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Difficulty: Very hardMeans of Payment in Foreign Trade

A Nigerian export firm ships a consignment of cashew nuts to a buyer in Germany under a Documentary Collection (Documents Against Acceptance - D/A) arrangement using a 90-day time Bill of Exchange. The German importer accepts the draft upon presentation of the documents, receives the Bill of Lading from the collecting bank, and takes delivery of the goods. However, 90 days later, the importer becomes insolvent and fails to pay the accepted draft at maturity. Which party bears the ultimate financial loss in this transaction, and why?

  1. The Nigerian exporter, because under a D/A documentary collection, collecting banks act solely as collection agents without guaranteeing buyer solvency or payment upon maturity.Answer
  2. B
    The German collecting bank, because releasing the Bill of Lading to the importer legally obligates the bank to honour the bill of exchange if the importer defaults.
  3. C
    The shipping company, because delivering cargo against an accepted bill of exchange without receiving verified cash settlement violates international maritime law.
  4. D
    The Central Bank of Nigeria, because unfulfilled foreign trade acceptances are automatically reimbursed through official Foreign Exchange Balance of Payments reserves.

Answer

The Nigerian exporter bears the loss because banks in a Documentary Collection (D/A) transaction act only as agents to present documents and collect funds; they do not guarantee the importer's solvency or financial obligation upon maturity.
In international trade, a Documentary Collection under Documents Against Acceptance (D/A) requires the collecting bank to hand over title documents (Bill of Lading) to the importer upon the importer's formal acceptance of a time bill of exchange. The banks involved serve strictly as collection facilitators and do not guarantee payment. If the importer defaults or becomes insolvent prior to maturity, the exporter retains full credit risk.

Step-by-Step Solution

1
Identify the payment instrument and procedure used in the scenario.
The mechanism is Documentary Collection under Documents Against Acceptance (D/A) with a 90-day time draft.
Understanding the specific rules governing D/A collection determines liability.
2
Analyze the role and legal liability of commercial banks under Documentary Collection rules (URC 522).
Banks act purely as intermediaries/agents for handling documents according to principal instructions without substituting their own credit.
Unlike a Letter of Credit, a documentary collection does not involve a bank payment guarantee.
3
Evaluate the status of the shipping documents (Bill of Lading) upon buyer acceptance.
The collecting bank releases the Bill of Lading (document of title) to the buyer as soon as the buyer accepts (signs) the 90-day bill of exchange.
The buyer gains immediate legal ownership of goods before actual money transfers occur 90 days later.
4
Determine who carries the credit risk if the buyer defaults at maturity.
Because title to goods was already transferred and no bank guarantee exists, the seller (exporter) holds only an unpaid trade acceptance, bearing 100% of the default risk.
Credit risk in D/A collection remains entirely with the exporter.

Key Concept

Risk Allocation in Documentary Collection (D/A vs. Irrevocable Letter of Credit)
Estimated Time:2m 0s
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Topics

Means of Payment in Foreign Trade

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