International Trade in Nigeria

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A presentation on International Trade practice in Nigeria by Ernest Dio

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<p>International Trade in Nigeria</p> <p>Presented By: Ernest Dio International Banking</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>What is Intl Trade</p> <p>Trade b/w Nations</p> <p>Visible Trade </p> <p>Imports Exports</p> <p>Invisible Trade</p> <p>Services </p> <p>Education Medical Intelectual property rights Etc.</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>Why Countries Trade </p> <p>Natural endowments Economies of Scale Transfer of Technologies Transfer of Cultural/social values Political tool Capital flight Comparative advantage2003 Ernest Dio. All rights reserved.</p> <p>Major Parties to Intl Trade</p> <p>Importers Exporters Banks Regulators Insurance Companies Shipping Companies Inspection Agencies</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>Other Parties to Intl Trade </p> <p>Multilateral Institutions WTO, World Bank, IMF, OECD, WAMA, etc. Chambers of Commerce Freight Forwarders Clearing Agents Commodity Traders etc2003 Ernest Dio. All rights reserved.</p> <p>Risks of Intl Trade</p> <p>Political Risks Country Risks </p> <p>Language barrier Laws, Rules &amp; Regulations</p> <p>Commercial Risks </p> <p>Trade customs &amp; practices Documentation requirements Solvency</p> <p>Financial Risks </p> <p>Inflation Currencies &amp; currency mgt systems Payment systems2003 Ernest Dio. All rights reserved.</p> <p>Foreign Exchange</p> <p>Foreign currency is any currency, notes &amp; coins other than the Naira &amp; TC denominated in any currency other than in Naira. FX is any foreign currency and checks, drafts, deposits, promissory notes, credits &amp; balances expressed or drawn in any foreign currency</p> <p>Foreign Exchange facilitates trade amongst nations2003 Ernest Dio. All rights reserved.</p> <p>Features of Intl Trade in Nigeria</p> <p>Mono-product economy Poor attempts to develop other Export areas e.g Iron &amp; Steel, Solid minerals, food stuff Decay of the Agric sector Export Incentive schemes Foreign Exchange Controls Poor administration of ports Cumbersome Clearing Procedures</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>Nigerian FX - Issues</p> <p>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 </p> <p>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</p> <p>Mismatch b/w supply &amp; demand of FX led to growth of a black market2003 Ernest Dio. All rights reserved.</p> <p>Removal of external credit due to breakdown of economy &amp; mounting debts Exchange controls introduced to achieve internal balance </p> <p>Nigerian FX (contd)</p> <p>CISS introduced in 1979 pres shipment decree no. 36 Import licensing Exchange Control Memorandum (CBN-9th January 1984 Reconciliation of Trade BillsSAP </p> <p>1986 - 1992</p> <p>SFEM/Deregulation Bidding for FX</p> <p>1992 2002 </p> <p>Free for all FX allocation Breakdown in CBNs ability to meet demand RE-Regulation Fixed exchange rate Guided Deregulation INTERVENTION2003 Ernest Dio. All rights reserved.</p> <p>Nigerian FX (contd)</p> <p>2002 TO DATE </p> <p>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</p> <p>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 ?</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>FX (Other Issues)</p> <p>Actors in the Market </p> <p>CBN FMF Authorized dealers Authorized Buyers Oil Companies Non-Oil Exporting companies Bureaux de change</p> <p>Principal Regulatory Guidelines </p> <p>FX decree no. 17 of 1995 Foreign Exchange control manual Exchange control guidelines</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>Intl Trade in Nigeria (Regulatory Framework) </p> <p>Exchange Control Requirements Trade Registration Forms M &amp; NXP Comprehensive Import Supervision CISS</p> <p>shipment inspection</p> <p>Inspection exemption list</p> <p>Import &amp; Export Prohibition Lists Trade Arrears &amp; L/C collateralization2003 Ernest Dio. All rights reserved.</p> <p>The Form M</p> <p>An Exchange Control Document Vital for operation of CISS A statistical tool Documentation requirements: </p> <p>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</p> <p>Life span of 3 months2003 Ernest Dio. All rights reserved.</p> <p>Detailed Description of Goods on The PFI </p> <p>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</p> <p>Quantity and packaging and /or packing, measure of content.</p> <p>Year of manufacture where applicable.2003 Ernest Dio. All rights reserved.</p> <p>Other issues on The PFI</p> <p>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</p> <p>items like paper must state the grams</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>NAFDAC CONTROLLED GOODS </p> <p>Finished Drugs and cosmetics Food/food related items All types of Chemicals.</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>soncap</p> <p>RETURN</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>The Form M (Contd) </p> <p>All imports must be supported by Form M Form M has a life span of 6 months except machinery &amp; 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 Approval2003 Ernest Dio. All rights reserved.</p> <p>Intl Trade in Nigeria (Trade Arrears &amp; L/C collateralization) </p> <p>Large Imports + Small FX = Trade arrears Large Foreign Debt Nigeria losses foreign Credit rating </p> <p>CBN insists on FCY backed L/Cs CBN bans Bills for collection &amp; Open A/C CBN allows uncollaterized L/Cs for importation of Raw materials by 1st Class Manuf. companiesCBN grants conditional approval for Bills for Collection transactions Allows max of 25% advance pymt on L/Cs for machinery</p> <p>Banks/Importers pressurize CBN </p> <p>CBN fully liberalizes issuance of uncollateralized L/Cs2003 Ernest Dio. All rights reserved.</p> <p>Intl Trade (Incoterms) </p> <p>Intl Commercial Terms Used by actors in Intl Trade Define who: </p> <p>pays cost of each transport segment Is responsible for loading &amp; unloading of goods Bears risk of loss at any point</p> <p>Determines Customs valuation basis2003 Ernest Dio. All rights reserved.</p> <p>Settlement of Intl Trade (Payment Options) </p> <p>Advance Payment* Open Account** Bills for collection (Documentary) Letters of Credit Cash on Delivery.etc**</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>Settlement of Intl Trade TrxnsHIGHEST RISK TO EXPORTER - Open Account - Bills for Collection -D/A -D/P - Letter of Credit -Unconfirmed -Confirmed - Advance Payment LEAST RISK TO IMPORTER</p> <p>LEAST RISK TO EXPORTER</p> <p>HIGHEST RISK TO IMPORTER2003 Ernest Dio. All rights reserved.</p> <p>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 buyers bank. It promises to honor drafts drawn on the bank, if the seller follows the rules set in the letter. </p> <p>A conditional undertaking by a Bank Is a payment method, not a sales agreementPayment for documents not goods or services</p> <p>Is normally subject to the UCP2003 Ernest Dio. All rights reserved.</p> <p>Letters of Credit (Contd)</p> <p>Advantages to the Buyer </p> <p>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</p> <p>Risks to the Buyer </p> <p>Banks deal in documents not goods The L/C is distinct from the underlying sales contract</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>Letters of Credit (Contd)</p> <p>Advantages to the Seller </p> <p>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</p> <p>Risks to the Seller </p> <p>Discrepant documents may lead to non payment Exposure to commercial risk on Issuing/confirming Bank</p> <p>Risks to the Bank </p> <p>Default by Applicant Operational Risk2003 Ernest Dio. All rights reserved.</p> <p>Letters of Credit (Parties Involved) </p> <p>Applicant</p> <p>The Buyer/Importer</p> <p>Beneficiary</p> <p>Supplier/Exporter</p> <p>Issuing Bank</p> <p>Applicants bankerBuyers banker</p> <p>Advising Bank</p> <p>Confirming Bank</p> <p>Bank that adds its guarantee to that of the Issuing Bank</p> <p>Negotiating Bank</p> <p>Bank that discounts docs drawn2003 Ernest Dio. All rights reserved.</p> <p>Letters of Credit (Types)</p> <p>Revocable/Irrevocable Confirmed/unconfirmed</p> <p>In Both cases the issuing bank has an obligation to pay</p> <p>Transferrable/Non-transferrable Red Clause Stand by Back to back Revolving</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>Letters of Credit (Terms &amp; Conditions)</p> <p>Drafts LC Opening Date Expiration Date Latest shipment date Ship from to Documents required Partial shipments Transhipments Drafts drawn on2003 Ernest Dio. All rights reserved.</p> <p>Letters of Credit - Amendments </p> <p>A change to the terms &amp; 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 regulations2003 Ernest Dio. All rights reserved.</p> <p>L/Cs - negotiation &amp; pymt </p> <p>Bene ships goods &amp; presents docs Docs may be negotiated by benes 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 &amp; revert within 7 days in case of discrepancies2003 Ernest Dio. All rights reserved.</p> <p>Letters of Credit - Discrepancies </p> <p>When Docs do not conform with L/C Bene Can correct docs Docs can be sent in Trust</p> <p>Issuing Bank to reject docs Issuing Bank to get Applicants consent to pay Contravene FX guidelines</p> <p>Regulatory Discrepancies</p> <p>Non Regulatory guidelines Issuing Bank must revert to paying bank within 7 days2003 Ernest Dio. All rights reserved.</p> <p>Endorsement of shipping Docs</p> <p>Docs consigned to order of the Bank Applicant requests for endorsement</p> <p>Must use standard format</p> <p>Passing on of title Docs endorsed to applicant </p> <p>Credit approval Unaccepted discrepancies ?</p> <p>Final exchange control docs to be submitted within 90 days2003 Ernest Dio. All rights reserved.</p> <p>Final Exchange Control docs </p> <p>Evidence that goods arrived Nigeria Issued by customs &amp; port authorities </p> <p>Gate pass Tally sheet Terminal delivery order Payment schedule SGD Form</p> <p>Must be submitted within 90 days of pymt Defaulters reported to CBN Defaulters embargoed by CBN2003 Ernest Dio. All rights reserved.</p> <p>Letters of Credit Principles &amp; Theory(1) Contract</p> <p>BUYER (9) Goods (2) Docs (8) Debit (7) (4)</p> <p>SELLER Docs (5) Paymt (6) (3) BUYER'S BANK Letter of Credit</p> <p>L/C Application</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>L/C Principles &amp; Theory</p> <p>Step 1. The buyer agrees to purchase goods from the seller. </p> <p>A purchase order Accepted pro-forma invoice, A formal contract, An informal exchange of messages,</p> <p>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.)</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>L/C Principles &amp; Theory (contd) </p> <p>Step 2. The buyer applies to his bank for a letter of credit, signing the banks letter of credit application/agreement form.</p> <p>1st Principle of Letters of Credit: Letters of Credit are documentary.</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>L/C Principles &amp; Theory (Contd)</p> <p>Step 3. After approving the application, the issuing bank issues the actual L/C instrument and sends it to the beneficiary (the seller). </p> <p>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.</p> <p>Step 4. Having received the issuing banks assurance of payment, the seller ships the goods to the buyer.2003 Ernest Dio. All rights reserved.</p> <p>L/C Principles &amp; Theory (Contd)</p> <p>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).</p> <p>2nd Principle of Letters of Credit: Letters of Credit are independent of any other contract or obligation.2003 Ernest Dio. All rights reserved.</p> <p>L/C Principles &amp; Theory (Contd) </p> <p>Steps 7 &amp; 8. The issuing bank obtains payment from the applicant (buyer) in accordance with the terms of the applicants 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.2003 Ernest Dio. All rights reserved.</p> <p>Unconfirmed L/Cs - Last Words</p> <p>Uncollateralised L/Cs</p> <p>Unconfirmed Confirmed with Offshore LinesFinancing Charges Confirmation Charges pure sight confirmation Sight with usance option</p> <p>Pricing</p> <p>Structure </p> <p>Highest exposure by the Bank2003 Ernest Dio. All rights reserved.</p> <p>Risk issues </p> <p>Over Trading Over invoicing Fictitious transport documents Perishable items Operational risk</p> <p>Documentation issues</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>Other Common Trade Finance Sources </p> <p>Technical Services fees Personal Home Remittance School fees Capital Repatriation BDC Sales </p> <p>Direct sales PTA/BTA BDC Funds Transfers</p> <p>Monthly Mortgage Payment School Fees abroad Medical Fees abroad Credit Card Payments Utility Bills Life Insurance Premium payment</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>How to improve TAT </p> <p>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</p> <p>Form M ; LC; Funds Transfer; Bills</p> <p>Note that same day L/C issuance (12 hours) is possible</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>The RAR process</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>The E Form M</p> <p>2003 Ernest Dio. All rights reserved.</p> <p>THANK YOU2003 Ernest Dio. All rights reserved.</p>