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BANKING DIPLOMA EXAMINATION, JUNE 2013(DAIBB) INTERNATIONAL TRADE AND FOREIGN EXCHANGE (EF)

1. Describe the types of export credits provided by the banks. What precautions the banks should take to ensure safety of funds lent the customers to finance exports.

2. Discuss the purpose of exchange control and methods of applying control on foreign exchange transactions by the central bank of Bangladesh. Do you think exchange control is still necessary in view of the realization of exchange rates of take and satisfactory level of foreign exchange reserve.

3. What is meant by foreign exchange market? Briefly discuss the principal features of foreign exchange market of Bangladesh.

4.

Define the terms Balance of Trade and balance of Payment. What are the differences between Balance of trade and Balance of payment ? What are your suggestions to improve the Balance of Payment of Bangladesh.

5. What is called exchange position ? What are the components of exchange position ? What are the risks of maintaining an oversold exchange position ?

6. Write short Notes: a) Supplier's Credit b) Off-shore Banking c) Duty drawback d) Negotiation under reserve e)Export Processing Zone f)Documentary Collection g) Asian Clearing Union.

7. A letter of credit was issued by an importer for import of second hand garment machinery. On receipt of the import documents from the negotiating bank it was noticed that the preshipment inspection certificate contain a remark as follows: “ Some machinery appear to be rusted� The LC issuing Bank refused to accept the documents on account of this discrepancy. The negotiating bank, on the other hand contended that the discrepancy was not a discrepancy in the real sense nor does it indicate any defective condition of the machinery.

The negotiating bank also refused to refund the money that it had realised by debiting 'Nostro account' of the issuing bank.

Please furnish your views in the light of the provisions of UCPDC on the contentions of both the bank.

Md. Shafiqur Rahman Executive Vice president Islami Bank Bangladesh Ltd. shafiqur@islamibankbd.com Question No. 1.

Describe the types of export credits provided by the banks. What precautions the banks should take to ensure safety of funds lent the customers to finance exports.

Ans.of the Question No. 1 Types of Export Credits: Export credit is classified into two categories 1) Pre Shipment Credit 2) Post Shipment Credit.

Pre Shipment Credit Pre Shipment credit is a short term working capital finance specially provided to an exporter against the documentary evidence of having entered into export commitment.

Pre Shipment credit is granted at the stage prior to the shipment of goods and such credit is given to procure raw material, for paying manufacturing and packing charges and payment of insurance premium and freight. As and when the goods are shipped and shipping documents are obtained.

The banks grant pre shipment Credit against documentary evidence either by way of an export letter of credit or a contract The Pre Shipment Crdit is categorized broadly as per following: 1. Back to Back L/C (Inland and Foreign) 2. Export Cash Credit (ECC) 3. Packing Credit (PC)

1. Back to Back L/C: Under this arrangement the Bank finance an exporter by way of opening L/C for procuring raw material with a view to manufacture exportable goods as stated in the L/C received by the exporter from an overseas buyer . The payment of this Import L/C (for procuring raw materials) is settled by the proceeds of Export L/C so it is called Back to Back L/C. 2. Export Cash Credit: This type of facility is allowed to exporter for procuring and processing of goods. For export of traditional item like jute, tea and leather the facility can be extended up to 90% of the value of export L/C as contract. For garments industry this can be allowed between 10% - 15% based on the category of unit because the main raw material is procured through Back to Back L/C. 3. Packing Credit: Packing Credit is allowed for making necessary preparation for shipment of goods. This finance generally covers cost of packing, transportation from godown to the port for shipment ware housing, insurance etc.

Post Shipment Credit : This type of credit refers to the credit facilities extended to the exporters by the banks after shipment of the goods against export documents.

Banks in our country extended post-shipment credit to the exporters through: 1. Negotiation of Documents under L/C. 2. Purchase of DP & DA bills.

3. Advance against Export Bills surrendered for collection.

1. Negotiation of Documents under L/C Under this arrangement, after the goods are shipped, the exporter submits the concerned documents to the negotiating bank for negotiation. The documents should be negotiated strictly in accordance with the terms and conditions and within the period mentioned in the letter of credit.

2. Purchase of DP & DA Bills In such a case, the banks purchase/discount the DP (Documents against payment) and DA (Documents against Acceptance) bills at rate published by the Exchange Rate Committee of authorized dealers. While doing so, the banks should scrutinize all the export documents separately and minutely and clear instructions are to be obtained from the drawer of the bill in regard to all important issues related to the negotiation of the bills.

3. Advance against bills for Collection Banks generally accept export bills for collection of proceeds when they are not drawn under a L/C or when the documents, even through drawn against an L/C contain some discrepancies. Bills drawn under L/C, without any discrepancy in the documents, are generally negotiated by the bank and the exporter gets the money from the bank immediately.

However, if the bill is not eligible for negotiation, he may obtain advance from the banks against the security of export bills. Banks may give advance ranging from 50 to 80 percent of the document’s value. In addition to the export bills, banks may ask for collateral security like a guarantee by a third party and equitable/registered mortgage of property.

The bank should take the following precautionary measure to consider in making decisions about financing: The need for financing to make the sale.In some cases, favorable payment terms make a product more competitive. If the competition offers better terms and has a similar product, a sale can be lost. In other cases, the buyer may have preference for buying from a particular exporter, but might buy your product because of shorter or more secure credit terms. The length of time the product is being financed.This determines how long the exporter will have to wait before payment is received and influences the choice of how the transaction is financed. The cost of different methods of financing.Interest rates and fees vary. Where an exporter can expect to assume some or all of the financing costs, their effect on price and profit should be well understood before a pro forma invoice is submitted to the buyer. The risks associated with financing the transaction.The riskier the transaction, the harder and more costly it will be to finance. The political and economic stability of the buyer's country can also be an issue. To provide financing for either accounts receivable or the production or purchase of the product for sale, the lender may require the most secure methods of payment, a letter of credit (possibly confirmed), or export credit insurance or guarantee. The need for pre-shipment finance and for post-shipment working capital.Production for an unusually large order, or for a surge of orders, may present unexpected and severe strains on the exporter's working capital. Even during normal periods, inadequate working capital may curb an exporter's growth.

Question No. 2 Discuss the purpose of exchange control and methods of applying control on foreign exchange transactions by the central bank of Bangladesh. Do you think exchange control is still necessary in view of the realization of exchange rates of taka and satisfactory level of foreign exchange reserve.

Ans of the Question No.2 What is an 'Exchange Control' Types of controls that governments put in place to ban or restrict the amount of foreign currency or local currency that is allowed to be traded or purchased that can be exchanged within the country.

Foreign exchange controls include: • Banning the use of foreign currency within the country • Banning locals from possessing foreign currency • Restricting currency exchange to government-approved exchangers • Fixed exchange rates • Restrictions on the amount of currency that may be imported or exported ►The purpose of Exchange control is to give guidance to Authorised Dealers in foreign exchange, their clients and other interested parties regarding the operation of the exchange control system. ►The current general policy approach to exchange control; ►The duties of the Authorised Dealers in terms of the Regulations, Orders and Rules and the Rulings as amended from time to time; ►The procedures to be followed by Authorised Dealers in exercising their functions and performing their duties, including submitting applications to the Financial Surveillance Department on matters which they are not permitted to authorise; ► The information required when submitting applications; ►The norms applied by the Financial Surveillance Department in arriving at decisions on matters outside the authorities granted to Authorised Dealers; ►The supervisory function of the Financial Surveillance Department; ►The methods of communication between the Financial Surveillance Department and the Authorised Dealers. It should be stressed, as set out in the disclaimer,

Methods of Exchange control The various methods of exchange control may broadly be classified into two types, direct and indirect. Direct methods of exchange control include those devices which are adopted by governments to have an effective control over the exchange rate, while indirect methods are designed to regulate international movements of goods.

These are usually classified into two groups: (i)Direct Exchange Control and (ii)Indirect Exchange Control.

Direct Methods of Exchange Control In direct exchange control, certain measures are adopted which effectuate immediate direct restriction on foreign exchange from all sides - its quantum, use and allocation.

In general, direct exchange control includes measures like: (i)Intervention; (ii)Exchange restrictions; (iii)Exchange clearing agreements; (iv)Payment agreements; and (v)Gold policy.

Indirect Methods of Exchange Control: Apart from the direct methods, there are several indirect methods also regulating the rates of exchange. Important ones are briefly discussed below.

Changes in Interest Rates: Changes in interest rate tend to influence indirectly the foreign exchange rate. A rise in the interest rate of a country attracts liquid capital and banking funds of foreigners. It will tend to keep their funds in their own country. All this tends to increase the demand for local currency and consequently the exchange rate move in its favour. It goes without saying that, a lowering of the rate of interest will have the opposite effect.

Tariffs Duties and Import Quotas: The most important indirect method is the use of tariffs and import quotas and other such quantitative restrictions on the volume of foreign trade. Import duty reduces imports. when import duties and quotas are imposed, the rate of exchange tends to go up in favour of the controlling country.

Export Bounties:

Export bounties of subsidies increase exports. As such the external value of the currency of the subsidy-giving country rises.

There are various forms in which the exchange control system may be devised. Each form has its own merits and demerits and each one serves a specific purpose. Therefore, the whole economic situation of foreign trade of a country must be carefully viewed while resorting to exchange control and more than one methods must be combined together.

Moreover, exchange control is always an inhibiting factor to an expanding world trade. With its adoption the gains from international trade are reduced and channels of trade are distorted. It also checks the flow of international investments which are very essential for the planned development of world's economic resources. In normal peace times, therefore, it has hardly anything to commend. That is why, International Monetary Fund also has mentioned the removal of exchange controls as one of its major objectives.

EXCHANGE RATE SYSTEMS Broadly, there are two important exchange rate systems, namely the fixed exchange rate system and flexible exchange rate system.

Fixed Exchange Rates Countries following the fixed exchange rate (also known as stable exchange rate and pegged exchange rate) system agree to keep their currencies. at a fixed, pegged rate.

OVERVIEW

The exchange control is necessary to realization of exchange rate of taka and satisfactory level of foreign exchange reserve because it should be adopted to check the flight of capital.

This is Specially important when a country’s currency is under speculative pressure. In such cases tariffs and quotas would not be effective. Exchange control being direct method would successfully present the flight of capital of hot money.

Exchange control is effective only when the balance of payment is disturbed due to some temporary reasons such as fare of war, failure of corps or some other reasons. But if there are some other underlying reasons,Exchange control device would not be fruitful.

Exchange control is necessary when the country wants to discriminate between various sources of supply. Country may allow foreign exchange liberally for imports from soft currency area and imports from hard currency areas will be subject to light import control.

Exchange control helps to stable the exchange rate If exchange rate stability is not assured, exporters will be uncertain about the amount they will receive and importers will be uncertain about the amount they will have to pay. Such uncertainties and the associated risks adversely affect foreign trade besides a stable exchange rate system eliminates speculation in the foreign exchange market.

Question No. 3 What is meant by foreign exchange market? Briefly discuss the principal features of foreign exchange market of Bangladesh.

Ans of the Question No.3 Foreign Exchange Market:: Foreign exchange market is the market in which foreign currencies are bought and sold. The buyers and sellers include individuals, firms, foreign exchange brokers, commercial banks and the central bank. Like any other market, foreign exchange market is a system, not a place. The transactions in this market are not confined to only one or few foreign currencies.

In fact, there are a large number of foreign currencies which are traded, converted and exchanged in the foreign exchange market.

Foreign exchange market performs the following three functions: 1. Transfer Function: It transfers purchasing power between the countries involved in the transaction. This function is performed through credit instruments like bills of foreign exchange, bank drafts and telephonic transfers.

2. Credit Function: It provides credit for foreign trade. Bills of exchange, with maturity period of three months, are generally used for international payments. Credit is required for this period in order to enable the importer to take possession of goods, sell them and obtain money to pay off the bill.

3. Hedging Function: When exporters and importers enter into an agreement to sell and buy goods on some future date at the current prices and exchange rate, it is called hedging. The purpose of hedging is to avoid losses that might be caused due to exchange rate variations in the future.

Kinds of Foreign Exchange Markets: Foreign exchange markets are classified on the basis of whether the foreign exchange transactions are spot or forward accordingly, there are two kinds of foreign exchange markets: (i) Spot Market: Spot market refers to the market in which the receipts and payments are made immediately. Generally, a time of two business days is permitted to settle the transaction. Spot market is of daily nature and deals only in spot transactions of foreign exchange (not in future transactions). The rate of exchange, which prevails in the spot market, is termed as spot exchange rate or current rate of exchange. (ii) Forward Market: Forward market refers to the market in which sale and purchase of foreign currency is settled on a specified future date at a rate agreed upon today. The exchange rate quoted in forward transactions is known as the forward exchange rate. Generally, most of the international transactions are signed on one date and completed on a later date. Forward exchange rate becomes useful for both the parties involved in the transaction.

Principal Features of Foreign Exchange Market: Given below are some of the main features of foreign exchange market – 1. Foreign exchange market is the only market which is open 24 hours a day, except for weekends unlike equity or commodities market which are open only for few hours.

2. Volume of transactions which are executed in foreign exchange market is extremely huge because of many big players in foreign exchange market. Foreign exchange markets are more liquid than any other market because of this reason.

3. Foreign Exchange Market are present in specific place of country and therefore geographically they are located to whom Bangladesh Bank has given authorization to deal foreign exchange which makes them quite unique.

4. Foreign exchange markets are the most difficult market to trade in as the exchange rates of countries are affected by so many factors like interest rates, liquidity, geo political factor and so on.

5. Foreign exchange market is a big player market, because mostly it is the big banks and government who are the players in foreign exchange market 6. Foreign exchange rates can change rapidly in response to any real-time economic and political events. This offers great opportunities for traders to make profits in the forex markets. Of course, volatility can be a double-edged sword, and losses can accumulate just as quickly

Question No. 4 Define the terms Balance of Trade and balance of Payment. What are the differences between Balance of trade and Balance of payment ? What are your suggestions to improve the Balance of Payment of Bangladesh.

Ans. to the Question No. 4 BALANCE OF TRADE: BALANCE OF TRADE: The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country. The balance of trade is the official term for net exports that makes up the balance of payments. The balance of trade can be a "favorable" surplus (exports exceed imports) or an "unfavorable" deficit (imports exceed exports). The official balance of trade is separated into the balance of merchandise trade for tangible goods and the balance of services....

A balance of trade surplus is most favorable to domestic producers responsible for the exports.

However, this is also likely to be unfavorable to domestic consumers of the exports who pay higher prices.

Alternatively, a balance of trade deficit is most unfavorable to domestic producers in competition with the imports, but it can also be favorable to domestic consumers of the exports who pay lower prices....

Largest component of a country's current account in its balance of payments (BOP) accounts, it shows the difference between export earnings and import expenditure. Called 'favorable' when the amount realized from physical (or tangible or visible) exports is more than the amount spent on physical imports, otherwise called 'unfavorable.' Also called trade balance.

Definition of 'Balance Of Payment' Set of accounts that record a country's international transactions, and which (because double entry bookkeeping is used) always balance out with no surplus or deficit shown on the overall basis. A surplus or deficit, however, can be shown in any of its three component accounts: (1) Current account, covers export and import of goods and services, (2) Capital account, covers investment inflows and outflows, and (3) Gold account, covers gold inflows and outflows. BOP accounting serves to highlight a country's competitive strengths and weaknesses, and helps in achieving balanced economic-growth.

The balance of payments accounts of a country record the payments and receipts of the residents of the country in their transactions with residents of other countries. If all transactions are included, the payments and receipts of each country are, and must be, equal. Any apparent inequality simply leaves one country acquiring assets in the others. For example, if Americans buy automobiles from Japan, and have no other transactions with Japan, the Japanese must end up holding dollars, which they may hold

in the form of bank deposits in the United States or in some other U.S. investment. The payments of Americans to Japan for automobiles are balanced by the payments of Japanese to U.S. individuals and institutions, including banks, for the acquisition of dollar assets. Put another way, Japan sold the United States automobiles, and the United States sold Japan dollars or dollar-denominated assets such as Treasury bills and New York office buildings....

Although the totals of payments and receipts are necessarily equal, there will be inequalities—excesses of payments or receipts, called deficits or surpluses—in particular kinds of transactions. Thus, there can be a deficit or surplus in any of the following: merchandise trade (goods), services trade, foreign investment income, unilateral transfers (foreign aid), private investment, the flow of gold and money between central banks and treasuries, or any combination of these or other international transactions.

According to the RBI, balance of payment is a statistical statement that shows the transaction in goods, services and income between an economy and the rest of the world.

Definition: According to the RBI, balance of payment is a statistical statement that shows 1. The transaction in goods, services and income between an economy and the rest of the world, 2. Changes of ownership and other changes in that economy's monetary gold, special drawing rights (SDRs), and financial claims on and liabilities to the rest of the world, and 3. Unrequited transfers.

Description: The transactions in BOP are categorised in a) Current account showing export and import of visibles (also called merchandise) and invisibles (also called non-merchandise). Invisibles take into account services, transfers and income. b) Capital account showing a capital expenditure and income for a country. It gives a summary of the net flow of both private and public investment into an economy. External commercial borrowing (ECB), foreign direct investment, foreign portfolio investment, etc form a part of capital account. c) Errors and omissions: Sometimes the balance of payment does not balance. This imbalance is shown in the BOP as errors and omissions. BOP is compiled using the double entry book keeping system consisting assets and liabilities.

Difference Due to the effect of globalization, now every country is transacting with other countries of the world which made the world a global village. There are two statements that are kept to record the transactions made by the country internationally, they are: Balance of Trade (BOT) and Balance of Payment (BOP). The scope of BOP is greater than BOT or you can also say that Balance of Trade is a major

section of Balance of Payment.

If you are searching for the difference between balance of trade and balance of payment, so this your right destination. Look at all the important distinguishing points between the two topics of macro economics below.

Content: Balance of Trade Vs Balance of Payment 1. Comparison Chart 2. Definition 3. Key Differences 4. Conclusion Comparison Chart

Basis for Comparison

Balance of Trade

Balance of Payment

Meaning

Balance of Trade is a statement that captures the country's export and import of goods with the remaining world.

Balance of Payment is a statement that keeps track of all economic transactions done by the country with the remaining world.

Records

Transactions related to goods only.

Transactions related to both goods and services are recorded.

Capital Transfers

Are not included in the Balance of Trade.

Are included in Balance of Payment.

Which is better?

It gives a partial view of the country's It gives a clear view of the economic economic status. position of the country.

Result

It can be Favorable, Unfavorable or balanced.

Component

It is a component of Current Account Current Account and Capital Account. of Balance of Payment.

Both the receipts and payment sides tallies.

Suggestion to improve the Balance of Payment

Last but not the least, Errors and Omissions are also considered in Balance of Payments. In Bangladesh errors and omissions are the difference between the current account and capital & financial account. If we will success to minimize the errors and omissions account then the overall balance will be increased. New items such as handicraft and cottage goods should be implemented to export. It will be a good source of foreign revenue. Bangladesh have also an opportunity to implement the beach of

Cox’s Bazaar to catch the eye of foreigners, it will also a good source of revenue. At Present Bangladesh have to provide necessary incentives to the FDI that will increase the capital account and thus overall balance. Also Bangladesh have to search new country to export labor. As we know the remittance is the highest source of Current transfer of Bangladesh which plays an important role in increasing the overall balance of payment.

To attract foreign direct investment, the Government of Bangladesh has offered most liberal package of investment facilities and incentives, which are:Tax holiday, Accelerated depreciation, Concessionary duty on imported capital machinery, Rationalization of is import duty Incentives to Non-Resident Bangladeshis(NRBs), etc.

Other incentives:

Tax exemption on royalties, technical know-how fees received by any foreign collaborator, firm, company and expert. Tax exemption on the interest on Foreign loans under certain conditions. Avoidance of double taxation in case of foreign investors on the basis of bilateral agreements. Exemption of income tax up to 3 years for the foreign technicians employed inindustries specified in the relevant schedule of income tax ordinance. Tax exemption on income of the private sector power generation company for15 years from the date of commercial production. Facilities for full repatriation of invested capital, profit & dividend 6 months’multiple entry visa for the prospective new investors. Re-investment of repatriable dividend treated as new investment.

Question No. 5.

What is called exchange position ? What are the components of exchange position ? What are the risks of maintaining an oversold exchange position ?

Ans. to the Question No. 5 Exchange Position: Exchange position refers to the position of foreign currency (FCY) to be reported as per prescribed format of Bangladesh Bank which indicates the total FX assets and liabilities and differences thereof.

Exchange position reflects the overall exposure of all foreign exchange transactions of a bank on a specific date. Authorized dealers engage themselves in buying and selling of different currencies as per requirement of the clients within the limit (Open Position) allowed by the central Bank. Trasure Department of a bank maintains the exchange position. They observe the net position and do the selling and buying as per customer demand keeping the open position limit within the approved limit of Bangladesh Bank.

The Exchange position or currency position as it is called of a bank is the position from its day's purchases and sales both ready and forward of foreign currencies.

Component of exchange position: Assets:

     

Nostro Balance (Local Book) Bangladesh Bank clearing account balance (Local Book) Placement abroad Others Cash Holding Outward Bill purchase (FDBP)

Liabilities:  

Credit Balance of Nostro A/C Balance Held on difference FC A/C of customers I.e ►NFCD ►RFCD ►ERQ ►FC A/C ► FDD/TT/MTT ►BTB L/C (FCBPAR) ►Others.

Others Components  



Net position of Assets / Liabilities Forward against contract ( Off balance sheet item) Contingent liability on A/C of Customers ( Off balance sheet Item)

                    

L/C (the amount of letters of credit outstanding only with out having forward booking should be reported under this head) Letter of Guarantee Overall Position (Net position of Asset / Liability + forward) Spot / Cash transaction of the day ( means day transaction) Sale to Bangladesh Bank Net position with Bangladesh Bank sales to other Banks Purchase from other banks Net position with other banks Sales to customers ( Against Import) Purchase from customers ( Against Export) Net position with customers Net Spot / Cash transaction of the day.

Forward Transaction of the day.

Sales to the other Bank Purchase from other bank Total forward position of the dad Total spot position of the day Total position of the day Position over bought / over sold (Taka) Position over bought / over sold (USD)

The risks of maintaining an oversold exchange position:

i)Markets that are in a strong downtrend can remain oversold for long periods of time.

This is why these oscillators have limited value in trending markets . ii) when market moves down to an oversold condition, the market has a tendency to reverse. ii) If oversold is happen then FEX liability are more than the F. Ex assets as a result a gap schedules based on asset and liability iv)when over sold is happen bank can loss its profitability due to higher exchange rate.

Question No. 6. Write short Notes: a) Supplier's Credit b) Off-shore Banking c) Duty drawback d) Negotiation under reserve e)Export Processing Zone f)Documentary Collection g) Asian Clearing Union.

Ans of The Question No. 6 a) Supplier's Credit: Definition of Supplier’s Credit: Supplier’s credit is defined as a financial credit facility that is extended to a local Buyer by the Foreign Seller/ BANK/ Financial institutions, preferably of Seller’s Country. The local bank will issue Usance Bills under the LC for the Importer and in return the Foreign bank will discount this LC. Why Required Supplier’s Credit:  Suppliers would ask for sight payment where as you want credit on the transaction.  At times, in capital goods, banks would insist on using term loan instead of buyer’s credit. By this way you can avail cheap LIBOR rate funds and your supplier would also not mind as he is getting funds at sight.

Benefits of Suppliers’s Credit: For Importer  Availability of cheaper funds for import of raw materials and capital goods  Ease short-term fund pressure as able to get credit  Ability to negotiate better price with suppliers  Able to meet the Suppliers requirement of payment at sight For Supplier Realize at-sight payment Avoid the risk of importer’s credit by making settlement with LC

ans: b) Off-shore Banking

An offshore bank is a bank located outside the country of residence of its depositors, with most of its account holders being non-residents of the jurisdiction. An account held in a foreign account, especially in a tax haven country, is often described as an offshore account.

Typically, an individual or company will maintain an offshore account in a low-tax jurisdiction (or tax haven) that provides financial and legal advantages, such as greater privacy little or no taxation easy access to deposits(at least in terms of regulation) protection against local, political, or financial instability.

While the term originates from the Channel Islands being "offshore" from the United Kingdom, and while most offshore banks are located in island nations to this day, the term is used figuratively to refer to any bank used for these advantages, regardless of location. Thus, some banks in landlocked Switzerland, Luxembourg and Andorra may be described as "offshore banks". c) Duty drawback Duty Drawback is the rebate of duty chargeable on imported material or excisable material used in the manufacturing of goods in and is exported. The exporter may claim drawback or refund of excise and customs duties being paid by his suppliers. The final exporter can claim the drawback on material used for the manufacture of export products. In case of re-import of goods the drawback can be claimed.

The following are Drawbacks: Customs paid on imported inputs plus excise duty paid on indigenous input. Duty paid on packing material.

Drawback is not allowed on inputs obtained without payment of customs or excise duty. In part payment of customs and excise duty, rebate or refund can be claimed only on the paid part.

In case of re-export of goods, it should be done within 2 years from the date of payment of duty when they were imported. 99% of the duty is allowable as drawback, only after inspection. If the goods imported are used before its re-export, the drawback will be allowed as at reduced percent.

d) Negotiation under reserve: The documents presented under a documentary credit are scrutinized as per the International standards of scrutiny and negotiated if they strictly comply with the LC terms. This is called a clean negotiation.

On the other hand if the documents do not comply with the LC terms and discrepancies are found, the negotiating bank may still opt to give value under the LC by paying or incurring a deferred payment obligation as per LC provided the beneficiary undertakes to indemnify the negotiating bank in the event of rejection by the LC opening Bank. This is technically called a negotiation under reserve. The Reserve will be lifted on acceptance of discrepancies by the LC opening Bank. e)Export Processing Zone An Export processing zone (EPZ) is a specific type of free trade zone (FTZ) , set up generally in developing countries by their governments to promote industrial and commercial exports In addition to providing the benefits of a FTZ, these zones offer other incentives such as exemptions from certain taxes and business regulations. Also called development economic zone or special economic zone. f) Documentary Collection International trade procedure in which a bank in the importer's country acts on behalf of an exporter for collecting and remitting payment for a shipment. The exporter presents the shipping and collection documents to his or her bank (in own country) which sends them to its correspondent bank in the importer's country. The foreign bank (called the presenting bank) hands over shipping and title documents (required for taking delivery of the shipment) to the importer in exchange for cash payment (in case of 'documents against payment' instructions) or a firm commitment to pay on a fixed date (in case of 'documents against acceptance'instructions). g) Asian Clearing Union.

Asian Clearing Union (ACU) is a payment arrangement whereby the participants settle payments for intra­ regional transactions among the participating central banks on a net multilateral basis. The main objectives of the clearing union are to facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade and banking relations among the participating countries.

The ACU was established at the initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). The Decision to establish the ACU was taken at the Fourth Ministerial Conference on Asian Economic Cooperation held in December 1970 at Kabul. The Draft Agreement Establishing the ACU, was finalized at a meeting of senior officials of the governments and central banks held at ESCAP, Bangkok, in December 1974 after five

central banks (India, Iran, Nepal, Pakistan, and Sri Lanka) signed the Agreement. Bangladesh and Myanmar were the sixth and seventh signatories to this Agreement. Bhutan and Maldives signed the Agreement in 1999 and 2009 respectively and the number of the ACU participants reached nine.

Members Currently (2009), the members of ACU are the central banks of Bangladesh, Bhutan, Iran, India, Maldives, Nepal, Pakistan, Sri Lanka, and Myanmar. The central banking authority of member countries has issued detailed instructions and modalities for channeling the monetary transactions through the ACU. Membership in the ACU is open to central banks located in the geographical area of ESCAP.

Question No. 7 8. A letter of credit was issued by an importer for import of second hand garment machinery. On receipt of the import documents from the negotiating bank it was noticed that the preshipment inspection certificate contain a remark as follows: “ Some machinery appear to be rusted” The LC issuing Bank refused to accept the documents on account of this discrepancy. The negotiating bank, on the other hand contended that the discrepancy was not a discrepancy in the real sense nor does it indicate any defective condition of the machinery.

The negotiating bank also refused to refund the money that it had realised by debiting 'Nostro account' of the issuing bank.

Please furnish your views in the light of the provisions of UCPDC on the contentions of both the bank.

Ans. To the Question No. 7 As per UCP- 600, Article 14(f) If a credit requires presentation of a document other than a transport document, insurance document or commercial invoice, without stipulating by whom the document is to be issued or its data content, banks will accept the document as presented if its content appears to fulfil the function of the required document and otherwise complies with sub-article 14 (d).

Views:

So in the light of UCP-14(f) the issuing bank is not in right position and their discrepancy was not a discrepancy because the content of Preshipment inspection certificate was not clarified in the Credit.

Md. Shafiqur Rahman Executive Vice president Islami Bank Bangladesh Ltd. shafiqur@islamibankbd.com

BANKING DIPLOMA EXAMINATION, JUNE 2014(DAIBB) INTERNATIONAL TRADE AND FOREIGN EXCHANGE (EF)

Q 1. Short Notes : a) Cross rate: When the rate of a currency with the third currency is calculated by the rate prevailing between the second and third currency is called Cross rate.

The exchange rate between two currencies that are not the official currencies of the country that the exchange was quoted in. Cross rates usually do not involve the U.S. dollar. For example, an investor in the United States could get the cross rate of the Euro to the Canadian Dollar b) Forced LIM: When the importer does not come to the Bank for retiring the Bill, Bank has to clear the imported goods from the Customs authority under bank’s authority by creating a Lim A/C in the name of the importer, which is known as Forced Lim. Before creating Forced Lim, bank has to calculate 3) The ‘Landed cost’ and determine 4) Determine the value of the imported goods.

Loan against Imported Merchandise (LIM): ADs provide this type of loan to the Importer against trading items by keeping the imported goods in the Bank’s warehouse or Bank’s controlled warehouse. This is a very short term loan, normally sanctioned for maximum 90 days. The Goods are cleared by the Bank’s own C& F Agent and directly stored in Bank’s warehouse. The Bank issues Delivery Order (DO) against receipt of payment of merchandise. The Importer can release the goods in parts. The interest is charged quarterly. When the Customer doesn’t come up to clear the goods, then the Bank creates Forced LIM and adjusts the import costs by selling the goods in open auction. Money laundering : The concealment of the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses.

Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.

There are three steps involved in the process of laundering money: placement, layering, and integration. Placement refers to the act of introducing "dirty money" (money obtained through illegitimate, criminal means) into the financial system in some way; "layering" is the act of concealing the source of that money by way of a series of complex transactions and book keeping gymnastics; and integration refers to the act of acquiring that money in purportedly legitimate means.

One of the more common ways that laundering takes place is when a criminal organization funnels their illegally obtained cash through a cash-based business, slightly inflating the daily take. These organizations are often referred to as "fronts." In the popular television series "Breaking Bad," the methamphetamine dealer funnels his earnings from selling illicit drugs through a series of car-wash businesses.

Other common forms of money laundering include smurfing, where a person breaks up large chunks of cash and deposits them over an extended period of time in a financial institution, or simply smuggles large amounts of cash across boarders to deposit them in offshore accounts where money laundering enforcement is less strict. d) Back to Back LC: The back to back credit is a new credit opened on the basis of an original credit in favour of another beneficiary.The Back to Back LC is opened by the Exporter’s Bank in favour of the actual Manufacturer or producer of the raw materials and spares to facilitate the production of finished goods for ultimate export. The BBLC is opened on the strength of the Export LC. The Bank in due course will receive Import Documents. Usually payment terms of BBLC IS 90/ 120 days deferred. e) Claused Bill Of Lading: A bill of lading that shows a shortfall or damage in the delivered goods. Typically, if the shipped products deviate from the delivery specifications or expected quality, the receiver may declare a claused bill of lading.

Also known as a "dirty bill of lading" or "foul bill of lading."

Being issued a claused bill of lading can be troublesome for most exporters. If the goods are deemed damaged or some quantity is missing, the exporter may have difficulty receiving payment. Because most banks will refuse to accept any claused bills of lading, purchasers relying on letters of credit to pay for the goods will be unable to receive funds if the bill is foul. f) European Union: The EU is a unique economic and political partnership between 28 European countries that together cover much of the continent.

The EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries who trade with one another become economically interdependent and so more likely to avoid conflict.

The result was the European Economic Community (EEC), created in 1958, and initially increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands. Since then, a huge single market has been created and continues to develop towards its full potential.

From economic to political union What began as a purely economic union has evolved into an organisation spanning policy areas ,fromdevelopment aid to environment. A name change from the EEC to the European Union (EU) in 1993 reflected this.

The EU is based on the rule of law: everything that it does is founded on treaties, voluntarily and democratically agreed by all member countries. These binding agreements set out the EU's goals in its many areas of activity.

Mobility, growth, stability and a single currency The EU has delivered half a century of peace, stability and prosperity, helped raise living standards, and launched a single European currency, the euro.

Thanks to the abolition of border controls between EU countries, people can travel freely throughout most of the continent. And it's become much easier to live, work, and travel abroad in Europe.

The single or 'internal' market is the EU's main economic engine, enabling most goods, services, money and people to move freely. Another key objective is to develop this huge resource to ensure that Europeans can draw the maximum benefit from it.

Human rights and equality One of the EU’s main goals is to promote human rights both internally and around the world. Human dignity, freedom, democracy, equality, the rule of law and respect for human rights: these are the core values of the EU. Since the Lisbon Treaty's entry in force in 2009, the EU's Charter of Fundamental Rights brings all these rights together in a single document. The EU's institutions are legally bound to uphold them, as are EU governments whenever they apply EU law.

Transparent and democratic institutions As it continues to grow, the EU remains focused on making its governing institutions more transparent and democratic. More powers are being given to the directly elected European Parliament, while national parliaments are being given a greater role, working alongside the European institutions. In turn, European citizens have an ever-increasing number of channels for taking part in the political process. g) SWIFT: SWIFT - Society for Worldwide Inter-bank Financial Telecommunication established in 1973 by 239 Banks of 15 European countries with Head Quarter in Belgium – is the industry-owned co-operative supplying secure, standardized messaging services and interface software to nearly 9500 Financial Institutions in 209 countries & territories.

SWIFT, the Society for Worldwide Inter-bank Financial Telecommunication is the bank-owned cooperative serving the financial community worldwide. The SWIFT Transport Network (STN) is a dedicated global network for secure communication between SWIFT Customers.

SWIFT supports the financial data communication and processing needs of financial data communication and processing needs of financial institutions, through a range of financial messaging services and value-added processing, as well as, access through the SWIFT Transport Network (STN) and interface and application software. In short SWIFT is a pioneer in the automation of the global financial industry.

ADVANTAGE OF SWIFT · Confidentiality – Information is only disclosed to authorized persons at authorized locations.

· Integrity – Information can be relied upon to be complete, accurate and unchanged. · Availability – Information and associated service is accessible and usable when needed. · Accountability – Every individual authorized to use the system is accountable.

Confidentiality and Integrity are ensured by means of security of transmission, delivery and message storage; by validation of messages; and by user-to-user authentications.

Uses of SWIFT in Trade Payment SWIFT provides complete solutions covering every aspect of financial service processing which include – payments & cash management, treasury & derivatives, trade services, securities pretrade/trade, pre-settlement, clearing & settlement, custody services and reporting.

Q 2. Discuss the main feature/Characteristics of a Documentary letter of credit. Discuss the right and obligation of the Confirming Bank under Documentary Credit.

As per Ucp 600 Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. Main feature of a documentary credit are mentioned below.

Applicability Recommended for use in new or less-established trade relationships when you are satisfied with the creditworthiness of the buyer’s bank.

Risk Risk is evenly spread between seller and buyer provided all terms and conditions are adhered to.

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Payment after shipment

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A variety of payment, financing and risk mitigation options

Negotiability (ii)The beneficiary of a letter of credit has right to payment because of the letter of credit. This contractual relationship is independent of the relationship in trade that may have prompted the need for the letter of credit. To be negotiable, the letter of credit must contain either an unconditional promise to pay at any time the holder wishes or at a definite time. Negotiable notes become transferable in a way comparable to money when they have this feature.

Revocability 2. A letter of credit may be revocable or irrevocable. In the case of a revocable letter of credit, it is possible that the obligation to pay may be revoked or modified at any time or for any reason. An irrevocable letter cannot be changed without agreement by all of the affected parties.

Transfer and Assignment 2. Domestic letters of credit, which are governed by the UCC, may be transferred as many times as

desired and will remain effective. This holds true even where the letter of credit says that it is non-transferable to the extent that no one has yet performed actions pursuant to the letter of credit when the transfer occurs.

Sight and Time Drafts 5. There are two possible features of a letter of credit that can trigger an obligation to pay: sight or time. A sight draft must be paid when the letter is presented for payment. A time draft must be paid after a certain period of time has elapsed. In both instances, the bank is allowed the opportunity to review the letter of credit to assure its validity.

Responsibility of a Confirming Bank under documentary credit: When the opening/ issuing bank authorizes or requests another bank to confirm its irrevocable credit and the later has added its confirmation, such confirmation constitutes a definite undertaking of such bank (the confirming bank) in addition to that of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with. The confirming bank must: i. honor, if the credit is available by a. sight payment, deferred payment or acceptance with the confirming bank; b. sight payment with another nominated bank and that nominated bank does not pay; c. deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity; d. acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity; e. negotiation with another nominated bank and that nominated bank does not negotiate. ii. negotiate, without recourse, if the credit is available by negotiation with the confirming bank. b. A confirming bank is irrevocably bound to honor or negotiate as of the time it adds its confirmation to the credit. Ref: UCP 600 Art. - 8.

Q 3. Distinguish between fixed and floating rates. Discuss the type exchange rate system followed

by Bangladesh and the factors that have helped Bangladesh to maintain a stable taka rate.

Fixed Exchange Rate: Maintain the external value of their currency at a pre-determined level. Whenever the fixed exchange rate deviates from the pre-determined level, it is corrected by official intervention.

Floating Exchange rate: Floating rates refers to a system where exchange rates are determined by the demand for and supply of foreign exchange in the market. The rates are free to fluctuate as per demand& supply of currency in market. The Central Bank does not intervene in the market to correct any disequilibrium directly.

The best policy is to fix the exchange rate through normal market mechanism. If we artificially try to over value our currency there will presence of different types of evil: 1. The currency will be traded at high price in the curb/ black market.

2. The Hundi and smuggling will be increased.

3. The people will hold foreign currency or gold instead of local currency.

4. In the local market less amount of Foreign Currency can be procured.

5. As people get less amount of local currency against FC people prefers to transfer their fund in FC abroad.

6. The wage earners prefers to send money via Hundi instead of Official channel as they get more in local currency in Hundi rate.

7. The unofficial cost of imported goods becomes higher than official rate.

CURRENT EXCHANGE RATE SYSTEM OF BANGLADESH : To meet up the economic demand and to fulfill the IMF conditionality, on 29 May, 2003 Bangladesh Bank issued a circular stating- effective from 31st May, 2003, Bangladesh Bank floated its exchange

rate and followed a fully market based exchange rate for Taka. Under this arrangement, exchange rate is determined on the basis of demand and supply of the respective currencies.

Under the new rate banks started to fix buying and selling rates of dollar and other currencies according to supply and demand situation under free-float system. The BB keep an eye on the market and intervence in money market and US dollar selling and purchase transactions whenever needed. The BB also deal with banks on dollar on a case-to-case basis.

The major reasons behind the adoption of new exchange rate system is mainly the government’s commitment to the liberalization of the country’s economy and to take the appropriate steps to create suitable environment of the economy for entering into capital account convertibility regime. Rather than this, there was IMF's 'conditionalities' to enter into new floating exchange rate regime.

Factor helped Bangladesh to maintain stable Taka Rate: Introduction of floating exchange rate was debatable issue and also there were some criticisms about the competence of Bangladesh Bank's from some corner. But Bangladesh Bank performed a tremendous performance. There was no volatility; no speculation in price and market behaves rationally. Three major variables have been considered for evaluating the impact of exchange rate with them. The variables are Export, Workers Remittances and Foreign reserve. They also help bangladesh to maintain stable Taka rate.

The Export Situation: The export trend from 1998 to 2011 shows an increasing trend. It is shown here thatthere is upward trend of export after 2003,i.e, after adopting the floating exchange rate regime, the export has a robust growth in the economy. During the global recession, the export trend of Bangladesh was not that much affected mostly for the RMG sector.

Enhancement of Workers Remittance: The Inward remittances from Bangladeshi nationals working abroad remained strong in FY10 even in the face of global economic slowdown and continued to play an important role in strengthening the current account. Receipts on this sector increased by 13.4 percent to USD 10987.40 million in FY10 from USD 9689.26 million in FY09. The underlying reason was that Bangladesh Bank has simplified the approval policy of drawing arrangements between foreign exchange houses and domestic banks. As a result, 40 banks 13 have been allowed for establishing 885 drawing arrangements with 300 exchange houses all over the world for collecting remittances. Considering the growth rate of workers’ remittances, it has been observed that the rate is quite higher after the free floating exchange rate regime that is 20.52 % (2003-2010) than that of fixed exchange rate regime of Bangladesh which is calculated as 11.89% (1993- 2002). The increasing amount of workers remittance helps to balance the trade deficit in a prudent manner.

Reserve Position: The main sources of foreign reserve are workers remittance, foreign loans and grants and exports.

After the inception of floating exchange rate regime, the foreign exchange reserve boosted up due to huge amount of workers remittance and increasing trend of export.

The Growth Rate of GDP The GDP growth rate reaches upto 6.7% during FY 11. From 1994 to 2010, the average growth rate of GDP was 5.47% reaching at high of 6.63% in June 2006. The record low rate was 4.08% during June 2004. For the last couple of years the growth rate was 5% above and Bangladesh is considered as a developing country.

Conclusion: From above discusion it shows that floating exchange rate regime has constructive effect on economic growth. The transition period from Fixed rate regime to Floating rate regime was quite smooth and stable. There is significant growth in the fundamental economic variables on the long path of the new exchange rate regime. The trend of export, workers’ remittances and foreign reserves have been analyzed and found considerable growth on these variables. For this reason new exchange rate helped bangladesh to maintain stable taka rate.

Q 4.Discuss the types of credit facilities provided by the banks to the exporters in Bangladesh.

Identify the steps a financial bank should take to address those risks.

Export

plays a dominant role in the economy of our country. In the export trade, exporter needs the finance at different stages right from the stage he gets an export order to supply the goods from an overseas buyer. The finance is required for procuring, processing, manufacturing, assembling and packaging the goods for export in the pre shipment stage. After the shipment is made, exporters sometimes will have to give credit to the importer for an agreed period and he has to wait for the value till the expiry of the credit period (maturity of export bill). Even if no credit is allowed to importer, the capital of the exporter is blocked till documents reach the importer, he makes the payment and the amount is collected by the exporter’s bank.

Thus the post shipment credit is required during the intervening period between the shipments of goods till receipt of payment there against. Therefore, these are two stages in export financing: 2. Pre-shipment Export Credit 3. Post -Shiment Export Finance The advance allowed for arranging goods falls into the category of pre shipment finance and the advance made against the shipping documents i.e. negotiation of foreign bills falls under the category of post shipment finance.

Pre-shipment Export Credit: Pre Shipment finance is a short term working capital finance specially provided to an exporter against the documentary evidence of having entered into export commitment. Pre Shipment Finance is granted at the stage prior to the shipment of goods and such finance is given to procure raw material, for paying manufacturing and packing charges and payment of insurance premium and freight. As and when the

goods are shipped and shipping documents are obtained the pre shipment finance is to be liquidated against the proceeds of export documents tendered.

The banks grant pre shipment finance against documentary evidence either by way of an export letter of credit or a contract. Letter of Credit constitutes the most frequently used instrument for export of goods from Bangladesh. Readymade garments, which comprise a large chunk of Bangladesh’s export, are invariably exported against L/C because the underlying L/C constitutes the basis for opening Back to Back L/C (both local and foreign) for procuring fabric and accessories.

The Pre Shipment finance is categorized broadly as per following : 1.Back to Back LC(Inland and Foreign) 2.Export Cash Credit (ECC) 3.Packing Credit(PC) 1. Back to Back L/C: This type of facility is allowed to exporter for procuring and processing of goods. For export of traditional item like jute, tea and leather the facility can be extended up to 90% of the value of export L/C as contract. For garments industry this can be allowed between 10% - 15% based on the category of unit because the main raw material is procured through Back to Back L/C.

2. Export Cash Credit: This type of facility is allowed to exporter for procuring and processing of goods. For export of traditional item like jute, tea and leather the facility can be extended up to 90% of the value of export L/C as contract. For garments industry this can be allowed between 10% - 15% based on the category of unit because the main raw material is procured through Back to Back L/C. 3. Packing Credit: Packing Credit is allowed for making necessary preparation for shipment of goods. This finance generally covers cost of packing, transportation from godown to the port for shipment ware housing, insurance

etc.

For traditional item like Jute, Tea, Leather etc. packing credit may be allowed up to 90% of invoice value against rail receipt/steamer receipt/Barge receipt. This credit is thus extended against submission of documents of title to goods showing loading of goods from the place of shipment to port for ultimate shipment to abroad.s.

Post Shipment Credit This type of credit refers to the credit facilities extended to the exporters by bank after shipment of the goods against export documents. Necessity for such credit arises as the exporter can not afford to wait for a long time for payment to local manufacturers/suppliers. Before extending such credit,

it is necessary to obtain report on creditworthiness the exporters and financial soundness of the buyers as well as other relevant documents connected with the exporter in accordance with the rules and regulations in force. Banks in our country extended post-shipment credit to the exporters through: 1. Negotiation of Documents under L/C 2. Purchase of DP & DA Bills 3. Advance against bills for Collection Negotiation of Documents under L/C Under this arrangement, after the goods are shipped, the exporter submits the concerned documents to the negotiating bank for negotiation. The documents should be negotiated strictly in accordance with the terms and conditions and within the period mentioned in the letter of credit.

Purchase of DP & DA Bills In such a case, the banks purchase/discount the DP (Documents against payment) and DA (Documents against Acceptance) bills at rate published by the Exchange Rate Committee of authorized dealers. While doing so, the banks should scrutinize all the export documents separately and minutely and clear instructions are to be obtained from the drawer of the bill in regard to all important issues related to the negotiation of the bills.

Advance against bills for Collection Banks generally accept export bills for collection of proceeds when they are not drawn under a L/C or when the documents, even through drawn against an L/C contain some discrepancies. Bills drawn under L/C, without any discrepancy in the documents, are generally negotiated by the bank and the exporter gets the money from the bank immediately. However, if the bill is not eligible for negotiation, he may obtain advance from the banks against the security of export bills. Banks may give advance ranging from 50 to 80 percent of the document’s value. In addition to the export bills, banks may ask for collateral security like a guarantee by a third party and equitable/registered mortgage of property.

Step should a bank take to ensure pre-shipment ans post shipment export financing: 5. Bank must check wheathe the exporter make export aganist leter of Crdit or Contract.

6. If the Expoter export aganist aganist Leter of credit than bank must check the term and condition of the credit. The bank should also confirm that the exporter is capaable to execute the export LC. 7. Bank must collect Buyers Credit report aganist export under contract.

8. Bank must collect buyers credit report to minimize risks under contract. Otherwise following risk may occur :

I) Non-Acceptance of Documents Risk : Non-acceptance of documents is one of the major risk factor in a documentary collection. Under current documentary collection rules which are called URC 522 importers are not obligated to collect documents from their banks.

II)Non-Payment Risk: Non-payment risk is another risk factor in documentary collections. In most cases we would expect to see a nonpayment risk in a documentary collection which is available by Documents Against Acceptance (D/A). Nonpayment risk would be happened if the importer accepts a time draft but not be paying on maturity.

II) Risk of Delivery of Goods to the Importer without Original Shipment Documents may happened under contract.

9. Banks also ensure business exposure of the expoter.

10. Ensure sufficient collateral aganist export credit.

11. Bank also monitor/follow up shipment schdule of export lc/contract to timely execute the export.

Q 5. What is meant of export position. What are the main components of export position. Identify the risks of maintaining an overbought or oversold position at the end of working day.

The Exchange Position The Exchange Position or the Currency Position as it is called of a Bank is the position from its day’s purchase and sales both ready/ spot and forward of Foreign Currencies.

Over bought and oversold Position When the sales of a day exceed the purchase, the position is known as: Oversold or Short.

When the purchase of a day exceeds the sales, the position is known as: Overbought or Long.

In either case the Position is generally termed “Open”.

When the sales and purchases equal each other the Position is said to be “Square”.

Dealing position: Overbought / Oversold/ Square position

Banker must not get involved in speculative overbuying or overselling.

Under the Exchange Control Regulations Bankers are not permitted to indulge in speculative activities in foreign exchange, and are required to maintain a square i.e. neither overbought nor oversold position or a near square position in each currency in which they have dealing so as to avoid exchange loss resulting from an adverse movement of the rate of exchange.

Components of Exchange Position The transactions that go into the composition of the exchange position in a given currency are the sales and purchases in that currency for which a firm rate has been quoted, irrespective of whether such transactions have been completed or not by the delivery of the currency.

In determining the exchange position, the sales and purchases are to be classified into separate groups, together with overbought or oversold position, the resultant balance gives the exchange position.

Position and balance The position in a foreign currency, is the net difference between the total sales and purchases of that currency on a particular day.

Balance refers to the balance, debit or credit, of the nostro account of a bank in that currency with its overseas branch or correspondent.

Q 6. State the main features of the generalized system of preference(GSP). What are the likely impacts of the withdrawal of GSP facility by the USA, following the Rana Plaza accident, on exports from Bangladesh.

GSP, is a formal system of exemption from the more general rules of the WTO, formerly the GATT. Under this system the Developed countries extend preferential treatment to a range of specified products imported from developed countries. The preferential treatment is provided either by reduced or zero rates of import tariff duties on the goods imported. GSP giving countries are called Donor countries and GSP receiving countries are called Beneficiary countries.

Main features of the GSP: 1. Concentrate GSP preferences on developing countries most in need. A number of countries,

which do not require GSP preferences to be competitive on the EU markets, no longer benefit from the Scheme, namely: 2. Countries that have another preferential access to the EU which is at least as good as under GSP – for example, under a Free Trade Agreement or a special autonomous trade regime.

3. Countries which have achieved a high or upper-middle income per capita during three consecutive years, according to the World Bank classification.

4. A number of overseas countries and territories, which are either attached to the EU and so have an alternative EU market access arrangement or are linked to another developed country.

5. Reinforce the trade incentives for the respect of core human and labour rights, environmental protection and good governance standards through the GSP+ arrangement.

6.Strengthen the effectiveness of the trade concessions for least-developed countries (LDCs) through the "Everything But Arms" arrangement. Reducing GSP to fewer beneficiaries reduces competitive pressure and makes the preferences for LDCs more meaningful.

7.Increase predictability, transparency and stability of the GSP. With the exception of EBA, which has no expiry date, the new Scheme is to last 10 years, instead of 3 previously. This makes it easier and more interesting for EU importers to purchase from GSP beneficiary countries. In addition, procedures have become even more transparent, with clearer, better defined legal principles and objective criteria.

Benefits from GSP • Bangladesh may quote more competitive prices.

• Can stimulate to buy more as the relative price is lower than others.

• Increases the export earnings.

• Scope for diversification of products and Market base.

GSP Offering Countries • EC Countries: Belgium, Denmark, Germany, France, Ireland, Italy, Luxembourg, Netherlands, United Kingdom, Greece, Portugal, Spain, Finland • Japan, USA, Australia, New Zealand, Norway, Sweden, Switzerland, Bulgaria, Hungary, Poland, Russia, Austria, Canada etc Effects of GSP Suspension in Bangladesh At first we should look at what Bangladesh was getting from GSP in USA. The benefitsor opportunities are: Bangladesh can export nearly 5000 products duty-free to US. Golf equipments , pla equipment,plastic bags, bone china, porcelain kitchenware, headgears, spectacles and tentsare on the list.

GSP covers less than 1% of Bangladesh’s total exports to the US a year.

Bangladesh spared $2m in duties on $35m of exports to US under GSP in 2012.

US GSP program does not include garment from Bangladesh. The nation paid$749.7m in duties at 15.3% on $4.9b of garment exports to American market in2012 Bangladesh enjoys trade benefits from US along with neighboring countries India,Bhutan, Cambodia, Nepal, Indonesia, Sri Lanka, and Thailand At a glance the major effects are: Economic costs of GSP withdrawal may not seem significant, but it carries reputation costs and can also influence European Union’s decision to cancel GSP privileges EU action, if any, could have a much bigger economic impact as its duty-free privileges cover garment GSP loss may discourage American companies from investing in BangladeshDue to the suspension of the GSP, a duty waiver scheme adopted in 1976 by the USgovernment for more than 5,000 goods from least developed and developing countries,Bangladesh will lose competitiveness in the US market.Although Bangladesh exports less than 1 percent of $5 billion annually under the GSP tothe US market, the impact of the withdrawal is significant. This is because some other ountries in the European Union, where the country enjoys duty waiver, might beinfluenced by the US decision. The economic impact of the withdrawal could have beenmuch deeper if the garment products had been included in the GSP package. Sincegarments are not covered by the scheme, Bangladeshi apparel exporters have to pay 15.3 percent duty to enter the US market.The probable financial loss in terms of falling export may be very small, at least in theshort run. As RMG products (which make up most of the US import from Bangladesh)are not included in the list of duty-free products in GSP, there will an export fall of about$40 million according to Charles Kernaghan, executive director of Institute for GlobalLabor and Human Rights. At present, Bangladesh exports about $5 billion worth of goods(mostly RMG products) to the USA every year and hence, the suspension from US GSPwill account for a fall in export of about 0.8%. Effect of GSP suspension and badcoverage media can be viewed this below figure:From the figure it is clear in every violence year in Politics and RMG sectors, exports ofRMG decreases by slight or big figure. As US importers try to avoid Bangladeshi productduring bad media coverage of political and RMG violence time.However, this $40 million will translate to export loss for some small industries in thecountry, namely, ceramic products, tobacco, etc.

Since global export of products fromthese industries are very small compared to that of RMG sector, this $40 million exportfall will make up a much larger proportion total export for these small industries.

More importantly, Bangladesh’s image as a trade partner of the USA is tainted. This maydiscourage US and other foreign investors, new and old, from venturing into Bangladesh,which may have a moderate effect on the prospect of future export growth of the country, particularly in US market.The biggest short-run fear for the country will be to see a similar action adopted byEuropean Union. EU had previously threatened to remove preferential access ofBangladeshi RMG products in EU market if the government did not take measures toimprove the working condition in Bangladeshi factories.

Bangladesh RMG export to EU

Q.07.What are the principal incentives offered for foreign investment in Bangladesh?

Analyze the favorable and adverse impacts of foreign investment on Bangladesh economy.

Bangladesh, a densely populated, agro-based, developing South Asian country having per capita income of US$ 690 and low growth rate od GDP, wants to boost its economic performance for better future. Bangladesh is distinguished among the LDCs because of its relative success in economic and rural development. No doubt, rapid industrialization is necessary in this country to keep pace with the developmental needs. But the low rate of Gross Domestic Savings and Gross Domestic Investment as well as low level technology base hamper the expected industrialization process. There is a significant

Savings-Investment gap in Bangladesh. Foreign aid and grants had been serving to bridge the gap. But foreign aid is decreasing every year. To cope with the new situation, foreign investment is viewed as a major stimulus to economic growth and industrialization process in developing the country.

Some of the incentives allowed for attracting foreign investment in Bangladesh are mentioned below: i) No ceiling on investment ii) 100% foreign equity participation allowed iii) Tax holiday up to 10 years iv) Allowances of accelerated depreciation in lieu of tax holiday v) Tax exemption and duty free importation of capital machinery and spare parts for 100% export oriented industries vi) Residency permits for foreign nationals vii) No restriction on issuing work permit to a foreign national viii) Capital, profit and dividend repatriation facilities ix) Term loans and working capital loans from local banks x) Avoidance of double taxation on the basis of bilateral agreement xi) Tax exemption on the interest of payable to foreign loans and on royalties and technical know how fees xii) Open exchange control xiii) Multiple entry visas for investors xiv) Convertibility of Taka for current account transactions xv) Protection of foreign investment through ‘The Foreign Private Investment Act-1980’ and Settlement of Investment Dispute (ICSID), The Multilateral Investment Guarantee (MIGA), and World Intellectual Property Organization (WIPO). xvi) Adequate protection is available for intellectual property rights such as patents, designs, trademarks and copyrights.

Some of the major measures undertaken by the government to attract foreign investment are: a) Private Export processing Zone Act has been enacted. Korea has set up a private EPZ at Chittagong. b) A Regulatory Reform Commission (RRC) has been set up. c) A permanent Law Reform Commission has been set up to ensure greater transparency and predictability in the way rules and regulations work. d) An Administrative Reform Commission has been set up e) The company law 1913 has been updated and revised in 1994. f) The Industrial relations Act has been enacted to enhance labor market efficiency. g) Power generation in the private sector has been allowed. h) Telecommunication in the private sector has been allowed. i) Multiple entry visas to visiting foreign investors are being given by all the Bangladesh missions abroad. j) Provision made for allowing import of standby generators free of tax and sale of excess electricity to nearby industrial units without permission from any agency provided own distribution line is used. k) Licenses issued to six cellular telecom phone operators, which illustrate government’s commitment to a competitive and market economy. l) Establishment of Bangladesh Better Business Forum (BBBF)

Impacts of Foreign Investment: In Bangladesh the country’s savings-investment gap had been mainly bridged by external economic assistance. However, after the cold war era, the availability of foreign aid is decreasing gradually. As a result, there is now widespread support for the need for foreign investment in Bangladesh. If the economy is to grow faster, as is being envisaged, there is the need for larger inflow of foreign investment in Bangladesh with a view to creating jobs for vast labor force, increasing foreign exchange earnings, acquiring new and modern technology and management skills, accelerating overall growth and development of the economy. Foreign investment is thought of contributing to economic development (and therefore poverty reduction) through initial macroeconomic stimulus and by raising total factor productivity and efficiency of resource use in the recipient economy by: • transferring more advanced technology and organizational forms directly to MNC affiliates in the host country • triggering technological and other spillovers to domestically owned enterprises • assisting human capital formation • contributing to international trade integration • helping to create a more competitive business environment • enhancing enterprise development and • improving environmental and social conditions These transmission mechanisms are illustrated in Fig. 1. They all lead to higher economic growth, which is the most potent tool for poverty reduction in the developing countries (UNCTAD, 2002a: OECD 2002).

Fig. 1: Transmission mechanisms between Foreign Investment and poverty reduction 1. Foreign Investment 2. Transmission Mechanisms: • • • • • • •

Direct technology transfer to affiliates Technological and other spillovers Human capital formation International trade – integration Competitive business environment Enterprises development Improvement of environmental and social conditions  Enhanced Economic Growth 4. Poverty Reduction .

Bangladesh has gradually increased its focus on foreign investment as a major means for raising resources for its developmental need. However, concerns are being raised about the poverty-alleviating impact of foreign capital flow. This is particularly important given the fact that more than forty percent of the population of the country lives in poverty on the basis of Direct Calorie Intake (DCI) .

Bangladesh PRSP reported that the rate of poverty reduction during the ‘90s was one percent point per year. On the other hand, GDP growth rate during the period was 4.8 percent in real terms per year. 

Your bank negotiated export documents under reserve aganist an indemnity furnished by the export because of a minor discrepancy in the documents noticed by the bank. The overseas bank that opened the LC, however, returned the documents to you saying that the importer had refused to accept the documents. It later transpired that the importer

had already taken delivery of the goods aganist a gurantee issued by the LC opening bank.

In the meamtime, your customer, te exporter also refused to refund the money that you paid at the time of negitiation.

What are the options available to your bank to realise the money from by the bank.

1. the exporter on the strength of the indemnity bond.

2. the LC opening bank for allowing the importer to take delivery of the goods without making payment.

3. the sipping company for delivery of the consignment to the importer without producing the original shipping documents.

Ans. The issuing bank that issue the shipping gurantee is deemed to pay the Negotiating Bank the value of the goods. It is also note that if our bank unable to recover fund from issuing bank then beneficiary also bound to refund the fund aganist negotiation under indemnity. Why issuing bank and beneficary are liable to pay the fund to our bank mentioned below.

The shipping guarantee A shipping guarantee is a guarantee that may be made by a bank to a shipping company indemnifying the shipping company for the release of cargo prior to their receipt of an original bill of lading. In most countries a shipping guarantee is an evergreen guarantee. It does not have an expiry date. It can only be redeemed upon surrendering the underlying original bill of lading to the shipping company. The shipping guarantee can be of considerable convenience to importers; cargo can be cleared without long delays and demurrage charges avoided. However, there is considerable risk attached to the issuance of shipping guarantees for banks. This is primarily because banks do not know the actual value of the cargo covered under its shipping guarantee, even though the cargo may be shipped under its documentary letter of credit. Banks mainly rely on the declaration and copy of the invoice given by its customer. Because of this risk attached to the issuance of shipping guarantees, most prudent banks offer this facility infrequently, and only to financially trustworthy customers.

The letter of credit As we all know, the core principle of Letters of Credit is that a bank (the issuing bank) provides its definite undertaking to pay against documents that comply with the terms and conditions of the credit.

If the documents do not comply, the bank's undertaking lapses and it is not obliged to take up the documents. It is clear in the UCP 600 that the bank's undertaking in its documentary letter of credit is to pay against compliant documents. It will be precluded from claiming that the documents are not in compliance with the terms and conditions of its letter of credit only if it fails to comply with the provisions in UCP 600.

Shipping Guarantee and letter of credit

Individually, the responsibility of a bank under both Letter of Credit and shipping guarantee is very clear. It is when the two are looked at in tandem that the lines are blurred and confusion arises. Again, a bank that authorises release of goods by issuance of a shipping guarantee is liable to the shipping company as the guarantee indemnifies the shipping company for the release of cargo without receiving the original bill of lading. It is separate from the undertaking given by banks in a documentary letter of credit.

Most banks require their customers to accept all discrepancies identified in the presentation of documents if they apply for a shipping guarantee in favour of a shipping company. So, it should not be a problem for banks to pay against presentation of discrepant documents.

From above discussion it is clear that when issuing bank issue a shipping guarantee to enable the applicant to take delivery of the goods without production of original bill of lading, the issuing bank is deemed to be liable for payment of the documents presented under the L/C irrespective of any discrepancies including “overdrawn�. In this event the issuing bank may bear the risk of paying the amount in excess of the L/C amount. So, issuing bank is bound to pay the value of export.

EXPORTERS OBLIGATION UNDER INDEMNITY: It is also mentioable here that our bank negotiate the documents aganist exporter idemnity. In indemnity the exporter request us to negotiate discrepant documents and unconditional undertake to refund the value of export. So the expoter also bound to pay the value if we are unable to recover the fund from issuing bank.

Md. Shafiqur Rahman Executive Vice president Islami Bank Bangladesh Ltd. shafiqur@islamibankbd.com

Banking Diploma Examination (December-2014) International Trade & Foreign Exchange

1. Short Notes :

a) Gold Standard :

The gold standard is a system in which the price of the national currency is measured in units of gold bars and is kept constant by the daily buying and selling of base currency to other countries and nationals. (i.e. open market operations). The selling of gold is very important for economic growth and stability. The gold standard might be regarded as a special case of the "Fixed Exchange Rate" policy. And the gold price might be regarded as a special type of "Commodity Price Index". Today this type of monetary policy is not used anywhere in the world, although a form of gold standard was used widely across the world between the mid-1800s through 1971.[14] Its major advantages were simplicity and transparency. The major disadvantage of a gold standard is that it induces deflation, which occurs whenever economies grow faster than the gold supply. When an economy grows faster than its money supply, the same amount of money is used to execute a larger number of transactions. The only way to make this possible is to lower the nominal cost of each transaction, which means that prices of goods and services fall, and each unit of money increases in value. Deflation can cause economic problems, for instance, it tends to increase the ratio of debts to assets over time. As an example, the monthly cost of a fixed-rate home mortgage stays the same, but the dollar value of the house goes down, and the value of the dollars required to pay the mortgage goes up. William Jennings Bryan rose to national prominence when he built his historic (though unsuccessful) 1896 presidential campaign around the argument that deflation caused by the gold standard made it harder for everyday citizens to start new businesses, expand their farms, or build new homes b) Inco-term :

INCOTERMS means International Commercial Terms, Trade Terms, Delivery terms. These terms have been prepared and named by the ICC Paris. First published in 1936 and latest in 2000. At present there are 11 Inco-terms. It reduces or remove altogether uncertainties arising from different interpretation of such terms in different countries. Scope of this is limited to matters relating to right and obligations of the parties to the contract of sale with respect to the delivery of goods sold.

They are used to divide transaction costs and responsibilities between buyer and seller and reflect state-of-theart transportation practices. They closely correspond to the U.N. Convention on Contracts for the International Sale of Goods. The first version was introduced in 1936 and the present dates from 2010.

There are 11 Inco-terms :

Ex-Works FCA- Free Carrier FAS-Free Alongside ship FOB- Free on Board CFR-Cost and Freight CIF-Cost, Insurance & Freight CPT-Carriage Paid to CIP- Carriage and Insurance Paid to DAT-Delivered at Terminal DAP-Delivered at Place

DDP-Delivered duty Paid c) Consular Invoice : This is an invoice issued or certified by the consulate or embassy of the importing country, stationed in the exporting country. This type of invoice is called Legalized Invoice.

d) Revolving Letter of Credit : It is an L/C, where the original amount restore after it has been utilized. How many times and how long, the amount will restore must be specified in the L/C. For example, an L/C opened for USD 10,000,000 and shipment effected for USD 5,000,000, now the L/C restored for full value i.e. there is scope to effect further shipment of USD 10,000,000. Revolving L/C may be opened to avoid difficulties of opining new L/C. This L/C is not allowed in our present import policy.

e) Asian Clearing Union : It is an Union of Nine Asian countries, established on December 9, 1974. Members are: Iran, India, Bangladesh, Pakistan, Nepal, Sri Lanka, Bhutan, Myanmar (Burma) & Maldives. Export-Import payment of member countries is being settled through ACU Dollar which is equivalent to US Dollar. Authorised Dealer will open NOSTRO Account in ACU Dollar with their correspondent & will arrange ACU Dollar through their Central Bank for payment settlement. ACU has it's Head Office in Tehran, Iran. f) Document against Acceptance DA : Under an usance Draft, related shipping documents are deliverable against acceptance i.e. shipping document may be delivered to the importer against his acceptance of the bill, without making payment at this stage. g) Authorized Dealer in Foreign Exchange : According to FER Act 1947 Sec.2, Authorized Dealer means a person, for the time being authorized under sec.3 to deal in foreign exchange.

The main functions of AD are :

1. Exchange of Foreign Currency 2. Arrangement with foreign correspondents 3. Buying & Selling of F.C. 4. Inward & Outward Remittance 5. LC Opening & Settlements

6. Investment in Foreign Trade 7. Maintenance of Nostro accounts 8. Export document handling 2. Documentary Letter of Credit : A Letter of Credit is an irrevocable undertaking of the Issuing Bank, to honour a complying presentation , on behalf of the importer, in other words, it is a letter of the Issuing Bank to the beneficiary, undertaking to effect payment under some agreed conditions. It is an undertaking of the Issuing Bank to the Beneficiary to make payment or to accept bill of exchange and make payment at maturity. It is also an authorization of the Issuing Bank to another Bank to effect payment or to negotiate bill of exchange, against stipulated documents, complying credit terms. L/C is called documentary Letter of Credit, because the undertaking of the Issuing Bank is subject to presentation of some specified documents.

As per UCP-600 Article 2, Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. where Honor means a. to pay at sight if the credit is available by sight payment. b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. c. to accept a bill of exchange ("draft") drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

Where complying presentation means the presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice.

Under the UCP 600 issuing banks are obligated to make payment under letters of credit when conforming documents (bill of lading, packing list, invoice, certificates, etc.) are presented. The documents are to be in strict compliance with the terms stated on the letter of credit. Generally, rulings in legal cases, revolving around the issue of payment when discrepant documents are presented, have come down on the side of strict compliance rather than substantial compliance. However, strict compliance does not demand oppressive perfectionism such as the misspelling of a word. A typical discrepancy, which would fall under the strict compliance rule, is that the invoice does not describe the goods exactly as specified in the terms of the letter of credit.

Another important principle underlying letters of credit is that all parties concerned deal with documents alone, and not with goods, services and/or other performances to which the documents may relate (refer to UCP 600 - Article 4). In practical terms this means that issuing banks make payments under letters of credit based on the examination of documents, not on the examination of the goods. The letter of credit does not protect the applicant from paying for the shipment of defective merchandise. The applicant cannot wait until the goods arrive, examine the goods, and then approve payment under the letter of credit. For getting exact quantity or right quality of the goods, he may exclude

Article-30 of UCP-600 and can include Pre Shipment Inspection (PSI) clause executed by

renowned PSI Company or himself.

3. Distinguish : a) Fixed Exchange Rate: A fixed exchange rate is one, whose value is fixed against the value of another currency (or currencies) and is maintained by the government. The value may be set at a precise value or within a given margin. If market forces are pushing down the value of the currency, the government will step in and seek to increase its price, either by buying the currency or raising the rate of interest.

In Fig. 1, the price of one US dollar is initially two euros. Demand for the dollar rises and, if left to market forces, its price would rise to 2.3 euros. If, however, the government wants to keep the value of the dollar at two euros, it may ask its central bank to sell dollars. If it does so, the supply of dollars traded on the foreign exchange market will increase and price may stay at two euros.

The main advantage of a fixed exchange rate is that it creates certainty. Firms that buy and sell products abroad will know the exact amount they will pay and receive in terms of their own currency, if the exchange rate does not change. A fixed exchange rate can, however, mean that a government has to use up a considerable amount of foreign currency.

If the exchange rate is under downward pressure, it may also have to adopt other macroeconomic policy objectives. If a government cannot maintain an exchange rate at a given parity, it may have to change its value. A change in the value of the currency from one exchange rate to a lower one is referred to as devaluation. A rise in a fixed exchange rate is called a revaluation.

Floating Exchange Rate: A floating exchange rate is one which is determined by market forces. If demand for the currency rises or the supply decreases, the value of the currency will rise. Such a rise is referred to as an appreciation. In contrast, depreciation is a fall in the value of a floating exchange rate. It can be caused by a fall in demand for

the currency or a rise in its supply. Fig. 2 shows a decrease in demand for pounds sterling, causing the price of the pound to fall.

A floating exchange rate may help to eliminate a growing current account deficit. If demand for import rises Exchangeand Rate & sell Foreign Exchange Market whilst demand for exports falls, supply of the currency will rise (as individuals firms it to buy for361 eign currency) and demand for the currency will fall.

This will lower the value of the currency and hence reduce export prices and raise import prices. Even with a growing current account deficit, however, demand for the currency may rise. Firms and individuals may still buy more of the currency to invest in the country, if they think that economic prospects are good.

A floating exchange rate, nevertheless, does allow a government to concentrate on other objectives. The main disadvantage with a floating exchange rate is that it can fluctuate, making it difficult for firms to plan ahead.

b) Spot Rate and Forward Exchange Rate

Spot Rate It is an exchange rate for "on the spot" transaction. The spot price is what one must pay to buy currencies for immediate delivery. However delivery within two business days from transaction date is also considered as spot transaction.

Forward Rate It is an exchange rate for the transaction to be happened at some future date, but agreement for the transaction is to be done to day. Forward rate is quoted either at premium (+) or at discount rate (-) over the spot rate. In case of pence rate or direct quotation, premium will be added to and discount will be subtracted from spot rate. The reverse is for currency rate

c) Direct & Indirect Quotation

Direct Quotations: If the exchange rate is expressed in variable units of domestic currency for a fixed unit (s) of Foreign Currency the rate is called pence rate or direct quotations. Here Foreign Currency is fixed and local currency is variable. As for example, Dhaka quotes New York as $1= Tk 69.25 - 69.50. Dhaka quotes London £1 = Tk. 137.00 Indirect Quotations: If the ER is expressed in variable units of Foreign Currency per fixed unit of the domestic currency the rate is called currency rate. Here local currency is fixed and Foreign Currency is variable. As for example, London quotes New York as £1 = $1.9785 - 86.

Dhaka quotes New York Tk. 100 = $1.45 From the above examples it is clear to understand that a rate shown as currency rate in one country, is pence rate for the corresponding country and vice versa. d) TT Selling Rate and B.C Selling Rate :

T.T Selling Rate: This rate applies to sale of foreign currencies for private remittance, i.e sales other than sales arising out of import bills. T.T, MT, Draft & T.C to be sold under this rate.

However some times Bank may add some additional charges to sell T.C & cash Foreign Currency and may quote a higher rate than the T T rate to sell T.C & cash Dollar for private remittance.

B.C Selling Rate

This rate applies to sale of foreign currencies for payment of import bills. This rate is higher than the T T & OD selling rate because of the handling charge on documents.

4. Importance of Migrants Remittance :

Migrant’s Remittances have been continuously playing an increasingly large role to the economic growth and the livelihoods of people in Bangladesh. Remittance income is more valuable for any developing country like Bangladesh. Puri and Ritzema (2001) tell that remittance is the portion of international migrant workers’ earnings sent back from the country of employment to the country of origin, play a central role in the economies of many labor sending countries. Osmani (2004) tells that remittances have been identified as one of the three factors that have been responsible for reducing the overall incidence of poverty in Bangladesh. The demand of migrant workers remittances has now increased tremendously in Bangladesh in a number of reasons. These are as follows: i) Remittance contributes to our national economy is a large scale by increasing foreign exchange

reserve, per capita income and employment opportunities. ii) It has been continuously lifting-up the GDP (Gross Domestic Product) of Bangladesh. iii) Remittance has been continuously keeping the contribution to alleviate the poverty of Bangladesh through micro-enterprise development, generating substantial employment and income. iv) The government has been paid various government and non-government import bills and investments of different foreign debt & donation from the remittance income. v) Remittance income helps the government of Bangladesh to reduce dependency on foreign aid. vi) Remittance helps to improve the balance of payment position of Bangladesh. vii) Remittance also contributes to the expansion of financial market activities and the development of payment systems through enhancing direct capital flows and distributing those funds to users end and for investment or finance consumption purposes. viii) The government of Bangladesh is using remittance income to build schools, colleges, universities hospitals, roads, & highways, bridges, culverts etc. ix) Remittance income is positively the socio-economic condition of migrant families. x) Remittance income makes more strong local currency (Bangladesh) against US dollar.

Reason for declining Remittance in recent year : For the first time in recent memory, Bangladesh has experienced a decline in remittances in the first half of the fiscal year. There are four factors that can potentially account for the decline in remittances: a) The stock of Bangladeshi migrants abroad is not growing: The standard refrain appears to be that the flow of remittance has declined because the stock of Bangladeshi migrants abroad is not growing like it used to. This is because of two reasons. First, Bangladesh is failing to send more workers abroad to traditional markets and exploring new markets. Second, the number of migrant workers returning to Bangladesh has also increased because the government could not resolve problems related to the legal status of Bangladeshi migrant labors in Saudi Arabia, the United Arab Emirates and Kuwait through diplomatic channels. Unfortunately, there is no reliable time series on the annual number of migrant returnees from abroad.

b)

Declining Earnings per migrant worker : It is generally assumed that the current migrant workers are sending money home as per their maximum capacities and have little capacity to increase the flow. Average earnings may have declined because of increased unemployment and/or decreased wages of illegal migrants in GCC countries in particular as the authorities tightened enforcement of regulation against illegal migrants. c) Average propensity to save :

With increased unemployment and/or lower wages, the propensity to save may have decreased because of ratchet effects on consumption. Conventionally, if income falls, then consumption should fall proportionally, but this does not necessarily happen because once consumption habits are acquired, it is hard to get rid of them. Certain consumption habits are formed at high income levels which are not completely abandoned when income falls. This effect is particularly strong when the income decline is perceived to be temporary. d) Average propensity to remit money home out of those savings The propensity to remit may also have declined because of the appreciation of taka against US dollar in recent year and increase in transaction costs due to incessant political turmoil. Taka appreciation has stronger effects on remittances motivated by the desire to invest. By reducing the taka paid per unit of dollar, appreciation raises the taka prices of the assets the migrant workers wish to buy in Bangladesh, thus reducing the asset demand and hence the amount that would have been remitted to buy those assets. Political turmoil affects remittance transaction costs as well as the ability to remit by disrupting the smooth functioning of the banking system.

Suggestion for increasing Remittance : To attract the remittance inflow, there may be taken some initiatives : a) Expansion of Market. b) Building positive image among the expatriates. c) Drawing arrangements with more Bank and Exchange Houses all over the world for collection of remittances. d) To ease remittance disbursement, BEFTN and mobile banking are operating in full-swing. e) Micro Finance Institutions (MFIs) and Mobile banking services are involved to get a Bangladesh Economic. f) Developing unique service for Migrant. g) Offering Competitive Exchange Rate. h) Declaring Remittance business as Thrust Sector for next 5 years.

5. Various method of Payment Settlement :

There are four renowned method of Payment Settlement as per ICC guide to Documentary Credit Operation :

a) Cash in Advance :

Sometimes importer makes payment in advance. With cash in advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. Wire transfers and credit cards are the most commonly used cash in advance options available to exporters.

However, requiring payment in advance is the least attractive option for the buyer, because it creates

cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms. If the exporter is not sure about credit worthiness of the buyer, he may prefer cash in advance as extra precaution. Usually the method is used for 1st time buyer who is not familiar to the seller/exporter.

b) Open Account :

An open Account is a payment method where the supplier ships the goods and waits for the buyer to remit the bill proceeds. This option is the most advantageous option to the importer in terms of cash flow and cost but it is consequently the highest risk option for an exporter. Due to intense competition in export markets, foreign buyers often press exporters for open account terms. However, the exporter can offer competitive open account terms while substantially mitigating the risk of non-payment by using one or more of the appropriate trade finance techniques such as export credit insurance. c) Documentary Collection : Documentary Collection is a process, in which the seller's instructs his bank to forwards documents related to the export of goods to the buyer's bank with a request to present these documents to the buyer for payment, indicating when and on what conditions these documents can be released to the buyer. The buyer may obtain possession of goods and clear them through customs, if the buyer has the shipping documents (original bill of lading, certificate of origin, etc.). The documents, however, are only released to the buyer after payment has been made ("Documents against Payment- DP") or payment undertaking has been given the buyer has accepted a bill of exchange issued by the seller and payable at a certain date in the future maturity date ("Documents against Acceptance- DA").

Banks, therefore, act as intermediaries to collect payment from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods. The procedure is easier than a documentary credit, and the bank charges are lower. The bank, however, does not act as surety of payment but rather only as collector of funds for documents. d) Documentary Credit/ LC :

Documentary Credit/LC is one of the most secure instruments available to international trades.

A Letter of Credit is an irrevocable undertaking of the Issuing Bank, to honor a complying presentation, on behalf of the importer, in other words, it is a letter of the Issuing Bank to the beneficiary, undertaking to effect payment under some agreed conditions. It is an undertaking of the Issuing Bank to the Beneficiary to make payment or to accept bill of exchange and make payment at maturity. It is also an authorization of the Issuing Bank to another Bank to effect payment or to negotiate bill of exchange, against stipulated documents, complying credit terms. L/C is called documentary Letter of Credit, because the undertaking of the Issuing Bank is subject to presentation of some specified documents.

As per UCP-600 Article 2, Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a

complying presentation.

Where Honor means a. to pay at sight if the credit is available by sight payment. b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. c. to accept a bill of exchange ("draft") drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

Where complying presentation means the presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice.

6. Methods Employed by the Exchange Control Authority For Import

To ensure Foreign Exchange earnings from imports brought to the country and to bring underlying goods in Bangladesh, the Exchange Control Authority has take specific methods. Considering the demand of imported goods, proper use of scarce valuable Foreign Currency & development of local industries; ministry of commerce and industry, CCI&E, Bangladesh Bank and Gov’t other body are controlling the import directly or indirectly through various methods as under.

Import under LCAF without L/C iii) Import of any permissible item for an amount not exceeding USD50,000/= during a calendar year is allowed. iv) Import of books, journal magazine and periodicals on sight draft or usance bill basis for any amount is permissible under LCAF without L/C. Import under L/C Unless other specified import shall be made only by L/C. LCA form is mandatory LCA form is mandatory for import through a Bank.

Direct payment in abroad Bangladeshi national working in abroad are allowed to make payment of the goods from his salary and may send the goods to Bangladesh without L/C or approval from CCI & E. IMP Form Import payment is to be reported to Bangladesh Bank through IMP form.

Registration of importer Industrial & commercial importer must be registered as importer under CCI & E. Importer can change his nominated bank subject to no -objection certificate from his nominated bank.

Methods Employed by the Exchange Control Authority for Export

To ensure Foreign Exchange Remittance made abroad are actually used for payment of Import, the Exchange Controlling set rules which are as under: (1) No person can export any goods from Bangladesh, unless he is duly registered as an exporter with the CCI & E. (2) All export must be declared on the EXP form which is consisting of 2 copies.

(3) Export must be against any of the following: a) Export L/C. b) Firm Contract. c) Advance Payment.

(4) Transport documents related to land route or sea and any other documents of title to cargo, should be drawn only to the order of an Authorized Dealer. The Air way bill and any other documents of title to cargo may be drawn to the order of a Bank in the country of import.

However in case of advance payment, transport document may be drawn to the order of Foreign Importer. Blank endorsement of transport documents is prohibited. Directions under SL No: 4 shall not apply in the following cases: a) Export of Trade Sample. b) Personal Effects. c) Goods shipped under the order of Govt. d) Export of fresh fish, vegetables & fruits. e) Gift package for less than USD 1000 (5) 'EXP' must be submitted to the Bank, by the exporter & Bank will submit the Duplicate Copy to the Bangladesh Bank with in 14 days from the date of shipment.

(6) Payment for goods exported should be received through an Authorized Dealer in freely convertible currency.

(7) Export proceeds must be received by the exporters within 4 Months from the date of shipment.

(8) Overdue export bills statement to Bangladesh Bank should be submitted by the 15th of the month, following the quarter to which it relates.

(9) In case of short shipment, exporter should give a notice of short shipment on the prescribed form in duplicate, to the customs, who will forward a Certified Copy of the notice, to the Bangladesh Bank.

7. Reason for Over Invoicing & Under Invoicing :

The prices of commodities and their trading in Bangladesh have always been somewhat topsyturvy. While we produce and source these locally, we often hear that the growers are not getting the right price, production costs are higher than selling prices or all the money are going to the pockets of the wholesalers or middlemen, at times even to the retailers. While commodities are being sourced from the global markets, importers are being put, most of the time, on the dock, for importing those at a lower price and selling them locally at a higher price. And we also hear about traders/importers forming syndicates to command the price level, importing inferior quality goods, evading taxes, hoarding or even bribing government officials to create artificial crises for selling them at higher prices in the domestic market.

The allegations of under invoicing and over invoicing have also been there against the importers since long. While we used to hear about 'under invoicing' quite often in the past, now-a-days we are hearing more about over invoicing. As we understand, under invoicing is the provision of an invoice that states price at a level lower than what is actually being paid. This might be done in the case of an import in order to reduce the amount that will be collected on an ad valorem tariff or as

such duties. Or it might be done on an export to reduce apparent profit or thus evade or avoid taxes. On the other hand, over-invoicing is the provision of an invoice that reports the price at a higher level than is actually being paid. This might be done by a company on imported inputs in order to shift the profit to lower tax jurisdiction. Due to higher tax regime in the past, a general tendency among the importers was to under-invoice, to show the imported amount at a lower level, mainly in order to avoid taxes, rather high taxes. A portion of tax savings was used to be paid to take care of the actual price settlement through informal channel. With continuous tariff liberalization or reforms, we see now less of under-invoicing cases.

Rather the incidence of over-invoicing has gone up significantly. People are doing this for several reasons: 1) to hold some hard currency abroad to take care of their other activities, including education for children, buying assets outside, even to take care of them in bad days like in 2007 and 2008; 2) to obtain coverage against continuous depreciation of Bangladesh Taka against hard currencies; and 3) to take care of payments against imports, where they might have underinvoiced. The same company may be in food as well as in cement business. While food import is tax-free, import of clinker for cement may be highly taxed. If they have under-invoiced the cement import price, they settle the cement exporter's obligation through the money they remitted in excess of the required money for food import - in a simpler version through over-invoicing.

There has been a recent allegation against the commodities' traders or importers about overinvoicing the prices of commodities, thereby contributing to price-spiraling in the local market, thereby causing inflationary pressure and more importantly, remitting money outside in excess of the actual value of the commodities imported. Since it has always been tough for the regulators to catch hold of the alleged importers, the easy way has always been to keep the banks under pressure and send indirectly a message to the importers and traders. The regulators usually take shelter under an import-policy stipulation, which says, before opening letters of credit, the opening banks should verify the price. The same has been in the foreign exchange guideline from the central bank, too.

Suggestion to stop Over Invoicing & Under Invoicing Recent reports tell us, the central bank has decided to reprimand a few banks in this regard. More may be in the queue. While the banks do and should try to determine the prices of the commodities before they open the import letters of credit, we have seen a trend among the large food grain or commodity importers to purchase various goods in the future market in order to 'lock the price', where there was an apprehension about the prices of particular commodities going up. We saw this trend in recent. Many edible oil, sugar and hot rolled coil (ingredient for steel mills) operators are buying goods in the future market to avoid negative price fluctuations in the commodity markets.

They were large importers, mostly importing from the biggies in the commodities' world. They would have mostly opened letters of credit at a later date. This is how this market operates.

However, most of them burnt their fingers while they could see the prices of commodities coming down in 2015. We have seen many operators in steel and edible oil industries crying on the shoulders of bank executives for the banks to extend their loan liabilities or take a hit on their earnings. I remember an edible oil importer in Chittagong, for whom it was all 'red' in their balance sheet. They had to bleed heavily for booking the deal while edible oil price was approximately USD 1200.00 and later came down to an almost half of the previous level while they opened the letter of credit or cargo arrived at Chittagong port. The same thing happened for a large steel company which showed an almost 100 per cent difference between forward booking price and the price in the international market while letter of credit was opened or settled. Most of the operators suffered, some went almost 'belly up'. Only the people with 'deep pocket' could survive the situation.

We have also seen, some exporters abroad quoting weird prices in order to capture a new importer from Bangladesh. While Bangladesh commodity biggies often import from Argentina, Brazil, Canada, Malaysia, Australia, Taiwan, Japan and Korea, we have seen Chinese and Indian exporters at times quoting 'out of the market' or 'desperate' prices for small amounts of cargo or leftovers.

The sour experience (L/C cancellation in view of price-hike in the global markets or late delivery or short delivery) in the past also influenced the large importers to shy away from these otherwise attractive offers from not-so-known exporters, for the time being.

This is true that the commodities market in Bangladesh is getting concentrated among a few business houses only. The ground reality tells us that these are again the operators who can command the global supply-chain i.e. 'obtaining export orders/invoices', 'timely delivery', 'competitive pricing' and 'supply as well as distribution chain'. This trend is evident everywhere, where the markets are consolidating. Small operators can not influence the process, they can not 'call the shot' with large suppliers or even shipping companies, thereby their margin is very small or expenses are always high (higher price, higher bank interest, higher shipping cost, higher distribution cost, higher storage cost, higher insurance costs and etc).

What do we do then? How do we make sure the biggies behave well? There should always be regular and proper monitoring by the banks, customs, pre-shipment inspection companies and other relevant agencies. In doing so, we must have a clear visibility about the 'end-to-end transaction', international prices for the same commodities and more importantly, similar amounts and similar off-takers. In the era of rapid technological advancement, the job should not be tough.

However, while doing this, we must not 'harass' any of the biggies and thereby endanger the 'supply-chain' of essential commodities in Bangladesh.

8. Position Sheet Date

Fig. in USD Description

Sale/

Purchase/ Credit

Over brought/ over sold

Debit 01.01.14

Nostro A/C Balance

01.01.14

Issuance of TT

01.01.14

Credited by Abu Dhabi Bank

01.01.14

Re-imbursement Authorization

01.01.14

Export Bill Negotiation

01.01.14

Re-imbursement of Import Payment

01.01.14

FBP against Traveler’s Cheaque

01.01.14

Import Payment as Confirming Bank

Position (+)/ (-)

-

50,000

50,000

-

OB Square up

50,000 0

30,000

OB

30,000

25,000

-

OB

5,000

-

200,000

OB

205,000

10,000

-

OB

195,000

-

20,000

OB

215,000

20,000

-

OB

195,000

DAIBB- December-2013 Md. Shafiqur Rahman Executive Vice president Islami Bank Bangladesh Ltd. shafiqur@islamibankbd.com Question no.1 (Short Note) (a) GSP- generalized system of preference.

It is a preferential duty facility by developed Countries to the developing countries for easy export. The EU's "Generalised System of Preferences" (GSP) allows developing countries to pay less or no duties on their exports to the EU. This gives them vital access to EU markets and contributes to their economic growth.

As from 1 January 2014, the EU's reformed GSP set out by Regulation 978/2012 applies. The reformed system focuses support on developing countries most in need. 28 January 2016, the Commission published its first bi-annual report to the European Parliament and the Council on the effects of the reformed GSP. (b) Exporter’s Retention Quota: Exporter’s Retention Quota means exporters are allowed to keep a percentage amount of export proceeds, stipulated by Bangladesh Bank Guide Lines time to time to their FC accounts. It is 10% in case of export against which import is higher, proportionately. Maximum is allowed up to 50% of the export proceeds. Fund from these accounts can be used to meet bonafide business expenses. (c) Open Position: If exchange position is too much over bought or over sold then it is called open position. The ADS are required to work out their open exchange position daily and report to the Bangladesh Bank the position(overbought/over sold) as at the close of business on Thursday at each week. The Ads will purchase and sell FC and will ensure that the prescribed open position limit is not exceeded. (d)Revolving documentary credits: Revolving documentary credits are generally used between an applicant and beneficiary who have a long-standing trading relationship and experience in the shipment of the goods described in the documentary credit. The applicant and beneficiary arrange for a documentary credit to be issued, which allows the amount thereof to be reinstated, usually without amendment (ie on an automatic basis).

Under this arrangement the continuing availability of the documentary credit revolves upon shipment or presentation of documents or at a specific time − for instance the first of each month − and not upon the issuance of a specific amendment. For example, an L/C opened for USD10,000,000 and shipment effected for USD 5,00,000, now the L/C restored for full value i.e. there is scope to effect further shipment of USD 10,000,000. This L/C is not allowed in our present Import Policy. (e) International Finance Corporation (IFC):

The IFC established in 1956 to promote private sector growth in developing countries. Legally and finally the IFC and the world Bank are separate entities and the IFC has its own operating and legal staff. The IFC provides loan and makes equity investment in support of projects. The IFC seeks profitable returns and prices in its finance. (f) Stale Bill of Lading: A Bill of Lading is called a ‘stale’ one when it is dated subsequent to the date of shipment stipulated in the credit or when it is dated later than expiry date of the credit, or it has been hold too long before it is passed to a bank or to the consignee. If there is no presentation period in the L/C, the B/L to be stale after 21 days from the date of shipment. (g) Authorised Dealer in Foreign Exchange: Authorised Dealer means a person for the time being authorized under section 3 of Foreign Exchange Regulation Act.1947. In other words Authorised Dealer means a bank, authorized by Bangladesh Bank to deal in Foreign Exchange under the FER Act.1947. Following are the main function of Authorised Dealer: 1) Exchange of Foreign Exchange.

2) To make arrangement with foreign correspondent.

3) Buying & Selling Foreign Exchange.

4) Handling Inward & Outward Remittance.

5) Opening L/C & settlement of payment 6) Export Document Handling.

Question no: 2. Briefly discuss the types of credit facilities provided by the banks to the importers at the post-shipment stage. Identify the risks associated with the credit facilities provided under LIM and LTR and the measures that can be taken to reduce those risks.

Answer: Three types import finance is provided by the Ads in Bangladesh to meet up import costs, duties/Tax, VAT and other expenses. They are: Payment against Document: (PAD) On receipt of Import Document from Negotiating Bank the Bank lodges the value in an Account which is called Payment against Document (PAD) and advises the importer to clear the PAD by making payment of the PAD outstanding with up-to-date interest.

Loan against Trust Receipt (LATR): Ads provide this type of loan to the acceptable, reliable clients who have good track of business record.

The LC is opened by a margin. After receiving the import Documents; at the request of the client the bank extends the LATR. The PAD is adjusted by a new Loan LATR, Normally the LATR is allowed for 90 to 180 days. The goods are kept in the custody of the importer.

Charge Document: DP Note, Indemnity,Personal/Corporate Guarantee,Later of Continuity, Letter of Renewal etc.

Loan against Imported Merchandise (LIM): Ads provide this type of loan to the Importer against trading items by keeping the imported goods in the Bank’ warehouse or Bank’s controlled warehouse. This is a very short term loan,normally sanctioned for maximum 90 days. The Goods are cleared by the Bank’s own C&F Agent and directly stored in Bank’s warehouse. The bank issues Delivery Order(DO) against receipt of payment of merchandise. The importer can release the goods in parts. The interest is charged quarterly. When the Customer does not come up to clear the goods, then the bank creats forced LIM and adjusts import costs by selling the goods in open auction.

Import Cash Credit: This loan is provided for importing industrial raw materials. The maximum period allowed is one year.

The Bank takes sufficient collaterals for ICC. Question no.03: How does a transferable letter of credit operate? State the rights and obligations of the Negotiating Bank under this type of credit.

Answer: If the word ‘transferable’ incorporated in L/C, then the L/C is transferable. Transferable L/C can be transferred by the 1st beneficiary to the 2nd beneficiary. But 2nd beneficiary can not transfer it further to another beneficiary. Transfer may be done to more than one beneficiary, partially, if not prohibited in the L/C. If the first beneficiary is to present its own invoice and draft, if any, but fails to do so on first demand, or if the invoices presented by the first beneficiary create discrepancies that did not exist in the presentation made by the second beneficiary and the first beneficiary fails to correct them on first demand, the negotiating (transferring) bank has the right to present the documents as received from the second beneficiary to the issuing bank, without further responsibility to the first beneficiary.

Question no. 04: What are the factors responsible for appreciation and depreciation of the exchange of a currency? Trace the reason for appreciation of the value of Taka in recent months (middle of this year).

Answer: The appreciation of a country's currency refers to an increase in the value of that country's currency and the Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. The factors responsible for appreciation and depreciation of the exchange of a currency is as furnished below: 1. Inflation The one of the factors is inflation. As for example in the UK inflation is relatively lower than elsewhere, then UK exports will become more competitive and there will be an increase in demand for Pound Sterling to buy UK goods. Also foreign goods will be less competitive and so UK citizens will buy less imports. Therefore countries with lower inflation rates tend to see an appreciation in the value of their currency.

2. Interest Rates Interest rate also a factor. As for example, if interest rates rise in Bangladesh relative to elsewhere, it will become more attractive to deposit money in Bangladesh. We will get a better rate of return from saving in the country, Therefore demand for Taka will rise. This is known as “hot money flows” and is an important short run factor in determining the value of a currency. Higher interest rates cause an appreciation.

3. Speculation If speculators believe the Taka will rise in the future, they will demand more now to be able to make a

profit. This increase in demand will cause the value to rise. Therefore movements in the exchange rate do not always reflect economic fundamentals, but are often driven by the sentiments of the financial markets. For example, if markets see news which makes an interest rate increase more likely, the value of Taka will probably rise in anticipation.

4. Change in competitiveness If Bangladeshi goods become more attractive and competitive this will also cause the value of the exchange rate to rise. This is important for determining the long run value of Taka. This is similar factor to low inflation.

5. Relative strength of other currencies Relative strength of other currencies causes appreciating the currency. For example in 2010 and 2011, the value of the Japanese Yen and Swiss Franc rose because markets were worried about all the other major economies – US and EU. Therefore, despite low interest rates and low growth in Japan, the Yen kept appreciating.

6. Balance of payments A deficit on the current account means that the value of imports (of goods and services) is greater than the value of exports. If this is financed by a surplus on the financial / capital account then this is OK. But a country, who struggles to attract enough capital inflows to finance a current account deficit, will see depreciation in the currency. (For example current account deficit in US of 7% of GDP was one reason for depreciation of dollar in 2006-07) 7. Government debt Under some circumstances, the value of government debt can influence the exchange rate. If markets fear a government may default on its debt, then investors will sell their bonds causing a fall in the value of the exchange rate. For example, Iceland debt problems in 2008, caused a rapid fall in the value of the Icelandic currency. For example, if markets feared the US would default on its debt, foreign investors would sell their holdings of US bonds. This would cause a fall in the value of the dollar.

8. Government Intervention Some governments attempt to influence the value of their currency. For example, China has sought to keep its currency undervalued to make Chinese exports more competitive. They can do this by buying US dollar assets which increases the value of the US dollar to Chinese Yuan.

9. Economic growth / recession A recession may cause depreciation in the exchange rate because during a recession interest rates usually fall. However, there is no hard and fast rule. It depends on several factors Question no. 05: Explain the importance of using incoterms in international trade. Describe the obligation of the buyers and sellers under the contract for sale on FOB, CFR and CIF terms.

Ans: 5) Incoterms means International Commercial terms and technique used to operate international trade. It is required for reducing/minimizing disputes between exporter and buyer and to fix up the responsibility of both (buyer and seller) in cross boarder transaction.

The obligation of the buyers and sellers under the contract for sale on FOB, CFR and CIF terms are described below: FOB –Free On Board: Seller: -

Deliver the goods on Board

-

Provide Export Clearance, License. Pay export Tax & Fees if required.

-

Provide a clean on Board Receipt.

-

Pay loading cost according the custom of the port.

Buyer: -

Nominate Carrier.

-

Contract the carriage and pay the freight

-

Pay unloading cost.

CFR-Cost & Freight: Seller: -

Contract for the carriage & pay the Freight to the named port of the destination.

-

Deliver the goods on Board.

-

Provide export clearance, Export License, pay export taxes & fees if required.

-

Furnish the buyer invoice & clean Transport Documents.

-

Pay loading cost.

-

Pay unloading cost to the extend that they are included in the freight.

Buyer:

-

Accept delivery of the goods upon shipment and receive the goods from the carrier at the named port of destination.

-

Pay unloading cost to the extend that they are not included in the freight

CIF- Cost, Insurance & Freight: - It is alike as CFR, but with the addition that seller has to procure Marine Insurance against buyer risk of loss and demurrage to the goods during the carriage.

Question no. 06: How does a forward exchange differ from a spot exchange? How can a bank cover its risks arising from forward transaction with its customers?

Forward Rate is an exchange rate for the transaction to be happened at some future date, but agreement for the transaction is to be done today. Forward Rate is quoted either at premium (+) or at discount rate (-) over the spot rate. In case of pence rate or direct quotation, premium will be dated to and discount will be subtracted from spot rate. The reverse is for currency rate on indirect quotation. In forward rate are will have to pay the currency when the contract mature.

Spot Rate it is an exchange rate for ‘‘on the spot’’ transaction. The spot price is what one must pay to buy currencies for immediate delivery. However, within two business days from transaction date also considered as spot transaction.

Question no. 07: An official in the foreign exchange department how you would deal with the following situations? (a) The issuing bank of an LC has asked you to add your confirmation to the LC before advising it to the beneficiary. The issuing bank has no credit line with your bank.

Answer: My bank is not in a position to add confirmation to the LC in such case , because LC issuing bank has no credit line with my bank. In this situation there is compensating measures for risks involved. ( b) The beneficiary of an LC has requested you to add your confirmation to the credit.

Answer: If beneficiary has credit limit with the bank has been requested for add confirmation, then we may add confirmation as per norms; otherwise we are not in a position to do so as the risk associated here is unrecoverable. (c) Your customer has presented export documents for negotiation under irrevocable LC. The documents contain some discrepancies.

Answer: My customer has presented export documents for negotiation under irrevocable LC. The documents contain some discrepancies in this position we can not negotiate the export document.

Because, we know, negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

The export documents for negotiation under irrevocable LC in the question is not fulfilled ‘a complying presentation’ (d) You have been asked by your customer to open a back to back LC for import of fabrics against an LC received from abroad for export of ready-made garments. The customer asks you to stipulate in the LC that payment to the foreign exporter under the back to back LC will be made on realization of payments against export made by him under the original LC. Answer: We can not stipulate in the LC that payment to the foreign exporter under the back to back LC

will be made on realization of payments against export made by the client under the original LC because, we know that credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation.

The clause asked by the client to stipulate in the LC is not be incorporated in LC because it is an indefinite /conditional undertaking to honor a complying presentation upon receiving of export proceeds.