CONVERTIBILITY OF CURRENCY AND INTERNATIONAL FACTORING
CONVERTIBILITY OF CURRENCY:
- What do you mean by convertibility? From which period Taka has made convertible?
Ans. Convertibility is the ability of the owner of the asset (foreign currency and foreign exchange) to exchange it from one currency into another. Convertibility also called as free tradability which ensures that every holder of the currency is able to obtain at the margin an equal satisfaction from it as he could obtain from other currencies. The financial Authority of Bangladesh has made the Taka convertible on current account since October 20, 1993 and also decided to make the Taka fully convertible from July 01, 1994. (Article VIII of IMF).
What do you mean by ‘full’ & ‘partial’ convertibility?
Ans. Full convertibility implies that both current and capital account transactions can be done without any intervention/involvement from exchange control authority. Partial convertibility denotes that the transactions related to current account only (or part of it as trade account) are to be made freely.
Why currency convertibility is mandatory?
Ans. Currency convertibility is central to the mandate of the IMF. The IMF’s Articles of Agreement call for the “elimination of foreign exchange restrictions which hamper the growth of world trade”. Members accepting the obligations of Article VIII undertake, among other things, to refrain from imposing restrictions on the making payments and transfer for current international transactions.
What are the basic requirements of convertibility?
Ans. 1). An appropriate exchange rate.
2). An adequate level of international liquidity.
3). Sound macro economic policies.
4). Incentives for domestic economic agents to respond to market price.
INTERNATIONAL FACTORING
What is factoring? What are the different form of factoring?
Ans. The International Institute for Unification of Private Laws (UNIDROIT) which is known as Ottawa (Canada) convention 1988 defines International factoring as an agreement between an exporter and factor whereby the factor purchase the trade debts /receivables from the exporter & provides different facilities like financing, maintenance of sales ledger, collection of debts, protection against credit risk etc.
Different form of factoring:
i). Two factor systems: The transaction is based on operation of two factoring companies in two different countries involving all four parties i.e. Exporter, Exporter factors of exporting country, Importer & Importer factor of importing country.
ii). Single factoring: Under this system import factor provides credit cover whereas pre-payment, bookkeeping, collection responsibilities remain vested with export factor.
iii). Direct Export factoring: Under this system, only export factor is involved and he has to collect the dues from the buyers, directly, located in different countries & also provides all elements of services.
iv). Direct Import factoring: under these arrangements the exporter chooses to work directly with a factor of importer country. The import factor is responsible for sales ledger administration, collection of debts, bad debts protection etc.
v). Back to back factoring: The arrangement is normally applicable in respect of sales by an exporter, usually a large export company, to its subsidiary or distribution or selling agent abroad. Here the export factor and import factor sign an agreement with the exporter and subsidiary, respectively.
What are the two associations of factoring companies?
Ans. There are two associations of factoring companies, which emerged for facilitation of international factoring by formation of the concept of correspondent export and import factors, and for arousing of factoring awareness, and for promotion the concept of such business in countries where such services are not available. These two associations are:
i). International factors group (IFG)
ii). Factors Chain International (FCI).
What are the different stages of operation when FCI involves with international factoring?
Ans. When the international factoring is carried out by the members of FCI, the services involve a four or five stage operation. Stages of operation are discussed below:
1st stage: The exporter signs an factoring agreement assigning all trade receivables to an export factor.
2nd stage: The export factors chooses an FCI correspondent to serve as an import factor in the country where goods are to be shipped and reassigned the receivables to the import factor.
3rd stage: At the same time the import factor investigates the credit standing of the buyer of the exporters goods and establishes line of credit. This allows the buyers to place an order on open account terms without opening letter of credit.
4th stage: The export factor will now advance up to 80% of the invoice value to the exporter.
5th stage: Once the sale has taken place, the import factor collects the full invoice value and is responsible for the swift transmission of funds to the export factor who then pays the outstanding balance to the exporter.