Updated: Nov 1
Earlier this week, the Central Bank of Egypt issued a new decision which will affect all Egyptian importers: all banks are to stop dealing with documentary collection (D/C) and replace them with letters of credit (L/Cs). So, here’s a brief of what the decision involves, along with 6 key highlights you should know.
First, let’s break down the basic concepts mentioned in the law, then understand its implications for SMEs in Egypt.
In simple words, international trade among entities usually take place using one of two payments methods:
Letter of Credit (L/C):
An agreement in which the buyer’s bank guarantees to pay the seller’s bank at the time goods/services are delivered, along with the related documents that contain very precise information about the trade. Letters of credit guarantee payment and are more suited for use when the two parties are unknown.
Documentary Collection (D/C):
It is very similar to a letter of credit. For the payment to be made, a number of specific documentations needs to be submitted. (D/C) requires strict compliance and correct documentation that needs to be presented at the time the goods are delivered; failing which can result in the rejection of the goods from the buyer’s side.
So, with that understanding, what are the main highlights of the new decision?
As of March 2021, importers should have a letter of credit to buy goods.
Importers should pay the total cost of their purchase to the bank before the shipment is delivered, offering more protection to the exporter.
Importers can now switch to L/Cs without extra bank fees, as directed by CBE.
This new decision does not apply to branches of foreign or international companies and their subsidiaries in Egypt.
Imports of medicines, serums, relevant chemical substances, and certain food commodities are excluded from CBE’s decision.
The exclusion decision also applies to express mail shipments and shipments worth up to $5,000 (or the equivalent of this amount in other currencies).
mporting for SMEs, who represent the majority of importers, will be more challenging than before.
Egyptian SME importers who require support in navigating the new requirements can seek legal, financial, tax and business consulting services through UNLOCK experts.
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The requirement of upfront payment of the total cost prior to shipment will likely lead to higher production costs & retail prices of many products.
In addition to that, the complexity that SMEs will experience while navigating the bureaucracy needed to obtain an L/C makes the adaptation phase harder.
Tips From UNLOCK
Submitting documents in strict compliance with the terms and conditions of the LC is vital. Any non-adherence with the LC can lead to non-payment or delay and disputes in payment.
LC will no longer make way for installments, so we recommend urgent financial refinements within your entity for better adaptation to the new decision.
Seeking legal and financial advice might be crucial for your business at this point; to swiftly cope with the decision.