by Omodele Adigun
Are you a global player in the world of business, particularly merchandise? Are you in dire need of credit line to finance the business? Then Bankers’ Acceptance (BA) may be your best bet.
Therefore, you have to take a trip to your bank and find out how best to access this credit facility. But before that, you can walk your way through this overview.
What is a Banker’s Acceptance?
A Bankers’ Acceptance (BA), according to the Central Bank of Nigeria (CBN), is “a draft drawn on and accepted by a bank, unconditionally ordering payment of a certain sum of money at a specified time in the future to the order of a designated party. Since the instrument is negotiable, title to it is transferred by endorsement. It is a marketable instrument and allows a bank to finance its customers without necessarily utilising its loanable funds. Instead, funds are provided by investors who are willing to purchase these obligations on a discounted basis.”
To simplify this definition, Wikipedia explains that “a Banker’s Acceptance is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank. The BA specifies the amount of money, the date, and the person to whom the payment is due. “After acceptance, the draft becomes an unconditional liability of the bank. But the holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit.”
A banker’s acceptance starts as a time draft drawn on a bank deposit by a bank’s customer to pay money at a future date, typically within six months, analogous to a post-dated check. Next, the bank accepts (guarantees) payment to the holder of the draft, analogous to a post-dated check drawn on a deposit with over-draft protection.
The party that holds the banker’s acceptance may keep the acceptance until it matures, and thereby allow the bank to make the promised payment, or it may sell the acceptance at a discount today to any party willing to wait for the face value payment of the deposit on the maturity date.
Conditions for creating BA
The apex bank, in its guidelines on the issuance and treatment of Bankers’ Acceptances, stipulates that: Every BA shall have an underlying trade transaction for which the bank should hold the title documents to the merchandise as collateral for the acceptance.
And that a BA shall be represented by a physical instrument in the form of a draft signed by the drawer and accepted by the bank; all BAs shall be properly executed by the bank by affixing its “Accepted” stamp, signature and date on the face of the bill. These shall be made available for examiners’ scrutiny; the bank shall have a signed agreement, for each acceptance it creates, with the drawer.
Subject to these guidelines, a BA may only be drawn on and accepted by a bank, pursuant to an acceptance credit line, to finance the drawer’s business-related activity in relation to the purchases from or sale of goods to another person who may be a resident or non-resident, evidenced by proper and adequate documentation; the “sale” or “purchase” of services shall not be eligible for BA financing.
In the event that funds collected from investors are not disbursed to the issuer immediately, such funds shall be treated as deposits. A BA shall be executed before canvassing for funds from potential investors. Investors in BAs shall also be made aware of the identity of the issuer.
Documentation requirements
In general, a BA may only be drawn on the presentation of a complete set of documents as follows: The drawer’s declaration that no other source of finance (including a lease, hire purchase, or factoring agreement) has been or would be entered into in respect of the trade transaction concerned; the full set of commercial and/or financial documents, evidencing or acknowledging the trade transaction concerned; and a receipt or other documentary evidence of payment, in the case where the purchaser who is drawing the BA has already made payment to the supplier prior to the creation of the BA. Where the full set of commercial and/or financial documents may not yet be available on the drawing date or where the transaction is only evidenced by a single document, a BA may still be drawn subject to the following conditions: At least, one supporting document or the single document is presented; the document(s) presented contain the following information – names and addresses of the parties to the trade transaction; specific description of the goods, which is the subject of the trade transaction; financial value of the trade transaction; and terms and conditions for the settlement of the trade transaction.
The remaining documents should be presented for the accepting bank’s records once they become available.