BANKERS ACCEPTANCES

A banker’s acceptance, or BA, is a time draft drawn on and accepted by a bank.

Before acceptance, the draft is not an obligation of the bank; it is merely an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer of the draft.

Upon acceptance, which occurs when an authorized bank employee stamps the draft "accepted" and signs it, the draft becomes a primary and unconditional liability of the bank. If the bank is well known and enjoys a good reputation, the accepted draft may be readily sold in an active market.

Many commercial traders in the United States and abroad have found acceptance financing a convenient and relatively inexpensive vehicle to finance trade. Although acceptances can be created in any currency, in practice most acceptances are created in the major world currencies such as the U.S. dollar, the Japanese yen, the German mark, and the British pound.

Bas have a minimum denomination of RM30, 000 with no maximum value and are drawn for periods ranging from 21 days to 365 days provided prior approval from the Controller of Foreign Exchange is obtained.

For the borrower, the cost of the BA is made up of 2 elements:

a. Acceptance commission, which reflect the credit standing of the drawer or borrower.

b. Discounting rate at which the BA can be sold in the secondary instrument.

THE CREATION OF A BANKERS ACCEPTANCE

By far the largest proportions of bankers’ acceptances are created as a result of international trade transactions. The following is an example of a bankers’ acceptance created by a trade transaction

1. KL Trading is interested in purchasing 1000 laptops from Georgia Tech in the United States. Since the two companies have never done business with each other, Gergia Tech will require that KL Trading obtain a letter of credit. The letter of credit places the bank in the intermediary role to facilitate the completion of the