accounting principles books

1. WELCOME
TO
Trade Service
IMPORT
SEMINAR

2. OVER VIEW OF
INTERNATIONAL TRADE
INTRODUCTION

3.  International trade means cross-frontier
exchange of goods(merchandise and
services) between several political
economics.
 It involves the flow of goods from seller
to buyer in accordance with the
contract of sale and the consequential
flow of payment from buyer to seller.

4. Seller
Sales contract
Shipment
Payment

5. Why International Trade?
 Uneven distribution of resources
– People maximizes their satisfaction
by exchanging goods and services for
another goods and services based on
the principle of comparative
advantages.

6. The Sales Contract
 A sales contract
– The sales contract may be verbal, it
is advisable that it is written for ease
of reference in future
– It should be carefully worded as it
represents the ultimate fall back
position in case of any dispute
between the buyer and seller

7. The sale contract
 A good sales contract have the following
features
– Unambiguous
– Must clearly state the duties and liabilities of
each party
– Must state the price of arbitration/settlement
in case of dispute
 An agreed product or service
 Shipping and delivery details
 Required documentation
 Insurance cover
 Terms of payment

8. Buyer’s Goals:
 Minimize cost of financing
 Maintain good relationship with
supplier
 Assure receipt of specified goods
previously contracted

9. Seller’s Goals
 Maximize the price without losing
sale
 Assure payment from the buyer
 Assure that funds can be received
by the supplier

10.  The very important thing to traders involved
in international trade is managing their
risks, transportation risks and political risks.
Terms of payment are also important thing
that sellers and buyers should agree on
when concluding a contract.

11.  To meet needs of the buyer and the seller ,
the participation of international trade
facilitators is unquestionable.
 These facilitators can be categorized as:-
– Transport companies – to transport
goods
– Agents – like forwarding agents, clearing
agents and sales agents
– Financial institutions
 Insurance companies – gives cover to
risk of loss or damage of goods
 Banks – facilitates payment

12. The
Documentary
Business

13. Payment Methods
Bank

14. Payment Methods
 There are at five alternatives a
seller has for obtaining payment for
goods shipped to buyer namely:
1. Advance payment
2. Open account
3. Consignment
4. Collections
5. Letter of credit

15. 1.Cash in Advance
 This is the most basic payment
methods for goods. The supplier
receives cash from the buyer before
goods are shipped.
 This option has no advantage to the
buyer due to:-
– Lack of control over the goods
– Loss of the use of funds
– Supplier may refuse or be unable to ship
the goods
– Possible impact of political/country risk
– Possible transit risk implication

16. Payment Methods
CASH IN ADVANCE
Description Risks Other Features
1. Buyer pays for goods before
the seller ships
2. Used when there is no trust in
a market controlled sellers
1. Performance risk of
seller
2. Capital tied down by
buyer
1. Goods shipped at
sellers
convenience
2. Buyer finance

17. 2. Open Account
 The supplier ships the goods and
documentation, and awaits payment from the
buyer
 Advantages for the buyer
– Can obtain control of the goods prior to
payment
– Has the ability to generate cash from sale
before payment is due
– Can exercise right not to pay if goods are
defective.

18. Open Account (cont.)
 For the supplier there is no control over the
goods or the buyer’s willingness to pay
 May incur
– commercial or credit risk
– political/country risk
– foreign exchange risk

19. Payment Methods
Open Account
Description Risks Other Features
1. Seller ships first and
buyer pays later
2. Used when there is
no trust in a market
controlled of buyers
1. Payment risk of buyer
2. Loss of control of
goods
1. Buyer enjoys supplier’s
credit.

20. 3. On consignment
 The supplier ships the goods to the
importer (known as the consignee)
whilst retaining ownership. The
consignee is the agent responsible for
paying the supplier if and when the
goods are sold.

21. Why consignment?
 Buyer acts as agent and pays only when the
goods are sold
 Supplier retains only limited control of the
goods and uses services for the consignee to
intermediate the sale of goods to the ultimate
buyer
 Supplier has no control over the consignee's
willingness to pay
 Supplier incurs cross border risk(country risk)
and possible foreign exchange risk

22. Payment Methods
consignment
Description Risks Other Features
The seller ships
goods to the
buyer, but retains
ownership.
Payment is
made if and when
the buyer sells the
goods
No risk for
buyer
Limited control
of goods by seller
and payment
contingent

23. 4.Documentary collection
 A process governed by international
rules by which the supplier is able to
collect from an overseas buyer through
an intermediary –i.e. banks. It is a
comprise between open account and
advance payment and simpler but less
secure than letter of credit.
 Two types of collection
– Clean collection
– Documentary collection

24. Documentary collection (cont.)
 Clean collection – contain financial
documents only
– It is an alternate of open account where seller ships,
sends commercial documents to buyer but sends
financial documents I.e. draft through the banks for
collection
 Documentary Collection - contain financial
and commercial documents
– Seller ships and then sends all documents (both
financial and commercial) through the banks for
handling

25. Why Documentary Collection?
 The buyer wants an assurance that on
payment or acceptance documents will
be released to obtain goods.
 The supplier wants assurance that
documents are only made available on
release of payment or acceptance.

26. Documentary Collection (cont.)
 Advantages for the buyer
– Can refuse or delay payment
– Can refuse to accept a tenor or usance
draft/bill of exchange.
 The main disadvantage for the buyer is
that the documents and or shipment of
goods may not conform/match to the
agreed/requested specifications.

27. Documentary Collection (cont.)
 Advantages for the supplier
– Documents are processed through the
banking system in accordance with the
supplier’s instruction under URC 522
(Uniform Rules for Collection)
– Documents are exchange for payment
(sight draft/bill of exchange)
– Documents are released against the
guarantee of the buyer to pay at a future
date (tenor/usance draft/bill of exchange)
 The main disadvantage for the supplier
is that the buyer can refuse or delay to
accept or pay.

28. Payment Methods
Collections
Description Risks Other features
A. Clean Collections
 An alternate of open account where
seller ships, sends commercial
documents to buyer but sends
financial documents I.e. draft
through the banks for collection
Payment risk
of buyer
though
accepted draft
constitute a
legal evidence
against buyer
1. Some element of trust
exists between buyer
and seller
2. Buyer still enjoys
supplier’s credit
B. Documentary Collections
 Seller ships and then sends all
documents (both financial and
commercial) through the banks for
handling
Same as in
clear
connections
1. Seller still retains a
constructive control
over goods through
the banks
2. Buyers still enjoys
supplier’s credit.

29. 5. Documentary Credit (L/C)
 A written undertaking by a bank at a
request of its customer (buyer or
applicant) , in which the bank
obligates itself to pay a supplier
(beneficiary) up to a stated amount
within a prescribed timeframe, upon
presentation of documents that
conform to all the terms and conditions
requested by the applicant.
 It is the most secure.
 Governed by the UCP600.

30. The Letter of Credit
Definition:
A letter of credit is a written undertaking
of a bank on behalf of its customer (the
applicant) in favor of a named beneficiary
in which the bank obligates itself to pay
up to a certain sum of money before a
certain date upon the beneficiary
presenting documents as requested in
the credit.

31. The Letter of Credit
OR
 A documentary credit is a written
undertaking by a bank given to the seller
at a request and on the instruction of the
buyer to pay at sight or at determinable
future date up to a stated some of
money within a prescribed time limit and
against presentation of stipulated
documents.

32. Why Letter of Credit?
 Buyer wants assurance that
documents delivered meet all the
terms and conditions laid down in
the L/C
 Supplier wants to assurance that
settlement is made upon
presentation of complying
documents.

33. Letter of credit (cont.)
 Advantages for the buyer
– Pays after shipment
– Payment made after supplier’s compliance
with terms and conditions of the L/C
– Risk of not receiving goods ordered can be
reduced through conditions and terms
imposed in the L/C.
 Disadvantage for the buyer
– Expensive
– Goods may not be as represented in the
documentation.

34. Letter of credit (cont.)
 Advantages for the supplier
 Elimination of buyer risk (assumed by the
issuing bank)
 Elimination of country risk (if L/C is
confirmed)
 Disadvantages
 Expensive

35. Payment Methods
Letter of Credit
Description Risks Other features
Seller ships goods to buyer
and obtains payment based
on agreed terms and
conditions
1. Political risk/FX risk
affecting issuing
bank’s obligations
2. Documentary risk
3. Performance risk of
seller since bank's
deal in documents
only
1. Serves to protect both
buyer and seller
2. Universally accepted
rule i.e. UCP600
3. More than one bank
serving various roles
may be involved.

36. The Letter of Credit
 Parties and responsibilities
 Basic types of L/C

37. Components of letter of credit
 The basic components of L/C can be listed as
follows:-
– Advising bank name and address
– Beneficiary name and address
– Issue date
– Form and type of credit
– Amount
– Term of trade
– Mode of transport

38. Components of L/C (cont.)
– Required documents
– Expiry date and place
– Date of shipment
– Description of goods/services
– Port/place of loading
– Port/place of discharge
– Allowance for partial shipment/transshipment
– Type of payment availability
– Accountability of bank charges

39. Parties to the Documentary Credit
1. Applicant – is the buyer or an importer, who applies for
the issuance of a letter of credit in favor of a seller.
2. Beneficiary – is the seller, to whom a letter of credit is
issued.
3. Issuing bank – is the buyer’s bank who issues a letter of
credit.
4. Advising bank – is a bank, which advises a letter of
credit to a beneficiary.
5. Reimbursing bank – is correspondent bank to an issuing
bank and makes fund available to a paying bank for value
of the negotiated document under a specific letter of
credit.
6. Confirming bank – is a bank, which undertakes to a
seller to effect payment to that of issuing bank according
to the letter of credit terms and conditions.

40. Types of Letters of Credit
 Per UCP 600 art. No. 10, all documentary credit are
irrevocable that can not be cancelled or amended
without the consent of the parties in the L/C, except
as otherwise provided by art.38.
 Unconfirmed versus Confirmed
– Unconfirmed LC
 Any LC that carries the payment obligation of just one
bank being the issuing bank
– Confirmed LC
 Any LC that carries an additional payment obligation of
another bank other than the issuing bank
 Confirmation mitigates against both the commercial risk
of the issuing bank and also the country risk
 confirmation comes at a cost depending on the source of
collateral (Cash) or Clean and sometimes silent.

41. Special types of Letters of Credit
There are special letters of credit needed to
meet uncommon transactions.
These are:-
1. Revolving L/C
2. Transferable L/C
3. Back to Back L/C
4. Red clause L/C

42. 1. Revolving LC
 LCs that are renewed or reinstated within their
overall validity without requiring specific
amendments.
 Commonly used by traders having regular
shipment from the same supplier over an extended
period.
 They may revolve around time or around value.
– Time: Established for fixed amounts that are
reinstated for each specific period within the overall
validity
 For example – Revolving DC available for up to
$1,000.- Per month for a fixed period of 6 months
is available for $1,000.- each month
– L/C of this nature could be cumulative or non-
cumulative
– In both cases the issuing bank’s liability under the
RVDC would be $6,000.-, however, if it is non
cumulative the liability could be reduced as each
month’s available drawing expires.

43. – Value: Re-instated to their original value, within a
given period of validity
– The L/C provides for automatic reinstatement upon
presentation of specified documents.
 Example- LC revolving around value for
$10,000 and valid for six month , the
supplier can present documents up to a value
of $10,000 during this six months.
 The liability of the issuing bank and the
applicant is infinite and are rarely used.

44. 2. Transferable LC
 This derivative is also used to accommodate
scenarios involving middlemen.
 However, instead of having 2 LCs to cover a
single shipment, only one LC is issued which
must be designated as transferable.
 A credit which allows the beneficiary to
transfer part, or all, of the letter of credit
rights to a third party or parties if part
shipment are allowed.
 Article 38 of UCP 600 is the guiding rule for
transferable LCs.

45. Transferable DC Cycle
Seller
2nd Beneficiary
Middle Man
1st Beneficiary
Importer
Applicant
2nd Advising
Bank
Advising/
Nominated Bank
Transferring
Bank
Issuing Bank
8. Goods shipped
18. B/L exchanged
for goods
1.contract 1. contract
Transferred DC Transferable DC
2. TFDC
application
For $100,000
17. Docs
released
16. Dr. Acc
$100,000
13. $100,000
12. Docs
3.TFDC issued
For $100,000
4.TFDC
Advised for
$100,000
5. Transfer
request
11. Substitute
Docs for
$100,000
14.$25,000
14. $75,000
10. Docs
6. TFDC transferred
for $75,000
7. TFDC advised
For $75,000
9. Docs presented
For $75,000
15. $75,000

46. 3. Back to Back letter of credit
– LCs issued in favor of a supplier at the request of a
middleman against the security of a “Master” LC
issued by the ultimate buyer.
– This may involve parties domiciled in 3 different
countries.
– The terms and conditions of a back-to-back LC
should mirror the terms and conditions of the master
LC(Essentially 2 LCs to cover a single shipment of
goods)
– The following should be considered when issuing
Back-to-back LCs:
 The terms and conditions of the primary (or master) LC
must be thoroughly understood
 Considerable efforts must be made to mirror the above
terms to prevent material discrepancies
 Issues relating to third party documentation should be
addressed.

47. Back to Back DC Cycle
Importer
Applicant
Issuing Bank
8. Goods shipped
19. B/L exchanged
for goods
1.contract 1. contract
Baby DC Master DC
2. DC
application
For $100,000
18. Docs
released
17. Dr. Acc
$100,000
15. $100,000
14. Docs
3.DC issued
For $100,000
4.DC
Advised for
$100,000
5. BBDC
Application for
$75,000
13. Substitute
Docs for
$100,000
16.$25,000
11. $75,000
10. Docs
6. BBDC issued
for $75,000
7. BBDC advised
For $75,000
9. Docs presented
For $75,000
Seller
Beneficiary
Advising/
Nominated
Bank
Applicant Beneficiary
Issuing
Bank
Advising
Nominated
Bank
or
12.$75,000
Middleman
Middle

48. 4. Red Clause LC
 LCs that incorporates a special clause enabling
the beneficiary to draw a pre-shipment
advance against a simple receipt and advance
payment guarantee(APG)
 Historically utilized for pre shipment finance in the
wool industry in commonwealth countries and in
other commodity businesses.
 Provides beneficiary with credit before shipment
 Proceeds of negotiations should be applied in
repayment of the advance plus interest which
should be settled in full before any further funds
are paid.
 In event of default from the beneficiary the bank
that issued the APG becomes liable.

49. L/C Setup
The Process of L/C issuance can generally be
summarized as follows:-
 Commercial contract between buyer and seller
 Buyer applies to his bank to issue L/C in favor of
seller filling a detailed application form provided by
the bank,
 The issuing bank transmits the L/C to the advising
bank and advises the L/C to beneficiary adding
confirmation if asked to do so,
 Advising the L/C imposes a contractual obligation
on the issuing bank to pay the exporter for the
correct documents provided the documents are
presented within the stipulated time limit.

50. Graphical Representation of L/C Set Up
1. Sales Agreement
5. Shipment
7. Notification of Documents + Claim
3. Opening of LC
8. Payment/Reimbursement
(Sight / Acceptance)
Applicant or
(Importer)
Beneficiary or
(Exporter)
Opening Bank Advising Bank
9. Payment/
Acceptance
4.Advising
LC
6. Presentation
of
documents
10. Release
of
Document
2. LC
Application

51. Major contents of LC
 LC should have the following:-
– Advising bank name and address
– Beneficiary name and address
– Issue date
– Term of trade (FOB, C&F etc)
– Applicant name and address
– Amount of LC
– Mode of transport
– Required documents
– Expiry date and place, Date of shipment
– Shipment from and to if the LC is goods LC
– Methods of payments
– Payment at Sight
– Negotiation
– Deferred payments/Acceptance
– Acceptance of term draft (Bill of Exchange)etc

52. Methods of Payment under Documentary Credit
1. Payment at sight – payment is made without
recourse(option) to exporter or beneficiary.
 means payment to the beneficiary is to be effected
immediately upon presentation of complying documents.
2. Negotiation – payment may be made by negotiating
bank(advising bank ) with recourse to the
exporter(beneficiary) unless the nominated bank
(advising bank ) has confirmed the L/C.
 Negotiation is the purchase by the nominated bank
documents under a complying presentation., by
advancing or agreeing to advance funds to the
beneficiary on or before the banking day on which
reimbursement is due to the nominated bank (Art.2
UCP600).

53. Methods of Payment under Documentary
Credit
3. Acceptance of Term Draft (Bill of Exchange) –
draft(s) is accepted by the nominated, confirming
or issuing bank. Whosoever accepts the draft,
there is no recourse to the exporter and the draft
must be paid at maturity.
* Draft (Bill of Exchange ) is unconditional order
written from one person (the drawer), to
another Person (the drawee). It directs the
drawee to pay a certain sum at “sight” or at a
fixed or future determinable date, to the order
of the party who is to receive payment (Payee).

54. Methods of Payment under Documentary
Credit
4. Deferred Payment – the exporter receives an
undertaking, in return for the correct
documents, that payment will be made at the
date stated in the L/C. There is no draft
involved nor is there any recourse to the
exporter. Once issued, the undertaking must be
honored at the due date.

55. Amendment
 After the L/C establishment, there may arise the
need to change some terms and conditions of the
letter of credit, initiated by the beneficiary or the
applicant.
 Of both parties agree on the change the applicant
submits an application to the issuing bank to
make the requested changes on the L/C – called
amendment
 Some types of amendment are:-
– Increase in L./C amount
– Extension of expiry date and shipment date
– Change in trade term
– Correction of misspellings,
– Change in origin of goods, etc

56. L/C Settlement
 Exporter sends the required documents to
advising(nominated) bank.
 The advising bank, now becomes negotiating bank,
will then check the documents to ascertain whether
they are in accordance with the L/C will pay to the
beneficiary or agree to pay later in accordance with
the terms of the L/C.
 If the L/C is conformed, the advising (negotiating )
bank pays on its own account, then sends
documents claiming reimbursement.

57. Documents
Financial or Commercial
Commercial
Invoices
Packing
List
Certificate
of Origin
Insurance
Certificate
Promissory Note Transport
Documents
Bill of Exchange

58. Types of documents
 Financial documents
– Bill of exchange (draft), promissory note, cheque
 Commercial documents
– Invoices, packing list , certificate of analysis, insurance
certificate
 Transport document
– Bill of Lading, Airway bill, Rail road, Parcel receipt
 Official documents
– Certificate of origin, health certificate
 Article 14 UCP 600 is a guide for examination of
documents
 Article 18-25 also clearly states what are
included on the content of each document.

59. Letters of Credit
Discrepancies
 Discrepancies are deviations from the terms
and conditions stated on the LC
 They could be Regulatory or Non regulatory
 Non regulatory discrepancies can be waived
by the importer, while regulatory
discrepancies can not be waived.

60. Letters of Credit
Common Discrepancies
 Some examples are:-
– Late shipment
– LC expired
– Over shipment
– B/L not consigned as per LC terms
– B/L not dated
– L/C overdrawn
– Documents not marked as original
– Required document not presented

61. Letters of Credit
 If advising(negotiating) bank finds
discrepancies, it should arrange for correction
or sends documents for collection or return
documents if they are very wrong.
 The advising bank may also contact the
issuing bank explaining the nature of
discrepancy and asking to negotiate the
document by message type MT750
 Discrepancies discovered by the issuing bank
should be informed to the negotiating bank
with in five bank working days stating the
discrepancies (Art.16d UCP 600).
 The option for the importer for discrepant
documents are either to accept or not to
accept.

62. Risks and Advantages of Documentary Credits
for Applicant
Risk Mitigation Advantage
-Seller sends inferior goods
-Country risk, e.g. Trade
embargo imposed
-Lack of finance if sight
payment called for
-Obtain a status report on
the beneficiary, and/or
ask for the pre-shipment
inspection certificate
with the documents.
-make enquiries of
banks, own government,
trade agencies etc
-Arrange finance with
bankers before
establishment of the
credit
-Applicant get the goods
they want them, when
they want them, with
proper documentation
-Finance can be time to
coincide with the arrival
of goods
-Credit can be obtained
by arranging for terms of
bills of exchange.

63. Risks and Advantages of Documentary Credits
for Beneficiary
Risk Mitigation Advantages
-If L/C are unconfirmed
there is the possibility of
country risk holding up
remittance of funds
-Ask for credit to be
confirmed
If they produce the right
documents at the right
time they will be paid
irrevocably
-Immediate finance on
term bills of exchange
by having them
accepted by advising
banks and then
discounted.

64. Risks and Advantages of Documentary Credits
for Issuing Banks
Risks Mitigation Advantage
-Applicant may
be unable to pay
- Paying
documents
containing
discrepancies
-know the
customer, take
security and apply
the usual lending
criteria to L/C
limits
-Check
documents
carefully
-Fees

65. Risks and Advantages of Documentary Credits
for Advising/Confirming Banks
Risks Mitigation Advantages
-Country risk
of issuing
bank/country
-Incorrect
paying
documents
-Know the
customer take
security and
apply the usual
lending criteria
to L/C limits
-Fees ,charges are
usually recovered from
applicants by
reimbursement claims
on issuing banks
.

66. The following are to be considered before effecting
payment on LC transaction.
Payment and Re-
imbursement consideration
Migrants Control issues
Regulatory requirements
Documentation
requirements
Authenticity of
underlying transaction
Nature of discrepancies
Adopting of
international banking
rules (The UCP 600)
Knowledge of local
regulations
Insurance of goods
A good document
review desk to put
together
Safety of shipping
documents
Inspection of goods
Verification of shipping
documents
Verification of the cost
of goods involved against
international prices to
ensure no capital flight.

67. Import procedures in Ethiopia
 Commercial banks are authorized
to facilitate import and provide
associated services against
required documents
 Three mode of payment to import
goods and services
– Documentary credit (LC)
– Documentary Collection (CAD)
– Advance payment (TT)

68. 1. Prior to LC establishment
 Approved foreign exchange permit for import
 Complete, signed and stamped foreign exchange
application for import
 Valid trade License for import, investment or industry and
TIN certificate
 Valid, signed and stamped Prforma invoice
 NBE account No and customer not listed delinquent
 Insurance certificate
 Additional requirements
– Letter from Road Transport Authority for Vehicle
– License from Ethiopian Drug Control & Admin. Authority for
Pharmaceuticals.
– License from Quality and Standard Authority for items which
require standardization License from Ministry of Agriculture for
Agricultural chemicals & veterinary medicines
– Copy of loan or grant agreement and No objection letter for
grant letter of credit
– International competitive bid with the relevant document is the
amt is more than $1 million.

69. Import procedures in Ethiopia
2. For LC Opening
 Approved original Foreign exchange application
with 2 photocopies
 Filled, signed, stamped and verified LC application
 Proforma invoice stamped by CBE and its copy
 Insurance certificate, if LC facility is to be utilized
 Letter from Ethiopian shipping Lines if the delivery
term is C&F.
3. Amendment
 Signed and verified application letter with the
supplier’;s inquiry for amendment.

70. Import procedures in Ethiopia
4. LC settlement
 Supplier send goods presenting documents
to its bank listed below with its covering
letter.
– Chamberized commercial invoice
– Certificate of origin
– Shipping documents, Packing list
– Freight invoice for delivery term C&F or CIF
– Original Libre for used car
– Beneficiary certificate, Carrier certificate
– Other documents may also be presented if it is
request in the LC.

71. Import L/C Opening
1. Receives the following from customer
1. L/C application duly completed, signed
and verified
2. Supporting documents – approved
foreign exchange permit, proforma
invoice , insurance certificate etc
3. Checks against L/C application checking
form, puts initial, marks date and
register the necessary information on
register book.
4. Nominates advising bank, reimbursing
and confirming bank

72. 5. Assign L/C no., prepare paper file and
prepare the L/C instrument
6. Calculate margin( if needed) charges and
commission per banks tariff, and prepares
tickets
7. Fills L/C history card , gets the L/C
instrument checked and signed.
8. Posts tickets on posting machine, transmits
the message by swift
9. Attach file copy of the instrument and file
copy of the tickets to the L/C file and give
cop of L/C instrument and debit advices to
customer.

73. Accounting entries
1. Dr. Customer account
Cr. Exchange payable
Margin(allowed %of L/C value)
Service Charge
Swift Cost
Postage
Opening Commission
Confirmation commission (if any)
NB. One period is 90 days and exchange commission shall not be
taken from F/Cy account holders
2. Contingent Liability
Dr. Liability by bank
Cr. Liability by customer

74. Import L/C Amendment
1. Check the content of the amendment and the
attached fax message from the supplier
2. Prepare amendment message, calculate the
related charges per banks tariff and prepares
tickets
3. Update the L/C history card, if needed
4. Get the amendment message and tickets checked
and signed
5. Post the ticket and transmit the message by swift
6. Attach file copy of the message .

75. Account entries for amendment
1.Dr. Customer account
Cr. Exchange comm. (if amt increased)
Margin
Service charge
SWIFT charge
2. Pass the credit entry to the related contingent account by
increased amount, and pass a debit entry if the amount decreases

76. Import L/C Settlement
Documents are received from our mail division or any courier
services
1. Record document’s arrival date and document amount in
the register book
2. Check documents received against L/C instrument for
compliance using L/C checking form.
3. If documents are discrepant, correspond with negotiating
bank and give advice to applicant
4. If documents are clean, prepare tickets for document value
and commission and charges if any
5. Get tickets checked and signed, and post
6. Advices applicant to collect the document
7. Get bill of lading endorsed by a signatory
8. Hand over documents with debit advices making the
customer sign on the covering letter of the document

77. Accounting entries
 Without L/C facility
Dr. Margin held account
Cr. Handling commission
Cr. Correspondent bank
 With L/C facility
Dr. Marin held account
Cr. Advance on import bills
Cr. Correspondent bank
– When applicants authority is received to debit its acc
Dr. Customer account
Cr. Advance on import bills
Cr. Interest income/Handling commission

78. Issuance of Delivery order prior to
arrival of documents
 When the goods arrive at port before arrival of documents the
applicant may request for issuance of delivery order by writing an
undertaking letter attaching copy of documents (chamberzed invoice,
packing list, certificate of origin transport documents and official
documents.
 Then we will pass the following entry
1. With Facility
Dr. Customer Acc
Cr. Margin(for unpaid percentage amt.)
Cr. Guarantee commission
2. Without Facility
Dr. Customer Acc
Cr. Guarantee commission

79. The
Documentary Collection

80. COLLECTIONS
Definition:per URC 522
The Uniform Rules for Collection (URC) defines
collection as “the handling of documents
(financial and or commercial) by banks in
accordance with instructions received, in order
to:
a. Obtain payment and/or acceptance, or
b. Deliver documents against payment and/or
against acceptance, or
c. Deliver documents on other terms and
conditions”
Therefore:
Banks are only agents (of Exporter) in
collections, they are bound to follow the
instruction of whoever their principal is.

81. COLLECTIONS
Types of collection
1. Clean Collection – collection of financial
documents not accompanied by commercial
documents (when financial documents are
presented for collection).
2. Documentary collection – when financial
documents accompanied by commercial
document or commercial documents not
accompanied by financial document.

82. Collections
Parties to a Collection and their responsibilities.
1. Drawer (Principal ) – is the seller and
responsible:-
• Submits documents in good order
• Instruct the remitting bank clearly
2. Remitting Bank (Exporter’s Bank) – the
seller’s bank, which sends documents for
collection to a bank in buyer’s country,
and responsible: -
• To deal with documents quickly
• To check that its principal’s instructions can be
carried out
• To instruct collecting bank clearly.

83. Collections
3. Collecting Bank/Presenting Bank – bank
that presents collection documents to buyer
for payment or acceptance and is responsible
to: -
• to carry out remitting bank’s instruction
• to keep the remitting bank informed of all
developments
• to keep the documents secure until
payment/acceptance
4. Drawee (Buyer ) – is the buyer and
responsible: -
• To pay ,or to accept and pay

84. Collections
Collections – Process Flow
(1.)Sale Agreement
(2) Shipment
(4) Doc. & Collection Order
(7) Payment or Acceptance
Buyer / Drawee Principal / Seller
REMITTING
BANK
COLLECTING
BANK
(8) Payment or
Acceptance
(3) Documents &
Collection order
(6) Release of doc. After payment
(DP)/Acceptance (DA
(5) Payment or
Acceptance

85. Collections
Responsibilities of parties in Documentary Collection
1. Drawer (Principal ) –
• Submits documents in good order
• Instruct the remitting bank clearly
2. Remitting Bank (Exporter’s Bank) –
• deal with documents quickly
• check that its principal’s instructions can be carried out
• instruct collecting bank clearly.
3. Collecting Bank –
• carry out remitting bank’s instruction
• keep the remitting bank informed of all developments
• keep the documents secure until payment/acceptance
4. Drawee (Buyer ) –
• pay ,or to accept and pay

86. Collection Instruction
 Remitting instruction
– Remitting bank should send documents
and collecting instructions to the collecting
or presenting bank

87. Collecting instructions should include:-
– Address of remitting bank
– Details of principal
– Drawee name and address
– Amount and currency of collection
– List of documents enclosed
– Terms of
payment(payment/acceptance/other)
– Charges to be collected indicating whether
they may be waived or not
– Method of payment – acceptance/sight.
– Instruction in case of non-payment, non-
acceptance.

88. Collection Instruction
 Presenting bank
– Makes the document available to drawee as
instructed by drawer through remitting bank
– Has to present document to the drawee as received
without examination
– Inform any missing documents listed by the remitter
– Act upon instruction given in collection instruction
– Disregard any instruction from other party other than
the remitting bank
– Release document against payment or acceptance
per instruction of the remitting bank
– Will act in good faith and exercise reasonable care
– If drawee did not respond with in 60 days after
presentation of documents, the collecting/presenting
bank may return the documents to the remitting
bank.

89. Collections
– Banks have no obligation to take any action
in respond of the goods to which
documentary collection relates including
storage and insurance of goods even when
specific instruction are given to do so.
– Can take action if they are agreed to do so
but have no responsibility for any condition of
good and charge has to be covered by the
remitting bank.
– Banks assume no liability or responsibility for
consequences arising out of the interruption
of their business by Acts of God, riots, civil
commotions, wars, or any other causes
beyond their control.

90. Collections
Methods of payment
1. Document Against Payment (D/P) –
documents are release to drawee against
payment.
2. Document Against Acceptance (D/A) –
documents are release to drawee against
acceptance of the time draft by drawee.
3. Acceptance D/P – drawee accepts the time
draft but does not get the documents until the
draft is due and paid.

91. Risks and advantages of documentary collection
Principal
/
seller
Risk
 Buyer may default by non
acceptance or non payment,
 country risk,
 delay in payment
 expense of reshipment if
goods not taken up.
Advantage
 Retains control of
the goods until
payment or
acceptance by
drawee
 less expensive.
Drawee
/
buyer
 Goods may not arrive or are
damaged
 Non compliance with the
contract
 May not pay/accept
until goods arrive,
 cheaper than
documentary credits,

92. Import procedures in Ethiopia on CAD Basis
1. Purchase order (P/O) approval
– Documents required for P/O approval
 Valid, signed and sealed purchase order
– It should be addressed to importer
– It has to include at least
• Payment term Cash Against Payment
• Delivery term (FOB, C&F, CIF), it has to show
breakdown of cost and freight/insurance for C&F
and CIF
• Country of origin, Description of goods
• Hs code, Unit price
• Year of manufacture and model for used car
– NBE account number
– Insurance certificate
– Letter from ESL for delivery term C&F Djibouti
 Valid trade license for import, investment or
industry

93. Import procedures in Ethiopia on CAD Basis
 Additional requirements
– Letter from Road Transport Authority for Vehicle
– License from Ethiopian Drug Control & Admin.
Authority for Pharmaceuticals.
– License from Quality and Standard Authority for
items which require standardization License from
Ministry of Agriculture for Agricultural chemicals &
veterinary medicines
– Copy of loan or grant agreement and No objection
letter for grant letter of credit
– International competitive bid with the relevant
document is the amt is more than $1 million.

94. Import procedures in Ethiopia on CAD Basis
 Once P/O approved the importer can fax it to
its supplier and the supplier will send the
goods to Ethiopia and present the relevant
document to Remitting Bank and the bank will
send it to the Collecting Bank or Presenting
bank. Upon arrival copy of documents with
advise given to the applicant then the
importer can apply for foreign exchange.

95. Import procedures in Ethiopia on CAD Basis
 Documents required for foreign exchange
permit approval and settlement of
documents presented to the collecting
bank –CBE
– Original approved P/O
– Chamberzed commercial invoice
– Certificate of origin
– Shipping documents
– Packing list
– Freight invoice for delivery term C&F or CIF
– Original Libre (ownership certificate) for used
car.

96. Collection
 The importer prepares and submits
purchase order for approval , once
approved faxes the p/o for the seller
 The banker
– Receives docs from courier service or mail
division
– Checks all documents listed in the covering letter
are enclosed
– Checks settlement instruction are operative and
insure the doc have approved p/o
– Assign a number to the documents and records
in cad register
– Prepare single entry ticket, and post

97. – Inform importer arrival of docs and gives
copies of documents to obtain foreign
exchange application
– When authorized calculate charges and
commissions per the banks tariff and
prepare payment order and completes cad
tickets
– Get tickets and payment order checked and
signed
– After collecting payment release documents
to drawee
– Records value of collection documents
settled and credit the sum to single entry
IBC account.

98. Accounting entries
 On arrival of document
Dr. Inward bill for collection(memorandum acc.)
 On settlement
Dr. Customer’s Account
Cr. Correspondent bank
Exchange Commission
Service charge
Swift Charge
Photocopy
- pass credit entry to Memorandum account.

99. Collections
Regulatory Considerations
 Local laws
– Central bank publications
– Exchange control laws
– Legal opinions
 International guidelines
– The URC
 In dispute situations, the local laws prevail
Mitigants
 Adoption of international banking rules (The URC 522)

100. Risk can be divided in three major
categories
ECONOMIC
RISK
Manufacturing risk
Goods acceptance risk
Refusal of payment
Payment inability
POLITICAL
RISK
Political measures
Revolution
War
Prohibition on
payment
CURRENCY
RISK
Devaluation
Exchange fluctuations
Exchange control

101. Regulatory Guidelines
 International trade is an aspect of
banking that is very much regulated
 Proper regulation is a must in view of
the aggregate figures of trade
transactions processed annually
 There are two basic categories of
regulations
– Local regulations
– International regulations

102. Regulatory Guidelines
 Local Regulations:
 Varies from country to country depending
on the monetary policies of government
 The basics of the regulations would
include:
– Exchange control Regulations
– Documentation requirements

103. Regulatory Guidelines
 International regulations:
 There are many regulation bodies but
the most widely accepted is the
International Chambers of Commerce
(ICC)

104. Regulatory Guidelines
 What happens where there is a
conflict between local and
international rules?
– Local rules prevail
– For issues of great importance, we
suggest that the matter be referred
to the local regulatory agencies

105. Incoterms
 International commercial terms
 Provides a uniform set of rules for interpretation
of trade terms in international trade
 Reduces confusion and facilitates trade negotiation
between traders.
 Incoterms should be stated in commercial
contracts and can be included in the text of
documentary credit. Ex. FOB Hamburg

106. Incoterms
 There are 13 incoterms
 Explains how functions, cost and risks
should be divided between parties in
connection with delivery of goods.
 The technique used to establish this division
is to indicate the pint where the goods to be
delivered from seller to buyer.

107. incoterms
 Incoterms are described from the sellers
perspective.
 Eg. Fob – free on board – the seller is free
from any further costs, obligation and risk
once the goods have been delivered on
board in a vessel.

108. E EXW
F FCA, FAS, FOB
C CFR, CIF, CPT, CIP
D DAF, DES, DEQ, DDU, DDP
Always 3-lettercode plus a named place
For example: CIF Cairo or FOB Hamburg

109. INCOTERMS 2000
DEFINE 13 TERMS WHICH ARE STRUCTURED INTO 4 GROUPS:
GROUP 'E‘ - Departure
GROUP 'F‘ - Main carriage unpaid
GROUP 'C‘ - Main carriage paid
GROUP 'D‘ – Arrival
The next revision is planned for 2010 (INCOTERMS 2010).

110. OUTLINES
EXW
transport
risks
cost
FAS
FOB
transport
risk
cost
transport
risk
cost
FCA
transport
risk
cost
BUYER
SELLER

111. OUTLINES
CFR
transport
risk
cost
CIF
transport + insurance
risk
cost
CPT
CIP
transport
risk
cost
transport + insurance
risk
cost
BUYER
SELLER

112. OUTLINES
DAF
DDU
DES
DEQ
transport + insurance
risk
cost
transport + insurance
risk
cost
transport + insurance
risk
cost
transport + insurance
risk
cost
BUYER
SELLER

113. OUTLINES
DDP
transport + insurance
risk
cost
BUYER
SELLER