MGT604 Management of Financial Institutions Assignment 2 Fall 2012

Question No. 1: (15 marks)
Pakistan is a developing economy and financial institutions particularly banks play a major role in the development of such economy. The financial growth of these financial institutions is linked with the growth of the private sector in general and SME sector in particular. Commercial Banks in Pakistan are observing high growth in terms of spreads and profits but that growth is not linked to the private sector due to which private sector is not growing at the same pace. State Bank of Pakistan has taken certain steps to create a harmony between growth of these sectors (Financial, Agriculture and SME) but these efforts are not being proven fruitful. In this context, a link to an article “Convoluted Expectations” published in Dawn dated 8th January 2013 has been provided hereunder. In the article, writer Mr. Shahid Kardar has elaborated different aspects of neglected role of commercial banks as well as failure of the measures introduced by State Bank of Pakistan. You are required to read the article carefully and discuss in your own words whether you agree or disagree with the views of the writer? Provide detailed logical rationale in either case.

Link to the Article: http://dawn.com/2013/01/08/convoluted-expectations
Question No. 2 ( 5 + 5 = 10 Marks)
Mr. Anees is an importer and wants to import some machinery from Germany for which he visits ABC Bank. Suppose you are working as Foreign Exchange Officer in the bank and Mr. Anees comes to you for opening Letter of Credit. You are required to guide Mr. Anees not only about the documents required but also about the procedure for opening letter of credit.

Solution:
Thus a LC (as it is commonly referred to) is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer. The Buyer is the Applicantand the Seller is the Beneficiary. The Bank that issues the LC is referred to as the Issuing Bank which is generally in the country of the Buyer. The Bank that Advises the LC to the Seller is called the Advising Bank which is generally in the country of the Seller.




The specified bank makes the payment upon the successful presentation of the required documents by the seller within the specified time frame. Note that the Bank scrutinizes the ‘documents’ and not the ‘goods’ for making payment. Thus the process works both in favor of both the buyer and the seller. The Seller gets assured that if documents are presented on time and in the way that they have been requested on the LC the payment will be made and Buyer on the other hand is assured that the bank will thoroughly examine these presented documents and ensure that they meet the terms and conditions stipulated in the LC.
Typically the documents requested in a Letter of Credit are the following:
Commercial invoice
Transport document such as a Bill of lading or Airway bill,
Insurance document;
Inspection Certificate
Certificate of Origin
Letters of credit (LC) deal in documents, not goods. The LC could be ‘irrevocable’ or ‘revocable’. An irrevocable LC cannot be changed unless both the buyer and seller agree. Whereas in a revocable LC changes to the LC can be made without the consent of the beneficiary. A ‘sight’ LC means that payment is made immediately to the beneficiary/seller/exporter upon presentation of the correct documents in the required time frame. A ‘time’ or ‘date’ LC will specify when payment will be made at a future date and upon presentation of the required documents.

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