- To introduce product pricing mechanism
The Central Bank of Nigeria (CBN) has directed all authorised dealers in the international trade market to open Forms M for Letters of Credit (LC), Bills for Collection and other forms of payment in favour of the ultimate supplier of the product or service with immediate effect.
Aim of the new CBN directive
The apex bank, in a circular signed by O.S Nnaji, the director of trade and exchange department, disclosed that the directive is part of its continued and concerted efforts to ensure prudent use of Nigeria’s foreign exchange resources and eliminate incidences of over-invoicing, transfer pricing, double handling charges, and cost avoiding.
The CBN, through the circular, also demanded that dealers desist from opening Forms M whose payments are routed through a buying company or agent or any other third parties.
What is a letter of credit and how beneficial is it in trade?
Simply put, a Letter of Credit (LC) is a letter from a financial institution guaranteeing a seller that a buyer’s payment to him will be received within an agreed time period. However, in the event that the buyer defaults, the bank will be required to cover the full or remaining amount of the purchase. It is beneficial to business partners because a seller has the obligation of the buyer’s bank to make payment in accordance with the invoice, as well as being able to calculate the payment date for the goods. On the other hand, the buyer can lay bare his solvency as well as the bank being able to pay the seller until the bill of lading or other agreed documents is presented to the bank by the buyer.
The apex bank further revealed that it will immediately introduce a product price verification (PPV) mechanism to forestall over-pricing and or in any case of mispricing of goods and services imported into the country. This mechanism shall be used by all authorised dealers to verify quoted prices before Forms are approved.
An upshot from the new development from the CBN is that the use of the LC will be a tool to help reduce the risk involved in international trade payments and also facilitate trade.