Introduction to documentary credits in Nigeria
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 local banks, while others require confirmation from other ‘international banks’ based in Europe, North America, among others, for some of the local Letters of Credit.
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, by whatever name or description, which is irrevocable and therefore constitutes a final undertaking by the issuing bank to honor a conforming presentation’.
In other words, this document can be seen as a commitment 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 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 since 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 an M form using the proforma invoice and other documents
The buyer requests the bank to issue the document
It is issued in favor of the Supplier and a foreign bank (Correspondent Bank of the issuing Bank) is notified using cash or a 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 at the designated bank for payment
The designated bank verifies the documents and, if found to be in order, forwards them to the issuing bank
The designated bank pays the seller using cash or line of credit
Copies of shipping documents are used by the issuing bank to request the Pre-Arrival Assessment Report (PAAR)
The issuing bank releases documents to the Buyer, including the PAAR
The buyer pays 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 receipt of delivery at port, Buyer submits Exchange Control Documents to issuing bank (45 days for petroleum products)
The transaction is closed.
FLOW OF THE DOCUMENTARY CREDIT PROCESS
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 (Mandatory)
Current Pharmaceutical License (Pharmaceutical Products)
Current 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 usually ask Documentary Credit applicants 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 request differ from bank to bank.
SOURCES OF CURRENCY 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.
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 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 pro forma invoice value before credit is established.
The foreign currency will be sent to the confirming bank to cover the cash credit, as 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.