“COMPARISON ALALYSIS ON FOREIGN EXCHANGE & FINANCIAL PERFORMANCE OF
MERCANTILE BANK LIMITED” DHAKA BANK LIMITED, & ISLAMI BANK LIMITED”
CHAPTER ONE
INTRODUCTION
MERCANTILE BANK LIMITED (MBL)
1. INTRODUCTION
Desertion program is a pre-requisite for acquiring BBA degree. Before completion of the degree, a student must, undergo the Desertion program. Every student under the desertion program has to prepare a report based on the project or particular matching with the desertion’s area of specialization and organizational requirement. The report writing consists of desertion’s analysis, findings and achievements. This report titled “Comparison analysis of foreign exchange & financial performance of Mercantile Bank Limited, Dhaka Bank Limited &Islami Bank Limited.” is prepared as desertion report under the supervision and guidance of Mr Asif Mahbub Karim, Assistant Professor ,of Business Administration, Stamford University, Bangladesh, to meet the requirement of the Desertion program.
Any academic course of study has a great value when it has practical application in real life. That’s why after completing the BBA course, all students of Stamford University have to joint three months internship program, as a mandatory part of BBA program. There is a gap between the theoretical knowledge and practical knowledge. Our internship program has been launched mainly to bridge the gap. And also internship students become aware of organizational culture.
And after completion of the program period a student must present the report on the assigned topic to Superviso). I was assigned toMercantile Bank Ltd (MBL), Dhaka Bank Limited & Islami Bank Limited to complete this program. During this period I communicate with the employees of the Bank. In consulting with the supervisor of the program I have selected a topic “Comparision analysis of foreign exchange & financial performance of Marcantile Bank Limited,Dhaka Bank Limited &Islami Bank Limited.”
The prime objectives of the orientation are —
a. To analyze the condition of foreign exchange and financial performance of Mercantile Bank, Dhaka Bank, Islami bank.
b. To find out the common features among of financial statement of these Bank.
c. To find out what are the variables to look for when a client makes a L/C order
d. To make some suggestions for making the scenario better.
The report is based on both primary and secondary sources of information. Interviewing employees is the primary sources of information. Further more the secondary sources of information are the different annual reports kept in the Bank, their respective official websites, Product Manual of Dhaka Bank Ltd. and the previous report kept as record for the student.
The scope of the study is limited to only foreign exchange and financial performance . The study is limited to only the foreign exchange and financial performance disbursed byMercantile Bank Limited, Dhaka Bank Limited &Islami Bank Limited.” The data presented in the report as of December 31, 2009.
The following limitations are apparent in the report;
· Time was the first limitation as the duration of the program was of 3 months only.
· Load at the work place was also barrier to preparing this report. The officers of some Bank Haven’t been very helpful, they don’t have enough time to provide, as they very busy with their assigned works. So, in some cases, observation was used.
· Due to lack of experience, there may have been faults in the report though maximum efforts have been given to avoid any kind of mistake.
· The information provided in the report regarding the loan accounts is instructed to be presented anonymously by the bank officials because of confidentiality and importance of the information.
· Lack of secondary information was another major problem that was faced during the study.
The branch office had very little of this information as they sent the foreign exchange files to the Head Office for further action
1.7 Economic situation of Bangladesh (During the global recession and before recession)
The economy of Bangladesh is constituted by that of a developing country. Its per capita income in 2008 was US$1389 (adjusted by purchasing power parity) lower than the world average of $10,497. According to the gradation by the International Monetary Fund, Bangladesh ranked as the 48th largest economy in the world in 2008, with a gross domestic product of US$224,889 million. The economy has grown at the rate of 6-7% p.a. over the past few years. While more than half of the GDP belongs to the service sector, nearly two-thirds of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important produce.
Remittances from Bangladeshis working overseas, mainly in the Middle East and East Asia, as well as exports of garments are the main source of foreign exchange earnings. Economic growth is rather endogenous with slow growth in foreign direct investment. Bangladesh has made major strides to meet the food needs of its ever growing population. The land is devoted mainly to rice and jute cultivation, although wheat production has increased in recent years; the country is largely self-sufficient in rice production. Nonetheless, an estimated 10% to 15% of the population faces serious nutritional risk, and that food security is at risk for 45% of the population.
<href=”#cite_note-bn-2″>[3] Bangladesh’s predominantly agricultural economy depends heavily on an erratic monsoonal cycle, with periodic flooding and drought.
Although improving at a very fast rate, infrastructure to support transportation, communications, and power supply and water distribution is still developing. Bangladesh is limited in its reserves of oil, but recently there was huge development in coal mining. While the service sector has expanded rapidly during last two decades, country’s industrial base remains narrow. The country’s main endowments include its vast human resource base, rich agricultural land, relatively abundant water, and substantial reserves of natural gas which are depleting quickly and may disappear in the next 7-8 years.
| Currency | Bangladesh Taka (BDT) |
| Fiscal year | 1 July – 30 June |
| Trade organizations | WTO, SAFTA, D8, WCO |
| Statistics | |
| GDP | $228.4 billion (2008 est.PPP) |
| GDP growth | 6.5% (2008 est.) |
| GDP per capita | $ 1500 (2008 est.PPP) |
| GDP by sector | Agriculture (19%), industry (28.7%), services (53.7%) (2007 est.) |
| Inflation (CPI) | 9.4% (2008 est.) |
| Population below poverty line |
38% (2009 est.) |
| Labor force | 70.86 million (2008 est.) |
| Labor force by occupation |
Agriculture (65%), industry (25%), services (10%) (2005 est.) |
| Unemployment | 2.4% (2008) |
| Main industries | jute manufacturing, cotton textiles, garments, tea processing, paper newsprint, sugar, light engineering, chemical, cement, fertilizer, food processing |
| External | |
| Exports | $15.56 billion (2008-2009) |
| Export goods | garments, jute and jute goods, leather, frozen fish and seafood |
| Main export partners | US 31.8%, Germany 10.9%, UK 7.9%, France 5.2%, Netherlands 5.2%, Italy 4.42% (2000) |
| Imports | $25.205 billion (2008) |
| Import goods | machinery and equipment, chemicals, iron and steel, raw cotton, food, crude oil and petroleum products, |
| Main import partners | India 10.5%, EU 9.5%, Japan 9.5%, Singapore 8.5%, China 7.4%(2004) |
| Gross External Debt | $21.23 billion (31 December 2007 est.) |
| Public finances | |
| Public Debt | $1.2 billion (June 2005 est.) |
| Revenues | $8 billion (2007 est.) |
| Expenses | $11 billion (2007 est.) |
| Economic aid | $1.575 billion (2000 est.) |
Micro-Economic-Trend
This is a chart of trend of gross domestic product of Bangladesh at market prices estimated by the International Monetary Fund with figures in millions of Bangladeshi Taka. However, this reflects only the formal sector of the economy.
| Year | Gross Domestic Product | US Dollar Exchange | Inflation Index (2000=100) |
Per Capita Income (as % of USA) |
| 1980 | 250,300 | 16.10 Taka | 20 | 1.79 |
| 1985 | 597,318 | 31.00 Taka | 36 | 1.19 |
| 1990 | 1,054,234 | 35.79 Taka | 58 | 1.16 |
| 1995 | 1,594,210 | 40.27 Taka | 78 | 1.12 |
| 2000 | 2,453,160 | 52.14 Taka | 100 | 0.97 |
| 2005 | 3,913,334 | 63.92 Taka | 126 | 0.95 |
| 2008 | 5,003,438 | 68.65 Taka | 147 |
Economic Overview
Bangladesh has made significant strides in her economic sector since her independence in 1971. Although the economy has improved vastly in the 1990s, Bangladesh still suffers in the area of foreign trade in South Asian region. Despite major impediments to growth like the inefficiency of state-owned enterprises, a rapidly growing labor force that cannot be absorbed by agriculture, inadequate power supplies, and slow implementation of economic reforms, Bangladesh has made some headway improving the climate for foreign investors and liberalizing the capital markets; for example, it has negotiated with foreign firms for oil and gas exploration, better countrywide distribution of cooking gas, and the construction of natural gas pipelines and power stations. Progress on other economic reforms has been halting because of opposition from the bureaucracy, public sector unions, and other vested interest groups. The especially severe floods of 1998 increased the country’s reliance on large-scale international aid. So far the East Asian financial crisis has not had major impact on the economy. World Bank predicted economic growth of 6.5% for current year. Foreign aid has seen a decline of 10% over the last few months but economists see this as a good sign for self-reliance. There has been 18% growth in exports over the last 9 months and remittance inflow has increased at a remarkable 25% rate. Export was $10.5 billion in fiscal year 2005 exceeding the target export of $10.4 billion. Target export for current year is $11.5 billion. An estimated GDP growth of 6.7% was predicted for FY 2006
| Fiscal Year | Total Export | Total Import | Foreign Remittance Earnings |
| 2007-2008 | $14.11b | $25.205b | $8.9b |
| 2008-2009 | $15.56b | $22.00b+ | $9.68b |
| 2009-2010(Set Target) | $17.6b | N/A | $10.87b |
CHAPTER TWO
ORGANIZATIONAL PART
2.1 HISTORY OF MBL
Mercantile Bank Limited is a scheduled private commercial Bank established on May 20, 1999 under the Bank Company Act, 1991 and incorporated as a Private Limited Company under Companies Act, 1994. The Bank started commercial Banking operations from June 02, 1999. From then with in a short time MBL established itself in a strong position in the economy of the country. It has earned significant reputation in the country’s Banking sector and created a wide image in the eye of the people.
The dream of creating MBL, which is ‘A Bank of 21st Century’, has become successful because of the initiative of some persons who are the sponsors of MBL. There are 30 sponsors in Mercantile Bank Limited and all of them are highly regarded for their entrepreneurial competence.
The Bank has been operating since 1999 with an authorized capital of Taka 800 million and paid up capital 245 million, under the entrepreneurship of thirty prominent & leading businessman of the country.
The Mercantile Bank Limited has already introduced some new Banking products like duel currency Credit Cards, ATM and Online services which has created attraction among the clients.
1.2 OBJECTIVE OF MBL
Ø MBL is always ready to maintain the highest quality of services by upgrading banking technology prudence in management and by applying high standard of business is established commitment and heritage.
Ø MBL is committed to ensure its contribution to national economy by increasing its profitability through professional and disciplined growth strategy for its customer and by creating corporate culture in international banking arena.
Ø The objective of MBL is not only to earn profit but also to keep the social commitment and to ensure its co-operation to the persons of all level, to the businessman, industrialist – specially whom are engages in establishing large scale industry by consortium and the agro based export oriented medium and small scale industries by self inspiration.
Ø MBL as the largest private bank is committees to continue its endeavor by rapidly increasing the investment of shareholders into assets.
Ø MBL believes in building up strong –based capitalization of the country.
Ø MBL is committed to continue its activities the new horizon of business with a developing service oriented industry and culture of morality and its maintenance in banking.
2.3 FUNCTION OF MBL
The bank plays a vital role for developing economic growth in any country money circulation. It has a lot of function in different ways. Firstly to know about the bank:
A bank means an institution, which borrows money from the surplus unit of the society and lends money to the deficit for earning profit. The banker through current account mainly accepts the deposits, which are withdrawn by the cheques. Several heads of account also accept deposit-making institution, which deals with money and credit.
The functions of commercial banks are now wide and varied. However the functions of commercial banks may broadly be classified under the following two categories:
- Primary functions
- Secondary functions
- Primary functions
- Accept deposits
i. Demand deposits
ii. Time deposits
- Lends money
- Loans
ii. Overdrafts
iii. Cash credit
iv. Bills purchased and discounted
- Creates credit
- Creates medium exchange
- Secondary functions
- Agency Services
i. Collection of cheques, drafts, rents etc.
ii. Execution of standing interaction
iii. Conducting stock exchange transactions
iv. Acting as correspondent and representative
- General Utility Services
o Accepting valuables for safe custody
o Conducting foreign exchange business
o Issuing of L/C
o Transfer of funds in both ways
o Telegraphic transfer and TCs
o Merchant banking
o Factoring
o Serving as a referee
o Underwriting shares and securities
o Issuing debit and credit cards
o Specialized advisory services
o Tele banking and home banking serviced
o Inter-net banking services
2.4 ROLE OF MBL IN THE ECONOMIC DEVELOPMENT OF BANGLADESH
MBL has been working from its very beginning to ensure the best use of its creativity, well managed and perfect growth.MBL is playing a vital role in socioeconomic development of Bangladesh by way of linkage with rest of the worldwide network in domestic and international operations.
2.5 Foreign Trade
For providing batter service in foreign tread MBL established correspondent relationship with 102 of foreign Banks.
Import
From the beginning of the Bank it has been evolve in foreign exchange to help the countries international trade. In 2008 MBL executed a total of 20,321 Letters of Credit amounting to BDT 56,528.80 million. The import items are:
· Machinery
· Electronics item
· Rice
· Sugar
· Oil
· Wheat
· Garments item
· Raw Cotton
· Button
· Cloths
· Mobile Phone
· Animals Food etc.
Export
MBL is very much supportive in export financing science its beginning. As an outcome of its positive attitude, in export performance it is holding the top position among leading Banks of new generation. A total of 17,581 export bills were handled worth BDT 43,108.50 million is 2008. The export items are:
· Readymade garments
· Jute & jute goods
· Leather
· Tea
· Frozen foods
· Fish products etc.
Remittance
In the year 2008 the Bank has operated BDT 4,722.90 million remittances, which as in 2007 it was BDT 3,510.40 million. Bank establishes remittance arrangements with overseas exchange companies where Bangladeshi expertise’s are working. These include United Kingdom, UAE, Kuwait, Bahrain, France, Italy, and Canada etc.
SMS Banking
As the time goes by, life style changes. To keep up, MBL provide you to SMS Banking Service, one of the most modern banking services. MBL SMS banking Service is convenient, safe, low-cost, fast and available round the clock.
MBL SMS Banking Service offers:
· Access to account balance
· Last 3 transaction inquiry
· Cheque status inquiry
2.5 Financial Performance
Funding Structure
The Bank’s principal sources of fund are Deposits, which constituted 88.57% of total fund in 2008. Reserves & Provisions 4.26%, Paid-up capital accounted for 3.22% and other sources 3.95% of total fund in 2008.
(BDT in million)
| Components | Amount | % Of Total |
| Deposits | 49,538.36 | 88.57 |
| Reserves & Provisions | 2,385.19 | 4.26 |
| Paid-up capital | 1,798.68 | 3.22 |
| Other | 2,206.50 | 3.95 |
| Total | 55,928.72 | 100 |
Total Income
The total income of the year 2008 was BDT 6,877.50 million, which were BDT 5,560.95 in the year 2007. The total income earned by
(BDT in million)
| Components | Amount | % of Total |
| Interest Income | 5,604.35 | 81.49 |
| Commission | 459.05 | 6.67 |
| Exchange Gains | 458.15 | 6.66 |
| Others Income | 355.94 | 5.18 |
| Total | 6,877.50 | 100 |
MERCANTILE BANK LIMITED AT A GLANCE
(BDT in million)
| Particulars | 2006 | 2007 | 2008 | 2009 |
| Authorized Capital | 1,200.00 | 3,000.00 | 3,000.00 | 3,200.00 |
| Paid-up Capital | 999.27 | 1,199.12 | 1,498.90 | 1,900.68 |
| Total Assets | 28,890.48 | 37,159.65 | 44,940.54 | 55,956.72 |
| Deposits | 25,087.43 | 33,332.65 | 39,348.00 | 49,428.36 |
| Loan & Advances | 21,857.05 | 26,842.14 | 31,877.86 | 42568.95 |
| Import | 33,271.90 | 42,442.80 | 40,380.10 | 56,528.80 |
| Export | 24,108.57 | 34,592.10 | 32,670.10 | 43,108.50 |
| Remittance | 679.10 | 2,989.10 | 3,510.40 | 4,722.90 |
| Profit after tax | 386.83 | 494.22 | 540.50 | 615.88 |
| No. Of Branches | 28 | 35 | 41 | 42 |
| No. Of Employees | 663 | 879 | 945 | 1115 |
| No. Of Foreign Correspondents | 266 | 306 | 584 | 630 |
CHAPTER FOUR
THEORETICAL ASPECTS OF
FOREIGN EXCHANGE
Theoretical Aspects of Foreign Exchange
Foreign Exchange and Foreign Exchange Market:
The most important prerequisite of this market is that the buyers and sellers are systematically in contact with each other for the purpose of executing foreign exchange transactions. For establishing the contact, would be buyer need not personally meet the probable sellers. It is of course true that in the early phase of the evolution of foreign exchange business there emerged meeting places known as bourse to conduct dealings in foreign exchange.
To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business. Generally, exporters prefer to be paid in their country’s currency or in U.S. dollars, which are accepted all to the world.
The foreign exchange market, or the “FX” market, is where the buying and selling of different currencies takes place. The price of one currency in terms of another is called an exchange rate.
The market itself is actually a worldwide network of traders, connected by telephone lines and computer screens—there is no central headquarters. There are three main centers of trading, which handle the majority of all FX transactions—United Kingdom, United States, and Japan.
Foreign Exchange Market Participants:
There are four types of market participants—banks, brokers, customers, and central banks.
Banks and other financial institutions are the biggest participants. They earn profits by buying and selling currencies from and to each other. Roughly two-thirds of all FX transactions involve banks dealing directly with each other.
Brokers act as intermediaries between banks. Dealers call them to find out where they can get the best price for currencies. Such arrangements are beneficial since they afford anonymity to the buyer/seller. Brokers earn profit by charging a commission on the transactions they arrange.
Customers, mainly large companies, require foreign currency in the course of doing business or making investments. Some even have their own trading desks if their requirements are large. Other types of customers are individuals who buy foreign exchange to travel abroad or make purchases in foreign countries.
Central banks which act on behalf of their governments, sometimes participate in the FX market to influence the value of their currencies.
In a way, foreign market looks like a clearinghouse to offset the purchases and sales of foreign exchanges. The banks are natural intermediaries for offsetting the transactions, which are carried out on five different planes:
· Between banks and customers
· Between banks in the same market
· Between banks in different centers
· Between banks and central banks
· Between central banks outside the market
Three-Tiered Market:
Foreign exchange market in Bangladesh is undeveloped and devoid of sophistication of the type witnessed in the advanced foreign exchange markets in the western world or Far East. The market of Bangladesh is essentially a three-tiered one:
· Between Bangladesh Bank and authorized dealers in foreign exchange (banks)
· Between banks and their correspondents and branches abroad
· Between banks and their customers
Foreign Exchange Transactions:
Conversion of currencies or exchanges is known as foreign exchange transactions. The conversion may arise from a transaction between a bank and another bank at home or abroad. The transactions involve at least two currencies. For a bank in Bangladesh, the process of conversion frequently involves conversion of Bangladesh Taka into foreign currency and vice versa.
Types of FX Transactions: There are different types of FX transactions:
1. Spot transactions: Spot market – deals with currency for immediate delivery (within one or two business days). Two parties agree on an exchange rate and trade currencies at that rate. This expresses only a potential interest in a deal, without the caller saying whether he wants to buy or sell. Although spot transactions are popular, they leave the currency buyer exposed to some potentially dangerous financial risks.
2. Forward transaction: One way to deal with the FX risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future and the transaction occurs on that date, regardless of what the market rates are then.
Futures: Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate.
Swap: The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date.
3. Options: To address the lack of flexibility in forward transactions, the foreign currency option was developed. An option is similar to a forward transaction. It gives its owner the right to buy or sell a specified amount of foreign currency at a specified price at any time up to a specified expiration date. For a price, a market participant can buy the right, but not the obligation, to buy or sell a currency at a fixed price on or before an agreed upon future date.
Foreign Accounts of Banks:
There are generally three types of inter-bank foreign accounts, which are discussed briefly in below:
Figure: Type of Foreign Correspondent Accounts
Nostro Account: Nostro account is a Latin word means ‘ours’. In order to follow the exact position of the foreign currency accounts maintained by the bank concerned in Bangladesh with bank abroad, banks maintained ‘Nostro Account’ their own bank. In the Nostro Account bank will show the foreign currency accounts of each transaction and alongside the respective items of domestic currency equivalents are indicated.
Vostro Account: The word Vostro means ‘yours’. It is also called a local currency account. Foreign banks maintained current accounts in domestic currency in local banks and such accounts are called Vostro Account. Generally the Vostro Account are maintained by the foreign banks on a reciprocal basis to effect payment of as well as to receive payment on behalf of their clients.
Loro Account: The word Loro means ‘their’. Foreign bank accounts of any third party, whether in foreign currency or in home currency is treated as Loro Account.
Foreign exchange position:
The exchange position is the net result of a banks sales and purchases. An authorized dealer in foreign exchange engages itself in buying and selling currencies of different countries. At one stage it may find itself having sold a substantial amount of a foreign currency while at the same time accumulating sizeable surplus amount of another currency. To keep an eye on the level of purchase and sale of each currency the bank maintains a book, known as position book. Exchange position or open position is the difference between the cumulative sales and purchases of each currency at any stage or context of Bangladesh. There are generally three types of exchange position as follows:
Oversold (OS) position:When the cumulative sales exceed the purchases including the oversight balance, the bank is said to be ‘short’ or ‘oversold’ in the respective currencies.
Overbought (OB) position:If the amount of a currency purchases at any stage is more than the aggregate amount of sales – both short and forward – the bank reaches what is known as ‘long’ or ‘overbought’ position.
Square position:In the event the amount purchased is equal to the amount sold, the bank reaches a square position. Square position is what a bank wishes to maintain in order to eliminate the risk of adverse movement of the exchange rate on its oversold or overbought position.
Components of exchange position:
Exchange position reflects all kinds of sales and purchases in each currency for which a rate of exchange has been agreed upon, explicitly or implicitly, with the customers, other dealers in the market and overseas correspondent and Bangladesh Bank. The purchase side of exchange position consists of the following:
· Inward remittance: All inward foreign exchange remittances from the overseas branches and correspondents by means of cables or Mali Transfers payable to local payees and beneficiaries fall in this category.
· Outward bills: All outward bills purchased, discounted or negotiated shall be entered into the purchase side of the exchange position regardless whether the bill is payable at sight, on demand or after tenor. Cheques and drafts against which payments have not already been made received in banks Nostro Account also fall in this category.
· Ready and forward purchase: Ready and forward purchase of a foreign currency in the form of bill or otherwise from customers would come under this head.
· Other purchases: All other foreign exchange transaction, both ready and forward including those carried out by the bank to maintain its position and for which a firm rate has been quoted or agreed upon, would fall in this category.
The sales side of exchange position usually consists of the following:
1. Outward remittances by means of TT, MT or DD.
2. Foreign bills including those relating to imports, which have been paid.
3. All sales including forward sales against which firm rates have been quoted.
4. Ready and forward sales to maintain the position.
Factors are considered at time foreign trade payment:
The following factors are usually taken into consideration while deciding about the terms of payment:
· Exporter’s knowledge of the buyer
· Buyer’s financing standing
· The degree of security of payment
· Speed of remittance
· Cost involved in receiving payment
· Exchange rustications in the importing country
· Competition faced by the seller.
· Exporter’s knowledge of the buyer
· Buyer’s financing standing
· The degree of security of payment
· Speed of remittance
· Cost involved in receiving payment
· Exchange rustications in the importing country
· Competition faced by the seller.
Payment mode of foreign trade:
An export contract can be deemed to be successfully completed when the exporter gets paid for the goods shipped by him, how he has to negotiations between which is to be decided during earlier negotiations between the exporter and the importer. There are five methods of payment which involve varying degrees of risk for the exporter are as follows:
1. Payment in advance
2. Open account
3. Documentary collections
4. Shipment on consignment basis
5. Documentary credit under letter of credit
1. Payment in Advance
In this method of payment buyer pays seller before goods are shipped. Its generally used in case of new relationships and for smaller Transactions where buyer is unable to obtain an L/C. there is no advantage for buyer – Pays prior to receipt of goods and documents. Its adventurous for seller as eliminates risk of non-payment
2. Open Account:
In open account method Buyer pays seller subsequent to receipt of an invoice, normally after goods are shipped. Its used when there is high trusts relationships between buyer and seller and in inter-company transactions. It allows buyer to delay payment until goods have been examined, and/or goods have been sold. It doesn’t give any Advantage to seller – Risks non-payment.
3. Documentary Collections:
Documents (representing title to the goods) are exchanged through a bank for payment or acceptance (promise to pay). It is used for ongoing business relationships and transactions not requiring the protection and expense of L/C’s. Its adventurous for buyer as delays payment until receipt of documents and buyer can be financed directly by seller through use of time drafts. Its benefit able for seller as they can retains title to goods until payment or acceptance.
4. Shipment on Consignment Basis:
In this method the exporter makes shipment to the overseas consignee/ agent, but the title to the goods, as also the risk attendant thereto, even through the overseas consignee will have the physical possession of the goods. The payment is only made when the overseas consignee ultimately sells the goods to other parties; this producer is rather costly and risky to the exporter.
5. Documentary credit under Letter of Credit:
The most popular from in recent times, as the credit and payment risks of the exporter can be eliminated under appropriate forms of documentary credit. Documentary credit is any agreement, however named or described whereby a bank (the issuing bank) acting at the request and in accordance with the instructions of the customer (the applicant for the credit) (i) is to make payment to or to the order of a third party (the beneficiary) or is to pay, accept or negotiate bills of exchange (drafts) drawn by the beneficiary or (ii) authorizes such payment to be made or such drafts to be paid, accepted or negotiated by another bank against stipulated documents, provided that the terms and conditions of the credit are compiled with.
SALES CONTRACT
DOCUMENTS
Flow Chart: Documentary Credit
CHAPTER FIVE
FOREIGN EXCHANGE
FOREIGN EXCHANGE MANAGEMENT OF MERCANTILE BANK LIMITED
Foreign Exchange Department of MBL:
International trade is the system by which countries exchange goods and services. Countries trade with each other to obtain things that are better quality, less expensive or simply different from what is produced at home.
To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business. Generally, exporters prefer to be paid in their country’s currency or in U.S. dollars, which are accepted all to the world.
The procedures used to exchange currency in international trade are called foreign exchange system, banks plays vital roles in this procedures world widely. The Bangladeshi banks provide foreign exchange services under, Foreign Exchange Act, 1947 is for dealing in foreign exchange business, and Import and Export Control Act, and 1950 is for Documentary Credits. MBL has also become a member of SWIFT (Society For Worldwide Inter Bank Financial Telecommunication) in 2000, which provides a fast, secured & accurate communication network for financial transactions such as letter of credit, fund transfer etc. As an authorized dealer under regulations of BB, MBL Uttara Branch provides the followings three type services under their foreign exchange department.
· Import Services
· Export Services
· Remittance Services
Foreign Currency Accounts offered by MBL:
Following the liberalization of exchange controls Bangladesh Bank has authorized the banks to maintain different types of foreign currency accounts and convertible Taka accounts. The following are the regulations laid down by Bangladesh in respect of these accounts.
Who can open the accounts?
Branches of Mercantile Bank Limited may open Foreign Currency Accounts in the names of:
6. Bangladesh nationals residing abroad
7. Foreign nationals residing abroad or Bangladesh and foreign firms operating in Bangladesh or abroad,
8. Foreign missions and their expatriate employees.
Resident Foreign Currency Deposit (RFCD):
This is a foreign currency denominated account. Those who domicile in Bangladesh but have to remit money to abroad because of various reasons.
Non Resident Foreign Currency Deposit (NFCD):
This is a foreign currency denominated account. Those who doesn’t domicile in Bangladesh but have to remit money to Bangladesh because of various reasons.
Import Section of MBL:
As a authorized dealer the major import items financed by MBL, Uttara branch are capital machinery, Hot Roll Steel, electronic equipment, rice, wheat, seeds, palmolein, cement clinkers, dyes, chemicals, raw cotton, garments accessories, fabrics, cotton etc. To import, a person should be competent to be an ‘importer’. According to Import and Export (Control) Act, 1950, the officer of Chief Controller of Import and Export provides the registration (IRC) to the importer. After obtaining this, the person has to secure a letter of credit authorization (LCA) from Bangladesh Bank. And then a person becomes a qualified importer. He requests or instructs the opening bank to open an L/C.
Import procedures:
· Registration with CCI&E
Ø For engaging in international trade, every trader must be first registered with the Chief Controller or Import and Export.
Ø By paying specified registration fees and submitting necessary papers to the CCI&E. the trader will get IRC (Import Registration Certificate). After obtaining IRC, the person is eligible to import.
Purchase Contract between importers and exporter:
· Now the importer has to contact with the seller outside the country to obtain the Performa invoice/indent, which describes goods.
· Indent is got through indenters a local agent of the sellers.
· After the importer accept the preformed invoice, he makes a purchase contract with the exporter declaring the terms and conditions of the import.
· Import procedure differs with different means of payment. In most cases import payment is made by the documentary letter of credit (L/C) in our country.
Collection of LCA form:
Then the importer collects and Letter of Credit Authorization (LCA) from MBL Uttara Branch.
Opening a Letter of Credit (L/C)
Bank provides guarantee to importer and exporter through Letter of Credit. Thus the contract between importer and exporter is given a legal shape by the banker by its ‘Letter of Credit’. The process of opening L/C regarding to import through MBL, Uttara branch are as following:
· Interview of probable L/C opener:
At first in case of import L/C opening opener must give an oral interview to the responsible officers of MBL. If the officers is satisfied with openers motive of import, type of import goods, quality of imported goods and marketability of goods than they will give approval to opener to further steps.
· Application For L/C limit:
Before opening L/C, importer applies for L/C limit. To have an import L/C limit, an importer submits an application to the Department of MBL furnishing the following information,-
· Nature of business.
· Required amount of limit.
· Payment terms and conditions.
· Goods to be imported.
· Offered security.
· Repayment schedule.
· Full particulars of bank account maintained with MBL Uttara Branch.
· The L/C Application:
After getting the importer applies to the bank to open a letter of credit on behalf of him with required papers. Documentary Credit Application Form:
· Tax Identification Number Certificate.
· VAT Registration Certificate.
· Membership Certificate of recognized Trade Association as per IPO.
· Proforma Invoice: It states description of the goods including quantity, unit price etc.
· L/C Form: MBL provides a printed form for opening of L/C (MF-fx 13) to the importer. This form is known as Credit Application form. A special adhesive stamp is affixed on the form. While opening, the stamp is cancelled. Usually the importer expresses his desire to open the L/C quoting the amount of margin in percentage.
· L/C authorization form (LCAF) duly signed by the importer.
· The insurance cover note: The name of issuing company and the insurance number are to be mentioned on it.
· IMP form duly signed by the importer.
· Forwarding for Pre-Shipment Inspection (PSI): Importer sends forwarding letter to exporter for Pre-Shipment Inspection. But all types of goods do not require PSI.
Time limit for opening L/C:
L/C (s) shall be open within 180 days from the date of issuance of LCAF or from the date of registration of LCAF with Bangladesh Bank.
Terms of L/C:
Full description of the goods along with quantity and unit price to be incorporated in the L/C and shall take all precautions to quote the correct H.S. Codes of the goods. Prices to be quoted on CER or FOB basis according to the P/Invoice or Indent. No import shall be made on CIF basis without prior approval from the Ministry of Commerce.
All L/Cs should provide for payment to be made against full sets of on board (shipped) transport documents drawn and/or endorsed to cover by the credit to a destination in Bangladesh.
All L/Cs must specify submission of signed invoices, certificates of origin & pre-shipment Inspection Certificate. L/Cs shall also incorporate any other documents, which are mandatory specified for those commodities in the IPO/Public Notices/Bangladesh Bank Circulars.
It is not permissible to open import L/Cs in favor of beneficiaries or to use shipping carriers of the countries from which import into Bangladesh are banned by the competent authority.
Shipment Validity & Expiry:
All L/Cs must specify shipment validity as per terms of the P/Invoice or indent or L/C application. However, shipment validity under any circumstances shall not exceed 9 (nine) months from the date of issuance of LCAF or registration LCAF with Bangladesh Bank excepting capital machinery and spare parts shipments of which shall be made within 17 (seventeen) months. All L/Cs must stipulate an expiry date and a place for presentation of documents for payment/acceptance.
Transmission of L/C to Beneficiary through Advising Bank:
In this step the transmission of L/C is done through tested telex or fax to advise the L/C by MBL to the advising bank. The advising bank verifies the authenticity of the L/C. MBL has corresponding relationship or arrangement throughout the world by which the L/C is advised. Actually the advising bank does not take and liability if otherwise not requested.
Presentation of the Documents:
· The seller being satisfied with the terms and the conditions of the credit makes shipment o the goods as per L/C terms.
· After making the shipment of the goods in favor of the importer the exporter submits the documents to the negotiating bank.
· After receiving all the documents, the negotiating bank then checks the documents against the credit. If the documents are found in order, the bank will pay, accept or negotiate to MBL.
· MBL, Uttara Branch & bank received seal to be affixed on the forwarding schedule.
· MBL, Uttara Branch crossed the bill of exchange & transport documents immediately to protects loss or fraudulent.
MBL checks the documents. The usual documents are,
· Bill of exchange.
· Invoice.
· Bill of lading or Airway bills
· Certificate of origin.
· Packing list.
· Weight list.
· Shipping advice.
· Non-negotiable copy of bill of lading.
· Pre-shipment inspection report.
· Shipment certificate.
Lodgment of Documents:
If the documents are found in order or the discrepancies in the document if any, are subsequently accepted by the applicant, the branch will record the particulars of the documents in the PAD Register (MB fx-05) .
Retirement of Documents:
MBL advise Importer about the date of lodgment of documents with full particulars of shipment to retire the documents against payment or to dispose the import documents as per prearrangement, if any. Subsequent reminders (MF fx-05) are also to be issued every week till retirement of the bill. Such bills will be considered and be reported as overdue if the importer fails to retire the documents within 21 days of arrival of the relative import consignments at the port of destination.
Cancellation of L/Cs:
An irrevocable L/C cannot be cancelled without the agreement of the beneficiary and the confirming bank, if any.
The MBL, Uttara branch at the request of the importer may approach the L/C advising bank for cancellation of the L/C and such cancellation will only be effective upon consent of the beneficiary advised to the branch through the L/C advising bank. However, the MBL, Uttara branch may cancel the L/C without the consent of the beneficiary. Advising bank and confirming bank, if any, if the L/C expires and the MBL, Uttara branch receives no shipping documents within 15 days of expiry of the L/C. The branch should send a massage to the concerned bank advising such cancellation and closure of L/C file due to expiry of the same. The MBL then cancels the Reimbursement Authorization, which has been provided to the Reimbursement Bank while opening the L/C. The branch will reverse L/C contra liabilities, refund margin and recover charges from the L/C applicant as per schedule of charges.
Import Financing by MBL:
Payment against Document (PAD):
The MBL, Uttara branch starts PAD procedure after getting all documents from the exporter of importer as evidence of exporting goods. Documents required for PAD is mentioned below:
· Original (Non-negotiable) bill of Leading.
· Commercial Invoice.
· Certificate of Insurance.
· Certificate of Origin.
· Bill of Exchange.
· Pre-shipment Inspection Certificate.
· Packing List.
· Clean Report of Findings (CRF).
Loan against Trust Receipt (LTR):
Under this LTR, Loan is allowed by MBL only to first class importers. Here only on the basis of trust without paying MBL anything or a partial amount, the importer takes the documents. Then importer is allowed 60-90 days time to make payment.
Loan against Imported Merchandise (LIM):
The imported goods come to the port the party may fall into financial crisis and requests MBL to clear the goods from the port making payment to the exporter. In this case the party later may take the goods partly or fully from MBL by making required payment (if he/she takes the goods time-to-time payment will be adjusted simultaneously).
5.5 Export section of MBL:
Export Procedures:
The import and export trade in our country are regulated by the Import and Export (Control) Act, 1950.Under the export policy of Bangladesh the exporter has to get valid Export registration Certificate (ERC) from Chief Controller of Import & Export (CCI&E). The ERC is required to renew every year. The ERC number is to incorporate on EXP forms and other papers connected with exports. MBL mainly handles export of readymade garments, jute goods, leather, plastic scrap, handicrafts etc. The followings process must be passed by a exporter to open a documentary credit in MBL, Uttara branch:
(a) Registration of Exporters: For obtaining ERC, intending Bangladeshi exporters are required to apply to the controller/ Joint Controller/ Deputy Controller/ Assistant Controller of Imports and Exports, Dhaka/ Chittagong/ Rajshahi/ Mymensingh/ Sylhet/ Comilla/ Barishal/ Bogra/ Rangpur/ Dinajpur in the prescribed form along with the following documents:
] Nationality and Assets Certificate;
] Memorandum and Article of Association and Certificate of Incorporation in case of Limited Company;
· Bank Certificate;
· Income Tax Certificate;
· Trade License etc.
(b) Securing the Order: After getting ERC Certificate the exporter may proceed to secure the export order. He can do this by contacting the buyers directly or through agent. In this purpose the exporter may get help from:
· License Officer;
· Buyer’s Local Agent;
· Export Promoting Organization;
· Bangladesh Mission Abroad;
· Chamber of Commerce (local & foreign)
· Trade Fair etc.
(c) Signing the Contract: After communicating buyer, exporter has to get contracted (writing or oral) for exporting exportable items from Bangladesh detailing commodity, quantity, price, shipment, insurance and marks, inspection and arbitration etc.
(d) Receiving Letter of Credit: After getting contract for sale, exporter should ask the buyer for Letter of Credit (L/C) clearly stating terms and conditions of export and payment.
The following are the main points to be looked into for receiving/ collecting export proceeds by means of Documentary Credit:
· The terms of the L/C are in conformity with those of the contract;
· The L/C is an irrevocable one, preferably confirmed by the advising bank;
· The L/C allows sufficient time for shipment and negotiation.
(Here the regulatory framework is UCPDC-500, ICC publication)
Terms and conditions should be stated in the contract clearly in case of other mode of payment:
· Cash in advance;
· Open account;
· Collection basis (Documentary/ Clean)
(Here the regulatory framework is URC-525, ICC publication)
(e) Procuring the materials: After making the deal and on having the L/C opened in his favor, the next step for the exporter is to set about the task of procuring or manufacturing the contracted merchandise.
(f) Shipment of goods: Then the exporter should take the preparation for export arrangement for delivery of goods as per L/C and incomer’s, prepare and submit shipping documents for Payment/ Acceptance/ Negotiation in due time.
Documents for shipment:
· EXP form,
· ERC (valid),
· L/C copy,
· Customer Duty Certificate,
· Shipping Instruction,
· Transport Documents,
· Insurance Documents,
· Invoice,
· Other Documents,
· Bills of Exchange (if required)
· Certificate of Origin,
· Inspection Certificate,
· Quality Control Certificate,
· G.S.P. Certificate,
(g) Documents submission: In this step exporter who confined with MBL will prepare export related documents and submit those documents to MBL, Uttara branch for negotiation. According to those documents MBL collects proceeds from the former issuing banks.
Export Financing by MBL:
Financing exports constitutes an important part of a bank’s activities. Exporters require financial services at four different stages of their export operation. During each of these phases exporters need MBL provides different types of financial assistance depending on the nature of the export contract are as follows:
· Pre-shipment credit
· Post-shipment credit
Pre-shipment credit:
Pre-shipment credit, as the name suggests, is given to finance the activities of an exporter prior to the actual shipment of the goods for export. MBL provides different type of Pre-shipment credit to its worthy customers for the following purposes:
· Cost of production or purchase
· Packing including any special packing for export
· Cost of special inspection or tests required by the exporter
· Internal transport cost
· Port, customs and shipping agent’s costs
· Freight and insurance charges if the contract is either C&F contract or a CIF contract and
· Export duty or tax etc
An exporter can obtain credit facilities against lien on the irrevocable, confirmed and unrestricted export letter of credit in form of the followings from MBL, but PC and BTBL is most common from of pre shipment of credit provided by MBL:
· Export cash credit (Hypothecation)
· Export cash credit (Pledge)
· Export cash credit against trust receipt.
· Packing credit.
· Back to back letter of credit.
(a) Export cash credit (Hypothecation):
Here MBL only gets charge documents and lien on exports L/C or contract, bank normally insists on the exporter in furnishing collateral security. The letter of hypothecation creates a charge against merchandise in favor of MBL but neither the ownership nor the possession is passed to it.
(b) Export cash Credit (Pledge):
MBL provides such credit facility to exporter by pledge of exportable goods or raw materials. Here pledged goods are kept in MBL’s control and failure of the exporter to honor his commitment, MBL can sell the pledged merchandise for recovery the advance.
(c) Export Cash Credit against Trust Receipt:
In this case, MBL provides credit limit is sanctioned against trust receipt (TR). Its also unlike MBL’s pledge facility, only difference is that the exportable goods remain in the custody of the exporter. This facility is allowed by MBL only to the first class party and collateral security is generally obtained in this case.
(d) Packing Credit:
Packing Credit is essentially a short-term advance granted by MBL to an exporter for assisting him to buy, process, manufacture, pack and ship the goods. The highest limit of providing PC to a first class exporter by MBL is 10% of total export value.
Charge Documents for P.C.
Responsible officer of MBL should obtain the following charge documents duly stamped prior to disbursement:
Ø Demand Promissory
Ø Note Letter of Arrangement
Ø Letter of Lien of Packing Credit (On special adhesive stamp)
Ø Letter of Disbursement
Ø Packing Credit Letter
Additional Documents for P.C:
· Letter of Partnership along with Registered Partnership Deed in case of Partnership Accounts.
· Resolution of the Board of Di