MONETARY DOCUMENTS OF FOREIGN TRADE | @gwillchrist

Foreign trade involves two or more countries, which implies that two or more currencies are involved. When goods are imported, importer must pay the exporter. Some monetary documents are used in payment for goods in foreign trade. These different monetary documents of payment differ in speed.

It is a letter of instruction or order from an importer’s bank to its foreign branch or agent sent by ordinary mail or air mail to pay a specific amount of money to the account of the exporter or named beneficiary. Mail transfer is slow because of the method of transfer of the letter.

Documentary credit is a letter that authorises the bank to make payment as soon as it receives evidence that the goods have been dispatched. Letter of credit is commonly used than documentary credit. This is the exporters most satisfactory method of payment.

Letter of credit is a financial statement report of the importer sent through his/ her bank to the exporter indicating that the importer has sufficient credit in his/ her account to cover for the stated importation once the necessary documents are received by the bank. There are three types of letter of credit, which are revocable letter of credit, irrevocable letter of credit and confirmed irrevocable letter of credit.

Letter of hypothecation is a letter that authorises the bank to obtain and sell

Goods originally consigned to an importer who has default in payment. When goods are sent to an importer who after shipment can no longer pay for them, the importer can authorise a local bank to obtain the goods and sell on his/her behalf.

The Bill of Exchange Act (1882) defines bill of exchange as an unconditional order in writing addressed by one person to the other,signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a certain sum of money to a specified person orbearer. Bill of exchange is an unconditional assurance from the exporter that the importer will make payment within specific period of time.

This is a cheque issued by a bank to someone travelling aboard to enable him/ her obtain the local currency of a specific country. Travellers’ cheque enables businessmen to settle their indebtedness in foreign countries. It is often issued on round sum and therefore small may not likely use it.

It is a letter of instruction or order from an importer’s bank to its foreign counterpart

By telegram or cablegram to pay a specific amount of money to the account of the exporter or beneficiary. The account of the exporter is credited by the foreign bank, while the importer’s account will be debited. Telegraphic transfer is faster because the letter is sent by telegram or cablegram.