New Module Banking

Banking and Custom Clearing LSCM3062
Chapter One
1. Meaning of Import and Reasons of Importing Commodity
Learning Objectives
After studying this chapter you should able:

 Examine the reasons for importing materials.
 Explain the parties that facilitate importing materials.
 Explain import procedures in international practice.
 Understand the trade terms in import transaction.
 Understand the responsibility and duty of sellers and buyers of each trade
terms.
 Explain compulsory documents in import transaction.
Introduction
In this stiff and intensive competition Companies go overseas to obtain lower

manufacturing costs and protect themselves from lower-priced imports being sold in their
own country; importing enables them to be competitive with other companies doing
business in their country. Free trade agreements help strengthen business climates by
eliminating or reducing tariff rates, improving intellectual property regulations, opening
government procurement opportunities, and easing investment rules.
In connection with the flow of goods and services in the international market, boundaries
are shrinking and disappearing, and what’s becoming apparent is that global purchasing
and domestic purchasing are flowing, blending, and converging in to one stream. The inter
dependence of countries is increasingly growing, however, their advantages may not be of
equal terms, and in fact with big gaps, particularly, between the developed and developing
countries.
Aksum University Page 1

What is importing?
Importing is bringing goods into your country from another country in order to sell them.
1.1. Reasons for importing
Although strengthening domestic sources can be justified from its multi- effect on national
socio- economic aspects, it is difficult, and now a day’s seems even impossible to be a
closed economy, to become self- supporting in all requirements. Particularly the poor
countries like ours are highly dependent on international sources.
As the consequence of the only being poor, but also the globalization has further
strengthened the inter-dependence of countries of the world where the issue of self-
sufficiency became almost a far cry, particularly in the poor countries.
Importing should not, however, understand from the pressures it creates on balance of
payments only. It has to be recognized as an essential economic function since many of the
technological output and industrial products required in the production systems are missing
in many of the developing countries. Such imported materials would be fundamental in the
endeavors made for self- sufficiency including from the long – term perspective. Infect
though the exchange may not be in a balanced manner where developing countries who
depend on only very few export items of mostly raw nature, with less value added and
mainly agricultural products are at a disadvantaged position, the developed countries also
are not self- sufficient. So the industrially advanced countries also import items from other
countries.
As stated above, importing is an essential economic function which cannot be completely
eliminated. In connection with this, Ricardo’s principle of comparative advantage states
that it would be beneficial for an economy to concentrate on the production of items in
which it specializes, export these items and import its requirement of other items. The
principle, though not totally practical, cannot be dismissed. International trade is
undoubtedly governed by political motives and, as such, a country cannot totally rely on
another country for its requirements of specific items. Accounting various parameters,
countries have their respective policies on imports. These days import policies are liberated
in many countries as possessed the import substitution policies that were common

practices and procedures are very important to industries which depend on import for their
production. Policies consider, among others, the impact of imports on indigenous
production and its influences on foreign exchange resources. Generally, policies need to be
neither liberalized nor restrictive, but with a balance between the need for import and
export production.
In relation to the classification of the purchasing process as to the possible source, the
points highlighted above suffice to indicate that foreign purchase is one important source.
But the detail aspects of the importing are looked in to the following chapter.
Most businesses go overseas to obtain lower manufacturing costs and protect themselves
from lower-priced imports being sold in their own country. It enables them to be
competitive with other companies doing business in their country.
Developing countries are highly dependent on technological and industrial product imports
for the progresses they endeavor especially in the industrial sector. Not only they have to
import machineries but the spare parts for their maintenances as well as other inputs for
their continuous production.
The reason for importing goods from abroad are many and actually vary with the specific
commodity needed, however, the underlying principal and governing reason for using
foreign vendor is that better value is perceived to be available from that source than from a
domestic vendor.
Importing goods and services of foreign origin can be highly challenging. Importing
requires additional efforts when compared with domestic sourcing, though may be with
higher rewards. One of the complexities of buying goods and services of foreign origin is
the wide variability among the production countries in characteristics such as quality,
service, and dependability. With this perception in mind, however, there are common
reasons for importing/ purchasing goods and services from international sources as
highlighted below.

A. Quality
Although the issue of quality is argumentative, for there can be practices when foreign
items are purchased while their quality may not be better than domestic products, the key
reason forwarded by purchasing managers for international sourcing is to obtain the
required level of quality. This is not to imply infect there are no higher quality products in
the international market than in domestic markets. Especially in developing countries like
Ethiopia, there may not be domestic sources for many industrial products and hence this
may eventually lead to developing lack of confidence one’s own products. Such
understanding impedes their progresses and domestic industrial development potential.
B. Price
It may seem surprising to see a foreign vendor producing and transport an item several
miles at the lower cost than domestic supplier(producer). But, it actually is observed in the
international trade through additional costs, import duties, and transportation expenses are
required on international sourcing. Several factors can influence the issue and be reasons
for the specific commodity, such as:
I. The labor costs in the producing country may be substantially lower than
the costs incurred domestically.
II. The exchange rate may favor buying foreign.
III. The equipment and processes used by the foreign vendor may be more
efficient than those used by domestic vendors.
IV. The foreign vendor may be concentrating on certain products and pricing
export products at particularly attractive levels to gain volume.
C. Product and Process Technologies
International sources in some industrial products are more advanced technologically than
their domestic counter parts. So importing may be advisable than an attempt to produce an
item.
D. Unavailability of Items Domestically
Some items may only be available in foreign sources. In such situations there may not be
option than depending on foreign purchase.
E. Faster delivery and continuity of supply

Because of limited capacity of the domestic sources, foreign vendor can deliver faster than
the domestic supplier. The foreign supplier may even maintain an inventory of products. In
related connection professional buyers want to develop and maintain an adequate supply
base for required materials. It may be necessary to develop international suppliers in order
to have a completive supply base.
F. Better Technical Service
If the foreign vendor has a well – organized distribution network in various areas; better
supply of parts, warranty service, and technical advice may be available than from
domestic suppliers.
G. Counter Trade
The term “counter trade” refers to any transaction in which payment is made partially or
fully with goods instead of many. Counter trade links two normally unrelated transactions;
the sale of a product in to a foreign country and the sale of goods out of that country.
Under such arrangement countries require their domestic suppliers to purchase materials in
their country as part of the sales transactions, which commonly are called barter, offsets, or
counter trade.
F. Tie – in with Foreign Subsidiaries
Firms can consciously be made to operate in foreign countries to support the local, foreign
economy by purchasing there and for export to own country.
Activity 1.1
1. What is importing? ____________________________________________
__________________________________________________________________
__________________________________________________________________
2. List the reasons for importing commodity?
___________________________________________________________________
___________________________________________________________________
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1.2. Parties That Facilitate Import/Export Commodity

There are several participants in facilitation of international trade. An exporter or importer
can draw on a greater number of professional services-bankers, transporters, freight
forwarders, and insurers-for advice and assistance. The following diagram depicts the
parties that are among the active participants of international trade.
I. Freight forwarders
For the smooth flow of customs clearing activities in any country customs
Authority/House, freight forwarders or Customs Clearing Agents (CCA) play critical roles.
Freight forwarding is the representation of a consignor or consignee locally or
internationally in fulfilling customs, port and other formalities for import and export cargo.
The freight forwarder is a person who is licensed to carryout freight forwarding. In other
words, freight forwarder refers to a service provider working from his/her premises and
taking care of a range of operations relating to his/her clients’ goods: transshipment,
handling, storage and various commercial and administrative formalities. He/she is
generally also a customs broker. The exporter or importer must take appropriate policies in
order to insure risks as per the terms of sales contract such as CIF (cost insurance and
freight).
A freight forwarder is an independent company that acts as your agent in moving the cargo
from its point of origin to its overseas destination. Freight forwarders provide a valuable
service to exporters. They coordinate the shipment of the goods from the factory, arrange
to have the cargo loaded onto the vessel, and process the documentation on the shipment.
Especially when you’re new to importing, having a freight forwarder you can trust helps
ease the stress of sending your first shipments overseas.
Freight forwarders also assist exporters by advising them about freight costs, port charges,
consular fees, cost of special documentation, and handling fees. They do this as part of
their price quote process for their prospective customers. So you don’t have to worry about
getting slammed with a charge you hadn’t expected. Every charge you pay should be
spelled out ahead of time, allowing you to budget and plan accordingly.

Freight forwarders can recommend proper packing so that the goods arrive in good
condition, and they can also arrange to have the cargo export packed at the point of
shipment or coordinates the packing of goods into a container. When the order is ready for
shipment, the freight forwarder coordinates the preparation of all shipping documents
required by the foreign government, as well as those required as part of the payment
process. Freight forwarders also arrange to have the goods delivered to the carrier in time
for loading, prepare the bill of lading and any special required documentation, and forward
all documents directly to the customer or to the paying bank, if applicable.
II. Custom Clearing Agent

Customs brokers act as agents for importers in the transaction of their Customs business.
Brokers are private individuals or firms licensed by the Customs Service to
 Prepare and file the necessary Customs entries
 Arrange for the payment of duties
 Take steps to effect the release of the goods in Customs custody
 Represent the importer in Customs matters
In addition to assisting in the entry process, Customs brokers can also:
 Help you decide which shipping routes are best, to get your goods in the
shortest possible time
 tell you which method of shipment is best for your goods and advise you on
packing requirements for those goods
 Guide you on matters relating to international payments
 When you’re choosing a Customs broker, consider the following questions:
 Do you have a specialized product line or type of import? You may want
to find a broker who either specializes or has a great deal of expertise in clearing
your type of products.
 How many ports will you be using for your imports? If you’re importing
through a large number of ports, you’ll want to hire a broker who has offices in
those ports.
 How connected is the broker? You want to identify a broker who is fully
automated with full connectivity with various Web portals and cargo tracking sites.

Consider using a firm that participates in the Automated Broker Interface (ABI),
which is a system that permits transmission of data pertaining to merchandise being
imported into the United States.
 What is the broker’s general reputation? The best source of information
about a broker’s reputation comes from the broker’s own customers. Ask for
references — and be sure to contact them.
III. Commercial Banks

Owing to commercial banks’ vital role in export-import business activity, the exporter
once conclude the sales contract with his/her counterpart importer, arranges the delivery of
documents to be given to exporting bank. The exporter’s bank, in turn, scrutinizes the
documents and gets confirmation from its correspondent importer’s bank. If there are no
discrepancies in the content of documents, the exporter’s bank will effect payments to the
exporter outright.
IV. Transportation and shipping company

In importing goods from abroad transportation company play a prominent role by moving
goods from point of origin or exporter country to the importers country.
There are five modes of transport involved in the international transportation of goods.
These modes include Water/sea transport, Railroad transport, Motor vehicle/Road
transport, Air transport, and Pipelines transport.
V. Insurance and Insurers Company
Insurance is legal contract that protects people from the financial costs that result from loss
of life, loss of health, lawsuits, or property damage. Insurance provides a means for
individuals and societies to cope with some of the risks faced in everyday life. People
purchase contracts of insurance, called policies, from a variety of insurance organizations.
Insurances facilitate in import/export trade by protecting the goods against an expected loss
and damages and their purpose to redistribute the loss and thereby eliminate risk. Insurance

company they issue a certificate of insurance to the insured goods to importer/exporter as

an evidence to claim against damage or loss of the goods and to get compensations.
Insurance certificate — an insurance certificate is issued by an insurance company or
agent and is proof that the shipment is insured to the extent stated (and no more).an
insurance certificate gives evidence of risk coverage for merchandise shipped. It is sent to
the bank with other collection documents, and normally is used only when required by
Letter of Credit or Documentary Collection procedures. There are many types of insurance
policies available.
It is compulsory to insure goods import from abroad .There are several type of insurances
for cargos to be transship from origin to a place or importers premises and depends up on
the nature costs ,and other environmental factor of the cargo and transportation mode.
Marine insurance, one of the oldest forms of insurance, covers damage to and losses of
boats, ships, marine workers, cargo, and passengers. Both businesses and individuals may
purchase various forms of marine insurance.
Insurance for commercial ships or boats at sea, docked in a port or on some inland
waterways— as well as their cargo or passengers—is known as ocean marine insurance.
There are four main types of ocean marine insurance: (1) hull insurance, (2) cargo
insurance, (3) freight insurance, and (4) marine liability.
Hull insurance covers damage to a ship itself. Cargo insurance covers losses to a ship’s
physical cargo. Freight insurance covers shippers against a loss of freight (payment for the
transportation of cargo). Marine liability covers damages to people and property from
collisions and other incidents.
Activity 1.2
1. Mention parties participate in import to facilitate importing materials.
_________________________________________________________________________
_________________________________________________________________________

_________________________________________________________________________
_________________________________________________________________________
______________________________________________________________
1.3. Import/export Procedure: International Practices
Before beginning to import, and on each importation, the importer/buyer should consider a
number of preliminary matters that will make a great deal of difference in smooth and
efficient importing.
A. Products
Before actually importing, or whenever the importer is considering importing a new item,
the characteristics of that item should be reviewed. That is, is the product being imported
as a raw material or component to be used in the manufacturing process? Is it a finished
product that is going to be resold in the form imported or with some slight or significant
modification? Is it a replacement or spare part? Is the item sold singly or as a part of a set
or system? Does the product need to be modified, such as in size, weight, or color, to be
suitable for the domestic market? Often the appropriate methods of manufacturing and
marketing, the appropriate purchase and import documentation, the appropriate procedures
for importation, and the treatment under law of a given country , including ,Customs law,
will depend upon these considerations (for example, whether or not the product may be
imported duty-free or what the correct classification and duty will be).
In addition to the general procedures and documents, some products are subject to special
import restrictions, permits, licenses, standards, and/or procedures. Therefore before
actually engaged in to import of a given product, you have to check the legal fulfillment
and custom laws of given the country.
B. Volume
What is the expected volume of imports of the product? Will this be an isolated purchase
of a small quantity or an ongoing series of transactions amounting to substantial quantities?
Small quantities may be imported under purchase orders and purchase order acceptance
documentation. Large quantities may require more formal international purchase
agreements; more formal methods of payment; special shipping, packing, and handling

procedures; an appointment as the U.S. sales agent and/or distributor from the foreign
exporter; or commitments to perform after-sales service.
C. Country Sourcing
One of the principal preliminary considerations will be to identify those countries that have
the products that the importer is seeking to purchase. If the importer seeks to import a raw
material or natural resource, the importer may be limited to purchasing from those
countries where such products are grown or mined. If the importer is looking for a
manufactured product, it is likely that the number of countries where such products are
available for sale will be much greater; however, identifying the low-cost countries based
upon proximity to raw materials, labor costs of manufacturing, current exchange rates with
the United States, or transportation costs may require considerable study and analysis.
In identifying the potential country, the importer should ascertain whether the products of
that country are eligible for duty-free or reduced duty treatment under the different nation’s
trade agreement. Sourcing or importing products from hostile or internationally sanctioned
country is restricted.
D. Identification of Suppliers
Once the countries with the products available for supply have been identified, of course,
the importer still needs to identify a specific supplier. This will be just as important as
identifying which countries can provide the products at the lowest cost.
An unreliable supplier or one that has poor product quality control will certainly result in
disaster for the importer. The importer should spend a significant amount of time in
evaluating the potential supplier if there are going to be ongoing purchase transactions. The
importer should ascertain the business reputation and performance of the potential
supplier. If possible, the importer should inspect the plant and manufacturing facilities of
the supplier. The importer should determine whether there are other customers within its
own country who might be able to confirm the quality and supply reliability of the
potential supplier.

E. Compliance with Foreign Law

Prior to importing from a foreign country or even agreeing to purchase from a supplier in a
foreign country, an importer should be aware of any foreign laws that might affect the
purchase. Information about foreign law can often be obtained from the supplier from
whom the importer intends to purchase. However, if the supplier is incorrect in the
information that it gives to the importer, the importer may have to pay dearly for having
relied solely upon the advice of the supplier. Incorrect information about foreign law may
result in the prohibition of importation of the supplier’s product, or it may mean that the
importer cannot resell the product as profitably as expected. Unfortunately, suppliers often
overlook those things that may be of the greatest concern to the importer. As a result, it
may be necessary for the importer to confirm its supplier’s advice with third parties,
including attorneys, banks, or government agencies, to feel confident that it properly
understands the foreign law.
F. Import Packing and Labeling
Prior to the exportation of the purchased products, the importer should ascertain the type of
packaging and labeling that the exporter will use. Different packaging is often required to
withstand the rigors of international transportation and to ensure that the importer is going
to receive the products in an undamaged condition.
Generally, container transportation will protect best against damage and pilferage. Certain
types of containers may be needed, such as ventilated, refrigerated, flat, open top, or high-
cube. If the merchandise is a hazardous material, it cannot be transported unless it complies
with the International Maritime Dangerous Goods Code or the International Air
Transportation Association Dangerous Goods regulations depending on the mode of
transport.
The packing, labeling, and invoicing requirements for such hazardous materials must be
communicated to the seller before shipment. Where the supplier sells FOB factory or on
any term or condition of sale other than delivered to the buyer, the buyer/importer will be
taking the risk of loss during the transportation.

G. Commercial Considerations
There are several commercial considerations that the importer must take into account.
1. Prevailing Market Price
In planning its import purchases, the importer must pay attention to the prevailing market
price. Obviously, if raw materials or components can be purchased in the domestic at a
lower price than they can be purchased abroad, depending upon the source country,
importation will not be economically feasible. In purchasing for resale, if the purchase
price is not sufficiently low to permit an adequate markup when the product is resold at the
prevailing domestic market price, the importation will not be economic.
2. Industry Standards
Merchandise manufactured abroad should comply with quality standards of given country.
Prior to agreeing to purchase foreign products, the importer should check any applicable
industry standards to make sure that the products will comply. The importer may need to
advise the manufacturer of the appropriate specifications so that the products can be
manufactured to meet an importer country industry standard.
H. Terms of Purchase
Although there are ordinarily many terms and conditions that the buyer will include in its
import purchase agreements, the terms of purchase upon which seller and buyer must agree
is that relating to passage of title, risk of loss, price, and payment.
Although a buyer can purchase on different terms of sale from different sellers in
accordance with whatever terms are expressed in each seller’s quotation or purchase order
acceptance, it is ordinarily much better for the buyer to think about and formulate policies
relating to its terms of purchase in advance of placing its order. There are a number of
considerations, the first of which relates to the use of abbreviations. The international
commercial (13 in number we will discuss later in this chapter) developed by international
chamber of commerce shows clearly the responsibility and duties of buyer and seller to be
used as contract terms of statement in international trade.

I. Method of Transportation; Booking Transportation

Transportation may be made by air or by ship. Transportation can be arranged directly with
air carriers or steamship companies or through freight forwarders.
Air transportation is obviously much quicker, but is more expensive. Large shipments
cannot be shipped by air. In obtaining quotations from various carriers, it is important to
record and confirm any such quotations to avoid future increases and discrepancies. When
checking with transportation carriers, the name of the person making the quotation, the
date, the rate, and the appropriate tariff classification number used by the carrier should be
recorded.
J. Import Financing
Some foreign governments offer financing assistance to for importers who are purchasing
merchandise from exporters in their countries. Some state government agencies even offer
financing to purchase imported components if the finished products will be exported. If the
importer intends to utilize any import financing program, the program should be
investigated sufficiently in advance of commencing imports.
The necessary applications and documentation must be filed and approvals obtained prior
to importation of the merchandise.
k. Payment
An importer may be required to pay for merchandise it purchases by cash in advance or a

letter of credit, unless the exchange control regulations of the government of the buyer do
not require it or the buyer has sufficient bargaining leverage to purchase on more liberal
terms. The buyer’s methods of payment are discussed in Chapter 2. If a letter of credit is
required, the seller will often provide instructions to the importer), and the importer will
have to make an application in the nature of a credit application to a bank that offers letter
of credit services.
For payment by documentary collection, a sample of the seller’s instructions to the bank is.
Sample sight or time drafts that the seller will present to the correspondent bank under a
letter of credit to obtain payment when the goods are shipped. A buyer using a letter of
credit should realize that the bank does not verify the quantity, the quality, or even the
existence of the goods. The bank will make payment as long as the seller presents

documents that appear on their face to be in compliance with the terms of the letter of
credit. For this reason, a buyer may wish to arrange for a pre-shipment inspection by an
inspection service.
Activity 1.3
1. List down import procedures in international import transactions.
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
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1.4. Contract consideration for importers Or On Formation
Purchase /sales agreement
The purchase agreement is a formal contract governed by law. In general, a purchase
agreement is formed by agreement between the seller and the buyer and is the passing of
title and ownership to goods for a price. An agreement is a mutual manifestation of assent
to the same terms. Agreements are ordinarily reached by a process of offer and acceptance.
This process of offer and acceptance can proceed by the seller and the buyer preparing a
purchase agreement contained in a single document that is signed by both parties, by the
exchange of documents such as purchase orders and purchase order acceptances, or by
conduct, such as when the buyer offers to purchase and the seller ships the goods.
From the view of clarity and reducing risks, preparation of a purchase agreement contained
in a single document is best. Both parties negotiate the agreement by exchanges of letters,
emails, or faxes or in person. Before proceeding with the performance of any part of the
transaction, both parties reach agreement and sign the same purchase agreement. This
gives both the seller and the buyer the best opportunity to understand the terms and
conditions under which the other intends to transact business, and to negotiate and resolve
any differences or conflicts. This type of purchase agreement is often used if the size of the
transaction is large, if the seller is concerned about payment or the buyer is concerned
about manufacture and shipment, or if there are particular risks involved, such as

government regulations or exchange controls, or differences in culture, language, or

business customs that might create misunderstandings.
Common Forms for the Formation of Purchase Agreements

There are a number of forms that are customarily used in the formation of purchase
agreements. In order to save time (and discourage changes by the other party), both buyers
and sellers often purchase preprinted forms from commercial stationers or develop and
preprint their own forms. however, it is important to be familiar with the various forms.
A. price lists
Sometimes a seller will send a price list to a prospective buyer as its first communication.
Ordinarily, a buyer should not consider such lists as offers to sell that entitle the buyer to
accept. The buyer should ordinarily communicate with the seller (specifying that he is not
making an order), asking for a quotation and confirming that the terms of the price list are
still current.
B. Requests for Quotations and Offers to Purchase
Sometimes the first document involved in the formation of a purchase agreement is a
request from the buyer to the seller for a quotation (RFQ). Ordinarily, such a request—
whether it be informal, in an email, facsimile, or letter, or formal, in a printed form—will
ask for a price quotation from the seller for a specific quantity and often a shipping date.
When requesting a quotation, the buyer should be particularly careful to specify that its
request is not an offer to purchase and that such an offer will be made only by the buyer’s
subsequent purchase order. Another method is to expressly state that the buyer’s request is
subject to or incorporates all of the buyer’s standard terms and conditions of purchase.
C. Quotations
In response to a request for a quotation, the seller ordinarily prepares and forwards a
quotation or a pro forma invoice. In making quotations, the seller may use a printed form
that may contain all of its terms and conditions of sale on the front or back thereof. If this
is the first communication from the seller to the buyer, the buyer should be careful to
ascertain whether the quotation contains other terms and conditions of sale in addition to
the price, quantity, and shipment date.

The quotation on the pro forma invoice form should include the following:
 Names and addresses of the exporter (seller) and importer (buyer)
 Any reference numbers.
 Listing and description of products.
 Itemized list of prices for each individual item being sold
 Net and gross shipping weights (using metric units when appropriate)
 Dimensions for all packages (total cubic volume, again using metric unit
when appropriate)
 Any potential discounts
 Destination delivery point
 Terms of sale
 Terms of payment
 Shipping and insurance costs (if required)
 Expiration date for the quotation
 Total to be paid by the importer
 Estimated shipping date
 Currency of sale
 Statement certifying that the information found on this pro forma invoice is
true and correct
 Statement that provides the country of origin of the goods
D. Purchase Orders
The next document that may occur in a purchase transaction is a purchase order
(PO) issued by the buyer. Again, the purchase order may be informal, such as in an email,
facsimile, or letter or it may be on a printed form. This is the most important document for
the buyer because it should contain all of the additional terms and conditions that the buyer
wants to be a part of the purchase agreement when the purchase order is accepted by the
seller. Before issuing a purchase order in response to a quotation, the buyer should
carefully calculate its costs. The buyer should determine whether the quotation is ex-
factory, FOB port, CIF, or delivered, since all expenses of transportation from the point
quoted will be expenses of the buyer, including customs duties. If the buyer intends to

resell the product in its imported form, it should determine whether the quoted price plus
additional expenses of importation will still permit the buyer to sell at the prevailing
market price with a reasonable profit or, if the product will be used as a raw material or
component, that its delivered cost will be lower than that from the domestic supplier If the
price is unacceptable, the buyer should make a counteroffer at a lower price before sending
a purchase order. Even though the buyer may expect that no purchase agreement will be
formed until she has sent a purchase order, if the seller has previously sent a quotation to
the buyer, the terms and conditions stated in the seller’s quotation may govern the purchase
agreement.
E. Purchase Order Acknowledgments and Acceptances and Sales
Confirmations
When a purchase order is received, some sellers prepare a purchase order
acknowledgment, purchase order acceptance, or sales confirmation form.
A purchase order acknowledgment may state that the seller has received the purchase
order from the buyer and is in the process of evaluating it, such as checking on the credit of
the buyer or determining the availability of raw materials for manufacture, but that the
seller has not yet accepted the purchase order and will issue a purchase order acceptance at
a later date.
F. Commercial Invoices
Later, when manufacture is complete and the product is ready for shipment, ordinarily the
seller will prepare a commercial invoice, which is the formal statement for payment to be
sent directly to the buyer or submitted through banking channels for payment by the buyer.
Such invoices may also contain the detailed terms or conditions of sale on the front or back
of the form
In additions to the above mentioned contract consideration; There are numerous terms and
conditions in an international purchase agreement that require special consideration
different from the usual terms and conditions in a domestic purchase agreement.
A. Quantity

To reach on the purchase agreement the buyer and the seller has clearly state the amount of
the items or goods and their measurements. The quantity term is even more important than
the price. One reason for forming a formal purchase agreement is for the buyer to obtain a
lower price by committing to purchase a large quantity, usually over a year or more.
The seller may be willing to grant a lower price in return for the ability to plan ahead,
schedule production and inventory, develop economies of scale, and reduce shipping and
administrative costs.
B. Pricing
There are a number of considerations in formulating the buyer’s pricing policy for
international purchase agreements. A delivered price calculation sheet will identify all
additional costs of importing to make sure that the price of resale results in a net profit that
is acceptable to the buyer. Some of the constraints are laws regarding dumping, antitrust
laws of a given country.
Another very important pricing area relates to rebates, discounts, allowances, and price
escalation clauses. Sometimes the buyer will ask for and the seller will be willing to grant
some form of rebate, discount, or allowance under certain circumstances, such as the
purchase of large quantities of merchandise.
Pricing should consider the currency fluctuations that occur between the countries of the
seller and the buyer. Currency fluctuation risk has to be taken in to account. Sometimes,
when the term of the agreement is long, or when major currency fluctuations are
anticipated, neither the seller nor the buyer is comfortable in entirely assuming such risk.
Consequently, they may agree to some sharing of the risk, such as a 50/50 price adjustment
due to any exchange fluctuations that occur during the life of the agreement, or some other
formula that attempts to protect both sides against such fluctuations
C. Terms of purchase or sales
In any sales agreement, you need to provide not only the price but also a corresponding
term of sale. Terms of sale are the conditions of sale that clarify who is responsible for
what expenses, as the goods move from the seller to the buyer. Terms of Sales used in
import/export called INCOTERMS (will discuss in detail in chapter two). These INCO
terms are 13 in number and a universal trade terminology developed by the International

Chamber of Commerce (ICC). These terms were created to describe the responsibilities of
the exporter and importer in international trade and to resolve disputes among parties
engaged in international trade. Understanding and using these terms correctly are
important, because any misunderstanding may prevent you from living up to your
contractual obligations and make you accountable for shipping expenses that you had
initially intended to avoid.
D. Methods of payment
In a domestic sales transaction, the buyer may be used to purchasing on open account,
receiving credit, or paying cash on delivery. In international purchases, it is more
customary to utilize certain methods of payment that are designed to give the overseas
seller a greater level of protection. The idea is that if the buyer fails to pay, it is much more
difficult for a seller to institute a lawsuit, attempt to attach the buyer’s assets, or otherwise
obtain payment.
Any international transaction involves risk. You need to understand what those risks are
and what actions you can take to minimize them. The primary payments used in
international transactions are (we will discuss in detail in chapter two).
Cash in advance: This means that the exporter will receive his money in advance of
making the shipment.
Letter of credit drawn at sight: This is a document issued by the importer’s bank
guaranteeing that the exporter will get paid, just as long as he presents required documents
to the bank before an expiration date.
Time letter of credit: This is the same as the letter of credit drawn at sight except that the
exporter will get the money a certain number of days after the documents have been
presented and accepted.
Bill of exchange (documentary collections): This is like buying something using cash on
delivery (COD) except the importer makes the payment when the required documents are
presented, instead of when the goods are received. There are two types of bills of
exchange:
• Sight draft documents against payment: The importer pays when the documents are
presented.

• Sight draft documents against acceptance: The importer makes the payment a certain
number of days after he has accepted the documents.
Open account: With this method, no bank is involved in the transaction. The exporter
sends the documents to the importer and trusts that the importer will send him the money.
Consignment: The exporter ships the goods, and the importer only has to remit payment
for them after the goods have been sold and the importer gets paid from his customer.
1.5. Trade Terms

International terms of sale are contained in the Incoterms. The Incoterms are a set of terms
that define respective responsibilities and are published by the International Chamber of
Commerce. They are periodically reviewed and updated by delegates selected from many
countries in order to reflect current practice and changing technologies. The last revision
was in the year 2000, and the publication is referred to as Incoterms 2000. Although the
International Chamber of Commerce is not a governmental body, the terms are recognized
worldwide as legally binding upon the parties to an international transaction.
Activity 1.4
What is a trade term or INCOTERM?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
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1.5.1. Descriptions of International Commercial Terms

(INCOTERMS)
The INCOTERMS are grouped in four categories, and 13 in number. The terms are
discussed and summarized below in Table 1.5.1.
Group Of The Acronym Of Description Of The Terms
Terms Incoterms
E-Terms EXW Ex Works (… named place)
F-Terms FCA Free Carrier (... named place)

FAS Free Alongside Ship (... named port of shipment)
FOB Free On Board (... named port of destination)
C-Terms CFR Cost and Freight (... named port of destination)

CIF Cost Insurance and Freight {... named port of
destination)
CPT: Carriage Paid To (... named place of destination)
CIP Carriage and Insurance Paid To (... named place
of destination)
D-Terms DAF Delivered At Frontier (... named place)
DES Delivered Ex Ship (... named port of destination)
DDP Delivered Ex Quay (... named port of destination)
DDU Delivered Duty Unpaid (... named place of
destination)
DEQ Delivered Duty Paid (... named place of
destination)
Table 1.5.1: Trade Terms

1.5.2. Responsibilities of Foreign Purchaser (Importer) and Exporter

(Seller) in Specific INCOTERMS.
In this section we will see the responsibilities and duties of parties’ i.e exporter and
importer based on binding trade terms contracts.
1. EXW( Ex Works)
In this most basic transaction, the seller transfers all risk of loss and all responsibility for
expenses to the buyer at his loading dock. In an EX-Works transaction, goods are made
available for pickup at the seller’s factory or warehouse.
Seller’s Obligation
 Place the goods for disposal at his premises or another named place (i.e.
works, factory, warehouse, etc.).
Points of prime importance
 Even after the delivery of the goods, seller still bear a considerable financial
risk until full payment has been made.
 These conditions are disadvantageous for buyer. He bears a high risk and
has to arrange everything himself such as export, transportation, insurance etc.
Buyer’s Obligation
 Take delivery of the goods as soon they have been made available at the
seller's premises or another named place (i.e. works factory, warehouse, etc.);
 Bear all costs and risks involved with organizing the transport from that
time on.
 Risk of loss or damage to the goods is transferred to buyer as soon as they
have been placed at disposal at the seller's premises or other named place (i.e.
works, factory, warehouse, etc.);
 The supplier is under no obligation to obtain marine insurance.
2. FOB-( Free on Board)

Officially, the Inco terms limit the use of FOB to carriage by water and define the point of
title transfer as occurring when the goods have passed over the ship’s rail. In other words,
freight to a vessel, loading aboard, and export clearance are the seller’s responsibility.
Once the goods are loaded, the risk of loss and costs of transport revert to the buyer.

 Buyer may only be able to obtain restricted insurance from the port of
shipment.
 On the one hand, seller bears a considerable financial risk should no
payment have been made before the shipment; on the other hand, seller has no
guarantee that the buyer has obtained marine insurance.
 The supplier has no obligation to obtain insurance for the maritime voye
3. FCA (Free Carrier)

The seller hands over the goods, cleared for export, into the custody of the first carrier
(named by the buyer) at the named place. This term is suitable for all modes of transport,
including carriage by air, rail, road, and containerized / multi-modal transport.
4. FAS (Free Alongside Ship)

In this transaction, the seller must arrange for delivery and assume all risks up to the ocean
carrier at a port of origin .Freight costs up to the ship, risk of loss, and costs of clearance
are borne by the seller.
5. CFR (Cost and Freight)
CFR is a new term replacing “CNF,” which itself replaced “C&F.” The “Cost” portion of
CFR refers to the merchandise. The “Freight” refers to all the freight, including export
clearance, up to the foreign port of unloading.
What is not included is cargo insurance from the port of loading. Indeed, risks are shared
in a CFR transaction. The seller must deliver over the ship’s rail, so any loss up to that
point is the seller’s responsibility. Once loaded, the risk transfers to the buyer.
6. CIF (Cost, Insurance and Freight)

A CIF transaction includes the costs of freight and the costs of insurance. The seller retains
the risk of loss up to the foreign port of unloading. The buyer responsible to bear risks

from import port to final destination place.CIF is only applicable for goods to be
transported using ocean or vessel transportation mode.
 If the insurance has been agreed "CIF named port of destination", it is
usually possible to obtain only restricted coverage for the subsequent overland
transport.
 Seller only has to obtain minimal coverage for the goods during the
maritime voyage.
 Without a qualitative and quantitative examination of the goods at the port
of arrival, only restricted insurance can be obtained for the subsequent transport to
the destination.
7. CPT (Carriage Paid To)

This term is similar to CFR, but it can be used for any mode of transport including air
cargo. CPT means that the seller will pay all freight costs all the way up to the foreign port
and that the buyer assumes all risk of loss beyond the loading port.

 Even after the delivery of the goods seller still bear a considerable financial
risk until full payment has been made and your customer has obtained marine
insurance.
 The supplier is under no obligation to take out marine insurance.
 Damage which is not detected before the carrier takes delivery of the goods
can no longer be claimed for from the supplier.
 Without a qualitative and quantitative examination of the goods at the time
the carrier takes delivery, only restricted coverage can be obtained for the
subsequent transport.
8. CIP (Freight, Carriage and Insurance Paid to)

This term is similar to CIF except that it is primarily used in multimodal transactions
where the place of receipt and place of delivery may be different from the port of loading
or place of unloading.
 For subsequent transportation from the named place of destination (if
different from the final place of destination) your client can only obtain restricted
insurance.
 Sellers carry the risk for loss or damage to the goods during shipment.
However, the seller has to obtain insurance from warehouse to warehouse.
 Buyer have the option of agreeing the scope of insurance with the seller. If
no such agreement is made, seller is only obliged to obtain insurance coverage
which conforms to market standards.
 You neither know the insurance company nor the exact scope of coverage.
9. DES (Delivered Ex Ship)

In this type of transaction, the seller must pay all the costs and bear all the risk of transport
up to the foreign port of unloading, but not including the cost or risk of unloading the
cargo from the ship. In the case of large pieces of equipment or bulk cargoes, the costs of
unloading can exceed the cost of the main freight.
10. DEQ (Delivered Ex Quay)

This is the same as DES except that the term provides for the seller to pay the costs of
unloading the cargo from the vessel and the cost of import clearance.
11. DAF Delivered At Frontier

Here the seller’s responsibility is to deliver goods to a named frontier, which usually
means a border crossing point, and to clear the transaction for export. The buyer’s
responsibility is to arrange for the pickup of the goods after they are cleared for export,
carry them across the border, clear them for importation and, effect delivery.
 Place the goods at the disposal of the buyer on the arriving means of
transport not unloaded at the named place of delivery at the frontier;

 Bear all costs and the risk of loss or damage to the goods as far as the
named place of delivery at the frontier.
 Even after delivery of the goods you still bear a considerable financial risk
until full payment has been made and your customer has obtained marine
insurance.
 Your client may only be able to obtain minimum insurance coverage for the
 Take delivery of the goods on the arriving means of transport not unloaded
at the named place of delivery at the frontier and from that time bear all costs to the
final destination.

 Damage which occurs before the goods reach the named place of delivery at
the frontier, but which is only detected at the named place of destination can no
longer be claimed for from the supplier.
 Without a qualitative and quantitative examination of the goods at the
named place of delivery at the frontier, only restricted coverage can be obtained for
the subsequent transport.
12. DDP (Delivered Duty Paid)

This is a new term mainly used in intermodal transactions whereby the seller undertakes all
the risks and costs from origin to the buyer’s warehouse door, including export and import
clearance and import customs duties. Essentially, the seller pays everything in a DDP
transaction and passes all related costs in the merchandise price.
 Place the goods at the disposal of the buyer on any arriving means of
transport not unloaded at the named place of destination;

 Bear all costs and the risk of loss or damage to the goods as well as all costs
incurred through customs formalities, duties, taxes and other charges.
 Even after delivery of the goods you still bear a considerable financial risk
until full payment has been made and your customer has obtained marine
insurance.
 Your client may only be able to obtain restricted coverage for the
subsequent transportation.
 You may encounter insurmountable problems when attempting to clear
customs in the country of destination (e.g. missing import licenses which must be
procured by the buyer).
 Take delivery of the goods on the arriving means of transport not unloaded
at the named place of destination and from that time bear all costs to the final
destination.
 Damage which occurs before the goods reach the named place of
destination, but which is only detected at the final destination can no longer be
claimed for from the supplier.
 Without a qualitative and quantitative examination of the goods at the
named place of destination, only restricted coverage can be obtained for the
13. DDU (Delivered Duty Unpaid)
This is the same as DDP except that duty is not paid. Since the importer is generally better
informed on local customs, a DDU transaction makes a great deal of sense even when the
buyer does not want to deal with transportation and insurance issues.

Summary of Trade Terms

For a given term, "Yes" indicates that the seller has the responsibility to provide the service
included in the price. "No" indicates it is the buyer's responsibility. If insurance is not
included in the term (for example, CFR) then insurance for transport is the responsibility of
the buyer or the seller depending on who owns the cargo at time of transport. In the case of
CFR terms, it would be the buyer while in the case of DDU or DDP terms, it would be the
seller.
term Lo Expor Trans Unlo Land Trans Landi Unloa Transp Insura Entry - Entr
ad t duty port to ad ing port to ng d onto ort to Custo y-
s nce
to paym export from char import charg trucks destina ms Duti
tru er's truck ges es at from cleara es
ent 's port tion
port at at import the and
ck nce
the origi er's import Tax
origi port
n's ers' es
n's
port port
port
EX no no no no no no no no no no no
wor
no
k
FC yes yes yes no no no no no no no no no
A
FA yes yes yes yes no no no no no no no no
S
FO yes yes yes yes yes no no no no no no no
B
CF yes yes yes yes yes yes no no no no no no
R
CIF yes yes yes yes yes yes no no no yes no no
CP yes yes yes yes yes yes no no no no no no
T
CIP yes yes yes yes yes yes no no no yes no no
DA yes yes yes yes yes yes no no no no no no
F
DE yes yes yes yes yes yes no no no yes no no
S

DE yes yes yes yes yes yes yes no no yes no no

Q
DD yes yes yes yes yes yes yes yes yes yes no no
U
DD yes yes yes yes yes yes yes yes yes yes yes yes
P
Table 1.5.2; Summary of Trade Term Responsibility and Duties of the Party
Activity 1.5
1. List down the international commercial terms (INCOTERMS)?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
2. Explain the duties and responsibilities of buyer(importer ) and seller(exporter) in
each trade terms?
_________________________________________________________________________
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_________________________________________________________________________
_________________________________________________________________________
1.5.3. Cost Factors of in Export-Import Goods
In international trade or engaging in importing /exporting activities there are a number of

factors that drive costs. These costs are commonly categorized as material’s, labors and
over head costs, commissions, transport and freight, and insurance costs, and other costs.
Materials, labor and overhead cost includes costs like, Custom packaging, Inspection fees,
and Licensing and Royalties fees. Commission and related fees, cost encompasses such as
Buying agent’s commissions, Trader’s markups, Bank charges and commissions, overseas

agent’s commissions, Brokerage fees, Export levies, Export license fees, Certification fees,
Consular fees.
Transport and freight costs related with conveying of the goods from the seller to buyer
using specified transportation mode and carriages. Some of the costs incurred on
transportation and freight are Freight forwarders charges, Uninsured damages, Theft and
pilferage, Handling charges, Demurrage, Insurance premiums ,Wharfage and Loading and
unloading fees .
The other costs are like Advertising fees; Import duties and taxes, Import license fees
Warehousing, and Interest charges e.t.c.
1.6. Compulsory Documentation in Foreign Purchasing
In import /export the numbers and type of documents to be processed is depending on the
complexity of the transaction, nature of items and financial weight as well as the legal
requirements and documentations to cross boundary. Therefore the documents commonly
referred as a mandatory documents in international trade are discussed below.
A. Bills of Lading
A bill of lading is a contract between the owner of the goods (normally the exporter) and
the carrier of the goods. There are two types of bills of lading:
1. A non-negotiable straight bill of lading: The straight bill of lading is issued by the
exporter. It pertains to the shipment of the cargo from the point of origin to the port of
shipment. This document serves as evidence that the shipping carrier has received the
goods and will be transporting them to the destination listed on the document.
2. A negotiable shipper’s order bill of lading: The negotiable shipper’s order bill of,
which can also be referred to as a marine or ocean bill of lading, is prepared by the freight
forwarder and issued by the steamship company. It covers ocean transportation. The
importer needs this document as proof of ownership to take possession of the goods .
When we say that this is a negotiable bill of lading, I mean that the goods being shipped
can be bought, sold, or graded while they’re in transit. The bill of lading is endorsed, just

like a check that can be endorsed from one party to another; a negotiable bill of lading can
be endorsed from one party to another.
B. Air waybill
The air waybill is a bill of lading for cargo being shipped by air. It is a nonnegotiable
document, issued by the air carrier that specifies the terms under which the air carrier will
be transporting the goods to their destination.
C. Commercial Invoices
The commercial invoice serves as a bill for the goods from the importer to the exporter,
and it also serves as evidence of a transaction. Additionally, the importer uses the
commercial invoice to classify the merchandise, so that he can get the shipment cleared
expeditiously through Customs and make sure that all duties and taxes have been
accurately assessed.
Commercial invoice itemizing the merchandise sold and the amount due for payment.
There must be one invoice for each separate shipment. These commercial invoices must
contain very specific items of information, such as quantities, description, purchase price,
country of origin, assists, transportation charges, commissions, installation service, and
financing charges.
D. Pro Forma Invoices

An abbreviated invoice sent at the beginning of a sale transaction, usually to enable the
buyer to obtain an import permit or a foreign exchange permit or both. The pro forma
invoice gives a close approximation of the weights and values of a shipment that is to be
made.
E. Packing Lists
A document describing the contents of a shipment. It includes more detail than is contained
in a commercial invoice but does not contain prices or values. It is used for insurance
claims as well as by the foreign customs authorities when examining goods to verify
proper customs entry.

F. Inspection Certificates
A document issued by an inspection company or other person independent of the seller and
buyer that has inspected the goods for quality and/or value. It may be required for payment
under the terms of the sales agreement or a letter of credit.
G. Certificate of Origin:
A document in which the exporter certifies the place of origin (manufacture) of the
merchandise being exported. Sometimes these certificates must be legalized by the consul
of the country of destination, but more often they may be legalized by a commercial
organization, such as a chamber of commerce, in the country of manufacture. Such
information is needed primarily to comply with tariff laws, which may extend more
favorable treatment to products of certain countries.
Activity 1.6
1. Explain factors that determine the cost of importing commodity?

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
2. Mention down a compulsory documents that should present in import –export

transaction?
_________________________________________________________________________
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_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

Chapter Summary
In this stiff and intensive competition Companies go overseas to obtain lower

manufacturing costs and protect themselves from lower-priced imports being sold in their
own country; importing enables them to be competitive with other companies doing
business in their country.
Importing is bringing goods into your country from another country in order to sell them.
Therefore country are engaged in importing of commodity for several reasons .these
reason can be to get superior quality products ,price, product and process technology
,unavailability of items domestically e.t.c.
In importing commodity from abroad transaction there are actor who plays crucial
facilitating role as freight forwarders, customhouse, custom clearing agent, transport and
shipping companies, bank and insurances.
Importing commodity from foreign market is not a simple transaction in domestic it
consists a series of procedures .these procedures proceeds from product type specification
,volume of products ,country sourcing ,supplier identification ,compliance with foreign law
and regulations, and with other purchase terms and conditions.
To perform import of commodity from abroad there must be established a clear sales or
purchase agreement between the importer and exporter .this understanding the basic
conditions should be remind on the contract is purchase order , product type , ,commercial
invoice (states the product quality ,quantity ,pricing ,trade terms ,methods of payments
e.t.c.
In dealing import transaction you have to understand the trade terms agreement. Trade
Terms are commonly referred to as INCO terms. They determine the obligations of the
Exporter and Importer with respect to freight costs, insurance, taxes, duties, etc. These
terms are issued by the International Chamber of Commerce are 13 in number and
designed to resolve disputes and conflicts between buyer and seller found in different
country.
In import and export transaction documentation is an important tool .the common
compulsory documents in import export trade is bill of lading, airway bill, commercial
invoice ,pro forma invoice, packing list ,inspection certificate, certificate of origin e.t.c.

Self Test Exercise Questions

Part I: Multiple choices
1. One of the following statements is incorrect about purchase agreement

A. It is an agreement a formal contract governed by law
B. It is an agreement formed between seller and buyer
C. It states the passing of title and ownership to goods for a price
D. To reducing risks and preparation purchase agreement should contain a single
document
E. None of the above
2. ______________is an independent company that acts as your agent in moving cargo

from its point of origin to its oversea destination.
A. Custom clearing agent
B. Freight forwarders
C. Commercial banks
D. Insurance company
3. Which one the following statement is not a reason for importing commodity from
abroad.
A. To acquire superior quality product
B. To enjoy opportunity of lower price products
C. To get industrial and process technologies
D. If the product is not available in domestic market
E. None
4. Commercial invoice contains the following elements except______________?

A. quality and quantity of the product
B. price of the product
C. terms of trade or sales
D. methods of payments

E. none of the above
5. EX-work transaction of trade term characterized by

A. seller made available the goods for pick up at factory or warehouse
B. the seller is under no obligation to obtain maritime insurance
C. risk of loss or damage to the goods is transferred to seller
D. buyers bears all costs and risks involved transporting from point of origin to the
final destination
E. all except C
6. Cost of insurance and freight (CIF) IS distinguish from carriage paid to (CPT)
A. because buyer is responsible to bear risks from import port to final destination
B. CIF is only applicable for goods to be transported using ocean or vessel
transportation mode
C. Under CIF insurance coverage for goods is obtained by seller ,up to the foreign port
of unloading
D. All of the above
Short Answer Questions

1. ________________is a type of trade term or INCO term the seller is responsible to
bear all risk and all cost associated with goods from origin point to the buyer final
destination place.
2. List down the type of INCO terms.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
3. Mention down the main costs factors considered in import export transaction
contract.
4. List down the compulsory document in foreign purchasing.

Chapter Two:
2. Modes or Terms of Payments in Foreign Purchasing
Learning objective
After studying this chapter you should able.

 Identify payment options for import transactions.
 Recognize the risks and advantages of payment options for both buyers and
sellers.
 Distinguish between major categories of Letters of Credit Analyze the
application of different types of Letters of Credit to international trade
transactions.
Introduction
Import –export transaction is more complex than domestic transactions; because the
transaction is takes place between buyer and seller found in different macro environment
conditions and factors. Some of the factors are associated with economic conditions, socio
-cultural, legal and politics. Each of those factors involves risks. In importing goods you
must need to understand what those risks are and what actions you can take to minimize
them.
A Methods or terms of payments refer to the manner by which the seller will be paid for
his. The terms of payment in import –export is much complex than the domestic business
transactions .In a domestic sales transaction, the seller may be used to selling on open
account, extending credit, or asking for cash on delivery. In international agreements, it is
more customary to utilize certain methods of payment that are designed to give the seller a
greater level of protection. The idea is that if the buyer fails to pay, it is much more
difficult for a seller to go to a foreign country, institute a lawsuit, attempt to attach the
buyer’s assets, or otherwise obtain payment. Therefore Payment is an important contract
issue that you have to give a due emphasis in import-export transactions.
The primary payments used in international transactions are : letter of credit ,cash in
advance ,open account, on consignment ,draft or documentary collection(bill of exchange).

This chapter will discuss the natures, advantages and disadvantages of the above
mentioned modes or terms of payment in depth.
2.1. Letter Of Credit

2.1.1. Meaning of letter of credit
Letters of Credit have been a cornerstone of international trade dating back to the early
1900s. They continue to play a critical role in world trade today. For any company entering
the international market, Letters of Credit are an important payment mechanism which
helps eliminate certain risks.
In simple terms, a letter of credit is a bank undertaking of payment separate from the sales
or other contracts on which it is based. It is a way of reducing the payment risks associated
with the movement of goods.
Expressed more fully, it is a written undertaking by a bank (issuing bank) given to the
seller (beneficiary) at the request, and in accordance with the buyer’s (applicant)
instructions to effect payment — that is by making a payment, or by accepting or
negotiating bills of exchange (drafts) up to a stated amount, against stipulated documents
and within a prescribed time limit.
The International Chamber of Commerce (ICC) publishes internationally agreed-upon

rules, definitions and practices governing Letters of Credit, called “Uniform Customs and
Practice for Documentary Credits” (UCP). The UCP facilitates standardization of Letters
of Credit among all banks in the world that subscribe to it.
Activity 2.1
1. Define letter of credit.

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

The need for a letter of credit is a consideration in the course of negotiations between the
buyer and seller when the important matter of method of payment is being discussed.
Payment can be made in several different ways: by the buyer remitting cash with his order;
by open account whereby the buyer remits payment at an agreed time after receiving the
goods; or by documentary collection through a bank in which case the buyer pays the
collecting bank for account of the seller in exchange for shipping documents which would
include, in most cases, the document of title to the goods. In the aforementioned methods
of payment, the seller relies entirely on the willingness and ability of the buyer to effect
payment.
Letter of credit is the most widely used payment modality in international trade.
Specifically, letters of credit are used for the following reasons.
 Credit risk is reduced if the documents comply with terms of the letter; it is,
therefore, a comparatively safe methods payment.
 The letter of credit is covered by international rule and system for settling disputes.
 They letter of credit provides the seller with firm evidence of an export sale, which
is an aid of obtain local or international pre –export finance ,give the banker’s
performance for granting loans against the collateral an actual sale(i.e. letter of
credit as given below.
2.1.2. Parties Involved In a Letter Of Credit Transaction
In order to help the reader understand the steps taken in a letter of credit transaction, the
following is a brief description of the parties most commonly involved in letters of credit.
Accepting Bank: The bank named in a letter of credit on whom term drafts are drawn
and who indicates acceptance of the draft by dating and signing across its face, thereby
incurring a legal obligation to pay the amount of the draft at maturity.
Advising Bank: A branch or correspondent bank at or near the domicile of the

beneficiary, to which the issuing bank either sends the letter of credit, or a notification that
a letter of credit has been issued, with instructions to notify the beneficiary. The advising

bank advises the beneficiary of the letter of credit without engagement. Applicant The
buyer or the party who requests the letter of credit to be issued.
Beneficiary: The seller or the party to whom the letter of credit is addressed.
Confirming Bank: A bank usually in the country of the beneficiary which, at the
request of the issuing bank, joins that bank in undertaking to honor drawings made by the
beneficiary, provided the terms and conditions of the letter of credit have been complied
with.
Discounting Bank: A bank which discounts a draft for the beneficiary after it has been
accepted by an accepting bank.
Drawee Bank: The bank named in the letter of credit on whom drafts are to be drawn.
Drawer: The beneficiary of the letter of credit who will draw the draft in accordance
with the terms of the letter of credit.
Issuing Bank: The bank which opens a letter of credit on behalf of the applicant and
forwards it to the advising bank for delivery to the beneficiary.
Negotiating Bank: Usually the beneficiary’s bank which, after satisfying itself that the
documents conform with the letter of credit, agrees to purchase the draft (pay the
beneficiary).
Paying Bank: The bank named in the letter of credit where drafts are to be paid. It is not
necessarily the issuing bank, but often a branch of the issuing bank or its correspondent.
Once drafts have been paid or accepted by the paying/drawee bank, there is no recourse to
the drawers.
Reimbursing Bank: The bank authorized by the issuing bank to reimburse the drawee
bank or other banks submitting claims under the letter of credit.

Transferring Bank: The bank authorized by the Issuing Bank to transfer all or part of
the Letter of Credit to another party at the Beneficiary’s request.
2.1.3. Letter of Credit Terms and Conditions

The following terms and conditions are basic to most letters of credit: .
Draft – Letters of Credit usually necessitate that the Beneficiary draw a draft on the
Issuing Bank. The period of time from the date on which either the complying documents
are presented or the draft is drawn, to the date on which payment is payable is the “tenor”
of the draft. If the draft is payable upon presentation, the draft will be drawn payable at
‘’sight.”
If the draft is payable, for example, 30 days after presentation of complying documents (“30
days sight”) or 30 days after the date the draft is drawn (“30 days date”), the draft is a time
draft. Time drafts may be drawn for any number of days. For ease in financing, days are
usually expressed in 30 day increments, i.e., 30, 60, 90, 120, 150, 180 days. The accepted
draft is the unconditional obligation of the Accepting Bank to pay at maturity. When drafts
are accepted by an Accepting Bank they take on special properties.
Expiration Date – A Letter of Credit should contain a stated expiry date. The
Beneficiary is required to present the draft(s) and documents to the Issuing Bank or a
Nominated Bank on or before that date. Under the Uniform Customs and Practice for
Documentary Credits Act (UCP), published by the International Chamber of Commerce
(and incorporated by reference in most commercial letters of credit), if the expiration date
falls on a day when banks at the place of presentation are closed, the expiration date is
extended to the next business day. Letters of Credit expire at the times and locations
specified in the Letter of Credit.
Latest Shipping Date – Most Commercial Letters of Credit contain a latest shipping
date. The documents confirming shipment must not be dated after that date. When “on
board” transportation documents are required, the date indicated in the “on board” notation
on the transport documents is considered to be the date of shipment.

Marine Bills of Lading are issued in either “Shipped on Board” or “Received for Shipment”
form. When a Letter of Credit specifies marine or ocean on board” bills of lading,
“onboard” may be evidenced by:
A bill of lading being issued using an “on board” form; or
A bill of lading carrying an “on board” notation. This notation (often a
superimposed stamp) must be dated. The “on board” date (the shipping date)
cannot be later than the “latest shipping date” specified in the Letter of Credit.
Unless the Letter of Credit otherwise states, the UCP requires that marine bills of lading
show that the goods are on board. This means that the Beneficiary must either provide an
“on board” bill of lading or have the carrier’s “on board” notation put on the bill of lading.
Latest Date for Presentation – Unless the credit stipulates otherwise, the UCP
requires that documents be presented within 21 days of the date of shipment or at another
such period stated in the Letter of Credit. For Marine Bills of Lading, the “on board” date is
seen as the shipment date.
Commercial Letters of Credit are often issued with a latest shipping date that is more than
21 days prior to the Letter of Credit expiration date. This is due to the fact that the most
common amendment to a commercial Letter of Credit is to extend the shipping date. The
additional period permits the shipping date to be adjusted without the expiration date being
extended. The additional time is not a “cure” period for documents under discrepancy.
UCP 500: The letter of credit process has been standardized by a set of rules published by
the International Chamber of Commerce (ICC). These rules are called the Uniform Customs
and Practice for Documentary Credits (UCP) and are contained in ICC Publication No. 500.
Activity 2.2
Explain terms and conditions that incorporate in letter of credit?
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2.1.4. L/C Opening Procedure in International Practice

A. The Sales Contract
The sales contract is the formal agreement between the buyer and seller specifying the
terms of sale that both parties have agreed upon. The contract should include: a description
of the goods; the amount; the unit price; the terms of delivery; the time allowed for
shipment and presentation of documents; the currency; and the method of payment.
B. Application & Agreement
The bank’s letter of credit application and agreement forms, when executed, constitute a
payment and reimbursement contract between the issuing bank and its customer. It is also
the customer’s instruction to the issuing bank. The letter of credit must be issued exactly in
accordance with the customer’s instructions; therefore, it is important that the application
be completed fully and accurately, so as to avoid the inconvenience of having to have the
letter of credit amended. The agreement constitutes an undertaking by the customer to
reimburse the issuing bank for drawings paid in accordance with the terms of the letter of
credit, and normally takes the form of an authorization to debit the customer’s account.
C. Issuance of the Letter of Credit
The issuing bank prepares the letter of credit as specified in the application and forwards it
by TELE transmission or airmail to the advising bank, (a branch or correspondent of the
issuing bank). The issuing bank instructs the advising bank as to whether or not to add its
confirmation, as per their customer’s instructions.
Advising bank
The advising bank forwards the letter of credit to the beneficiary (seller) stating that no
commitment is conveyed on its part. However, if the advising bank has been asked to
confirm the letter of credit and agrees to do so, it will incorporate a clause undertaking to
honour the beneficiary’s drafts, provided the documents evidence that all terms and
conditions of the letter of credit have been complied with.

Issuance of Letter Of Credit
Buyer/Importer Seller/Exporter
Purchase and sales agreement
2
Request for a L/C Advice Of L/C
3
Request For Advice Possibly Confirm L/C
Issuing Bank Advising Bank
Figure 2.1 : the issuance of letter of a credit
D. Shipment of Goods
Upon receiving the letter of credit, the beneficiary should examine it carefully and be
satisfied that all the terms and conditions can be complied with. If this is not possible, the
beneficiary should request the applicant to arrange an amendment to the letter of credit.
Once completely satisfied, the beneficiary will then be in a position to assemble and ship
the goods.

E. Presentation of Documents by Beneficiary
The beneficiary prepares an invoice in the number of copies required, with the description
of goods shown exactly as stipulated in the letter of credit. The beneficiary obtains the bill
of lading and/or other transport documents from the carrier and prepares and/or obtains all
other documents required by the letter of credit. These are attached to the draft, drawn on
the bank indicated and at the term stipulated in the letter of credit, and are presented to the
advising/confirming/negotiating bank.
F. Sending Documents to the Issuing Bank
The advising/confirming/negotiating bank checks the documents presented by the seller

against the letter of credit. If the documents meet the requirements of the letter of credit,
that bank will send them to the issuing bank, claiming reimbursement and paying the
seller.
G. Delivering Documents to the Applicant
The issuing bank will also check the documents for compliance and then deliver them to
the applicant either against payment or as an undertaking to pay on maturity of the drawing
under the letter of credit.
H. Payments under letter of credit

The seller reviews all the conditions specified in the letter of credit and if they cannot
fulfill any of the terms, they will ask the buyer to adjust the letter of credit. When the
final terms are settled, the seller ships the goods to the specified port or location
After shipping the goods, the seller obtains the required documents. The documents are
presented to a bank, in most cases the advising bank (prior to presenting the documents to
the bank, the seller should ensure there are no inconsistencies with the letter of credit, and
if there are amend the documents where necessary).
The seller's advising bank reviews the documents. If they are in order, it will forward
them to the buyer's issuing bank. If the letter of credit is confirmed, the advising bank will

pay the seller (cash or a bankers' acceptance check).

Once the buyer's issuing bank takes delivery of and reviews the documents, it either pays
if there are no inconsistencies; or sends the documents to the buyer if there are
discrepancies for their review and approval.
After applicant reviews and accepts the documents, the beneficiary receives payment
from the advising bank. The issuing bank pays for the advising bank for the goods
according to the letter of credit .Finally; the applicant pays the issuing bank for the
goods
Buyer/Importer Seller/Exporter
1
Shipment of goods
5 Payment
2
Documents 7 payment
4
documents payment
6
3
documents /
IssuingBank Advising Bank
Figure2.2: payments under letter of credit.

Activity 2.2
1. Explain the procedures in opening letter of credit payment methods?

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2.1.5. Common Defects in Documentation under L/C Mode of

Payments
1. The agreed time schedule is not followed, because of late shipment or late presentation.
2. The specified documents are not prepared as specified by the letter of credit, other than
the transport document, insurance document and invoice.
3. Certificates, such as the certificate of origin and certificate of inspection, are not signed.
4. The goods description on the commercial invoice does not match the description on the
letter of credit.
5. Documents are not properly endorsed.
6. Drafts (bills of exchange) are not presented as stipulated by the letter of credit or are not
prepared properly.
7. The insurance document is dated after the shipment date, or does not cover the risks as
required by the letter of credit. The types of risk, extent of risk coverage or currency differ
from what is stated in the letter of credit.
8. The transport document is not properly signed as defined by the UCP, or it is not
prepared in compliance with the letter of credit.
9. The documents are inconsistent with one another.
10. The type and number of stipulated documents and copies are not the same as those
stipulated by the letter of credit.

N.B -Check the following items to verify that all terms and conditions in the Letter of
Credit agree with your Price Quotation/Performa Invoice and/or sales agreement and that
you will be able to comply with the order as requested by the importer.
Identity of Parties – Are the names and addresses of your company and the
importer’s organization correct and complete?
Confirmed – Is the L/C confirmed? If not, are there restrictions that prohibit it
from being so?
Irrevocable – Can terms and conditions of the L/C be changed or cancelled
without your prior knowledge and consent?
Description of Goods – Are goods described correctly and completely to include
trademark names and model numbers?
Prices – Do unit prices and total price for goods agree with the prices that you
previously quoted?
Amount – Will the total amount cover all costs allowed by the L/C (e.g.
Documentation, transportation, insurance)?
Currency of Payment – Is L/C the payable at sight or at a later date? Is it drawn
on your bank or importer’s bank?
Insurance – Who is responsible for insurance? If the importer pays, do you have
evidence of adequate coverage?
Shipping Terms – Are terms correctly stated (e.g. Ex Works, FAS Port of Import,
FOB Port of Export, CFR Port of Import, CIF Port of Import)?
Shipping Date – Will you have adequate time to produce and have goods ready for
shipment for the specified date?
Transportation Charges – Are inland, ocean or airfreight charges prepaid or
collect? Who pays the transportation costs?
Partial Shipments – Are you allowed more than one shipment or must the
complete order be contained in one shipment?
Transshipment – Can goods be unloaded and transferred to another vessel
between the ports of export and import?

Documents – Can all documents be obtained in the exact requested form as and
within the validity period of the L/C?
Presentation of Documents – Is there enough time after delivery to collect and
present documents to the bank for payment?
Expiration Date – Can you comply with all the terms and conditions of the L/C
before it automatically expires?
Activity 2.3
1. Discuss the defects of documentation of letter of credit payments?
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2.1.6. Benefits and Basic Types of Letters of Credit
The payment of international trade using letter of credit offers both benefits and risk for
both importer and exporter. The advantages and risks of letter of credit for the
exporter/seller are listed below.
Advantages of letter of credit to exporter/seller
 The bank’s creditworthiness must be taken into account.
 To be able to obtain financing for the purchase or manufacture of goods that will be
shipped under LC.
 The seller will receive funds shortly after presentation of shipping documents to the
bank.
 The seller can reduce the risk that payment for the goods might be delayed.
The Risk of Letter Of Credit to Exporter

 The seller’s documents must comply strictly with the terms and conditions of the
LC to entitle the seller to payment.

 The seller is exposed to the commercial risk that the bank providing its undertaking
is unwilling and unable to perform.
 The seller assumes any political and foreign exchange risk affecting the issuing
bank’s obligation.
Advantages of Letter Of Credit to Importer/Buyer

 Guarantee that its bank will refuse payment unless the seller complies with the
terms and conditions of the letter of credit.
 If the seller is willing to allow the buyer extended terms, the buyer may organize
the payment for a future date.
 Through the use of a Banker’s Acceptance, the buyer may finance the goods until
they are marketed.
 By the documents called for, the buyer can seek to minimize the risks in not
receiving the goods ordered.
The Risk of Letter Of Credit to Importer
 Banks deal only with documents. The goods may not be the same as stated in the
documents
There are three basic features of letters of credit, each of which has two options. These are
described below. Each letter of credit has a combination of each of the three features.
A. Sight or Term/Usance
Letters of credit can permit the beneficiary to be paid immediately upon presentation of
specified documents (sight letter of credit), or at a future date as established in the sales
contract (term/usance letter of credit).
B. Revocable
Letters of credit can be revocable. This means that they can be cancelled or amended at
any time by the issuing bank without notice to the beneficiary. However, drawings

negotiated before notice of cancellation or amendment must be honored by the issuing

bank.
C. Irrevocable Letter of Credit
With this type of credit the buyer's bank has given an irrevocable promise to pay the
seller, on his/her proof of compliance with the set conditions of the Letter of Credit, and
the bank without the authorization of the exporter cannot change this. The buyer has no
responsibility to agree to changes to the Letter of Credit. If it includes conditions that are
inconsistent with the sales-purchase agreement, then this is a subject to be settled between
the buyer and seller; the bank has no responsibility to involve itself with the particulars of
the agreement..An irrevocable letter of credit cannot be cancelled without the consent of
the beneficiary.
D. Unconfirmed
An unconfirmed letter of credit is when the document carriers the assurance of just the
issuing bank. The advising bank simply notifies the exporter of the terms and conditions of
the letter of credit, without adding its obligation to pay. The exporter takes on the payment
risk of the issuing bank, which is normally situated in a foreign country.
An unconfirmed letter of credit carries the obligation of the issuing bank to honour all
drawings, provided that the terms and conditions of the letter of credit have been complied
with.
E. Confirmed
A confirmed letter of credit also carries the obligation of another bank which is normally
located in the beneficiary’s country, thereby giving the beneficiary the comfort of dealing
with a bank known to him. A confirmed letter of credit is when a second guarantee is
added to the document by another bank. The advising bank, the branch or the
correspondent through which the issuing bank directs the letter of credit, adds its
undertaking and commitment to pay the letter of credit. This confirmation means that the

seller/beneficiary may also look at the credit worthiness of the confirming bank for
payment guarantee.
Special Types of Letters Of Credit
So far a description has been provided of the basic types of letters of credit used to cover
the shipment of goods. In addition to these basic types, there are various specialized
formats which meet particular sets of circumstances.
Red Clause Letter of Credit
A red clause letter of credit incorporates a clause, traditionally written in red, which
authorizes the bank acting as the negotiating or paying bank to pay the beneficiary in
advance of shipment. This enables the purchase and accumulation of goods from a number
of different suppliers, and the arrangement of shipment in accordance with the letter of
credit terms. Such advances will be deducted from the amount due to be paid when the
documents called for are presented under the letter of credit. If the beneficiary fails to ship
the goods or cannot do so before the expiry of the letter of credit, the issuing bank is bound
to reimburse the negotiating or paying bank, recovering its payment from the applicant.
Variations of such credits may also require that any advances be secured by temporary
warehouse receipts until shipment is effected. Beneficiaries of red clause letters of credit
are invariably brokers/agents of buyers in a particular field.
Transferable Letter of Credit
A transferable letter of credit allows the beneficiary to act as a middleman and transfer his
rights under a letter of credit to another party or parties who may be suppliers of the goods.
Depending on whether the letter of credit permits partial shipments, fractional amounts
may be transferred to more than one beneficiary. The letter of credit however, can be
transferred only once: the secondary beneficiaries cannot transfer their rights to a third
party. Transfer of a letter of credit can be made on specific application by the original
beneficiary to the authorized transferring bank To be transferable, a letter of credit must be

so marked by the issuing bank which can only do so on the applicant’s specific
instructions. The applicant should be aware that any second beneficiary, the probable
supplier, is usually a party not likely known to the applicant.
The terms and conditions of the transferred letter of credit must be identical to those of the
original letter of credit with the following exceptions:
• The original beneficiary may be shown as the applicant on the transferred credit.
• The amount of the letter of credit, and unit prices if any, may be less than in the original
letter of credit (the difference being the original beneficiary’s profit margin).
• The latest shipment date, if any, and expiry date as shown on the original letter of credit
should be shortened.
• The percentage of insurance coverage, if any, should be increased to satisfy the

requirements of the original letter of credit.
• When a drawing takes place, the original beneficiary normally substitutes his invoices for
those of the second beneficiary for up to the amount and unit prices available under the
original letter of credit, and draws the difference as profit.
Back-to-Back Letter of Credit
Although not recorded on a letter of credit, “back-to-back” is a term used in transactions

involving two irrevocable letters of credit. Such transactions originate when a seller
receives a letter of credit covering goods which must be obtained from a third party who in
turn requires a letter of credit. The “second” issuing bank looks to the first issuing bank for
reimbursement after paying under the second letter of credit.
The difference between back-to-back letters of credit and transferable letters of credit is
such that in a transferable letter of credit, the rights under the existing letter of credit are
transferred. In a back-to-back transaction, different letters of credit are actually issued.

Because technical problems can arise in back-to-back transactions, banks tend to

discourage their use.
Deferred Payment Letter of Credit
Under a deferred payment letter of credit, the applicant does not pay until a future date
determined in accordance with the terms of the letter of credit. No drafts are called for,
which avoids “stamp duties” charged by some countries on bills of exchange (drafts). One
reason an exporter might extend credit terms to an importer could be the competitiveness
of the market and the need for the exporter to finance the importer if the exporter is to
make the sale.
Other Types of Letters Of Credit
The letters of credit described thus far cover the movement of goods from one destination
to another. There are other types of letters of credit which are not specifically related to the
movement of goods. The principal one is as follows:
Standby Letters of Credit
Standby letters of credit may apply in general to transactions which are based on the
concept of default by the applicant in performance of a contract or obligation. In the event
of default, the beneficiary is permitted to draw under the letter of credit. Standby letters of
credit may be used as a substitute for performance guarantees, or issued to guarantee loans
granted by one firm to another, thereby securing payment to the creditor in the event the
other party fails to repay its obligation on the due date. Even if the applicant claims to have
performed, the bank issuing the letter of credit is obliged to make payment provided the
beneficiary produces complying documents, usually a sight draft, and a written demand for
payment.

Compulsory Documents Usually Required Under a Letter Of Credit
There is no limit to the number and variety of documents which letters of credit may
stipulate. The following is a list of documents most commonly seen in a letter of credit
transaction. Each document is described in brief with a check-list for preparing the
document.
As already stated, the beneficiary should, on first being advised of the letter of credit,
examine it carefully and be satisfied that all the documentary requirements can be
complied with. Unless the documentary requirements can be strictly complied with, the
beneficiary may not receive payment from the issuing bank.
If there are any requirements that cannot be complied with, the beneficiary should
immediately request the applicant to arrange for an appropriate amendment to the letter of
credit.
Draft
A draft is a bill of exchange and a legally enforceable instrument which may be regarded
as the formal evidence of debt under a letter of credit. Drafts drawn at sight are payable by
the drawee on presentation. Term (usance) drafts, after acceptance by the drawee, are
payable on their indicated due date.
Checklist
• Drafts must show the name of the issuing bank and the number and date of the letter of
credit under which they are drawn.
• Drafts must be drawn and signed by the beneficiary of the letter of credit.
• The terms of the draft must be expressed in accordance with the tenor shown in the letter
of credit;e.g., at sight or at a stated number of days after bill of lading/shipment date.

• The amount in words and figures must agree and be within the available balance of the
letter of credit and in the same currency as the letter of credit.
• The amount must agree with the total amount of the invoices unless the letter of credit
stipulates that drafts are to be drawn for a given percentage of the invoice amount.
Commercial Invoice
The commercial invoice is an itemized account issued by the beneficiary and addressed to
the applicant, and must be supplied in the number of copies specified in the letter of credit.
Checklist
• The invoice description of the goods must be identical to that stipulated in the letter of
credit.
• Unit prices and shipping terms, ie., CIF, FOB, etc., must be as stipulated in the letter of
credit. Extensions and totals should be checked for arithmetical correctness.
Consular or Customs Invoice
A consular or customs invoice is prepared by the beneficiary on forms either supplied by

the buyer or local consulate offices.
Checklist
• Consular invoices must be visaed (officially stamped) and signed by a consular officer of
the importing country and be supplied in the official form and number of copies as
stipulated in the letter of credit.
• All headings of the forms must be completed.
• The value of goods required must agree with that shown on the commercial invoice.

Bill of Lading
A bill of lading is a receipt issued by a carrier for goods to be transported to a named

destination, which details the terms and conditions of transit. In the case of goods shipped
by sea, it is the document of title which controls the physical custody of the goods. There
are two different types of bill of lading:
• A Straight Bill Of Lading is one that names a specific consignee to whom goods are to be
delivered. It is a non-negotiable document.
• An Order Bill Of Lading is one that is written “to order” or to order of a named party
making the instrument negotiable by endorsement. Letters of credit usually call for an
order bill of lading blank endorsed, meaning the holder of the bill of lading has title to the
goods. Given that each bill of lading must be either “straight” or “order”, the following is a
list of more common types of bill of lading:
• An Ocean Bill Of Lading is one issued by an ocean carrier in sets, usually three signed
originals comprising a complete set, any one of which gives title to the goods. Ocean bills
of lading may be issued in “straight” or “order” form.
• A Short Form Bill Of Lading is one issued by a carrier which does not indicate all the
conditions of the contract of carriage. This is acceptable unless otherwise specified in the
letter of credit.
• A Charter Party Bill Of Lading is one which shippers may, when large or bulk cargoes
are concerned, lease the carrying vessel for a stated time or specific voyage under a charter
party contract with the owner. Goods carried are then covered under a form of bill of
lading issued by the charterer and indicate as being shipped, subject to the term and
conditions of the charter party. Charter party bills of lading are not acceptable unless
specifically authorized by the letter of credit.
• A Multimodal Transport Document is one covering shipments by at least two different

modes of transport.

Checklist
Ensure that the port of loading and port of discharge are as stipulated in the letter of credit.
The shipment must be consigned in the manner stipulated in the letter of credit.
A general description of the goods is acceptable if consistent with but not necessarily
identical with the description specified in the letter of credit and other documents.
If the letter of credit calls for an “on board” bill of lading, it must be evidenced by a
“shipped on board” bill of lading, or by marked or stamped “on board” notation indicating
the date the goods were loaded on board.
If the letter of credit stipulates that freight is to be prepaid; or if the invoice is priced CIF
or CFR; or if the ocean freight has been added to the FOB or FAS value: the bill of lading
must be marked “freight paid” or “freight prepaid”. Expressions such as “freight to be
paid” or “freight payable” are not acceptable.8
The bill of lading must be “clean”. Any superimposed marking indicating a defect in the
packaging or condition of the goods renders the bill of lading “unclean” and unacceptable.
Bills of lading indicating goods shipped “on deck” are not acceptable unless specifically
allowed in the letter of credit.
The total number of packages comprising the shipment, shipping marks and numbers, and
any gross weight must agree with those on the commercial invoice and other documents.
Letters of credit should stipulate a period of time after date of issue of the bill of lading or
other shipping document for presentation of drawings. If no such period is specified, banks
will refuse documents and consider them to be stale dated if presented later than 21 days
after the date of “on board” endorsement, or, in the case of a shipped bill of lading or other
shipping document, 21 days after the date of issue. The bill of lading is to cover only goods
described in the invoice and specified in the letter of credit. Any correction or alteration
must be initialed by the party signing the bill of lading.

The name of the carrier must appear on the front of the bill of lading where the particulars
of the shipment are shown. If the bill of lading is signed by an agent, the name of the
agent as well as the name of the carrier must be shown.
Air Waybill
An air waybill is a receipt issued by an air carrier indicating receipt of goods to be

transported by air and showing goods consigned to a named party. Being a non-negotiable
receipt it is not a document of title.
Checklist
Only the goods invoiced and specified in the letter of credit may be covered by the air
waybill.
If the letter of credit stipulates that freight is to be prepaid; or if the invoice is priced CIF
or CFR; or if freight is otherwise included in the invoice: the air waybill must indicate that
freight has been paid.
The airport of departure and airport of destination must be as stipulated in the letter of
credit. The number of packages and gross weight shown on the air waybill must be
consistent with the other documents. An air waybill issued by a forwarder is not
acceptable.
Insurance Policy or Certificate
Under the terms of a CIF contract, the beneficiary is obliged to arrange insurance and
furnish the buyer with the appropriate insurance policy or certificate. The extent of
coverage and risks should be agreed upon between the buyer and seller in their initial
negotiations and be set out in the sales contract. Since the topic of marine insurance is
extremely specialized and with conditions varying from country to country, the services of
a competent marine insurance broker are useful and well-advised.

Checklist
• If the letter of credit calls for an insurance policy, an insurance certificate is not
acceptable and the policy must be provided. Broker’s cover notes are not acceptable unless
specifically allowed in the letter of credit.
• If the insurance policy or certificate indicates that it is issued in duplicate, both copies
must be presented.
• Unless the amount to be insured is stipulated in the letter of credit, the amount should
cover at least the CIF value plus 10 percent if invoiced in those terms. Otherwise, the
amount should be for the greater of the draft amount or the total invoice value plus 10%.
• The amount insured must be expressed in the same currency as the letter of credit.
• The description of the goods insured must be consistent with that in the other documents
although not necessarily identical.
• The number of packages comprising the shipment and shipping marks and numbers must
agree with those shown on the invoice and bill of lading.
• The name of the carrying vessel, port of loading and port of discharge must agree with
those shown on the bill of lading.
• The insurance document must cover transshipment if transshipment is indicated on the

bill of lading.
• The insurance document must cover specifically those risks stipulated in the letter of
credit. The “all risks” clause in the insurance document does not cover risks of war, which
must be separately shown as covered, if required by the letter of credit.
• Unless the letter of credit specifies to whom loss is to be payable, the insurance document
must be endorsed by the party to whose order it is made so as to be in negotiable form.

• The date of the insurance document should not be later than the date of shipment as
shown by the bill of lading or other transport document. However, the insurance document
may be dated after the date of shipment provided it evidences that cover is effective from
date of dispatch ie., by way of “warehouse to warehouse” clause.
• The insurance document must be signed by an authorized person.
The foregoing are the most common documents usually called for in an export letter of
credit. The following may also be asked for to satisfy government requirements or for the
convenience of the buyer.
Certificate of Origin
As the name suggests, a certificate of origin certifies as to the country of origin of the
goods described and should comply with any stipulations in the letter of credit as to
originating country and by whom the certificate is to be issued. The certificate should be
consistent with and identified with the other shipping documents by shipping marks and
numbers, and must be signed.
Inspection Certificate
When a letter of credit calls for an inspection certificate it will usually specify by whom
the certificate is to be issued; otherwise, the same general comments as in the case of the
certificate of origin apply. As a preventative measure against fraud or as a means of
protecting the buyer against the possibility of receiving substandard or unwanted goods,
survey or inspection certificates issued by a reputable third party may be deemed prudent.
Such certificates indicate that the goods have been examined and found to be as ordered.
Packing List
A packing list is usually requested by the buyer to assist in identifying the contents of each
package or container. It must show the shipping marks and number of each package.

Activity 2.4
1. Explain the advantage and disadvantage of letter of credit payment method for the
buyer and seller?
_______________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. List types of letter of credit.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
What to Do If Documents are dishonored in letter of credit payment method?
When documents are presented by the beneficiary and are found not to be in accordance
with the terms of the letter of credit, the following courses of action are available:
• The documents may be corrected if possible. However, this option is only applicable if
the discrepancies are such that the beneficiary, shipping company or whoever is concerned
is able to correct the discrepancies before the expiry of the letter of credit and within the
period of time allowed for presentation of the documents.
• If the discrepancies cannot be corrected, the beneficiary’s bank may request authority
from the issuing bank to negotiate the draft, despite the discrepancies.
• If, in the case of a sight draft, the beneficiary wishes to receive the proceeds of the
drawing immediately, then an indemnity may be the expedient method. Under the

indemnity the beneficiary agrees to indemnify the negotiating bank for payment of
principal, interest and any other loss resulting from the refusal of the issuing bank to
honour the drawing due to non-conformity of the documents. If the discrepancies are
considered minor, the beneficiary’s bank may be prepared to negotiate the draft “under
reserve”; it being understood the beneficiary’s bank will have recourse to the beneficiary if
the discrepancies are unacceptable to the issuing bank.
• As a last resort, documents may be sent to the issuing bank on an “approval” basis; the
documents to be delivered to the buyer only against the buyer’s authority to pay or accept.
2.2. Other Modes of Payments in import export trade
2.2.1. Cash in Advance
The Cash in Advance or Advance Payment method allows the buyer to pay cash in
advance to the seller. Paying in advance gives the greatest protection for the seller and puts
the risk on the buyer. Payment does not guarantee the shipment or delivery of the goods
from the seller. Therefore, the buyer will rarely pay cash up front before receiving an
assurance that the goods will be shipped and that the quality and quantity of the goods
ordered will be delivered.
Although this method of payment is not uncommon, the seller requiring full payment in
advance may cause lost sales to a foreign or domestic competitor who is able to offer more
attractive payment terms. In some cases, however, where the manufacturing process is
specialized, lengthy or capital- intensive, it may be reasonable to ask for some of the full
payment in advance, or with progressive payments. This method is often too expensive and
risky for foreign buyers, but useful when shipping to politically unstable countries, when
the buyer's credit is unsatisfactory or when goods are custom made to the customer’s
requirements.
In some circumstances this payment method can be modified to a partial payment in
advance with agreed upon installments or additional terms available.

1 2
Buyer Payment payment Seller
Shipment after payment

3
Figure 2.3. Cash in advance payment process.
Advantages and Risks of Cash in Advance Method
The cash in advance method is advantageous for the seller as there is no risk for him/her.
The advantages and risks for both the buyer and seller are illustrated in the figure bellow.
Advantages Risks
Buyer * None * No control over the goods
* Use of the funds is lost
*Seller may refuse to ship
*Political risk in the seller country
* Goods shipped when
Seller convenient use of buyer’s fund
The cash in advance may be most practical method if;
 The buyer lacks creditworthiness
 The buyer is not able to offer sufficient security for payment
 The buyer is located in a region of politic and/or economic instability

 The product is so specialized that it is specifically made for the customer and
cannot be easily sold to another customer
Activity 2.5
1. What is cash in advance?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. Explain the advantages and disadvantages of cash in advance to the buyer and
seller?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2.2.2. Open Account
An open account transaction means that the goods are manufactured and delivered
before payment is necessary (for example, payment could be due 14, 30, or 60 following
shipment or delivery). The method provides great flexibility and in many countries sales
are likely to be made on an open-account basis if the manufacturer has been dealing with
the buyer over a long period of time and has established a secure working relationship.
The open account method is a preferred method of payment for the importer, since it places
the risk on the exporter or seller. This method cannot be used safely unless the buyer is
credit worthy and the country of destination is politically and economically stable.
However, in certain instances it might be possible to discount open accounts receivable
with a factoring company or other financial institution.

Open Account Payment Methods
1 2
Shipment Shipment
Seller Buyer
After shipment /delivery
Payment
3
Figure 2.4. Open Account Payment Method Process
Advantages and Risks of the Open Account Method

The Open Account method is advantageous for the buyer as there is no risk for him/her.
Advantage Risks
To The buyer * Control over the goods * None

* Pays when convenient
To the seller * none * no control over the goods/payment

* Buyers may refuse to pay
Seller
The open account method may be useful if:
 There is long-term relationship and confidence between the buyer and

the seller
 The seller is under pressure to sell his goods
 The buyer has a very good reputation and is well-known in the market
 The buyer is solvent
The two payment methods, cash in advance and the open account, are not suitable when the
buyer and the seller don’t know each other very well or the seller doesn’t want to assume
the credit risk or the risk of dealing with a particular country when offering payment terms
to the buyer.
Activity 2.6
1. What is open account?
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. What are the benefits and disadvantage of open account payment method to the
buyer and the seller?
________________________________________________________________
________________________________________________________________
________________________________________________________________
2.2.3. On Consignment
With consignment sales, the seller does not receive payment until the importer sells or
resells the goods. The product stays with the importer until all the terms of the sale have
been satisfied. In the consignment method, the importer is called the consignee and he/she
is responsible for paying for the goods when they are sold. Consignment sales are very
risky and there is no control available to the exporter. Obtaining sales proceeds or return of
the merchandise if it is not sold can be difficult.

Payment under Consignment Method:
1 2 3
Shipment Shipment reselling
Seller Consignee Buyer
After reselling
4
Payment
Figure2.5: On Consignment Payment Method Process
Advantages and Risks of the On Consignment Method
There are several advantages and risks of the on consignment payment method. These
advantages and risks are listed below.
Table 2.1: advantage and disadvantage of payment in consignment.
Advantage Risk
To The Buyer  pays only when  none
goods are sold
To The Seller  retains the ownership of  limited control over
goods the goods
 consignee the  no control over the
intermediary for the sale willingness
of the goods buyer of the consignee to

pay for the goods

On Consignment payment method is useful if;

 The consignee is reliable.
 The consignee has a good credit history.
 The consignee’s country has economic and political stability.
 The consignee is the branch office of the main company.
Activity 2.7
1. What are the natures of on consignment methods of payment?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. What are the advantages and disadvantage of on consignment methods of payment

from the buyer and seller view?
________________________________________________________________
________________________________________________________________
2.2.4. Draft or Documentary Collection (Bill of Exchange)
The Draft or Documentary collection method is employed when either the cash in advance
method is not acceptable to the buyer, or the open account method is not acceptable to the
seller. With the Draft or Documentary Collection Method, the seller or exporter ships
the goods and draws a draft or bill of exchange on the buyer or importer through an
intermediary bank. The draft is an unconditional order to make a payment in accordance
with certain terms. The documents needed are specified before the title for the goods is
transferred.
The process of using a bill of exchange is normally referred to as a documentary collection.
It’s a transaction where the exporter entrusts the collection of payment to the exporter’s
bank, which sends documents to the importer’s bank along with instructions for payment.
Funds are received from the importer and remitted to the exporter through the banks

involved in the collection in exchange for the documents. This method of payment
involves the use of a draft that requires the importer to pay the face amount either on sight-
draft documents against payment or on a specified date in the future (known as sight-draft
documents against acceptance).
Documentary collections are less complicated and less expensive than letters of credit. The
importer is not obligated to pay for goods prior to shipment. The exporter retains title to
the goods until the importer either pays the full amount of the draft or signs a letter of
acceptance and agrees to pay at some specified future date. Similar to a letter of credit, the
bank is responsible for controlling the flow of the documents, but the bank does not verify
them or take any risks.
There are four parties involved in the documentary collection method: The buyer,
collecting/presenting bank (buyer’s bank), the seller and the remitting bank (seller’s bank).
Also, there are four main steps in the documentary collection method.
Seller Remitting Collecting Buyer

Drafts Bank Drafts Bank Draft
Payment Payment Payment
Shipment
2
Figure 2.6; Draft or Documentary Collection

In the process of documentary collection method,
 First of all, the seller sends the draft to the remitting bank.
 The remitting bank, as an intermediary, sends the draft to the

collecting/presenting bank.
 The collection/ presenting bank, as an intermediary, makes the documents

available to the buyer.
The buyer, after examine the documents, has three options:
 To pay immediately
 To pay at a future date
 To refuse to pay for the draft
When the draft is paid, the title documents are released to the buyer so he/she can obtain
possession of the goods. As the title to the goods is not transferred until the draft is paid
or accepted, both the buyer and seller are protected. However, nothing prevents the
buyer from refusing a draft for payment.
In such cases, the exporter, who has already shipped the goods, faces the problem of
getting his/her merchandise back, which may involve warehousing or insuring the goods,
or even disposing of the merchandise at the collection point. If the buyer refuses or
defaults on payment of the draft, the seller may also have to pursue collection through the
courts (or possibly, by arbitration, if such had been agreed upon between the parties). The
use of drafts involves a certain level of risk; but they are less expensive for the purchaser
than letters of credit.
Sight Drafts: If the exporter and importer have agreed that payment should be made
immediately upon receipt of the draft and/or shipping documents by the buyer's bank, the
draft is said to be drawn at sight .A sight draft is an order signed by the seller instructing
the buyer to pay a specified amount to the seller upon presentation of the draft.

Documentary Collection Sight Draft Method Agreement for Immediate Payment
Seller Remitting Collecting Buyer

Drafts Bank Drafts Bank Draft
1
2 3
6 5 4
Payment Payment Payment
Shipment
7
Figure2.7: Documentary Collection for a Sight Payment
Time Drafts: If the seller has provided credit terms to the buyer, thereby allowing the
merchandise to be released before payment is received; it is called a time draft. The
exporter will need a written promise from the buyer that payment will be made at a
specified future date. When a bank receives time drafts, the bank is requested to deliver
the documents only when the buyer has accepted. The buyer's acceptance of the draft is
his/her agreement to pay at an agreed upon future date.

Documentary Collection time Draft Method Agreement for future date Payment
Seller Remitting Bank Collecting Bank Buyer

Time Drafts Time Drafts Time Draft
1
2 3
6 5 4
Accepted Time Draft Accepted Time Draft Accepted Time Draft
Shipment
7
Figure 2.8: Documentary Collection for A time draft Payment
Advantages and Risks of Draft or Documentary Collection Method
Advantage To the buyer

 May refuse to pay or accept the draft
 Gives a time to sell before having paying them
 Low cost
Risks to the buyer

 Goods may not be as represented in the documentation
Advantage To seller
 Knows the title of the document is controlled by the bank.
 Evidence of indebtedness.

Risks of the seller

 Buyer May refuse to pay or accept the draft.
 Foreign exchange risk.
 Political risk.
Activity 2.8
1. What is documentary collection or bill of exchange term of payment?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
2. Distinguish of sight draft and time draft documentary collection?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3. Explain the procedures of documentary collection terms of payment?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________

Summary on Comparison of Various Payment Methods
Method of payment Goods Usual Time of Risk to Risk to

Available to Payment Exporter Importer
Buyer
Letter of Credit After When Very low Assured of
Confirmed Payment documents are quantity and
Unconfirmed available at also quality at
shipment shipment if
inspection report
is required
Cash In Advance After Before shipment Very low Maximum-Relies

payment on exporter to
ship goods as
ordered
Open Account Before payment As agreed Relies on Very low
importer to pay
account as
agreed- takes
complete risk
Consignment Before payment, exporter retains After use; Substantial risk
title until goods inventory and unless through
are sold or used warehousing foreign branch of
costs to exporter subsidiary
Very low
Documentary After On presentation If draft unpaid, Assured of

Collection/ Sight payment or draft to goods must be quantity, also
Draft /Documents importer returned or quality, if goods
against Payment disposed of, are inspected
usually at loss before shipment
Documentary Before Payment On maturity of Relies as Minimal-Can

Collection/ Time draft importer to pay check shipment
Draft/ Documents draft for quantity and
against quality before
Acceptance payment
Table 2.2: Comparison of Payment Methods

Chapter Summary
Import –export transaction is more complex than domestic transactions; because the
transaction is takes place between buyer and seller found in different macro environment
conditions and factors.
A Methods or terms of payments refer to the manner by which the seller will be paid for
his. The terms of payment in import –export is much complex than the domestic business
transactions .In a domestic sales transaction, the seller may be used to selling on open
account, extending credit, or asking for cash on delivery. In international agreements, it is
more customary to utilize certain methods of payment that are designed to give the seller a
greater level of protection.
The primary payments used in international transactions are: letter of credit, cash in
advance, open account, on consignment, draft or documentary collection (bill of
exchange).
Letter of credit it is a written undertaking by a bank (issuing bank) given to the seller
(beneficiary) at the request, and in accordance with the buyer’s (applicant) instructions to
effect payment — that is by making a payment, or by accepting or negotiating bills of
exchange (drafts) up to a stated amount, against stipulated documents and within a
prescribed time limit.
Letter of credit is the most widely used payment modality in international trade because
Credit risk is reduced if the documents comply with terms of the letter, covered by
international rule and system for settling disputes There are many types of letter of credit
like sight terms, revocable and irrevocable, confirmed and unconfirmed, red clause,
transferable and other special letter of credits type.
In Processing and facilitating letter of credit payments it involves parties; these parties are
the exporter, importer and banks from buyer and sellers country. Banks in sellers and
buyers country are the main actors to facilitate the letter of credit payments. The roles and
function of banks in processing letter of credit can be in different way it can be as advising

bank, confirming bank, issuing bank, negotiating bank, paying bank, reimbursing bank and
transferable bank.
Cash in advance or Advance Payment method allows the buyer to pay cash in advance to
the seller. Although this method of payment is not uncommon, the seller requiring full
payment in advance may cause lost sales to a foreign or domestic competitor who is able to
offer more attractive payment terms.
The cash in advance may be most practical method if; the buyer lacks creditworthiness, the
buyer is not able to offer sufficient security for payment, the buyer is located in a region of
politic and/or economic instability, the product is so specialized that it is specifically made
for the customer and cannot be easily sold to another customer.
An open account transaction means that the goods are manufactured and delivered before
payment is necessary (for example, payment could be due 14, 30, or 60 following
shipment or delivery). The method provides great flexibility and in many countries sales
are likely to be made on an open-account basis if the manufacturer has been dealing with
the buyer over a long period of time and has established a secure working relationship.
With consignment sales, the seller does not receive payment until the importer sells or
resells the goods. The product stays with the importer until all the terms of the sale have
been satisfied.
With the Draft or Documentary Collection Method, the seller or exporter ships the goods
and draws a draft or bill of exchange on the buyer or importer through an intermediary
bank. The draft is an unconditional order to make a payment in accordance with certain
terms. The documents needed are specified before the title for the goods is transferred.
Self Test Exercise Questions
Part; I: Multiple Choices
1. In a documentary collection, the banks;
A. Evaluate the quality of the goods before shipment

B. Act as intermediaries in the collection process
C. Finance the buyer and the seller
D. Dictate the terms
E. Only check the drafts

2. An exporter receives a P/O (purchase order) and payment for 100 kg. of knitting yarn.
This is an example of which type of payment option?
A. Cash in advance
B. On consignment
C. Open account
D. Letter of credit
E. Draft or documentary collection
3. If the bank holds shipping documents in custody and delivers them to the buyer upon
receipt of payment, what type of document of payment term is this?
A. Letter of credit
B. Cash in advance
C. Cash against goods
D. Documents against collection
E. Open account
4. An exporter receives a P/O (purchase order) for 1000 pullovers and ships the
goods and the documents directly to the buyer before receiving payment for the goods.
Which payment option is this?
A. Cash against documents
B. On consignment
C. Time draft
D. Cash in advance
E. Open account
5. An “open account” transaction gives all of the advantages to the;
A. Consignee
B. Seller
C. Bank
D. Forwarder
E. Buyer
6. Identify the payment option(s) which place(s) the seller in the risky position of
nonpayment by the buyer (select all that apply)?
I. Cash in advance III. Irrevocable letter of credit at sight
II. Open account IV. On consignment
A. I and ii
B. Only ii
C. Ii and iv
D. Only i
E. Only III

7. What kind of payment option(s) should the seller consider when his/her products are in
low demand (select all that apply)?
I. Cash in advance III. Open account
II. Letter of credit IV. Documents against payment
A. Only ii
B. Ii and iii
C. Only iii
D. Iii and iv
E. Only iv
8. Identify the risk(s) faced by the seller when collecting payment from an overseas buyer
(select all that apply).
I. Country III. Industrial
II. Political IV. Foreign exchange
A. Only i
B. Only iii
C. Ii and iii
D. Iii and iv
E. I and iv
9. What payment option(s) should the seller consider when he/she is willing to extend
credit to the buyer?
A. Cash in advance
B. Letter of credit at sight
C. Draft or documentary collection
D. Documents against payment
E. Documents against acceptance
10. The seller is best protected by which of the following payment terms;
A. Open account
B. Revolving letter of credit
C. Confirmed, irrevocable letter of credit
D. Red clause letter of credit
E. Transferable letter of credit
11. In a letter of credit transaction, the bank deals;
A. Only with goods, not with documents
B. Only with documents, not with goods
C. With documents and goods
D. With quantity and quality of goods
E. Only with payment

Chapter Three
3. Ethiopian Import/Export Bank and Customs Clearing Procedures

and Practices.
Learning objective
After studying this chapter students will able to:

 Understand Bank and banking practice in Ethiopia.
 Understand Ethiopian commercial banks practice in letter of credit opening and
settlement procedures.
 Understand Harmonized and nomenclature tariff system in Ethiopian.
 Know Ethiopian Custom regulations and operations.
 Recognize tariff and tariff types in Ethiopia
Introduction
Customs and commercial banks are the main actors in facilitating import –export
transaction.
Customs agency is responsible to control the movement of goods and peoples in and out of
a given nation. It is responsible to control illegal or contraband or underground trade,
inspects goods for import or export to confirm with stated quality standards, controls the
inflow of forbidden goods and dangerous drugs, refrain and control the out flow of
strategic and scarce resource of the country and to hostile country and collects taxes and
duties from goods of imported and exported.
Banks are financial institution facilitate import -export transaction by assessing the risks
associated with payments, offering credits and supplying foreign currency and effecting
payments.
Therefore, this chapter highlights the operations and practice of Ethiopian customs
authority and the laws and regulations that in forces to control of goods in international

transaction. Harmonized tariff systems, nature of tariffs and duties in Ethiopian custom are
themes of the chapter.
In addition the chapter covers the practice and nature of commercial banks in Ethiopian
and procedure in opening and settling letter of credit.
3.1. Ethiopian banking and commercial banks practice in letter of credit

Opening and Settling Procedures.
3.1.1. Nature of Bank and Banking practice in Ethiopia
What Is Banking?
Different authors banking differently, but conveys more or less the same meaning .some of
the definitions are:
Bank is a financial institution that accepts various type of deposit and use the fund
attracted primarily to grant loans.
Bank is a person or corporation, which hold itself out to receive from the public deposit
and payable on demand.
Bank is a manufacturer of credit and machine for facilitating exchange.
Banking means accepting for purpose of lending or investment ,of deposit of money from
the public ,repayable on demand or otherwise and withdrawals by cheques ,draft or
otherwise.
A banker is a person or company carrying on the business of receiving money, and
collecting drafts, customers subjected to the obligation of honor cheque drawn up on them
from time to time by the customer to the extent of the amount available on their account.
Types of banks
There are five commonly known types of banks .these are
1. National Bank.
2. Commercial Bank.
3. Construction and business bank.
4. Investment Bank.
5. Development bank

Activity 3.1
1. What is bank and banking?

____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
2. Mention types of bank in Ethiopia?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
A. The National Bank

Economist of financial experts lack in unanimity about the function of national /central
bank. According to kirsch and Elkin the essential function of central bank is maintenance
of stability of the monetary standard. De Kock has removed confusion by monitoring the
following seven function of national bank in his well known book central banking.
According to him a central bank is
 Bank of issue
 Banker ,agent and financial advisor to the government
 Custodian’s of national foreign exchange reserves
 Bank of central settlement and transfer acting as a clearance house.

 Controller of credit
The function of a national bank is different from those of commercial banks due to the
following three major reasons.
Firstly a central bank is established for public service rather than for profit .unlike the
commercial banks, its operations are not basically guided by profit motive.
Secondly a central bank has special relationship with government of the country. Since the
central bank acts as the banker to the government the latter informally influence its
activities.
Thirdly a central bank generally does not deal directly with the public; it deals with the
public indirectly through the commercial banks and the money market .it doesn’t welcome
deposit from the public as doing so would amount to take over the function of commercial
banks.
Major Functions of National Bank
Bank of issue –central bank enjoy the monopoly of bank note issue .i.e. no bank other than
the central bank is authorized by law to print currency note.
Government banker, fiscal agent and advisor- as government banker, it manages the
banking account of government department and enterprises. It gives short term loans to
government in anticipation of collection taxes or raising of loans from public.
Custodian Of Commercial Banks, Cash Reserves-it keeps cash reserves of commercial
banks and other banks in the economy and thus acts as the custodian of the ultimate
reserve of the country, which support its credit and banking system other banks look to it
for guidance and direction in shaping their policy in accordance with its directions .it
effects centralization of cash reserve member banks in the country.
Custodian Of Nation’s Foreign Exchange Reserve -the essential purpose behind
entrusting the custody of nation’s foreign exchange reserve to the central bank is the
meeting of adverseness at any time in country’s balance of payments position and the
maintenance of exchange rate stability. To the extent ,however the a central bank is
required by law to maintain a minimum reserve against both its note and deposit liabilities
,it’s holding of gold and foreign exchange are immobilized and are not available for
keeping equilibrium of the balance of international payments.

Bank Of Central Clearance ,Settlement And Transfer-since commercial banks keeps

their surplus cash reserve in on deposit on central bank it far easier to clear and settle
claims between them by making transfer entities in their accounts maintained with the
central bank than if each commercial bank entered in to separate clearance and settlement
transactions with other banks individually .much labor and inconvenience experienced in
the individual system of clearance and settlement is avoided when central bank enters in to
the picture as a central clearing agency . the process of effecting settlement between the
banks on the books of central bank while comparatively simple to operate is of great
convenience to the banking community as it economizes the use of money in banking
operations.
Controller Of Credit –to control unwarranted fluctuation in the volume of credit by
causing wide fluctuation in the value of money cause a great social and economical unrest
in the country. Thus, we believe that at this level you understand the indirect role of the
national banks in controlling the movement in and out of a country. Since import/export
trade are participants in the flow of money, they under the custody of the national bank of
Ethiopia.
B. Commercial Banks
Commercial bank is a business that issue short term and medium term loans. short term
loans is grant for not more than one year , and medium term loan is loans that mature more
than five consecutive years.
Commercial banks have the responsibility to provide the following services in accordance
with the general directives issued to it by the supervising authority the national bank of
Ethiopia.
 Receiving saving, demand and time deposit
 Make loans and advances
 Draw accept discount buy and sell bill of exchange, drafts and promissory notes
payable within or outside of Ethiopia.les.
 Issue letter of credit
 Buy, sell hold or otherwise deal in foreign exchange
 Provide monetary transfer services

 Hold, acquire and sell negotiable instruments and securities by the government or
private persons.
 Keep in safe otherwise, securities, jewels, precious metals and other valuable.
 Issue cheques and transfer cheques and generally deals with cheque
 Negotiate underwrites and bond.
 Act as an agent for persons and, in this capacity, engage in the sell of money and
shares.
 Control the end use of credits, loans and other facilities that if provides to its
customers.
 Enter in to contract Acquire, posses, own, mange, sell, exchange and dispose of
property for the purpose of attaining its objectives and the proper functioning of its
operation.
 Sue and be sued and
Perform such other banking activities as are customarily carried out by commercial banks.
In Ethiopian there are sixteen (16) commercial banks namely .Commercial Bank Of
Ethiopia ,Awash International Bank, Wegagen Bank, Dashen Bank ,Abay Bank, Birhan
International Bank ,Addis International Bank, Buna International Bank, Zemen Bank ,
Anbessa International Bank, Oromia International Bank, Cooperative Bank Of Oromia
,Nib International Bank, Construction And Business Bank, Bank Of Abyssinia ,United
Bank.
C. Developmental Bank
Developmental banks are essentially a multipurpose financial institution with abroad
development outlook. A development bank may , thus be defined as a financial institution
concerned with providing all type of financial assistance(medium as well as long term ) to
business units in the form of loans ,underwriting, investment and guarantee operations and
promotional activities economic development in general ,and industrial development in
particular . In short development –oriented bank. The following are the main
characteristics and features of a developmental bank:
 It is a specialized financial institution
 It provides medium and long-term finance to business to business units.

 Unlike commercial banks, it does not accept deposits from the public
 Its primary objective is to promote economic development by promoting
investment and entrepreneurial activities in developing economy.
 It provides financial assistance not only to the private sector but also to the public
sector undertakings.
 It motive is to serve the public interest rather than to making profits .it works in the
generally interest of the nation.
D. Construction and Business Bank (CBB)
Objectives and duties of CBB are
 Provide hotel and tourism
 Providing loan for construction sector activities
 Provide short and medium term loan to all economy sector
 Operate foreign banking service
 Accept savings, demands and time deposit
 Engage in such other activities as are customarily carried out by banks.
Activity 3.2
1. Explain the function of national bank of Ethiopia?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
2. Explain the functions of commercial banks of Ethiopia?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________

3. Distinguish development bank and national bank?

____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
Identifying the Service of Commercial Banks

The function of commercial bank can be classified in to two broad categories .these are
primary and subsidiary. The primary function includes receipt of deposit and lending of
money .and subsidiary functions includes agency, service and general utility services.
Function
Primary Subsidiary
Borrowing Lending Agency General

service Service
Figure 3.1: The Function of Commercial Banks

I. Primary Function
Every commercial bank performs the following functions.
Receipt Of Deposit Or Borrowing-the most important function of a modern bank is
borrowing of money or receipt deposit from the public. Bank borrows money from the
public by accepting deposit on:
 Current /checking account deposits.
 Fixed/time deposit
 Saving deposits
 Recurring deposits
 Endowment deposit
 Miscellaneous deposits
Lending Of Money-they provide loans and advances to the need persons against personal
securities of borrowers or securities of movable and immovable properties. Bank can grant
loans/make advances in four ways .these are cash credit, over draft, direct loans, and
discounting bills.
While making advances, generally no cash is given to borrower .an account is opened in
the name of the borrower and she/he is authorized to withdraw money through cheque until
the amount of loan agreed by the bank is exhausted.
Cash Credit: it is a type of advance where a bank permits its customer to borrow money
up to a particular limit by a bond of credit with one or more securities. The customer can
withdraw money as and when required. The bank will charge interest only the actual
amount withdrawal by the customer.
Over Draft: it is a form of finance by which the customer is allowed to draw beyond the
deposit made in the existing current account. To meet the temporary needs of the customer
the bank may permit the customer to overdraw money as and when required. The bank will
charge interest only the actual amount withdrawal by the customer.
Direct Loan: when the bank make a lump-sum advance to the customer it is called direct
loan interest is charged.

II. Subsidiary Functions

To retain existing customers and attract new customers banks perform various subsidiary
functions. There are two types of subsidiary /secondary functions.
These are agency functions
General utility services
a. Agency Services
The service rendered by a bank to its customer as their agent is called agency
function. Commercial banks usually perform the following agency services.
 Collection and payment of cheque and promissory notes.
 Collect divided and interest on behalf of its customers.
 Transfer of fund from one bank office to another bank
 Purchase and sell shares, debenture and government securities.
 Act as representative of correspondents of their customers and other banks such
as money transfer.
 Trustee service and execution of will.
b. General Utility Service
 Safe custody of valuables
 Locker facility
 Letter of credit
 Issue travelers cheque
 Credit information
 Foreign exchange
 Remittance of money
3.2. Ethiopian Bank practice and procedure related to Import
/Export payments.
Once the importer and/or exporter agree on the terms of the sale, they require financial
mediators to settle payments. The exporter wants to make sure that the amount of money
for the exported items will be paid. Also the importer wants to get the goods on time by
settlement of the price there of .since the importer and exporter work under different

currencies and social -economic situation the role of banks in facilitating transaction is
undeniable.
Every import /export should be recognized by the national bank of Ethiopia. It ensures that
exporters have imported the residual foreign currency in the country and importer has
made use of the currency permit for importation of goods. Now, lets us see separately
export/import bank related procedures.
Export Related Bank Procedures
To become beneficiary of export related bank service an exporter should present the
following documents
1. NBE clearance certificate, except for those in on-delinquent lists
2. Commercial invoice
3. The original letter of credit /swift message (for L/C payment settlement
4. Export license
5. Ministry of agriculture certificate (for food items, leather, raw hides and skins)
6. Bank permit four copies
7. Custom authority declarations (sets)-check, name of exporter, importer, invoice
number, weight e.t.c optional
8. Sales contact –description items, terms of delivery, unit price, terms of payment
etc.
9. Trade license
10. Letter of application
Bank Permit for Export Goods

As it has been discussed all goods ,whether entering or leaving ,should pass through bank
clearance for controlling foreign exchange and balance of payment of the country . Goods
to be exported from Ethiopia the form for this purpose is called “bank permit for export of
goods.”
Bank permit for export of goods contains the following information to be filled out.
Full description of goods, marks and number of packages of quantity ,Buyers (importers)
name and final destination of goods ,Basis of shipment ,Sales value of goods in birr and
foreign currency ,Condition of shipment (export on a single shipment or on partial

shipments) ,Commitment of the exporter per the regulation of the NBE. Name of the
exporter, tax payer registration number (Tin, signature, date)
This form is prepared in four copies and distributed to authorize bank by the NBE, NBE,
customs and exporter. The bank permit for export is used for all payments i.e. L/C, CAD,
TT (advance) or consignment.
Commitments by the exporter to the NBE

All residual collection from the export at its foreign currency value will accrued to
a bank entrusted by the law to that end.
For goods exported on consignment (open account) basis it is his/her responsibility
for the repatriation of the foreign exchange value stated in the permit within 90
days.
For goods that will be exported under advance payment, credit advice confirming
receipt of the related foreign exchange paid for the export should be produced.
Specifying the last date of delivery or accrual date of the foreign currency
Up on the payment of the foreign currency to an authorized bank in Ethiopia birr at
the rate of exchange at the time of such payment is effected.
The export permit will not be transferred, sold otherwise without the permission the
authorized bank.
The above mentioned documents should be presented to the permit section(international

banking division )of commercial banks in order to get export permit , except for the goods
like coffee ,fertilizer and some other where permits in connection with import of such
goods is given by NBE.
After the bank cross checks the relevant, it will process it based on the export payment
settlement modalities. There are two methods being used mostly in case of export
payments settlements in Ethiopia.
Import Related Bank Procedures
The procedure employed in facilitating import related procedure differs per the payment
modalities. In Ethiopia there are here types of payment settlement modes. There are three
types of import payment settlement modes in Ethiopia.

1. Cash in advance (advance payment)TT

2. Cash against document(CAD)
3. Documentary letter of credit (L/C)
Even if these payment modalities follow separate procedure, they require in common
presentation of the following documents.
 NBE clearance except for those in the non –delinquent list
 Pro forma invoice
 Insurance policy with copies
 Trade license and TIN (taxpayer) certificate with copies
 Foreign exchange application form (five set).
The international bank division (IBD’S) at commercial bank ,based on the customer ‘s
delinquency or non –delinquency status which is obtained from the NBE ,prepares and
issue bank permit for export of goods or bank permit for imports.
Foreign Exchange Application for Imports
The NBE of Ethiopia has the power vested in its control the movement foreign currency
.thus an importer should produce clearance from the NBE .if she/he is delinquent .the NBE
informs the commercial banks the list of delinquent accounts (importers and exporters
.then the IBD’s provide the importer “foreign exchange application for imports “. Of
course, trade license, import licenses; import licenses, Performa invoices should be
presented to the office.
Foreign exchange application for imports is bank permit for imports from used for all types
of payments modes. CAD (cash against document) ,TT(cash in advance),L/C (Letter of
credit)
This application for a license must be submitted in four copies for customer, file, NBE and
customs with attested pro forma invoice .this form contains following information.
 Name of the application and address
 Trading license No.
 Product specification
 Foreign Currency Amount (Equivalent in Birr) Including FOB, Freight, C&F

 Methods of Payment, Port Of Destination, Shipment Allowed By

 Supplier Name
Moreover, the applicant should observe the following points

 The ForEx license will not be transferred, and will be available for one payment
only.
 It is issued subject availability of foreign exchange without commitment by the
issuing bank.
 The importer should produce proof of entry of the goods in to Ethiopia to the NBE
with In Four Months of the Date up On Which Payments is made under this
license.
 If the license is not utilized within the validity date, it should be returned to the
issuing bank.
Foreign exchange application for import is bank permit for imports forms used for all types
of payment modes.
 CAD(cash against document)
 TT(cash in advance)
 Letter of credit.
Activity 3.3
1. Mention down bank related export procedures?
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2. Explain import related bank procedures?
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3.3. L/C Opening and settlement procedure in Ethiopian

commercial banks practice
A buyer and seller conclude a commercial contract requiring that the seller be paid by L/C.
The buyer then applies to this bank where the later issues L/C in favor of the seller .the
buyer usually completes a detailed application form enables the buyer to stipulate the terms
of the L/C concerning the method of payments ,and the documents the seller must present .
It also contains terms and conditions intended to protect the issuing bank. Normally the
applicant undertakes to reimburse the bank. If the obtains the required documents and
agrees the documents become the banks property if she/he doesn’t reimburse it .the actual
reimbursement arrangement between the applicant and the bank will reflect the applicants
credit standing either country’s foreign exchange position but its control of the documents
does represent some security for the bank. The lesser is the margin percentage to be held
by the bank, the more is the credit worthiness of importer (applicant).
The issuing bank transmits the L/C to the advising (nominated) bank, which is usually its
correspondent bank or a bank with which the issuing bank has a test key or bilateral key
arrangement in the seller’s country .the advising bank then advises the L/C TO the
beneficiary, adding its confirmation if asked to do so .the advice of the L/C imposes a
conditional obligation on the issuing bank to pay the exporter for the presentation of the
right documents at the right time.
Specifically the banker
 Receives L/C application with pro forma invoice ,import permit and insurance
certificate (if applicant is granted with L/C facility).
 Checks them against checking form number ,L/C 1025 and their inter compliance.
 Marks the date of receipt of the application on the face of the application.
 Register some details of the application on register book.
 Nominate advising bank

 Assign L/C number and prepare L/C file.

 Prepare L/C instrument using L/C 1025.
 Calculate margin and charges per the bank’s tariff and prepare tickets 9from
number (L/C 1003).
 Fills L/C history card (L/C-1003)
 Gets L/C instrument and tickets checked and signed by signatures.
 Posts tickets on posting machine or PC.
 Sends original and first copy of the instrument for the transmission to telex
division.
 Attaches second copy of the instruments and file copy of the tickets to the L/C file.
Letter Of Credit Amendment
After the establishment of the letter of credit there may raise a need to change some terms
and conditions of the L/C .this can be initiated by the applicant or beneficiary .if both
parties i.e. seller and buyer, agree on the change, the applicant submits an application to
the issuing bank to make the requested changes on the letter of credit .this alternation of
terms and conditions on the letter of credit is known as amendment.
When requested for an amendment on L/C terms and condition agreed upon by both
parties, i.e. buyer and seller, is received the banker.
 Check the contents
 Takes the specified L/C file
 Prepare the amendment telex message.
 Calculate the related charges per the bank’s tariff and prepares tickets.
 Update the L/C history card if it has to be done.
 Sets the telex message and tickets checked signed by signatories, post
tickets on posting machine.
 Sends original and first copy of the telex message for the transmission of
the telex division.
Some of the reasons that might require letter of credit amendments could be:
 Increase in the amount of money there in the L/C
 Extension of expiry date and shipment date.

 Changes in trade terms .E.g from C and F to FOB.

 Correction of misspellings.
 Change in the origin of goods.
 Omission or addition of documents.
 Change in payment conditions.
 Change in beneficiary address …e.t.c.
As described above the two banks i.e. the opening (issuing bank/the advising bank
communicate about the L/C through the telex message normally called SWIFT (society for
World Wide Web interbank financial telecommunication) message. Thus the SWIFT is an
instrument used as a method of advice between these banks. The SWIFT message prepared
in three copies of which ,ones goes to SWIFT section ,and one for customer and the last
copies is for file.
Letter of credit sight advice and settlement procedure
Upon dis-patchment of the goods, the exporter presents the requested documents to the
advising (nominated bank). The advising bank will then check the document carefully to
ascertain whether they are in accordance with the L/C stipulations. If they are, the advising
bank, which usually becomes a negotiating bank. Automatically in this case, will pay the
beneficiary, or agree to pay him later in accordance with the terms of the L/C.
Unless it has confirmed the L/C, the advising bank performs these services as agent of the
issuing bank. If it has confirmed at L/C the advising bank checks and pay on its account as
the confirming bank.
The advising bank then sends the documents to the issuing bank, claiming reimbursement
in accordance with the L/C .if they are in order, the issuing bank reimburse the advising
bank .if then passes the documents to the importer in return for the sight or differed
payment.
In summary the L/C presentation and settlement procedure consists of the following
activities carried out by the banker.
 Receive the incoming documents.
 Marks documents arrival date.

 Checks documents against L/C instrument and themselves for their inter
compliance using L/C checking form.
 If documents are discrepant, make correspondence with negotiating /confirming
bank.
 Give guidance to applicant of the discrepancy or if the discrepancy is accepted by
the applicant, make necessary computation and prepare tickets –advice sight and
L/C settlement tickets.
 Post tickets.
 Advice the applicant to collect documents after being certain that unpaid balance
(margin) with charges collected like interest charges on advance is made.
 Gets the bill of lading endorsed by the appropriate signatories.
 Hand over the whole documents to the applicants or to the legal representative
against signature.
Activity 3.4
1. Explain letter of credit settlement and procedure of commercial bank practice in

Ethiopian?
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2. Discuss conditions that demand an amendment on letter of credit?
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3.4. Harmonized System

The Harmonized Commodity Description and Coding System generally referred to as
"Harmonized System" or simply "HS" is a multipurpose international product
nomenclature developed by the World Customs Organization (WCO). It comprises about
5,000 commodity groups; each identified by a six digit code, arranged in a legal and
logical structure and is supported by well-defined rules to achieve uniform classification.
The system is used by more than 200 countries and economies as a basis for their Customs
tariffs and for the collection of international trade statistics. Over 98 % of the merchandise
in international trade is classified in terms of the HS.
The HS contributes to the harmonization of Customs and trade procedures, and the non-
documentary trade data interchange in connection with such procedures, thus reducing the
costs related to international trade.
It is also extensively used by governments, international organizations and the private
sector for many other purposes such as internal taxes, trade policies, monitoring of
controlled goods, rules of origin, freight tariffs, transport statistics, price monitoring, quota
controls, compilation of national accounts, and economic research and analysis. The HS is
thus a universal economic language and code for goods, and an indispensable tool for
international trade.
The Harmonized System is governed by "The International Convention on the

Harmonized Commodity Description and Coding System". The maintenance of the HS is
a WCO priority. This activity includes measures to secure uniform interpretation of the
HS and its periodic updating in light of developments in technology and changes in trade
patterns. The WCO manages this process through the Harmonized System Committee
(representing the Contracting Parties to the HS Convention), which examines policy
matters, takes decisions on classification questions, settles disputes and prepares
amendments to the Explanatory Notes.
The Ethiopia t a r i f f is based on the Harmonized System (HS). The legal framework for
the application of the HS is Article 4 of the International Convention on the

Harmonized Commodity Description and Coding System and Ratification Proclamation

No. 67/1993, Article 5 of the Definitions of Power and Duties of the Council of
Ministers and the Executive Organs of the Federal Democratic Republic of Ethiopia
Proclamation No. 4/1994 and Article 51 (1) of Proclamation 60/1997. All Customs
tariffs revisions and amendments since 1993 have been done based on the
Internationally Accepted Commodities Descriptions and Coding System of the HS
including the latest amendment of import tariffs Regulation No. 209/2003, dated January
9, 2003.
The Harmonized System (HS) is articulated in 4 digits, 6 digits and 8 digits of the
Harmonized System (HS) tariff item number. The HS 1996 version had been replaced by
the 2002 version as from January 1, 2003. Both import and export tariffs are based
on ad valorem duties. There are no preferential tariffs other than for imports from the
COMESA member states. All imports from the Sudan (Proclamation No 318/2003 and
Article 4 of the Agreement), and imports of salt, fish and fish products, and bottled or
canned water from Djibouti are zero-rated. The import duty rates for the rest of
imports from COMESA member states are 10 percent less than the (most favored nation)
MFN duty rates.
A series of customs tariff amendments and measures have been taken since 1993. The
maximum import tariff has been decreased step by step from 230 percent to 35 percent.
The average tariff rate has also been reduced from 41.6 percent to 17.5 percent and
tariff bands from 23 to 6 including the zero rate bands. As per Regulation
No.80/2002, the existing customs tariff amendment has been done in January 2003. At
present, there are five import tariff bands excluding zero rates. They are 5,10,20,30 and
35 percent.
The number of tariff lines is 5608, out of which 5424 are subject to ad valorem
duties while the rest are duty free items and prohibited. Currently the lowest and
highest tariffs are 5% and 35% respectively, which makes the dispersion of 30%. The
current simple arithmetic average of all tariff lines is 20 % and the weighted average tariff
rate is 17.5 %. In general, the duty-free category of imports is mostly comprised of

fertilizers, articles of wood, railway or tramway locomotives, rolling-stock and parts

thereof, aircraft, spacecraft and parts thereof, etc. Within the 5 and 10 percent bands are
raw materials and machineries, which are used by manufacturing industries. Items
within the 20 percent band include organic chemicals, carton, boxes, envelopes,
sacks and bags, thread, synthetic filaments, artificial filaments, yarn and synthetic
monofilament staple fibers. Items within the 30 and 35 percent bands include perfumes,
soaps, tiles, transmission belts, ornaments, silk, cotton, jewelry, footwear, motor
vehicles, textiles products and toys. To encourage sectoral development, and to
accommodate social health and security issues, the Ethiopian customs tariff book also
contains the second schedule which mainly lists conditional exemptions at nil or
reduced rates and exemptions at nil for importation by or on behalf of privileged
organizations, persons, public bodies and institutions.
Activity 3.5
1. What is harmonized tariff?
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3.5. Import /export Customs Clearance Procedures: ECUA

Practices.
Definition of Custom
Custom, which is responsible s an authority or agency in country for collecting custom
duties and for controlling the flow people and goods (including personal effects and
hazardous items) in and out of the country .depending on local legislation and regulations,
the import or export of some goods may be restricted or forbidden and the customs agency

enforces these rules. The custom agency may be different from the immigration authority,
which monitors persons who leave or enter the country. Checking for appropriate
documentation, apprehending people wanted by international search warrants and
impeding the entry of others deemed dangerous to the country.
Under this chapter we will see the practice of Ethiopian custom authority taken from
federal Negarit Gazet proc.no 60/1977 re –establishment and modernization of Ethiopian
custom authority .
Objectives of ECUA
The Authority shall have the following objectives:
I) Collect duties and taxes on goods imported or exported;
2) Implement Laws and International Conventions related to its objectives;
3) Control the importation or exportation of prohibited or restricted goods.
The Powers and Duties of ECuA

To achieve its objectives, the Authority shall have the following powers and duties;
i. to assess duty paying values, collect duties and taxes, collect license and service
charges;
ii. To examine documents of importers or exporters so as to enforce customs law;
iii. To establish customs stations in any customs port, frontier post and transit routes;
iv. to approve the place for the deposit of import and export goods, establish
warehouses, give license for those who establish customs warehouse, supervise the
proper handling of deposited goods; suspend or revoke warehouse license;
v. to prevent and control the importation or exportation of goods in contraband;
vi. to search any goods and means of transport entered in to or departing from Ethiopia
through customs ports, frontier posts and other customs stations;
vii. To detain prohibited, restricted or uncustomed goods; and take the necessary
measure;
viii. Under the authority given by and supervision of the Attorney General, to
investigate customs offences; institute criminal proceedings; and follow up the case
in court;

ix. To collect, organize and disseminate import and export data's;

x. To carry out studies as to the leveling, assessment and collection of customs duties,
devise ways of combating and repression of contraband activity, and implement
same upon approval;
xi. To sale or dispose otherwise goods without owner, abandoned or forfeited;
xii. To issue or revoke customs clearing license;
xiii. To prepare forms and brochures necessary for customs activity;
xiv. To prepare and implement systems for the assessment, and collection of duties,
financial accounting and other related activities;
xv. To arrange for trainings and workshops to upgrade the efficiency of customs
officers;
xvi. To own property, enter into contract, sue and be sued in its own name;
xvii. Perform such other related activities required for the attainment of its objectives.
3.5.1. Custom Clearance Procedures and Documents in Ethiopia
According to the Ethiopian custom law, all legally imported goods are subjected for
custom clearance so the customs duties are paid on imports; they have to be declared up on
their arrival .customs clearance procedure includes:
1. Applying for customs clearance by filling Ethiopian customs declaration form
(ECDF).
2. Submission of all required documents together with copy of ECDF.
3. Verification of documents by the customs officer (checking the truthfulness).
4. Customs inspections of goods in the presence of the importer or the agent.
5. Customs valuation of the declared goods (giving value in terms of money).
6. Customs calculation of taxed, fees and duties.
7. Authorization of their released.
The documents required for completing custom clearance include.

 Commercial invoice (total/Performa/single price of goods)/
 Shipping documents (bill of lading or air way bill).
 Packing list (a list of goods contained in a specific package container).
 Import license/import permit

 Certificate of origin: a document certifying the country from which the goods
originated as distinct from which they were immediately exported.
 Insurance documents
 Bank permit
 Permit from controlling agencies for restricted items.
 Duty free entitlement letter for duty free imports
 Freight invoices, etc.
Activity 3.6
1. List down custom clearance procedures in Ethiopia customs authority?
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2. Explain the documents required to complete custom clearance?
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3 .6. ECAU in Customs Control

Import and Export
For the implementation of the objectives of customs, the following goods shall be under
the supervision and control of Customs:

(a) Imported goods from the time they get at Customs port until the completion of customs
formalities and received by the importer;
(b) Goods under drawback procedure from the time of draw back claim until exportation;
(c) Goods, entered into customs warehouse until removed from the warehouse;
(d) Goods of export from the time they entered in to customs port until the completion of
customs formalities and be exported;
(e) Goods in transit, from the time their movement is allowed until the completion of
transit procedure;
(f) Goods found without owner, abandoned, forfeited or contraband goods until they are
sold or disposed otherwise.
(g). Without prior authorization of customs, no one is allowed to enter in to customs
warehouse in which goods are deposited or; open or do any acts on those goods controlled
and supervised by customs in accordance with sub Article (1) of this Article.
(h). The Authority shall be responsible for the damage on goods under its control and
supervision caused by its employees while discharging their official duties.
Postal consignment
a) Goods imported or exported through post office shall not be released without
accomplishing customs formalities.
b) The goods imported or exported through post office shall accomplish customs
formalities under the control and supervision of customs officer.
Prohibited Goods
Any goods the importation, exportation or transit of which is prohibited by laws or
international agreements to which Ethiopia is a party, shall be re-exported or forfeited
without any special procedure to be followed.
Restricted Goods
a) Goods the importation or exportation of which is restricted by law, unless they
fulfilled specific formalities or conditions, shall be detained in customs port unit a
decision is passed upon.

b) Goods detained in accordance with sub Article (1) of this Article shall be barred of
departing from Ethiopia or shall be re-exported to the country from which it is
imported, unless a permission is given to it, within 30 days, by the office
controlling its importation or exportation.
c) Where restricted goods are not re-exported within 30 days from the date of
notification it shall be considered as abandoned to the customs.
Declaration, Examination and Release of Goods

Lodgement of Customs Declaration
I. Except exempted by directives all goods entered in accordance with Article 17 of
this proclamation shall forthwith lodged for clearance inspected copies of customs
declaration.
II. Goods exempted from clearance shall be determined by directives issued by the
Board.
III. Where customs clearing agent applies for hold function and fulfils supporting
documents, pre lodgement of customs declaration may be allowed for any five days
before the arrival of the goods at customs port. However, if the goods do not arrive
within the five days, a new declaration shall be lodged at the time of arrival of the
goods.
IV. The Authority may allow goods to be cleared urgently due to their nature or the
service they are required for. The details and the reasons that justify this procedure
shall be prescribed in the directives issued by the Authority.
V. All information supplied in the customs declaration shall be filled and signed by the
customs clearing agent.
VI. Any imported goods registered for home consumption shall be identified and
declared in the customs declaration in dutiable, duty free or duty draw back import
regimes.
VII. Goods entered for an outright export or temporary export shall be declared in
Customs declaration.
VIII. Customs declaration accepted by the entry reception shall immediately be
registered for the accomplishment of customs formalities.

Supporting Documents of Customs Declaration

On the lodgement of customs declaration and declaration of facts the following original
documents shall be supplied to customs in a number of copies fixed by the Authority:
(a) Transportation document,
(b) Price document,
(c) Bank permit,
(d) Packing list,
(e) Certificate of origin, and
(f) Other necessary documents to be prescribed in the directives issued by the Authority.
Transportation document that is required in support of export goods shall be a document
that is used as evidence for the transportation of goods up to the customs port of exit.
The Authority may require any document to be presented in an Amharic translation made
by official translators.
Customs declaration shall be acceptable where the necessary documents which are
prescribed under this Article are presented and approved by the customs officer.
Verification of Documents and Examination of Goods

The proper customs officer shall verify documents and examine goods to assure the
accuracy of information supplied in the document. And the owner of the goods or his
authorized agent shall attend during examination of the goods. Where the owner or his
agent fails to appear at the time of examination, the proper Customs Officer shall open and
examine the goods in the presence of relevant officials. Procedure of goods examination
shall be prescribed by directives issued by the Authority.
Examination at the Request of Importer
If any importer or his agent believes that the goods have suffered damage, short or
pilferated in route may request for prior examination of the goods before the lodgement of
goods declaration.
Where the request made in accordance with sub- Article (1) of this Article and its reason
are justified by the Authority; goods examination may be carried out upon payment of
service charge. Customs declaration shall, therefore, be filled in accordance with the

examination report. Service charges for prior examination of goods shall be prescribed by
directives issued by the Authority.
Delivery of Goods
All goods listed in customs declaration shall be removed from the warehouse by the owner
or his agent immediately upon the accomplishment of customs formalities.
A goods which is not removed from the warehouse with in the period specified in sub-
Article (3) of Article 43 of this proclamation, shall be sold or disposed otherwise as
deemed abandoned to the customs.
Activity 3.7
1. Mention down documents required for lodgement of custom declaration?
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Goods in Transit
Condition for the Movement of Goods in Transit any goods in transit shall:
A. Accomplish transit formalities at the customs port of departure before the
commencement of transit operation. The details shall be specified in directives
issued by the Authority;
B. start the operation under the cover of guarantee prescribed by the Authority;
C. Move only by a clearing agent licensed by the Authority.
Arrival of Transit Goods

All transit goods shall arrive at the port of customs destination in the condition prescribed
and within the period specified by the customs.
Customs Clearing Agent shall report forth with to the customs destination office, the
arrival of the goods in accordance with sub-Article (1) of this Article.

Customs Port and Transit Routes

Goods in Transit shall be imported in prescribed customs ports and be transported through
allowed transit routes.
Customs ports and transit routes shall be determined by the Board and prescribed in public
notice issued by the Board.
Temporary Importation and Exportation of Goods
Temporary Importation
Goods necessary for trade promotion, technology transfer, tourism and cultural exchange,
development works and consultancy service may temporarily be imported without
payment of duties and taxes subject HO be re-exported on the completion of its objectives.
A person who imports goods temporarily, without payment of duties and taxes shall submit
security equivalent to the duties and taxes in accordance with the provisions of chapter 7 of
this Proclamation.
It is prohibited to use goods imported on temporary basis other than the purposes for which
they are imported or to use out of the localities where the activities are carried out.
. Time Limit
1) Temporarily imported goods shall be re-exported within six months or within the time
specified in the project agreement or in agreement entered with the Government.
2) The Authority may extend the time limit for a period of not more than one month where
the importer proves on acceptable ground that the goods imported temporarily cannot be
re-exported within the time specified in sub-Article(1) of this Article.
3) Goods for trade promotion, technology transfer, tourism and cultural exchange may,
upon request, be sold or remain within the country upon payment of taxes and duties based
on their value at the time of request, where the request is made within the period prescribed
for their stay and authorized by appropriate offices to remain in the country.
4) Goods for development work and consultancy services may remain within the country
upon payment of taxes and duties based on their value at the time when the goods are
imported; where it is requested within the period prescribed and authorized by appropriate
offices to remain in the country.

5) Where temporarily imported goods, are destroyed or irrecoverably lost by force majeure
and where it is proved with sufficient evidence, the goods may remain in the country upon
payment of duties and taxes based on the value of goods less the amount of damage.
Temporary Export
Goods exported temporarily by accomplishing customs formalities may be allowed to re-
enter into the country without payment of duties and taxes, on the following conditions:
(a) Imported goods sent abroad for repair and maintenance without repayment of duties
and taxes;
(b) Temporarily imported goods sent abroad for repair and maintenance without
cancellation of the guarantee given at the time of their importation;
(c) Personal effects, automobiles for personal use, machinery and other equipment
necessary for his work abroad;
(d) Goods exported for trade fair, exhibition or cultural show.
Goods returning pursuant to sub-Article (1)(a) and (b) of this Article shall be subject to
duties and taxes on the cost of maintenance and repair incurred abroad.
Goods may be eligible for exemption from duties only if returned from abroad within six
months, unless a greater period is specified in the agreement approved by the government.
Activity 3.8
1. Discuss conditions where goods permitted to temporary import?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
2. Explain conditions where goods are permit for temporary export?

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

Establishment and Administration of Warehouses and Conditions for Warehousing

Goods
Establishment of Warehouses
Customs warehouse, for the storage of import or export goods until the accomplishment of
customs formalities, may be established by the Authority, business organizations or by
individuals.
Customs warehouse established by the Authority shall be notified to the public by
Government Gazettes.
Business organizations and individuals shall establish customs warehouses by a license
given by the Authority.
Warehousing of Goods
Goods arriving at any Customs Port shall enter into appropriate customs warehouse within
5 days from the date of unloading.
Goods not entered into warehouses within the time specified in sub-Article (1) of this
Article, shall be deposited in the Authority's warehouse as ‘deemed imported for home
consumption pursuant to sub-Article (3) of Article 17.
Controlling Warehouses
All goods deposited in the Authority's ware house or in any licensed customs warehouses
shall be controlled by Customs Officers.
Warehouse Registers
1) All warehoused goods shall be registered in the appropriate register book. Method of
registration and the details of the register book shall be prescribed in directives issued by
the Authority.
2) Customs officer shall verify the goods described and its registration by signing on the
books of registration and cargo manifest.
. Time Limit of Storage in Customs Warehouses
1) Any goods entered in. to licensed customs warehouse shall be removed within three
months, by accomplishing the necessary customs formalities.

2) Goods entered in to licensed customs warehouse that is not removed within the time
specified in sub- Article (1) of this Article, may be sold or disposed otherwise after being
transferred to the Authority's warehouse.
3) Where a license for customs warehouse is cancelled before the expiration of three
months, that is prescribed for the storage of goods, the goods shall be transferred to the
Authority's warehouse to accomplish the remaining time for storage.
4) Any expenses for transferring the goods from licensed customs warehouse to the
Authority's warehouse shall be covered by the owner of the warehouse.
5) Goods entered into the Authority's customs warehouse shall be cleared within three
months upon accomplishing all customs formalities.
6) Any'. Goods which is not removed from the Authority's warehouse within the time
specified in sub Article (5) of this Article may be sold or disposed otherwise by the
Authority.
7) The Authority may sale, at any time goods that are perishable or not convenient for
preservation.
Sale of Goods
The proceeds of sale of goods which is not removed from customs warehouse and sold by
the Authority shall be applied in the payment of:
(a) Expenses of the sale,
(b) Duties and taxes,
(c) Charges for the Authority's warehouse,
(d) Cost of transport and the balance, if any, shall be deposited by the Authority for the
account of the owner.
Where no claim is lodged to the Authority within six months from the date of the sale, the
balance deposited shall be transferred to the government.
The Board shall issue directives regarding the sale and disposal of goods under this
proclamation.
Storage of Goods
I) The Authority shall issue directives for stacking and storage of goods in customs
warehouse.

2) Any person who operates customs warehouses shall respect the conditions specified in
the directives issued by the Authority.
3) The operator of a warehouse shall be liable for any damages on goods in disrespecting
the directives issued by the Authority under sub-Article (I) of this Article.
Goods Taken for Sample
I) for the reasons listed hereunder goods may be taken for sample from the warehouse
before the accomplishment of customs formalities:
(a) when required for checking the type and the content of goods to classify in the proper
tariff heading;
(b) When required for identifying the type, quality and country of origin of the goods for
valuation purposes;
(c) When a court or police order its presentation for inspection purposes;
(d) To ascertain the price indicated on the invoice is appropriate for the specified item;
(e) For other reasons allowed by the General Manager.
2) Goods issued for sample shall be returned in the same condition and quantity as they
were taken out. Where it is destroyed during examination or retained for reference it shall,
be. Presumed as warehoused for the purpose of duties, taxation and for other reasons
related with accounts and charges.
Access to Customs Warehouse

Except those authorized by customs, no one is allowed to enter into customs warehouse.
The Authority shall issue directives regarding persons to have access to customs
warehouses and the conditions thereof.
Establishment of Licensed Customs Warehouses
Persons specified in sub-Articles (2) and (3) of custom proc. No.60/1997 may establish
general or private customs warehouses upon receiving of license from the Authority.
Goods to be Deposited in the Authority's Warehouse
The following goods may be deposited in customs warehouses at customs port of entry,
and of exit or at any other places that are established by the Authority:

1) Goods not indicated in the cargo manifest;

2) Goods not declared the purpose they are imported for;
3) Goods not declared to be deposited in a licensed customs warehouse;
4) Goods imported to be deposited in the Authority's warehouse;
5) Goods transferred from licensed customs warehouse to the Authority's warehouse for
whatever reasons;
6) Goods seized by reason of contraband or for contravention of any laws that are to be
enforced by the Authority.
Calculation of Warehouse Fee
1) Storage fees for goods deposited in the Authority's customs warehouse shall be
calculated as follows:
(a) Goods entered in customs warehouse; from the date of entry until released upon
accomplishing customs formalities;
(b) Goods transferred from licensed warehouse; from the date of transfer until released
upon accomplishing customs formalities.
(c) Goods seized by reason of contraband or contravention of laws that are enforced by the
Authority; from the date of sales until the buyer collects them;
2) The amount of fees payable for storage pursuant to this Article, shall be prescribed by
the Authority in public notice.
3) Goods sold or accomplished customs formalities pursuant to sub-Article (1) of this
Article shall not stay in the warehouse for more than one month. If it stays for more than
one month the Authority can sale or dispose it in any way it thinks fit.
4) Goods which could not be released upon deposition of guarantee under sub-Article (2)
of Article 44 of this proclamation are free from warehouse fee from the date of seizure by
customs until released by a final decision of court.
Guarantee
Conditions for Guarantee
The Authority may release goods upon receiving guarantee for the following reasons:
(a) When an extension of time is required to fulfill documents necessary for the
accomplishment

of customs formalities; (b) when documentary proof is required to ascertain the re-
exportation of duty relieved temporarily imported goods;
(c) When it is necessary to ascertain that transit goods have been exited through the
approved customs port of exit or arrived at the predetermined customs port of destination;
(d) When it is necessary to ascertain the exportation of goods which are produced by duty
relieved imported raw materials;
(e) Until the disputes on tariff classification or price valuation of goods are settled;
2) Goods seized by reasons of contravention of customs laws, except those goods seized
due to contraband, prohibition, restriction or goods required as evidence by court, may be
released by the Authority upon receiving sufficient guarantee until a final decision is
passed upon.
Amount of Guarantee
1) The amount of guarantee for the goods specified in sub-Article (1) of Article 44 of this
proclamation shall not be less than the duties and taxes payable for the goods.
2) The amount of guarantee for the goods specified in sub-Article (2) of Article 44 of this
proclamation
Shall be equal to the value of the goods and duties payable for the goods;
Types of Guarantee
1) A guarantee to be accepted by the Authority shall be cash deposit or document of
guarantee given by insurance or bank registered in accordance with Ethiopian laws.
2) Guarantee given under this proclamation shall be governed by surety ship provisions of
the civil code.
3) The Authority shall decide on methods of payment of the guarantee.
Valuation, Tariff Classification and Calculation of Duties and Taxes

Duty Paying Value
The duty paying value of any import or export goods shall be the actual total costs of the
goods.

Duty Paying Value of imports

1) For the purpose of customs the duty paying value for imported goods shall be the sum of
the transaction value, freight cost and insurance premium that is paid to deliver the goods
up to a prescribed customs port.
2) Transaction value and other related costs given by a supplier who is associated in
business with the importer shall be considered genuine unless the given price is influenced
by their relationship.
3) Where a document which show the correct freight cost up to the first customs port is not
produced or the document produced is rejected by the Authority; the freight cost of
identical goods transported at or about the same time with' the same means of transport
shall be taken to calculate the cost of freight.
4) Goods imported without insurance coverage or transported under insurance coverage
but the bill produced is rejected by customs, the insurance cost paid for identical goods
transported at or about the same time with the same means of transport shall be taken to
calculate the cost of insurance.
5) To determine the accurate value of the goods pursuant to sub-Articles (2) and (3) of this
Article, the following additional costs shall be considered:
(a) Commissions and brokerage costs incurred by the buyer;
(b) The cost of container and cost of packing the goods be it for labor or material;
(c) The value of goods and services supplied by the buyer free of charge or at reduced cost,
to the extent that such value has not been included in the price actually paid or payable;
(d) Royalties and license fees related to the goods that is paid directly or indirectly by the
buyer;
(e) Loading, unloading and handling charges paid up to the port of importation.
6) The method of calculating the costs specified under sub-Article (5) of this Article and
conditions that may have impact on the duty paying value shall be prescribed in directives
issued by the Board.
7) Where documents necessary to determine duty paying value of the goods are not
presented, or rejected by the Authority, the transaction. Value of identical goods imported

from the same country at or about the same time shall be taken to determine the value of
the goods.
8) Sub-Article (7) of this Article shall apply, where the goods are purchased at the same
commercial level and quantity as the goods being valued. Where no such purchase is
found, upon some adjustment, the transaction value of identical goods sold at different
commercial level and in different quantities shall be taken to determine the value of the
goods.
9) Where the value of the goods cannot be determined in accordance with sub-Article (8)
of this Article, the transaction value of similar goods imported from the same country at or
about the same time shall be taken to determine the value of the goods.
10) Sub-Article (9) of this Article shall apply, where the goods are purchased at the same
commercial level and quantity as the goods being valued. Where no such purchase is
found, upon some adjustment, the transaction value of similar goods sold at different
commercial level and in different quantities shall be taken to determine the value of the
goods.
11) The application of valuation methods listed in this Article, and other alternatives to be
followed by the Authority, shall be prescribed in the directives issue by the Board.
Deductibles from Import Value.
The following adjustment costs shall be deducted from import values:
(a) Costs for damages in routes;
(b) Costs for damages in customs warehouse.
When it is requested and agreed upon by the customs office to destroy or dispose any
dangerous goods deposited in the warehouse, the goods shall be destroyed or disposed
otherwise at the presence of customs officer and other officials concerned, and the value of
the goods destroyed or disposed otherwise shall be deducted proportionally from the duty
paying value of the goods.
Value of Export Goods
For customs purpose the value of export goods shall be the transaction value of the goods
and the cost of transportation up to the port of exit.

Exchange Rate
For goods imported through letters of credit, the exchange rate shall be the rate specified
on the bank document against the utilized currency.
For any other purchase the official rate of exchange prescribed at the time of acceptance of
customs declaration, shall be applicable.
Activity 3.9
1. What are the main transactional value consider to calculate the duties of imported
goods?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
2. Explain deductable values and adjustment cost made for import values duties?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Commodity Classification & Tariff Rate

Any goods imported or exported shall be subject to:
a. Pay duties and taxes according to the tariff of Harmonized Commodity
Description and coding system;
b. Pay duties and "taxes according to the preferential tariff rate where goods
are imported from the preferred country;
c. Pay duties and taxes at the rate in force on the day the declaration of the
goods are presented to, and accepted by the customs office.

Disputable Cases
1) Where any protest arises as to valuation, commodity description and classification and
tariff rate, the duties and taxes shall be payable upon registration of the point of protest.
2) Payment made under protest pursuant to sub-Article (1) Of this Article shall be resolved
within 3 months by the General Manager.
3) Where final decision is given in favor of the person who paid under protest, the duties
and taxes paid excessively shall be refunded to him within 30 days after the decision is
given by the Authority.
4) Where the Authority's decision is given in favor of customs the sum of money paid on
protest shall be -deemed as the duty and tax payable for the goods, unless the person paid
under protest brought an action in a court having jurisdiction within 30 days after he is
notified of the decision by the Authority.
Duty Free Imports
1) Goods may be imported or exported free from any duties and taxes in accordance with
law or international agreement to which -Ethiopia is a party or by an agreement made and
permission given by the government.
2) Any goods imported duty free may be sold or disposed to ,any person who enjoys
similar privileges, or exported, without paying duties and taxes; or subject to pay customs
duties and taxes at the rate and value prevailing during the time of sales or disposal, be
transferred to any person.
3) Where duty free imported goods are lost or damaged due to force majeure the importer
shall report forthwith to the Authority, and if it is proved to the satisfaction of the
Authority the whole or part of the duties and taxes may be cancelled.
Re-payment of Duty
1) Not withstanding other duty draw back regulations, repayment claims shall be granted if
duties are over charged as a result of incorrect commodity classification, tariff setting,
valuation, and other calculation or assessment mistakes.
2) Pursuant to sub-Article (1) of this Article, duties and taxes shall be repaid when the
Authority discovers or. When the importer claims for it. However, the duties and taxes

may be repaid only if the errors are discovered and lodged to customs within 6 months
from the date of clearance for importation or exportation of the goods.
Re-exportation from the Customs Port
Goods imported and declared for home consumption may be re-exported at the request of
the importer before accomplishing customs formalities upon payment of 5% the fee of the
value of the goods.
Deferred Payment
1) If the duty paid for the goods imported or exported is less than the actual duty required
to be payable the different hall be collected by the Authority from the owner or his agent.
2) The collection of the difference referred to under sub-Article (1) of this Article shall be
made by the Authority within two years from the date of clearance of good
Activity 3.10
1. What is a deferred payment?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
3.7. Types of Customs Clearance Payments
3.7.1. Import/Export Related Taxes and Assessment Method.
All goods that we can see, feel, use buy etc are coded in customs .the coding will
differentiate one commodity from another, which means each commodity or a group of
items will have a separate code from other. This makes life for customs officer easy as
clearance of goods for whatever reason is facilitated.

The difference in the type of goods, in some cases, also means the difference in the
application of percentage rates of duty, which are normally indicated against the codes
items.
For example goods, which are mostly luxurious like perfumes will attract a higher rate of
custom duty as computed to necessities, like soap, which has lower rates of duty or even.
Some other may be which are considered important, duty free like medicaments.
The coding of items also helps to complied at of imports and exports.
The arrangements of the codes and goods in the customs tariff is systematic and
progressive and because of this, the tariff is sometimes called NOMECLATURE, which
means the systematic naming of goods in the tariff. It is a nomenclature because of goods
are systematically and progressively arranged from raw materials, semi finished goods
products, then finished products. It is not possible to know all the codes by heart but what
is important is the art of applying the techniques of signaling out one item from the many
in the tariff for the purposed of customs clearance ,duty collection and compilation of
statistics on imports and exports.
The language in nomenclature tariff is legal and the process of trying to signal out a code
for a commodity which is called classification should be legally done.
Generally proper classification or coding of goods means proper application of duty rates
resulting in collecting correct amounts of duty and correct data on imports and exports, as
the case may be.
3.7.2. Tariff
Tariff Definition
Tariff is a legal working document as prescribed in the custom and excise Act. It
systematically and progressively lists of goods, which are involved in international trade.
The Ethiopian custom tariff is based on internationally harmonized commodity description
and coding system in short H.S it is a multipurpose and Digital nomenclature.

It was developed by the world customs organization in Brussels ,Belgium with principal
objective of meeting the needs of all those interested in world trade such as customs
administration ,trade statistics ,transporters etc.
Function of the Tariff
 Collection of revenue by using the percentage rate of duty as indicated in the
various tariffs.
 Collection of statistics as provided for in tariff.
 Negotiation of trade agreement in so far as they relate to Ethiopia duties, there by
facilitating international trade.
 Protection of local industries by imposing customs duty rate on imported goods,
which are similar in nature to those locally manufactured.
 Provision of preferential rate of duty rates.
 Assisting and encouraging establishment of local industries by giving relieves.
To conclude the customs tariff is indeed a fiscal tool should always be well maintained and
kept up to date. Amendments will be coming from time to time and it is therefore the duty
of every officer to have their tariff books amended when required to do so.
Types of tariff
A .Customs Tariff
Used for collection of customs duties and taxes on certain imported goods only. In the case
of Ethiopian the collection method or rate in these categories varies depends on the item
imported.
B. Excise Tariff
Used to collect excise duties on certain imported and certain locally manufactured goods.
This also vary depends on the item imported or exported .but sometimes in Ethiopia ,to
discourage purchasing (importing) of luxury goods ,it reaches 100% of the item’s list price.
C. Surtax Tariff
Used to collect surtax duties on certain imported and on certain locally provided services.
D. Export Duties Tariff
Used to collect export duties on certain exports Ethiopia .

E. Damping Duties Tariff

Used to check dumping there are also some other types of duties and taxes
a. Value added taxes (15% of list price)
b. Withholding tax (3% of list price)
Note
This rate is only applicable in Ethiopia tax calculation
Ethiopian general tax calculation formulas
Total Cost of the Goods = Fob Cost + Insurance + Freight
Total Cost of the Goods X Import Customs Duty = A
(Total Cost Of the Goods + A) X Excise Tax Rate (If Applicable) = B
(Total Cost Of the Goods + A + B) X Vat = C
(Total Cost Of the Goods + A + B + C) X Surtax = D
Total Cost of the Goods X Withholding Tax = E
Total Payable at the Time of Import = A+B+C+D+E
Activity 3.11
1. Define tariff?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
2. What are the main functions of tariff?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
3. Explain and discuss type of tariff payments exercise in Ethiopia?
_________________________________________________________________________
_________________________________________________________________________

Chapter Summary
Customs and commercial banks are the main actors in facilitating import –export
transaction.
Commercial banks are the main actors who directly engaged in payment process and
effecting while individual or business are transacting import or export commodity.
In Ethiopia there are here types of payment settlement modes. There are three types of
import payment settlement modes in Ethiopia; Cash in advance (advance payment) or TT,
Cash against document (CAD) and, Documentary letter of credit (L/C). Even if these
payment modalities follow separate procedure, they require in common presentation such
as , NBE clearance except for those in the non –delinquent list ,Pro forma invoice
,Insurance policy with copies ,Trade license and TIN (taxpayer) certificate with copies and
Foreign exchange application form (five set).
In opening and settling letter of credit the Commercial Banks in ethiopia follow the same
procedure with the international letter of credit settlement procedures.
The Ethiopia t a r i f f is based on the Harmonized System (HS). The legal framework for
the application of the HS is Article 4 of the International Convention on the
Harmonized Commodity Description and Coding System and Ratification Proclamation
No. 67/1993 "Harmonized System" or simply "HS" is a multipurpose international
product nomenclature developed by the World Customs Organization (WCO). It
comprises about 5,000 commodity groups; each identified by a six digit code, arranged in a
legal and logical structure and is supported by well-defined rules to achieve uniform
classification. The Harmonized System (HS) is articulated in 4 digits, 6 digits and 8
digits of the Harmonized System (HS) tariff item number. Both import and export tariffs
are based on ad valorem duties. There are no preferential tariffs other than for imports
from the COMESA member states. . At present, there are five import tariff bands
excluding zero rates. They are 5,10,20,30 and 35 percent. The number of tariff lines is
5608, out of which 5424 are subject to ad valorem duties while the rest are duty free
items and prohibited. Currently the lowest and highest tariffs are 5% and 35%
respectively, which makes the dispersion of 30%.

Stated on federal Negarit Gazet proc.no 60/1977 re –establishment and modernization of

Ethiopian custom authority Ethiopian custom authority have the following objectives
Collect duties and taxes on goods imported or exported; Implement Laws and International
Conventions related to its objectives; Control the importation or exportation of prohibited
or restricted goods.
Ethiopian custom authority (ECuA). To achieve its objectives, the Authority shall have the
following powers and duties; to assess duty paying values, collect duties and taxes, collect
license and service charges; To examine documents of importers or exporters so as to
enforce customs law, To establish customs stations in any customs port, frontier post and
transit routes;
To approve the place for the deposit of import and export goods, establish warehouses,
give license for those who establish customs warehouse, supervise the proper handling of
deposited goods e.t.c.
To clear goods from custom the compulsory documents required to present are
Commercial invoice (total/Performa/single price of goods), Shipping documents (bill of
lading or air way bill). , Packing list (a list of goods contained in a specific package
container). , Import license/import permit.
Tariff is a legal working document as prescribed in the custom and excise Act. It
systematically and progressively lists of goods, which are involved in international trade.
The Ethiopian custom tariff is based on internationally harmonized commodity description
and coding system in short H.S it is a multipurpose and Digital nomenclature. The
common types of tariff exercise In Ethiopia are customs tariff, excise tariff, withholding
taxes, value added taxes, surtax tariff, export duties tariff and dumping duties tariff.

Self Text Exercise Questions

1. One of the following is not a function of national bank.
A. It is a bank of issue
B. Custodian of commercial bank cash reserves
C. Controller of credit
D. Gives credit service for business enterprises
E. None of the above
2. One of the following statements is false about harmonized tariff system.
A. Governed by international convention world customs organization
B. Non documentary trade data interchange
C. It comprises more than 5000 commodity groups
D. None of the above
3. Ethiopian harmonized tariff system contains ___________lines of tariff.
A. 4500
B. 5608
C. 5424
D. 6200
4. In Ethiopia customs regulations temporary importation without payment is allowed
A. Goods necessary for trade promotion
B. Technology transfer
C. Tourism and cultural exchange
D. Development works and consultancy service
E. All of the above
5. A type of tariff used to collect duties in certain imported on certain locally provided
service.
A. Excise tax
B. Sur tax
C. Customs tariff
D. Value added tax
E. Withholding tax

Essay part
1. Explain the main modes of payment in import –export in Ethiopia.

___________________________________________________________
___________________________________________________________
___________________________________________________________
2. Mention down supporting documents of customs declaration .
___________________________________________________________
___________________________________________________________
___________________________________________________________
2. List down compulsory documents to effect payments for imported goods in
Ethiopian commercial banks.
___________________________________________________________
___________________________________________________________
___________________________________________________________

References
1. Capela .J.J. (2008). Import/Export for Dummies .1st Edition, Wileys Publishing,
USA.
2. Czinkota, Michael R. et al, International Business, 6th ed., Harcourt College
Publisher Inc., Sea harbor Drive, Orlando, 2002
3. Federal Negarit Gazetta, “The Establishment and Modernization of Customs

Authority Proclamation [Proclamation no. 60/1997],” 3rd yr. no. 18, February 1997,
Addis Ababa.
4. Thomas E. J, Bade .D .L. (2010).Export Import: Procedures and Practice .4th

Edition USA.
5. Wood. D, Baron. A, Murphy.P and Others (2002). International Logistics.
2ndEdition .American Management Association, USA.

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After studying this chapter you should able:

In this stiff and intensive competition Companies go overseas to obtain lower

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1.2. Parties That Facilitate Import/Export Commodity

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II. Custom Clearing Agent

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III. Commercial Banks

IV. Transportation and shipping company

V. Insurance and Insurers Company

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company they issue a certificate of insurance to the insured goods to importer/exporter as

1. Mention parties participate in import to facilitate importing materials.

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E. Compliance with Foreign Law

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I. Method of Transportation; Booking Transportation

An importer may be required to pay for merchandise it purchases by cash in advance or a

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government regulations or exchange controls, or differences in culture, language, or

Common Forms for the Formation of Purchase Agreements

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1.5. Trade Terms

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1.5.1. Descriptions of International Commercial Terms

F-Terms FCA Free Carrier (... named place)

C-Terms CFR Cost and Freight (... named port of destination)

Table 1.5.1: Trade Terms

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1.5.2. Responsibilities of Foreign Purchaser (Importer) and Exporter

2. FOB-( Free on Board)

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Points of prime importance

3. FCA (Free Carrier)

4. FAS (Free Alongside Ship)

6. CIF (Cost, Insurance and Freight)

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7. CPT (Carriage Paid To)

Points of prime importance

8. CIP (Freight, Carriage and Insurance Paid to)

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9. DES (Delivered Ex Ship)

10. DEQ (Delivered Ex Quay)

11. DAF Delivered At Frontier

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Points of prime importance