Download - International Trade in Nigeria

©2003 Ernest Dio. All rights reserved.

International Trade in

Nigeria

Presented By:

Ernest Dio

International Banking


What is Int‟l Trade

Trade b/w Nations

Visible Trade

Imports

Exports

Invisible Trade

Services

Education

Medical

Intelectual property rights

Etc.


Why Countries Trade

Natural endowments

Economies of Scale

Transfer of Technologies

Transfer of Cultural/social values

Political tool

Capital flight

Comparative advantage


Major Parties to Int‟l Trade

Importers

Exporters

Banks

Regulators

Insurance Companies

Shipping Companies

Inspection Agencies


Other Parties to Int‟l Trade

Multilateral Institutions – WTO, World Bank, IMF, OECD, WAMA, etc.

Chambers of Commerce

Freight Forwarders

Clearing Agents

Commodity Traders

etc


Risks of Int‟l Trade

Political Risks

Country Risks Language barrier

Laws, Rules & Regulations

Commercial Risks Trade customs & practices

Documentation requirements

Solvency

Financial Risks Inflation

Currencies & currency mgt systems

Payment systems


Foreign Exchange

Foreign currency is any currency, notes & coins other than the Naira & TC denominated in any currency other than in Naira.

FX is any foreign currency and checks, drafts, deposits, promissory notes, credits & balances expressed or drawn in any foreign currency

Foreign Exchange facilitates trade amongst nations


Features of Int‟l Trade in Nigeria

Mono-product economy

Poor attempts to develop other Export areas e.g Iron &

Steel, Solid minerals, food stuff

Decay of the Agric sector

Export Incentive schemes

Foreign Exchange Controls

Poor administration of ports

Cumbersome Clearing Procedures


Nigerian FX - Issues

Mono Product Economy-Oil is major FX earner

Up to early 80s –Nigeria highly rated with access to offshore credit

By 1982 FX crisis set in Oil boom of early 70s increased demand for imports

Capital flight (importation of sand)

White elephant/big brother projects

Shrinking supply of FX due to reduced oil prices

Mismatch b/w supply & demand of FX led to growth of a „black‟ market


Nigerian FX (cont‟d) Removal of external credit due to breakdown of economy

& mounting debts

Exchange controls introduced to achieve internal balance CISS introduced in 1979 –pres shipment decree no. 36

Import licensing

Exchange Control Memorandum (CBN-9th January 1984

Reconciliation of Trade Bills

1986 - 1992 SAP

SFEM/Deregulation

Bidding for FX

1992 – 2002 „Free for all „ FX allocation

Breakdown in CBN‟s ability to meet demand

RE-Regulation

Fixed exchange rate

Guided Deregulation

INTERVENTION


Nigerian FX (cont‟d) 2002 TO DATE

DUTCH AUCTION SYSTEM introduced on 19th July 2002

CBN intervenes twice a week

Customers bid directly through their Bankers

CBN determines amount available for „auction‟

VALUE OF NAIRA OVER TIME

1973 =N=0.64/$1

1980 =N=0.55/$1

1985 =N=0.89/$1

1986 =N=1.00/$1

1987 =N=4.64/$1

2004 =N=133/$1

2005 =N=131/$1

2006 ?


FX (Other Issues)

Actors in the Market CBN

FMF

Authorized dealers

Authorized Buyers

Oil Companies

Non-Oil Exporting companies

Bureaux de change

Principal Regulatory Guidelines FX decree no. 17 of 1995

Foreign Exchange control manual

Exchange control guidelines


Int‟l Trade in Nigeria

(Regulatory Framework) Exchange Control Requirements

Trade Registration – Forms „M‟ & NXP

Comprehensive Import Supervision –CISS

shipment inspection

Inspection exemption list

Import & Export Prohibition Lists

Trade Arrears & L/C collateralization


The Form “M”

An Exchange Control Document

Vital for operation of CISS

A statistical tool

Documentation requirements: Proforma Invoice

Local insurance Certificate

License to practise as a chemist –for pharmaceuticals

Cert. Of Registration of BIZ premises-pharmaceuticals

NAFDAC Permit - Chemicals

NEPA approval - Generators

Life span of 3 months


Detailed Description of Goods on The PFI

Required under Destination Inspection

Generic product name

Mark/Brand name (where applicable)

Model name

model/reference No.

Color of the product (where applicable)

Description of Quality/ Grade/ capacity/ size/ specification of the product

Quantity and packaging and /or packing, measure of content.

Year of manufacture where applicable.


Other issues on The PFI Must not be more than 3 months old

Must not contradict the Form M

Must be signed

Country of Origin and supply indicated

Must be on CFR basis

All items must be listed individually

items like paper must state the grams


NAFDAC CONTROLLED

GOODS

Finished Drugs and cosmetics

Food/food related items

All types of Chemicals.


soncap

RETURN

soncap1.ppt


The Form “M” (Cont‟d)

All imports must be supported by Form M

Form M has a life span of 6 months except

machinery & capital goods which is 1 year

Extension requires CBN approval

Incoterm used must be CFR or CPT

110% Local insurance must be taken

Procedure for Form M Approval


Int’l Trade in Nigeria (Trade Arrears &

L/C collateralization) Large Imports + Small FX = Trade arrears

Large Foreign Debt

Nigeria losses foreign Credit rating

CBN insists on FCY backed L/Cs

CBN bans Bills for collection & Open A/C

Banks/Importers pressurize CBN

CBN allows uncollaterized L/Cs for importation of Raw materials by „1st Class‟ Manuf. companies

CBN grants conditional approval for Bills for Collection transactions

Allows max of 25% advance pymt on L/Cs for machinery

CBN fully liberalizes issuance of uncollateralized L/Cs


Int‟l Trade (Incoterms)

Int‟l Commercial Terms

Used by actors in Int‟l Trade

Define who:

pays cost of each transport segment

Is responsible for loading & unloading of goods

Bears risk of loss at any point

Determines Customs valuation basis


Advance Payment*

Open Account**

Bills for collection (Documentary)

Letters of Credit

Cash on Delivery.etc**

Settlement of Int‟l Trade

(Payment Options)


Settlement of Int‟l Trade TrxnsHIGHEST RISK LEAST RISK

TO EXPORTER TO IMPORTER

- Open Account

- Bills for Collection

-D/A

-D/P

- Letter of Credit

-Unconfirmed

-Confirmed

- Advance Payment

LEAST RISK HIGHEST RISK

TO EXPORTER TO IMPORTER


Letters of Credit (An Intro)

This is the mode of payment by which the majority of international transactions occur. It is a letter written to the seller, signed by the buyer‟s bank. It promises to honor drafts drawn on the bank, if the seller follows the rules set in the letter.

A conditional undertaking by a Bank

Is a payment method, not a sales agreement

Payment for documents not goods or services

Is normally subject to the UCP


Letters of Credit (Cont‟d)

Advantages to the Buyer Seller will only get payment on performance

The buyer may get import financing

Sellers may grant extended payment terms

Docs aid Buyer to minimize risk of getting wrong goods

Risks to the Buyer Banks deal in documents not goods

The L/C is distinct from the underlying sales contract


Letters of Credit (Cont‟d)

Advantages to the Seller Seller does not have to worry about Credit worthiness of buyer

Element of cross border/political risk is reduced

Financing may more easily be obtained

Seller may get immediate Credit thro Negotiation

Risks to the Seller Discrepant documents may lead to non payment

Exposure to commercial risk on Issuing/confirming Bank

Risks to the Bank Default by Applicant

Operational Risk


Letters of Credit (Parties Involved) Applicant

The Buyer/Importer

Beneficiary Supplier/Exporter

Issuing Bank Applicant‟s banker

Advising Bank Buyer‟s banker

Confirming Bank Bank that adds it‟s guarantee to that of the Issuing Bank

Negotiating Bank Bank that discounts docs drawn


Letters of Credit (Types)

Revocable/Irrevocable

Confirmed/unconfirmed

In Both cases the issuing bank has an obligation to pay

Transferrable/Non-transferrable

Red Clause

Stand by

Back to back

Revolving


Letters of Credit (Terms & Conditions)

Drafts

LC Opening Date

Expiration Date

Latest shipment date

Ship from – to

Documents required

Partial shipments

Transhipments

Drafts drawn on


Letters of Credit - Amendments

A change to the terms & conditions of the

L/C after issuance

At instance of Applicant or Bene

Must be acceptable to all parties –

Irrevocable – L/Cs

Must not contravene FX Control

regulations


L/Cs - negotiation & pymt

Bene ships goods & presents docs

Docs may be negotiated by bene‟s bank

Neg. bank checks docs for discrepancies

Neg. Bank fwds docs to issuing bank

Neg bank claims pymt from paying bank

Issuing bank must review docs & revert

within 7 days in case of discrepancies


Letters of Credit - Discrepancies When Docs do not conform with L/C

Bene Can correct docs

Docs can be sent in Trust

Issuing Bank to reject docs

Issuing Bank to get Applicants consent to pay

Regulatory Discrepancies

Contravene FX guidelines

Non Regulatory guidelines

Issuing Bank must revert to paying bank within 7 days


Endorsement of shipping Docs

Docs consigned to order of the Bank

Applicant requests for endorsement

Must use standard format

Passing on of title

Docs endorsed to applicant

Credit approval

Unaccepted discrepancies ?

Final exchange control docs to be submitted within 90 days


Final Exchange Control docs

Evidence that goods arrived Nigeria

Issued by customs & port authorities Gate pass

Tally sheet

Terminal delivery order

Payment schedule

SGD Form

Must be submitted within 90 days of pymt

Defaulters reported to CBN

Defaulters embargoed by CBN


Letters of Credit –Principles &

Theory(1) Contract

BUYER SELLER

(9) Goods (4)

(2) Docs Docs

(8) Debit (5)

(7) Paymt

L/C (6) Letter of

Application Credit

(3)

BUYER'S BANK


L/C Principles & Theory Step 1.

The buyer agrees to purchase goods from the seller.

A purchase order

Accepted pro-forma invoice,

A formal contract,

An informal exchange of messages,

Agreement indicates type of goods, how and when they are to be shipped, and how and when payment is to be effected. (In this case, the agreement is to use a letter of credit as the mechanism of payment.)


L/C Principles & Theory (cont‟d)

Step 2.

The buyer applies to his bank for a letter of

credit, signing the bank‟s letter of credit

application/agreement form.

1st Principle of Letters of Credit: Letters of

Credit are documentary.


L/C Principles & Theory (Cont‟d) Step 3.

After approving the application, the issuing bank issues the actual L/C instrument and sends it to the beneficiary (the seller). Note: There are 3 separate contracts in a letter of credit

transaction:

1. The contract of sale

2. The L/C application/agreement

3. The L/C itself.

Step 4.

Having received the issuing bank‟s assurance of payment, the seller ships the goods to the buyer.


L/C Principles & Theory (Cont‟d)

Step 5.

The seller prepares the documents called for in the letter of credit and presents them to the issuing bank.

Step 6.

The issuing bank examines the documents. If it determines that the documents comply with the letter of credit, the issuing bank pays the beneficiary (seller). 2nd Principle of Letters of Credit: Letters of Credit

are independent of any other contract or obligation.


L/C Principles & Theory (Cont‟d)

Steps 7 & 8.

The issuing bank obtains payment from the applicant (buyer) in accordance with the terms of the applicant‟s L/C agreement and forwards the docs to the applicant. **

Step 9.

The applicant (buyer) uses the documents to pick up the goods from the carrier.


Unconfirmed L/Cs - Last Words Uncollateralised L/Cs

Unconfirmed

Confirmed with Offshore Lines

Pricing Financing Charges

Confirmation Charges

Structure „pure‟ sight confirmation

Sight with usance option

Highest exposure by the Bank


Risk issues

Over Trading

Over invoicing

Fictitious transport documents

Perishable items

Operational risk

Documentation issues


Other Common Trade Finance

Sources Technical Services fees

Personal Home Remittance School fees

Capital Repatriation

BDC Sales Direct sales

PTA/BTA

BDC Funds Transfers Monthly Mortgage Payment

School Fees abroad

Medical Fees abroad

Credit Card Payments

Utility Bills

Life Insurance Premium payment


How to improve TAT Advise customer on Documentation requirements

Check documentation at branch before dispatch

Ensure that funds/Credit approvals are in place and

updated on Finacle

Ensure that documents are dispatched to Head Office on

Time and follow up for evidence of submission

Review daily Reports

Form M ; LC; Funds Transfer; Bills

Note that same day L/C issuance (12 hours) is possible


The RAR process


The E Form M


THANK YOU

Download - International Trade in Nigeria

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