FAREAST INTERNATIONAL UNIVERSITY

Course Title: BUS 2311(Fundamental of Banking)

Submitted to

Farhanaz Luna
Assistant Professor
Faculty of Business Administration
Fareast International University.

Submitted by
Sammi Sultana
ID. 19301040
Program: BBA
Faculty of Business Administration
Fareast International University.

5th October, 2020.

 Assignment 1:
Green Banking Practice by the Banks of
Bangladesh: Potential and Challenges
Introduction

Green banking means promoting environmental friendly practices and reducing your
carbon footprints from your banking activities. Green banking aims at improving the
operations and technology along with making the clients habits environment friendly
in the banking business. A green bank is a financial institution, typically public or
quasi-public, that uses innovative financing techniques and market development
tools in partnership with the private sector to accelerate deployment of clean energy
technologies. Environmental concern is at the centre of Green Banking (GB) policies
and strategies. Considering the importance of green banking, Bangladesh Bank
(BB), the central bank of the country, has undertaken a number of initiatives. The
broad objective of the paper is to assess the achievements of Bangladesh in eco-
friendly banking. The specific objectives of the paper are to review the relevance of
GB, the policy, regulatory and business environment of GB; to assess the
achievements and prospects of GB and to identify impediments on the way to
reaching a green economy in Bangladesh. The study finds that the policy initiatives
for GB are numerous; however, one-size fits all policy, weak enforcement of
environmental laws, unpreparedness of the banks, market imperfection and ignorant
customer group are the major hindrances in doing GB. The coordinated efforts of
BB, banks, government, consumers and pressure groups are essential to attain the
vision of a green economy in Bangladesh. However, Bangladesh Bank (BB) has
been supporting the government in achieving environmental objectives through
banks and financial institutions and from time to time it has been undertaking many
initiatives including environmental regulations, refinancing facilities, etc. The recent
circular on 'Policy Guidelines for Green Banking' is a noteworthy step on the way to
promoting green banking in Bangladesh.
Definition of Green Banking

To date, there is no commonly accepted definition of the term “green banking”

outlining its precise meaning and scope. For the past ten years, there are
numerous scientific publications related to the importance of various aspects
of green business – green marketing, corporate entrepreneurship as a means
to achieving sustainable banking, etc. As part of the research centered around
other topics, few papers provide definitions on green banking. In this respect
Lalon (2015) defines green banking as “…any form of banking from which
the country and nation gets environmental benefits. A conventional bank
becomes a green bank by directing its core operations toward the betterment
of environment.” Bhardwaj and Malhotra (2013) define it as “… an effort by
the banks to make the industries grow green and in the process restores the
natural environment.” Papastergiou and Blanas (2011) in essence discuss
green banking under the broader concept of sustainable banking and explain
the connection among the various organizational initiatives (including HR,
marketing, internal resource management) to achieve sustainability in the
services the banks are offering. They build their analysis on the basis of
Jeucken (2001) four stage model. Isalm and Das (2013) point out that green
banking “…indicates endorsing environment-friendly practices and reducing
carbon footprint from banking activities.” The definition proposed by the
authors is that green banking is banking in all its business aspects (deposit
gathering, credit disbursement, trade finance, leasing operations, mutual fund
s and custodian services, etc.) which is oriented towards preservation of
environment. And here a strict delimitation needs to take place so that the term
is understood and used correctly. Green banking in its essence is actually the
provision of loans, deposits and other banking products (mutual funds and
other investment products, custodian services etc.) that would have positive
impact on the environment. Activities such as introduction of paperless
statements, electronic communication with clients, internal efforts to save
energy, paper and toners, various internal campaigns targeting the building
and sustaining of staff awareness vis-à-vis environmental issues, PR and
marketing activities in this direction, are not in their nature green banking
 activities. This is true because all these efforts, though highly important for
the organization and for the society, do not represent core banking practices,
and could be, and are deployed in many other types of organizations, despite
the fact that the latter are not banks. The proposed definition of green banking
is more narrow compared to the one proposed by other authors, such as Lalon
(2015) who states that all kinds of banking activities, including internal
operations generating consumption of paper and other resources could go
under the definition of it. One of the reasons why the understanding and usage
of the term green banking is related to the practices described above, and not
to the core banking activities, is that these practices are comparatively easy to
put in place, and banks use the information on them for PR purposed. At the
same time the implementation of product lines targeting the specific and wide-
raging environmental needs requires huge efforts inside the bank, level of
education and awareness especially among corporate and risk officers, and
last but not least, a lot of time for implementation. Another important hurdle
for the fast deployment of such kind of products and services is the fact that
oftentimes they are related to accepting higher financial risks on the part of
the banks, or/and lower interest rate margin, and in certain cases, even
customer attrition (due to increased requirements from the customers which
are required to ensure that they operate in an environmentally-friendly way).
Also, this is against the interests not only of the bank as a whole but also of
the individuals who are supposed to sell those products and services, and
whose bonuses depend on the income they have generated.

Potentials for Green Banking in Bangladesh

 Sustainable Initiatives by the Government
The Government of Bangladesh is proactive and responsive about the environmental
degradation. Though the implementation status of laws is not up to the mark, there
are as many as 21 environmental legislations in Bangladesh. Around 60 per cent
people in Bangladesh are not getting electricity while around 90 per cent are out of
the natural gas network. Renewable energy, especially solar energy and biogas can
provide a sustainable and environment friendly solution. To facilitate them the
government enacted the Renewable Energy Policy in 2008 and accordingly decided
to produce 5 per cent of total power generation from renewable energy sources like
solar energy, air and waste by 2015 and 10 per cent by 2020.

Though Bangladesh is not compelled to mitigate carbon emission, the government

undertook a number of initiatives. Over the last three decades the government
invested about USD10.0 billion to strengthen resilience capacity. Moreover, the
government allocated BDT 21.0 billion during 2010-12 under Bangladesh Climate
Change Trust Fund (BCCTF) for increasing resilience to climate change and
proposed another BDT 4.0 billion for FY 2012-13. The government also established
a fund named Bangladesh Climate Change Resilience Fund (BCCRF) with the
financial help of the development partners including the United Kingdom, European
Union, Denmark, Sweden and Australia who have already contributed around US
$200 million to the Fund. World Bank is the trustee of the Fund (bccrf-bd.org).
 Environmental Adoption:
The negative impact of climate change already started though banks contribute little
to global warming. Banks have to focus on adaptation and mitigation process to cope
up the adverse impacts of global warming. And green banking initiative can facilitate
this process.

 Sustainable Initiatives by Bangladesh Bank

In line with government legislations, Bangladesh Bank has undertaken certain
praiseworthy green initiatives. In 1997, commercial banks of the country were
asked2 to ensure measures controlling environmental pollution before financing a
new project or providing working capital financing to the existing enterprises.3
According to the BB requirements, the industrial units that may harm environment
to be established under bank credit would get permission for opening LC to import
machineries only after ensuring that the list of machines include ETP.4 BB issued a
comprehensive guideline on CSR asking banks to consider CSR at their highest
corporate level.5 BB has also been taking initiatives for the rehabilitation of cyclone
and other natural disaster affected people of the country and asked the commercial
banks to be cautious about the adverse impact of natural calamities and encourage
farmers to cultivate salinity-resistant crops in the salty areas, water-resistant crops
in the water-logged and flood prone areas, drought-resistant crops in the drought
prone areas. The policy circular offers some incentives in the form of preferential
treatments for the compliant banks: favoring compliant banks in calculating
CAMELS rating and opening new branches; declaring top ten banks for their overall
performances in GB. Moreover, BB circulated a Guideline on Environmental Risk
Management (ERM) on January 30, 2011 prescribing a set of sector specific
'Environmental Due-Diligence Checklist' for financing environmentally sensitive
sectors by banks and requires banks to establish and maintain a database of NPL due
to environmental causes.
 Most of the PCBs and FCBS adopted the policy except SCBs and SDBs who
have not taken such steps yet.
 Online banking and ATM facilities of SCBs and SDBs are very poor, BB need
necessary steps for that regards.
 Shrink giving loans to environmentally harmful projects;
 Make sure the necessary environmental compliance factors before lending a
loan/investment;
 Bangladesh Bank not only gives the policy but also provide technical supports
for GB adoption.
 GB motivates the banking that reduces use of paper which Create brand
image;
 Create awareness amongst the stakeholders about the environment as well as
environmental friendly business practices i.e. solar equipment, ETP, Bio-gas
Plant,
 Hybrid Hoffman Kiln (HHK) etc.

Bangladesh Bank’s In-House Green Activities

BB is concentrating on its in-house green activities through the most effective

utilization of resources (power, gas, fuel, water, paper etc.).
 With a move towards encouraging green banking in
Bangladesh, Bangladesh Bank
 Installed 8 kilowatt solar power system on its rooftop in March 2010. This
is now being
 Extended to 20 kilowatt to cover more areas.
 LED bulbs are being installed to bring significant energy efficiency.
  As part of central bank automation, Bangladesh Automated Clearing
House (BACH),
 Credit Information Bureau online, Enterprise Resources Planning (ERP),
Enterprise Data Warehouse (EDW), retendering, and e-recruitment have
come into reality.
 Payment is in live operation since 2012. Southeast, Pubali & BDBL are
now connected with NPSB and doing live transaction.
 The overall banking functions of Bangladesh Bank
(Including all departments and branch offices relating to banking functions) have
been brought under automation by implementing the Banking Application
Package that includes Core Banking Module, Treasury Management
Module and Market Infrastructure module.
 All the departments of Bangladesh Bank Head Office and its nine branch
offices have
 already been brought under a computer network (LAN/WAN), connecting
more than
 3,800 PCs.
 Environmentally harmful incineration of non-re-issuable damaged bank
notes is being
 Phased out, resorting instead to shredding.
 Online salary and other necessary advice, personal file updated
information, office orders, notification online balance statements for all
employees of BB, electronic passes for visitors are instantly available.
 A recent initiative has been taken to convert the 30- storied building of
Bangladesh Bank into a Green Building with the modern facilities of rain
water harvesting, waste water recycling and motion sensor energy efficient
bulbs supported by window based solar panels.

Achievements in Green Banking in Bangladesh

 In-house Green Practices by Bangladesh Bank:

Bangladesh Bank, the central bank of the country, has implemented a number of
in-house green initiatives besides ensuring sustainable practices by commercial
banks. The major in-house practices of BB include installation of 8 kilowatt solar
panel on its roof top in 2010; use of energy saving LED bulbs; in-house online
connectivity; online salary and other necessary advice, personnel file updated
information, office orders, electronic-pass for visitors; e-recruitment;
retendering; Enterprise Data Warehouse; EXP Online Monitoring System;
Online CIB; Bangladesh Automated Clearing House; Enterprise Resources
Planning; Bangladesh Electronic Fund Transfer Network; and National Payment
Switch.

 Green Banking Practices by Commercial Banks in Bangladesh:

Commercial banks of the country are trying to comply with the regulations of
the Government and Bangladesh Bank. The status of commercial banks in this
regard is discussed below.
(a) Green Governance: Table 1 shows that in response to the policy circular of
BB, 47 banks (100 per cent) of the country formulated environmental policies;
created GB cells and separate committee to oversee green activities of the bank
as of December 2012 whereas only 16 per cent, 12 per cent and 4 per cent banks
had environmental policy, GB cell, and separate committee respectively as on
June 2011 (Habib, et al. 2011). The finding shows that BB's initiatives have
brought remarkable change in the awareness and approach of banking
communities.
(b) Paperless Banking: Paperless banking such as online banking, internet banking,
mobile banking, ATM banking, etc., plays crucial role in promoting GB. Saving
paper means saving trees, costs, and avoiding carbon footprint, saving the planet and
improving profit. Table 2 shows that although 44 banks (93.62 per cent) out of 47
have online banking, only 41.05 per cent bank branches of all categories are
providing online banking services.

(c) Branches/SME Centers/ATMs Powered by Solar Energy: As a move towards

GB banks have been adopting clean energy, 375 branches/ SME centers/ATMs of
different banks were powered by solar energy as of December 2012. More
specifically, 26 banks have been using solar power in their 214 branches. The IBBL
has the largest number of 23 solar-powered branches followed by AAIBL and Sonali
Bank Ltd.

(d) Internal Environment Management: Banks have limited initiatives regarding

utility management (paper, water and energy saving). It is good to observe that now
a good number of banks are thinking of introducing internal environment
management. Almost all the banks prepared green office guide or at least some forms
of green office instructions. However, banks having large branch network found
difficulty in following the deadline of BB.
(e) Environmental Risk: Mitigation Banks have been complying with the
Environment Conservation Act, 1995 requiring clearance from the Department of
Environment (DoE) for obtaining banks credit for industrial units. However, the
study found that such arrangement hardly works in protecting environment and
banks are not ready to establish and maintain a database of NPL that are due to
environmental reasons.
(f) Green Financing: Some banks financed reasonably good amount in solar, bio-
gas, bio-fertilizer, ETP and HHK in recent years. A few banks9 designed project for
the vulnerable areas affected by climate change. Financing for ETP, biogas plant,
solar energy, HHK, etc. are termed as direct financing and financing to projects
having ETP is termed as indirect green financing. Table 5 shows that the amount of
total green financing during 2012 was BDT 270921.53 million divided into BDT
11821 million and BDT259100 million in the forms of direct and indirect,
respectively. Figure 1 shows that the PCBs hold a dominant position (66 per cent)
in both the direct and indirect green financing. However, of total green financing
about 96 per cent are in the form of passive indirect green finance.
(g) Disbursement of Refinancing:
The study found that by 2012, 27 participatory banks signed participation availed
refinance facility of BDT 854.46 million (43 per cent of total refinance fund) for
solar energy, biogas and ETP. Whereas upto June 2011 the amount of refinance
availed by five participatory banks was less than 7 per cent of the funds (Habib, et.
al. 2011). Figure 2 shows that refinancing for solar power and solar equipments
holds the major portion of the total refinance followed by bio-gas and HHK.
(h) Training, Development and Awareness: All the banks in the country have
some sort of training arrangement for their employees. Most of the bank training
institutes offer at least one session on GB in their training courses. However, banks
mostly rely on BIBM and BBTA for educating their employees. The awareness of
GB is still limited in the head offices of the banks; most of the bankers in the rural
areas do not have a clear understanding of the concept of GB. A few banks have
initiatives for awareness development of consumers as well
(j) Disclosure and Reporting of Green Banking Activities: Generally, banks do
not publish separate reports of their green activities or CSR programs and do not use
comprehensive standard formats such as the GRI. However, all banks have reported
to BB, and also in their annual reports about their GB activities; some disclose their
GB activities on their websites also. Two notable exceptions are HSBC and Standard
Chartered Bank in Bangladesh, which published Corporate Sustainability Report
and Annual Green Banking Report covering some environmental issues.

Problems on the Way to Implementation of Green

Banking in Bangladesh
Green Banking in Bangladesh is still in a nascent stage. The banking sector of
the country has been facing a number of challenges in doing GB. Some of the
challenges are inherent in the nature of the country, some are related to the
banking sector, and others are bank specific. The country specific problems on
the way to attaining sustainability objectives are poor enforcement of
environmental laws, inability to adopt modern technology from the traditional
ones, shifting red industries to appropriate locations, unaware of the end-users,
etc. The DoE is not shouldering its responsibilities effectively. As a developing
country, we cannot afford to adopt modern technology and abandon currently
used ones. The red industries such as tanneries, pharmaceuticals, chemicals, etc.
have not shifted to appropriate locations due to lack of political commitment of
the government, and bureaucratic red tape. The consumer groups in Bangladesh
are very vulnerable, and mostly unaware of green practices. The sector specific
problems include reluctance of bank board and top management, lack of
awareness and inability of bankers to formulate policy documents, strategic plan,
sector specific environmental guidelines, lack of technical hand, etc. Most of the
directors and senior people of the bank do not have right attitude and
understanding of green banking. They generally want to perform their
responsibilities simply by taking environmental clearance certificate which is not
an effective measure in most of the cases. The time frame as per the policy
guideline for GB of BB is applicable to all banks irrespective of their size. This
has a problem of 'one size fits all' approach. The large banks especially the State-
Owned Commercial Banks (SCBs) dominated by rural branches cover about half
of the bank branches of the country. Moreover, most of the branches of SCBs do
 not have online banking facilities. As a result, they are facing more difficulty in
following the policy guideline, especially in preparing the inventory of utilities,
doing paperless banking, etc. Moreover, the absence of coordination among the
commercial banks, Bangladesh Bank, DoE, law enforcing agencies,
environmental NGOs, and the end-users is another critical problem in pursuing
sustainable banking in Bangladesh.

Recommendations
 Bangladesh Bank must monitor the green banking practices of the banks.
 Government should encourage and try to create awareness about green
banking among mass people.
 Coordination among concerned authorities is a must.
 Borrowers must be encouraged about going green.
 Green banking guidelines must be applied in an efficient manner.
Conclusion

Green Banking has become a buzz word in today’s banking world. For going green
products, electronic compliances, motor vehicles etc. for ecofriendly atmosphere.
Automation and improved in house green activities, required and rigorous training
program for top/mid/lower level management and at the same time clients as well
need to be carried on. Board/Competent authority should be aware and updated of
the current green banking activities and development. Green Banking now is not
only limited to awareness but also in practice. It is now expected from all scheduled
banks that they would not only allocate budget for green finance, green event or
green projects under CSR activities, green marketing and capacity building but
ensure the efficient utilization of budget allocation. Finally we can say that going
green should be the motto of all commercial banks.
 Assignment 2:
Importance of letter of credit in import and export
What is a letter of credit?

A letter of credit, or "credit letter" is a letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct amount. In the event
that the buyer is unable to make a payment on the purchase, the bank will be required
to cover the full or remaining amount of the purchase. It may be offered as a facility.
Due to the nature of international dealings, including factors such as distance,
differing laws in each country, and difficulty in knowing each party personally, the
use of letters of credit has become a very important aspect of international trade.

How a Letter of Credits Works

Because a letter of credit is typically a negotiable instrument, the issuing bank pays
the beneficiary or any bank nominated by the beneficiary. If a letter of credit is
transferable, the beneficiary may assign another entity, such as a corporate parent or
a third party, the right to draw. Banks typically require a pledge of securities or cash
as collateral for issuing a letter of credit.
Banks also collect a fee for service, typically a percentage of the size of the letter of
credit. The International Chamber of Commerce Uniform Customs and Practice for
Documentary Credits oversees letters of credit used in international transactions.
There are several types of letters of credit available.

Types of Letters of Credit

 Commercial Letter of Credit

This is a direct payment method in which the issuing bank makes the payments to
the beneficiary. In contrast, a standby letter of credit is a secondary payment method
in which the bank pays the beneficiary only when the holder cannot.
  Revolving Letter of Credit
This kind of letter allows a customer to make any number of draws within a certain
limit during a specific time period.

 Traveler's Letter of Credit

For those going abroad, this letter will guarantee that issuing banks will honor drafts
made at certain foreign banks.

 Confirmed Letter of Credit

A confirmed letter of credit involves a bank other than the issuing bank guaranteeing
the letter of credit. The second bank is the confirming bank, typically the seller’s
bank. The confirming bank ensures payment under the letter of credit if the holder
and the issuing bank default. The issuing bank in international transactions typically
requests this arrangement.

Importance of Letters of Credit in Import

While accepting a LC, the supplier guarantees to meet the terms and conditions of
letter of credit with documentary proof. This is one of the major advantages of LC
to an importer/buyer. This assurance provides security to buyer for future business
plan. Since buyer is the holder of Letter of credit, Bank acts on behalf of buyer.
Opening bank remits amount only after satisfaction of all terms and conditions of
letter of credit with documentary proof. This arrangement protects importer and
minimize time, as bank acts on behalf of him.

A letter of credit transaction reduces the risk of nonperformance by the supplier, as

the supplier prefers LC than other transactions due to various reasons which protect
him than the buyer. This is an advantage for the buyer on fulfillment of meeting
commitments on shipments. Another advantage of letter of credit to a buyer/importer
is that the exporter/seller receives payment of exported goods only after shipment
and meeting of all necessary requirements under LC terms and conditions with
presentation of documentary proof including evidence of shipment.
Unlike other shipments, a shipment under Letter of credit is treated with most care
to meet delivery schedule and other required parameters by the exporter. The
documents receive by buyer promptly and quickly with complete sets. Unless
meeting delivery schedule and prompt documentation, the supplier does not get his
payment from opening bank. This is one of the major advantages of LC for an
importer is concerned. An importer/buyer is concerned; he can plan his payment
schedule properly by anticipating the requirements under letter of credit. This
arrangement makes importer for easier planning. Based on timely delivery schedule,
buyer receives goods on time thereby he can execute his business plan smoothly and
efficiently, in turn satisfying his clients promptly and effectively.

Importance of Letters of Credit in Export

One of the best methods after advance mode of payment for any business transaction
is Letter of Credit (LC) mode, as buyer’s bank guarantees payment to seller through
seller’s bank on presentation of required documents as per LC.
The major advantage of Letter of credit to a supplier is minimizing of credit risk. In
an import and export trade, the geographical distance between importer and exporter
is very far; hence ascertaining credit worthiness of buyer is a major threat. In a mode
of Letter of credit, such risk can be avoided.
Buyer cannot deny payment by raising dispute on quality of goods, as letter of credit
terms and conditions are based on documentation. This is a major advantage of
Letter of Credit in terms of seller point of view. Some of the fraudulent buyers
deliberately delays or hold payments by complaining on quality of goods. In a letter
of credit terms of business transactions, rejection of export payment by raising
complaint on quality of goods cannot be effected. LC provides a security to exporter
which is another advantage of a letter of credit. Based on such security, the exporter
can preplan his further business activities to strengthen his business world.
In a letter of credit, any dispute in transaction can be settled easily, as LC terms and
conditions are under the guidelines of uniform customs and practice of documentary
credit. This is another advantage of a LC for an exporter. In a letter of credit, all
required documents have been mentioned well in advance of shipment and there is
no confusion or misunderstanding to the importer (buyer) to inform supplier to act
in between. This is a good advantage for a supplier to preplan efficiently which saves
time. Against a Letter of Credit, an exporter can avail pre shipment finance from
banks or other financial institutions. This is another advantage of Letter of credit for
a seller. Many banks extend financial assistance with minimum bank interest, as
letter of credit is a ‘safe export order’.
Assurance to receive money in full is another advantage of letter of credit. During
my career, I had bitter experience on some of the transactions that I had short
received invoice amount under a non LC transaction by informing us one of the other
reasons by buyer. In a letter of credit, an exporter can ensure that he receives full
amount as per LC which helps seller to plan future business ideas.

Another advantage under a Letter of Credit transaction is that the exporter receives
money on time. As you know, ‘finance at right time’ is a prime factor for any
business transaction. So if a business man receives his anticipated amount on time,
he can plan his business activities smoothly without wasting time. This is one of the
major advantages of letter of credit. Assurance to receive money on time is one of
the major advantages to supplier/exporter in a Letter of credit terms. Normally and
widely, a confirmed irrevocable LC is opened by buyer and seller which is suitable
for both. A ‘confirmed irrevocable letter of credit’ is a ‘confirmed order’ for any
exporter is concerned. So the exporter need not worry on cancellation of his export
order or changes in said order. This helps a lot for an exporter for his business plans
in various levels including financial plans, minimizing production risk, saving time
etc.
Meeting delivery schedule by proper production plan is one of the major advantages
under a letter of credit terms of business. Normally, under a non LC business terms,
the buyer may keep on changing delivery schedule as per their requirements time to
time. So this change of delivery schedule at importer’s interest leads exporter to
rearrange his overall daily business activities.
 Assignment 3:
How Does a Bill of Exchange Work?
What is a bill of exchange?

A bill of exchange is a written order used primarily in international trade that binds
one party to pay a fixed sum of money to another party on demand or at a
predetermined date. Bills of exchange are similar to checks and promissory notes—
they can be drawn by individuals or banks and are generally transferable by
endorsements. A bill of exchange is a written order binding one party to pay a fixed
sum of money to another party on demand or at some point in the future. A bill of
exchange often includes three parties—the drawee is the party that pays the sum, the
payee receives that sum, and the drawer is the one that obliges the drawee to pay the
payee. A bill of exchange is used in international trade to help importers and
exporters fulfill transactions. While a bill of exchange is not a contract itself, the
involved parties can use it to specify the terms of a transaction, such as the credit
terms and the rate of accrued interest.

Types of Bills of Exchange

If a bill of exchange is issued by a bank, it can be referred to as a bank draft. The

issuing bank guarantees payment on the transaction. If bills of exchange are issued
by individuals, they can be referred to as trade drafts.
If the funds are to be paid immediately or on-demand, the bill of exchange is known
as a sight draft. In international trade, a sight draft allows an exporter to hold title to
the exported goods until the importer takes delivery and immediately pays for them.
However, if the funds are to be paid at a set date in the future, it is known as a time
draft. A time draft gives the importer a short amount of time to pay the exporter for
the goods after receiving them.
How a Bill of Exchange Works

A bill of exchange transaction can involve up to three parties. The drawee is the
party that pays the sum specified by the bill of exchange. The payee is the one who
receives that sum. The drawer is the party that obliges the drawee to pay the payee.
The drawer and the payee are the same entity unless the drawer transfers the bill of
exchange to a third-party payee.
Unlike a check, however, a bill of exchange is a written document outlining a
debtor's indebtedness to a creditor. It's frequently used in international trade to pay
for goods or services. While a bill of exchange is not a contract itself, the involved
parties can use it to fulfill the terms of a contract. It can specify that payment is due
on demand or at a specified future date. It's often extended with credit terms, such
as 90 days. As well, a bill of exchange must be accepted by the drawee to be valid.
Bills of exchange generally do not pay interest, making them in essence post-dated
checks. They may accrue interest if not paid by a certain date, however, in which
case the rate must be specified on the instrument. They can, conversely, be
transferred at a discount before the date specified for payment. A bill of exchange
must clearly detail the amount of money, the date, and the parties involved including
the drawer and drawee. Bills of exchange are useful in international trade because
they help buyers and sellers deal with the risks associated with exchange rate
fluctuations and differences in legal jurisdictions. We can say

 It is a written instrument that is unconditional

 It involves the drawer, which is the initiator of the bill, mostly the seller;
 The drawee, the person made liable to pay the owed amount; and
 The payee, the enforcer of the bill, often the bank plays this role.
 This instrument defers payment to a later date (60/90 days or more)
 It is a negotiable document
This means of payment in order based on law that apply the general rules for all
securities on order. In fact the bill of exchange is far greater detail regulated form of
security to us upon which highlights her character identification in relation to other
securities. It is obligatory legal paper that always follows a certain amount. This
indicates an extremely legal meaning of the bill of exchange, because the economy
in the area of commodity-money situation is not as important. But it still has a major
role in the credit system, and during the development of trade and commerce she
acquires its role as a substitute for money. Thus the bill of exchange is primarily a
lending facility for securing the claim. Also the bill of exchange is an important tool
for ensuring not only in commodity -money circulation, but also among some
payment institutions, especially in the foreign trade exchanges.