The Commercial Bank of Ethiopia (CBE) began demanding its clients pay the entire amount up-front when using Cash against Document payment arrangement.

In Cash against Document (CAD), the process of collecting the settlement and releasing the documents is usually entrusted to a bank as a trusted third party. Banks release title documents to clients, after exporters ship the goods and clients effect payment. They will then transfer this payment to the seller in a foreign currency.

According to the new procedure Commercial Bank of Ethiopia introduced, clients are required to deposit full payments in advance even before the bank agrees to a CAD term of payment.

“I either had to pay the full amount right then or there was no deal,” one Ethiopian chemical importer told fortune.

The reason behind the Bank’s new procedure is liked to the accumulation of goods at dry ports in the country, according to Yishak Mengesha, Business Development director of the CBE.

“The Bank made this move because importers have failed to remove their containers on time,” he said.

An recent inspection by the Ministry of Trade and ESLSE discovered that most of the goods that remain unclaimed at dry ports were imported through CAD payment term. Of the 750 importers who have shipments at dry ports until March 2012, more than half has used CAD payment terms.

Because clients did not have to pay anything in advance, they could easily forgo ownership of goods later, when using CAD transactions, leading to accumulation of goods at dry ports, according to industry observers.Furthermore since banks were not owed anything by their clients they had no interest in repossessing the goods at dry ports either.

Source: Fortune