Shah Md Ahsan Habib
Background & Methods
Bangladesh economy is increasingly getting involved in international trade transactions. It is recognized that improved and efficient cross-border trade will have notable implications for the country’s LDC graduation process. Despite notable policy and operational strengthening of Bangladesh’s trade services, several areas need continuous scrutiny and streamlining as trade finance risks are multifaceted and constantly evolving. This necessitates continuous efforts to draw feedback from the market participants, enhance risk management capabilities, strengthen regulatory compliance measures, and foster collaboration among stakeholders. The Banking Policy Dialogue or BPD (the first of its kind at BIBM) is an effort to facilitate a dialogue platform for the policymakers and operational bankers to draw the status and development of policy expectations and feedback on operational responses on certain critical issues of trade services. For the BPD-1, the following international trade-related thematic issues were identified for discussion: Export Proceed Realization; Bangladesh Bank’s Refinancing to Support Traders; Challenges of Back-to-back LC Operations; and Price verification of tradable in Bangladesh.
As part of the method, a background paper was presented before the panels and audiences. The background paper was based on published information, interviews, and two focus group discussions. Four Regulator Panel Teams-Foreign Exchange Policy Department (FEPD); Foreign Exchange Operations Department (FEOD); Department of Foreign Exchange Inspection (DFEI); and Bangladesh Financial Intelligence Unit (BFIU) and five Bank Panel Teams Janata Bank PLC; Islami Bank Bangladesh PLC; Mutual Trust Bank PLC; Midland Bank Limited; and Citi NA put forward their comments, opinions, and/or recommendations from regulatory and operational perspectives. Opinions and comments were drawn from expert audiences that consisted of senior professors, heads of trade services, and CAMELCO/DCAMELCO of selected banks. Cross-questions were addressed by the invited special guest, panels, and facilitator bench.
The feedback, comments, opinions, and recommendations on the four selected issues and associated aspects were assembled by the Research Team, and selected recommendations were identified as the ‘Policy and Operational Recommendations’ with the consultation of the Research Advisor, and guidance of the ‘Chief Advisor & Dialogue Lead’ of the Banking Policy Dialogue.
Policy and Operational Recommendations
Export Proceed Realization
Considering the necessity of ensuring the timely realization of export proceeds, it is important to have accurate data on export overdue position. Bangladesh Bank has already started working on this. Removing data inconsistencies and alignment of data between BB and EPB must be addressed immediately to understand the true picture of unrealized export proceeds. For handling procedural delay of the deduction/discount application of the export proceeds, a minimum threshold may help. Bangladesh Bank may revisit the requirement of ‘export proceed realization within 120 days’ and may come up with differential requirements tagged with different payment terms, as opined in the dialogue. Commercial wings of the Embassies of Bangladesh located in the trading partner countries need to play a more proactive role through effective communication to support local exporters and banks to realize their export proceeds timely. Buying houses may be brought under obligation regarding timely export proceed realization. Banks and trade bodies have roles to play in improving bankers’ operational efficiency on compliance and awareness of exporters on the seriousness of export proceed realization, as emphasized by the regulators.
Back to Back LC
The role of Back-to-Back LC in the RMG and export development is well recognized, and export incentives are tagged with Back-to-Back LC. However, several existing cases and opinions indicate misuse or vulnerability of the financing instrument. ‘Back-to-Back LC’ issued against the contract becomes particularly challenging when the contract itself is not legally enforceable. It is time to examine the effectiveness, irregularities, and associated risks thoroughly and review the policy and operational framework of the instrument to ensure the effective use of this financing technique. A task force may work exclusively to bring changes to the system. Promoting the application of Documentary Collection might be a cost-effective alternative for the exporter, however, for that export incentives should be tagged with Documentary Collection as well like Back-to-Back LC. To use Back-to-Back against purchase-sale contracts, standardization of sales contracts with the provision of the insertion of an arbitration clause, and legal coverage would be useful. For legal coverage, ratification of CISG and signing UNIDROIT Principles is the need of the hour.
Refinancing and Access to Trade Finance
The contribution and popularity of EDF are well recognized. Declining trends of the EDF fund might restrain traders in their endeavours and planning, as surfaced in the dialogue. In the changing circumstances, traders should be ready to get lower limits of EDF and to find alternative trade finance products. BB’s initiatives to reduce the timeline for handling EDF pending cases would be helpful to the trade finance banks. To address the challenge of ‘SME Access to Trade Finance’, ‘Trade Finance to SMEs’ must be treated differently and distinctively both on policy and operational fronts to handle SME access to trade finance-related challenges and struggles. ‘CMSME Credit Policy and Program’, ‘SME Policy’, ‘Industrial Policy’, and trade policies must include ‘SME trade finance’ as a separate policy issue to address. Trade services departments of banks should install dedicated desks for SMEs. It is also important to gather and disclose segregated data on the performance of banks in trade finance to SMEs. Policymakers may incentivize commercial banks to work on drawing low-cost funds from multilateral and development agencies to support SME exporters and importers.
Addressing Price Verification Requirement and TBML
Due to the lack of relevant business information, such as the terms of the business relationship, volume, quality, feature, and specifications of goods involved, it is often difficult for bankers to verify the price of tradable. Standards for price verification vary from one bank to another and are mostly perception-driven. Despite improvement, lack of awareness amongst traders and enforcement weaknesses in some banks are visible. Global experiences do not indicate the effectiveness of any concrete price references. Bangladesh Customs Authority has information on the prices of tradables. The authority may think of publishing the price ranges for different HS codes (even though the price may vary for a single HS code for certain products) as a support reference for banks. Bangladesh Bank and Customs need to coordinate on the national goal of handling under and over-invoicing to address TBML challenges.
