Trends and challenges in trade financing: Bangladesh perspective

The banking industry of Bangladesh has been facilitating payment, finance and risk management services to the traders, and thus contributing remarkably towards trade integration of the country with other economies of the world. Banks have considerable involvement in trade facilitation by engaging in relevant legal enforcements and commercial risk minimisation. The regulatory provisions for international trade facilitation in the country expedite greater involvement of the trade services departments with both greater risks and greater opportunities.

With the growing business complexities, technological changes, market expectations and financial crimes, trade services are becoming increasingly challenging for 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 penalised due to negligence, avoidance or violation of 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 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 shareholder in trade financing, remittance services, and maintenance of foreign currency accounts. The year 2017 was marked by poor drafting of LC clauses and inappropriate use of incoterms in LC operation which was a cause of concern 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 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 number of LC opened on behalf of the public sector. PCBs were also the most dominant shareholder as a bank group in export financing, and remittance services. Though, the market share of Foreign Commercial Banks (FCBs) increased in 2018 in trade facilitation, the change does not seem significant.

Documentary credit remained the most prominent payment technique in import and export transactions in 2018, not different from the previous years. Though the extensive use of documentary credit started largely in response to regulatory compulsion, LC remained the most dominant tool. Use of LC increased both in onshore and offshore trade. Documentary collection remained the second most important trade facilitation tool. Of the different types of LCs, back-to-back and transferable LCs remained dominant. However, there was a declining trend in the use of transferable LCs.

Poor drafting of LC clause and inappropriate use of incoterms in trading remained a matter of concern 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 pertaining to  inappropriate use.

There are instances of delay in payment and 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 in the USA, China, Vietnam etc. Moreover, considering the unique nature of trade transactions and growing complexity, a separate bench in the High Court may be needed to ensure effective use of the regulatory machinery.

Packing Credit was the main component of the pre-shipment finance; however, overdraft or Export Cash Credit comprised a good portion of pre-shipment credit in 2018. Sometimes banks were more interested to offer overdraft or Export Cash Credit in respect of packing credit to charge relatively higher interest returns. Due to supportive approach and ceiling of volume, Export Development Fund facilities became 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 LCs.   

In offshore banking, Usance 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, the 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 improvements. 

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's expectation and compliance programme 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 Anti Money Laundering (AML) rules are in line with globally accepted standards, there is still a lot of scope 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. 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 'competitive' prices of importable items and '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.

Market transformation of international trade is bringing notable changes in trade services techniques. Adoption of technology and modernisation has no alternative. Time has come to undertake preparatory works for keeping pace with on-going global trade digitisation 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 competitiveness and minimise risks. 

Dr. Shah Md Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM) [email protected]