Unlocking working capital solution

Bangladesh is entering a new phase of financial innovation. As global investment into the country increases, the need for flexible, rapid, and non-traditional financing options becomes more pronounced. One such mechanism, Standby Letter of Credit (SBLC) monetisation, holds significant promise not only for raising working capital but also for laying the groundwork for a vibrant secondary foreign currency (FC) financial market.

A STRATEGIC FINANCIAL TOOL: A Standby Letter of Credit (SBLC) is a bank-issued guarantee, typically used to back trade or financial obligations. When monetised by a third-party financier or bank, the instrument becomes cash or liquid asset. The process allows companies to secure funds based on the creditworthiness of the SBLC issuer, usually a foreign parent company, without diluting equity or undergoing prolonged loan approval processes.

In a typical model, the foreign parent company of a Bangladeshi entity arranges for an SBLC through an internationally recognised bank. This SBLC is then advised to the local beneficiary, often via the Offshore Banking Unit (OBU). Financial institutions or forfeiting houses discount the SBLC and release a significant portion of its value-up to 90 per cent depending on the credit rating of the issuing bank. The monetised funds can be used for working capital, imports, or project execution.

UNTAPPED MARKET POTENTIAL: Bangladesh currently hosts over 500 foreign-owned or joint venture enterprises, many of which are situated in Special Economic Zones, Export Processing Zones, or Hi-Tech Parks. These firms collectively contribute to a trade volume exceeding US$ 10 billion annually.

Conservatively estimating that 25 per cent of this volume could be supported through SBLC-backed financing, the current market size stands at approximately US$ 2.5 to 3 billion. With increasing foreign investment, especially in electronics, renewable energy, and infrastructure, this market could easily grow to US$ 5-6 billion within the next three to five years.

CATALYSING SECONDARY MARKET IN BANGLADESH: SBLCs, particularly those that are transferable, can be used as instruments within a broader financial ecosystem-the secondary market. Such markets exist globally in the form of forfeiting and collateral transfer arrangements, where financial instruments are traded, discounted, or used to raise liquidity.

Bangladesh, with the right regulatory support and institutional infrastructure, can develop a similar ecosystem. Transferable SBLCs can be bought, sold, or used to support further lines of credit. This will not only deepen the country's capital markets but also offer an alternative to sovereign borrowing and domestic bank loans.

BENEFITS AND STRATEGIC VALUE: Monetisation of SBLC offers a host of advantages. It enables firms to retain full ownership while gaining access to liquidity, offering a non-dilutive form of financing. The process is typically faster and simpler than traditional loan arrangements, making it especially attractive for companies with urgent capital needs. Moreover, external borrowing through SBLCs often bypasses the need for prior approval from the central bank, easing regulatory constraints. Most significantly, this mechanism contributes to the development of a formal, instrument-based foreign currency debt market in Bangladesh.

CHALLENGES AND MITIGATION: As with any financial innovation, risks must be managed. Ensuring the authenticity of the SBLC instrument is paramount, necessitating robust due diligence and validation protocols. Exposure to foreign exchange volatility requires the adoption of hedging strategies to manage FX risks effectively. Additionally, a sound legal framework must be in place to govern contracts and facilitate dispute resolution in a standardized and enforceable manner.

SBLC monetisation represents a timely opportunity for Bangladesh to modernise its financial system and unlock new channels of liquidity. It empowers foreign investors, strengthens offshore banking operations, and paves the way for a dynamic secondary financial market.

If supported by proactive policy measures and guided by a risk-sensitive regulatory framework, SBLC-based financing could add US$ 3-5 billion in liquidity annually. This would not only reduce pressure on the domestic banking system but also solidify Bangladesh's position as a rising financial hub in South Asia.

Md. Saidul Islam CDCS is FVP and Head of OBU,  Gulshan Branch, Premier Bank PLC. islam.saidul@thepremierbankplc.com