INTRODUCTION
When trade occurred between two or more countries, then it is called international trade. That means selling goods or service by a particular country to another country or buying goods or service from another country is called international trade. There is a question, why trade occurs among countries?
To answer this question, many economists give their opinion but the main theme is same. Logic behind their answer is that, one country exports such goods which they can produce with high efficiency. In this case, before discussing financing in international trade, it is needed to introduce with classical and modern theory of international trade briefly.
To answer this question, many economists give their opinion but the main theme is same. Logic behind their answer is that, one country exports such goods which they can produce with high efficiency. In this case, before discussing financing in international trade, it is needed to introduce with classical and modern theory of international trade briefly.
THEORY OF INTERNATIONAL TRADE
Why or for which international trade occurred among different countries: classical, neo-classical & modern economists give their answers of this important question. These theories are briefly discussed in below:
1. Classical Theory: "Why trade occurs between two countries?" The answer of the question has given by the classical economist and it is called the theory of comparative cost. Adam Smith, David Ricardo & Stuart Mill are the primary inventor of this theory.
Main theme of comparative cost theory: If there is a difference in ratio between two countries in their comparative production cost, then those two countries will produce such kinds of product on which they have the efficiency to produce and cost must be less. Generally every country has not the same efficiency to produce every product. As a result, which product it can produce easily, it will produce & export that product and which it can't, it will import those.
To explain this theory, following assumption must be accepted:
Two countries
Two goods only
Only labor cost is used to produce product
Production cost is stable in two countries
Absence of transport cost
Perfect competition and full employment
Factors of production are perfectly mobile within a country and immobile between countries
It is seen that the core part of this theory is correct but the assumptions are not acceptable in all cases. Because:
Here, only labor cost is taken on production cost. But without other three elements, production is not possible.
This theory is established on two countries & two goods. But a country can produce more than two goods and take part in international trade among different countries.
Here, production cost is stable. But it is not correct at all stage. Because cost will be changed during increasing and decreasing of production.
Transport cost is absent here. But without this cost transportation of goods is not possible.
According to this theory, elements of production are active within a country. But it is not true. Because in every country there are classes which are out of competition, so that elements of production cannot be activated according to our wish.
Theory of comparative cost is established on free trade business policy. But practically the existence of free trade policy is limited.
Although it has some criticism but it is a remarkable theory of international trade.
2. Neo-Classical Theory: Though the classical economist has given the answer of the question-why international trade occurred, but they did not give clear explanation about why cost is raised. Hecksher, Ohlin, Samuelson, Lancaster is the inventor of this theory.
Main Theme of Neo-classical Theory: For the different submitted components comparative cost may differ country to country. As a result, any country will produce those products which raw materials are plenty. The plenty of relative source can be observed from three ways. Such as: Value of elements, Ratio and Product using intension.
The main inventor of this theory is Hecksher & Ohlin. From their concept, a country will produce & export those products where raw materials are plenty and available. Basically the difference of submitted elements is the base of international trade.
Samuelson & Lancaster also enriched this theory.
There are some criticisms of this theory. These are given below:
Perfect competition is considered in this theory. This is not logical.
This theory is established on free trade business policy, but free trade policy is limited.
There is a complexity about the relative cost.
On this theory, there is only one system of production. This is not fully acceptable.
3. Modern Theory: The theory of Hecksher & Ohlin is not acceptable, because lack of factual accuracy. As a result, at last of sixtieth decade and on the beginning of seventieth decade, some modern economist comes ahead to give a proper theory of international trade. Cradis, Linder & Poshner are some of them. The modern theory did not disclose the previous theory. This theory just finds out their lacking and gives the proper solutions.
Main Theme of Modern Theory: The modern theory is that: international trade is not only occurred for comparative opportunity but also for Government rules, control and implementation of production machinery system etc.
Finally we can say that, international trade mainly occurred for the proper combination of division of labor, relative opportunity & Government control.
From above discussion it is clear that international trade divided in two types.
Import trade
Export trade
When one country buys products or services from another country then it is called import trade. On the other hand, when one country sales their products to another country which have shortage of products or services then it is called export trade.
Importance and Necessity of Financing International Trade
There are very much necessity, expansion and importance of finance in international trade. This necessity is depends on the classification of trade and size, kind and nature of product. Generally in case of export and import trade for which reason, finance is necessary are discussed below.
In case of export trade, for the following activities financing is important:
Maintain current capital, inventory and production or business activities
Supply product to the consumer or customer
According to the customer needs and wants increase product quality and expansion of product classification
Development and extension of market
Market research
In case of import trade, for the following activities financing is important:
Opening Letter of Credit
Payment of product after reaching
Rent of warehouse and its related expenses
Advertisement and sales promotion activities
It has to note that, tax, inflation, up-down of exchange rate can create complexity on financing and impact on the management of international trade.
To help financial activities of the related exporter and importer in international trade, govt. and financial institutions of different countries play important role. As there are much organization but the commercial banks play the most important role.
Sources of Financing in International trade
From which source the finances in international trade are come, those are the following:
Own capital: A business man can supply necessary capital by his own money or properties for international trade.
Debt by friends: If his own capital is insufficient and inadequate then he can collect necessary by his friends or relatives as debt.
Foreign credit: Many international associations, govt. body, as well as foreign sellers may be the source for international trade.
Bank credit: For the financing in international trade all commercial banks and other international financing associations are also important.
From the light of above discussion we can say that, all these factors are important source for financing in international trade.
Financing and Account Settlement System in International Trade
There are some systems of financing in international trade. Such as:
Bill of Lading
Open Account
Bank Draft
Hypothecation paper
Cash payment
Letter of Credit
Bill of Lading: Some exporters send their product through their agents. After sale the agents pay money to the exporters. In import trade these method is followed very rarely. But this method is obsolete now.
Open Account: In this system the exporter send all products and shipping documents to the importers. And the exporters have not any control over those documents and payment. Exporters have account of these in his book. When the exporters and importers are closely related then this system is applicable.
To finance money in an open account is not favorable for following reasons:
For the cause of dissimilarity business laws and regulation in different countries; in an open account to collect bad debts of sold goods are complex and costly.
In an open account, for the money collection of sent goods exporters have to remind the importers. So it is not helpful for international trade
For lack of security banks doesn't show any interest to finance in export trade if the business is conducted by an open account.
Draft or Check: According to the law of Bill of Exchange 1882, draft means a order without condition, which is signed by one party and another party or recipient of the deed convoy or order to pay a certain amount of money in a certain time or when demand arises. In a foreign trade exporter give a request to make a draft by importer in favor of exporter. This is very conventional. Different types of draft are seen in business world.
Deed-less draft: Generally without attaching any shipment letters or deed letters this kind of draft are issued to pay value of imported product.
Draft with deed: Generally with attaching any shipment letters or deed letters this kind of draft are issued to pay value of imported product.
Payable at presentation draft: In case of which draft, money is payable at presentation of draft that is called Payable at presentation draft.
Last time payable draft: In case of which draft, money is payable after a certain time after presentation that is called Last time payable draft.
Mortgage Letter: By which letter any person or organization transfer ownership of his asset to pay advance to bank, that is called mortgage letter. The letter acts as a security of investment to bank. If the importer does not give money then by selling mortgage assets bank collects the money.
Cash payment: In international trade transactions is also done by giving cash, cheque, and money orders. These kinds of transactions are also legitimate. In this case money is paid after shipment or receiving goods or any other suitable time. But this method is not so popular.
Letter of Credit: In international trade, the most popular method is Letter of Credit. By this letter a huge amount of international trade is conducted. Importer sends a LC in favor of exporter with help of importer's bank. It certifies that, if importer is unwilling to pay money then the importer's bank took the responsibility to pay the money.
Importance of Letter of Credit: In international trade it is very important. In an international trade for the cause of some limitations, the importance of LC is increasing very enormously. It gains huge popularity because of exporter are unwilling to receive loan risk for an importer.
Classification of LC (Letter of Credit): LC is classified according to their characteristics. Such as:
Ascertained and unascertained LC: When the LC issuer bank ensures the certainty of payment of amount written on LC, that type of LC is called ascertained Letter of Credit. If the LC issuer bank doesn't ensure the certainty of payment then it is called unascertained LC. It has to note that, the ascertained LC is always safe and riskless.
Revocable and non-revocable LC: Revocable LC means that type of LC which can be changed or revoked without informing any benefiting person. But, non-revocable LC cannot be revoked or altered after issued by bank. It is a permanent responsibility of issuing bank. If the exporters have done all duties then the bank cannot revoke its promise. Ascertained and non-revocable LC is more accepted by exporters.
With deeds and deedless LC: In this case LC issuer bank promises to accept exporters bill with deeds. Shipment invoice, invoice, insurance policy are attached with the bill. But, on the other hand LC issuer bank just promises to sign on the bill without any deed attached.
Revolving LC: In this kind of LC, bank promises to give commercial credit to a certain limit. But the special characteristic is that the credit can be obtained more than once in a certain period. It is not necessary to open LC again and again. Advantage of getting credit is emerged again after paying previous debt.
Refundable LC: If any kind of LC issued by bank can be transferred to the creditor of exporter, by request of exporter then it is called refundable LC.
Back to back LC: When refund ability is not mentioned in main LC then the bank of the exporter issue an LC in favor of creditor of the exporter, on the basis of LC received from importer. This type of LC is called back to back LC.
Export Financing
Exporters need financing in two layers, these are:
Financing before exporting
Financing after exporting
Economic aid which is given to exporters by financial institutions before exporting product is called financing before exporting. This kind of credit is given to accomplish some tasks, such as, purchasing raw materials, processing, wrapping, warehousing and transporting. Again, which credit is provided to exporters after export is called financing after exporting. This financing is done to remove economic demand which is seen between the time of export and reception of money. Generally commercial banks give this kind of credit.
(i)PRE-SHIPMENT CREDIT:
This credit is rendered to help the exporter. Generally it is divided in two types:
This credit is rendered to help the exporter. Generally it is divided in two types:
Packing Credit
Red clause letter of credit
i.1. Packing Credit: Packing credit may be of these five types:
Cash credit against pledge: In this process which product will be exported must be handed over to the bank; but the ownership of product remain in hand of the exporter. This kind of mortgage of product renders right of bank and if the exporter fails to fulfill the conditions then the bank will collect money by selling those products. In general situation, exporters deposit all the export related documents to bank and bank collect money from importers.
Cash credit against Hypothecation: In this method, the product, which will be exported, is delivering to the bank through a hypothecation. That means the bank can get the special right on the product by the hypothecation. But the ownership is not delivered. The exporter has to submit the report about the product to the bank regularly. At the end of the exporting, the exporter needs to handover all the papers relating to export to the bank and the bank has to receive the payment.
Credit against Trust receipt: Exportable products are reserved by the exporter in this method. But it has to maintain a deed with a revenue ticket and delivered it to the bank. It has to declare that the product is buying with the help of the bank in this deed. In this case, bank calls the extra security for certainty.
Credit against Internal Transport receipt: In this system, the railway and ship receipt are given as a pledge for the repayment of credit. These receipts prove the certainty and the bank give the debt security. At last, the exporter provides all the documents to bank and the bank receive the payment.
Back to back Letter of credit (LC): In this process, bank provides the credit with depends on the letter of credit which is sent by the importer. But the exporter is not the producer of the product. For this reason bank needs to open another L.C on behalf of the producer. It is called the internal letter of credit. As it is a risky investment, the bank may call an extra security.
i.2. Red clause Letter of Credit: As the general rules, the exporter can get the payment after the exporting. But there is an exception. If the exporter feels the lacking of money or wants to take credit before the exporting, then he can get it through the red clause letter of credit.
It can be two ways which are given below:
Instant promise to pay full or partial payment.
Sometimes promise to pay the partial payment.
The above conditions are written by the red-ink in the letter of credit and that is why it is called the Red Clause letter of credit. Although the credit is made for the transportation, raw materials, production cost and packing, but it is called only the packing credit. It may be noted that, the duration of this type of credit is only 3 or 4 months. For this reason it's called the short term credit.
Warning to pay credit before exporting:
There are some warnings to pay credit before the shipment, which are given below:
To investigate the experience, borrowing power and financial solvency of the exporter
Submit the letter of credit to the bank
To check the indisputability and certainty of LC
Checking the goodwill and the financial condition of the foreign bank.
To ensure that there is no impossible terms & conditions in the letter of credit.
Compare the LC with the rules relating to export and foreign currency of the country
Examining the exporting and other deeds after it drops down to the bank
Observe the system of examine all the papers.
(ii) POST SHIPMENT CREDIT:
Each and every exporter has to wait for getting the payment from the importer. The duration of waiting is depends on various conditions. The duration may long when the product is delivered through the export trade or to wait for getting payment. In the meantime exporters have to pay to the producers. For this reason the exporter may have to take loan from the bank.
Each and every exporter has to wait for getting the payment from the importer. The duration of waiting is depends on various conditions. The duration may long when the product is delivered through the export trade or to wait for getting payment. In the meantime exporters have to pay to the producers. For this reason the exporter may have to take loan from the bank.
It can be happened in following ways:
Through hypothecation of LC: This is an important way to collect the credit after shipment. The LC is very important paper for the export trade. So it is used for taking credit.
Buying the exchange paper of selling & repayment: An exporter can get the credit by giving these bills to the bank. There is an advantage in this system that, the exporter has not to wait for the long period of time.
Through gathered the bills of collecting money: If the exporter is unwilling to submit export bill then he can obtain credit by showing the bill to bank. In this case, the bank considers the ability of the both exporters & importers. Without the bill the bank also can claim other papers as security to give credit.
IMPORT FINANCING
Economic institutions help the exporters for importing goods through import principles. Most of the import businesses collect the money by the letter of credit with the deed. Importer has to get the certified paper in which the description of credit has been provided before the delivery of the LC. To ascertain the limit of the credit, a bank has to consider the total conditions of the importer. After completing these series of activities, an importer has to submit an application to the bank.
We can explain these activities through the following points:
Pre-import credit: The time between the completion of an agreement with the foreign providers or sellers and the shipment of product is called the pre-import credit. In this stage, bank serves the importer to supply the letter of credit, and its need not to deliver the cash from bank instantly. So in case of L.C, bank has to take a special alertness about it.
Post-import credit: Post import financing is a credit which is used to release the imported goods and warehousing. An importer has to bear the tax, value and revenue of the imported goods after the goods has been reached in port. Sometimes the importer is not willing to release the product. In this case, bank will take the responsibilities. Thus a credit is created which is called the "Forced credit". The post import is a short term credit. So the importer has to pay the credit within a month.
Credit against trust receipt: This is another source of import financing, in which an importer pays all the documents relating to release the goods. The Govt. importer and another trust importer will get the chance of this credit. The duration of this credit is only 3 months. These tasks occur through deferred payment system of the imported goods. In this case, another bank acts on behalf of the importer.
IMPORT FINANCING IN BANGLADESH
There are various source of import financing in Bangladesh. These are the following:
Importer's Own equity: Importers pay the price for import goods and other expenses related to import from his own fund. But what portion of his fund will be used from his own fund it depend upon the ability of importers.
Loan from friends and relatives: When the importer fail to maintain expenses from his own fund, then he collect loan from his close friends and relatives for a short period.
Bank Credit: The main source of importers to collect money
is commercial bank. Sometimes they collect loan from commercial bank at a lower interest rate. They collect money by these following ways:
Pay cash exchange
Cash money discounting
Pay a bank cheque
Telegraphic transfer
Acceptance on cheque
Give opportunity of cash loan and bank overdraft
Letter of Credit: Letter of credit is a document issued by a bank on behalf of importer, in favor of the exporter, when the condition specified in the document. It means a letter from one bank to another bank for paying money to specified person which name is written on that document.
Loan on behalf of import goods: Commercial banks of Bangladesh give the opportunity to importers to obtain loan. It has to mention that other loans are different from this kind of loan.
X.P.L.: Occasion letter are given to the exporters on the basis of success and nature of goods, which is then used by exporters to import goods.
Wage earners' scheme: Bangladeshis who are working in foreign countries, they can import goods or any other person also can import goods using their name. Which goods can be imported in this way, those are described in Yearly Import Policy.
Foreign loan: Bangladesh is not a developed country. For developing this country foreign loan and aid is necessary. In the circumstances govt. of many countries supply goods on credit. They also give cash and credit for international trade promotion. Generally such kind of credit or aid is used for import industrial product and food. International financial organization also finance import trade by giving credit.
Every year govt. declares Import Policy. As example financing system and source of financial year 1985-86, 1989-90 and 1993-94 are shown in this chart:
Source based amount
|
1985-86
|
1989-90
|
1993-94
|
|
32
|
16
|
20
|
|
20
|
28
|
24
|
|
4
|
24
|
26
|
|
53
|
32
|
30
|
Total:
|
100
|
100
|
100
|
There is more than one reason why financing in import trade is problematic. The main reasons are:
Limited availability of foreign exchange: In our country the amount of import is greater than export. This is why the business is imbalanced. As a result import expenses are not filled up by export income. For this reason it is not easy to get loan or aid from financing institutions. So financing in import trade, importers face a lot of problem.
Unfavorable business conditions: Our international trade heavily dependent on foreign loan and aid. In this scope foreign exporters often imposed over rate for products. So importers have to pay much foreign exchange.
Inflation: The price of product increases for inflation in international and domestic market. So for same product we have to pay higher price day by day. The limitations of foreign exchange create problem for exporters.
Over bureaucracy: From getting import grant letter to shipment release there is much more bureaucracy, which causes a lot of problem to businessmen. Also businessmen have to pay bribe in many sectors, but bank do not help in this situations. So import cost is higher than the actual cost.
Let in getting product: For lack of own ships we have to dependent on foreign ships heavily. As a result there spent much time to get product. So importers have to pay much interest on their credit.
Export financing in Bangladesh
The sources of export financing in Bangladesh are described in below:
Owner's own fund: For collecting goods and executing production works the exporter collects money from his owns fund. Owner's fund is used as a special part of necessary money for total exporting goods.
Loan from friends and relatives: Sometimes exporters borrow money from friends and relatives for exporting goods. It is also an important source of collecting money.
Commercial bank: Commercial bank plays an important role in export financing. There are some methods and regulations to collect money from bank. These are given in below–
Export credit by bank:
In this system, loan or credit is provided to purchase raw-materials or produce exportable product for purpose of export. These products may be used as a security to the bank by hypothecation or pledge. By collecting price of exported goods, these credits may be paid. Sometimes credits/loans are provided by "Back-to-back letter of credit" according to Govt. policies. It is specially used for exported industries and RMG sectors.
In which fund provide at post export is "Export negotiable fund & purchase export fund". After auditing different types of condition bank made a negotiable bill to pay the exporter. Not only exporting goods but also success of exporting depends on collecting bill from importer. It has needed condition of debenture, clause, subdues etc to prepare the export bill and other necessary documents.
Documents used in export trade: An exporter exports goods for purpose of profit. But sometimes, exporter cannot get the value of exported goods and faces many problems to collect the value of exported goods.
There are three parties are involved in exporting such as: - Exporter 2. Importer 3. Bank
Generally we can see that, misunderstanding of right information and incompleteness of necessary document hampers trade within parties.
The first step of exporting is to make a sales contract. It is not only refers to formal contract but also it has include in which terms on exporters may export goods & get the bill.
Debenture: debenture defines as the conditional promise of bank for paying export bill. There are many types of debenture such as:
Debenture which can be altered or dismissed according to any one party
Debenture which can be altered or dismissed according to all parties
Debenture redeemable by exporters bank
Debenture which fulfils the clause no. 2 and 3
Transferable debenture
Debenture which is based on other debenture
This type of debenture in which is the exporters bank is directed to pay advance before submit other document
Duties of exporter after receiving debenture:
After getting the debenture, the exporter should compare the mentioned conditions between contract and debenture.
An exporter should follow the following terms:
What types of debenture is issued, and it's conditions? Is related sales contract or not?
Is there any unacceptable conditions?
By which process documents are wanted and have any possibility to get these documents by this way?
Is it reasonable the per unit price of product with the sales contact?
Is it possible to maintain the all condition of contract by the mentioned price in debenture?
Has it enough to shipment of goods, expire date of debenture, present the various documents after issuing and submit the documents to bank?
Is it similar to sales contract and insurance conditions?
If it is found after examining the debenture that any condition which is mentioned in contract that is unfavorable to importer. Importer can request to the bank to minimize that conditions. Besides, if any condition which is not mentioned in sales contract and exporter is not enabling to maintain that condition, it should be purified.
Prepare or submit the actual documents:
Generally there are two types of documents in debenture which are wanted by importer. Such as–
Substantive document and
Auxiliary document
In which document is needed of debenture are:
Bill of exchange
Invoice
Bill of lading
Bill of exchange: A bill of exchange is an instrument in writing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to the order of a certain person or to the bearer of the instrument.
Essential elements of a bill of exchange are:
Bill of exchange must be an unconditional order
It is must be written
It is made to another by the maker
It is must be signed by the maker
It is must be indicate on the payment of time
There must be mentioned currency and exact amount of payment
At the time of preparing Bill of Exchange exporter has to consider some other things. These are:
In a Bill of Exchange there must be the stamp of accurate price.
In a bill there must be mentioned the right date.
In a bill the amount of money must be written in both digit and word and the amount of money must be payable.
There must be the mention of right reference of the LC under which the bill is prepared.
The amount must be balanced with the amount which is mentioned in the invoice or LC.
If mentioned in the LC then there must be a section about interest.
Invoice or commercial invoice: Commercial invoice is a document prepared by the exporter which shows the details and price of product.
In a commercial invoice some information are mentioned. These are given in below:
Date
Name and actual address of buyer or seller
Contract/order number
Quantity and description of product
Total and per unit price of product
Weight, number of packets and specimen of product
Supply and price receive condition of product
Details description of providing product
Mentionable subjects for preparing invoice: To receive the price of exporting product easily the mentioned facts in below should be considered.
Invoice must be prepared by the exporter
Invoice must be written directly to the buyer or any other party mentioned in the LC
The description mentioned in the LC must be same to the description mentioned in the invoice
The quantity mentioned in the LC must be similar to the quantity mentioned in invoice
The price of invoice must be mentioned according to the price mentioned in the LC
If mentioned in LC then there must be the signature of exporter in invoice
Known sign, total and net weight, number of packets etc. given to the invoice must be similar to the other document
If not sanctioned then additional expenditure, such as- telegram cost, maintenance cost, commission cost cannot be included in the invoice
Other details description of invoice must be similar to the other export document
Bill of Lading: When products are carried on the way of sea then generally the bill of lading is mentioned in the LC.
Bill of Lading is issued by the captain of the ship or his correspondent. There are three main objectives of bill of lading. These are:
It is a contract of transporting goods
It is a receipt of getting product from the ship
It is a document of ownership of the product
Mentionable things of a Bill of Lading: Sometimes exporter faces problem in receiving money because of not preparing bill of lading properly. So exporter should consider the following things when preparing the bill of lading:
The place from where the product is sending and from where it will be receiving must be mentioned
The bill must be 'clean', which means bill of lading must be unconditional. In example, 'two broken packets', 'three leak drums' and 'four faulty packets', these types of comment cannot be in a bill of lading
There must be mentioned that products are placed on the ship
There must be the signature of captain or his correspondent
Any condition hampering LC must not be in a bill of lading
According to the rules of LC a complete set of bill of lading must be collected. Complete set means negotiable instruments according to the bill of lading.
If not mentioned in LC then any section of changing ship cannot be mentioned in bill of lading
The quantity and description of product mentioned in the invoice must be similar to destination and description of product mentioned in the bill of lading
Combined Transport Document: In case of product exporting where there is more than one transport facilities are necessary like ship, truck, rail, air etc. then combined transport document is used in the place of bill of lading. Generally it is issued by the organizations which are granted for performing transport activities directly.
(B) Subsidiary Papers: With necessary documents some subsidiary papers or documents are also needed for each LC. Generally these subsidiary documents are:
Insurance paper/policy
Certificate of origin
Inspection certificate
Consular invoice
Packing list
Quality Control Certificate
G.S.P. Certificate
Phyto sanitary certificate
These documents are briefly discussed in below:
Insurance paper/policy: In case of exporting insurance policy must be issued by granted insurance company. According to the condition of LC the exporter or importer has to take the responsibility of insurance policy.ins has to be taken at the time of loading the ship or before that.
Exporter should be careful about the following things regarding insurance policy:
There must be right stamp and it must be granted when it is blank
The description of product must be according to the bill of lading and the ship described there must be related with journey
If there is condition in LC then the total invoicing price of product must be issued by showing a margin
In case of ship clash, if there is any section like 'Both parties are responsible' in a bill of lading then this risk has to taken in insurance policy.
If not mentioned specially in LC then insurance certificate will not be allowed instead of insurance paper
If the changing of ship is mentioned in bill of lading then insurance policy has to take the risk
Packing sign and serial number mentioned in insurance policy must be similar to the sign and serial number mentioned in bill of lading and invoice
Certificate of origin: Certificate of origin bears the identity of origin of the product. Generally this certificate is given by the Chamber of Commerce and Industries. The things which are mentioned in this certificate are mainly the detail description of product, origin of product and seal of the organization which gives the certificate.
Consular invoice: In the exporter country the invoice prepared by the consul of importer country is called consular invoice. When it is mentioned in any LC then it has to be collected.
Generally, exporters prepare the commercial invoice and send it to the consul of importer country. On the other hand, exporter fills a form prepared by the consul and appeal for the consular invoice.
Quality Control Certificate: Sometimes Quality Control Certificate is wanted. This certificate is given by authorized quality control organization. Sometimes, in LC, from which organization that certificate would be collected that is also described.
Inspection certificate: Sometimes Inspection certificate is wanted in LC. In some cases, from which organization that certificate would be collected that is also described in LC.
Packing List: Exporters makes a packing list for importer as because of importer can unload his goods from ship after checking measurement and number of packets according to list. In this list there is description of goods, net and total weight, number of packets/cases etc.
G.S.P. Certificate: Some developed countries provide special tax holiday to developing countries. It is called G.S.P. (Generalized System of Preference). Advantages provider countries imposed various conditions for giving advantage. This advantage can be obtained for only those goods which fulfill the conditions. To take those advantages GSP certificate must be submitted. This certificate is given by Export Promotion Bureau. It is only needed if wanted in LC.
Every document prepared and submitted two or three copies as described in LC.
Phyto Sanitary Certificate: Importers often claim Phyto Sanitary Certificate to import any plant, vegetables, plant originated goods or its sample. This certificate is issued by Plant Conservation Bureau. It certifies that the exporting goods are free from harmful diseases, insect and insecticides.
Negotiation of Certificate: Bank examines the certificates after getting those from exporter. If all are right then the bank give money to exporter and send those documents to the importers' bank. All process is described in following chart:
Figure: Export-Import Business Chain
Problems of Export Financing in Bangladesh
Financial insolvency of exporter: Most of the exporters of our country are financially insolvent. So they do not have sufficient fund, that's why they face trouble in financing export business.
Shortage of Effective capital: After receiving purchase order from foreign buyer it become very complicated and delayed to collect the sufficient capital in a short period.
Uncertainty about the price of export product: The marked price is very uncertain, especially for the products which are out of use. Exporters are not able to store the product for the lack of capital. So when they get purchase order they face trouble to collect the export product from uncertain market.
Insufficient credit before exporting: There is lack in export financing institutions and sufficient funds. That's why the exporters don't get sufficient credit before exporting.
Short duration credit: Usually a commercial bank gives credit for about 15 days to 9 months for export business. But the payment of export product depends on agreement & the help of the importers. If the payment is not collected within the certain period then the exporters faces problems.
Dependence on foreign aid: Some exporters dependent on the credit of foreign customers to complete their exporting. In these circumstances, insufficient foreign credits and delay in supply can create problems in exporting.
Lack of experience in export trade: Exporting trade is much critical. Before liberation our export business was maintained by non-Bangladeshis. After liberation Bangladeshis get involved in exporting trade, but still they are not so skilled. That's why they could not prove themselves in the sector of export financing.
Limitation of export insurance: Only general insurance issues export insurance and even this insurance don't give 100 percent surety of exporting price. That's why exporting trade is facing risk.
Reliability of exporters: Most of the exporters are new and not totally financial solvent. So the bank & other financial organization doubt on their capability. And on the other hand some unworthy exporter had broken their trust. So these type of organization is not feeling interested to give credit to exporters.
Quality of export product: The foreign buyers give importance on the quality of products. Some of our corrupt businessman supply low quality product. This creates a bad image in export market, that's why financial organization is not feeling interested to give credit to exporters.
Lack of Information: The exporters sometime cannot collect the information of the source and system of export financing. Maximum time they are not informed about the condition of foreign trade and international economy. In this condition the export trading become risky for the exporters.
International Organizations and Commercial Agreements
Various contract, agreements and recommendations has been composed in various time to ensure expansion and proper accomplishment of international trade. Such kind of institutions, contracts and recommendations are discussed in below.
General Agreement on Tariff and Trade (GATT)
Origin: It formed on 30th October, 1947 in international trade to make a general law of behavior and follow it by the nations. For instance, industrially developed countries felt necessity to form this organization to solve trade conflict among them after the Second World War. Four round GATT discussion were held from 1949 to 1962 to reduce tax rate and discriminatory behaviors. After the Tokyo round in 1979 the tax rate is reduced for Twelve thousand and six hundred crore dollars international trade. Eight, the last round of GATT discussion started in 1986 in Pasta-del-East city of Uruguay. After discussion of some turns from 1986 to 1991 GATT accepted some important clauses. The functions of GATT can be identified from the light of last accepted proposals and other decisions.
Functions:
Increasing facilities among various countries and preventing discriminating behaviors.
Rendering permission to protect the domestic industries only by commercial tax. Though it is contrary to international free trade, yet it is allowing in limited way for giving safe-guard to child industries and to keep balance between import commandment prohibition and activities.
Taking steps in solving international trade problems by discussion, consultation and exchange views.
Taking effort to free from danger of tax rate by discussion.
To eliminate hindrances of investment of foreign multi-national organization in according to contract of Trade Related Investment Measures (TRIM).
Taking steps to protect patent rights of investors, inventors and possessors in case of science, technology, animal, seed, medicine etc. in according to Trade Related Intellectual Property Rights.
Reducing hindrances in the field of service such as communication, transport, hospital, hotel, educational institutions according to GATS contract and taking effort to implement that contract.
Methods of contract approval:
GATT contract is accomplished by discussion in various times. In some cases, decision is taken by vote in presence of member countries. Member countries are compelled to implement the accepted decision ethically.
Limitations of contract:
It has been seen that coming in similar decision is difficult as the economic development stages are different of the member countries of GATT. Socialist countries are not member of this organization and this is why the international entity of the organization faces difficulties.
It have to mention that 8th round contract of GATT was accepted in 1991 and permitted in 1993 by 117 countries in central office of GATT in Geneva. But from 1995 GATT did not remain in its previous condition. It has been converted to World Trade Organization.
World Trade Organization (WTO)
World Trade Organization (WTO) is a loose inheritor organization of GATT. It has been built up as an international organization operating business of various countries.
European Union gave proposal to build up GATT as a multilateral trade organization. On the other hand USA gave proposal to reform that as GATT-2. There are some differences between these two proposals. At last, decision was taken in 1995 unanimously to establish World Trade Organization. Members of GATT can be member of World Trade Organization automatically. For instance, after formation of WTO any country can be member of it after revoking membership from GATT maintaining rules and regulations. If any country does not want to be member of this organization, there is no restriction. But, there will possibilities of depriving from facilities of international trade.
Duties of World Trade Organization:
Giving solution of commercial conflict between two countries.
Reviewing commercial contract. In this case, World Bank and IMF will be concerned.
Give solution of international commercial problem after identifying.
Taking necessary steps to eliminate trade discrimination.
World Trade Organization has been criticized in various countries. If the activities of WTO are operated completely then its role will be evaluated by reviewing its successes and roles.
The United Nations Conference on Trade and Development (UNCTAD)
UNCTAD originated as a permanent co-organization of General Assembly in according to the decision of Development Decade of UNO in 1960. The central office UNCTAD is situated in Geneva. It is formed to identify the problems related with development and business of nations and to solve these problems.
Objectives:
The objectives of UNCTAD are described in following section:
Economic development of international trade specially developing countries
Determining rule and regulations of international market
Taking steps to implement on determined rules and regulations
Evolution of works of trade helping institutions and rendering help
Function:
The first convention of UNCTAD was held on March in 1964. There, some important recommendations were accepted. Such as, essentiality of fixing the import quantity of raw materials and industrial products from developing countries to developed countries, give permit to developing countries to export their product in developed countries without tax, taking steps to get international help in trading, money assets and engineering. Another characteristic of this convention is that all developing countries formed G-77 to ensure their unity. In later, some conventions were also held and various recommendations were accepted. These recommendations are related with terms of trade, problems and flow of trade, stability of product pricing etc.
Yet, these recommendations would not bring success. Developed countries neglected these recommendations often. Moreover, developed countries have given acknowledgement to give one percent of their annual national income to developing countries in according to the recommendation of the organization. Though the success of this organization is not mentionable, yet good result may come if this kind of effort and activity remains continuing.
New International Economic Organization (NIEO):
New International Economic Organization (NIEO) was declared on 1st May in 1974 in General Assembly of UNO. The declaration is about increasing international co-operation, reduction of trade imbalance and to make quick development of developing countries. Main objectives of its declaration are:
Bringing stability in export income of primary product to protect interest of exporting product of developing countries by an international system.
Making co-ordination between primary product price and industrial product price by an inter-govt. contract.
Forming special organization among countries of primary product producers and exporters.
Increasing standard quality of money and technology flow from developed countries.
Helping to achieve self dependency of developing countries by mutual co-operation.
Establishing right to nationalize foreign capital under self laws of developing countries.
Adjustment between field of industrial production and flow rate by increasing share of developing countries.
But there are various problems to implement the recommendations. Because, to implement these recommendations help of developed countries is necessary. But, these developed countries haven't shown their interest as of today. Moreover, there is also disagreement among developing countries as they are not in a same stage. As a result, there is sufficient doubt about the success of NIEO.
Factors considered by Lending Bank in Granting Loan
Before granting loan bank has to analyze the accuracy of granting that loan. For this purpose the bank should analyze the ability and other things of the person, who is taking the loan. The factors which are considered in granting loan are given below:
Analyzing the ability of taking loan: The bank has to consider the following things to analyze the ability of any organization or person of taking loan.
Character: To analyze the ability of taking loan, personal matters are specially considered. For this, data is collected and analyzed about the debtor's character, truthfulness and reliability. Whether the debtor is able to perform business activities or not, that is also considered. Except that the characteristics and the nature of organization is also needed to analyze. It should mentionable that, legally sole proprietorship business and company organization are different in their characteristics. This characteristics affect the ability of lending loan, receiving loan and receiving due loan.
The ability of repayment of loan: Bank analyzes the possibility of receiving back the loan at the time of giving the loan. For this purpose, bank analyzes the financial statement of the organization to know the liquidity, profitability and strength of financial basis. At the time of analyzing financial statement, bank gives more importance to ratio analyzing. Generally, the current ratio must be 2:1 and liquidity ratio must be 1:1. Otherwise bank does not consider it as the proper liquidity of the organization. For this purpose, comparable financial statement analysis can also be the way to analyze financial condition.
Mortgage: Bank loan may be with mortgage and without mortgage. Where it is needed there it is necessary to analyze the nature and price of mortgage assets. If price of the mortgage asset is not proper then the bank has to face risk about the repayment of the loan.
Accuracy of making contract: When a bank grants loan to anyone it makes a contract with him. In this case, it should be analyzed that the debtor is accurate for making contract legally or not. In terms of partnership and joint stock companies, the officer who makes the contract, his or her ability is analyzed.
Data regarding loan: Before giving loan the bank has to see the purpose of the organization for which it wants loan and the planning for earning it. Even the bank has to know how they will repay the loan.
Data regarding business: Bank has to collect data and analyze the history, situation, competition and possibility of the organization.
Economic information: The economic information has great importance. But it has no definite source. Economic information means those information which are commercial but it affect the business of the applicant of the loan. Before granting the loan the bank has to have assumptions about the future progress of organization, production capacity, change of demand etc. Political instability, undeveloped economy, has great impact on some business organization. Bank has to collect as more data as possible regarding these things.
Bank considers the possibility of granting loan by analyzing the discussed things on above. Practically, a bank makes a loan report and analyzes these things. If this report is positive then the bank has to do the following things to grant loan:
Determine the quantity of loan: The quantity of loan which can be lent to the debtor should be determined. For which the loan is needed, how much is necessary for that has to count. Because, if much loan is granted then the extra quantity can be used in other works and that may create problem in repayment of loan. On the other hand, if fewer loans are supplied then the plan may not succeed and it creates risk in repayment. So, not only the quantity of mortgage but also the quantity of loan should be according to necessity.
Utilization of loan: Though the mortgage is proper then it is not necessary to grant loan. Moreover, it must be assured for which purpose the loan is granted, the money is used in that purpose.
Condition and sanction: Bank will send message to the debtor about the condition of loan, interest rate etc. after determining the quality and logic of granting loan. If mortgage is needed then the formalities will be fulfilled legally. Then the loan will be sanctioned and the necessary steps will be taken for granting loan.
It have to mention that, if mortgage is fulfilled then it have to do insurance for the mortgage assets. After granting loan its utilization should be analyzed, whether it is used properly or not.
Methods of Borrowing fund from Bank
Before borrowing loan from commercial bank, the debtor has to primarily judge the quantity of loan, cost etc. For this purpose the following subjects have to consider:
Situation of Bank
Service standard of bank
Service regarding accounting
Quantity and adequacy of loan
Cost of loan
Alternative source of loan and its cost
Financial condition of bank and possibility of getting loan and service in future
If the above discussed matters satisfy the debtor then he will be taken the following steps. In the third world countries it is very difficult to get loan; so the above discussed matters are not analyzed.
Apply for loan: Receiver of the loan has to submit application to bank. Then, bank will take step according to the application. For receiving loan, the following things should be mentioned in the application.
Purpose of taking loan
Quantity of loan
Time and method of repayment of loan
Financial solvency of the debtor
Managerial structure of debtor's organization
The description of mortgage (if any)
Past relation of debtor with bank
Releasing loan: It may happen in many ways. Such as:
Line of credit: In this method, according to the application of debtor, bank set the line of credit for a definite period. Generally, bank releases loan to the parties regularly in this way. Debtor can receive loan at any time in this line of credit and the time mostly still for 1 year.
Revolving credit arrangement: In this method, bank grants the maximum loan for the debtor for definite period. Debtor can receive and repay the loan in this line at any time. But, total credit never exceeds the maximum line. If the debtor not utilize or receive the loan then he has to pay the promissory charges. This method can be renewed after the expiry of fixed date.
Single loan: When loan is needed for short period, then receiver can take loan in single loan method. In this method, regarding to the application of receiver, bank grants loan if the conditions and solvency of receiver is perfect.
So from the light of above discussion we can say that, bank loan can be obtained by following above mentioned method.
LEVEL OF BANK CREDIT
For the proper utilization of credit govt. or other organization sometimes set out the line of credit. As for example, in 1974 with lead of P.N. Tendon, Reserve Bank of India established a committee for bad effect in the economy of India for receiving much credit for business current capital. This committee appeal for making credit line of bank with some other factors. According to this principle bank grants credit for the business current capital by following these three methods:
1st method= 0.75 (Total assets - Current Liabilities)
2nd method=0.75 (Current assets - Current Liabilities)
3rd method=0.75 (Current assets - Permanent current assets) - Current Liabilities
According to these three methods the quantity of credit will be more in 1st method and less in last method. In this situation, if the condition of firm is bad then 1st method, if average then 2nd and if good then 3rd method should be taken according to commission's recommendations. Bank imposes various rules in various times and then fluctuate the rate of credit. For example, a system of loan for jute industry by Bangladesh Bank is stated below:
Factors of credit
|
Time
|
Amount
| |
| A. Raw Jute | = |
9 months for looming
|
Amount ×Cost
|
| B. Produced Inventory | = |
2.3 months
|
Fixed estimated cost
|
| C. Current activities | = |
3 weeks
|
Fixed price
|
| D. Machinery: local | = |
4 months
|
Market price
|
Imported
|
=
|
Real
|
Estimate price
|
Differences between Trade credit and Bank credit
The main sources of short term financing are trade credit and bank credit. Both are the sources of short term financing but there are some differences between them. The differences are stated below:
| DIFFERENCE | TRADE CREDIT | BANK CREDIT | |
| 01. | Credit provider | Trade credit is given by product seller or supplier. | Bank credit is given by bank. |
| 02. | Credit user | Product buyer gets trade credit. | Credit receiver gets bank credit. |
| 03. | Formality | There is no formality to take trade credit. | There are some formalities to take bank credit. |
| 04. | Interest | There is no interest on trade credit. | Interest is given in fixed rate in the case of bank credit. |
| 05. | Discount | The matter of discount is created with trade credit. | Discount is not related with bank credit. |
| 06. | Cost of credit | The cost of trade credit is comparatively less. | The cost of bank credit is comparatively more. |
| 07. | Cost bearer | Credit receiver can imposed of trade credit adding with product on other. | The expense of bank credit is borne by credit receiver directly. |
| 08. | Nature of credit | Trade credit is not gotten in cash money. | It is gotten by cash money. |
| 09. | Use of credit | It is used only in the case of buying product. | Because of getting in cash it is used in various processes. |
| 10. | Time of paying credit | Trade credit is paid for short time. | Bank credit is paid comparatively for long term than trade credit. |
| 11. | Less facility | The expense of trade credit is not seen directly. For this reason, tax facility is not gotten. | It is clearly different from the trade credit. |
| 12. | Conditions | There is no condition in this credit. | There are some conditions in this credit. |
| 13. | Classes | Mainly there is one type of credit. | There are various types of credit. |
COMMERCIAL PAPER
Which promissory notes are rendered by commercial paper room to collect money on the basis of short term is known as commercial paper. Various writers have defined it in various ways. Some definitions are mentioned in below:
Weston and Brigham: According to Weston and Brigham, "commercial paper is one kind of unsecured promissory note issued by large and wealthy institutions and that is mainly sold to other business institutions, insurance company, retirement allowance fund, money market or bank etc".
Bolton and Kong: "Commercial paper or simply 'paper' is the unsecured promissory note of large, creditworthy firms. Frequent sellers of paper are the finance companies, large manufacturer or retailers; frequent buyers of banks, insurance companies, pension funds and other industrial firms; seeking a short term revenue for temporary access".
In the light of above discussion we can say that, commercial paper is unsecured short term promissory note. That is a document with promise to pay money after a definite time. Large institutions sale these and bank, insurance company and other financial institutions purchase it on the basis of short term. These institutions get commission for discounting paper. Discount rate varies according to situation of money market. Short term financing is done by selling these papers. It is mentionable that, use and practice of commercial paper is very rare in our country.
FEATURES OF COMMERCIAL PAPERS
There are some characteristics of commercial paper. Such as-
It has no certainty.
Generally wealthy institutions can use the papers.
This paper work on the basis of time. Expenditure of this kind of loan is low because of this loan is taken for short time.
As a source of short term loan, this loan is placed after the position of commercial loan and bank loan.
If short term loan is necessary and it is impossible to collect from bank, then money is collected by commercial paper.
Advantages of commercial paper can be discussed from various points of views. Such as-
1. from view point of loan acceptor.
2. From view point of loan giver and
3. from view point of national economy.
Advantages of commercial paper from various views are discussed in below:
From view point of loan acceptor: Loan acceptor gets the following advantages by taking loan from commercial paper.
Necessary money finance: Loan acceptor can easily finance the necessary money by commercial paper.
Low cost: Expenditure is low of this loan that is collected by commercial paper.
Formality: No formality is needed to maintain to make finance by this paper or no expenditure is needed for this.
Good name: This kind of finance is not possible for the all institutions. Good name of loan acceptor spreads for financing such kind of paper.
Getting service: In this process loan acceptor sometimes gets various kinds of service and consultations.
Getting most money: In this way loan acceptor gets most money that is necessary.
Advantage of payment: There is an opportunity to finance by selling one or more commercial paper to pay money.
No need of indemnifying fund: All the money is got by selling commercial paper. Indemnifying fund is not kept.
From view point of loan acceptor: The following advantages get a loan acceptor by purchasing a commercial paper:
Profitable: This kind of investment is profitable. Because discount and commission are got from it.
Low risk: Investment on commercial paper is spreading among various industry and regions. So the amount of risk is reduced.
Liquidity: The payment time of commercial paper is very low. So the liquidity of creditor sustains.
New investment field: The creditors can create new field by financing of commercial paper.
From view point of national economy: There are some advantages like-
Increasing investment: Total investment of our country is increased to finance by commercial paper.
Productivity: Productivity is increased due to the increase of investment.
Proper distribution of loan: Proper distribution of loan is possible for financing by this paper.
Financing in shortage region: Financing by commercial paper helps to cover shortage in short region.
From above discussion we can say that, financing by commercial paper is advantageous. Not only it is a short term source of financing but also a source of low cost and alternative of bank loan.
DISADVANTAGES OF COMMERCIAL PAPER
Commercial paper is not free from error. It has some disadvantages which are given in below:
Short time in payment: Money of the commercial paper is to pay in short time.
Renew disadvantages: Commercial paper is disadvantageous to renew it.
Disadvantage in payment: It is mandatory to pay in the end of a certain time. But during the economic slump the loan acceptor has no cash money and if they are unable to sale new paper, then it faces some problems to pay it.
Disadvantage of small institutions: The commercial paper is of large amount of money. So small institutions are not able to finance by commercial paper.
Economic instability: If complexity arises in economic instability, then it comes impossible to finance.
After all, it can be said that, above disadvantages are of short term and some solves can be done. So commercial paper is comparatively advantageous and it is a special source of short term finance.
SECURED AND UNSECURED CREDIT
Secured Loan: To take which loan some collateral security is given without individual security that loan is called secured loan. According to Weston and Brigham, "Secured loan is one kind of loan that is generally taken by keeping mortgage some usual inventory product or receivable account".
According to J.L. Githman, "A secured loan is a loan for which the lender requires collateral. The collateral commonly takes the form of an asset, such as account, receivable or inventory".
The loan renders loan keeping mortgage share, bond, inventory product, precise metal as security of the loan. If the loan acceptor comes unable to pay the amount of loan, then the loan giver collects money by selling this security.
Unsecured Loan: For which loan, the debtor has not kept any other mortgage without personal secyrity is called unsecured loan. This loan is given on the basis of mutual belief and confidence. In this type of loan, debtor gives promissory note. This is risky for the creditor. For getting this type of loan good relation is needed. On the other hand, it increases the reputation of debtor.
It should be mentioned that, the security may be of different types. Such as: 1. Pledge, 2. Lien, 3. Mortgage, 4. Copyright. Except that creditor also analyzes the following things:
Nature of debtor, 2. Quantity of loan, 3. Risk and 4. Time of repayment.
Inventory Financing
Inventory means the raw material, half prepared product and non-selling full prepared product. This is a current asset so one can easily collect money by selling it. For collecting short term loan one can mortgage the inventory.
In this matter Githman said, "By keeping inventory as mortgage, loan can be collected when its nature is stable"
Bolton said, "Short term fund can also be raised by pledging inventory as collateral, using floating collateral liens, Trust receipts, Terminal Warehouse Receipts, Field Warehouse Receipts and Chattel Mortgages"
It should be mentioned that, short term loan can also be collected by keeping import product as mortgage. But the creditor has to collect data very carefully about the mortgage product price. The quantity of credit must be less than the price of mortgage product.
Method of mortgage for financing: There are some methods to collect money by mortgage inventory. These are briefly discussed in below:
Fixed Lien: In this system debtor gives right to creditor on certain product. If loan is repaid then creditor gives the mortgage back otherwise he forfeit it.
Floating Lien: In this system, debtor gives right to creditor to his entire inventory. That means, here no product is specified. When debtor fails to repay the loan, then creditor forfeit the inventory to collect money.
Factor's Lien: In this method, debtor mortgage inventory to creditor by his representative. If debtor fails to give repay the loan then the creditor collect money from the representative.
Trust Receipts: This is a type of receipt where debtor confesses that he is reserving the mortgage as the trustee of creditor. This inventory may be in the personal warehouse of debtor or any other warehouse and the creditor can examine it.
Warehouse Receipts: In this method, creditor gives the responsibility of maintaining inventory to a third party and the third party act as the representative of creditor.
Chattel Mortgage: In this method, debtor receives the loan by giving the full description and description of any processing change of the product. In this system creditors have not have the full control so creditors are not interested in this method.
Pawn Commodity: In this method, the full mortgage product is kept under the creditor. For this debtor faces great problem. So debtors are not interested in taking loan in this system. On the other side, creditor faces problem for maintaining the mortgage.
