a). The basic instrument appropriate for Builders Merchants Ltd is a back-to-back documentary credit.

In this method, the customer receives an incoming documentary credit (LC) from the overseas buyer in sterling for the CIF contract. The bank then uses this incoming LC as security to issue a new LC (the back-to-back credit) in favor of the overseas suppliers for the purchase of the goods. The terms of the back-to-back LC are similar to the incoming LC, but adjusted for the supplier’s requirements, such as lower value to account for profit margin.

This caters for the customer’s cash flow difficulties because they do not need to use their own funds or borrow to pay the suppliers upfront; the payment to suppliers is made only when the documents are presented and comply with the back-to-back LC, and the customer is reimbursed almost simultaneously from the incoming LC upon presentation of their own documents. It defers payment until shipment and aligns inflows and outflows.

It gives comfort to the suppliers because they receive a confirmed LC from a reputable bank, providing security of payment upon complying presentation of documents, reducing their credit risk on the customer.

In practice, in Ghana, banks like Ecobank or Stanbic would require the incoming LC to be from a strong issuer and may add confirmation if needed, ensuring compliance with BoG forex regulations and UCP 600.

b). The method is appropriate for the contract with the German supplier, but with caveats.

The incoming LC is in sterling, while the supplier requires payment in Euros, so the back-to-back LC can be issued in Euros, but the bank would need to handle the currency mismatch. The customer would bear the FX risk unless covered by a forward contract. Reasons: The bank can issue the LC in Euros using the sterling LC as security, but must ensure the value in Euros is covered by the sterling amount at the prevailing rate, and any FX fluctuations could affect the coverage.

c). A compromise to assist in complying with the German supplier’s request for Euros while providing security:

Arrange for the back-to-back LC to be issued in Euros, with the bank handling the currency conversion from sterling to Euros upon payment under the incoming LC. To mitigate FX risk, the customer can enter into a forward exchange contract to sell the sterling proceeds for Euros at a fixed rate to cover the Euro payment obligation. This ensures the supplier gets secured payment in Euros via the LC, and the customer avoids cash flow strain and FX losses. Alternatively, if the incoming LC allows, amend it to be in Euros, but if not, use the forward cover as above. This aligns with UCP 600 and BoG guidelines on FX dealings.