LETTER OF CREDIT – Flow Chart and Discussions

LETTER OF CREDIT – Flow Chart and Discussions CMA Chandan Chatterjee

Buyers Sheva Traders, Bangladesh Islamic Bank Bangladesh

G o o d s

Bank of Bhutan,

R e c e i v e d

Bangla bandha Check post

L C DOC sub mitt ed to bank

Goods Sent

TR Received

C o n f i r m

Sellers BMML Exports, Bhutan

Letter of Credit Associated Parties :

1. Buyers – Sheva Traders, Bangladesh.

2. Sellers – BMML Exports, Bhutan 3. Issuing Bank – Islamic Bank, Bangladesh 4. Beneficiaries Bank - Bank of Bhutan, Bhutan 5. Check Post - Banglabandha Check Post

Sheva Traders of Bangladesh wants to purchase Bounders and Aggregates (10 mm, 20 mm, 30 mm , 40 mm) from BMML Exports of Bhutan. Both of these parties from different country has made an agreement for exporting of Goods from Bhutan to Bangladesh. Based on the agreements BMML Exports raised a proforma invoice depicting quality, quantity of products, rate, amount, point of dispatch, point of delivery, payment terms, LC no., date of issue, date of expiry etc.

After receiving the Proforma Invoice Sheva Traders (buyers) approach to the Islamic Bank (issuing banker) for LC open. Islamic Bank should ensure that they have able to pay the Bank of Bhutan (beneficiaries bank) as and when the all documents gets from them. For this purpose Islamic bank gets sufficient fund (cash or Kind) from sheva traders to meet their liabilities.

After Receiving Original LC, BMML Exports starts to send goods as per details prescribed in the LC. With respect to the above example, BMML Exports delivers Goods to the banglabandha check post and collects TR Receipts after getting seal signature of Sheva traders.

After sending all goods (full quantity as per depicted in LC) BMML Exports submit document to the beneficiaries bank for collection of payments. The document consists of: a) Commercial Invoice b) Packing List c) Certificate of Origin d) All TR Copies e) Original LC f) Custom Clearings (in Bhutan it is called Form B) g) Other Documents After receiving these documents the Bank of Bhutan verify all of these properly and

sent the documents to the issuing bank for payment. Issuing bank

confirms from buyers that all goods received by the buyers. When the Islamic Bank satisfied it released the payment to Bank of Bhutan. When bank of

Bhutan gets payment from Islamic Bank it release the payment to Sellers accordingly. Of course issuing bank and beneficiaries bank deduct charges from the respective parties.

There are two main payment method and system of delivery of goods. FOB and CIF. In the following a brief discuss on it: Free On Board (FOB) is a shipment term used to indicate whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping.

"FOB shipping point" or "FOB origin" means the buyer is at risk and takes the ownership of goods once the seller ships the product.

For accounting purposes, the supplier should record a sale at the point of departure from its shipping dock. "FOB origin" means the purchaser pays the shipping cost from the factory or warehouse and gains ownership of the goods as soon as it leaves its point of origin.

Main Points : 1. Free On Board is a term used to indicate who is liable for goods damaged or destroyed during shipping.

2. The terms of FOB affect the buyer's inventory cost; adding liability for shipped goods increases inventory costs and reduces net income.

3. FOB contracts have become more sophisticated in response to the increasing complexities of international shipping.

Cost, insurance, and freight (CIF) is an expense paid by a seller to cover the costs, insurance, and freight of a buyer's order while it is in transit. The goods are exported to a port named in the sales contract. Until the goods are fully loaded onto a transport ship, the seller bears the costs of any loss or damage to the product. Further, if the product requires additional customs duties, export paperwork, or inspections or rerouting, the seller must cover these expenses. Once the freight loads, the buyer becomes responsible for all other costs. CIF is similar but not the same as carriage and insurance paid to (CIP).

Main Points: 1. Cost, insurance, and freight (CIF) is a common method of import and export shipping.

2. CIF determines when the responsibility for goods transfers from the seller to the buyer.

3. CIF is one of the international commerce terms known as Incoterms.

Similarities between CIF and FOB: • Both are conditions of delivery

of goods generally used at international

transactions.

• The positions of responsibility transfer and risks are both at the port of loading (port of departure).

• The responsibility of carrying out export customs clearance rests with the seller). The procedure for importing goods belongs to the buyer (buyer).

Differences between CIF and FOB: The major difference between FOB and CIF is when liability and ownership transfers. In most cases of FOB, liability and title possession shifts when the shipment leaves the point of origin. With CIF, responsibility transfers to the buyer when the goods reach the point of destination.

Exemple: Boulders Sale: 1000 mt. @ USD 18.00 Total Amt in USD 18,000.00 Less: Foreign Bank Charges (deducted by Issuing Bank) USD 50.00 --------------------------------------Net Amt Received in FC USD 17,950.00 --------------------------------------Foreign Exchange Rate per USD Nu. 73.50 ---------------------------------------Actual Amt Received in Bhutan Currency Nu. 13,19,325.00 Less: Bank Charges (deducted by Bank of Bhutan) Nu. 2,270.00 ------------------------------------Actually Amt Credited by BOB to BMML Exports A/C Nu. 13,17,055.00

The End