Introduction:
Documentary credit is one of the common international payment methods adopted by companies in Nigeria for the settlement of international commercial obligations. Many international exporters accept such documents issued by Nigerian banks. These exporters are assuming the risks of local banks, while others require confirmation from other ‘international banks’ based in Europe, North America, among others, for some of the local Documentary Credits.
Nigerian banks comply with the provisions of the International Chamber of Commerce Rules for Documentary Credits (ICC Publication Number 600, 2007 edition). This defines a credit as: “Any agreement, regardless of its name or description, that is irrevocable and, therefore, constitutes a definitive commitment by the issuing bank to comply with a compliant presentation”.
In other words, this document can be seen as a commitment made by a bank on behalf of its client to pay the seller of goods / services a certain amount of money as long as the seller presents the documents required by the credit and complies with other terms and conditions. specified. in it within the prescribed time.
Many local importers like this arrangement because:
They can obtain bank financing using this instrument.
They are sure that their bank will not pay the seller unless all the terms and conditions of the Credit are met. The buyer can control the quality and quantity of the goods by requesting certain documents under the credit.
The importer can obtain credit from the exporter as the exporter will bear the risk of the issuing bank instead of the importer.
Your transactions are eligible for the official foreign exchange market, which is a cheaper source of foreign exchange.
Elaboration of Documentary Credits:
The buyers and the seller execute a sales contract and the seller issues a proforma invoice
Buyer completes Form M using proforma invoice and other documents
The buyer requests the bank to issue the document.
It is issued in favor of the Provider and a foreign bank (Correspondent Bank of the issuing Bank) is notified by cash or credit line.
The correspondent bank advises the seller directly or through the seller’s bank.
The Seller receives the Credit and then sends the merchandise to the destination prescribed in the Credit.
The Supplier presents the documents specified in the Credit at the bank designated for payment.
The designated bank verifies the documents and, if it finds them in order, forwards them to the issuing bank.
The designated bank pays the seller using cash or line of credit
The issuing bank uses copies of the shipping documents to request the Pre-Arrival Assessment Report (PAAR)
Issue bank release documents to the Buyer, including the PAAR
The buyer pays the import duties to the bank that opened the LC and will clear the goods from the port often using a clearing agent.
On or before 90 days after receiving the delivery from the port, the buyer sends the exchange control documents to the issuing bank (45 days for petroleum products)
The transaction is closed.
FLOW OF THE DOCUMENTARY CREDIT PROCESS
Any request for a Document Credit transaction in Nigeria must comply with local exchange control regulations by supporting such request with the documents listed below, where applicable:
Electronic form M (required)
Proforma invoice (mandatory)
Local insurance certificate (required)
Current Pharmaceutical License (Pharmaceuticals)
Valid pharmaceutical license for registration / retention of premises (Pharmaceutical Products)
Current permit from the National Agency for Food and Drug Administration and Control (NAFDAC) (chemicals, food, beverages, etc.)
Valid NAFDAC Authorization Permit (Medication Only)
Current permit from the National Electricity Regulatory Agency (generators only)
Current permit from the Department of Petroleum Resources (DPR) (petroleum products)
Current certificate from the Department of Petroleum Resources (DPR)
for storage facility / tank farm (petroleum products)
Standard organization approved in accordance with Nigeria
Evaluation Program Product Certificate (SONCAP) (various
Household and industrial items).
Banks often ask applicants for documentary credits to complete an application form that serves as the contract for the transaction between the buyer and the issuing bank.
The specific terms of this application differ from bank to bank.
SOURCES OF CHANGE IN DOCUMENTARY CREDITS
Documentary Credits qualify for the official currency exchange window: the weekly intervention of the Central Bank and interbank funds.
However, importers can use their home account balances to fund their letter of credit transactions.
The Central Bank intervention is available only in US dollars and occurs every Monday and Wednesday of the week.
Importers with invoices in third currencies (Euros, Pounds, Yen, etc.) will use the Central Bank’s Dollars to buy these third currencies from the issuing bank of the loan.
When the importer is financing the Documentary Credit alone, the issuing bank will require the importer to provide the local currency equivalent of the value of the Proforma Invoice before the credit is established.
The foreign currency will be sent to the confirming bank for the cash to cover the credit, as the issuing bank cannot keep the funds.
The funds purchased from the Central Bank must be used to establish or pay the Documentary Credit within three days after the date the funds were received.
Unapplied funds must be returned to allow the Central Bank to buy back and return the local currency to the importer.
The Central Bank’s foreign currency is cheaper than that of the interbank market.