Introduction:
Documentary Credit is one of the common international payment methods adopted by companies in Nigeria for the settlement of international trade obligations. Very many international exporters accept such documents issued by Nigerian banks. These exporters are taking the risks of local banks while others require the confirmation of other 'international banks' based in Europe, North America among others for some of the local Documentary Credits.
Nigerian Banks comply with the provisions of International Chamber Of Commerce Rules for Documentaries Credits (ICC Publication Number 600, 2007 edition). This defines a Credit as: 'any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation'.
In other words, this document can be seen as a commitment given by a bank on behalf of its customer to pay the seller of goods/services certain amount of money provided the seller presents documents called for under the credit and meets other terms and conditions specified therein within prescribed time.
Many local importers like this arrangement because:
They are able to get bank funding using this instrument
They are sure that their bank will not pay the seller unless all terms and conditions of the Credit are complied with The buyer can control the quality and quantity of goods by calling for certain documents under the credit
Importer can obtain credit from the exporter since the exporter will be taking the risk of the issuing bank instead of that of the importer
Its transactions are eligible for official foreign exchange market which is a cheaper source of foreign exchange
Working of Documentary Credits:
Buyers and Seller execute a sales contract and Seller issues a Proforma Invoice
Buyer completes a Form M using the Proforma Invoice and other documents
Buyer applies to the bank to issue the document
It is issued in favour of the Supplier and advised to a foreign bank (Correspondent Bank of the issuing Bank) using cash or credit line
Correspondent Bank advises Seller directly or through seller's bank
Seller receives the Credit and thereafter ships the goods to destination prescribed in the Credit
Supplier presents the documents specified in the Credit on the nominated bank for payment
Nominated Bank checks the documents and if found in order, forwards them to the issuing bank
Nominated Bank pays the Seller using cash or credit line
Issuing Bank uses copies of the Shipping Documents to apply for Pre-Arrival Assessment Report (PAAR)
Issuing bank releases documents to the Buyer including the PAAR
Buyer pays import duty to the bank that opened the LC and goes to clear the goods from the port often using a Clearing Agent
On or before 90 days after taking delivery from the port, buyer sends Exchange Control Documents to the issuing bank (45days for Petroleum Products)
Transaction is closed.
DOCUMENTARY CREDIT PROCESS FLOW
Any request for a Documentary Credit transaction in Nigeria must comply with local exchange control regulations by supporting such application with the under listed documents where applicable:
E-Form M (Mandatory)
Proforma Invoice (Mandatory)
Local Insurance Certificate (Mandatory)
Current Pharmaceutical License (Pharmaceutical Products)
Current pharmaceutical License for registration / retention of premises (Pharmaceutical Products)
Current National Agency For Food, Drugs Administration and Control (NAFDAC) Permit (Chemicals, Food, Drink, etc)
Current NAFDAC Clearance Permit (Drugs only)
Current National Electricity Regulatory Agency permit (Generators only)
Current Department of Petroleum Resources (DPR) Permit (Petroleum Products)
Current Department of Petroleum Resources (DPR) Certificate
for Storage Facility / Tank Farm(Petroleum Products)
Endorsed Standard Organization Of Nigeria Conformity
Assessment Programme (SONCAP) Product Certificate (Various
Household and Industrial items).
Banks usually ask Documentary Credits applicants to complete an Application Form which 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.
SOURCES OF FOREIGN EXCHANGE FOR DOCUMENTARY CREDITS
Documentary Credits qualify for the official foreign exchange window - Central Bank weekly intervention as well as Inter-bank funds.
Importers can however use their Domiciliary Account balances to fund their Documentary Credit transactions.
The Central Bank intervention is made available in United States Dollars only and happens every Monday and Wednesday of the week
Importers with invoices in third currencies (Euros, Pounds, Yen, etc) will use the Dollars from the Central Bank to purchase these third currencies from the bank issuing the credit
Where the importer is funding the Documentary Credit alone, the issuing bank will require the importer to provide local currency equivalent of the Proforma Invoice value before the credit is established
The foreign currency will be sent to the confirming bank to cash cover the credit as the issuing bank is not allowed to keep the funds
Funds purchased from the Central Bank must be used to establish or pay on the Documentary Credit within three days from date funds were received.
Funds not applied must be returned to enable Central Bank repurchase and return local currency to the importer
Foreign currency from the Central Bank is cheaper than that from inter-bank market.