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Tuesday, 15 February 2022

Importers, get your letters of credit ASAP

Importers are going to need letters of credit to buy goods starting March: Documentary collection from exporters will no longer be accepted by banks to facilitate the import of goods into Egypt from the beginning of March, according to a decision by the Central Bank of Egypt taken over the weekend. Copies of letters sent to banks, dated 12 February and circulating widely in the domestic press and on social media, show that the CBE has instructed banks to begin only accepting letters of credit to facilitate the purchase of imports.

Importers are not happy: In a joint letter (pdf) to Prime Minister Mostafa Madbouly, the heads of the Federation of Egyptian Chamber of Commerce (the unfortunately named FEDCOC), Federation of Egyptian Industries, and Egyptian Businessmen’s Association called for the move to be reversed. They said the decision would exacerbate existing supply chain issues and increase production costs, causing the price of goods to rise in the local market and damaging the competitiveness of Egyptian exports. The new rule also presents a “direct threat to citizens' health and safety,” they said, as it would delay urgent pharma shipments and increase the cost of medical supplies. The organizations added that the decision did not take into account SMEs who are unable to take out credit lines to cover the cost of shipments, and said an exemption granted to foreign companies was unfair.

The decision could see the price of goods rise 15-20%, said Metta Beshay, a member of FEDCOC’s importers division, in a statement to the press yesterday. The new rule would increase costs and cause confusion for importers, he said, noting that prices are already rising due to global inflation.

From where we sit, that seems exaggerated: The cost of a basic import letter of credit at CIB for a period of three months is 1.75% (pdf), while the fee for the existing system of inward documentary collection runs at 0.3-1.75% (pdf) depending on the nature of the process.

Exempt from the decision: Foreign companies and their subsidiaries do not have to abide by the new decision. Banks are also allowed to accept invoices for goods that had already been shipped before the decision was issued.

How did it work before the change in regulations? We’re simplifying here, but importers previously had the option of inward documentary collection. That’s a process through which importers and exporters exchange information (via their banks) about who’s buying what. The bank would take a fee for releasing money from an importer’s account against documents that included a commercial invoice, a certificate of origin, a bill of lading, et cetera. Documentary collection tends to start with the exporter’s bank sending over … documents.

What’s changed? Letters of credit (or just “L/C” in trade finance) are a bit more complicated — and offer more protection to the exporter. The importer’s bank will still ask for plenty of documentation to take on a transaction, but they’re also entering into a contract that requires them to pay the exporter if the importer defaults for whatever reason. Industry wisdom is that L/Cs make bogus invoices and dodgy practices a bit more difficult to pull off because banks dig deeper. L/Cs tend to start when the buyer’s bank provides the seller’s bank the assurance that the money will flow on receipt of the shipment.

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