The document discusses various methods of international payment, including cash in advance, open account, documentary collection, and letters of credit. It provides details on each method, such as documentary collection involving the shipment of goods along with a bill of exchange to the seller's bank for collection from the buyer's bank in exchange for documents. Letters of credit are described as undertakings by an issuing bank to pay the beneficiary upon presentation of complying documents within a time period. The differences between documentary collections and letters of credit are also summarized.

1. NAME 457
Ship Economics
and Management
Part – 3: International payment
Cdre M Muzibur Rahman, (E), psc, PhD, BN
Cdre Muzib, psc, PhD

2. 1) Cash in Advance: Buyer places the fund at the disposal
of seller (exporter) prior to shipment of goods in accordance
with the sales or purchase contract. This method of payment is
expensive and contains a lot of risks on the part of buyer, they
may not be willing to accept such terms of payments.
2) Open Account: an arrangement takes place between
the buyer and seller whereby the goods are manufactured and
delivered before payment is required. Open account provides
for payment at some stated specific future date and without
requiring the buyer to issue any negotiable instrument
evidencing his legal commitment. The seller must have
absolute trust that he will be paid at the agreed day.
International Payments
Cdre Muzib, psc, PhD

3. 3) Documentary Collection (D/C): Documentary collection (D/C), which is also
known as Cash Against Documents (CAD), is a payment method in international trade
by which an exporter's bank collects funds from the importer's bank in exchange for
documents detailing shipped merchandise. A documentary collection is a trade
transaction in which exporters allow their bank to act as a collection agent for payment
of shipped goods to the buyer. In this arrangement, the goods are shipped and the
relevant bill of exchange or draft is drawn by the seller and documents are sent to the
seller’s bank with clear instructions for collection through one of its correspondent
bank’s located in the buyer’s domicile. Normally, title to the goods does not pass to the
buyer until the Draft is paid or accepted by the buyer. Collection provide the parties
with an alternative arrangement other than open account or cash in advance.
International Payments
Cdre Muzib, psc, PhD

4. 4) Documentary Credit / Letters of Credit ( L/C )
L/C is a letter addressed to the seller, written and signed by a bank who acts on the
buyer’s behalf. It is a written undertaking by the issuing bank to the beneficiary,
under which the bank will pay a sum certain in money to the beneficiary if the
beneficiary of the L/C provides the bank with specified documents within a
prescribed time period, which all comply with the terms and conditions of the
credit.
• LC should comply with Foreign Exchange Management regulations of concerned
countries and are also subject to provisions of Uniform Customs and Practices for
Documentary Credit (UCPDC) framed by International Chamber of Commerce
(ICC).
Characteristics of a L/C
A. Primary liability of the issuing bank to make payment
B. Separated from the sales
C. Dealing with documents Only
D. High level of protection and security to both buyers and sellers
Cdre Muzib, psc, PhD

5. Cdre Muzib, psc, PhD
• Both payment methods are executed by banks,
• Documents play a key role under both payment options,
• Both of them are governed by internationally accepted rules
of International Chamber of Commerce (ICC).
• Despite these similarities they have significant differences as well.
• In the case of a documentary collection (D/C), the exporter will request
payment by presenting its shipping document and collection document
to their remitting bank. The remitting bank then forwards these
documents on to the bank of the importer. The importers bank will then
pay the exporters bank, which will credit those funds to the exporter.
• The role of banks in D/C is limited, they do not verify the documents,
take risks, nor do they guarantee payment; banks just control the flow
of the documents.
• With D/C, the bank does not cover credit and country risk, however,
they are more convenient and more cost-effective than Letters of
Credit (L/C) and can be useful if the exporter and importer have a
good relationship, and if the importer is situated in a politically and
economically stable market.
D/Cs vs L/Cs

6. Cdre Muzib, psc, PhD
Governing Rules: L/C transactions are governed by Uniform Customs & Practice
for Documentary Credits (UCP 600) and cash against documents are governed by
uniform rules of collection (URC 522 rules).
Transaction Flow: L/Cs are opened by the issuing banks with the request and
authorization which they have received from the applicants. Applicant is the
importer in a commercial L/C. As a result L/Cs are initiated by the importers. On the
other hand, documentary collections (D/Cs) are initiated by the exporters.
Risk Degree: L/Cs give more assurance to the exporters than D/Cs. For this
reason L/C is accepted as a more secure payment method in international trade
than D/C.
Responsibilities of Banks : Banks play a key role in L/C transactions and they
have high levels of responsibilities against the exporters. On the other hand in
D/Cs, banks have almost no valid responsibilities against the exporters, banks do
not even verify the documents.
Complexity : D/Cs are much more easy in operational perspective than L Cs.
Cost : The costs of the D/Cs are less than the cost of L/Cs. L/Cs are one of the
most expensive payment methods in international trade.
Difference between D/Cs and L/Cs

7. Contents of a L/C
• Items on the credit itself
• Basic parties
• Items on draft
• Settlement conditions
• Items on goods, shipping documents , transport and insurance
• L/C amount and currency
• Additional conditions
• Reimbursement of the paying, accepting and negotiating bank
• The notation of the credit subject to provisions of law
Cdre Muzib, psc, PhD

8. Cdre Muzib, psc, PhD

9. Cdre Muzib, psc, PhD

10. Cdre Muzib, psc, PhD

11. LETTERS OF CREDIT
Advantages to the Importer (less than the
exporter)
• Expert Examination of Documents
• Sources of Supply expand
• Financing
• No cash tied up
• Payment only after compliance
– To ship by a certain date requires an on-board
bill of lading
Cdre Muzib, psc, PhD

12. Cdre Muzib, psc, PhD
Procedures of L/C

13. Procedures of L/C
Step 1: A buyer and a seller enter into a sales contract providing payment by a
documentary credit.
Step 2: The buyer applies to the issuing bank and instructs the bank to issue a
documentary credit in favor of the seller.
Step 3: The issuing bank opens a documentary credit according to the instructions of
the applicant.
Step 4: The issuing bank asks another bank, usually in the country of the seller, to
advise and perhaps also to add its confirmation to the documentary credit.
Step 5: The seller examines the documentary credit, and requires an amendment of
the credit if necessary and makes the shipment of goods.
Step 6: The seller presents his documents to the advising bank for settlement. The
negotiating bank forwards documents to the issuing bank, claiming reimbursement as
agreed between the two banks. The issuing bank examines the documents and make
reimbursement..
Step 7: The issuing bank makes debit from buyer’s account.
Step 8: The issuing bank provides the shipping documents to the buyer.
Step 9: The buyer redeems the documents and picks up the goods against the
documents
Cdre Muzib, psc, PhD

14. Types of L/C
Revocable L/C and Irrevocable L/C
Normally LC issued is irrevocable, which means that no single party can unilaterally
make any changes to the LC, unless it is mutually agreeable to both the parties
involved. However an LC is said to be revocable if the terms allow any one single
party to be able to make changes to the LC unilaterally. However it is in the interest
of the buyer that he should always insist on irrevocable Letter of Credit.
Confirmed L/C and Unconfirmed L/C
A Letter of Credit is always sent by the Buyer’s bank to the Seller’s Bank or any bank
that becomes an advising bank. Normally the Seller’s bank becomes an advising
bank when a normal LC is received and it delivers or advises the buyer regarding the
receipt of LC with no responsibility towards it. In case of a Confirmed LC, the Seller’s
bank checks out the authentication of the LC from the Buyer’s bank and confirms to
stand responsible for negotiating, collecting payment from the Buyer’s bank and
making payment to the seller in line with the terms and conditions stipulated in the
LC. By adding confirmation to the LC, the Seller’s bank too becomes equally
responsible to make payment for the transaction under the LC.
Seller’s Bank in turn will charge and collect service charges from the Seller for the
same.
Cdre Muzib, psc, PhD

15. Special Types of L/C
Transferable L/C : a credit that specifically states it is “transferable”. A transferable
credit may be made available in whole or in part to another beneficiary.
Back to Back Credit : Once the letter of credit is received by the middleman from the
opening bank, that letter of credit is used as security to establish a second letter
of credit drawn on the exporter in favour of his supplier. So a back-to-back
documentary credit process actually involves two separate documentary credits:
one opened by the buyer in favor of the middleman, and one opened for the
account of the middleman naming the actual supplier of the goods as the
beneficiary.
Reciprocal credit: A reciprocal credit is mostly used in a barter trade, a trade of
processing of incoming materials, a counter trade, or a compensation trade. In
the above types of trade, there are usually two transactions and letters of credit
involved. The applicant of one credit (the original credit) may assume the position
of the beneficiary of the other credit (the reciprocal credit), and the beneficiary of
the first credit is the applicant of the second credit.
Revolving L/C: The amount of the credit can be renewed or reinstated without
specific amendments to the credit. Resolving L/C may be around time or value.
Anticipatory credit : Anticipatory credit includes red clause letter of credit and
green clause credit. Under this LC variation, the beneficiary is able to obtain
advances or funds against (from within) the LC in order to purchase or process
merchandise or carry out other activities. The beneficiary does not have to
borrow money or to get money from other sources.
Cdre Muzib, psc, PhD

16. Cdre Muzib, psc, PhD
What to do if documents are dishonoured?

17. SWIFT
SWIFT (Society for Worldwide Interbank Financial
Telecommunication) provides a network to allow financial and non-
financial institutions to transfer financial transactions through a
'financial message'. It is a messaging network that financial
institutions use to securely transmit information and instructions
through a standardized system of codes.
SWIFT assigns each financial organization a unique code that has
either eight characters or 11 characters. The code is called
interchangeably the bank identifier code (BIC), SWIFT code, SWIFT
ID, or ISO 9362 code.
•First four characters: the institute code
•Next two characters: the country code
•Next two characters: the location/city code
•Last three characters: optional, but organizations use it to assign
codes to individual branches.
Cdre Muzib, psc, PhD