PRACTICE AND CHALLENGES OF INTERNATIONAL BANKING SERVICE ON SELECTED PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

International trade exposes the trading partners to various difficulties and risks due to the physical distance between parties, different time zones and currencies different legal rules applicable to the transaction as well as the fact that the parties may not generally know each other. Banks facilitate international commerce through a variety of products which include managing their international payments, mitigating the risks, and providing working capital. The research, a descriptive study using the survey method, makes an assessment of the trade service practices of selected Ethiopian private commercial banks in order to identify problems, expose any malpractices, indicate instances of noncompliance with international standard banking practices, shed light on risk areas, and identify knowledge gaps among the bank staff. From the research it has been found out that, most of the banks do not automatically effect payment to the remitting bank after releasing the shipping documents sent on documentary collection basis. Secondly, banks are having difficulty managing the level of approved purchase orders due to the fact that outstanding purchase orders are not considered as liabilities of banks under the Open Position directive of the National Bank of Ethiopia. On the other hand, most banks are not examining documents and notifying negotiating banks of discrepancies related to documents presented under letters of credits within the allowed period of five banking days. In addition, it can be concluded that most banks do not make a rigorous assessment of the creditworthiness of the importer and the marketability of the consignment when issuing letters of credit against a less-than 100% margin. In the study, it is recommended that banks should encourage importers to enter into a formal sales contract with sellers. Secondly, the National Bank of Ethiopia should revise its Open Position directive in such a way that banks would be allowed to account for at least 50-60% of their outstanding approved purchase orders as liabilities. Thirdly, banks should properly manage their commitments in foreign exchange so that they will not face liquidity problems when processing settlement of letters of credit and documentary collections