1.What is Letter of Credit and how many Kinds of Letter of Credit are there? 2 . Critically analys The principles of letter of credit including how Letter of Credit Perform in Bangladesh?

1. ID: LLB 066 09819
Name: Asif Mohammad Alfayed
Course Title: International Trade Law
Course Code: TRADE332
Date: 07 January, 2021
Assignment:
1. What Is a Letter of Credit?
Letters of credit are assurances or guarantees to sellers that they will be paid
for a large transaction.They are particularly common in international or
foreign exchanges. Think of them as a form of payment insurance from a
financial institution or another accredited party to the transaction.The very
first letters of credit, common in the 18thcentury, were known as travelers'
credits. The most common contemporary letters of credit are commercial
letters of credit, standby letters of credit, revocable letters of credit,
irrevocable letters of credit, revolving letters of credit, and red clause letters
of credit, although there are several others.

2. Types of letter of credit:
There are five commonly used types of letter of credit. Each has different
features and some are more secure than others. Sometimes a letter of credit
may combine two types, such as 'confirmed' and 'irrevocable'.
Common types of letters of credit
Revocable
A revocable letter of credit is uncommon because
it can be changed or cancelled by the bank that
issued it at any time and for any reason.
Irrevocable
An irrevocable letter of credit cannot be changed
or cancelled unless everyone involved agrees.
Irrevocable letters of credit provide more security
than revocable ones.
Confirmed
A confirmed letter of credit is one to which a
second bank, usually in the exporter's country adds
its own undertaking that payment will be made.
This is used when the exporter does not find the
security of an unconfirmed credit sufficient due to
issuing bank risk or political and/or economic risk
associated with the importer's country.
An irrevocable and confirmed letter of credit has
not only the commitment of the issuing bank but
also a binding undertaking given by the confirming

3. bank to pay when the documents are presented in
accordance with the terms and conditions of the
credit. So a confirmed letter of credit provides
more security than an unconfirmed one.
Unconfirmed
An unconfirmed letter of credit is one which has
not been guaranteed or confirmed by any bank
other than the bank that opened it. The advising
bank forwards the letter of credit to the
beneficiary without responsibility or undertaking
on its part but confirming authenticity.
Transferable
A transferable letter of credit can be passed from
one 'beneficiary' (person receiving payment) to
others. They're commonly used when
intermediaries are involved in a transaction.
Other types of letters of credit
Standby
A standby letter of credit is an assurance from a
bank that a buyer is able to pay a seller. The seller
doesn't expect to have to draw on the letter of
credit to get paid.
Revolving A single revolving letter of credit can cover several

4. transactionsbetween the same buyer and seller.
Back-to-back
Back-to-backletters of credit may be used when an
intermediary is involved but a transferable letter of
credit is unsuitable.
2. Critically analyze The principles of letter of
credit including how Letter of Credit Perform
in Bangladesh?
Letters of credit are based on two principles:
(i) Autonomy
(ii) Doctrine of strict compliance
1. The autonomy of the letter of credit:
According to this principle,the letter of credit is disassociated from the
actual sales and other contracts and, thus, is not affected by any problems

5. and disputes related to the contracts or dissatisfaction between the
exporter and buyer. The main and only agreement that is arranged
between the exporter and the bank is the letter of credit. Under a letter
of credit, the bank is only concerned with one problem: to check whether
the documents presented by the buyer comply with those specified in the
letter of credit. Because of the autonomy of a letter of credit, the buyer’s
bank is therefore absolutelybound to honorthe letter of credit by paying
the exporter upon presentationof proper documents, notwithstanding
any dissatisfaction from the buyer in relation to the sales contract or any
dispute between the buyer and seller. The buyer’s protest aboutthe
export cannot suspend payment of the letter of credit. Thiswas the case
with one exporter’s bank. It successfully sued a buyer’s bank for
dishonoringdrafts against a letter of credit because of complaintsabout
the qualityof the exported goods. The only case where a bank may refuse
payment is in case of fraud or forgery in the transaction, referred to as
“fraud exception”. (Articles 3 and 4 of UCP 500 refer to the principleof
autonomy of the letter of credit).
2. The doctrine of strict compliance:
According to this principle,the exporter must respect the written terms
“to the letter” of the letter of credit. If any discrepancy or inconstancy
occurs between the documentspresented by the exporter and what is
actuallyspecified in the letter of credit, the bank can refuse payment.
Therefore, with a letter of credit, the buyer has the protection of the bank
strictly controlling the documents, and the seller has the protection of

6. getting paid if all documents comply with the letter of credit. But the
problem is how strict compliance should be. Some courts insist upon
literal compliance,so that a misspelled name or typographicalerrors may
be a divergence to refuse payment. Others accept payment upon
substantialcompliancewith documentary requirements. However, one
should keep in mind that the bank may insist on strict compliancewith all
the requirements of the letter of credit, and therefore the beneficiary
must be able to provide prompt documentation.As the seller has very
limited defense to protect himself, he should check with his bank
whenever he has any doubts in interpreting unclear items in the letter of
credit.
Import Procedure:
One of the important functions of the commercial banks in the world is to
undertake import of merchandise into the country and payment of foreign
exchange towards the cost of the merchandise to foreign suppliers. In almost
all the countries of the world there is import trade control in one form or the
other which supervises the import into the country and controls certain items
of exports depending upon national exigencies. The main object of the import
trade control is to conserve the scarce foreign exchange resources of the
country with a view to meeting the needs of development of its expanding
economy. In Bangladesh,the import of goods is regulated by the Ministry of
Commerce in terms of the Import and Export (Control) act,1950; with Import
Policy Orders, and Public Notices issued from time to time by the Chief

7. Controller of Imports and Exports (C.C.I.& E), while payments for these
imports are regulated by Central Bank, i.e. Bangladesh Bank, through its
Exchange Control Department.
According to the Imports and Exports Act, 1950as adopted in Bangladesh,
anyone willing to carry import business needs registration with the licensing
authority, i.e., Chief Controller of Imports Exports and its offices at the
important trade centers of the country.
The following documents are required to be submitted to the licensing
authority for registration as importers.
i) Questionnaire form duly filled in and signed
ii) Income tax registration certificate
iii) Trade License from the Municipal or Local Authority
iv) Bank certificate
v) Nationality certificate
vi) Partnership Deed where applicable
vii) Certificate of Registration with the Register of Joint Stock Companies and
Memorandum and Articles of Association in case of Private and Public Limited
Company.
viii) Certificate from the Chamber of Commerce / registered Trade Association
ix) Ownership documents or rent receipts of the place of business
x) Any other documents required under the relevant import policy
On receipt of the application along with relative documents, the Chief
Controller of Imports and Exports and its regional offices scrutinizes the
documents and conducts physical verification (if considered necessary) and on
being satisfied, requests the applicant to pay fees towards registration

8. through treasury challan.
After submission of the above documents and payment of requisite fees, if the
documents are found in order and the C.C.I & E is satisfied, the Import
Registration Certificate (IRC) is issued to the applicant-importer.
The IRC is a security document issued under embossing seal and duly signed
by authorized officials of C.C.I & E and to be kept safe custody. The IRC is
required to be renewed every year on payment of usual fees.
Import in Bangladesh can take place in two ways
(1) By way of opening L/C
(2) Without opening L/C.
(I) Import by way of opening L/C requires fulfilling following criteria of private
sector importer;
a) Registered importer having valid IRC
b) Trade license (valid)
c) Membership certificate from local chamber of commerce of related
association (valid).
d) Income tax clearance/ declaration in case of new comer.
e) VAT registration certificate.
If a private sector importer fulfils above requirements, a banker can process
an L/C for import of goods & services from abroad but following
papers/documents are to be obtained before opening of LC in addition it the
above mentioned papers/documents:
1. L/C application.
2. Indent / Performa invoice / purchase order / contract/ agreement.

9. 3. Charge documents duly & properly executed.
4. Letter of Credit Authorization Form (LCAF) duly sealed & signed.
5. Insurance cover note.
The importer must be a customer of the L/C issuing bank / branch & the L/C
may be opened after sanction by the competent authority.
Liability vouchers
Debit- Customer’s Liability for L/C
Credit- Banker’s Liability for L/C
Other vouchers
Debit- Party’s account
Credit- Marginal Deposit
Credit- Commission
Credit- Postage
Credit- Vat
Credit – Other Charges
(2) Import into Bangladeshwithout opening L/C may be made in the following
cases against LCAF:
a) Books, journals, and magazines, periodicals against sight draft or usance
bills. Any importable item by making payment from Bangladesh to the tune of
maximum USD. 2500/-in a year.
b) The items allowed by the credit, Loan, Grant.

10. c) International chemical reference by registered allopathic industrial unit with
the approval of Director, Drug Administration.
Scrutiny of Documents
The letter of credit constitutes one of the most important methods of
financing trade. Under a banker’s letter of credit, the issuing bank gives a
undertaking on behalf of the buyer that the bank will honor the obligation of
payment on presentation of stipulated documents. Thus letter of credit
provides security if the beneficiary observes its terms and conditions. The
beneficiary of the documentary letter of credit when presents the stipulated
documents to the negotiating bank, he expects the bank to honor its
obligation under the credit in return. The negotiating bank scrutinizes the
document in strict accordancewith the L/C terms and negotiates the bill if the
documents are in order. After negotiation, the bank claims reimbursement as
per L/C terms. The L/C issuing bank / draw bank, after receiving of the above
documents, scrutinizes all the documents before lodgment of the same in
their books / registers.
After completion of careful scrutiny of the documents steps should be taken
to lodge the documents. If minor discrepancies are detected, acceptance/non-
acceptance in writing from the party concerned should be obtained. While
writing letter to the party the discrepancies should be pointed out specifically.

11. Steps for Lodgment
Following steps are maintained for lodge the documents.
1. Intimation is given to the party in time
2. Conversion of foreign currency in to Bangladesh currency.
3. Entry in to PAD register, along with PAD number
4. Entry in to L/C opening register by rounding the L/C no with date
5. Relative LCAF is to be endorsed showing the utilization of credit amount.
The utilized amount also to be noted in L/C file.
6. IMP forms duly signed by the importer are to be filled in.
7. Passing of vouchers
a) Reversal of contra liability vouchers
Debit- Bankers Liability for L/C
Credit- Customer’s Liability for L/C
b) Lodgment voucher i.e.,
Debit PAD(Payment Against Document) (At BC selling rate)
Credit ID, Head Office (name of Foreign bank, T.T/OD rate)
Credit I/A Exchange Earnings (Difference amount)

12. Retirement of Documents
After the arrival of goods in the port the party comes to retire the documents.
Then the following entry is passed.
1. Calculation of Interest
2. Determination of other Charges
3. Passing of Vouchers:
Dr. Party’s A!C
Dr. Marginal Deposit A/C
Cr. PAD
Cr. Interest A!C; Interest and other charges
4. Entry into the register
5. After retirement, document along with custom purpose copy of LCAF to
be delivered to the importer giving following endorsement:
a) Draft/Bill of Exchange is to be endorsed as “Receive payment”
b) The invoice value is to be certified as “certified (the amount-Foreign
Currency) converted @ …………. Dated………………Tk…………
6. The Bill of Lading / Transport document is to be endorsed for taking
delivering of goods as “Please deliver to ……………….Or to the order of
M/S………….”.
Interest is calculated on be amount from the date of reimbursement to
the date of retirement. If the margin is kept with the bank a minimum 30

13. days, then interest is paid to the party at the savings rate and following
vouchers are passed.
Dr. Expense control A!C Interest paid on margin L/C cash.
Cr. Party’s A!C.
Original documents are handed over to the importer after proper
endorsement along with original LCA. The importer clears the goods on
showing all these documents. The customs authority gives a bill of entry
as a document of entering the importer goods in the country. The
importer surrenders this bill of entry to the bank and forwards the bill of
entry to Bangladesh bank along with the duplicate of IMP from.
Import Financing
Banks are playing a very important role in financing foreign trade of a country.
Basic task in case of foreign trade is the same as in the home trade, i.e., to
receive payments from the buyers and to make payments to the sellers. In our
country import financing is made by the way of Payment Against Documents
(PAD), Loan Against Imported Merchandise (LIM),Loan Against Trust Receipt
(LTR).

14. Payment Against Documents (PAD)
When an import bill is received under a letter of credit, issuing bank carefully
examine the documents as these are in accordance with the terms of the
letter of credit. If the documents received in order, the bank lodge the
shipping documents in their book and the debit entry originated there against
by the negotiating bank / reimbursement bank is responded to the debit of
advance portfolio “Payment Against Documents” or “Bill of Exchange”as the
case may be and intimation is sent to the importer asking him to retire the
import bills immediately. Thus, liability under the letter of credit is converted
to bank’s advance. It is a practice that allows the importer to retire the
documents until ship carrying the goods arrives. Normally, outstanding under
“PAD” should not take more than 21 days for adjustment. When the importer
retires the bill, the transaction ends there.
Loan Against Imported Merchandise (LIM)
When the importer requests the bank for clearance of goods or the importer
fails to retire the documents on payment, the liabilities under PAD or Bill of
Exchange are converted to LIM accountand the overdue interest from the
date of accompanying Bill of Exchange or negotiation date to the date of
transfer to LIM accountis charged and incorporated to LIM. The advance
against merchandise account is a loan accountand only amounts for clearance
charges, such as, custom duty, sales tax or VAT etc are allowed to be debited
to the LIMaccount. A definite repayment schedule is also given to the
importer to take delivery of the goods from bank’s custody against payment.

15. Usually this loan is granted for 90 days within which importer should repay the
loan and take delivery of the goods.
Loan Against Trust Receipt(LTR)
Letter of Trust Receipt is a document duly stamped and signed in bank’s
prescribed format by the importer before getting delivery of the import
shipping documents. In the Trust Receipt the importer specifies the goods and
agrees that he is holding the goods not as their owner but as an agent for the
bank until the goods are sold or used for the express purpose for which they
were released to him. Thus, the bank continues to have the rights of the
pledge. In getting such facility, the importer is to offer sufficient tangible
securities acceptable to the bank equivalent to loan account.
Export Procedure:
The general framework for control of exports is similar to that of imports but
the objectives of import and export control are quite different. While import
control is aimed at curbing imports to the extent possible, export control
mainly aims at regulating the flow of foreign exchange into the country. Our
Government always encourages exports to the extent possible so as to earn
valuable foreign exchange for the country.

16. Any firms / parties desirous of undertaking export trade are required to obtain
Export Registration Certificate (ERC) from the offices of the Chief Controller of
Imports and Exports (C.C.I & E), Government of Bangladesh.No person is
allowed to export any goods from Bangladesh to any other country without
obtaining such a certificate. Authorized Dealer should, therefore, ensure
before certifying any export form, as required that the person is so registered.
The registration number should be quoted on the relative EXP form.
For the purpose of registration, an application in the prescribed form is
required to be submitted to the C.C.I & E authority along with the following
documents:
1. Nationality certificate from the local authority
2. Trade License from the Municipal authority
3. Bank certificate
4. Income Tax certificate
5. Registered partnership deed in case of Partnership concerns,
memorandum and Articles of Association and Certificate of Incorporation
in case of Limited Company.
6. Copy of rent receipt of the business premises.
An exporter has to obtain a firm contractor an export L/C/Firm contracthe
has to make the goods ready and necessary arrangement for shipment
particularly the following arrangements have to be done:

17.  Booking of shipping space.
 Packing of the goods with shipping makes as per instruction of Export
L/C/contract.
 Booking of space for storage of export cargo at the port of loading.
 Arrangement for transportationof goods to the port.
 Approaching bank (A.D) for issuing EXP.
 Whenever an exporter approaches the branch for issuing and certifying
EXP. Branch is to satisfy that he maintains a CD A/c with the branch. He is
a manufacturer, producers or supplier of the goods to be exported.
Market reputation is satisfactory.Being satisfied following papers and
documents are to be obtained:
 Application for the exporter.
 Valid export Registration certificate (ERC).
o Original copy of export L/C/Firm contract.
Examination of papers and documents by the branch
i. Application:
 Items are permissible for export.
 Arrangement made for realization of Export Proceeds within 4(Four)
months.

18.  Arrangement has been made for receipt of title of the goods like Bill of
Lading (B/L),Air Way Bill etc.
ii. Export L/C:
 Irrevocable / Confirmed L/C issued by an internationally reputed bank
under UCPDC in force and transfer made (if transferable) as per provision
of article 48 of ICC- 500.
 Genuineness of Advising or Transferring the L/C is to be verified.
 Time for shipment is sufficient.
 Negotiation authority is provided therein.
 Reimbursement clause is definite.
 B/L clause conforms to the provision of Guidelines for foreign Exchange
Transactions.
 All other terms and conditions are favorable.
iii) Contract:
 Contract is confirmed and duly signed by the seller and the purchaser.
 Buyer consignee is bonafide (Branchhas to obtain credentials of the
buyer through Foreign Correspondence).
 Full description of the goods to be exported with quantity, quality, price
and unite price are given.
 Mode of transportwith port of shipment and destination.

19.  Date of shipment.
 Delivery Term-FOB, CRE, CIF etc. mentioned clearly.
 Payment clause at Sight DC/ DP/ USANCE.
 Validity of the Contract.
 Being satisfied branch is to issue a set of EXP. Duly recorded in Export
Register as per specification given in appendix in 5/65 of Guidelines For
Foreign Exchange Transaction Volume-1 published by Bangladesh Bank.
 Exporter is to fill up and sign EXP. Under his seal. Branch is to check that
all the copies EXP have correctly been filled in as per particularsof export
L/C/contract.Signatureof the export is to be verified and certify under
seal and signature of the branch manager on the space provided.
Papers and documents are to be handed over to C& F Agent:
 EXP duly signed by Export and certified by the bank.
 Copy of Export L/C Contract.
 Commercial invoice duly issued and signed by the exporter.
 Packing List.
 Insurance cover note in case of Export on CIF basis.
 From VBF-9(Prescribed by Custom Authority for declaration of Export
Cargo).
 Detail instructions regarding shipment:

20.  Date by which the goods should be put on board.
 Name of the bank in Bangladesh to whose order BL/air way duty Bill
should be drawn.
 Number of original and non-negotiable B.Lto be obtained.
 A proof of export from the Custom Authority for claiming duty draw back
(wherever admissible).
C & F Agent has to arrange:
 Booking of shipping space.
 Storage of Export Cargo at the port.
 Marking the shipping marks on each packet / container.
 Issue instruction to the carrier regarding the date by which goods are to
be shipped on board and shipping documents to be issue with necessary
clauses and number of copies to be supplied.
After shipment Exporter will submit the following documents to the branch:
 All negotiable copies of B/L
 Commercial Invoice duly signed.
 Bill of exchange.
 Consular invoice (If required).
 Packing list.

21.  Certificate of Origin.(If required).
 Pre-shipment inspection certificate (If required).
 GSP certificate (wherever necessary).
 Original copy of export L/C/Contract.
 EXP duly certified by the custom authority.
 Any other documents required as per export L/C Contract.
 Exporter is to submit the export documents under cover of a letter
mentioning a number of documents submitted and detail instructions
regarding payment and delivery of documents.
Branch is to verify that–
The number of the documents mentioned in the forwarding letter is found
intact.
Instructionregarding payment and delivery of documents are in confirming
with the terms and conditions of Export L/C contract.
i) Sight Documents are to be delivered against payment at sight of the draft.
ii) D.A Documents to be delivered against acceptance of the draft by the
drawee and documents are too presented on due date for payments.
iii) D-P-Documentsare to be delivered against payment.
iv) All the documents required as per terms and conditions of L/C contractare
submitted.
Documents submitted are to be scrutinized and the discrepancies are to be
noted on the scrutiny sheet. Exporter is to be informed of the discrepancies

22. immediately. Export will rectify the discrepancies which are rectifiable by
them.
Export Financing
Financing of exports constitutes an important part of a bank’s activities.
Exporters require financial services at different stages of their export
operation. During each of these phase exporters need different types of
financial assistance depending on the nature of the export contract.Export
financing can be classified into two categories.
1) Pre-shipment credit
2) Post-shipment credit
Pre-shipmentcredit
Pre-shipment credit, as the name suggests, given to finance the activities of an
exporter prior to the actual shipment of goods for export. The purpose of such
credit is to meet working capital needs starting from the point of purchasing of
raw materials to transportationof goods for export to foreign country. Pre-
shipment credit takes place the following forms:
1) Export Cash Credit (Hypothecation)
2) Export Cash Credit (Pledge)
3) Export Cash Credit against Trust Receipt
4) Packing Credit
5) Back to Back letter of credit
6) Credit against Red-Clause letter of credit

23. Export Cash Credit (Hypothecation)
Under this arrangement a credit is sanctioned against hypothecation of the
raw materials or finished goods intended for export. Such facility is allowed to
the first class exporters. As the bank has got no security in this case, except
charge documents and lien of export L/C or contract,bank normally insists on
the exporter in furnishing collateral security. The letter of credit creates a
charge against the merchandise in favor of the bank but neither the ownership
nor the possession is passed to it.
Export Cash Credit (Pledge)
Such credit facility is allowed against pledge of exportable goods or raw
materials. In this case, cash credit facilities are extended against pledge of
goods to be stored in the godown under bank’s control by signing letter of
pledge and other pledge documents. The exporter surrenders the physical
possession of the goods under bank’s effective control as security for payment
of bank dues.
Export Cash Credit against Trust Receipt
In this case, credit limit is sanctioned against Trust Receipt. The exportable
goods remain in the custody of the exporter. He is required to execute a
stamped export trust receipt in favor of the bank. This facility is allowed only

24. to the first class party and aollateral security is generally obtained in this case.
Packing Credit
In this cash credit, facilities are extended against security of Railway Receipt /
Steamer Receipt / Barge Receipt / Truck Receipt evidencing transportationof
goods to the port for shipment of the goods in addition to the usual charge
documents and lien of export letter of credit. This type of credit is sanctioned
for the transitional period from dispatch of the goods till negotiation of the
export documents. The drawings under Export cash credit
(Hypothecation/Pledge) limit are generally adjusted by drawings in packing
credit limit which in turn, liquidated by negotiation of export documents.
Back to Back Letterof Credit
Under this arrangement, the bank finances export by opening a letter of credit
on behalf of the exporter who has received a letter of credit from the overseas
buyer. Since the second letter of credit is opened on the strength of and
backed by another letter of credit it is called Back to Back Letter of credit. The
need for a back to back letter of credit arise because the beneficiary of the
original (export) letter of credit may have to procure the goods from the
actual producer who may not supply the goods unless its payment is
guaranteed by the bank in the form of letter of credit. The bank’s credit
related to back to back letter of credit is realized subsequently from export
proceeds.

25. Credit against Red-Clause letterof credit
Under Red clause letter of credit, the opening bank authorizes the advising
bank/Negotiatingbank to make advance to the beneficiary prior to shipment
to enable him to procure and store the exportable goods in anticipation of his
effecting the shipment and submitting a bill under the L/C. as the clause
containing such authority is printed /typed in red ink the L/C is called Red
clause and Green Clause L/C respectively. Though it is not prohibited, it is very
rare in Bangladesh.
Post-shipment credit
This type of credit facilities extended to the exporters by the banks after
shipment of the goods against export documents. Necessity for such credit
arises as the exporter cannot afford to wait for a long time for without paying
manufacturers / suppliers. Banks in our country extend post-shipment credit
to the exporters through:
1) Negotiation of documents under L/C
2) Purchase of DP and DA bill’s
3) Advance against Export Bills surrendered 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 accordancewith the terms and
conditions and within the period mentioned in the letter of credit. If the
documents are found complying the terms and conditions of L/C, the bank

26. may purchase/discountthe drafts/documents.
Purchase of DP and DA bill’s
In such case, the banks purchase/discount the DP (Documents against
Payment) and DA (Documents against Acceptance) bills operated under the
payment method of documentary collection. While doing so, the banks
scrutinize all the export documents separately and minutely. 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 Export Billssurrendered 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 though 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, the exporter may obtain advance from the bank
against the security of export bills. In addition to the export bills, banks usually
ask for collateral security like a guarantee by a third party and equitable /
registered mortgage of property.

27. Payment Methods used in Foreign Exchange Transactions
in Bangladesh:
Like most other countries in the world, in Bangladesh,Documentary Letter of
Credit is the most popular and widely used for making import and export
payment settlement. In more than 80% cases documentary letter of credit is
used to make import payments. In a very few cases and in some cases of
export proceeds realization, especially in exporter’s retention quota accounts,
Cash in Advance method is used to import accessories.
It is found in a survey that in more than 65% cases L/C method is used for
getting export proceeds whereas only in 30% cases Documentary Collection is
used. Although Cash in Advance method is used to some extent, Open
Account is completely absent. According to Choudhury and Habib (2006),this
absence may be due to the superior bargaining power of the foreign exporters
and the lack of credibility of our importers and the greater use of L/C in
Bangladesh as main method of payment. Moreover, another discouraging
factor is the existence of Bangladesh Bank’s requirement that export receipts
must enter into the country within a period of 4 months from the date of
export, failing of which, the exporter as well as the AD and it’s officials
certifying the export forms becomes liable to punitive action under FER Act.

28. Methods of Payment used in Making and Getting Payment
Methods used Import Payment(no
of cases)
Export Payment(no
of cases)
Documentary credit 84% 67%
Documentary
Collection
14.5% 29%
Cash in Advance 1.5% 4%
Open Account 0 0
Source: Based on data collected from sampled banks.
Formalities and Margin Requirement while Opening L/C
Unless otherwise specified, no import License will be necessary for import of
any item in Bangladesh.However, registration to the Authorized Dealer is a
requirement to import into the country. Other than filling up L/C application
form, submission of the copy of proforma invoice and insurance cover note
along with LCAF to the bank is a regulatory requirement. Issuing Bank has an
agreement with the applicant while opening a Letter of Credit on his or her

29. behalf.
Before 2003,there were some restrictions by the Ministry of Commerce on LC
margin in some specific items. However, this restriction of margin requirement
becomes open from the year 2003and now this LC margin is
determined/negotiated by the relationship between the AD and the LC
applicant.
Forms of L/C in Use
In Bangladesh,all letter of credit opened and received are irrevocable in
nature as required by the domestic regulation of the country as well as UCPDC
600.Considering LC establishment about 42% out of the total credits are
Deferred Payment Back-to-Backin nature due to the garments sector import
raw materials to meet up their export orders. Whereas only about 3% LCs are
Confirmed and 55% are Irrevocable at sight L/C. Even though Revolving LCs are
rare, there is not a single case of Red Clause LC as there are some restrictions
imposed by the Central Bank i.e. Bangladesh Bank.
On the other hand in cases of Export LCs about 72% is transferable in nature
due to the existence of a large number of Buying Houses as they require
transferring the LCs to the manufacturers. Moreover the practices of
subcontractingby the garments manufacturers are also very common for
which LC is transferred. In contrastto import LC, back-to-back letter of credit
is completely absent in case of export LC. Very insignificantly (only 1%)
Bangladeshi exporters receive confirmed LC.

30. Forms of LC opened and received
Forms Import LC Export LC
Irrevocable 55% 27%
Confirmed 3% 1%
Back-to-Back 42% 0
Transferable 0 72%
Red Clause 0 0
Source: Based on data collected from sampled banks
Documents Called for by a Credit:
For Import L/C, issuing bank asks for
a) Bill of Exchange or Draft
b) Transport Documents like Bill of Lading, Airway Bill, Truck Receipt etc.

31. c) Commercial Invoice
d) Certificate of Origin and
e) Others as required by Bangladesh Bank Guideline or Import Policy Order
(IPO).
Even though transportdocuments (title documents),commercial invoice
(sellers bill) and insurance documents are essential as per UCP 600,insurance
documents are rarely asked in Bangladesh.According to the country’s Import
Policy Order, insurance is to be covered through domestic Insurance
companies. Therefore, there will be no CIF LC in our country.
Submission of signed commercial invoice is another regulatory requirement.
Under UCP 600,commercial invoice needs not to be signed. But as per BB
Guidelines, all LCs must ask for submission of signed invoices. Submission of
certificate of origin is a must in Bangladesh according to the Import Policy.
Besides these, Packing List is another very frequently asked documents with
Weight List, PSI certified Invoice, various Beneficiary’s Certificate are also
asked less frequently or depending of case basis.
It is worth mentioning here that if the import is made from India through land
customs, a Custom House Certified Invoice and/or Indian Application for
Export Bills are asked with the original documents.
For Export L/C, exporters in our country are asked for the documents like
a) Bill of Exchange
b) Transport Documents
c) Commercial Invoices

32. d) Packing List and
e) Certificate of Origin.
It has been observed that insurance documents are less frequently asked in
the export LCs. Weight list and PSI certificates are also asked but less
frequently based of case to case basis.
DocumentaryRequirements
Documents Asked Frequency for import
LC
Frequency for export
LC
Transport Document All All
Commercial Invoice All All
Certificate of Origin All Very Frequently
Bill of Exchange Very Frequently Very Frequently
Packing List Very Frequently Very Frequently
Insurance Document Very Rarely Less Frequently
Weight List Less Frequently Less Frequently

33. PSI Certificate Less Frequently Less Frequently
Source: Based on data collected from sampled banks
Examination of Documents
In connection with examination of documents ‘StandardFor ExaminationOf
Documents’ reflected in the article 14 of UCP 600 is the guideline.
As any LC opened in our country has to comply with domestic regulations,
guidelines on foreign exchange transactionsalong with FE circulars issued by
Bangladesh Bank and the Import Policy Order and the Export Policy Order of
the country are followed, these issues effect scrutinizing of import documents.
However, it is to be remembered that whenever an LC is established only the
‘LC terms’ are ‘terms’ and only they are to be considered for examining a set
of import documents.
As per article 14 of the UCP 600any bank shall have a maximum of five
banking days following the day of receiving of the document to determine if a
presentation is complying. In some banks there is a practice of sending the
discrepancy notices within 2-3 days after receiving the documents. Banks
consider the act as a protective measure on their part. Charging of discrepancy
fee appears to be another reason of such practice. Banks have been observed
to approach to the importers to get their opinion before rejecting the
documents. In regard to discrepancies, late shipment, late presentation, expiry

34. of the L/C are very common.
Availability of Credit
A letter of credit must point out whether the credit is available at sight,
deferred, acceptance or negotiation basis. The issuing bank is also required to
mention that whether the payment will be made from the counter of the
issuing bank or a nominated bank (negotiating bank). In most cases, LC issued
from the country are freely negotiable which means any bank is negotiating or
nominated bank at the counter of which documents are submitted by the
foreign exporter or beneficiary. In such a case, exporter can submit documents
at the counter of it’s bank in the country of his or domicile. In most cases
(68%) payments are designated on negotiation basis from the counter of the
nominated bank. Another 20% cases use acceptancebasis payment and 12%
deferred payment.
Charges and Commissions
Charges in documentary credit are much higher as compared to other forms of
payment as involvement of banks is significant in this mode. At different
stages of involvement, banks charge different rates of commissions as issuing
bank, advising bank, negotiating bank, confirming bank, reimbursing bank etc.
Commissions vary from bank to bank and in some cases also from client to
client.

35. Conclusion:
In Bangladesh,international trade and foreign exchange transactionsare
generally made through Letter of Credit. It is the most popular method out of
many others described earlier for importing and exporting goods and for
making and receiving payments to and from abroad. It is also notable thatthe
Import and Export policy of the country and Foreign Exchange Guideline
provided by the Central Bank are also encourage this Documentary Credit
system. For example import without LC is restricted for upto $35000/peryear
and to some restricted items like books, journals etc. (Import Policy Order
2006-2009)and import against advanced payment is comparatively complex
(Foreign Exchange Guideline Vol – 1).
From our above dissertation the following findings are worth noting:
1) Due to regulations and policies of the country, there are great differences in
the documentary requirements of export and import LCs in Bangladesh. LCs
issued from abroad i.e. export LC asks for fewer documents than the LCs
issued from our country. However, both import and export LCs, submission of
insurance documents are rarely asked for their requirement to be covered by
domestic insurance companies.
2) As both Bangladeshi Importer and Exporters are dominated by the foreign
suppliers and buyers respectively, imports are made on CNF basis and exports
are made on FOB. Due to this our country losses a substantial amount of
Foreign Currency.

36. 3) About one third of the cases collection method is used in export
transactions.However, in recent times, trend of the use of documentary
collection is increasing both in export and import payment transactions.
Though open accountis widely used in trades among developed countries, its
use in Bangladesh is completely absent. Absence or insignificant cases of use
of cash in advance and open account might be attributed to the regulatory
requirement of the country, relative bargaining power, reputation of the
country’s traders and mutual trust and relationship of the domestic traders
with their counterparts.
4) The beneficiary of an irrevocable documentary credit enjoys maximum
protection against commercial risks since it is assured that the buyer’s bank
will pay the value even if the buyer defaults to meet it’s payment obligation. If
the credit is confirmed by a bank in the seller’s country, the seller also obtains
protection against transfer risks since the confirming bank is obliged to pay
even if the buyer’s bank is unable to transfer funds out of the country.
However, of the four methods documentary letter of credit is the most
expensive.
5) All letter of credits issued and received in Bangladesh are irrevocable in
nature as opening or receiving revocable credit is completely banned by
regulations of the country as well as by the UCPDC 600.
6) In the Garments Sector imports are made through back-to-back DP LCs to
meet up the requirements for complete production and export in due time.
7) In our country garment exports are financed by the banks making lien and

37. pledge on Export LC commonly called as Master LC. But as our exporters in
many times become unable to make the shipment within validity the
documents becomes discrepant. Therefore repatriation of the related
proceeds becomes risky and vulnerable. Sometimes exporters can not ship the
goods or due to discrepancies repatriation of proceeds fails and thus the
goods become ‘stock lot’ and this way the exporter lost its business and the
Bank falls in trouble.
8) Absence of Red Clause and Revolving LCs in the trade payment is mainly
due to the country’s regulatory barriers.
9) In cases of LC advising banks generally prefer to select those banks available
by their correspondent relationship. However, some banks also try to
accommodate exporters’ choice but in doing so some banks avail the services
of a second advising bank. This actually imposes additional cost burden on the
trading parties.
10) Almost in all cases, confirming banks are selected by the issuing bank
though in some cases banks try to accommodate exporters’ choice if they
have arrangement with that bank.
11) For amendment of letter of credit, generally importers approach to the
bank on behalf of the exporters. An amendment can only be made if all 3
(three) prime parties i.e. the importer, the export and the LC issuing bank
agrees to do so. But in our country it is observed that the banks without
receiving any request from the beneficiary make amendment to an LC only
receiving an amendment application from the importer.

38. 12) Some banks are found to have practices to give a deadline for notification
of acceptance or rejection of amendment, and note that if they do not receive
any message within the given period from the beneficiary, the amendment
deemed to be accepted.
13) Banks in our country tends to send discrepancy notice on each and every
import documents even based on negligible discrepancies to safe-guard its
position on making its confirmed foreign payment. This makes payments
against import documents delayed and surely hampers the good will of the
country. This is one of the reasons why UCPDC 500 year 1993 was rectified as
UCPDC 600year 2007.Butthese commercial banks more or less become
bound to do so due to less effective legal structure in our country.