Easing cost of international trade transactions
In international trade, various modes of payment are being used for import and export trade. These are Cash in Advance, Open Account, Documentary Collection and Letter of Credit (L/C). The global transactions gradually changed to Open Account which means transaction against a contract and provision of deferred payment or payment at sight. This is on the basis of traditional trust among businessmen throughout the world.
Laws in Bangladesh are very conservative and open account is discouraged by different rules and policy. According to a study, Bangladesh uses L/C method in more than 65 per cent of cases for getting export proceeds whereas only in 30 per cent cases Documentary Collection is used. Although Cash in Advance method is used to some extent, Open Account is almost absent. The policy of Bangladesh allows export against Cash in Advance, but except a fixed small amount, as per import policy. It seems that Bangladesh does not have confidence on other countries but expects others to keep faith on it. Now-a-days, overseas buyers are not even interested in Cash in Advance method with wide introduction of Open Account i.e. transaction against contract with L/C or Cash in Advance.
The recent trends also replace the L/C with Factoring and other types of international trade financing and payment methods for reducing cost of transaction and easy and smooth dealing. Factoring is a guarantee of payment against contracts for international trade by factoring companies under certain procedures. Bangladesh Bank is actively considering formulation of Factoring and Primadollar type transactions to replace L/C. These types of transactions reduce burden of working capital of both exporters and importers.
L/C involves different banks in both importing and exporting countries and requires more working capital and mortgaged security. The regulations and practices are also regressive. As per practice, bank deals with documents and not with goods and as such the moment the documents are found to be without any discrepancy, any underlying disputes regarding actual supply or short supply or defective supply of the goods cannot in any way impact upon the payment on L/Cs.
The International Chamber of Commerce (ICC) has prepared the Uniform Customs & Practice for Documentary Credits (UCP 600) which does not have legislative enforcement but is accepted by the global banking community as universal codification of best practice. A bank under the law and banking practice, in particular in accordance with the relevant provisions of UCP-600, is bound to make payment or re-imbursement in respect of the accepted bills once they are accepted by the issuing banks and in view of the said provisions of the UCP-600, namely Article 16. Once such acceptance is given, the matter is closed and the concerned banks are precluded from raising any issue thereafter.
Articles 7, 14, 15 and 16 of UCP-600 are related to mandatory acceptance of documents while the L/C usually contains acceptance of terms and conditions of the UCP-600 and thereby makes itself liable to pay once the documents submitted by the exporter are found to be without any discrepancy.
Under Article 7 of the UCP-600, the issuing bank must honour the concerned L/C and through its issuance, the issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Article 14 then provides procedure for examination of the documents submitted before the negotiating bank in order to negotiate the said L/C wherein it has been provided that the negotiating bank and the L/C issuing bank must examine a presentation to determine on the basis of the documents alone whether or not these appear on their face to constitute a complying presentation.
Section 45 and other provisions of the Bank Companies Act, 1991, the central bank exercises regulatory authority on L/C issuing banks and must comply with the terms of the UCP-600 for the sake of protection of the reputation of documentary credits in Bangladesh.
The UCP rules also have become enforceable due to the law of contract when the parties voluntarily incorporate them in the contract or L/C.
Under the provisions of UCP-600, the L/C issuing bank, under no circumstances, can stop re-imbursement as against those bills unless it is directed to do so either by any competent court or the regulatory authority like the central bank with specific reason.
Article 15 of UCP 600 provides that when a confirming or negotiating bank determines that a presentation is complied with, it must forward the documents to the L/C issuing bank which determines that a presentation is complied with honouring the contract to pay. However, Article 16 confers a right on the issuing bank as well as the negotiating bank not to accept or negotiate L/Cs once the documents are found not complied with, meaning that a discrepancy has been found therein. If such a discrepancy is detected, the purchaser or the applicant of L/C may waive such discrepancy, and in that case, the L/C issuing bank and the negotiating bank may accept and negotiate the said L/C on such waiver by the applicant.
There is a serious problem with L/C due to irregular and delayed payment of import. This problem arises due to some unwritten practices of Bangladesh Bank during auditing of re-imbursement of proceeds of imports. The central bank insists on documentary evidence of payment of customs duty and release of consignment from port and Customs authorities. There is a document namely ‘Bill of Entry’ issued by the Customs department as evidence of payment of tax and release of import consignments. Although the Customs authority is used to forward a copy of Bill of Entry to the central bank, the audit department again insists on commercial bank to collect its copy to confirm the transaction. The commercial banks are also more conservative and hold the payment of import to exporting country unless the importers submit copy of Bill of Entry. This sometime causes delay of payment even after full payment by the importers to the bank. The reputation of Bangladesh is very poor in the global business and financial sectors for late payment or for a delay due to discrepancy.
There are many instances that banks don’t make payment against L/C as per verbal instruction of the importer. Reportedly, the High Court in Writ Petition No. 4081 of 2012 reiterated the said position wherein the operation of bank accounts was stopped by its bankers based on some allegations by some directors of the said bank. In this case, the court specifically directed the Bangladesh Bank to take actions against those banks found practising illegal activities without any order either from the competent court or from the Bangladesh Bank to do so.
The ICC guidelines are not a complete set of rules in regulating and guiding international trade payment transactions. That is why, national laws play an important role. This is particularly true for the issues that are not addressed by the UCP. For example, the legal nature of the credit itself as well as of relationship among different parties has not been addressed in the UCP. The national laws should offer solutions to any issue of international trade payment procedure open to interpretation.
The Foreign Exchange Regulation Act, 1947 (FERA, 1947) has empowered Bangladesh Bank (BB) to regulate all kinds of foreign exchange dealings in Bangladesh. The BB issues Authorised Dealer (AD) licenses to selected bank branches for conducting trade payments and other international banking operations.
Following the provisions of the Act, the central bank issues circulars/guidelines to banks from time to time to regulate trade payment and international banking activities.
Apart from the FERA, 1947 and Bangladesh Bank circulars/guidelines, banks are required to follow trade policies issued by the Ministry of Commerce of the country empowered by the Import and Exports Control Act, 1950 and the Import Policy Order. Moreover, the Customs Act 1969 is also applicable to trade transactions that deal with levy and collection of customs duties and other allied matters. The L/C application form generally contains a statement to the effect that credit will be subject to the UCP 600 rules that are considered legal.
The ongoing globalisation process has bought considerable changes in international trade transactions and practices. Greater involvement of costs in documentary credit operations is one of the main reasons of switching over to other modes of payment. Bangladesh should immediately go for Open Account transaction secured by Factoring and Primadollar-type international transactions and handling of documents on the basis of trust between buyers and sellers.
The foreign exchange policy authorises bankers to deliver documents to their agent. The agent may not be a banker. Bangladesh Bank may interpret the rule further to ease overseas transactions particularly in the field of exports.
M. S. Sidiqqui, Legal Economist.