International Trade

and
Trade Service Operation

Prepared by - Commercial Bank of Ethiopia

Trade Service Advisory and Training

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 INTRODUCTION

This training program is launched to provide knowledge on international trade, trade service
products and services, applicable rules and regulations in the process of international
banking practices of the Commercial Bank of Ethiopia (CBE).
We hope, you will benefit from the training and will enjoy your stay with us.

Content
I. International trade and its operations
 What is an International Trade?
 International Trade Facilitators
 Modes of Payment in International Trade
 Documents in International Trade
 Governing Rules in International Trade
 INCOTERMS

II. Trade Service and its Products

 TS – Import
 TS – Export
 TS – Guarantee

Definition
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 • Trade
– Exchange of goods/ services between buyer and seller by payment
• International Trade
– Trade between nations
• Import
– Purchase goods/services from abroad by payment (FCY)
• Export
– Selling /sending abroad/ of goods/ services by payment (FCY)

What is an International Trade?

Exchange of goods and services cross-frontier (between several political economics) and its flow of goods
from seller to buyer in accordance with the contract of sale and the consequential flow of payment from
buyer to seller.

International Trade Facilitators

International trade facilitators are the essential bodies needed to smooth the flow of goods and payments
between buyers and sellers. As the nature of the trade needs special attention the role played by these
facilitators are of great importance. They are categorized as:-

Financial Institution
• Banks
• Facilitates payment, avails finance and gives professional advice
• Insurance
• Gives cover to different types of risks involved in the trade
Transport Companies
• Airlines
• Shipping lines
• Courier service
• Postal office
• Land and rail way transport companies
Agents
• Commission Agent that identifies markets
• Clearing Agent/Forwarding Agent

Methods/ modes of payment in international trade ?

• Cash in Advance/Advance payment
• Consignment Basis Payment
• Open Account
• Documentary Collection
• Documentary /Letter of Credit

Cash in Advance/Advance payment

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• The method of payment where the seller receives payment from the buyer prior to shipment or
rendering of service.
• This mode payment is used between business partners having trust or otherwise against guarantee

Consignment Basis Payment

A mode of payment where the supplier ships the goods to the agent retaining ownership. The agent is
responsible for paying the supplier if and only when the goods are sold.
In our case this mode of payment is allowed for perishable items and other as per NBE approval.

Open Account
A mode of payment where supplier ships goods and sends shipping documents to the buyer and payment
will be made by the transfer to the supplier’s account as per their agreed time for payment.

Documentary Collection
A mode of payment where exporter ship the goods prior to receiving payment and give instruction for
handling of documents (financial and/or commercial) to his bank. Documents and funds are transferred
through banks as per the instruction of the exporter.

As per URC 522 art. 2 (definition)

"Collection" means the handling by banks of documents as defined in sub-Article 2(b), in accordance with
instructions received, in order to: 
1) obtain payment and/or acceptance, or
2) deliver documents against payment and/or against acceptance, or
3) deliver documents on other terms and conditions

Documentary/ Letter of Credit

• Undertaking issued by a bank in favor of a beneficiary by which the bank substitutes its
creditworthiness for that of the applicant by promising to honor (pay) if the document specified in the
letter of credit (complying documents ) are timely presented

As per UCP 600 Art. 2

• Credit - any arrangement, however named or described, that is irrevocable and there by constitutes a
definite undertaking of the issuing bank to honor complying presentation

Honor
– toApplicant the credit is1.
pay at sight ifor Sales Agreement
available by sight Beneficiary or
(Exporter)
– to incur deferred payment undertaking
(Importer) and pay at maturity if the credit is available by
5. Shipment deferred
payment
– to accept the bill of exchange(draft) drawn by the beneficiary and pay at maturity if the credit is
2. LC
available
Application by acceptance 6. Presentation
9. Payment
– Complying Presentation a presentation that is in accordance with theofterms and conditions/Acceptance
documents
of the
credit, the
10.applicable
Release provisions of these of rules and international standard bank practice
of Document
4.Advising LC
Letter of Credit Cycle 7. Notification of Documents + Claim
Opening Advising Bank/
3. Opening of LC
Bank
Negotiating Bank
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8. Payment/Reimbursement
Documents in international trade?
Documents be can classified into two.
1. Documents of deal/Pre-shipment documents
2. Documents for payment/Post-shipment documents

Documents of deal/Pre-shipment documents/

The following documents are classified as documents of deal. They are:-
 Pro forma Invoice:
 Purchase Oder
 Sales Contract

Pro forma Invoice

An invoice sent by a seller to a buyer in advance of shipment /delivery of goods. It is an indication of price
and presented in a form of quotation.
Content of pro forma Invoice

 Purchase Order:   is a commercial document issued by a buyer to a seller, indicating types, quantities,
and agreed prices for products or services the seller will provide to the buyer.
- by sending PO to a seller buyer constitutes a legal offer to buy products or services. Also
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 acceptance of a PO by a seller usually forms a contract between the buyer and seller, so no
contract exists until the purchase order is accepted.

Sales Contract: is a document concluded prior to engaging oneself in one of the international trade
products.
• it is a legal undertaking between buyer & seller on its own and may be sued outside of any trade
instrument associated with it for exchange of goods, services or property between seller and buyer for
an agreed upon value in money paid or promise to pay sum.
Content

Sales Contract should be :-

• Unambiguous
• Clearly state the duties and liabilities of each party
• Clearly state the place of arbitration/ settlement in case of dispute.
• Clearly state an agreed product or service.
• Clearly state shipping and delivery details.
• Required documents
• Insurance cover
• Method of payment
• Clearly state the place of arbitration/ settlement in case of dispute.

Post shipment documents are divided into two. They are: -

1. Financial Documents
Bill of Exchange,
Promissory note
2. Commercial Documents
Commercial Invoice
Official documents
Insurance documents
Transport document

1. Financial Documents

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Bill of Exchange / Beneficiary Draft
A signed order by one party, the drawer/exporter, addressed to another, the drawee/buyer, to pay certain
sum of money to the order of the third party, the payee

Promissory Note
A written promise committing the signer to pay a sum to another at a future date , usually with interest

2. Commercial Documents

Commercial invoice
A bill provided by the seller addressed to the buyer giving description of goods / services, price, charges… etc.

Official documents
an official document attesting or recording a particular fact or event, a level of achievement, the fulfillment
of a legal requirement, etc. these are different certificates like Certificate of Origin or other third party
certificates

Packing list
A list issued by the beneficiary showing packaging of items to be shipped … like in numbers, kgs, rolls…
etc

Insurance Certificate
Written evidence of insurance coverage for shipment of items

Transport Document
A document issued by the carrier of the goods from place of loading to place of destination. Goods can
be transported by any carrier like ship, air, truck, train, post or services.

Governing Rules in International Trade

International trade is governed/ regulated by two basic categories of regulations

1. Local regulations
• It Varies from country to country depending on the monetary policies of government
• The basics of the regulations would include:
– Exchange Control regulations
– Documentation requirements
– Foreign exchange funds flow

2. International Regulations
• There are many regulatory bodies but the most widely accepted is the International Chambers of
Commerce (ICC)

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 • Documentary Credit
– UCP 600 - Uniform Customs and Practices for Documentary Credits
• Documentary Collection
– URC 522 - Uniform Rules for Collections
• Guarantee
– URDG 758 - Demand Guarantees
– ISP98 - International Standby Practices
• Others
– INCOTERMS
Like (EXW, FOB, CFR…)

• Local rules over rule in case of conflict between local and international rules

INCOTERMS
INCOTERMS also known as delivery terms are contract of sales between buyer & seller classify what
parties must do in respect of:-
1.  Carriage of goods from seller to buyer
2.   Export & import clearance
3. Also explain division of costs and risk between parties (buyer & seller)

 INCOTERMS 2010 is the one currently in use. The 11 terms have been categorized under two
categories which categorized into two

1. RULES FOR ANY MODE OR MODES OF TRANSPORT

EXW          EX WORKS
FCA           FREE CARRIER 
CPT           CARRIAGE PAID TO
CIP            CARRIAGE AND INSURANCE PAID TO
DAT           DELIVERED AT TERMINAL
DAP           DELIVERED AT PLACE
DDP           DELIVERED DUTY PAID

2. RULES FOR SEA AND INLAND WATERWAY TRANSPORT

FAS            FREE ALONGSIDE SHIP
FOB            FREE ON BOARD
CFR            COST AND FREIGHT
CIF             COST INSURANCE AND FREIGHT

Trade Service
The major business of Commercial Bank of Ethiopia that targets the international trading society of the
country. It mainly focuses on facilitation of payments and mitigation of risks associated with international
trade through a process that is compatible with customers’ needs and international standards
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CB’s Trade Service Process is structured in a way that having an outlet/branches where customers apply
for foreign trade services and A process center connected to outlet and branches for processing the
customers’ request

Trade Service Products

• Documentary Letter of Credit
– Import - available by sight/negotiation/deferred * /acceptance *
– Export - available by sight/negotiation/acceptance
• Documentary Collection
– Import - available by sight payment
– Export - available by sight payment /acceptance payment
• Cash in Advance
– Import
– Export
• Consignment Basis Payment
– Export
• Franco Valuta license
– Import
• Small Items Export Permit
– Export
• Guarantee
– Bid Bond, Performance Bond, Advance Payment ….
• Foreign Transfer & Foreign currency account operation
* If approved by NBE

Franco Valuta (as per NBE directive FXD/07/1998)

- Items imported without payment of Foreign Currency (FCY) by the importing country
1. Machinery and goods imported by gov’t institution with financial assistance or donation
2. Goods imported by Int’l org’n
3. Machinery and goods imported by foreign investors having license
4. Goods imported for personal and family use per the directive of Revenue authority by
returning Ethiopians having stayed abroad
5. Awards obtained by individuals and government organization for outstanding
achievement

Small Items Export Permit- The permit issued for export of small items by tourists, & foreign
residents of Ethiopian nationals who wish to take souvenirs. ( as per NBE directive FXD
07/1998). Also this permit is given for items to be sent abroad for sample, gift, repair,
replacement, exhibition & trade fair & personal effects & belongings etc.

Ethiopian International Trade Practice

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Import
Eligibility Criteria for Import
Customer should have the following to enter in to import under any modes of payments as approved by
NBE.
– Valid license for trade, investment, or industry or
• must exist in the list of budgetary government organizations issued by NBE or
• certificate from Ministry of Justice or Regional Governments in case of NGO.
– Tax Identification Number (TIN).
– NBE account number
– Open account with the bank
– Should not be reported as delinquent by

Modes of payments allowed for Import as per the NBE’s Directives

• Advance Payment /TT
• Documentary collection /CAD sight
• Letter of credit
Sight/acceptance*
Franco Valuta
(* As per NBE approval)
Additional requirements for import

● Certificate from Road Transport Authority for import of vehicle,

● Ownership Certificate (Libre) from the country of purchase (In case of used vehicles).
– Chamberized documents showing full description of the goods including type, model,
date of manufacture, and original purchase price from parties other than the seller.
– The FOB value of used vehicles, machineries, equipments etc to be imported shall not
exceed the maximum value with respect of service year.
● Certificate from Ministry of Agriculture for agricultural chemical and medicines,
● Certificate from Ethiopian drug control and administration for medicines and equipment,
● Copy of a loan or grant agreement concluded between Government Agencies & foreign
financing organizations. However, a letter of NBE is required in the case of private sector, &
no objection letter from donor or lender
Required Documents under Advance Payment
 Valid Foreign Trade Import License /Industry/ Investment
 TIN Certificate
 Valid and signed Pro forma invoices ( indicating HS. Code
 Foreign Exchange Application for Import (permit) In case of service import signed and sealed
application letter
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  Insurance certificate from local insurance Company
 International competitive Bid for values USD1,000,000.- & above
 Waiver from ESL for delivery term C&F, (CIF… if approved by NBE)
 Any other certificates depending on the type of commodity to be imported (as stated on additional
requirement list)
 A letter of undertaking for the entry of the goods for the amount up to USD5000 or Foreign bank
guarantee if the amount is exceeding USD5000
 Authorization letter to debit their account

Required documents under Documentary Collection /CAD

At time of Purchase Order approval
 Valid Foreign Trade Import License /Industry/ Investment
 Tax Identification Number /TIN/ Certificate
 Valid and signed Pro forma invoices ( indicating HS. Code
 Insurance certificate from local insurance Company
 International competitive Bid for values USD1,000,000.- & above
 Waiver from ESL for delivery term C&F, (CIF… if approved by NBE)
 Any other certificates depending on the type of commodity to be imported (as stated on additional
requirement list)
 Completed, signed and sealed Purchase Order (P/O) indicating
- Importer and exporter name and address
- Description of goods showing HS code and Country of origin, Year of manufacture and model
for used car
- Payment term Cash Against Document (CAD) sight
- Unit & total price
- Delivery term FOB, (C&F), it has to show breakdown of cost and freight, for (CIF) needs NBE
approval
- List of required documents &
- importer’s bank address, (CBE TSCPC)

At time of settlement
upon arrival of the following shipping documents:-
◦ Chamberzed commercial invoice
◦ Certificate of origin
◦ Packing list
◦ Transport documents
◦ Freight invoice for delivery term C&F or CIF
◦ any other additional documents as required
the importer is required to present
◦ Duly completed signed and sealed Foreign Exchange Application for import /permit/
◦ Original approved P/O
◦ Authorization letter to debit customer account for the value of goods and bank charges if any.

Required Documents under Documentary /Letter of Credit

At time of L/C issuance
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  Valid Foreign Trade Import License /Industry/ Investment
 TIN Certificate
 Valid and signed Pro forma invoices indicating HS. Code
 Foreign Exchange Application for Import (permit) In case of service import signed and sealed
application letter
 Insurance certificate from local insurance Company
 International competitive Bid for values USD1,000,000.- & above
 Waiver from ESL for delivery term C&F, (CIF… if approved by NBE)
 Any other certificates depending on the type of commodity to be imported (as stated on additional
requirement list)
 Duly completed signed and sealed L/C application

Tasks at Branch Level

FCY Approval
After concluding with the foreign dealer/supplier and collect the pro forma customer will apply for FCY at
his branch
▪ Collect Pro forma Invoice & check the content
• Send the request to the fund management (use excel)
• Follow the approval of FCY & inform customer the availability of fund
• Accept documents required for different modes of payments allowed for import

Advance Payment
• Collect all relevant documents (license, TIN…)
• Check customer name on delinquent list
• Verify signature on the application letter
• Check the balance
• Mark the FCY Approval date and non delinquent on check list and sign , Scan and send to CPC - &
inform the officers
• Open file and retain original documents
• Communicate the customer and deliver copy of SWIFT (MT103), Debit Advice, two customs
copies of Foreign Exchange Application for Import (permit), after marking Number, date authorized
validity date after signing and seal on the bank side
• Send the NBE Copy of the Foreign Exchange Application for Import (permit), with other copies of
documents license, TIN, Pro forma invoice Additional docs, if any to TS CPC to be sent to NBE
• Send the Original Foreign Exchange Application with exchange control copy to CBE Finance
• Retain all the necessary copies including Foreign Exchange Application for Import (permit) file copy
in the opened file

CAD
At time of P/O approval
• Collect all relevant documents (license, TIN…)
• Check customer name on delinquent list
• Check the content of valid, signed and sealed Purchase Order (P/O)
• Block the amount
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 • Calculate the value of service charge and debit customer account
• Approve by marking the reference of your branch, validity date for the P/O ( 90 days) sign and put
seal of the bank
• Deliver the original P/O to the customer after retaining copy, and different advices
• Open file, retain copy of the P/O, advices and other relevant documents like license… etc.,

Arrival and settlement of CAD document

▪ Collect duly completed signed and sealed Foreign Exchange Application for Import (permit),
Original Purchase Order (PO) and authorization letter to debit his account for value of goods and
bank charges if any.
▪ Scan and send to center together with other relevant document
license, TIN… P/O,
• After collecting original shipping documents from the center, communicate the customer to collect
original shipping document, then endorse the Bill of Lading, or Prepare delivery order (D/O) if
shipment is by Air and deliver them together with debit advice
• Deliver two customs copies of Foreign Exchange Application for Import (permit), after marking
Permit Number, date authorized, validity date, signing and seal on the bank side
▪ Send the NBE Copy of the Foreign Exchange Application with other copies of
documents license, TIN, Pro forma invoice, Additional docs, if any to TS CPC to be sent to NBE

Letter of Credit
For Issuance of Letter of Credit
▪ Collect all relevant documents (license, TIN…)
• Check customer name on delinquent list
• Verify signature on the L/C application
• Mark the FCY Approval date and non delinquent on check list and sign
• Scan and send to CPC - & inform the officers
• Open file and retain original documents
• If discrepancy reported, communicate the customer for correction, scan and send correction to CPC

After L/C issuance is processed by CPC…

• print SWIFT /MT 700/ message and debit advice, deliver one of each to customer, two customs
copies of Foreign Exchange Application for Import (permit), after marking permit number shown on
SWIFT, date authorized , validity date and signing and seal on the bank side
• Retain the original and file copy of permit, debit advice and copy of MT 700 in the file opened by
the customer name by writing L/C No shown on the SWIFT massage ( such as TF…. )
• Send the NBE Copy attached with other relevant copy documents ( license, TIN, Pro forma invoice
Additional docs, if any presented at time of permit issuance) to TS CPC to be sent to NBE

Amendment
A process to change terms and conditions of letter of credit. It can be initiated by the beneficiary or the
applicant and all parties should agree on the changes.
The applicant should submit an application to his bank/issuing bank quoting the L/C number and authorize
to debit his account for bank charges and for all the additional costs. Amendments can be :-
− Increase/decrease L/C amount
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 – Extension of expiry and/or shipment date
– Change on trade term
– Correction of misspellings,
– Change on origin of goods, …etc

Amendment to L/C
• Check the requested amendments are not contrary to NBE directives and supporting message fax
or e-mail from the exporter,
• Verify signature on the application.
• Scan and send the request letter and supporting documents to CPC.
• Keep the application and supporting documents in the respective L/C file.
• When amendment is completed, print SWIFT (MT 707 amendment message) and debit advice in
two copies, one of each to customer and the rest for file opened by the customer name

Arrival of Shipping documents under L/C

After processing is completed at CPC
• Print customer advice in 2 copies
• Communicate customer the arrival of document, deliver one customer advice, retain copy in the file
• Advise the customer to read the comment, the mentioned discrepancies may be regulatory which
can not waived
• If the non regulatory ones are accepted by the customer, he will return the customer advice giving
his consent to accept the discrepancy
• Check the authority given, verify signature on the customer advice
• Scan and send customer advice to CPC, retain original in a file
If documents are clean but the customers are facility users
• Print the Loan Disbursement (LD) advice in two copies
• Communicate customer the arrival of document, tell how much amount he is liable to pay including
the interest and deliver one LD advice to the customer to authorize the bank to debit his account by
signing and marking his account number on the LD advice and retain copy in the file
• Check the authority given, verify signature on the customer advice, scan and send to CPC, retain
the original in the file
• Follow up past due report after 45 days.

Settlement of L/C
After settlement is done at CPC
• Print settlement advice, and debit advice in two copies
• Collect the document, copy all and retain for file
• Endorse B/L or issue delivery order (D/O) if AWB is presented
• Deliver original documents, debit advice and settlement advice to customer
• Send the Original Foreign Exchange Application with exchange control copy to CBE Finance
• If partial shipment is required, customer will fill another Foreign Exchange Application form and
request to split

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 EXPORT
Eligibility Criteria for Export
Customer should have the following to export under any modes of payments as approved by NBE.
– Valid Export License
– Tax Identification Number /TIN /
– NBE account number
– Open account with the bank
– Should not be reported as delinquent by NBE

Modes of payments allowed for Export as per the NBE’s Directives

• Advance Payment
• Documentary collection -CAD sight/acceptance
• Letter of credit -Sight/acceptance* (* L/C should be confirmed by first class bank)
• Consignment
Small items export

Export Process
The following processes will be performed for export under Trade service process
Contract Registration - Contract registration should be performed at branch /outlet level which presented
by the customer
Receipt of Inward Remittance (Advance Payment)/ A/P – pay the amount and deliver credit ticket
showing receipt of the FCY either by SWIFT, or Declared Cash notes checking the indication of purpose
of payment to the customer

Advising of Letter of Credit/Amendment - communicate customer, deliver copy of L/C / amendment, open
file for each L/C and retain same in the file

Export Permit Issuance - This task is performed at branch/outlet level for the allowed modes of payment
as per the NBE directives.

Required documents for Export Permit under Advance Payment

The following lists of documents should be presented for Export permit Issuance under Advance Payment
 Valid Export License,
 Tax Identification Number /TIN/ certificate
 A copy of sales contract
 Completed signed & sealed export application form (BANK PERMIT FOR EXPORT OF GOODS)
 At least three copies of invoices duly completed, signed and stamped,
 Bank credit advice for TT payments and cash notes (declared by customs)

Tasks at Branch/outlet
• Collect Original, Valid Remittance/declared cash notes Credit ticket (validity is one year only from the
date of issuance)
• Credit ticket should be marked as A/P for future export clearly mention type of commodity
• Issue permit in the name of the exporter
• Mark the remaining balance for partially shipped or show/ mark on the ticket if it is fully utilized
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• Retain copies of the ticket for file and NBE to be attached with the permit
• Inform customer that the validity date of the permit is only within the issue month

Required documents for Export Permit under Consignment

The following lists of documents should be presented for Export permit issuance under Consignment
 Valid Export License,
 Tax Identification Number /TIN/ certificate
 A copy of sales contract
 Completed signed & sealed export application form (BANK PERMIT FOR EXPORT OF GOODS)
 At least three copies of invoices duly completed, signed and stamped,
 Letter of undertaking for repatriation of FCY

Tasks at Branch/outlet
 After permit issuance follow up and alert the customer for the settlement of the undertaking
 Inform customer that the validity date of the permit is only within the issue month

Required documents for Export Permit under collection (CAD)

The following lists of documents should be presented for Export permit issuance under CAD
 Valid Export License
 Tax Identification Number /TIN/ certificate
 A copy of sales contract
 Completed signed & sealed export application form (BANK PERMIT FOR EXPORT OF GOODS)
 At least three copies of invoices duly completed, signed and stamped,
 Letter of undertaking for repatriation of FCY

Tasks at Branch/outlet
• Check the outstanding balance before permit issuance
• Follow and alert the customer for the settlement of the undertaking
• Inform customer that the validity date of the permit is only within the issue month

Required documents for Export Permit under Letter of Credit

The following lists of documents should be presented for Export permit issuance under Letter of Credit
 Valid Export License,
 Tax Identification Number /TIN/ certificate
 A copy of sales contract
 Completed signed & sealed export application form (BANK PERMIT FOR EXPORT OF GOODS)
 At least three copies of invoices duly completed, signed and stamped,
 Authenticated L/C instrument

Tasks at Branch/outlet
• Check if shipment is in full or partial
• Check the validity of shipment and expiry as well
• Check B/L to be issued to the order of a named bank … (issuing or negotiating) and should not
show blank endorsement or to be issued to the order of applicant
• Inform customer that the validity date of the permit is only within the issue month
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Receipt of Document -
• For L/C - check and receive documents presented by the customer, sign by marking date and
time, scan and send to CPC, retain original in the file opened for each L/C.
• For CAD - check and receive documents presented by customer, sign by marking date and time,
scan and send to CPC, open file and retain original

Dispatch of Document -
▪ After process is competed at CPC, print covering letter, sign and stamp, endorse the B/L if issued to the
order of CBE, Bill of exchange if any.
▪ Copy the document for file, fill the address of the issuing bank from the L/C / and if it is CAD copy the
address of buyer’s bank/ collecting bank from covering letter presented by the customer on the courier's
AWB, deliver document to courier, file copy documents and debit the customer account for the courier
charge.

Settlement –
communicate settlement information to the customer when process is completed by CPC

Privileges for exporters in CBE

1. Free service
no commission or service charge is collected for export handling

2. Pre-shipment Financing
Depending on their creditworthiness, exporters can get pre shipment financing against their contract or
Letter of Credit

3. Post-shipment Financing
Negotiate complying documents before getting paid by the issuing bank.

4. Opening and utilization of foreign retention accounts. They are of two types:

i. Forex Retention Account ‘A’

For 10percent of the document value.
For unlimited period of time.
ii. Forex Retention Account ‘B’
For 90percent of the document value.
For maximum 28 days.

Guarantee
Upon the trade partners agreement, either payment or shipment of goods should come first in international
trade. Thus, to effect shipment prior to payment, sellers want to be certain that the buyer is able to pay on
time once the goods or services have been shipped or performed. There in a threat of Non-payment.

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Buyers, on the other hand, have the following fears in effecting payment prior to shipment and receipt of
goods:
– “We do not know the seller, how can they meet their commitments?”
– “Can we be sure that he/she will deliver on time?”
– “How can we check that the goods are exactly those we ordered and protect ourselves from
getting inferior and unwanted goods?”

• The buyers and sellers risks inherited in international trade could be mitigated by supporting a
transaction with guarantee
A letter of guarantee is a written promise issued by the bank to compensate (pay a sum of money) to the
beneficiary in the event that the obligor fails to honour his obligations in accordance with the terms and
conditions of the guarantee. It can have a form of direct/indirect or incoming/outgoing

Forms of Guarantee:-
DIRECT GUARANTEE
a guarantee advised to a beneficiary through advising bank without engagement on the part of the advising bank, but the
bank should take reasonable care to check the apparent authenticity of the guarantee

INDIRECT GUARANTEE
a guarantee issued by the beneficiary’s bank with full responsibility based on the applicant’s bank instruction. It requires the
involvement of a beneficiary’s bank to issue this guarantee

Types of bank Guarantee

Bid Bond, Performance Bond, Advance Payment Guarantee, Loan Guarantee, Retention Guarantee, Customs Duty
Guarantee, Local Guarantee, and Short Term Guarantee (Out going Guarantee)

• Bid bond /Tender guarantee - a guarantee issued by the bank in favor of beneficiary to undertake to pay if the bidder
withdraws its bid during the period of bid validity or fails to accept the award when he becomes the winner.

• Performance bond - a guarantee issued in favor of beneficiary to undertake to pay if the supplier/contractor fails to
deliver the goods or to perform the services in accordance with the terms and conditions of the contract.
• Advance payment guarantee - a guarantee issued in favor of beneficiary ( who makes the advance) , to undertake to pay
the sum in case the applicant fails to honor the contract terms in their entirety, or in part, and the applicant fails to return the
advance

• Loan guarantee - a guarantee issued by foreign bank in favor of a local bank which disburses the loan to the beneficiary to
undertake to pay the sum if the beneficiary fails to pay the loan granted to him

• Retention Guarantee - a guarantee issued in favor of the beneficiary (party accepting to release the retention), upon the
request of the applicant to provide security to a beneficiary in the event that the applicant fails to perform its obligation as
per the terms and conditions of the contract.

• Customs duty guarantee - a guarantee issued in favor of customs authority to undertake to pay if the goods imported
without payment of customs duties are not re-exported and the respective customs duties have not been paid.

Forms of guarantees
▪ Incoming guarantee
a guarantee issued by a local bank in favor of a local beneficiary based on instruction provided by a foreign bank.
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▪Outgoing guarantee
a guarantee issued by a foreign bank at the request of local bank to compensate a foreign beneficiary in the event that
principal fails its obligation . This guarantee is issued on the NBE approval only

▪Local guarantee
a guarantee issued by local banks at the request of a local beneficiary in local currency. Any branch can accept
applications and issue for any guarantee types, bid bond, performance…etc. It can be issued with cash collateral or credit
facility given to the
customer/principal

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