Import & Export Financing

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IMPORT FINANCING

Background
Like other developing countries, Pakistan’s import bill exceeds exports. Therefore, it faces scarcity of foreign exchange to meet its import requirements. According to daily “DAWN” dated 18th November 2012, Pakistan’s foreign exchange reserves were USD 13.84 Billion at the week ended as on 9th November 2012.

Gap between the import and export bills is partially covered by regulations, controls and measures exercised by State Bank of Pakistan and partially by the international credit, aid, loan agencies like International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB). State Bank of Pakistan keeps control at a time, over this imbalance by imposing cash margin restrictions on import of general items from time to time. This is done in order to restrict imports and to allow import of only necessary items to fulfill genuine requirements and to discourage import of non-commercial and luxury items.

CASE STUDY: On 1st February 2012, restriction on import of CNG cylinders and kits was imposed by Government of Pakistan in view of government policy to discourage use of CNG as a fuel due to its short supply and ever rising demand. No importer is allowed to import CNG cylinders & kits up till now which is being restricted by SBP & custom authority.

Foreign trade involves many risks because of different locations /countries of importer and exporter. Both the parties are doing their businesses in different countries where different laws & regulations apply and it is difficult to settle any dispute regarding goods quality and payment settlement between importer and exporter. For safeguarding interest of both importer and exporter, banks involve in these transactions for smooth settlement between the parties.

IMPORTERS
Any body who imports the required goods into the country is called an importer. The importer has to pay the exporter for the value of goods in foreign exchange.

Importers are classified into three categories:
i) Commercial sector importer i-e. a firm, institution, organization, person or group of persons registered as an importer is called commercial importer. ii) Industrial sector importer i-e. any industrial unit which is registered as importer comes under this category. iii) Public sector importers i-e. the organizations owned by the government which import capital / consumer commodities as per their requirement. Usually, these organizations are not registered as regular importer and their requests for opening letter of credit is routed through SBP.

Letter of Credit (L/C)
Letter of Credit is a written undertaking by a bank given to the seller/exporter (beneficiary) at the request and instructions of the buyer/importer (applicant) to pay at sight or at a determinable future date a stated sum of money against the required documents. The documents include commercial invoice, certificate of origin, transport document relating to the mode of transport used (Airway Bill, Bill of Lading, Railway Receipt, Truck Receipt, etc.) and other documents required as per terms of letter of credit.

Parties to Letter of Credit

In documentary credit operations, maximum number of parties involved are as under: i) Applicant (Opener of L/C):
The applicant of a credit is an importer or buyer who requests his bank to issue documentary credit in favor of the seller /exporter. ii) Issuing Bank (Opening Bank):
The issuing bank is also called importer’s bank. At the request of the applicant, this bank issues the credit in accordance with the instructions of the applicant in favor of the exporter. The letter of credit is sent to the bank in the exporter/seller’s country. iii) Advising Bank:

Advising bank is also known as transmitting or correspondent bank in the seller’s country. Issuing bank forwards the advice of the credit by mail or by any means of tele-transmission (i-e. cable, telex, SWIFT, etc.) to a correspondent...
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