Descriptive Study on Foreign Trade Operation of Mercantile Bank Ltd

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A Descriptive Study on Foreign Trade Operation of Mercantile Bank Ltd

1.1 Introduction:

The prosperity of a country depends upon its economic activities like any other sphere of modern socio-economic activities; banking is a powerful medium of bringing about socio-economic changes of a developing country. Agriculture, commerce and industry provide the bulk of a country’s wealth. Without adequate banking facility these three cannot flourish. For a rapid economic growth a fully developed banking system is highly essential. A suitably developed banking system can provide the necessary boost for the economic uplift of the country. The whole economy of a country is linked up with its banking system.

Banks in Bangladesh can be classified into the following categories.

BANKS

BANGLADESH BANK (central bank of the country)

COMMERCIAL BANKS

SPECILIZED BANKS AND CREDIT AGENCIES

BANGLADESH SAMABAYA BANK LTD.

NATIONALIZED COMMERCIAL BANKS

FOREIGN BANKS

PRIVATE BANKS

BANGLADESH SHILPA RING SANGSTHA

BANGLADESH KRISHI BANK

BANGLADESH SHILPA BANK

CENTRAL CO-OPERATIVE BANK

PRIMARY CO-OPERATIVE CREDIT SOCIETES

Figure: 2-1 Classification of Banks in Bangladesh

1.2 History & Background:

Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in modern society. It plays a liberalization of economic policies in Bangladesh. Mercantile Bank Limited emerged as a new commercial bank to provide efficient banking services with a view to improving the socio-economic development of the country.

Mercantile Bank has been incorporated on May 20, 1999 in Dhaka, Bangladesh as a limited company with the permission with the permission of the Bangladesh Bank; MBL commenced formal commercial banking operation from the June 2, 1999. The bank stood 15 branches all over the country up to 2001.

There are thirty Sponsors involved in creating MBL the Sponsors of the Bank have a long heritage of trade, commerce and industry. They are highly regarded for their entrepreneurial competence. The Sponsors happen to be members of different professional groups among whom are also renowned banking professionals having vast range of banking knowledge. There are also members who are associated with other financial institutions like insurance companies, leasing company’s etc.

1.3 Mission of MBL

Mercantile Bank Limited aims to become one of the leading Banks in Bangladesh by prudence, flair and quality of operations in their banking sector. The bank has some mission to achieve the organizational goals. Some of them are as follows as:

Mercantile Bank Limited provide high quality financial services to strengthen the well being and success of individual, industries and business communities.

Its aim to ensure their competitive advantages by upgrading banking technology and information system.

MBL intends to play more important role in economic development of Bangladesh and its financial relations with the rest of the world by interlining both modernistic and international operations.

MBL encourages investors to boost up share market.

The bank creates wealth for the shareholders.

The bank believes in strong capitalization.

It maintains high standard of corporate and business ethics.

Mercantile Bank Limited extend highest quality of services, which attracts the customers to choose them first.

The bank creates wealth for the shareholders.

The bank maintains congenial atmosphere for which people are proud and eager to word with Mercantile Bank Limited.

Mercantile Bank Limited intend to provide better benefits to their customers and good returns to their shareholders.

The bank intends to meet the needs of their clients and enhance their profitability by creating corporate culture.

1.4 Objectives & Goals of Mercantile Bank Limited:

MBL is always ready to maintain the highest quality to services by upgrading banking technology prudence in management and by applying high standard of business ethics through its established commitment and heritage.

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.

The objective MBL is not only to earn profit but also to keep the social commitment and to ensure its co-operation to the person of all level, to the businessman, industrialist-specially who are engaged in establishing large-scale industry by consortium and the agro-based export oriented medium & small-scale industries by self-inspiration.

MBL, one of the renowned private banks is committed to continue its endeavor by rapidly increasing the investment of honorable shareholders into assets.

MBL believes in building up strong-based capitalization of the country.

MBL is committed to continue its activities in the new horizon of business with a view to developing service oriented industry and culture of morality and its maintenance in banking.

MBL is always pre-occupied to encourage the inventors for purchasing its share by creating the opportunity of long-term investment and increasing the value of share through prosperity as developed day by day.

MBL is playing a vital role in Socio-economic development of Bangladesh by way of linkage with rest of the world by developing worldwide network in domestic and international operations.

1.5 Directors and Management of MBL:

The organizational structure and corporate governance of MBL strongly reflect its determination to establish, uphold and gain a stronger footing as an organization, which is customer oriented and transparent in its management.

The Board of Directors consists of eminent personalities from commerce and industry of the country. Mr. Md. Abdul Jalil, the founder Chairman of the Board of Directors, is a businessman besides being an eminent personality of the country. The last Government had been pleased to induct him as a Senior Cabinet Minister with the portfolio of Commerce.

The Bank is manned and managed by highly qualified and efficient professionals. The chief Executive officer of the Bank is Mr. M. Taheruddin who has rich experience of managing both the nationalized and the private sector banks as Managing Director.

Mr. Lutfar Rahman Sarkar who born in 1935, initiated his banking carrier from Habib Bank Limited as a provisionary officer. Then he served as Managing Director in Agrani Bank, Sonali Bank, Islami Bank Bangladesh Limited and Prime Bank Limited. The Chief Adviser of the Bank is the former Governor of the Central Bank of Bangladesh. He brings with him a wealth of experience of managing both the public and private sector banks.

1.5.1 Board Committees of MBL:

Board of Directors who also decides the composition of each committee determines the responsibilities of each committee.

1.5.2 Executives Committees of MBL:

All routine matters beyond delegated powers of management are decided by or routed through the Executives Committee, subject to rectification by the Board of Directors.

1.5.3 Structural Management of MBL:

Organization Chart of Mercantile Bank Limited

Chairman

Managing Director – HRD

Executive Vice President/ Company Secretary

Chief Adviser

Board of Directors

Deputy Managing Director ID, IT, CREDIT, R&P

Deputy Managing Director GSD, CAD, A&I, GB, D&M

Senior Vice President

Senior Vice President

Senior Vice President

Vice President

Senior Asst. Vice President

Asst. Vice President

Senior Principle Officer

Principle Officer

Senior Officer

Officer

Junior Officer

Asst. Officer

Abbreviations: GSD – General Service Division CAD – Central Account Division ASI – Audit and Inspect CB – Central Bank D&M – Developing and Marketing ID – International Division R&P – Research & Planning

Figure: 2-2 Organization chart of MBL

1.6 Functions of Mercantile Bank Limited:

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; and

· Secondary Functions.

A. Primary Functions:

The primary functions of Mercantile Bank Limited are same as other Commercial Banks. These functions includes-

i. Accepts deposits;

ii. Lends money;

iii. Creates credit;

iv. Creates medium of exchange.

B. Secondary Functions:

Modern commercial Banks like MBL, besides performing the functions, cover a wide range of financial and on-financial services to meet the growing needs of the time. Some of these services are available only to the customers while others are available to the public in general.

The subsidiary services provided by a modern banker may be classified into following three groups-

• Agency Services; and
• Generally Utility Services
• Foreign Exchange Business

1.7 Performance of MBL – At a glance

(BDT in million)

Particulars	2005	2006	2007	2008	2009
Authorized Capital	1200.00	3000.00	3000.00	3000.00	8000.00
Paid-up Capital	999.27	1199.12	1498.90	1798.68	2158.42
Assets	28890.48	37159.65	44940.54	55928.72	66166.52
Investments	3517.68	5407.90	7099.97	6264.71	9664.72
Deposits	25727.43	33317.64	39348.00	49538.35	58033.47
Advances	21857.05	26842.14	31877.86	43419.36	48295.55
Import	33271.90	42442.80	40380.10	56528.80	60592.50
Export	24108.57	34592.10	32670.10	43108.50	46298.60
Profit after tax	386.83	494.22	540.50	615.88	807.52
Earning Per Share	32.26	32.97	30.05	28.53	37.41
Price earning ratio	9 times	10 times	17 times	9 times	10 times
No. of Branches	28	35	41	42	53
No. of Employees	663	879	945	1115	1303
No. of foreign Correspondence	266	271	584	586	590

Source: Annual Report 2009 of MBL

Source: Annual Report 2009 of MBL

Source: Annual Report 2009 of MBL

Source: Annual Report 2009 of MBL

1.8 MBL: Gulshan Branch – At a glance

1.8.1 Start Of Operation:

Gulshan Branch is on of the most profit-oriented branch of Mercantile Bank Limited which started its operation at Gulshan Avenue, Gulshan on January 31, 2000 with the 18 efficient & responsible officers. Now the number of employees of Gulshan Branch 32.

1.8.2 Organ gram of Gulshan branch

Figure: 2-4 Organ gram of Gulshan Branch

1.9 SWOT Analysis of MBL:

SOWT analysis is used to measure views of a single issue from different patterns. From historical data and practical observation, found the following Strength opportunity, weakness and threat under SOWT analysis of Mercantile Bank Limited, Gulsan Branch:

Strength:

· Not engaged in unfair business practice.

· Well-known reputed bank in the market.

· Concentrated market.

· Officers are highly educated and experienced.

· Deposit is larger than advance.

· Attractive credit and deposit schemes than competitive markets.

· Well-furnished and Air-conditioned Bank.

· Strictly complies of government banking rules, regulations and acts.

Weakness:

· Small market shares in Banking-business.

· Short time experience in the banking sector.

· Growth is slower than other competitive banks.

· Training programs to officers are not so effective and adequate.

· Lack of advance technology utilization in all aspects.

Opportunities:

· Can provide more attractive and deposit facilities and credit facilities.

· Take incentives to provide high quality service.

· Can increase the advertising of the Bank to highlight latest services of MBL.

· Can adopt high technology based inter-branch networking system.

Threat:

· The number competitors in banking sectors are increasing.

· Governments increasing rules and regulations are not so inspiring.

· Competitive performance is in high positive flow.

· Competitors are using more advance technological system.

· Government tendency of imposing tax and VAT is becoming stricter.

2.2 Objective of the study:

This report on Mercantile Bank is prepared for some distinguished objective, which is as follows:

· To understand procedures of foreign trade operation of commercial banks in Bangladesh.

· To gather knowledge about banking companies operations in practical field.

· To gather practical knowledge and real life experience in official environment.

· To apply theoretical knowledge in the practical field.

· To help the students in taking up professional courses in the B.B.A program.

· To have exposure to the functions of foreign exchange section.

· To understand procedures of foreign exchange management of commercial banks in Bangladesh.

· To observe the working environment in commercial banks.

· To study existing banker customer relationship.

· To identify a link between practical operational aspects of the Bank to complementary the theoretical lessons.

· To get an overview of the private Banking in our country.

2.3 Statement of the problem:

Foreign exchange department is the most sensitive part for any bank and financial institutions. Letter of Credit (LC) is the main component and areas of foreign trade operation in MBL, Gulshan branch. The letter of credit transaction is a financing device. Whether this device be considered as the superimposition of the credit of the issuing bank upon, or the substitution of such credit for, that of the buyer, its purpose is to utilize the issuing bank’s credit in order that a seller may obtain payment for his merchandise at the time of shipment, and a buyer may obtain possession of the merchandise on redid it.

According to Julius & Walter (1932) to achieve these ends, the buyer agrees to pay the bank an amount which is equivalent to the purchase price of the merchandise plus the bank’s commission, and the bank engages with the seller and prospective holders to accept and pay drafts in an amount equivalent to the purchase price. Under the standard payment-assurance account, the whole transaction hinges on the seller having a reliable right to payment by the bank that issues the letter of credit. Ronald (2000) explained that some time transaction would ignore formal documentation requirements which is not surprising, but their systematic purchase of a product conditioned on their compliance with requirements they commonly ignore does not appear rational. Though the LC reduces the business transaction risk between two parties but bank will take the liabilities if any of involving party failure to meet the LC requirement. So in teams of banks point of view bank should consider the risk factors which can affect the cross broader transaction. Therefore, the present study will investigate the impact of risk factors (market risk, credit risk and operation risk) engaging with LC.

2.5 Methodology of the study:

The study is performed based on the information extracted from different sources collected by using a specific methodology… The methodology is mentioned below:

Data collection: Source of data of this report can be divided into two categories:

Primary Sources:

· Three months practical participation in internee ship

· Face-to-Face conversation with the respective officers and staffs.

· Face to face conversation with the client

· Direct observations

Secondary Sources:

• Annual Report of Mercantile Bank Limited.
• Relevant books, Research papers, Newspapers and Journals.
• Internet and various study selected reports.

· Various publications on Bank,

· Websites

• Files & Folders

2.7 Limitations of the Study:

The major limitations of this study are given as follows

• There were some restrictions to have access to the information confidential by concern authority.
• The time limit of three months internee ship is stuffiest to understand the total operational process of the bank.
• Sufficient records, publications were not available as per my requirement.
• This report doesn’t provide adequate historical information.

3.1 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.

1 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.

2 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.

3 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.

4 Central banks, which act on behalf of their governments, sometimes participate in the FX market to influence the value of their currencies.

3.2 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.

1 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.

2 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.

3.3 Foreign Accounts of Banks:

There are generally three types of inter-bank foreign accounts, which are discussed briefly in below:

· 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.

3.4 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 exporters 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

3.4.1 Cash 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

3.4.2 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.

3.4.3 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.

3.4.4 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.

3.4.5 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.

3.5 Letter of Credit:

A letter of credit is basically a document issued by a bank guaranteeing a client’s ability to pay for goods or services. A bank or finance company issues a letter of credit on behalf of an importer or buyer, authorizing the exporter or seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met. LC is a conditional commitment to pay certain amount after a certain period and some contains are fulfilled. It is useful when the importer or buyer is not well known and when exchange restrictions exist or are possible. Proper letters of credit have the following basic components:

1. Applicant: The party applying for the letter of credit, usually the importer in a grain transaction.

2. The Issuing Bank: The bank that issues the letter of credit and assumes the obligation to make payment to the beneficiary, usually the exporter.

3. Beneficiary: The party in whose favor the letter of credit is issued, usually the exporter in a grain transaction.

4. Amount: The sum of money, usually expressed as a maximum amount, of the credit defined in a specific currency.

5. Terms: The requirements, including documents that must be met for the collection of the credit.

6. Expiry: The final date for the beneficiary to present against the credit.

3.5.1 Letters of Credit Parties Involved:

We’ve provided you with a comprehensive list of the parties involved in a letter of credit transaction. This page helps you understand the possible players in your scenario.

· Advising Bank: Denotes the bank giving notification of the terms and conditions of a letter of credit to the beneficiary (seller). The advising bank also takes reasonable care to check the apparent authenticity of the letter of credit, which it advises.

· Applicant: The party who applies to the opening (issuing) bank for the issuance of a letter of credit.

· Beneficiary: The party in whose favor the letter of credit has been established. The beneficiary is the party who demands payment under the letter of credit.

· Confirming Bank: A bank that at the request of the issuing bank, assures that drawings under the credit will be honored (provided the terms and conditions of the credit have been met).

· Drawee Bank: The bank on which the drafts specified in the credit are drawn and from which payment is expected.

· Issuing Bank (Opening Bank): The bank, which issues the letter of credit on behalf of the applicant.

· Negotiating Bank: Bank, other than the issuing bank, which elects to “negotiate” (advance funds or give value to the beneficiary) against presentation of complying documents.

· Paying Bank: The bank authorized in the letter of credit by the issuing bank to honor sight or deferred payments under the terms specified in the credit. (If this bank is the advising bank, it has no obligation to honor documents; however, if this is a confirming bank, it is obligated to pay against complying documents.)

· Presenting Bank: The bank that forwards the documents directly to the issuing bank to obtain settlement.

· Reimbursing Bank: The bank authorized by the issuing bank to reimburse the drawee bank or other banks submitting claims under the terms of the credit.

· Transferring Bank: A bank authorized by the issuing bank as specified in the credit that can transfer the issuing bank’s documentary credit from one beneficiary to another at the request of the first beneficiary.

3.6 Operations of Documentary Letters of Credit:

The following five major steps are involved in the operation of a documentary letter of credit:

? Opening.

? Advising.

? Amendment.

? Presentation.

? Settlement.

3.6.1 Opening of Letter of Credit:

Opening of letter of credit means, at the request of the applicant (importer) issuance of a L/C in favour of the beneficiary (exporter) by a Bank. The Bank, which open or issue L/C opening Bank or issuing Bank.

3.6.2 L/C Advising:

Advising through a Bank is a proof of evident authenticity of the credit to the seller. The process of advising a credit consists of forwarding the original credit to the beneficiary to whom it is addressed. Before forwarding the advising Bank verify the signature (s) of the officer (s) of the issuing Bank & ensure that the terms & condition are not in violation of existing exchange control regulation & the other regulation relating to export. If credit is transmitted via telex, advising Bank will match the test used in the telex.

3.6.3 Amendment of Credit:

Parties involved in a L/C, particularly the seller and the buyer, cannot always satisfy the terms and conditions in full as expected due to some obvious and genuine reasons. In such a situation, the credit should be amended.

3.6.4 Presentation of Document:

The seller being satisfied with the terms and conditions of the credit proceeds to dispatch the required goods the buyer and after that, has to present the documents evidencing dispatching of goods to the negotiating bank on or before the stipulated expiry date of the credit. After receiving the entire document, 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 the issuing bank. The issuing bank also checks the documents and if they are found as per credit requirements, either effects payment, or reimburse in the pre-agreed manner.

3.6.5 Settlement:

Settlement means fulfilling the commitment of issuing Bank in regard to effecting payment subject to satisfying the credit terms fully. This settlement may be done three separate arrangements as stipulated in the credit

3.7 Main Types of Money Transfers through banks:

• SWIFT Inter-Bank Transfer: Now firmly established as standard practice in the major trading nations. The buyer will instruct their bank to make payment to any bank account specified by the exporter. It is good practice, therefore, for the exporter to include their account details on their invoice heads.

• Buyer’s Cheque: An unsatisfactory method of settlement for the exporter as it carries the risk of dishonor upon presentation as well as the added inconvenience of being slow to clear. There is also the very real danger of the cheque being lost in transit as well. A cheque is also unsatisfactory if it is in the currency of the buyer, as this will take longer to clear and will involve additional bank charges. Exporters should only use this method if they have an established trading history with their customer or in cases where the profit margin has been increased to offset cash flow problems anticipated by the delay in receiving payment.

• Banker’s Draft: The buyer who asks their bank to raise a draft on its corresponding bank in the exporter’s country arranges this. Provides additional security to a buyer’s cheque, but they can be costly to arrange and they do run the risk of getting lost in transit.

• International Money Orders: These are similar in nature to postal orders. They are pre-printed therefore cheaper to obtain than a Banker’s Draft, although again there is the risk of loss in transit.

4.1 Foreign Exchange Department of MBL:

International trade shapes our everyday lives and the world we live in. Nearly every time we make a purchase we are participating in the global economy. 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 Gulshan Branch provides the followings three type services under their foreign exchange department.

1 Import Services

2 Export Services

3 Remittance Services

4.2 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.

4.2.1 Who can open the accounts?

Branches of Mercantile Bank Limited may open Foreign Currency Accounts in the names of:

A. Bangladesh nationals residing abroad

B. Foreign nationals residing abroad or Bangladesh and foreign firms operating in Bangladesh or abroad,

C. Foreign missions and their expatriate employees.

4.2.1.1 Resident Foreign Currency Deposit (RFCD):

This is a foreign currency denominated account. Those who residence in Bangladesh but has to remit money to abroad because of various reasons.

4.2.1.2 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.

4.2.1.2.1 Requirements for opening RFCD Account:

1 Two copies of recent passport size photograph

2 Photocopy of passport

3 Photocopy of work permit

4 Salary certificate or employers certificate

For the Officers of Different Embassy they need not to submit all these documents but the Employers certificate is must.

4.2.1.2.2 Requirements for opening NFCD Account:

· Photocopy of passport

· Citizenship certificate if available

· Certificate or approval from our authority for exporting manpower

· A nominee or authorized person will be selected by the account holder for transactions.

· Under this account the nominee will receive local currency TK against any Foreign

· Currency.

4.3 Import Section of MBL:

As a authorized dealer the major import items financed by MBL, Gulshan branch are capital machinery, Hot Roll Steel, electronic equipment, rice, wheat, seeds, polyolefin, 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.

4.3.1 Import procedures:

1. Registration with CCI&E

For engaging in international trade, every trader must be first registered with the Chief Controller or Import and Export.

2. 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 or Indent is got through indenters a local agent of the sellers.

3. Collection of LCA form:

Then the importer collects and Letter of Credit Authorization (LCA) from MBL Gulshan Branch.

4. 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, Gulshan branch are as following:

A. 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 are satisfied with opener’s 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.

B. 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 Gulshan Branch.

C. 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.

D. 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.

E. 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.

F. 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.

G. Amendments:

The MBL, Gulshan Branch may allow amendments to the L/Cs only upon requests of the L/C applicants that do not violate foreign exchange regulations and import control regulations. Necessary charges and/or margin (where L/C value is increased by subsequent amendments) also to be realized/recovered from the customer before amending the L/Cs.

H. 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.

I. Presentation of the Documents:

a. The seller being satisfied with the terms and the conditions of the credit makes shipment o the goods as per L/C terms.

b. After making the shipment of the goods in favor of the importer the exporter submits the documents to the negotiating bank.

c. 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.

d. MBL, Gulshan Branch & bank received seal to be affixed on the forwarding schedule.

e. MBL, Gulshan 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.

J. Lodgement 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) .

K. 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.

L. Endorsement of Non-Negotiable Copy Documents:

For clearance of cargo:

In the event of non-receipt of import documents relating to goods, which have already reached the port, the customer may ask the bank to provide a Shipping Guarantee/NOC to enable them to clear the goods, form the customers. The Shipping Guarantee may be given on the basis of a written undertaking from the clients by MBL. The S/G should state, inter alias, that he will in due course accept the original documents in spite of discrepancies, if any and bear the exchange loss on account of fluctuation of exchange rates between the dates of guarantee to actual date of lodgment of original documents, when received.

· MBL, Gulshan Branch will check the non-negotiable copy documents with the L/C terms and make entries of particulars of copy documents in the Shipping Guarantee Issue Register (MB fx-06)

· MBL, Gulshan Branch will recover Taka equivalent of F.C value of N/N copy documents and charges from the customer.

· MBL, Gulshan Branch will ensure return back of the shipping indemnity/guarantee from the shipping company by delivering original shipping documents to the importer after receipt of original documents from the payee bank.

· MBL, Gulshan Branch will mark cancellation on the shipping indemnity/guarantee returned by the shipping company through the importer and file it in the respective L/C file.

For customer Assessment Purpose:

· At the request of the importer, MBL, Gulshan branch may endorse Non-negotiable copy documents for custom assessment purpose. The branch will certify the value of F.C on the copy invoice and also certify the copy transport documents under single authorized signature. Endorsement charge is to be realized as per schedule of charges of the bank.

· 14. 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, Gulshan 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, Gulshan 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, Gulshan branch receives no shipping documents within 15 days of expiry of the L/C. The branch should send a message 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.

4.3.2 Import Financing by MBL:

4.3.2.1 Payment Against Document (PAD):

The MBL, Gulshan 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).

4.3.2.1.1 Examination of PAD Documents:

Scrutinizing documents is very important for the MBL, Gulshan branch. As after examining all the documents the MBL will make payment to the negotiating bank. So any mistake in the examination process may cost MBL, Gulshan branch.

4.3.2.2 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.

4.4 Accounting Treatment For Opening Import L/C:

When the officer thinks fit the application to open a L/C, giving the following entries- creates the following charges-Table-Showing accounting treatment at t