On 12th February 2022, the Central Bank of Egypt announced a new rule for Egyptian importers stating that they would need Letters of Credit to buy goods from March onwards and that they should stop dealing with collection documents during import operations, especially within the framework of the Cabinet’s directives regarding the activation of the ACI system and the governance of the import processes. This decision was taken to facilitate the import of goods into Egypt and improve the quality of products imported into the Egyptian market.
The Central Bank of Egypt also advised all banks to provide a reduction in all commissions for L/C to be like commissions taken in case of CAD. Along with this, the Central Bank also asked the banks to increase the existing credit limits for customers and open new limits for new customers, based on their import volume.
The companies used to deal with CAD or documentary collection. This is a transaction in which the exporter assigns the task of payment to a bank that sends the documents to the collecting bank which the importer deals with. In this system, the exporter provides instructions for the payment, and when the payment is received from the importer and transferred to the exporter, the importer’s bank releases the documents. Only then would the importer start the customs clearance procedure.
Upon implementation of this decision, all dealings are to happen solely between the issuing bank (that issues the Letter of Credit) and the importing bank (that which pays for the goods). The L/C is a guarantee to the importer that the goods will be delivered abiding by the completed documents under the contractual terms, as mentioned in the purchase agreement.
Having said that, a lot of businesses find it challenging to work with the L/C system because it is tedious in terms of working capital, credit line usage, and absolute cost. The L/C is also known to cover single transactions for a single buyer. This means that you need a different L/C for every transaction. It also has complex governing rules that pose a material fraud risk to the importer.
There is also the additional need for collateral and security to satisfy the bank’s coverage terms for the buyer along with a requirement for more paperwork for the seller, all within an expiration date as stated in the L/C.
The implementation of this decision will happen from 22nd February 2022 to accommodate shipments that have been processed before the decision was made public.
The Timber Exchange platform, as a supply chain automation tool that aims to automate global trade is integrated with CargoX and Nafeza so that importers and exporters can easily automate and comply with the recent ACI regulations of Egypt.
For more information, register on https://www.timber.exchange and request for a demo from our industry experts.