques
- To make entry in foreign Bills Collection Register.
- To prepare forwarding schedule in quadruplicate.
- To prepare vouchers on realization of proceeds i.e. on receipt of advice from the collecting
Payment of Foreign Currency Notes
- To check the custom declaration (if any).
- To made entry in (kateha) raw register.
- To convert foreign currency into Bangladesh
- To prepare vouchers.
- No FET schedule is required to be prepared & sent to head office because in this case there is no transaction with head office.
Cancellation of Inward Remittance
In the event of any inward remittance which has already been reported to the Bangladesh Bank being subsequently cancelled, either in full or in part because of non-availability of beneficiary. Authorized dealers must report the cancellation of the inward remittance as an outward remittance of “Form-T/M”. Required documents are:
- The date of return in which the inward remittance was reported.
- The name & address of the beneficiary.
- The amount of the purchase as effected.
- Reasons for cancellation.
The findings obtained from the study on Foreign Exchange Business of IFIC Bank are follows:
- Toward the growth and economic development of Bangladesh IFIC Bank is playing an important role.
- There are three types of modes of foreign exchange market, which are: Export Finance, Import Finance & Foreign Remittance. Out of 82 branches 22 branches are directly related to the foreign exchange activities and 56 branches provide online facilities to the customer.
- With wide network of branches at home and also a large number of correspondent banks worldwide it is singularly handling the largest volume of export-import business including remittances.
- The total foreign exchange business of the Bank for the year 2010 was Tk. 12,917.00 crore as against Tk. 10,599.60 Crore in 2009 showing an increase of 21.86%. (Annual Report 2008, Page19)
- The foreign exchange department is semi computerized. Paper-based works are still in existence.
- The liquidity & profitability condition of the Foreign Exchange Corporate branch is standard.
- Employees are loyal to the organization but they need training for providing better service.
Foreign exchange Activities department play a vital role in any banking institutions. On the basis of some analysis of this topic I have got some suggestions. These are given below-
- The Bank should develop sectors wise export-financing facilities.
- Letter of Credit (L/C) opening system for the importer should be easier.
- For customer’s convenience, IFIC Bank should provide more personnel to deliver faster services to the customers in case of foreign exchange dealings.
- The Bank should develop an effective database needed for analyzing Foreign Exchange Business.
- Proper communication system and maintenance of files & machineries like phone, computer, fax, and photocopier need to be ensured.
- To ensure error free faster services, the bank should be fully computerized.
- Effective strategies must be undertaken against defaulters.
- More employees are to recruit. For the better service, training is must and according to the skill and education background of employee needs to be positioned.
- The Bank should apply modernized Marketing Information System
The Banking arena in recent time is one of the most competitive business fields in Bangladesh. As Bangladesh is a developing country, a strong banking sector can change the socio economic structure of the country. So we can say, the whole economy of the country in linked up with its banking system. IFIC Bank is the bank which is highly potential commercial Bank of Bangladesh. This bank performs hundreds of important activities both for the public and for the government as a whole. It has an outstanding bearing to thrive our business sector. It has strong performance on General Banking, Loans & Advances, Industrial credit, and foreign Exchange. I had the privilege to learn many things from the Foreign exchange Corporate Branch through my active involvement in this branch. In this paper I have tried to highlight Foreign Exchange Business of IFIC Bank. With wide network of branches at home and also a large number of correspondent banks worldwide it is singularly handling the large volume of export-import business including homebound remittances. The effective and efficient Foreign Exchange Business of the Bank helps in the continuous growth and progress of national economy.