Which Terms are used in Foreign Exchange Operations

Which Terms are used in Foreign Exchange Operations

Terms used in foreign exchange operations:

Foreign exchange, like foreign trade, is a part of economic science. It deals with the means and methods by which rights to wealth in one country’s currency are converted into those of another country. By the same taken, it covers the methods used for conversion, the forms in which such conversions take place and the causes which render this conversion necessary. Foreign exchange means exchange foreign currency between two countries, If we consider” Foreign exchange” as a subject ,then it means all kind of transactions related to foreign currency. In other words foreign exchange deals with foreign financial transactions.

Activities of Foreign exchange :   

There are three kinds of  Foreign exchange transactions :

  • Import
  • Export
  • Remittance


Under the import policy of Bangladesh the Importer has get the valid Import Registration Certificate (IRC) from the Chief Controller of Import and Export (CCI&E).

Letter of credit:

Letter of credit (L/C) means it’s an undertaking by issuing bank on behalf of the buyer/applicant/import to pay certain amount at the seller/ beneficiary/exporter for performing certain activities (transaction / purchase) under some agreed condition.

Types of documentary credit : Documentary credit may be have three types –

  • Recoverable credit
  • Irrecoverable credit
  • Add confirmed credit

Recoverable credit :

This type of  credit can be cancelled or amended at any time by the issuing bank without prior notice to the seller .It is not in use.

Irrecoverable credit :

This type of credit can’t be cancelled or amended by the issuing bank without agreement of parties concerned thereto. All the credit is issued in our country are of recoverable nature.

Add confirmed credit:

When a third  bank provides guarantee to the beneficiary to make payment, if issuing bank fail to make payment, the L/C is called confirmed L/C . In case of a confirmed L/C a third bank adds their confirmation to the beneficiary, to make payment, in addition to that of issuing bank .Confirmed L/C gives the beneficiary a double assurance of payment.

Special documentary letter of credit :

The following five major steps are involved in the operation of a documentary letter of credit

  • Opening
  • Advising
  • Amendment
  • Presentation
  • Settlemen

Import financing:

         The post import finance extends he import credit  in the following forms:

  • PAD (Payment Against Documents)
  • LTR (Loan Against Trust receipt)
  • LIM (Loan Against Imported Merchandise)


Export :

Under the export policy of Bangladesh ,the exporter has to get the valid Export Registration Certificate (ERC)  from chief controller of export & import (CCI&E).

The ERC is required to renew every year. The ERC number is to be incorporated on export form & other  paper connected with exports.

Receiving the letter of credit:

After getting the contract for sales ,exporter should ask the buyer for L/C clearly starting terms & conditions of export & payment.

Procuring the materials:

After knowing that the L/C has opened in his favor, the next step for the exporter is to set about the task of procuring or manufacturing the contracted merchandise. If the exporter has to procure the raw materials from another supplier (local or abroad) he has to open Back – to – Back  L/C.

Back -to- Back L/C :

Back – to – Back  L/C is one type of L/C , which is opened against lien on a valid export L/C . It is opened for inland & aboard as well .Bank will supply the following papers / documents for opening a Back – to – Back  L/C.

  • L/C application form
  • LCA form
  • IMP form
  • Charge document papers

The above papers must be completed, filled & singed by the party thereto. The party will submit the entire filled document along with application in printed form of the designated  bank which is also an agreement between applicant & the bank.

Export Financing :    

An exporter is who exports the goods to another customer whether in domestic country or in aboard . In exporting the stipulated goods he may require financing. So export financing may be required at two stages.

  • Pre shipment credit
  • Post shipment credit

Pre shipment credit :

Pre shipment credit is the credit ,which is given to finance the export activities of an exporter for the actual shipment of goods. The purpose of each credit is to meet the  working capital shipment of goods .The purpose of each credit is to meet the working capital needs from the procuring of raw materials to the transportation of goods for the export the foreign country .Before sanctioning of that credit the bank takes into consideration the credit worthiness, export performance of the exporter’s together worthiness all other information required for sanctioning the credit in accordance with the existing rules & regulations.

Post shipment credit :

There is a time gap between export of the goods and realization of the proceeds. So exporter may require finance in that period to continue his business. So bank may finance against export documents ensuring the following:

  • Export documents comply with the credit terms
  • Party’s past performance is satisfactory
  • Any other security in case of exporting under contract


Foreign Remittance:

Foreign remittance means remittance of foreign from one place /person to another place/person .In board sense, foreign remittance includes all sales and purchase of foreign currencies on account of Import ,Export Travel and other purposes. However, specially foreign remittance means sale & purpose of foreign currencies for the purposes other than export and import .BASIC bank limited performs the remittance functions with different countries . It maintains the foreign remittance in the  following form

  • Foreign Demand Draft (FDD)
  • Inward
  • Outward

Foreign Demand Draft :

A Foreign Demand Draft is a  negotiable instrument issued by a bank drawn on other bank with another country the instruction to pay a certain amount to the beneficiary on demand. Remittance through demand draft may be inward or outward.

Inward Remittance :

Inward remittance refers to the extent where the bank makes payment to the client against foreign demand draft .Bank will make payment to the client by verifying the test number and signature of the authorized officer.

Outward Remittance:

It refers to the extant where by the bank issues foreign demand draft. The Bank  charges TK. 300 per Demand Draft. Two forms are used for Outward Remittance of foreign currency such as:

IMP From: All outward remittance on account of Imports is done by from IMP.

TM From: For all other outward remittance from TM is used.