Follow one container of T-shirts from a factory in Gazipur to a shop in Germany, and the money all the way back.
Meet Shirin. She runs a garment factory in Gazipur. A buyer in Hamburg, Germany, wants 20,000 T-shirts in three colours for the summer.
In this lesson we follow that order from the first email to the last dollar. You'll see the goods travel one way, the documents travel the other way, and the money finally come home. Keep an eye on the documents: in trade, paper often moves faster, and matters more, than the goods.
The buyer and Shirin agree on the basics:
These go into a contract, or into a purchase order and Shirin's proforma invoice.
It is like ordering a wedding cake: you agree the flavour, size, price, delivery day, whether the shop delivers or you pick it up, and how much advance you pay. Skip one point and there will be an argument on the wedding day.
The buyer asks his bank in Germany to open a letter of credit in Shirin's favour. That bank sends it to Shirin's bank in Dhaka, which checks that it is genuine and passes it to her.
Now Shirin has a bank's promise: if she ships on time and presents the right documents, she will be paid.
To make the T-shirts she needs fabric and yarn, often imported. Her bank may open a back-to-back LC to buy them, using the export LC as support.
A bank promise is like a booking confirmation from a big hotel. You don't worry whether the hotel will keep your room, because its name stands behind the promise, as long as you arrive on the right date with the right ID.
Shirin's factory cuts, sews, checks and packs the T-shirts. Then:
Posting a parcel abroad works the same way, only bigger: you fill in a customs form, the courier takes the box and gives you a receipt with a tracking number. That receipt is your proof the box left your hands.
While the ship is at sea, Shirin collects her documents: commercial invoice, packing list, bill of lading, certificate of origin, and whatever else the LC asks for.
She hands them to her bank within the time the LC allows. The bank checks them carefully against the LC, line by line. If everything matches, it sends them to the buyer's bank in Germany.
Small differences can matter. A wrong amount, a late shipment date, a goods description that doesn't match, or a missing signature can be a discrepancy, and the buyer's bank may refuse to pay until it is sorted out. (A tiny typing slip that doesn't change the meaning is usually not one.)
At an exam hall, the guard checks your admit card against the seat list. If the roll number on your card is different, you may be stopped at the door, even if you studied all night. LC documents face the same strict guard.
The buyer's bank checks the documents too. If they comply, it pays, on sight or on the agreed later date. The money travels through correspondent banks to Shirin's bank in Dhaka.
Her bank first keeps aside the dollars needed to pay for the back-to-back LC for fabric. It changes the rest into Taka for her (she may keep a share in her foreign currency ERQ account), reports the receipt to Bangladesh Bank's online system, and issues a PRC, the proof that the export money came home.
Meanwhile, the buyer's bank hands the documents to the buyer, who uses the bill of lading to collect the container in Germany. Soon the T-shirts hang in a shop in Hamburg.
Think of selling your old motorbike through a trusted dealer. The buyer pays the dealer; the dealer checks the papers, gives the buyer the registration documents and passes the money to you, with a receipt. Everyone has proof of their part.
So far: one shipment, five steps. Agree the deal; get the bank's promise; make, declare and ship the goods; present the documents; and bring the money home. Goods travel one way, documents chase them through the banks, and money flows back.
Next: an LC is only one way to get paid. Let's look at all of them, from the safest for the seller to the safest for the buyer.
Four quick questions. Nobody sees your answers but you.
The shipping line issues the bill of lading as its receipt for the goods; a negotiable B/L is also the document of title.
Under an LC, banks pay against documents. If the documents don't comply with the LC terms, payment can be refused until the discrepancy is resolved.
The Proceeds Realisation Certificate shows that the export proceeds came home through a bank.
In garments, a back-to-back LC to buy inputs is commonly opened on the strength of the export LC.
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