Trends and Challenges of Trade Financing of Bangladesh of 2019
(Published in the Financial Express)
Dr. Shah Md Ahsan Habib[1]
Banking industry of Bangladesh has been facilitating payment, finance and risk management services to the traders, and thus, contributing toward growing global trade integration of Bangladesh and other economies of the world. Banks have considerable involvement in trade facilitation by engaging in relevant legal enforcements and commercial risk minimization. The regulatory provisions for international trade facilitation in the country expedite greater involvement of the trade services departments with greater risks and greater opportunities to earn. With the growing business complexities, technological changes, market expectations and financial crimes, trade services are becoming increasingly challenging to the banks and financial institutions of the country, similar to the other trading countries of the globe. Though trade finance is seen as a relatively safe and liquid asset, with low default rates, it is self-liquidating and short-term in nature. There are evidences that banks can run down their trade finance portfolios quickly at the time of financial stress. Moreover, banks can be severely affected or penalized due to the negligence, avoidance or violation of risks and compliance issues.
In Bangladesh, trade services products of the country includes products or services related to trade payment, trade finance and some other services that are offered from trade services department of banks or banking services closely associated with international trade transactions. Use of technology has brought notable changes in the operational procedures and compliance issues of trade services in the country in recent years. As a whole, 2018 has several trends that are not very different from 2017. However, newer challenges came up that are not very different from most other global economies.
In 2017, Private Commercial Banks (PCBs) as a group was the major market share holder in trade facilitation; and of the payment methods, documentary credit was the most prominent payment technique in import and export transactions. In Export Processing Zones (EPZs) however, the situation was different where documentary collection was the most commonly used method followed by open account. Of the pre-shipment finance, Packing Credit was not the main component rather over draft or Export Cash Credit accounted for about half of the total pre-shipment credit that required higher cost for the clients. PCBs as a group, was also the most dominant share holder in trade financing, remittance services, and maintenance of foreign currency accounts. The year 2017 was marked by poor drafting of LC clause and inappropriate use of incoterms in LC operation which was cause of concerns to many of the country’s trading partners. In 2017, greater enforcement of online reporting and monitoring system by the Bangladesh Bank brought about positive changes in terms of decline in irregularities by banks and improvement in data accuracy. As a whole several challenges identified for the year 2017 were received due attention of the policy makers.
In 2018,PCBs as a group was the major market share holder in trade facilitation, not very different from the year 2017. One notable observation in recent time was the growth of import financing of State Controlled Banks (SCBs) due to huge LC opening on behalf of the government sector. PCBs were also the most dominant share holder as a bank group in export financing, and remittance services. Though, the market share of Foreign Commercial Banks (FCBs) increased in CY 2018 in trade facilitation, the change does not seem significant.
Documentary credit remained the most prominent payment technique in import and export transactions in CY2018, not different from the previous years. Though the extensive use of documentary credit started largely in response to the regulatory compulsion, LC remained the most dominant even after removing restrictions. Rather use of LC increased both in onshore and off shore trade facilitation. Documentary collection remained the second most important trade facilitation tool. Of the different types of LC, back-to-back and transferable LC remained dominant; however, there was decreasing trend in the use of transferable LC.
Poor drafting of LC clause and inappropriate use of incoterms in trading remained a matter of concerns to many of the trading partners. In spite of some improvement, the situation demands more attention. As an extensive user of LC, the country’s practices are examples to many of the key stakeholders in the Globe. It is essential to work on the issues to uphold the country’s reputation for due competitiveness. The upcoming version of Incoterms is expected to solve several related challenges in regard to the inappropriate use.
In spite of the improvement, there are instances of delay in payment and spurious discrepancies in handling documents under LC. For handling fraudulent activities in LC, there should be applicable supportive local laws/set of rules alongside universally accepted guiding rules like UCP 600. Time has come to have separate LC law for the country. This can be achieved either by enacting separate law like USA, China and Vietnam etc. Moreover, considering the unique nature of trade transactions and growing complexity, a separate bench in the court may be needed to ensure effective use of regulatory machinery.
Packing Credit was the main component of the pre-shipment finance; however, over draft or Export Cash Credit remained a good proportion of pre-shipment credit in CY 2018. Sometimes banks were more interested to offer over draft or Export Cash Credit in place of packing credit to charge relatively higher interest returns. Due to supportive approach and ceiling of volume, Export Development Fund facilities became even more attractive to the traders. Loan against Trust Receipt remained the key component of post-shipment financing.
There are evidences and symptoms of increasing cross border bank-guarantee practices over last few years. Though there are reporting arrangements of the BB, the true exposures of international bank guarantees by banks cannot be identified with these. Time has come to identify the exposure of banks on international bank guarantees; and it seems crucial now to formulate guideline/sets of rules for international bank guarantees and adopt international rules associated with international bank guarantees and standby LC.
In offshore banking, Uance Pay at Sight (UPAS) remained the key component in the asset side, and volume increased. Though total volume of short-term and long-term foreign loans facilitated by banks increased consistently, growing trend of short term credit was particularly visible. On the way to address regulatory and monitoring challenges of offshore banking, the issuance of Offshore Banking Guideline is expected to bring due developments and changes.
In most cases, the contract or purchase/sale contracts have not been legally enforceable for ensuring optimum protection. For sound purchase/sale agreement, it is essential to have coverage of a regulatory framework. Alongside ratifying the UN Vienna Convention on Contract of Sale, there should be clear instructions on the other non-ratifying countries. BB may also revisit the four-month repatriation requirement in export transactions considering some recent challenges associated with usance payment arrangement.
The impact of the de-risking has now been rebounded to some extent with the intervention of some development institutions to bridge the gap between uncertainty in regulator expectation and compliance program of global correspondent banks. However, the role of certain banks as advising bank, nominated bank under LC, and collecting under documentary collection changed remarkably. Some traders and banks in Bangladesh were also facing challenges. For credibility, BB may think of assessing and publishing status report on correspondent banking relationship every year.
Incidences of Trade Based Money Laundering (TBML) remain a growing concern for policy makers and central banks throughout the globe. Though the available sets of AML rules are in line with globally accepted standards, still there is lot of scopes to improve their enforcements. BB is working on a TBML guideline which is expected to bring positive changes regarding better enforcement of the AML rules. Greater use of LC offers better protection, monitoring and control of the regulatory authority. Bangladesh is having favorable circumstance in this connection. Any attempt to move towards open account in line with global trend might prove to be risky from the point of view of TBML. As banks have obligation of ensuring the ‘competitive’ prices of importable items ‘fair’ prices of exportable, banks have to find out an effective mechanism to implement the obligation. The country needs greater coordination amongst different stakeholders to address the pricing issues and country risks for competitiveness and regulatory compliance.
The market transformation of international trade is bringing notable alteration in the trade services techniques. Adoption of technology and modernization has no alternative. Time has come to undertake preparatory work for pacing with on-going global trade digitization movements and embracing distributed ledger technology for efficient trade services and addressing related financial crimes. In addition, alongside investing on capacity development of the bank executives, awareness initiatives for the traders should get due emphasis to ensure competiveness and to minimize the risks.
[1] Professor and Director (Training), BIBM.
