Introduction:
Documentary credit is one of the common international payment methods adopted by companies in Nigeria for the payment of international trade obligations. Many international exporters accept such documents issued by Nigerian banks. These exporters are assuming the risks of the 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 arrangement, however called or described, that is irrevocable and therefore constitutes a definitive commitment by the issuing bank to honor a conforming 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 provided that 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 are able to 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.
Operation of Documentary Credits:
Buyers and seller execute a sales contract and the seller issues a proforma invoice
The buyer completes a form M using the proforma invoice and other documents
The buyer asks the bank to issue the document
It is issued in favor of the Supplier and notified to a foreign bank (Correspondent Bank of the issuing Bank) using cash or line of credit
The Correspondent Bank informs the Seller directly or through the seller’s bank
The seller receives the credit and then ships the goods to the destination prescribed in the credit.
The supplier presents the documents specified in the Credit in the designated bank for payment
The designated bank verifies the documents and, if found in order, sends them to the issuing bank
Designated bank pays seller using cash or line of credit
The issuing bank uses copies of the shipping documents to request the Pre-Arrival Assessment Report (PAAR)
Issuing bank releases documents to Buyer, including PAAR
The buyer pays import duties to the bank that opened the LC and clears the goods from the port, often using a clearing agent.
On or before 90 days after receiving the delivery at the port, the buyer sends the Exchange Control Documents to the issuing bank (45 days for petroleum products)
The transaction is closed.
DOCUMENTARY CREDIT PROCESS FLOW
Any application for a documentary credit transaction in Nigeria must comply with local exchange control regulations by supporting such application with the documents listed below where applicable:
E-Form M (Required)
Proforma Invoice (Required)
Local Insurance Certificate (Required)
Valid Pharmaceutical License (Pharmaceutical Products)
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.)
Current NAFDAC clearance permit (drugs only)
Current permits 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 (SONCAP) Product Certificate (Various
household and industrial items).
Banks often ask applicants for Documentary Credits to complete an Application Form that serves as a contract for the transaction between the buyer and the issuing bank.
The specific terms of this application differ from bank to bank.
FOREIGN CURRENCY SOURCES FOR DOCUMENTARY CREDITS
Documentary Credits qualify for the Official Exchange Window – Weekly Intervention of the Central Bank as well as Interbank Funds.
However, importers can use the balances of their Domiciliary Account to finance their Documentary Credit transactions.
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, Yens, etc.) will use the Central Bank Dollars to purchase these third currencies from the credit issuing bank.
When the importer finances only the documentary credit, 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 to cover the credit in cash, since the issuing bank cannot keep the funds.
The funds purchased from the Central Bank must be used to constitute or pay the Documentary Credit within three days following the date of receipt of the funds.
Unapplied funds must be returned to allow the Central Bank to repurchase and return the local currency to the importer
The currencies of the Central Bank are cheaper than those of the interbank market.