Thinking Like an International Credit Manager
I'm still in the process of finishing module 8 of FCIB's International & Credit Risk Management (ICRM) course. As I mentioned in my last post, this module covers letters of credit, guarantees and bonds. I just answered one of the discussion post questions, "Your customer in Ethiopia has just placed a large order and has offered payment through a letter of credit with maturity 60 days from date of shipment. In your opinion, is this a good option? Why or why not?"Although I come from a writing background, I answered to the best of my ability in accordance with another peer. I believe the political instability is a huge factor that needs to be considered and can affect the customer's ability to pay, so the agreement must be bulletproof. A letter of credit with a maturity of 60 days may not be sufficient for a customer from there.
The second part of the question asked: "What conditions would you require of your customer include on a letter of credit? Why did you select these conditions to be included?" The condition that I would require for my customer is a reimbursement agreement, which gives the issuing bank rights over documents of title and the underlying goods and authorizes the bank to take possession of and sell the goods if the customer does not reimburse the bank.
So, in that letter of credit, the bank may require the customer to issue a trust receipt or other security agreement granting the bank a security interest in the goods and proceeds from their sale. This security of the bank taking over due to payment default is a must for me given Ethiopia's political and economic instability and helps us both in the long run.
Until next time,
Jamilex Gotay, editorial associate