Safeguarding payment on exports

Banks facilitate repatriation of export payment against export trade on contract sales. They do not take responsibility to repatriate payment, rather they comply with regulatory instructions to execute the transactions.

In case of export under sales contract on sight basis, banks send documents to counterpart banks of importers' country to collect payment. They instruct counterparts, for export on usance term under sales contract, to release documents to importers on importers' acceptance with maturity date.

Banks in Bangladesh have nothing to do if importers default in making payment on maturity date. As such, export under contract sales is a risky game unless payment commitment is received from others. Export trade of the country is reported to have decreased for consecutive months. Continuation of this situation leads export on usance terms under sales contract.

Trade depends on banks that take exposure through issuance of letters of credit (LCs). So, customers need credit line with banks for the LCs. Customers especially foreign importers avoid LCs. They import goods on sales contracts, avoiding charges payable to banks. They also require to upload export documents by exporters in electronic platforms; no bank-to-bank documents movement is needed. Importers accept electronic documents and give payment date. On maturity, importers arrange payments to exporters through their banks. Such mode of trade completely depends on relations and faith on importers as well.

But it is really risky since no safeguards are there in case of payment default by importers. The situation of non-payment is peculiar in type which cannot be solved through access to market under bilateral trade agreements. Legal proceedings like arbitration may bring results but this takes long time, even many years. So, we need financial safeguards to execute exports under sales contract on usance basis for a reasonable period.

Export to developed countries enjoys favourable position in accessing post shipment finance. Many financing entities are ready to make payment to exporters in Bangladesh taking recourse on importers. Payment before maturity requires exporters to bear costs. Whatever the cost is, the process gives safety to exporters. In addition to financing to exporters, external financing entities give payment guarantees at a cost on bill values to the effect that they will make payment in case of payment default by importers.

Market access by way of bilateral/free trade agreements, multilateral trade agreements under the World Trade Organisation (WTO) frameworks can support exporters for easy market access since importers of countries under agreements enjoy duty-free imports. Easy market access does not, in reality, ensure increased trade.

Exporters need privilege in negotiations like export on cash or sight basis under CFR incoterms, and settlement of payment in advance or on LCs. But reality shows that exporters do cross border business at risky way on sales contracts. They receive orders on plain papers containing shipment details, date of shipment, payment terms, incoterms, importers' bank names, etc. based on which exporters ship goods. Payment term is on credit meaning that importers will pay after a specified period. This seems to be 'pay when you sell'-like situation.

As stated earlier, importers' banks do not give commitment for payment for export on document against acceptance in case of non-payment by importers on maturity. The recent trend shows that our exporters exporting goods to Europe and America make arrangement with foreign banks/financing institutions for earlier payment including payment commitment. This has a cost for exporters but gives safety for export payment.

We have still in export basket very few durable goods. Consumer goods should be sold on cash. But despite market access, our exporters face competition from many countries, leading to execution of export on sales contracts with usance terms. There is no option before them to avoid the orders. Surely they need orders to continue their business operations. With the orders of adverse options, they should make them safe with regard to payment. In this case, they need to negotiate with external banks/financing entities for payment commitment and earlier payment as well. Otherwise, payment default of a shipment will result in closure of business.

Our export basket is full of products but we depend on few, with readymade garments covering more than 85 per cent. Export market is still dependent on Europe and North America. We have potential markets in Latin America, Africa, CIS (Commonwealth of Independent States) countries including the central Asia.

It is reported that different bilateral trade agreements are underway for easy access to market. The changing situation in export trade on credit terms with no commitment by importers' banks will not give robust support to explore markets, rather we need post shipment financing solution. We are on good track of records in terms of exports to the USA without GSP facilities due to post shipment financing windows therein.

Export is basically of help in creating employment. Export of goods is referred to as import of employment, and export of employment import of goods. Bangladesh is a country of huge manpower. Employment through import substitution is possible but it needs protection through tariff and non-tariff walls. Such protection cannot last long.

Moreover, multilateral trade agreements with graduation to Middle Income Country may make tariff walls to lose weight. Export sectors will be focused on mass employment as was found in the history of East Asian miracles. So, nothing but export is the singe-window for Bangladesh to generate huge employment, for which product diversification as well as market exploration is the crying need of the hour.

However, achievement will not come easily since export trade is operated under buyers' market, requiring to abide by what buyers impose in terms of payment and different compliance. As a result, exporters are forced to face, despite having so-called easy market access, risky journey - export on sales contracts, usance payment of unfavorable period, different compliances, etc. For safety in payment under adverse situation, exporters should need separate arrangements with financing entities abroad.

If we look at countries like China and India, we will find, there are institutions like EXIM Bank that offer guarantee/commitment services. These institutions facilitate export of their countries by providing payment guarantee and early payment to exporters. However, such institutions are found in countries that export intermediate goods and capital goods. We are still in the bracket of consumer goods.

So, such institutions are yet to be found in our country. For graduation to durable goods from consumers', we would need these types of institutions. We can expect to be graduated to that stage with diversification of jute goods and leather goods, as the first step.

Product graduation to durable ones needs market expansion for which trade-related agreements need to be struck. This helps importers to import from us without taxes or at reduced taxes. This is a supportive tool. But export basically starts with arm's length basis; importers are not readily known. Faith on importers is not easy to be established, especially for export on credit. Therefore, counterparty financing exposure limits need to be arranged with private financing operators for which suitable regulatory architecture needs to be established.

We need product diversifications and market exploration within the prevailing buyers' denominated market. Cash flow operating cycle is a vital for business. Longer operating cash cycle leads to sufferings or cost bearing borrowings. So export needs reasonable operating cash cycle. Keeping financial flows in mind, exporters need to consider many issues for export on credit terms under sales contract. These may be, without limiting to payment guarantee from reputed financing institutions abroad, early payment arrangement from external sources without recourse. The cost for these safeguards should be bearable to exporters.

Besides exporters, authorities concerned should frame policy incorporating requirements for exports on usance term under sales contract, including reasonable early payment arrangement on non-recourse basis keeping in mind that exporters should not be over-financed by early payment in consideration of import liabilities to be payable for settlement.

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