Question

1/ Illustrate the definition of documentary collections and give an example to explain when this kind of payment terms may be used in international trade settlement.

2. Illustrate the relationship among the exporter, the importer, the issuing bank and the confirming bank under L/C transactions.

Answer 1

1. Documentary collection is when the banks act as a collecting agent for the exporter and importer wherein the exporter's bank provides to the importer's bank the details of the shipped merchandise and collects the payment from the importer bank on behalf of the exporter. Documentary collection is an easy and reliable method to follow when international trade is involved. Due to the distance and other factors, the seller cannot rely on the buyer to send the goods without payment and the buyer can not rely on the seller to make an advance payment without receiving the goods. In such a case the banks play the role of intermediaries and take guarantee of their parties for reliability by importer paying a face amount of the draft at sight or pay at a future decided date.

For example, in the shipping documents, the bank will provide a commercial invoice, origin and insurance certificate and packing list. The exporter will also provide a bill of exchange which will act as a demand for payment for the goods. The importer will pay the face amount of the draft and a promise to pay the amount on a future date. This exchanges of documents specifying the details of the payments and the details of the goods by the banks of both parties make the international trade settlement easy, authentic and trustworthy.