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Question

Difficulty: Very hardBanking: Functions and Services to Trade

An importer in Kano needs to guarantee payment to a foreign supplier prior to shipment, authorize their bank to settle varying monthly electricity bills automatically as billed by the utility company, and obtain immediate cash against an accepted 90-day trade bill. Which combination of commercial banking services directly fulfills these three operational requirements respectively?

  1. Letter of credit, direct debit, and bill discountingAnswer
  2. B
    Letter of credit, standing order, and bill discounting
  3. C
    Credit transfer, direct debit, and bank overdraft
  4. D
    Bank guarantee, standing order, and bank loan

Answer

Letter of credit, direct debit, and bill discounting
The correct answer accurately matches all three specific banking services to the trader's operational needs in order: a letter of credit guarantees payment to an overseas exporter, a direct debit enables the utility company to draw fluctuating bill amounts automatically, and discounting a bill of exchange converts a future receivable into immediate cash.

Step-by-Step Solution

1
Analyze the first requirement: guaranteeing international trade settlement.
A letter of credit is a financial instrument issued by an importer's bank guaranteeing payment to an overseas exporter upon submission of required shipping documents.
Foreign suppliers require credit risk mitigation before dispatching goods across borders.
2
Analyze the second requirement: automated settlement of fluctuating monthly utility bills.
A direct debit mandate authorizes a creditor (utility provider) to collect variable amounts directly from the debtor's bank account on scheduled dates.
A standing order is unsuitable because standing orders are restricted to fixed, unchanging payment amounts initiated by the debtor.
3
Analyze the third requirement: converting a 90-day accepted bill into immediate cash.
Bill discounting allows a merchant to sell an accepted term bill of exchange to a commercial bank at a discount before its maturity date.
This provides immediate working capital without waiting for the full 90-day credit period to elapse.

Key Concept

Commercial Banking Services and Instruments in Support of Trade
Estimated Time:1m 30s
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Topics

Banking: Functions and Services to Trade

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