INTERNATIONAL FINANCE PACK

OpsyConsult(CIBN Tuition House) 24 Road, Opp H Close, Festac

08023743124, 08050228726

1.0  TRADE FINANCING

Trade finance to both importer and exporter could be pre-import ot post-import finance and preshipment or postshipment finance.

Import Financing Facilities

·        Loan/Overdraft

·        Produce/Merchandize/Hypothecation

·        Accommodation Finance

·        Documentary Acceptance credit

·        Leasing

·        Hire Purchase

1.1  Loan/Overdraft:  This is usually in form of short or medium term advance. Written request for loan or overdraft is made by the customer to his banker. His credibility is truly assessed by taking into consideration the principle of good lending. Overdraft facility could be secured/ unsecured.  The overdraft credit facility could be a charge over  stocks and shares, a lien over credit balance in the same bank,  a legal mortgage over life assurance policy.

1.2   Produce/Merchandize/ Hypothecation:  This is common to agricultural produce whereby loans are granted to farmers at the beginning of the planting season or during fumigation and pest control period with the expectation of periodical repayments after the harvesting period.

This practice has transcended to the modern practice whereby an advance is made against a particular merchandize upon which the lender has no possession of either the merchandize or title documents rather in most cases the lender relies on the goodwill of the borrower.

Steps in Hypothecation

·         Written request is made by the importer to his banker indicating terms of repayment.

·         Approved limit is granted  when all lending principles have been taking into consideration.

·         It will be a condition in the facility letter that documents of title to the imported goods must pass through the  banker for onward dispatch to the importer

·         A charge by way of lien on the title document is created

·         The documents of title will be released to the importer for him to take delivery of the goods with a trust receipt and a letter of pledge

·         Where the importer is of undoubted ability with proven integrity. The banker may allow him to take possession of the goods, warehouse, insure and sell while the sales proceeds are deposited immediately to liquidate the facility.

·         Through the submission of the warehouse keeper receipts , the bank will ensure the prompt payment of all warehouse fees and charges and the warrant will enable the bank to monitor  the sales proceeds

·          Buyers will pay directly to the bank account opened specifically for the  purpose while the bank issues warrants each time sales are made until the facility is fully liquidated.

1.3 Accommodation Finance:  It is a type of pre-import financing. It can be used to meet obligations due under  bills of exchange accepted under collection or documentary letters of credit.  There are mainly 2 types of accommodation finance.

1.3.1     Bankers Acceptance

·         Granted by a bank through a tenor bill of exchange to fill the gap in a sight documentary collections

·         It can be offered where a bank is not willing to increase its exposure to a customer

·         The rate of return is agreed between the bank and the investing customer who accepts the concept of bankers acceptance when introduced by the bank.

·         The borrowing customer draws a bill of exchange on the investor for the agreed period.

·         The borrowing customer writes a postdated cheque for the bill plus the interest.

·         The accepted bill is discounted in the money market or by the bank, the proceeds less discounting charges is credited to the importer’s account.

·         The bank presents the discounted bill to the investing customer where account is debited directly.

·         At maturity, the post dated cheque is presented to the importer who pays and the proceeds credited to the investing customer’s account

·         The discounting bank earns its commission at discounting while the investor earns the interest for the tenor.

·         It would be a direct bank acceptance where the tenor bill is drawn on the bank directly and it accepts, while earning both the interest and the commission.

·         The liability of the accepting bank to the investor is like a guarantee which crystallizes only if the importer fails to pay at maturity of the discounted bill.

1.3.2  Commercial Paper

A commercial paper is a short term unsecured promissory note issued by a company at a discount to an interested investor for cash for a specified maturity period. It is a money market instrument used mainly by blue chip companies to raise short term finance.

Steps

·         A reputable finance company who serves as a broker is approached by the importer

·         The finance company raises promissory notes denominated in thousands or millions of Naira with rate of interest and the maturity date, sold to banks, private and corporate investors

·         The investors pay the value of interest

·         The proceeds are used by the importer to offset obligations due under the accepted sight bill of exchange

·         At maturity, the commercial papers are presented to the finance company for redemption

·         Where the importer cannot redeem his  own obligation, the finance company has to pay the investors by arranging another paper with similar terms.

1.4 Documentary Acceptance Credit:  If the method of payment agreed between importer and exporter is a documentary letter of credit providing for acceptance, a period of credit can be obtained from the exporter by seeking an acceptance credit rather than a sight credit.

1.5 Leasing:  An importer by means of leasing agreement in his country or from a finance house in the exporter’s country can obtain the use  of capital assets

1.6 Hire Purchase:  An importer may obtain the use of capital assets by means of hire purchase agreement.

EXPORT FINANCING FACILITIES

·         Loan/Overdraft

·         Produce/Hypothecation

·         Accommodation Finance

·         Hypothecation

·         Acceptance credit facilities

·         Capital market financing

·         Leasing

·         Hire Purchase

·         Export factoring

·         Bills discounting

·         Bills Negotiation

·         Forfaiting

·         Avalising

·         Red-Clause L/C

·         Direct Credit Purchases

1.8   Loan/Overdraft

1.9 Produce/Hypothecation Loan:  The flow of document is a bit different from that of importer.  Documents relating to trade are used as lien and the bank collects the proceeds of the export to liquidate the finance granted to the exporter.

Steps

·         Exporter submits his request for finance, if granted ,he is made to sign a letter of undertaking to submit all documents to the bank

·         A limit is approved for the exporter and he is made to submit financial documents and all other documents relating to the exporters to the bank for collection while he forwards goods to importer

·         He signs necessary charge forms including a lien on the documents of title which will legally transfer title of the goods to the bank.

·         The proceeds of the exports is collected by the bank to liquidate the exporter’s indebtedness

1.10 Acceptance Credit Facility: This facility is used by large and established customers. The exporter’s bank allows the exporter to draw a bill of exchange on the bank itself and the bill is accepted by the bank.  The exporter discounts the bill in the discount market. The exporter pays the bank before the maturity of the bill to enable the bank meet due obligations.

 1.11 Capital Market Financing:  This could be used where financing is required for long term. A company that is into importation can decide to go to the capital market where the finance needed is long term.

The company can raise capital through any of the following:

I    Ordinary shares   ii  preference shares iii debenture stocks

1.12 Accommodation Finance:  It is similar to documentary acceptance credit except that accommodation finance is a post shipment finance requiring the physical possession of the underlying bills and other shipping documents which may have to be deposited with the bank while the bank accepts bill drawn on it by the exporter.

·         The exporter discount accommodation bill at a free rate in the money market or with another bank

·         An accommodation bill is a bill of exchange drawn and accepted without any underlying commercial contract between the drawer and the acceptor, the purpose is just to allow the drawer to raise finance on the strength of the acceptor’s name.

·         The underlying bill i.e the trade bill drawn on the importer by the exporter should mature before the accommodation bill, because this will provide the bank with funds to meet is obligation under the accommodation bill.

1.13 Factoring

Factoring is generally referred to as a contractual agreement between a company called

the factoring company and a financial institution, called the factor, usually a subsidiary of a bank to discount book debts of the company by the factor for a fee.

Such discounting under factoring can be done in any of the following ways:

·         Invoice discounting

·         Discounting of book debts

1.13.1    INVOICE DISCOUNTING:  The factor agrees to provide funds against selected invoices of foreign importers, in which case the factor examines the book debt of the exporter and analyses by invoices from which it selectively picks those to be discounted based on factors experience and its credit rating of the debtor.

1.13.2 DISCOUNTING OF BOOK DEBTS:   It involves the management of the exporter’s receivables by the factor. The main difference between invoice discounting and book debt discounting is that factor is under a contractual obligation to perform at least 2 of the following functions.

I provision of funds

Ii credit management

Iii risk bearing

·         Provision of Funds:  The factor undertakes to provide funds against the book debts of the exporter for a fee and receives payment thereafter for its own account directly from the debtor

·          Credit Management:  The factor analyses the book debts, performs credit ratings, designs credit policies based on credit ratings

·         Risk Bearing:  The factor undertakes to bear the risks of non-payment, in addition to that of provision of funds and credit management for an additional fee ranging between 1 and 10 percent of the debt value depending on the credibility of the foreign importer and because the factor has undertaken the risk bearing function, discounting is without recourse to the exporter.

1.14   Bills Negotiation: It is a type of finance under which the exporter’s bill or collection is bought by the bank.  Interest and proceeds from the bill is thereafter used by the bank to reimburse itself. It is the process of transferring legal title of an holder or endorser of a bill who holds it till maturity date to another party.

1.15  Bills discounting: Biils that had been accepted by the an importer may be discounted to the exporter (drawer) by the bank. The face value less discount charges is paid to the exporter and the bill is kept till maturity when it is presented to the acceptor for payment. The bank’s margin or discount rate is the difference between the amount paid to the exporter and the amount collected from the acceptor on due date.

1.16  Forfaiting: It is the purchase of obligations falling due at some future date and arising from delivery of goods and services usually relating to export. It is a medium term financing for exporter in exchange for bills of exchange or promissory notes arising mainly out of goods and services exported by him.

1.17  Avalising: It is the discounting of long term financial instruments such as bill of exchange and promissory notes particularly for capital goods in the importer’s country but for the benefits of the exporter.

1.18   Red-Claused Letter of Credit: This is a special type of documentary  credit containing a clause usually printed in red, authorizing the correspondent bank (advising or confirming bank) in the beneficiary’s country to grant advances to him (exporter) up to a stipulated figure to meet pre-shipment expenses.

1.19 Direct Credit Purchases: Under this arrangement, the exporter who may be a blue chip company issues a local purchase order with the deserved credit period matching the payment terms of the international order and repay the local supplier from the exports proceeds. This is common to items of raw materials and produce.

IMPORT PROCEDURE AND DOCUMENTATION

2.0   Import Procedure in Nigeria

The old system of pre-shipment inspection of goods imported into Nigeria was discarded in December 2005. Under the system, pre-shipment inspection agents were contacted by federal government of Nigeria, with the mandate to examine the quality, quantity and value of goods overseas, before shipment to Nigeria. If an inspection agent was satisfied with the goods, it issued a Clean Report of Inspection(CRI).

Sequel to the economic reform embarked upon by the federal government of Nigeria, a new system of Destination Inspection (DI) replaced the old system of pre-shipment inspection, with effect from January 1, 2006. Under the new arrangement, scanning companies (Cotechna, SGS and Globascan) undertake the scanning and risk assessment report (RAR) which evaluates  the level of risk involved in the transaction, taking into consideration the track records and reputations of the importer and exporter, type of goods, country of origin etc. The RAR contains a recommendation as to the level of inspection required, which serve as a vital input into the actual inspection process.

The system being used by the NCS for the valuation and verification is known as the Automated System of Customs Data (ASYCUDA). It is a software developed by the United Nations Conference on Trade and Development (UNCTAD)

A potential importer planning to import for the first time should be briefed on the relevant procedure so as to avoid potential pit-falls. With respect to visible imports, the following procedure is applicable:

Step 1: Status of the Importer

Step 2: Establish Banking Relationship

Step 3: Contacts with sellers abroad

Step 4: Registration of Form “M ”

Step 5: preliminary Risk Assessment

Step 6: Procurement of Foreign Exchange:  The following documents should be attached to the purchase request:

·         Approved Form M

·         Proforma Invoice

·         Current Tax Clearance  certificate

·         Certificate of Incorporation

·         Local Insurance

·         Completed provisional import duty Assessment form C -186A;

·         National Maritime Authority Shipping notification form C-3.1

Step 7: Entering a definite contract

Step 8: Shipping of documents

Step 9: Arrival of Shipping Documents from Abroad

Step 10: Arrival of the Goods

Step 11: The importer is expected to supply the following documents to the bank.

·         Approved Form “M”

·         Final or Attested Invoice or CCVO

·         Bill of Lading/Airway Bill

·         Risk Assessment Report

·         Import Duty Payment Receipt

·         Single Goods Declaration(SGD) Form

·         Tally Sheets/Gate pass

·         Any other applicable documents

2.1  Export Procedure and Documentation

Introduction

Exports are surplus goods and services of a country that are sent to other countries of the world mainly for the purpose of earning foreign exchange. They are broadly divided into visible and invisible. Visible exports refer to exports of tangible commodities such as hides and skin, groundnuts, rubber, etcetera.  Invisible exports refer to intangibles in the form of services such as insurance, civil aviation, shipping, legal services etc. Cateris Paribus, a country’s exports should be able to pay for her imports.

CLASSIFICATION OF NIGERIAN EXPORTS

Nigerian exports can be divided into three main categories namely:

·         Oil Export

·         Commerical non-oil export

·         Non-commercial export

2.1.1   EXPORT PROCEDURE (Commercial non-oil exports)

Step 1: Incorporation of Business

Step 2: Preliminary Market Survey

Step 3: Registration with Nigeria Export Promotion Council

Step 4: Establishment of Banking Relations

Step 5: Identification of Buyer

Step 6: Completion of Form NXP

The next stage is the completion and registration of Nigeria Export Proceeds (NXP) form and subsequent stamping and endorsement by the Negotiating Bank.  This form (supplied by banks or NEPC) will contain full details of the export (usually in sextuplicate). Notification copies will be made available to the following:

·         Nigeria Maritime Authority

·         Export Inspection Agents

·         Nigeria Customs Service (NCS)

·         Nigeria Export Promotion council

·         Central Bank of Nigeria

The aim is to ensure that export proceeds are received in an approved manner.

Step 7: Preparation of the Goods for Export

Step 8: Shipment

Step 9: Repatriation of export Proceeds

2.1.2 EXPORT DOCUMENTATION (Commercial non-oil export)

The level of documentation depends on the nature of the goods being exported. However, we can distinguish between the shipping documents that must accompany the export, documents required for exchange control purposes and specialized documents.

Shipping Documents

(i)                 Proforma Invoice

(ii)               Final Invoice – commercial,certified,attested, consular

(iii)             Bill of Lading

(iv)              Clean Certificate of Inspection (CI)

(v)                Parking List

Exchange Control Documents

(i)                 All the above, in addition to:

(ii)               Form NXP

(iii)             Customs Bill of Entry

(iv)             NEPC Certificate of Registration

Special Documents

(i)                 Generalized system of Preference (GSP) forms e.g

(a)   EUR 1 – for export into European Union

PUG – for export into Portugal

(ii)               ICO-1 Certiciate

(iii)             ECOWAS Certificate – used for goods being exported within the ECOWAS sub-region under the ECOWAS Trade Liberalization scheme -(TLS)

(iv)             Form K- for export of solid minerals

(v)               NAFDAC Certificate

2.2  NON-COMMERCIAL EXPORTS

These refer to exports for which no foreign exchange inflows are expected into Nigeria. Approval of Central Bank of Nigeria is required for such transactions even though  they are exempted from pre-shipment inspection. Examples of transactions that fall under this category and their supporting documentations are as described below:

Export of Trade Samples:

This category of exports should be accompanied with the following documentation:

(i)                 A statement of purpose of export, including quantity and estimated naira

Value

(ii)               Correspondence with the consignee

(iii)             Copy of NEPC registration certificate

Export of Machine for repair and return

This category ofexports should be accompanied with the following documentation:

(i)                 Correspondence with consignee

(ii)               Cost of repair and means of settlement

(iii)             Parking list

(iv)             Certification of re-importation issued by Nigeria Customs service

Re-exportation of goods previously imported

This category of exports should be accompanied with the following documentation:

(i)                 Evidence of initial importation

(ii)               Statement of purpose of importation and re-exportation

(iii)             Certificate of initial importation issued by NCS

(iv)              Packing List

Export of Gifts and Personal Effects

This category of exports should be accompanied with the following documentation:

(i)                 Particulars and values of goods to be exported

(ii)               A statement of purpose of export

(iii)             Residence permit and passport,t in the case of non-residents

2.3  EXPORTS INCENTIVES IN NIGERIA

In an attempt to reduce Nigeria’s over-dependence on crude oil/natural gas export and thereby diversify her economic base, government promulagated the Export Incentives and Miscellaneous Provisions Decree no. 18 of 1986 as amended by Decree No. 65 of 1992 (now Act). It contained a package of incentives aimed at massaging and stimulating non-oil exports from Nigeria. A summary of available incentives is as described below:

1.      Abolition of export licence

2.      Currency retention scheme

3.      Tax relief on interest income

4.      Pioneer status

5.      Capital assets depreciation allowance

6.      Export processing zones

7.      Buyback scheme

8.      ECOWAS Trade Liberalization scheme

9.      Duty Drawback Scheme

10. Manufacture-in-bond scheme

11. Export expansion grant fund

12. Export Development Fund

In order to tap the incentives, the applicant should forward his applicant to the Nigeria Export Processing Zones Authority (NEPZA), a parastatal under the Federal Ministry of Commerce.

1.      Abolition of Export Licence

Any person can now export provided such a person is a duly incorporated entity in Nigeria

2.      Currency Retention Scheme

Exporters can operate foreign currency domiciliary account with any bank of their choice where 100% of export proceeds may be retained. They may sell all or part thereof to any bank of their choice or retain part of it for purposes of eligible transactions such as export related activities or for imports.

3.      Tax relief on interest income

In order to encourage Nigerian Banks to extend credits judiciously to the export sector, banks are granted tax exemptions on interest income accruing from such credit facilities

4.      Pioneer Status Scheme

Under this scheme, tax holidays are granted to manufacturing exporters who export at least 50% of their turnover. The holidays could be granted for any period ranging from 1-5 years, depending on annual evaluation of the company by NEPC and the Nigerian Investment Promotion Commission (NIPC). During the tax holidays, no corporate income tax is payable.

5.      Buy back Scheme

In order to alleviate the problems of sourcing for foreign exchange for the importation of plant/machinery and other inputs used in export production, the Buyback Scheme enables a manufacturing exporter to obtain such input on deferred payment basis and subsequently repay with the export proceeds generated from the use of such inputs, plant/machinery.

6.      Duty Drawback Scheme

This scheme provides for refunds of custom duties/surcharges on imported raw materials (including packaging materials) used in the production of goods that are  eventually exported. Normally the exporter will apply for the refund after export and repatriation of export proceeds. Where the application for duty drawback rate is made before exportation, such request can still be granted provided it is backed up by a Bond from a reputable financial institution.

7.      Manufacture-in-bond Scheme

This scheme is designed to support and improve the liquidity of export manufacturers by permitting them to imp ort, duty-free, raw materials and other intermediate products/inputs (whether prohibited or not) for the production of exportable goods, provided such duty free import is backed by a bond issued by a reputable financial institution. The Bond is subsequently discharged upon repatriation of the export proceeds confirmed by the Central Bank of Nigeria.

2.4  FREE TRADE ZONES/EXPORT PROCESSING ZONES: A free trade zone is a special area of land, which has more liberal bursiness rules and regulations than the country at large which is located.

2.4.1 THE CALABAR FREE TRADE ZONE (CFTZ): The calabar Free Trade Zone (formerly called Calabar Export Processing Zone) is the premier export processing zone in Nigeria. Its establishment was sequel to the positivie report of the United Nations Industrial Development Organisation (UNIDO). Activities in the zone are not limited to processing and exporting as the old name suggests, but include other wide-ranging activities as permitted under the Act.

The following incentives are available to operators in the zone:

(i) Exemption from all Federal, State and Local Government taxes, levies and rates;

(ii) Legislative provisions pertaining to foreign exchange regulations, taxes, levies and

(iv)             Approved firms shall be entitled to import into the zone, free of customs duty, any capital goods, consumer goods, raw materials, components and articles intended for purpose of and in connection with an approved activity

(v)               Repatriation of foreign capital investment is allowed.

2.5               NEXIM

NEXIM ids the acronym for Nigeria Export-Import Bank. It was established by Decree 38 of 1991(now Act) to replace the defunct Nigeria Export Credit Guarantee and Insurance Corporation. The bank commenced operations on 2^nd January 1991 and its main function is to providefinance, risk mitigating facilities and trade information as well as advisory services to the Nigeria export community.

NEXIM provides credit in local and foreign currencies thsiorough other banks in Nigeria.

The main functions of NEXIM are

       

2.5.1      Provision of finance

                  Rediscounting and refinancing facility

·        Stocking facility

·        Foreign input facility

·        Local input facility

·        Funds placement with Banks involved in export facilities

2.5.2       Risk bearing services

·        Export credit guarantee facility

·        Export credit insurance facility

·        Investment guarantee and investment insurance

·        Inter-state Road Transit Scheme to guarantee goods transiting Nigeria to other member states of Economic Community of West African States (ECOWAS)

2.5.3      Export advisory services and market information

·        Provision of information on export related matters

·        Maintenance of a well stocked library complemented by publication of periodicals, journals and handbooks

·        Offering advisory services to exports

Rediscounting and Refinancing Facility (RRF)

RRF is designed to assist banks provide pre and post-shipment finance in local  currency to support non-oil exports. The refinancing scheme provides a bank with credit of up to one year while the discounting scheme provides short-term pre-shipment credit up to 120 days and post shipment credit up to 60 days.

Stocking Facility

The facility is available in local currency and it enables manufacturing exporters to procure adequate stocks of local raw materials (which are seasonal in nature) to ensure that scarcity of raw materials does not disrupt the production process particularly during off-season. The interest rate on this facility is at a concessionary rate

Foreign Input Facility (FIF)

The FIF was introduced to provide small and medium sized enterprises foreign currency loans to import capital equipments, packaging and raw materials(which are seasonal in nature) to ensure that scarcity of raw materials does not disrupt the production process particularly during off-season. The interest rate on this facility is at a concessionary rate.

Foreign Input Facility

The FIF was introduced to provide small and medium sized enterprises foreign currency loans to import capital equipments, packaging and raw materials to produce goods for export. The federal government of Nigeria obtain the first quantum of resources for operating the scheme from the African Development Bank.

Local Input Facility (LIF)

Under this facility, NEXIM extends medium and long term local currency loans to banks for on-lending to their clients for the establishment of new export projects, expansion of existing product lines, rehabilitation of farms and plantations for production of exportable commodities.

Export Credit Guarantee Facility

NEXIM’s export credit insurance facility is configured to protect participating banks against the risk of non-payment for loans or advances granted to exporters of goods/services to meet short-term export contracts. The aim is to stimulate the interest of Banks in export financing.  This facility is available in form of either pre-shipment or post-shipment guarantees.

2.6  BONDS AND GUARANTEES GIVEN BY BANKS

More often than not, overseas buyers of capital goods and large projects have requested that suppliers and contractors oblige them with a guarantee or bond. In the context of import/export finance, a bond or guarantee is a written undertaking issued by a bank on behalf of its customer guaranteeing compliance by the customer with his obligations or indemnifying the recipient for a stated amount against the failure of the customer to fulfil his obligation under the contract.  The main types of guarantees or bonds which banks are requested to issue on behalf of customers engaged in international trade are:

(i)     Tender or bid bonds

(ii)   Performance bonds

(iii) Advance or progress payment bond

(iv) Warranty or retention bond

(v)   Stand-by letter of credit

(vi) Customs and exercise bond

(vii)    Bill of lading indemnity

Tender or Bid Bond:  This is issued at the time the contractor submits a tender or bid for an overseas contract, and is an indication that his intentions are serious, thus encouraging the beneficiary to believe that the customer is confident and capable of fulfilling any contract which might be awarded to him. In the event of failure of the contractor to enter into any contract granted in accordance with the terms of the tender, the beneficiary is entitled to claim under the bond. Such bonds are usually 5% of the contract value but may be for as little as 1% or as much as 10%.

Performance Bond: This is an undertaking given by a bank in support of a customer’s obligation  to perform the terms of their contract satisifactorily and in the event of them not doing so, a penalty will be paid under the terms of the bond. A performance bond is normally issued after the tender bond had been surrendered for cancellation, although the tender bond may be extended to become performance bond.

Advance Payment or Progress Payment Bond: Where large contracts are involved it is common for a down payment or advance payment to be made to  the contractor or supplier and sometimes progress or stage payments are also made.  This bond guarantees return of such payment in part or in whole in the event of the contractor or the supplier failing to perform under the terms of the contract. This is a variation of performance bond.

Warranty or retention bond: Some contracts contain suitable warranties of performance after commissioning whereby the contractor or supplier is responsible for a maintenance and effectiveness of the completed project. Warranty or retention bond is often issued to obtainthe release of funds on completion of the contract which, under the terms and conditions of the contract, would not otherwise be paid over until the warranty had expired. In other words, the aim is to facilitate faster release of funds to the contractor. However, in most cases, this is covered in the original performance bond and is normally the subject of a separate bond.

Stand-By Letters of Credit: This is a specie of letter of credit which is concerned with performance of obligations (rather than specific goods) can be conditional or unconditional and fulfill a role, which is similar tothat of bonds. It is based on the concept of default by the applicant in the performance of his commitment. The bank is bound to pay under the credit if it receives a certificate or non-compliance/payment from the beneficiary i.e if the borrower fails to pay, the issuing bank will pay. The advantages of stand-by letter of credit is that apart from having specific expiry date.

Customs/Excise Bond: This bond is issued by a bank on behalf of a manufacturing exporter in favour of the department of customs. It is issued in lieu of immediate payment of excise duty, and the aim is to enable the customer to sell the goods and pay the excise duties from the sales proceeds. This helps to salvage the customer from potential cash flow problem.

Bill of Lading Indemnity: This is usually issued on behalf of a customer in favour of a shipping company in a situation where the original bill of lading is either lost or delayed. The aim is to enable the importer (customer) to clear the goods quickly from the wharf and avoid payment of demurrage.

Question

You have been appointed appointed as the Assistant Manager in charge of the international banking department of your bank and today is your first day in office. Chief Ilori Ajah called this morning to make enquiries. He said that some produce buyers have invaded his village searching for palm kernel and coffee to buy for export. He wondered why everybody is exporting despite the local consumption of the end products of these commodities.

Required:

(i)     Briefly stimulate Chief Ajah’s interest on export business, taking into consideration the peculiar nature of the Nigerian economy

(ii) Advise Chief Ajah on the steps to be taken (in proper order) in export business in      accordance with the current legislation and the CBN’s policies on international trade transactions in Nigeria

(iii)List two items that are prohibited for exportation under the Nigerian exchange control regulations

Iv List the areas in which your bank could be of assistance to Chief Ajah on export business at least, highlighting 4 banking and 2 non-banking facilities and services.

Suggested Solution

Any export-operating economy enjoys tremendous merits in many ways such as follows:

I)                    Benefits of the Nigerian Economy; and

II)                  Benefits to the exporter

Benefits to the Nigerian Economy

1.It enables Nigeria to improve its balance of payments.

2.It increases foreign reserves

3. It enables Nigerian technology to have stability over the world currencies

4.It provides opportunities for Nigeria to obtainforeign raw materials

5. It increases the country’s social, political and economic activities

6. It enables the country to improve on standard of living.

Benefits to the Exporter

1.It improves business turnover and profitability

2. It improves the exporter’s liquidity position and reduces the danger of operating cycle

3. It improves the credit worthiness of the exporter as regards his banker and customers

4. It increases the goodwill and finance future assets of the customer as regards its increasing potential investors.

5. It allows easy access to foreign earnings

Ii Requirements

·        Registration as limited liability company

·        Registration with NEPC

·        Domiciliary account opening

·        Tax clearance

·        Must have a banking relationship

Iii Items Prohibited Under the Exchange Control Regulations

Hides and skin, timber and

other items under prohibition list published annually by exchange control.

iv)  Access of Banking Assistance

·        Foreign earnings management

·        Credit facilities

·        Guarantee and indemnity

·        Maintain deposit, savings and current

·        Business advisory services

·        Information service bureau

·        Status enquiries on foreign importers

3.0   CORRESPONDENT BANKING

Correspondent banking can either be domestic or Foreign banking.

Domestic correspondent banking is a system whereby banks within a country hold deposits with one another and perform various services in return for these deposits (e.g for purposes of cheque clearing).

Foreign correspondent banking is a banking system where banks in addition to their own operations also facilitates transactions of other banks in different countries sequel to constraints imposed on such other banks by factors such as distance, law, lack of expertise, lack of adequate resources or a combination of such similar factors.

3.1 RELATIONSHIP STRUCTURE AND OBJECTIVES

Generally speaking, the objectives behind any relationship determine the structure it will take and correspondent banking is no exception. There are three major relationship objectives in any correspondent-banking proposition:

·        Transactional

·        Revolving/Operational

·        Strategic

Transactional Relationship : This is a temporary or ad-hoc relationship. The decision here is whether or not to embark on a single piece of overseas transaction with a correspondent bank without the desire, at present, to enter into any long-term relationship. In other words, the deals are not relationship-driven. A good example would be the decision to confirm letter of credit issued by a bank incorporated in a third-world country, without overseas branches and payable to a beneficiary in the local market place of the correspondent.

Revolving/Operational Relationship: This type of relationship extends beyond individual transactions into a regular or even daily interchange business. This represents the core of most correspondent banking relationships.  Typical products for this category would be the availability of acceptance facilities or confirmation lines that are regularly availed.

Strategic Relationship: This involves the decision to form strategic long-term partnerships, with products designed to be permanent. Examples of this type of transaction include the provision of private electronic funds transfer system, decision to form joint ventures or to merge.

3.2   SERVICES OFFERED BY CORRESPONDENT BANKS

1. Provide avenue for investment of surplus foreign exchange by the principal.

2. They act as conduit for funds transfer worldwide on behalf of their principals

3. They assist in confirmation of letters of credit

4. They assist in bills for collection transactions by acting as acceptors or negotiators of bill of exchange

5. They can issue bonds and guarantees to foreign beneficiaries

FACTORS TO BE CONSIDERED BEFORE ENTERING INTO CORRESPONDENT BANKING RELATIONSHIP

3.3.1  Internal Factors

·        Age of the banks

·        Image of the banks

·        Size of the banks

·        Financial strength

·        Management capability

·        History of service delivery

·        Branch networl

3.3.2  External factors

·        International images of the respective countires

·        The economic environment the banks operate

·        Political situations of the country

·        Culture of both countries

·        Rate of economic crimes

·        Restrictions on banking practices

·        Exchange control regulations

·        Language

3.4    INTERNATIONAL INTER-BANK SETTLEMENTS

Buyers and sellers in international trade need to close their deals through settlement in “hard currencies”. This process is made possible through correspondent banking.  Just as Nigerian banks maintain accounts with American banks (denominated in Dollar), American banks may also open accounts with Nigerian banks here in Nigeria (denominated in naira) for the same purpose. These accounts are known as NOSTRO and VOSTRO accounts – the Latin words for “our” and “your” respectively.

3.4.1 Nostro Accounts

From the point of view of a Nigerian bank, its nostro accounts are those currency accounts which are maintained in its name in the books of banks overseas. For example, if a Nigerian bank has an account maintained in US Dollar with the bank of America, then this is a nostro account for the Nigerian bank.

3.4.2 Vostro Accounts

Again, from the  point of view of a Nigerian bank, its vostro accounts are those naira accounts in the names of overseas banks that are maintained here in Nigeria. It is a liability account showing what the local bank is owing to the correspondent bank.

Note:

The concept of nostro and vostro accounts works perfectly where the currencies of both countries are convertible. However, where one of the currencies is not convertible, it is common to find that the arrangement is not necessarily done on reciprocal basis between banks but essentially to meet the exigencies of international funds transfer. Thus, while Nigerian banks maintain nostro accounts with American banks, American banks don’t usually maintain vostro accounts in Nigeria because naira is neither presently convertible nor an international currency (you cannot credit beneficiary abroad in naira) In otherwords, the concept of vostro account only operates in theory in Nigeria.

3.4.3 Mirror Account: In other to ensure that the Nostro and Vostro Accountsa are properly reconciled, the two banks involved usually maintain a “notional” or mirror account. With respect to Nostro Account, this notional account serves as a mirror image. It is the reverse picture of the transactions passing through the nostro account abroad. Thus when the nostro account is in credit, the mirror account (record account) will show a debit balance and vice versa

3.5 Management of Nostro Account

Where there is regular dealing between a bank and its correspondents, the volume of transactions passing through the nostro account will be so high such that if they are not strictly monitored, reconciliation problems is bound to arise. This problem can be mitigated by:

        I.            Value dating of transactions passed through the nostro account to indicate the expected date when the funds are likely to be available for use or paid out of the account abroad

      II.            Reconciliation of the foreign exchange dealer’s position sheets with the mirror account records

    III.            Immediate processing of transactions without undue delays

   IV.            Periodic statements of accounts sent to the “home bank” by the overseas bank should be reconciled promptly

Thus a bank with surplus balance in its nostro accounts can take the following steps:

        I.            Move currencies from surplus to deficit nostro accounts with other correspondent banks or to other nostro accounts that need more funds to meet pending obligations

      II.            Sell the surplus in the foreign exchange market in order to keep the balance as low as possible

    III.            Lend the surplus to interested borrowers at a good rate of interest

   IV.            Invest in international money market

3.6 ACCOUNTING PROCEDURE FOR MAKING SETTLEMENTS

What is nostro for a Nigerian bank will be vostro to an American Bank and vice versa. The accounting  procedure for funds transfer is simple but we must be careful to distinguish payments made in the home currency and those made in a foreign currency.

3.7 Payments in the home currency

Assume that a customer of a London bank wishes to remit pound sterling to an overseas beneficiary in France. The procedure is as follows:

        i.            The London customer completes a bank application form and indicates the mode of  transfer e.g bank draft, TT, MT, SWIFT etc.

      ii.            The bank selects a correspondent bank in France and then debits its London customer with the amount and credit the (Sterling) vostro account of the correspondent bank.

    iii.            The remittance is then made and the beneficiary receives, or his bank account is credited with, the Euro equivalent of the sterling amount at the exchange rate ruling on the day of receipt of funds in France, but if he maintained a domiciliary account in sterling, the account will be credited direct without first converting it to Euro.

    iv.            To complete the book-keeping, the French bank debits, with the sterling amount, a record account if maintains in its books which mirrors its sterling account in London and finally credits the beneficiary.

3.8     Payments in a foreign currency

Assume a customer of a Nigerian bank wishes to remit a foreign currency e.g US dollars, to a beneficiary in New York. The procedure is as follows.

        i.            The customer completes the banks application form as usual;

      ii.            The bank debits the customers with the Naira equivalent of the  dollars or, if the customer operates a foreign currency account designated in dollars, debits that account.

    iii.            The Nigerian Bank credits the dollar amount to the account in its books which mirrors the dollar accou

mirrors the dollar account maintained with its New York correspondent

(v)               The remittance is then made and the New York bank debits the Nigerian bank’s nostro account and credits the beneficiary with the dollar amount.

4.0    METHODS OF PAYMENT IN INTERNATIONAL TRADE

 4.1    Introduction

The terms and methods of payment in international trade are usually agreed between the exporter and the importer in their contract. There are four (4) principle of mechanisms for settling international trade debts. These are:

·        Documentary letter of credit

·        Bills for collection

·        Open Account

·        Advance Payment

The risk ladder below briefly illustrates the way in which the payment mechanisms affect importer and exporter.

IMPORTER                                          MECHANISM                                     EXPORTER

Most Secured                                    Open Account                                    Least secured

                                                            Bills for collection                                  

                                                            Documentary credit

Least secured                                     Advance Payment                             Most secured

4.2   OPEN ACCOUNT TRADING : Under this system, the exporter sends the goods and relevant documents directly to the overseas buyer who will have agreed to pay the exporter upon arrival of the documents or within a defined time frame. This method is mostly used where the exporter has absolute confidence in the financial integrity of the buyer since once they (the exporters) have dispatched the shipping documents they have lost all control of the goods.  This is similar to the way in which credit sales are made between businessmen within the same country. The major differences in international trade are that the distances involved are greater and the volume of documentation is higher.

4.2.1 Advantages and Disadvantages of Open Account to Importer

	Advantages	Disadvantages
(i)	Easy to Arrange	It could encourage the  importer to overtrade because of liberal period of credit obtainable
(ii)	Saves time	Prices may be higher than that charge by competitors
(iii)	It is a demonstration of trust and confidence by the exporter	Possibility of blind loyalty to the exporter
(iv)	Importer may refuse to take possession of the goods if they are sub-standard	Possibility of exchange risk because of time lag in making payment
(V)	Secures the importer more than letter of credit, collection or advance payment	Exchange control regulations may hamper speedy payment to the exporter
(vi)	Boost cashflow position of the importer as he is allowed to sell the goods before making payment

4.2.2  Advantages and Disadvantages of Open Account to the Exporter

	Advantages	Disadvantages
(i)	He is encouraged to sell more	Delays in receipt of proceds will negatively affect cash flow
(ii)	Serves as a competitive strategy where stiff competition exist among exporters	Buyer may refuse to pay
(iii)	Since it demonstrates good measure of confidence on the importer, it helps to cement their relationship	Buyer may refuse to take possession of the goods, in which case there will be additional expenses of protecting the goods.
(iv)	Helps to solve the problem of excess capacity, as goods are sold on liberal terms	Least secured compared to other methods
(v)	Possibility of exchange gain if rates moves to his favour	Loss of ownership, control and possession as soon as goods are dispatched.

                                                                   

4.3   BILLS FOR COLLECTION/DOCUMENTARY COLLECTION

Under a documentary collection arrangement, the exporteank’r will draw a draft (bill of exchange) on the importer, attach to it the relative shipping documents such as bill of lading, invoices etc; and hand them over to the bank with instructions for their collection.  The exporter’s bank then forwards the documents to the importer’s bank for release to the importer against acceptance of the bill of exchange attached (documents against acceptance – D/A) or against immediate payment (documents against payment –D/P) in accordance with the terms set out in the remitting bank’s collection order. In many countries of the world it is common practice to defer presentation, payment or acceptance until arrival of the carrying vessel.

4.3.1    Advantages and Disadvantages of Collection to the Importer

	Advantages	Disadvantages
(i)	Less stringent than L/C	Possibility of exchange risk
(ii)	Less costly than L/c	If D/p is involved, the cash flow position of the importer is impaired
(iii)	Involvement of a bank boosts level of confidence	More cumbersome than open account
(iv)	He could insist on D/A basis to avail himself with some credit period	Misinterpretation of terms could cause delays in the release of documents by the bank
(v)	Supplier will only be paid if the documents are provided	Charges are higher than open account

4.3.2  Advantages and Disadvantages of Collection to the Exporter

	Advantages	Disadvantages
(i)	Possibility of exchange gainr	Possibility of exchange loss
(ii)	Promotes trust between exporter and importer	Exchange control regulations in importer’s country could inhibit quick remittance of proceeds
(iii)	Conditions less stringent than L/C hence, this could lead to increased turnover by the exporter	Less secured than L/c and advance payment
(iv)	If D/P is involved, he receives immediate payment before documents are released to importer

4.4                                           LETTERS OF CREDIT

In  simple terms, a letter of credit is issued by the buyer’s bank (at the request of the buyer) in favour of the seller. A documentary letter of credit may be defined as “undertaking by an issuing bank, on behalf of an importer (the applicant), that payment will be made for goods or services supplied by the exporter(the beneficiary) provided that the exporter complies with all the terms of the credit.”

Documentary credits are normally sent to the beneficiary (exporter) through an advising bank in the beneficiary’s country. The advising bank may further be requested by the issuing bank to “confirm” the credit (i.e add its own undertaking to that of the issuing bank). If this happens, we refer to such letter of credit as a confirmed credit. In the case of unconfirmed credit, the advising bank does not add its own confirmation to the credit; the exporter is relying primarily on the undertaking of the overseas bank to payment.

A letter of credit could be revocable or irrevocable.

4.4.1Advantages of Letter of Credit to Importer

        i.            Involvement of the bank enables the importer to obtain expalanation of technical issues involved

      ii.            The bank can further assist in the wording of the letter of credit by advising the importer on the appropriate terms and conditions.

    iii.            The importer is assured that unless the exporter complies with the terms of the credit, he will not be paid.

    iv.            The importer may pass on some of the charges to the exporter depending on the wording of the credit

      v.            Where the term is D/A, the importer will be enabled to enjoy some period of credit

 vi.            It enhances the status of the importer

4.4.2 Disadvantages of Letter of Credit to Importer

        I.            Once the terms and conditions of the credit are complied with, payment will be made accordingly irrespective of the physical condition of the goods. This is because bank deal in documents, not goods.

      II.            Charges may be higher than other methods

    III.            A letter of credit imposes a contingent liability on the bank and as such, other credit facilities available to the customer may be restricted.

   IV.            If expressed to be revocable, then it can be revoked by the exporter without its consent

     V.            Cumbersome documentation is usually involved.

4.4.3 Advantages of Letter of Credit to the Exporter

        I.            Assurance of payment, acceptance or negotiation once the agreed documents are presented.

      II.            If acceptance credit is involved, exporter can discount the accepted bills prior to maturity

    III.            The unknown credit worthiness of importer is substituted for that of issuing bank

   IV.            Additional assurance as all documents pass through banks

     V.            If L/C is revocable, then exporter can revoke a credit that does not suit his purpose

4.4.4Disadvantages of Letter of Credit to Exporter

        I.            Litigations may arise regarding the correct interpretation of credit terms

      II.            Cumbersome requirements and documentation

    III.            Does not promote trust between contracting parties

   IV.            Possibility of diminished turnover in view of difficulty of establishing L/C by importer.

4.5 ADVANCE PAYMENT

As the name implies, under this method, the buyer pays for the goods in advance of shipment. By implication, the buyer is extending credit to his supplier and relies on integrity of the exporter to deliver the goods in a satisfactory condition on the agreed date.