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
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
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
Removal of external credit due to breakdown of economy & mounting debts Exchange controls introduced to achieve internal balance
Nigerian FX (cont‟d)
CISS introduced in 1979 –pres shipment decree no. 36 Import licensing Exchange Control Memorandum (CBN-9th January 1984 Reconciliation of Trade Bills
SAP
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 ?
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
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.
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
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 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
Settlement of Int‟l Trade Trxns
HIGHEST RISK TO EXPORTER - Open Account - Bills for Collection -D/A -D/P - Letter of Credit -Unconfirmed -Confirmed - Advance Payment LEAST RISK 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
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
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
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.)
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).
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