Chapter-2 (E)

Foreign Exchange
Operation
Foreign Trade or International Trade
It is a exchange of capital, goods, and services across international border or
territories. It consists of transaction between residents of different countries under
contract
Foreign Currency
foreign currency is any currency other than domestic currency. It is the mechanism
by which the currency of one country gets converted into the currency of another
country
Foreign Remittance
In simple term means money remitted in foreign currency. It represents remittances
in foreign currency that are received in and made out abroad. There are two types of
foreign remittance.
a. Inward foreign remittance: remittance of foreign currency being received in the
country from abroad is called inward foreign remittance. Purchase of foreign
currencies and bills constitute inward foreign remittance. Common modes of
inward foreign remittance are TT, MT, DD, TC, online transfer through computer
b. Outward foreign remittance: foreign currency made out abroad and sales of
which constitutes outward foreign remittance. Common modes of outward
foreign remittance are TT, MT, DD, TC, online transfer through computer, SWIFT.
Sources of inward foreign remittance:
i. Export proceeds
ii. Remittances by expatriate Bangladeshi/Bangladesh nationals
working abroad
iii. Commission/fees earned by local Bangladeshi people
iv. Foreign loan, grants, donation, and gift
Sources of outward foreign remittance:
i. Payment of import liabilities
ii. Payment of consular fees and commissions
iii. Foreign travel quota through travelers cheque/foreign currency
iv. Educational expenses for students abroad/medical expenses or
other purposes
v. All other payment sent abroad in currency
Authorized Dealer
AD is a financial institution which has received authorization from a relevant
regulatory body to act as a dealer involved with trading of foreign currencies.
Dealing with authorized forex dealers ensure that your transactions are
being executed in a legal and justifying way. BB in exercise of the power
under Section 3 of Foreign Exchange Regulation Act 1947, issues licenses to
schedule banks where they have adequate trained officers/staff to deal in
foreign exchange. The bank branched that are authorized to deal in foreign
exchange are called AD Branches
Functions of AD Branch:
i. Exchange of foreign currencies
ii. Handling of inward and outward remittance
iii. Opening L/C and settlement of payment
iv. Investment in foreign trade
v. Opening and maintenance of accounts with foreign banks
vi. Handling of export documents
Letter of Credit/Documentary Credit
It is a conditional undertaking of a bank for payment. In other words,
LC is a letter from the importer bank to the exporter that the bills, if
drawn, as per terms and conditions are complied with will be honored
on presentation.
LC is an undertaking issued by a bank for the account of the buyer (the
application) or for its own account, to pay the beneficiary the value of
the draft and/or documents provided that the terms and conditions of
the LC are complied with.
Documentary credit arrangement usually satisfies the seller’s desire for
cash and the importer’s desire for credit. This financial instrument
serves the interest of both parties independently.
The documentary credit offers a unique and universally used method
of achieving a commercially acceptable undertaking by providing for
payment to be made against complying documents that represent the
goods and making possible the transfer of title to those goods.
Letter of Credit/Documentary Credit Mechanism
Types of Letter of Credit:
As per UCPDC 600 there are two types of LC
1. Revocable LC: as per Article no. 8(a) of a revocable credit is a
credit which can be amended or cancelled by the issuing bank
at any time without prior notification to the seller since it
offers little security to the seller.
2. Irrevocable LC: an irrevocable LC constitutes a definite
undertaking of the issuing bank. A credit cannot be amended
or cancelled without the agreement of all parties. It gives the
seller greater assurance of payment. An irrevocable LC can be
either confirmed or unconfirmed depending on the desire of
the seller.
Other Types of Letter of Credit
1. Confirmed irrevocable LC: double assurance (i) opening bank, (ii)
confirming bank
2. Transferable LC:
3. With recourse: in case the drawee of the bill fails to honor it, the banker as
a holder of the bill can claim the amount back from the drawer
4. Without recourse:
5. Stand by LC: a guarantee of payment by a bank on behalf of their client
6. Anticipatory LC: (i) Red clause LC, and (ii) Green clause LC
7. Back to back LC:
8. Revolving LC
9. Restricted LC
10.Sight/Cash LC
11.Deferred Payment LC:
12.Divisible LC
Parties of Letter of Credit
1. Importer/Buyer/Applicant: the party on whose request credit is issued
2. Exporter/Seller/Beneficiary: the party on whose favor credit is issued
3. Importer’s/Opening/Issuing Bank: the bank that issues a credit at the request
4. Nominated Bank: with which the credit is available
5. Advising/Notifying Bank: the bank that advises the credit at the request of issuing bank
6. Confirming Bank: that adds its confirmation to a credit upon the request issuing bank
7. Exporter’s/Negotiating Bank: that provides value to the beneficiary
8. Accepting Bank:
9. Reimbursing/Paying Bank: appointed by issuing bank to reimburse the claim
10. Presenter: beneficiary, bank or other party that makes a presentation
11. Transferring Bank: that transfers the credit, it may be advising bank
12. Claiming Bank: which claims the payment from the reimbursing bank
 Advantage and Disadvantage of Letter of Credit
Advantage to the Importer:
i. Importer is assured that the exporter will be paid only if all the terms and
conditions of the LC have been met
ii. Importer is able to negotiate more favorable trade terms with the exporter
when payment by LC is offered
Disadvantage to the Importer:
i. A LC does not offer protection to the importer against shipment inferior
quality goods and/or a lesser quantity of goods by the exporter. Consequently,
it is important that the importer perform the appropriate due diligence to
assess the reputation of the exporter. If the exporter acts fraudulently, the
only recourse available to the importer is through legal proceedings
ii. It is necessary for the importer to have a line of credit with a bank before the
bank is able to issue a letter of credit. The amount outstanding under each LC
issued is applied against this line of credit from the date of issuance until
final payment
 Advantage and Disadvantage of Letter of Credit
Advantage to the Exporter:
i. The risk of payment relies upon the creditworthiness of the issuing
bank and the political risk of the issuing bank’s domicile, and not the
creditworthiness of the importer
ii. Exporter agrees in advance to all requirements for payment under the
LC, if the LC is not issued as agreed, the exporter is not obligated to
ship against it
Disadvantage to the Exporter:
i. Documents must be prepared and presented in strict compliance
with the requirements stipulated in the LC
ii. Some importers may not be able to open LC due to the lack of credit
facilities with their bank which consequently inhibits exports growth
Step by Step Process of a Typical LC Transaction:
Step by Step Process of a Typical LC Transaction:
1. Importer (buyer) and Exporter (seller) agree on a purchase and sale of
goods where payment is made by LC
2. The importer completes an application requesting its bank (issuing bank) to
issue a LC in favor of the exporter. Note that the importer must have a line of
credit with the issuing bank in order to request that a LC be issued
3. The issuing bank issues LC and sends it to the advising bank by
telecommunication or registered mail in accordance with the importer’s
instruction. A request may be included for the advising bank to add its
confirmation. The advising bank is typically located in the country where the
exporter carries on business and may be the exporter’s bank
4. The advising bank will verify the LC for authenticity and send a copy to the
exporter
5. The exporter examines the LC to ensure:
a) It corresponds to the terms and conditions in the purchase and sale agreement
b) Documents stipulated in the LC can be produced
c) The terms and conditions of the LC may be fulfilled
Step by Step Process of a Typical LC Transaction:
6. If the exporter is unable to comply with the terms or conditions of the LC
or if the LC differs from the purchase and sale agreement, the exporter
should immediately notify the importer and request for an amendment to
the LC
7. When all the parties agree to the amendments, they are incorporated into
the terms of the LC and advised to the exporter through the advising
bank. It is recommended that the exporter does not make any shipments
against the LC until the amendments have been received
8. The exporter arranges for shipments of goods, prepares and/or obtains
the documents specified in the LC and makes demand under the LC by
presenting within the stated period and before the expiry date to the
“available with” bank. This may be the advising/confirming bank. The
bank checks the documents against the LC and forwards them to the
issuing bank. The drawing is negotiated, paid, or accepted as the case
may be.
Step by Step Process of a Typical LC Transaction:
9. The issuing bank examines the documents to ensure they comply with the LC
terms and conditions. The issuing bank obtains payment from the importer for
payment already made to the “available with” or the confirming bank
10.Documents are delivered to the importer to allow them to take possession of
the goods from the transport company. The trade cycle is complete as the
importer has received its goods and the exporter has obtained payment
• A key principle underlying LC is that banks deal only in documents and not in
goods
• The decision to pay under a LC is entirely on whether the documents presented
to the bank appear on their face to be in accordance with the terms and
conditions of the LC
• It would be prohibitive for the banks to physically check all the merchandise
shipped under LC to ensure merchandise has been shipped exactly as per each
LC
• The integrity of both the exporter and importer are very important in a LC
transaction
Import registration certificate (IRC)
As per Import and Export Control Act, 1950, no person can indent, import, or
export any goods into Bangladesh without IRC except in case of exemption
issued by the Government of the People’s Republic of Bangladesh. The IRC
and the passbook are security documents issued under embossing seal of
the CCI&E and duly signed by the authorized official of CCI&E
Credit report:
Bank prepares credit report in prescribed forms on the basis of five C’s of
credit. Instead of this some mention three R’s i.e. reliability, responsibility,
and resources. Bankers have to make inquiries from those their customers
and other people and inquiry the report given by the banker. Sometimes
information’s are gathered by deputing marketing officer or credit officer.
Letter of credit application
For opening LC the client is to submit an application to the bank in the
printed format of the designated bank known as LCA form. It is also known
as the agreement between the importer and the bank.
Letter of credit authorization (LCA) form
LCA form should be registered with Bangladesh Bank. LC authorization form consists of six
copies. 1 copy for exchange control purpose, 2 copy for the licensing authority, 3 and 4 copy
st nd rd th

for the CCI&E, 5 copy for the registration unit, and 6 is the office copy for the bank.
th th

Bill of lading (BL)

BL is important transport document of the bills which is applicable to a carriage of goods
solely by sea. BL is a quasi negotiable instrument issued by shipping company. This a
document of title of the goods described in it.
Particulars to be mentioned in BL:
i. The name of the shipper, consignee and name & address of notify party
ii. Description of the goods
iii. Identifying marks and number of BL with date
iv. The post of shipment and discharge
v. Evidence that the goods have been loaded on board
vi. The name of the carrying ship
vii. Amount of freight paid or unpaid
viii.The date of shipment
ix. The number of original BL issued
Types of Bill of lading (BL)
i. Clean BL: carriage of goods solely be sea and mentioned in details
ii. Combined transport BL: applicable for carriage of goods by more than one mode of
transport
iii. Stale BL: has been held too long before it is passed on to a bank or to the consignee
iv. Short form BL: detailed condition of transportation are not listed in full
v. Through BL: goods being transshipped inter route and cover several modes of transport
vi. Straight BL: issued to a certain party and which cannot be transferred by endorsement
vii. Chartered party BL: it covers the whole voyages in his own direction and own risk
viii. Port or custody BL: issued by port officer/warehouse supervisor stating that goods have
been received for shipment
ix. Claused BL: expressly declares a defective condition
x. On deck BL: the goods are or will be loaded and carried on deck
xi. Clean on board BL: if carriage of goods solely by ocean and indicate the goods loaded on
board
Mate’s receipt
When the goods are handed over to the agent of the shipping company for
shipment and they issue a receipt known as mate’s receipt signed by the master
of the ship. When the goods are actually shipped the mate’s receipt is
exchanged for the regular BL
Bill of exchange (B/E):
As per interpretation of Uniform Rules for Collection (ICC publication no. 522)
applicable for documentary collection method of payment, the B/E is treated as
a financial document. It is defined as, “an unconditional order in writing
addressed by one person to another, signed by the person giving it requiring the
person to whom it is addressed to pay on demand or at fixed or determinable
future time a certain sum of money to or to the order of a specified person, or to
bearer”
There are six parties of B/E: the drawer, the drawee, the payee, the acceptor, the
endorser, and the endorsee
Parties of B/E as per URC-522: principal, remitting bank, collecting bank, and
presenting bank
Types of Bill of exchange (B/E):
1. Clean bills:
2. Documentary bills:
i. DP (document against payment) bills:
a. sight/demand bill
b. Usance/time bill
ii. DA (document against acceptance) bills:
a. After sight usance bill
b. After date usance bill
3. Other types of bills:
i. Bank bill
ii. Trade bill
iii. Accommodation bill
iv. Domiciled bill
v. Bill for collection
Maturity date of Bill of exchange (B/E):
It is the date on which a bill is payable. In calculating the maturity date
of a bill calendar months are reckoned.
For example, a two months bill dated 4th April is payable on 4th June. In
case of after date bill the tenure will run from the date of the drawing.
But the tenure will run from the date of acceptance for the after sight
bill. Three days grace period is allowed for the bills payable in future
and consequently the bill will be due and payable on the last day of
grace. But where the word “without grace” are written, no days of grace
will be allowed. Similarly, no days of grace is allowed for a bill which is
expressed to be payable on a fixed date.
Invoice:
It is the seller’s bill for the merchandise. The document describes the goods which
are the subject of contract of sale between the buyer and seller. It is dated and bears
the names and addresses of both party (buyer and seller)., shipping marks, total
weight or quantity of the goods etc.
Types of Invoice:
i. Commercial invoice: there is standard form for commercial invoice and exporter
designs his own form and it must be duly signed by the exporter
ii. Consular invoice: it is made out on a prescribed format certified by the consulate
of the importing country stationed in the exporter’s country. This is also known
as legalized invoice
iii. Custom invoice: duly filled and signed accordance with the preferential tariff
rates of the importers country
iv. Pro forma invoice: it is a form of quotation as per pro-forma and if it is accepted
the details are normally transferred to a commercial invoice.
v. Certified invoice: an invoice bearing a signed statement by someone in the
importer’s country who has inspected the goods and found them in accordance
with those specified in the contract
Back to Back L/C:
Back-to-back letters of credit consist of two letter of credit used together to finance a
transaction. A back-to-back letter of credit is usually used in a transaction involving
an intermediary between the buyer and seller, such as a broker, or when a seller must
purchase the goods it will sell from a supplier as part of the sale to his buyer.
Back-to-back letters of credit are actually made up of two distinct LCs, one issued by
the buyer's bank to the intermediary and the other issued by the intermediary's bank
to the seller. With the original LC from the buyer's bank in place, the broker goes to
his own bank and has a second LC issued, with the seller as beneficiary. The seller is
thus ensured of payment upon fulfilling the terms of the contract and presenting the
appropriate documentation to the intermediary's bank. In some cases, the seller may
not even know who the ultimate buyer of the goods is.
As is often the case with LCs, back-to-back LCs are used primarily in international
transactions, with the first LC serving as collateral on the second. Back-to-back LCs
essentially substitute the two issuing banks' credit to the buyer's and intermediary's
and thus help facilitate trade between parties who may be dealing from great
distances and who may not otherwise be able to verify one another's credit.
Features of back-to-back (B2B) L/C:
i. It is an import L/C to procure goods/raw materials for further processing
ii. It is opened based on export L/C
iii. It is a kind of export finance
iv. Export L/C is sight but B2B L/C is at usance/deferred
v. No margin is required to open B2B L/C
vi. Application is registered with the CCI&E
vii. Applicant has bonded warehouse license
viii.L/C value shall not exceed the admissible percentage of net FOB value of
relative master L/C
ix. Usance period will up to be 180 days
x. The import L/C is opened for 75% of the value of export L/C
xi. Here L/C issued against the lien of export L/C
xii. Arrangements are such that export L/C matures first then out of his export
profit, import L/C is paid out
Lodgement:
When the documents are received from the foreign correspondent and
checked with L/C file by two persons to ascertain the correctness and if
it is found in order, it is time to make entry in the bill register and pass the
necessary voucher (reverse the liability entry). This process is known as
lodgement. Document must be lodged within 5 (five) working days as per
UCPDC 600.
Retirement:
When the parties release the documents by cash payment or by PI/LIM/
TR/PIB arrangement is known as retirement.
*PI= Post Import
*LIM= Loan against Import Merchandise
*LTR= Loan against Trust Receipt
*PIB= Payment against Import Bill
Offshore Banking:
It is a financial institution located in a country in which typically accepts
deposit funds from non-residents. Offshore banks are generally located in a
low tax jurisdiction, also known as “Tax Haven” that often provides legal or
fiscal advantages.
OBU deploy funds/advance in foreign currency when they accept deposits
from foreign banks and other OBUs. Its activities are not restricted by local
monetary authorities or governments, but they are prohibited from accepting
domestic deposits.
Key Features:
i. Free or concessional rates of taxes and levies
ii. Freedom from the central bank control on interest rates and other credit
control features
iii. Exemption from the minimum reserve requirements
iv. Obtaining license is easier and fees are generally low or exempted
Advantages:
i. Opening such an account provides a powerful tool for keeping money
secure and making it exempted from taxes
ii. Using an offshore bank account provides opportunities that are not
available to domestic banking users
iii. Income generated in the form of deposits is not taxed by the income
tax authorities
iv. Customers also get possibility to invest globally
Disadvantages:
i. Offshore jurisdictions are often remote, and therefore costly to visit;
so physical access and access to information can be difficult
ii. Tax collecting authorities have often attempted to characterize
offshore bank accounts as being associated with tax evasion, money
laundering, criminal enterprises, and terrorism.
SWIFT:
It stands for “Society for Worldwide Inter Bank Financial Telecommunications” and is pioneer
in the automation of the global financial industry. Established in 1973, the bank owned co-
operative has achieved its first mission to standardize and automate international payments
messaging for the benefit of banks through the world. At present more than 11000 number of
users of 220 countries are involved with SWIFT.
Terms of trade:
It refers to the relative price of exports in terms of imports. If a country’s terms of trade rise
improves, it means that for every unit of exports sold it can buy more units of imported goods.
Balance of trade:
Is the difference between the monetary value of exports and imports in an economy over a
certain period. A positive balance is known as trade surplus and a negative balance is known
as trade deficit
LIBOR:
Is an interest rate at which banks can borrow funds, in marketable size from other banks in the
London inter bank market. The LIBOR is fixed on daily basis by the British Bankers’ Association.
It is derived from a filtered average of the world’s most credit worthy banks’ interbank deposit
rates for larger loans with maturities between overnight and one full year. It is the world’s most
widely used benchmark for short-term interest rates.
Balance of payment:
Is the record of all transactions made between one particular country
and all other countries during specified period of time. These
transactions include payments for the country’s export and import of
goods, services, financial capital, and financial transfers.
NOSTRO A/c:
The foreign currency account maintained by the authorized dealers
in foreign exchange with the foreign banks/correspondents are
called NOSTRO accounts. All foreign exchange transactions are
routed through NOSTRO accounts.
It means, out account with you. Suppose AB Bank, Bangladesh
maintains a dollar account with HSBC, New York, USA. This dollar
account is the NOSTRO account of AB Bank, Bangladesh
VOSTRO A/c:
Current account of foreign banks with their correspondents in the
later’s currency is called VOSTRO account. It means “your account
with us”.
Suppose HSBC, New York, USA maintains a taka account with AB
Bank, Bangladesh. This account is the VOSTRO account of AB Bank,
Bangladesh,
LORO A/c:
Current accounts which the banks maintain with banks abroad on
behalf of their clients. It means “their account with you” i.e. 3rd party
relationship.
Suppose AB Bank, Bangladesh is having an account with HSBC, New
York, USA, when Padma Bank, Bangladesh likes to refer to this
account while corresponding with HSBC, New York, USA.
Import:
It is a mechanism by which any commodities i.e. goods or services brought into
one country to another for the purposes of trade.
Importer:
Are those who are authorized by the Import Trade Control Authority i.e. the
CCI&E for import of goods essential for consumption or for production process
Documents consists with Import Bills:
i. Bill of exchange
ii. Invoice
iii. Bill of lading/ any other transport documents
iv. Insurance documents
v. Certificate of origin
vi. Credit report
vii. Inspection certificate
Steps in Import:
i. Procurement of IRC from the concerned authority
ii. Signing purchase contract with the seller
iii. Requesting the concerned bank to open an L/C
iv. The issuing bank opens L/C in accordance with the instruction/request of the importer
and request the advising bank to advise the L/C to the beneficiary
v. The advising bank informs the seller that the L/C has been issued
vi. As soon as the seller satisfied with the terms and conditions of L/C, he is in a position
to make shipment of the goods
vii. After shipment the seller submit the documents to the negotiating bank for negotiation
viii.After scrutinizes the documents negotiating bank transfer the docs to the issuing bank
ix. After scrutinizes the documents issuing bank make payment to the negotiating bank
x. Issuing bank then requests the importer for payments against documents
xi. The importer after paying all dues receives the docs and then release the goods from
importing authorities
Export:
It denotes a function of international trade whereby goods produced in one country are shipped to another country
for future sale or trade
Exporter:
Any person lawfully exporting goods from his own country to any other country.
Documents consists with Import Bills:
i. Bill of exchange or draft
ii. Invoice
iii. Bill of lading/ any other transport documents
iv. Packing list
v. Export license
vi. Shipment advice
vii. Quality certificate
viii.EXP form
ix. Weight certificate
x. Quality certificate
xi. International courier receipt
xii. Certificate of origin
xiii.Credit report
xiv.Inspection certificate
Steps in Export:
i. Registration and procurement of ERC from the concerned
authority
ii. Obtaining export order
iii. Signing contract with the buyer
iv. Receiving the letter of credit
v. Procuring the materials
vi. Collect documents for shipment of goods
vii. Shipped the goods
viii. Collect documents for receiving money
ix. Submission of the documents to the bank for negotiation and
receive money
Add confirmation to Export L/C:
Add confirmation is an undertaking to the exporter by the advising
bank on behalf of the L/C opening bank regarding payment of
documents value to be submitted against the L/C. add confirmation
is to be given at the request of L/C opening bank. Therefore, there
must have an agency arrangement between both the bank i.e. L/C
opening bank and advising bank.
While adding confirmation, commission must be realized as per
instruction of the correspondent. While L/C is confirmed, its
negotiation is done by the confirming bank usually.