INTRODUCTION 1. 1 BACKGROUND The spree of economic integration process has inflated the trade volumes dramatically during the last few decades. And here international trade consequently demonstrates the extent of globalization with increased spatial interdependencies amongst the participants of the global economy and their level of integration. The volume of exchanged goods and services between the nations is taking a growing share in generating wealth, mainly by offering economic growth opportunities in new egions and by reducing the costs of procurement for a wide array of trade bales.

The initiatives under the rubric of multilateralism by the WTO, the bilateral as well the regional agreements popularly known as the PTAs, gargantuan efforts undertaken by the ICC to simplify the trade procedures and practices, tremendous emphasis on external sector liberalization proposed by the think tanks and business community compelling the policy makers across the globe to go for opening up-all these worked as the pertinent catalysts for huge surge in trade volumes. Now, the international trade continues to grow every year as nations expand their global trade and new nations are Joining.

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In these ever-increasing trade transactions, trade payment is particularly very important. In international transactions, securing payments might be affected by a number of factors such as the relative strength of the counterparties, credibility of the traders as well as the domestic regulatory requirements. Most important among them are the potential risks and costs which the exporters and the importers are willing to share between them. To succeed in todays global marketplace, exporters must offer their customers attrac tive sales terms supported by the appropriate payment method to win over the foreign competitors.

The risks and costs of todays global payment system, associated in international trade transactions have been exerting pressure on the trade volumes. It calls for an assessment of the various aspects of international trade payment methods based upon which the trade payment related financial services have developed and expanded by banks to support the expansion of world trade. Traders commonly believe that the major international banks are the primary providers of these services. There are four trade payment methods. Among the international trade payment methods ‘Documentary credit’ is the most vastly practiced one.

Apart from ‘Documentary credit’, there are three other international trade payment methods and they are ‘Cash in advance’, ‘Open account’ and ‘Documentary collection’. This method of financing trade has been developed over the years to provide the maximum benefit to both Buyer and Seller by removing the corporate risk of payment and the gain, two banks between the contracting parties and those banks deal solely in the documents as presented under the Letter of Credit without being influenced by the goods or the underlying contract.

As per a research conducted by two prominent international trade payment specialists of Bangladesh Institute of Bank Management (BIBM), around 88% of international trade transactions in Bangladesh conducted through the method ‘Documentary credit’, this is true in respect of both transaction volume and monetary value of trade. The features of ‘Documentary credit’ also make ome strong points in the support of the extensive use of this method. “Documentary credit” is the most convenient international trade payment method among the trade payment methods for exporters, importers and bankers.

As result it is also very important to identify the risks associated with “Documentary Credit” operation and the ways of mitigating risks arises from the activities of different parties involved in operation. For smooth international trade transactions it’s essential to have a safe and sound practice. For this we need to identify the deviations in practice from the ecommended process and this comparison will be done on the basis of documentation, compliance with regulatory guidelines, dispute resolution, roles of different parties and documents acceptance and rejection process. . 2 OBJECTIVES “Documentary credit” is the most vastly practiced international trade payment method. In case of its operation bankers need to follow some rules and regulations provided by international authorities such as ICC and the central bank of the country where the bank resides. Apart from compliance with regulatory guidelines bankers eed to consider the risks associated with “Documentary credit” operations. Risks can arise in any step of operations and by the activities of any of the parties involved in this process.

For identifying the risks we need to analyze the operational procedure of “Documentary credit”, roles of different parties, regulatory guidelines and required documents. The objectives of the study are listed below: i. To discuss concepts and operational aspects of Documentary credit. it. To discuss domestic and international regulations applicable for Documentary credit. ii. To identify and examine different documents and risks associated with Documentary credit process. ‘v. To analyze operational procedure and relevant issues in connection with the use of Documentary credit in BD. . 3 METHODOLOGY It is an “Analytic Research”, so here I’ll use facts or information already available, and analyzes these to make a critical evaluation of the material. Here the available information indicates secondary data which is already available in several Medias such as internet, publications, related books and Journals. This will fulfill the purpose of identifying and analyzing the standard operational procedure of the method. In this paper, objectives also demand the analysis of the practice of “Documentary illustrated without raw data interpretation.

Hence, to accomplish stated objectives it is mandatory to collect, organize, analyze, present and interpret both primary and secondary data. For collecting secondary data, internet, publications, Journals and text books will be the sources. Official websites of BIS, ICC and BB will be emphasized as sources of secondary data. Although, different Journals of ITPF specialists, will be studied and in some cases will be followed to address the risks associated with operations of the trade payment method.

Apart from these, related text books will also be conducted to get adequate knowledge regarding the recommended process. Again for accomplishing the last objective “Determine the transaction volume of different banks’, I’ll need to use some statistical data presentation tools such as bar diagram. It’ll help me to illustrate comparison data of different banks in an easily understandable way. The reason is to make a crystal clear view. 1. 4 ORGANIZATION of THE REPORT This paper has been segregated into several chapters.

Each chapter illustrates the objectives stated in the previous portion of this paper. The immediate next chapter of this report contains the involvement of the related parties of Documentary credit process and also the documents required in Documentary credit operation. This chapter also covers the operational procedure of Documentary credit. The third chapter covers different regulatory frameworks that have direct influence on the peration of this trade payment method.

In this chapter, the regulations are described in a brief manner. Here both domestic and international regulations are covered. Now the fourth chapter of this report, it contains some relevant issues and risks associated with Documentary credit operations. Here some cases are incorporated along with their possible solutions. The last chapter of this report contains the observations from the research. DOCUMENTARY CREDIT: INVOLVEMENT and ROLE of DIFFERENT PARTIES and DOCUMENTS


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