INTERNSHIP REPORT

Report onForeign Exchange Activities of Mercantile Bank Limited

Chapter 1

Introduction

INTRODUCTION

1.1 .Origin of the Report

In todays world only academic education does not make a student perfect to become competitive with the out side world. Internship is highly needed to gain idea, knowledge and experience. Asian University of Bangladesh is the reputed private university in Bangladesh, has designed the curriculum of the BBA course such a way that the international standard graduates will be produced. After completing 132 credit hours, one student needs to go for further 3 credit hours internship program in a commercial organization. From this internship program students get the opportunity to learn facing the real business world.

Mercantile Bank Limited is a place where I could learn the business dealings. This organization has created a positive image to the customers mind by providing better service. This bank has introduced some modern banking scheme that has got high market demand. As it maintain the place with the competitive business world, its activities, culture, philosophy and style leads an intern student to be the best at any field of working life. As an intern student I have got the opportunity to work with this organization for three months (from May 02, 2012 to July 31, 2012) and acquire idea about foreign division.1.2. Background of the Report:

Mercantile Bank Ltd. (MBL) is a specialized financial institution that performs most of the standard banking services and investment activities on the basis not only profit sharing but also social partnership. This study attempts to analyze the nature of modern banking activities and performance of MBL. All through the internship program, close observation was made on different banking activities of MBL. Its performance was reviewed and analyzed through the annual reports, and internal records of the bank.

1.3. Significance of the Report

The prime reason of this study is to become familiar with the practical business world and to attain practical knowledge about the Banking and Corporate world, which is so much essential for each and every student to meet the extreme growing challenges in job market. It is also known to all of us that there is no alternative of practical knowledge and the practical knowledge is much more durable and useful than the theoretical knowledge. This study will help us to get a true picture of the practical business world, particularly of banking business and also to attain practical knowledge on the various spheres of banking business. So this study is of paramount importance for each and every student regardless of his/her study area or discipline.1.4. Scope of the Report

The scope of the report is limited to Mercantile Bank, Dhanmondi Branch. The whole report covers the organizational structure; Background of the bank, objectives, functions, departments, units and business performance, activities of MBL, the main part works on Foreign Exchange Operation of Mercantile Bank Limited.My three months internship in MBL I worked in Cash, GB, Clearing, and Foreign Exchange Departments of Mercantile Bank and at last I am motivated to work with this topic. An Overview on foreign exchange operations of MBL

Financial Performance of the Bank

Export and Import Performance.

1.5. Objectives of the Report

The objectives of the study are as follows:

General Objectives:

The general objective of the report is the evaluation of foreign exchange operation of Mercantile Bank and compare with its competitor.

Specific Objective: To apply theoretical knowledge into practical area.

To be familiar with the banking management system.

To attain practical knowledge on the foreign exchange operations performed by MBL.

To evaluate the performance of General Banking division.

To know the banking operational guideline of a bank.

To get a brief idea about operational procedure.

To analyze the financing systems of the bank and find out whether the bank needs any improvement to be done and make greater contribution towards the countrys economy.

To familiarize different rules and regulations of Banks formalities.

To familiarize the working hours, values and environment of the bank.

To adopt with the everyday banking activities.

To find out the contribution of private commercial banks for the economic development of the country.

To attain practical knowledge on the foreign exchange operations performed by MBL.

To have better direction to identify and suggest the scope of enhancement in foreign exchange operations to fulfill the requirement of the internship program.

L/C Opening.

To learn about the benefits and incentives provides to the export proceeds.

To know the collection process of export proceeds.

To detect the problems involved and to obtain solutions.1.6. Methodology of the Report

I. Research DesignExploratory research has been conducted for gathering better information that will give a better understanding on different financial data. Both primary and secondary sources of data collection procedure have been used in the report. Primary data has been collected mainly through the writers observation of the approval process and monitoring techniques, informal interviews of executives, officers and employees of Mercantile Bank Limited.

II. Sources of Data Collection

To make the Report more meaningful and presentable, two sources of data and information have been used widely.

Chapter 2

An Overview of Mercantile Bank Ltd

2.1 BRIEF SYNOPSIS OF MERCANTILE BANK LIMITED:2.1.1. IntroductionBanking system occupies an important place in a nations 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 was established in June 2, 1999 as a private commercial bank and started its operation. Prime minister Sheikh Hasina inaugurates the bank. The renowned 30 industrialists establish this bank with everybodys consent Mr. Abdul Jalil elected as the chairman. Mercantile Bank Limited is a private commercial bank with Head Office at 61, Dilkusha C/A, Dhaka, Bangladesh started operation on 2nd June 1999. The Bank has 29 branches spread all over the country and introducing some braches. With assets of TK. 13078.93 million and more than 663 employees, the bank has diversified activities in retail banking, corporate banking and international trade.

2.1.2. World EconomyThe year 2009 reminds us the worst financial meltdown since the 1930s. It is argued that the meltdown of the financial system was made in America because it relaxes rules of providing loans to the people with no income for buying houses, called sub-prime housing loans amounting to about $2.1 trillion. Furthermore, US regulators did not monitor the way in which the banks were providing loans during the housing-boom period. The regulatory bodies in the US ignored warning signs of a financial storm since August 2007 and believed that the free market system would take care of it. But free market could not prove its effectiveness in avoiding the financial crisis. As a result, almost every country of the world faced the ongoing world economic crisis.

World growth is expected to fall to 0.5% in 200, its lowest rate since World War 2. The US economy, the worlds largest and the epicenter of the Financial Tsunami would shrink to 1.3% in 2009. Output in the advanced economies is now expected to contract by 2% in 2009, first contraction during the post war period. Growth in emerging and developing economies is expected to slow sharply from 6.25% in 2008 to 3.25% in 2009. China, the fastest growing economy in the world is expected to slow down to 7.5% in 2009 from a double-digit growth rate over the past several years, while Indias deceleration would be less steep to 5.0% from 6.2% and the economy of Japan would shrink to 1.2% in 2009.

Sluggish real activities and lower commodity prices resulted from tiny demand caused by the current economic meltdown have dampened inflation pressures. In the advanced economies, headline inflation is expected to decline from 3.5% in 2008 to a record low of 0.25% in 2009, before edging up to 0.75% in 2010. In emerging and developing economies, inflation is also expected to subside to 5.75% in 2009 and 5% in 2010, down from 9% in 2008. 2.1.3. Bangladesh EconomyBangladesh Economy recorded satisfactory growth in FY2008 in spite of experiencing two consecutive floods and devastating cyclone Sidre, price hike of oil and other commodities in the world market. Governments growth generating and poverty reduction programs coupled with the prudent monetary policy of Bangladesh Bank lead to achieve 6.2% growth in FY2008, slightly lower than 6.4% of FY2007. Nearly all sectors contributed to the GDP growth, particularly significant were the growth of export-oriented sectors, inflow of remittances and some service sector like transport and communication.2.1.4. Back Ground of MBL

Banking system occupies an important place in an economy. A banking institution is indispensable in modern society. It plays a liberalization of economics policies in Bangladesh. Mercantile Bank Limited emerged as a new commercial bank to provide efficient banking service with a view to improving the socio-economic development of the country.Mercantile Bank Limited has been incorporated on May 20, 1999 in Dhaka, Bangladesh as a Private limited company with the permission of the Bangladesh Bank; Mercantile Bank Limited commenced formal commercial banking operation from the June 2, 1999. The bank stood 45 branches all over the country up to December, 2008.

There are 28 sponsors involved in creating Mercantile Bank Limited. 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 etc.I. Mission:Will become most caring, focused for equitable growth based on diversified deployment resources, and nevertheless would remain healthy and gainfully profitable Bank. 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.

II. Vision:

Would make finest corporate citizen. is the main vision of MBL. MBL dreams to become the bank of choice of the general public that includes both the consumer and the corporate clients. It has created a cadre of young professionals in banking profession which has helped boosting productivity in the bank.III. Core Values: For Customers:

Providing with caring services by being innovative in the development of new banking products and services.

For Shareholders: Maximizing wealth of the bank.For Employees:

Respecting worth and dignity of individual employees devoting their earnings for the progress of the bank.For The Community:

Strengthening the corporate values and taking environment and social risks and reward into account.

1(a) MBL Timeline 1(b) Coverage of MBL

2.2. Nature of business

Mercantile Bank Limited offer services for all banking needs of the customers, which include deposits, making loans and advances, discounting bills, conducting money transfer and foreign exchange transactions and performing other related services such as safe keeping, collections, issuing guarantees, acceptances and letters of credit.2.3. Features of MBL There are so many reasons behind the better performance of Mercantile Bank Limited than any other newly established banks:

Mercantile Bank Limited has established a core Research & Planning Division comprising skilled person from the very inception of the bank.

Highly qualified and efficient professionals manage the bank.

The inner environments of the all branches of Mercantile Bank Limited are well decorated.

Banking operations of the all branches of Mercantile Bank Limited have been computerized to provide the promptly & frequently customers service.

The bank has established correspondent relationship with 102 of foreign banks.

The bank has launched some financial products, which is not available in any other banks, like Ajebon Pension Scheme.

Mercantile Bank Limited provides attractive interest rate than the other financial institutions.

The bank provides loan to the customers at lower interest with easy & flexible condition than the other do.

The bank frequent arranges customers meeting to achieve their valuable suggestions.

Letter of Credit (L/C) commissions and other charges are very lower than the other banks.

Profit earning is not the main aim of the MBL. The bank is responsible to maintain the social duties.

The bank is committed to provide the cherub amount within 30 seconds of submission the cherub.

1(c) Milestones in the development of the organization

Table: General Information of MBL

SOURCE: www.mblbd.com

2.4.Ownership Structure

The Board of Directors consists of eminent personalities from commerce and industry of the country. Mr. Md. Abdul Jail, 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.

2.5. Board Committees of MBL

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

2.6. 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. 2.7. Composition of the board

Board of Directors, the apex body of the Bank, formulates policy guidelines, provides strategic planning and supervises business and performance of management while the

Board remains accountable to the company and its shareholders. The Board is assisted by the Executive Committee and Audit Committee.

2.8. Branch expansion

The Bank commenced its business on June 02, 1999. The First branch was opened at Dilkhusha Commercial Area in Dhaka on the inauguration day of the Bank. The Second Branch was opened at Dhanmondi Residential Area, Dhaka on August 04, 1999. The Third Branch was opened at Kawran Bazar, Dhaka on September 06, 1999. The Fourth Branch was opened at Agrabad, Chittagong on November 06, 1999. Now, the total number of branches stood at 53 at the end of the year 2009.2.9. Function of MBLA bank has a lot of function in different ways. A Bank means an institution, which borrows money from the surplus unit of the society and lends money to the deficit unit for earning profit. The deposits are mainly accepted by the banker through current and saving account that is withdrawal by cheques. A bank includes a body of persons weather incorporated or not who carry on business of banking. Thus a bank is a profit intuition which deals in 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 Function

Secondary Function2.9.1. Primary Function:

The Primary functions of Commercial Bank/MBL are as follows-

Accepts Deposits:

The first primary functions of bank are to accept deposits of money from the public

or sever group. The total deposits held by the banker are broadly classified as-

Demand Deposit: Demand deposits are withdrawn able on demand and thus no prior notice is needed. Deposits in Current Account and Saving Account fall in this category.

Time Deposit: Time deposits are repayable on the expiry of a fixed period of time only. Fixes deposit Accounts, recurring Deposit Accounts and deposit payable at specified

notice fall in this category.

Lends Money:

Banking system essentially involves lending. Depending on the requirements of the borrower, banks lend money in the forms following:

Loans: In case of loan, the entire amount is paid to the borrower in lump sump, either in cash or way of transfer to his account. The borrower can withdraw the amount at any time. Interest is calculated and charged on the debit balance usually with quarterly rests. A loan once repaid in full or in part cannot be withdrawn further. Thus, no cheque book is issued against the loan account.

Overdraft: Overdraft is usually a temporary arrangement where the customer is allowed to withdraw money exceeding the credit balance of the current account up to an agreed limit. Interest in charged only for the amount drawn.

Cash Credit: A cash credit is an arrangement where the customer is allowed to withdraw money up to the sanctioned limit. Unlike overdraft this is a permanent arrangement and usually used to meet the working capital needs of business housed, industries etc. in cash credit account withdrawals and deposits may be effected frequently. Interest is charged on the daily balanced. Cash credit arrangement is usually made against pledge or goods but this could also be extended against personal security.

Bill Discounted and Purchase: Another mode of advancing money is discounting of the issuance bill of exchange. The banks buy the bill before its maturity at a price less than the face value. The amount, which the bank deducts from the face value of the instrument, is actually the interest calculated up to the date of maturity of the bills.

Creates Credit: The creation of credit is one of the important functions of Commercial Bank. The bank accepts deposits from the public and lends money to its customers. When a bank extends loan, it does not pay the amount in the bank account of the borrower and allow withdrawing the required amount by cheques. In this way the bank creates credit or deposit which is regarded as money and can be used for the purchase goods and services and also for the payment of debt just like currency notes.

Creates medium of Exchange: Commercial bank usually issues cheque which circulates like money in the society and creates the medium of exchange

2.9.2. Secondary Function: Modern commercial bank like MBL, besides performing the primary functions, cover a wide range of financial and non-financial services to meet the growing needs of the time. Some of the services are available only to the customer while others are available to the public in general. The subsidiary services provided by a modern banker may be classified into the following two groups:

Agency Services: In many cases the Commercial Banks acts the agent of the customers. As agents the banks provide the following services:

Collection of cheque, draft, bill of exchange, promissory note, dividends, salaries, pension, rent etc. on behalf of the customer.

Acting as correspondent and representative of its customers, other banks, and financial institutions.

Conducting stock exchange transaction i.e. purchase and sale of share and securities for the customers.

Functioning as trustee, executor or administrator of estate of a customer. General Utility Services: Commercial banks provide a variety of general utility services to the customers. They are given below: Issue letter of credit (L/C)

Accepts valuables for safe custody

Conducts in foreign exchange business

Lease financing

Provides Internet banking services

Provides specialized advisory services

Issues debit and credit cards

Underwrites of share and securities

Merchant Banking

Serving as a referee as to the financial standing business reputation and respectability of their customersForeign Exchange business:

A commercial Bank/MBL is involved in financing foreign trade apart from financing internal credit requirement in the economy. This involves handling of import business through opening L/C and handling of export business. As banking has become very keenly competitive, banks find it convenient to involve in foreign exchange business as a lucrative source of earning income and profit.

Apart from financing foreign trade, Commercial Banks also provide guarantees of various types to their clients. While these facilities clients to undertake jobs assigned to them by various corporations and organization, this enables the bank to earn commission.

A commercial Bank also provides the facilities of remittance to its clients for transfer of funds to various traded centers within the country and also outside the country in keeping with the foreign restrictions of the Central Bank.2.10. Future outlook of MBL

World economic crisis and stiff domestic competition in the banking industry would make the year 2009 very challenging for MBL. MBL believes that continuation of their superior services, adoption of new products and technologies, harmonious banker-customer relationship, embellishment of human resources with various trainings, prudent business policies, better risk management and corporate governance system will help MBL to handle this challenge more efficiently. Sound asset quality of the bank will also maximize value addition to the shareholders, employees, customers as well as society in the days to come.

with a view to reaching MBL services to the doorsteps of all types of people, MBL intend to establish some new branches and SME service centre in 2009 across the country.MBL aims to reach its desired goal by maintaining all the rules and regulations of all regulatory authorities, taking care of the welfare of the customers and society and its employees providing quality services to its customers.

2.11. MBL Management Organ gram

2.12. Departments of Dhanmondi Branch

General Banking & Deposit Management

Credit Department

Foreign Exchange Department

2.13. Divisions of MBL

General Banking Division

Credit Division

Foreign Exchange Division

2.14. General Banking & Deposit Management

Account opening and KYC procedures.

Issuance of DD/TT/PO/FDR.

Interbank Transaction, OBC/IBC.

Account section.

Clearing Section.

IT Section.

2.15. Credit Department

Credit Proposals Processing Procedures.

Documentation and Loan Disbursement Procedures.

Overview on all returns.

2.16. Foreign Exchange Department

I .Cash L/C

Opening of L/C.

Lodgment of Import Bill.

Payment against Import Bill.

B/E Matching.

IMP Reporting.

II. BTB L/C

Export L/C Checking.

Opening of BTB L/C (Local/ Foreign/ EDF/ EPZ).

Lodgment and confirmation of maturity date.

Allowing of PC.

Payment against realization of Export Proceeds/ Forced Loan.

B/E Matching.

Reporting.

III. Export

Scrutinizing/ Negotiation/ Send on Collection.

Follow-up.

Realization.

Reporting.IV. Foreign Remittance

Inward

FDD.

FTT.

Others. Outward

Endorsement of Traveling.

Education/ Treatment/ Others.

Cash Rebate.

FC issuing.

FDD/ FTT etc.2.17. Services Offered by MBL

The Bank does believe that it has differentiated itself from other banks through its products and services. It is banking for the people to fulfill their needs conceptualizing product and services to meet their aspiration and expectations. The bank is proud to have exemplified the true concept as Banglar Bank .The Bank launched several financial products and services since its inception. Among them are:A. DEPOSIT Schemes

Family Maintenance Deposit

Monthly Savings Scheme

Pension and Family Support Deposit

Monthly Benefit Scheme

Quarterly Benefit Deposit Scheme

1.5 Times Benefit Deposit Scheme

Double Benefit Deposit Scheme

Special Savings Scheme.Deposits: The Bank mobilized total deposits of BDT 49,538.36 million as of December 31, 2008 as compared to BDT 39,348.00 million in 2007. Competitive interest rates, attractive deposit products, deposit mobilization efforts of the Bank and confidence reposed by the customers in the Bank contributed to the notable growth in deposits. The Bank introduced a number of attractive deposit schemes to cater to the requirement of small and medium savers. This improved not only the quantum of deposits; it also brought about qualitative changes in the deposits structure.

Table: Trend of Deposits in MBLB. CREDIT Schemes

Customers credit Scheme

Small Loan Scheme

Lease Finance

Doctors credit Scheme

Rural Development scheme

SME Financing scheme

Personal Loan Scheme

Car Loan Scheme

House Loan

Finance Business LoanAdvances:

The Bank has formulated its policy to give priority to small and medium enterprises while financing large-scale enterprises through consortium of banks. Total loans and advances of the Bank stood at BDT 41,993.95 million as of December 31, 2008 as compared to BDT 31,877.86 million in 2007.

Table: Trend of Advances in MBL

Loans and Advances:

The Bank has formulated its policy to give priority to small and medium businessmen while financing large-scale enterprises through consortium of banks. Total loans and advances of the Bank stood at BDT 31,877.86 million as of December 31, 2008 as compared to BDT 26,842.14 million in 2007. Trade and commerce, garments industry, large and medium scale industries and construction are major sectors in which the Bank extended credit.

Table: Trend of Loans & Advances in MBL

Card Business:

MBL cardholder can enjoy the following benefits and much more: No Cash Withdrawal Fee: For withdrawals of cash from MBL ATM by MBL cardholders no cash advance fee is necessary and from any other Q-cash ATM the fee is Tk.10 only. MBL is the only bank offering such unique facility. Moreover, our VISA Cardholders can also withdraw cash from any Visa logo ATM locally and internationally.

Acceptability: International/Dual card is accepted all over the world at millions of outlets and ATMs. A Dual card is also accepted in most of the big cities like Dhaka, Citation, Khulna, Rajshahi, and Sylhet at more than 10,000 outlets including 4500 POS. It covers various kinds of merchants like hospital, hotel, restaurant, department store and the card has accessibility to any outlet having VISA logo.

Credit Facility: Mercantile Bank Ltd. Visa Credit card offers maximum 45 days credit facilities free of interest and minimum payment is 5% of outstanding billing payment for easy repayment and convenience of the customers.

Supplementary Card: A Principal cardholder (local) may apply for more than one supplementary card where one supplementary card is free. Expenses made by supplementary card will be charged to the principle card.

Advance against Credit card: MBL cardholder can take advance as term loan up to 50% of the card limit to be repaid on the monthly installment basis. Any POS transaction over TK. 20000 but not exceeding 50% of the credit limit is convertible to Personal loan/CCS and to be repaid on monthly installment basis. Repayment period of such loan may be from 6 months to 36 months. Overdraft Facilities: Overdraft facilities up to 80% of the credit card limit may also be allowed for payment of the installment of scheme deposit with our Bank.

Payment of Utility Bill: Payment of utility bills like telephone bills, gas bills, electric bills, water bills, may be settled by card.

Dual Card (two in one): Single Card with double benefits. No hassle to carry two cards (local and international). A single credit card can be used both locally and internationally to withdraw cash from ATM for POS transaction. This is the special feature of MBL Visa card.

Debit Card: Visa debit card is mainly tagged with deposit account (CD/SB/STD) that is automatically debited from the A/C having available balance. Debit card

can also be used for purchasing goods, services, payment of utility bills etc as well as withdrawal of cash from ATM.

Pre-Paid Card: Those who have no account with MBL may avail Pre-Paid card facilities. The Pre-Paid cardholders pay first buy later. Pre-Paid card offers the convenience and security of electronic payment in situations where one might otherwise use cash, such as birthday gift or a monthly allowance for a young adult. Examples include gift cards and salary payment etc.

C. FOREIGN EXCHANGE Services

Export Finance

Import Finance

Inward Remittance

Issue L/C

Shipping GuaranteeImport Trade:

Mercantile Bank Limited opted quality financing while facilitating import trade in 2008. This year the Bank executed a total of 20,321 letters of credits amounting to BDT 56,528.80 million. The principal items were capital machineries, garments & accessories, rice, wheat, sugar, CDSO, vegetable oil, cement clinkers, hot roll steel, raw cotton, ships-breaking etc.

Table: Trend of Import Trade in MBL

Export Trade: The Bank is very much supportive in export financing since its inception. 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 in 2008. The main export items of the bank were readymade garments, jute & jute goods, leather, handicrafts, tea frozen food, fish products etc.

Cash advance fee:

a) MBL card to MBL ATM: No fee.

b) MBL card to other Q-Cash ATM: Tk.10 per transaction.

c) MBL card to other ATM: 2% of transaction amount or Tk.125 whichever is higher.

d) For international card: USD 3 or 2% of transaction amount whichever is higher.

Foreign Exchange Business:

From the very beginning a Commercial Bank like MBL is involved in financing foreign trade apart from financing internal credit requirements in the economy. This involves handling of import business through opening Letter of Credit and Handling of export business. As banking has become very keenly competitive, banks find it convenient to involve in foreign exchange business as lucrative sources of earning income and profit. Apart from financing foreign trade, Commercial Banks also provide guarantees of various types to their clients. While these facilities clients to undertake jobs assigned to them by various Corporations and Organizations, this enables the Bank to earn commission, which is becoming gradually major source of earning of Commercial Bank.

Online Banking:

Online Banking has so far been activated with 41 Branches of the Bank from January 01, 2006. Online service is now available for all customers Both Cash deposit and withdrawals, Cherub Deposits and Transfer in CD, SB, STD, Loan accounts (Cherub B earing within limit) and Monthly Savings Scheme (MSS).

Table: Trend of Export Trade in MBL

An Overview of Dhanmondi branch

Dhanmondi Branch

Sima Blossom (1st floor)

House#3(new)

Road#16(new), Dhanmondi R/A, Dhaka-1209

Tel: +880-2-9130500, 01713452824

Fax: +880-2-8126768

Telex: 642509 MBLID BJ

E-mail: mbl@bol-online.com

Website: www.mblbd.com

The Dhanmondi Branch of Mercantile Bank Limited is located in the Motijheel commercial area. The total manpower of this branch is 118.The total number of the senior vice president is 10.As it is the Dhanmondi Branch of the bank, the customer appearance in the bank is very high. In the Mercantile Bank Limited, Dhanmondi Branch, the people are mostly courteous, friendly in nature and eager to help despite the tremendous workload. Manpower is sufficient in the branch but there is no information booth for customer information. So as a new private bank, Mercantile Bank Limited is running steadily.

Chapter 3

Introduction to Foreign Exchange

3. Foreign Exchange- its meaning and definition

Foreign exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country. Foreign exchange is the means and methods by which rights to wealth in a country's currency are converted into rights to wealth in another country's currency. In banks when we talk of foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another. Foreign Trade gives rise to foreign exchange. Modern banks facilitate trade and commerce by rendering valuable services to the business community. Apart from providing appropriate mechanism for making payments arising out of trade transactions, the banks gear the machinery of commerce, especially in case of international commerce, by acting as a useful link between the buyer and the seller, who are often too far away from and too unfamiliar with each other. According to Foreign Exchange Regulation Act (FERA) 1947, "Anything that conveys the right to wealth in another country is foreign exchange. Foreign exchange means and includes all deposits, credits and balances payable in foreign currency as well as foreign currency instruments such as drafts, TCs. Bill of Exchange, promissory Notes and Letters of Credit payable in any foreign currency. ". This definition implies that all business activities relating to Import, Export, Outward & Inward Remittances, buying & selling of foreign commissions, etc. come under the purview of foreign exchange business. Foreign exchange department of banks plays significant roles through providing different services for the customers.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 countrys 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 screensthere is no central headquarters. There are three main centers of trading, which handle the majority of all FX transactionsUnited Kingdom, United States, and Japan.

3.2. Foreign Exchange Market and Bangladesh

Foreign Exchange Market allows currencies to be exchanged to facilitate international trade and financial transactions. Evolution of the market in Bangladesh is closely linked with the exchange rate regime of the country. It had virtually no foreign exchange market up to 1993. BANGLADESH BANK, as agent of the government, was the sole purveyor of foreign currency among users. It tried to equilibrate the demand for and supply of foreign exchange at an officially determined exchange rate, which, however, ceased to exist with introduction of current account Convertibility. Immediately after liberation, the Bangladesh currency taka was pegged with pound sterling but was brought at par with the Indian rupee. Within a short time, the value of taka experienced a rapid decline against foreign currencies and in May 1975, it was substantially devalued. In 1976, Bangladesh adopted a regime of managed float, which continued up to August 1979, when a currency-weighted basket method of exchange rate was introduced. The exchange rate management policy was again replaced in 1983 by the trade-weighted basket method and US the dollar was chosen as intervention currency. By this time a secondary exchange market (SEM) was allowed to grow parallel to the official exchange rate. Up to 1990, multiple exchange rates were allowed under different names of export benefit schemes such as, Export Bonus Scheme, XPL, XPB, EFAS, IECS, and Home Remittances Scheme. This led to a wide divergence between the official rate and the SEM rate. The situation also gradually gave rise to a number of conflicting regulations, poor risk management, and various types of implicit or explicit government guarantees to the users of foreign exchange. This resulted in a number of macro-economic imbalances prompting the government to adjust the official rate in phases. 3.3. Functions of Foreign exchange department

Following are the functions that Foreign exchange department performs to facilitate the transaction of foreign exchange:

Facilitating import and export trades.

Providing funded and non-funded credit facility.

Providing non-commercial remittance.

Maintaining foreign currency accounts.

Selling foreign currency bond.

Preparing and submitting statements relating to foreign currency.

3.4. Foreign Exchange Market Participants:

There are four types of market participants:

banks

brokers

customers

central banks

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:

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: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: 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

3.5. 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 customers3.6. 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:

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.

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.

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.3.7. 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.3.8. 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:

i. Outward remittances by means of TT, MT or DD.

ii. Foreign bills including those relating to imports, which have been paid.

iii. All sales including forward sales against which firm rates have been quoted.

iv. Ready and forward sales to maintain the position.

3.9. Types of Foreign Trades There are mainly three types of transactions which lead to foreign exchange. These are:

a) Import

b) Export

c) Foreign Remittance

3.10. Regulations for Foreign Exchange

Local regulations: Our foreign exchange transactions are being controlled by the following local regulations: Foreign Exchange Regulation Act: Foreign Exchange Regulation (FERA) Act. 1947 enacted on 11th March 1947 in the then British India, provides the legal basis for regulation the foreign exchange. This act was adapted in Pakistan and lastly in Bangladesh. Guidelines for Foreign Exchange Transaction: This publication issued by Bangladesh Bank in the year 1996 in two volumes. This is a compilation of the instructions to be followed by the Authorized Dealers in transactions relating to foreign exchange. F.E. Circular: Bangladesh Bank issues F.E. circular from time to time to control the export import business and remittance that is to control the foreign exchange. Export-Import Policy: Ministry of commerce issues Export Policy and Import Policy giving basic formalities for Import and Export Business. Public Notice: Some times CCI &E issues public notice for any kind of change in Foreign Exchange Transaction. Instructions from different ministry: Different ministries of the Govt. sometimes instruct the authorized dealer directly or through Bangladesh Bank to follow something required for the government.

International Regulations: There are also some international organizations influencing our Foreign Exchange transactions. Few of them are discussed below: ICC: International Chamber of Commerce is a world wide Non-governmental Organization of thousands of companies. It was founded in 1919. ICC National committees throughout the world present ICC views to their Governments and alert Paris Headquarters about national business concerns. ICC has issued some publications like UCPDC, URC and URR etc., which are being followed by all the member countries. There is also an international Court of Arbitration to solve the international business disputes. WTO: World Trade Organization is another International Trade Organization established on 1st January 1995. GATT (General Agreement on Tariff & Trade) was established on 1st January 1948. After completion of its 8th round, the organization has been abolished and replaced by WTO. This organization has vital role in international trade through its 124 member countries.3.11. Letter of creditA Letter of credit is a letter issued by a bank (known as the opening or the issuing bank) at the instance of its customer (known as the opener) addressed to a person (known as beneficiary) undertaking that the bills drawn by the beneficiary will be duly honored by it (opening bank) provided certain conditions mentioned in the letter gave been complied with.

3.11.1. Classification of Letter of Credit In different considerations there are many kinds of L/Cs. Some of them are discussed below: Irrevocable L/C

Irrevocable L/C cannot be amended or cancelled without the consent of the beneficiary or any other interested parties. Banks commonly open this type of L/C.Revocable L/C

This kind of L/C can be amended or cancelled by the Issuing Bank, without the consent of the beneficiary or any other interested parties. If it is not indicated in the L/C, whether it is Revocable or Irrevocable, then the L/C to be treated as Irrevocable.

Add-confirmed L/C:

When a third bank provide guarantee to the beneficiary to make payment, if Issuing Bank fail to make payment, the L/C is called Add-Confirmed L/C. In case of a confirmed L/C a third bank adds their confirmation to the beneficiary, to make payment, in addition to that of Issuing Bank. Confirmed L/C gives the beneficiary a double assurance of payment. Clean Clause: It is a normal claused L/C without third bank's confirmation. Revolving L/C: It is an L/C where the original amount restores after it has been utilized. How many times and how long, the amount will restore must be specified in the L/C. For example, an L/C opened for USD 1000 and shipment effected for USD 500, now the L/C restored for full value i.e. there is scope to effect further shipment of USD 1000 revolving L/C may be opened to avoid difficulties of opening new L/C. This L/C is not allowed in our present import policy.

Transferable L/C:

If the word "Transferable" incorporated in an L/C, then the L/C is transferable. The 1st beneficiary can transfer transferable L/C to the 2nd beneficiary. But 2nd beneficiary cannot transfer it further to another beneficiary. Transfer may be done to more than one beneficiary, partially, if not prohibited in the L/C. Restricted L/C:

If advising and/or negotiation of an L/C are restricted to a particular bank, the L/C is called a restricted L/C.

Green Clause L/C:

It is an L/C, where the Issuing Bank authorizes the Negotiating Bank to grant storage facilities to the beneficiary. The special clause was originally written in Green-ink, so the L/C is called Green Clause. In both the case of Red Clause and Green Clause L/C, if the exporter fails to ship the goods the financing bank has the right to demand repayment from the Issuing Bank and that bank would have a similar right of recourse against the applicant.Clean Letter of Credit: This is a commercial letter of Credit, wherein the Issuing Bank does not ask any documents as evidence of execution of the deal under the L/C. Under the said L/C only bill of exchange may be negotiated or may be paid without any supporting documents. Clean Letter of //Credit is not permissible in our import policy.

Documentary Letter of Credit:

All the commercial letter of credits, where export related documents such as invoice, B/L etc. are required to present with the bill of exchange, is called Documentary Credit. Under this L/C, bill of exchange will not be honored without other required documents.

Straight Documentary Credit:

Under the irrevocable straight documentary credit, the obligation of the Issuing Bank is extended only to the beneficiary, in honoring draft(s)/ documents and usually expires at the counter of the Issuing bank. This L/C. does not authorize anybody to negotiate, purchase the documents. This L/C. is available for payment only at the Issuing Bank's counter, not available for negotiation.

Irrevocable Negotiation Documentary Credit:

This L/C. is available for negotiation by a nominated bank/any bank and expiring for presentation of document at the offices of negotiating bank. The Issuing Bank is bound to reimburse the Negotiating Bank, if it negotiates the documents complying with the credit terms.

With Recourse and Without Recourse to Drawers:

These terms are related with bill of exchange. If the L/C allow a Bill of Exchange with recourse to the drawer, that means the Negotiating Bank has the right to claim the amount back, from the drawer, if the B/E is dishonored by, the drawee. And in case of without recourse, the Negotiating Bank has no right to claim the amount back.

3.11.2. L/C can be classified according to source of fund

A) Back-to-Back L/C:

Back to Back import L/C is backed by another export L/C. where import of the goods to be made to execute the export L/C and payment of Back to Back bills to be made normally from related export process, the import L/C is called Back to Back L/C. A Back-to-Back L/C is opened against an irrevocable L/C. The L/C is lien marked with the back-to-back L/C issuing branch. Back to Back L/C may be opened up to 75% of export L/C, (FOB value) and up to 80% where export price is more than USD 60/- per dozen in case of garments industries.B) Cash L/C:

Where payment of import bills under L/C is being made from (i) Foreign Currency reserve in Bangladesh Bank or (ii) F.C. account with authorized Dealer, the L/C is called Cash L/C.

C) Barter L/C:

Where final settlements are being made through commodity exchange between the nations, the L/C is called Barter L/C.

3.12. Documents used in LC operation

The most commonly used documents in foreign exchange are:

Bill of Exchange

Bill of Lading

Commercial of invoice

Certificate of origin

Inspection certificate

Packing list

Insurance document

Pro Forma Invoice (PI)/Indent

Bill of exchangeBill of exchange is one of the important negotiable instruments in the mercantile world and used as a vital document facilitating settlement of payments between buyer/importer and seller/exporter at home and abroad. A bill who accepted by the drawer, gives evidence of the claim as made by the drawer as well as testimony to the acceptance the debt by drawer. The payment is done either in accordance with the terms of sale contract or under a L/C opened by the buyer/importer in favor of the seller/exporter.

Bill of Lading

A bill of lading is a document that is usually stipulated in a credit when the goods are dispatched by sea. It evidence of a contract of carriage, is a receipt for the goods, and is a document of title to the goods. It also constitutes a document that is, or may be, needed to support an insurance claim. The details on the bill of lading include:

A description of the goods in general terms not inconsistent with that in the credit.

Identifying marks and numbers.

The name of the carrying vessel.

Evidence that the goods have been loaded on board.

The ports of shipment and discharge.

The names of shipper, consignee and name ad address of notifying party.

Whether freight has been paid or is payable at destination.

The number of original bills of lading issued.

The date of issuance A bill of lading specifically stating that goods are loaded for ultimate destination specifically mentioned in the credit.

Commercial of invoice

A Commercial invoice is the accounting document by which the seller charges the goods to the buyer. A commercial invoice normally includes the following information: Date.

Name and address of buyer and seller. Order or contract number, quantity and description of the goods, unit price and the total Price. Weight of the goods, number of packages, and shipping marks and numbers. Terms of delivery and payment.

Shipment details.

Certificate of origin

A certificate of origin is a signed statement providing evidence of the origin of the goods. Inspection certificate

This is usually issued by an independent inspection company located in the exporting country certifying describing the quality, specification or other aspects of the goods, as called for in the contract and/or the L/C. The buyer who also indicates the type of inspection he wishes the company to undertake usually nominates the inspection company.Packing list

This is unique document and not combined with other document. This is a listing of the contents of each package cartoon etc. and other relevant information. Insurance document

Insurance is a contract whereby the insurer is undertaking to indemnify the assured to the agreed manner and extend against fortuitous losses. Insurance document generally contains the following information:

The name of the insurer or his agent

The name of the ship/carrier

The name of assured

The subject matter of insurance

The peril(s) insured against

The date and subscription

The valuationPro Forma Invoice (PI)/Indent

Pro Forma Invoice / Indent are the sale contract between seller and buyer in import-export business. There is slight difference between indent and Pro forma invoice. The sales contract, which is direct correspondence between importer and exporter, is called Pro forma invoice. There is no intermediary between them. On the other hand, the may be an agent of exporter in importers country. In this regard, if the sale contract is occurred between the agent of exporter and importer then it is called indent. Pro Forma Invoice is a form of quotation to a potential buyer, inviting him to buy the goods on stated terms. This should be clearly stated that it is pro forma and if it is accepted the details are normally transferred to a commercial invoice.

3.13. Different accounts related to foreign exchange transaction

In L/C operation different accounts are maintained which are needed for foreign exchange transaction. These are: Nostro account

Nostro account means our account with you. A Nostro account is a foreign currency account of a bank maintained its foreign correspondents abroad. For example, US Dollar Account of MBL maintained with Citibank, N.A, New York, USA is a Nostro account of MBL.

Vostro account

Vostro account means your account with us. The account maintained with foreign correspondent in a bank of a particular country is known as Vostro account. What is the nostro account for a bank in a particular country is a vostro account for the bank abroad maintaining the account thus the account of MBL with Citi Bank N.A, New York is regarded as its nostro account held with Citi Bank, while Citi Bank N.A, New York regards it as a its vostro account held for MBL. Loro Account

Loro account means their account with you. Account maintained by third party is known as loro account; suppose MBL is maintaining an account with Citi Bank N.A, New York and at the same time Janata Bank is also maintaining a nostro account with Citi Bank N.A, New York. From the point of view of MBL Janata Banks account maintained with Citi Bank N.A New York is the loro account. Bangladesh USA Nostro Account

Vostro Account

Figure: Type of Foreign Correspondent Accounts

3.14. 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:

Payment in advance

Open account

Documentary collections

Shipment on consignment basis

Documentary credit under letter of creditPayment in AdvanceIn 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

Open AccountIn 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 doesnt give any Advantage to seller - Risks non-payment.

Documentary CollectionsDocuments (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.Shipment on Consignment BasisIn 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.

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

DOCU MENTS

Flow Chart: Documentary Credit

3.15. Different parties involved Foreign exchange transaction Normally the following parties are involved to a documentary credit:

Importer

The buyer or the importer is he who initiates the credit. He applies to bank for issue foreign a documentary credit. The obligations between the importer and the issuing bank are governed by the application-cum-agreement submitted by the importer to the bank. He is bound to reimburse the bank, which effects payment or incurred a deferred payment undertaking or has accepted or negotiated under the credit as per terms, and to take up the documents.

Opening Bank

The issuing or opening bank is the importer's bank and it issues a letter of credit normally pursuant to the terms of sales contract as set out in the application for the credit by the importer. The issuing bank should nominate the bank, which is authorized to pay or to accept drafts or to negotiate, unless the credit allows negotiation by any bank.

Exporter

The seller or exporter is the beneficiary of the credit. The letter of credit is opened in his favor and addressed to him-. The beneficiary has the obligation to make export as per the contract and produce the documents as required by the credit.

The Advising Bank

It is the bank in the exporter's country (normally the exporter's bank), which is usually the foreign correspondent of importer's bank through which the L/C is advised to the supplier. If the intermediary bank simply advises/notifies the L/C to the exporter part, it is called "Advising Bank".

The Confirming Bank

If the advising bank also adds its own undertaking to honor the credit while advising the same to the beneficiary, he becomes the confirming bank. In addition, becomes liable to pay for documents in conformity with the L/C's terms and conditions. The liability of the confirming bank is the primary liability and it is not contingent on the fulfillment of the obligation by the issuing bank.

The Accepting Bank

Accepting bank is the bank nominated in the letter of credit to accept usance bills drawn under the credit. If the bank so nominated accepts the nomination, its responsibility to the beneficiary is not only to accept the drafts drawn but also to make payment on their due dates. The Paying Bank

Paying bank is a bank in the beneficiary's country nominated in the letter of credit to make payment against documents to be tendered under the credit. Paying Bank must examine all documents with reasonable care to ascertain that these are drawn in accordance with the terms and conditions of the credit.

Reimbursing Bank

The issuing bank may indicate in the credit the name of a bank. From whom the paying/negotiating bank can obtain reimbursement. The documents are sent to the issuing bank. The negotiating/paying bank simultaneously makes a claim with the reimbursing bank for the payment effected. Normally the reimbursing bank would be the bank with which the issuing bank maintains an account. The Transferring Bank

If the L/C is transferable, then the 1st beneficiary of the L/C may transfer the L/C to the 2nd beneficiary, through a bank nominated by the Issuing Bank. This bank is called the Transferring Bank.3.16. FOREIGN EXCHANGE MANAGEMENT OF MERCANTILE BANK LIMITED

3.16.1Foreign 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 countrys 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 Dhanmondi Branch provides the followings three type services under their foreign exchange department.

Import Services

Export Services

Remittance Services 3.16.2 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.Who can open the accounts?

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

1. Bangladesh nationals residing abroad

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

3. 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 doesnt domicile in Bangladesh but have to remit money to Bangladesh because of various reasons.

Chapter 4

Import

4.1. Import

As a authorized dealer the major import items financed by MBL, Dhanmondi branch are capital machinery, Hot Roll Steel, electronic equipment, rice, wheat, seeds, 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 Section of MBL:

As a authorized dealer the major import items financed by MBL, Dhanmondi 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.4.2. Parties to a letter of Credit

The Applicant

The Issuing Bank (located at the importers place)

The Beneficiary or Exporter

The Advising or Corresponding Bank (located at the exporter's place)4.3. 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.

4.4. Import procedures

An importer is required to have the following to import through MBL: Applicant has to apply for opening L/C by a prescribed form.

L/C Application Form duly filled in and signed.

Applicant has to submit the Letter of Indent or Letter of Performa Invoice.

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

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.

Letter of Indent

Many sellers have their agent in sellers country. If the contract of buying is made between the buyers and the agent of the sellers then Letter of Indent is required. Letter of Performa Invoice

If the contract is made directly between the buyers and the sellers then Letter of Performa Invoice is needed.

Applicant has to submit IRC (Import Registration Certificate). It is a certificate being renewed every year. IRC is of two types COM and IND. COM is given for commerce purpose and IND is given for industrial purpose.

Applicant has to submit LCAF (Letter of Credit Authorization Form).

Applicant has to submit insurance coverage of products document.

Applicant has to prepare FORM-IMP.

Recently, there has been made a provision to give a certificate named TIN (Tax Identification Number). Taxation department issues this certificate.

Then after proper scrutiny, bank will open an L/C.

While opening L/C, importer must keep certain percentage of the document value in the bank as margin (Maintained in L/C application form). 4.5. To open an L/C, the requirements of an importer are

L/C application Form duly filled in and signed.

2. Indent or Performa Invoice.

Import Merceddised Permit Form (IMP).

L/C Authorization Form (L/CAF).

Taxpayer Identification Number (TIN).

Insurance cover note with money receipt.

A bank account number.

Membership of chamber of commerce.

4.6. 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, Dhanmondi 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 officer 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. L/C application Form consists The name and address of Beneficiarys.

The name and address of Openers.

L/C amount. (Figure and in Ward).

Description of Commodities.

Performa Invoice or Indent Number.

H.S. Code.

Country of origin.

IRC No.

LCAF No.

Last date of Shipment.

Last date of Negotiation.

Insurance cover note / policy no.

Name and address of Insurance Company.

Mentioned Part shipment allowed or prohibited.

Mentioned Transshipment allowed or prohibited.

Shipment formtoand by. Performa Invoice (PI)Performa invoice is the sale contract between seller and buyer in import-export business. That is which is direct correspondence between importer and exporter, is called Performa invoice. PI sends by the exporter, and Importer provides their Company Stamp on the PI. After than PI submit in to Bank. It consists:

Name and Address of the Importer and Exporter.

Detail Description of Goods.

Total Units of Goods and Price.

H.S Code of Goods.

Country of Origin. Etc. Import Merchandised Permit Form (IMP)This form is prepared for maintaining account of the money, which goes out side the country for the purpose of payment. This form is required by Bangladesh Bank. It is an application for permission under 4/5 of the Foreign Exchange Regulation Act, 1947 to purchase foreign currency for the payment of import.

IMP FORM has four copies:

Original copy for Bangladesh Bank.

Duplicate copy for authorized dealers. It is issued for processing Exchange Control Copy of bill of entry or certified invoice.

Triplicate copy for authorized dealers record.

Quadruplicate copy for submission to the bank in case of imports where documents are retired. Following documents are sent with FORM-IMP:

Letter of Credit Authorization Form,

One copy of invoice,

Indent copy / Performa invoice.

The following information is included in the FORM-IMP: Name and address of the authorized dealer,

Amount of foreign currency in words and figures,

Names and address of the beneficiary,

L/C Authorization Form number and date,

Registration number of L/C Authorization Form with Bangladesh Bank, and

Description of the goods. L/C Authorization Form (L/CAF)It has four copies, one is original and three duplicate copy. 1st copy is for Bangladesh Bank, 2nd copy is for importer for release the goods from check post. 3rd and 4th copy is for controller of export and import. It consist: Name and Address of Importer.

I.R.C. No.

Amount of L/C Credit in Tk.

Description of goods to be import.

H.S. Code Number

After receiving the above document Banker make an office note. Banker mentioned the L/C amount, Margin of L/C, Limit, Outstanding etc. After than Banker take the signature of Foreign Exchange In charge, Manager Operation, and the Branch Manager.

After complete this process Bankers open L/C on Behalf of Importer. MBL Dhanmondi sends the L/C to corresponding bank. Than corresponding bank contract with the exporter. After that the exporter takes preparation for send goods to importer and also makes the necessary documents for provide the corresponding bank.4.7. Collection of LCA form:

Then the importer collects and Letter of Credit Authorization (LCA) from MBL Dhanmondi 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, Dhanmondi 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 are 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 Dhanmondi 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.

Performa 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.

4.8. 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.4.9. 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.4.10. 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. 4.11. Submission of Necessary Documents by Exporter to the Corresponding Bank

As soon as the exporter receives the credit and is satisfied that he can meet its terms and conditions, he is in position to load the goods and dispatch them. The seller then sends the documents evidencing the shipment to the advising bank. Exporter will submit those documents in accordance with the terms and conditions as mentioned in L/C. Generally the documents observed by me in the foreign exchange department are:

Bill of exchange

Commercial invoice

Bill of lading

Certificate of origin

Packing list

Weight list

Shipping advice.

Non-negotiable copy of bill of lading.

Pre-shipment inspection report.

Shipment certificate. Bill of exchangeAccording to the section 05, Negotiable Instruments (NI) Act unconditional order signed by the maker, directing a certain person to pay [on or to the order of a certain person or to the bearer of the instrument. It may be either at sight or certain day sight. At sight means making payment whenever documents will reach in the issuing bank.

Commercial InvoiceCommercial Invoice issued by exporter is the accounting document by which the seller charges the goods to buyer.

Bill of ladingA bill of lading is a document usually stipulated in a credit when exporter dispatches the goods. It is an evidence of a contract of carriage, is a receipt for the goods and is a document of title to goods. It also constitutes a document that is or may be, needed to support an insurance claim.

4.12. The Documents send to the Issuing Bank By Corresponding Bank

After receiving this document, the corresponding bank carefully checks the documents provided by the exporter against the credit, and if the documents meet all the requirement of the credit, the bank will pay, accept, or negotiate in accordance with the terms and conditions of the credit. Then the bank sends the documents to the L/C opening bank.4.13. Cancellation of L/CsAn irrevocable L/C cannot be cancelled without the agreement of the beneficiary and the confirming bank, if any.

The MBL, Dhanmondi 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, Dhanmondi 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, Dhanmondi 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.4.14. Accounting Treatment for Opening L/C

For opening L/C, importer will apply to the issuing bank. In that case, importer is called applicant or opener. After opening an L/C bank will create a contingent liability. In that case, the accounting posting will be the following:

Customers Liability Dr.

Contingent Liability Cr.

Generally L/C is opened against some margin.

While paying the money by the issuing bank, issuing bank will reverse the above entry and the entry will be:

Contingent Liability Dr.

Customers Liability Cr.

Then the issuing bank will give another entry:

Payment against Document (PAD)

Dr.

MBL General Account Cr.

Exchange Gain Cr.

PAD will debit because the bank will pay the money against some documents. MBL General Account is a miscellaneous account. It will be credited because by this entry MBL creates a liability. He has to pay the money to the advising bank. And the gain made by the transaction is shown at Exchange Gain Account. All these entries are made after receiving some documents from the exporters. The above procedure is called Lodging. After giving the above entry, MBL will inform the clients for collecting the documents from the bank. Importers will pay the due to the bank and collects the documents. In that case, the entry will be :

Party Account Dr.

PAD Account Cr.

After opening the L/C, MBL (issuing bank) must receive the documents for any other proceedings. These documents are :

i. Bill of Lading,

ii. Invoice,

iii. Packing List,

iv. Country of Origin.

Lodgment of the DocumentsAfter receiving the documents from the exporters, at first MBL write it in the PAD Registrar. PAD Register contains date, PAD number, L/C number, and name of the drawer, name of the drawee, amount, and number of copies of various documents, name of the imported items. This written procedure is called Lodgment.

Accounting ApplicationWhile doing lodgment, MBL makes the following entries:

PAD Account Dr.

MBL General Account Cr.

Exchange Gain Account Cr.

MBL makes the payment to the reimbursing bank against the documents. Thats why, it debts the PAD Account.

For payment, MBL deposits the money at the miscellaneous account @ 57.65 (current rate). And sends an Inter Branch Credit Advice (IBCA) to credit the amount to a nostro account maintained in a bank of exporters country from which payment will be made. By this transaction, MBL makes a profit @ 0.15 per dollar.4.15. Retirement of the Documents

The process of collecting documents from bank by the importer is called retirement of the documents. The importer gives necessary instructions to the bank for retirement of the import bills or for the disposal of the shipping documents to clear the imported goods from the customs authority. The importer may instruct the bank to retire the documents by debiting his current account with the bank or by creating Loan against Trust Receipt (LTR). Following steps are taken while retiring the doc