Forfeiting a Kenyan Bank Acceptance versus Post-Shipment Credit
An Indian exporter of textile machinery has a 180-day usance LC for USD 1,500,000 issued by a Kenyan bank and accepted by it on 10 March 2025. The exporter needs liquidity and obtains two options. A forfeiter offers to purchase the accepted draft without recourse at a discount rate of 6.75% per annum on a 360-day basis, plus a flat commitment fee of 0.25% and a handling fee of 0.15% on face value. The exporter's bank offers post-shipment credit in rupees for 180 days at 8.5% per annum, with recourse, advancing 90% of the LC value; the retained 10% is paid on maturity. The exporter's bank has a country limit for Kenya that is nearly exhausted, while the forfeiter has a fresh Kenya limit. The buyer has accepted the goods, but the Kenyan bank's acceptance is advised only by an MT799 free-format message, not by an authenticated acceptance advice or an avalised bill of exchange.
1. Calculate the net proceeds of the forfeiting option and compare it with the post-shipment credit option.
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Forfeiting costs are calculated on the face value of USD 1,500,000 for 180 days on a 360-day basis. The discount is USD 1,500,000 x 6.75% x 180/360 = USD 50,625. The commitment fee is 0.25% x USD 1,500,000 = USD 3,750. The handling fee is 0.15% x USD 1,500,000 = USD 2,250. Total costs are USD 56,625, so the net proceeds are USD 1,443,375.
Under post-shipment credit, the bank advances 90% of USD 1,500,000, which is USD 1,350,000. Interest for 180 days at 8.5% is USD 1,350,000 x 8.5% x 180/360 = USD 57,375. The net cash now is USD 1,292,625, with USD 150,000 retained until maturity. If the buyer pays in full, the exporter eventually receives USD 1,442,625 in total, before considering any other charges.
The two options are close in total cost, but they are not equivalent. Forfeiting produces USD 1,443,375 immediately and transfers the Kenyan bank and country risk to the forfeiter without recourse. Post-shipment credit produces less cash now, leaves 10% at risk until maturity, and remains with recourse to the exporter. The comparison should therefore be on risk-adjusted proceeds, not only on the nominal cost.
2. What is the significance of the MT799 advice for the forfeiting decision, and what documentation should the forfeiter require?
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An MT799 is a free-format SWIFT message. It can convey information, but it is not by itself a formal acceptance of a draft or an aval. For a forfeiter to purchase without recourse, it needs an enforceable payment undertaking from a bank it has approved. The MT799 may confirm that the Kenyan bank has accepted the draft, but the forfeiter will want an authenticated acceptance advice, an accepted bill of exchange or an aval, together with verification that the signatory had authority to bind the bank.
The forfeiter should also check the underlying LC and documents. It needs evidence that the presentation was complying, that the acceptance is unconditional, that the amount and maturity date are clear, and that the acceptance is governed by an acceptable law and jurisdiction. It should verify the Kenyan bank's credit limit, the country limit and sanctions status. If the acceptance is only a free-format message, the forfeiter may decline the transaction, price it with recourse, or require additional confirmation from the bank.
The exporter should not assume that the buyer's acceptance of the goods cures the documentary weakness. The bank's payment undertaking is the asset being sold. Without a valid and authenticated acceptance, the forfeiting facility may be unavailable or may be converted into a recourse facility, which changes the exporter's risk profile.
3. Recommend which option the exporter should take and state the conditions that should be met before proceeding.
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On the numbers alone, forfeiting is attractive because it produces USD 1,443,375 now, slightly more than the total eventual USD 1,442,625 under post-shipment credit, and it removes the 10% retention and the recourse exposure. It also solves the country-limit problem, because the exporter's bank has little Kenya headroom while the forfeiter has a fresh limit. The recommendation should therefore be to proceed with forfeiting only if the acceptance documentation can be strengthened.
Before proceeding, the exporter should obtain an authenticated acceptance or aval from the Kenyan bank, confirm the maturity date and amount, and ensure that the underlying LC presentation was compliant. The forfeiter should confirm its credit approval for the Kenyan bank and the country, and the exporter should obtain a written confirmation that the purchase is without recourse and that the pricing includes all fees. The exporter should also check the settlement currency and the mechanism for receiving funds, and should retain a copy of all documents.
If the Kenyan bank cannot provide an authenticated acceptance or aval, the exporter should not rely on the MT799 alone. In that case, post-shipment credit with recourse, or a wait-and-see approach, is safer. The exporter should also consider whether the forfeiter's without-recourse price still compensates for the residual documentation risk.