THE SQ3R STRATEGY

In order to study efficiently, you will need to learn to vary your reading style to suit both the material and your reason for reading that material. You will also need to develop the ability to quickly switch from one method of reading to another. This will enable you to search for specific items by scanning, to assess a passage quickly by skimming, and then to read it closely to understand it. The following active reading strategy, devised by Derek Rowntree, combines the use of these techniques and is commonly referred to as the SQ3R method. This stands for Survey, Question, Read, Recall, and Review. This strategy is particularly useful when you need to study a topic in depth in order to master it and when revising and making revision notes.

 

Question the ideas –

ask yourself questions about the text, about the ideas in practice, and about what the examiner might ask.

Read thoroughly –

the styles of reading have already been covered. Make sure that you are not reading just words but reading the meaning of the text.

Recite the ideas to memory –

this involves reading aloud, making notes, summarising main points, or asking a friend to test your understanding. If you can prove to yourself that you have understood the main points then you are well on your way to success.

Review to check your understanding –

this should be a regular part of your study, checking your understanding and your ability to reproduce the information.

PARTIES INVOLVED IN A LETTER OF CREDIT TRANSACTION

In order to help the reader understand the steps taken in a letter of credit transaction, the following is a brief description of the parties most commonly involved in letters of credit.

Accepting Bank

The bank named in a letter of credit on whom term drafts are drawn and who indicates acceptance of the draft by dating and signing across its face, thereby incurring a legal obligation to pay the amount of the draft at maturity.

Advising Bank

A branch or correspondent bank at or near the domicile of the beneficiary, to which the issuing bank either sends the letter of credit, or a notification that a letter of credit has been issued, with instructions to notify the beneficiary. The advising bank advises the beneficiary of the letter of credit without engagement.

Applicant

The buyer or the party who requests the letter of credit to be issued.

Beneficiary

The seller or the party to whom the letter of credit is addressed.

Confirming Bank

A bank usually in the country of the beneficiary which, at the request of the issuing bank, joins that bank in undertaking to honour drawings made by the beneficiary, provided the terms and conditions of the letter of credit have been complied with.

Discounting Bank

A bank which discounts a draft for the beneficiary after it has been accepted by an accepting bank.

Drawee Bank

The bank named in the letter of credit on whom drafts are to be drawn.

Drawer

The beneficiary of the letter of credit who will draw the draft in accordance with the terms of the letter of credit.

Issuing Bank

The bank which opens a letter of credit on behalf of the applicant and forwards it to the advising bank for delivery to the beneficiary.

Negotiating Bank

Usually the beneficiary’s bank which, after satisfying itself that the documents conform with the letter of credit, agrees to purchase the draft (pay the beneficiary).

Paying Bank

The bank named in the letter of credit where drafts are to be paid. It is not necessarily the issuing bank, but often a branch of the issuing bank or its correspondent. Once drafts have been paid or accepted by the paying/drawee bank, there is no recourse to the drawers.

Reimbursing Bank

The bank authorized by the issuing bank to reimburse the drawee bank or other banks submitting claims under the letter of credit.

A BRIEF EXPLANATION OF TRADE TERMS

Explanations of four of the most common terms are:

CFR

“Cost and Freight” to the named port of destination. The seller loads the goods on board the carrying vessel at his expense, prepays the freight and supplies the buyer with a “clean” negotiable “on board” ocean bill of lading. Insurance of the goods is the buyer’s responsibility.

CIF

“Cost, Insurance and Freight” to the named port of destination. The seller loads the

goods on board at the port of shipment at his expense, prepays the freight and cost of

marine insurance and supplies the buyer with a negotiable marine insurance policy and

a “clean” negotiable, “on board” ocean bill of lading.

FOB

“Free On Board” to the named port of shipment. The seller delivers the goods on board the carrying vessel and bears all costs and risks until goods pass over the ship’s rail. The seller supplies the buyer with a “clean” negotiable “on board” bill of lading. The buyer is responsible for payment of freight and insurance.

FAS

“Free Alongside Ship”. The seller delivers the goods alongside the vessel at the loading berth named by the buyer. At this point the seller’s obligations are fulfilled. This means the buyer bears all costs and risks of loss or damage to the goods from that moment. Unlike FOB, this term requires the buyer to clear the goods for export and pay loading costs in addition to freight and insurance.

WHAT TO DO IF DOCUMENTS ARE DISHONOURED

When documents are presented by the beneficiary and are found not to be in accordance with the terms of the letter of credit, the following courses of action are available:

• The documents may be corrected if possible. However, this option is only applicable if the discrepancies are such that the beneficiary, shipping company or whoever is concerned is able to correct the discrepancies before the expiry of the letter of credit and within the period of time allowed for presentation of the documents.

• If the discrepancies cannot be corrected, the beneficiary’s bank may request authority from the issuing bank to negotiate the draft, despite the discrepancies.

• If, in the case of a sight draft, the beneficiary wishes to receive the proceeds of the drawing immediately, then an indemnity may be the expedient method. Under the indemnity the beneficiary agrees to indemnify the negotiating bank for payment of principal, interest and any other loss resulting from the refusal of the issuing bank to honour the drawing due to non-conformity of the documents. If the discrepancies are considered minor, the beneficiary’s bank may be prepared to negotiate the draft “under reserve”; it being understood the beneficiary’s bank will have recourse to the beneficiary if the discrepancies are unacceptable to the issuing bank.

• As a last resort, documents may be sent to the issuing bank on an “approval” basis; the documents to be delivered to the buyer only against the buyer’s authority to pay or accept.

TERM (USANCE) LETTER OF CREDIT

Acceptance

On presentation of the documents called for under the letter of credit, provided they are in compliance with its terms, the beneficiary’s bank, which may be the advising bank, will send the documents and the draft to the accepting bank for acceptance. The accepted draft may be held by the accepting bank until it matures or it may be returned to the beneficiary at the beneficiary’s option, who may hold it until maturity or discount it at the best rate with any bank.

The chart below tracks the term draft and documents to the beneficiary’s bank which, in turn, presents these items to the accepting bank for acceptance.

Payment

On maturity of the accepted draft, the accepting bank will pay the beneficiary or the discounting bank and claim reimbursement from the issuing bank who will charge the applicant’s account and will remit the proceeds. The discounting bank would be any bank which had purchased the accepted draft at a discount.

The chart below tracks this procedure. The applicant (buyer) pays the issuing bank who in turn pays the beneficiary or discounting bank through the paying bank.

SIGHT LETTER OF CREDIT

Unconfirmed Sight Letter Of Credit

With an unconfirmed sight letter of credit, payment of funds flows from the applicant (buyer) to the

beneficiary (seller).

Confirmed Sight Letter Of Credit

With a confirmed sight letter of credit, the payment of funds also flows from the applicant (buyer) to the beneficiary (seller). However, the payment made by the negotiating/confirming bank is made without recourse to the beneficiary.

PAYMENT PROCEDURE

Payment

On presentation of the documents called for under the letter of credit, provided they are in compliance with its terms, the advising/negotiating bank, in the case of an unconfirmed letter of credit, may pay/negotiate the draft.

In the case of a confirmed letter of credit, the confirming bank is obliged to honour the drawing without recourse to the beneficiary.

Reimbursement

The advising/confirming/negotiating bank will claim reimbursement from the issuing bank.

Settlement

On receipt of conforming documents, the issuing bank will also be responsible for checking documents and will charge the applicant’s account under the terms of the letter of credit application and agreement forms, effecting reimbursement to the negotiating bank.