Problem:

Superstores Ltd is engaged in the import and distribution of kitchen wares in Mauritius and also for the regional countries. Goods are imported on open account and collection basis. The goods that are re-exported to the region are under documentary credit.

Recently the main supplier (exporter) of kitchen wares contacted Superstores Ltd to inform them that trade has to be done only on documentary credit terms/ letters of credit.

This will impact on Superstores’ banking facility and has contacted you, as their banker, to advise them on the way forward. During the meeting, the following problems have been set and you are requested to give answers to clarify their doubts.

Towards the end of the meeting, the finance manager of Superstores informs you that they have already reached their limit in terms on banking facilities with their banks and they cannot request any further increase.

problem1. describe the following terms used in Trade Finance:

(i) Open account;

(ii) Documentary collections;

(iii) Incoterms;

(iv) Avalised bill of exchange;

(v) Charter Party bill of Lading.

problem2. How do you think the change from import under documentary collections to documentary credit will affect the company’s banking facilities?

problem3. Using separate diagrams/ flow charts show how Letter of Credit and documentary collection operate.

problem4. Taking into account the restraint in terms of banking facilities, how would you advise the company to operate so as to be able to open letters of credit in favour of their suppliers and at the same time not to request additional banking facilities?