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More clarity required in Bangladesh's factoring policy  

MS Siddiqui   | Published: October 28, 2019 22:10:52 | Updated: October 29, 2019 16:34:55


The country's traders including garment exporters often need credit facilities while dealing with global brands and international buyers. It is the factors which pay in advance the receivables from exports of goods and services. However, there are factoring markets without regulations and elsewhere, factoring is governed by regulatory authorities.

Businesses are often incapacitated by a lack of working capital during their infancy and maturity stages. They may secure a contract for supply of goods or services for which they will not receive payment until several weeks or months but immediately need capital to fulfil terms of the contract. In such a situation, the seller's or the exporter's accounts receivables are purchased by the factor, at a discount. It has turned into a business.

Factoring may be called relationship, created by an agreement, between the seller of goods/services and a special financial institution called the factor. It is also known as 'debtor financing'. Factoring is used for both domestic and international trade financing. It is essentially a short-term financing facility.

Modern-day factoring has evolved from commission business for collection of payments of export on behalf of exporters. It has been developed subsequently to mitigate export risks of non-payment.

At last, the country is going to finalise a policy regulation since the Bangladesh Bank (BB) has recently prepared and circulated a draft circular titled "Export under open account and repatriation of export proceeds by factoring on non-recourse basis" seeking opinions from different stakeholders.

The title of the draft policy indicates the central bank has considered export under open account (i.e. without L/C or letter of credit). Emphasis has been given on 'repatriation of export proceeds' and 'factoring on non-recourse basis'. This means the factor will undertake risk of collection of export proceeds from the buyer.

Another landmark policy decision that came out of this circular is that the BB allows open account transaction with deferred payment of four months in line with non-recourse factoring by international factoring company. Factoring 'without recourse' entails that the factor assumes risk of non-payment and may not be entitled to compensation from the business.

The draft policy regulation is silent about formation and characteristic of factoring company and whether there should be dual or single factoring company.

Also, the word 'international factoring company; is not sufficient to understand the characteristics of factoring company that the policymakers have in the mind. The factoring without recourse should be guaranteed by the factor but what will be mechanism for binding obligation of collection of export proceeds? This may be clarified further.

Existing trade financing mechanism in Bangladesh practiced by some overseas companies, which are identical to non-recourse single factoring, may be evaluated by the BB to incorporate it into the factoring policy. This is a good experience of successful trade financing and proceed realisation method practiced in Bangladesh. The central bank may take into consideration the experience while finalising the policy and legal framework.

 

mssiddiqui2035@gmail.com

 

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