LC confirmation charges higher in Bangladesh

An importer in Bangladesh has to pay up to 4 percent of the import value as confirmation fees on letters of credit a year, which is far higher than in other South Asian countries.

Businesses fear that the new spat of political instability that began on January 5 may further increase the fees and put extra pressures on them. They are already reeling from additional costs in transportation and supply chain management.

“The charge for confirming the LCs remains between 3 and 4 percent annually, depending on the clients. But the prolonged unrest may push it up,” said the head of the treasury department of a private commercial bank.

Confirmation fees are a security mechanism that eliminates risks for exporters. When exporters are not satisfied with the LC-issuing bank mainly for its insolvency risks or the importing country for its political risks, or both, they may seek an additional guarantee for the LCs. Confirmation is a definite and legal undertaking from the importer's bank to the exporter's bank. The LC confirmation charge is 1 percent in India, 2 percent in Pakistan.

“Adding a confirmation charge has slightly increased in recent times, with growing political uncertainty and foreign banks charging extra for accepting an LC,” said MS Siddiqui, president of Bangladesh Indenting Agents' Association. Siddiqui said shippers and insurers have also increased their charges.

“The LC confirmation charge has increased to up to 4 percent in recent days. We used to pay 2.5-3 percent in 2014,” said Mostafa Kamal, chairman and managing director of Meghna Group of Industries that imports commodities, such as sugar, edible oil and wheat, in bulk.

Bankers said although the LC confirmation charge is higher in Bangladesh, it differs from bank-to-bank and bank-to-client relationships.

“It also depends on the country's risk and sovereign rating,” said Mirza Elias Uddin Ahmed, deputy managing director of Jamuna Bank.

The LC confirmation charge previously was 2-2.5 percent, but it shot up to 3-4 percent during political unrest in 2012 and 2013.

Bankers said scams in the banking sector also contributed to the rise in LC confirmation charges in 2012.

Haider Ali Miah, managing director of EXIM Bank, said the additional confirmation charge did not rise in recent months.

“With a network spanning the world, Citi overseas branches provide LC confirmation services across the globe. From a pricing standpoint, Bangladesh has remained relatively stable within recent years,” said Rashed Maqsood, managing director and Citi country officer in Bangladesh.

Bitopi Das Chowdhury, head of corporate affairs of Standard Chartered Bank, Bangladesh, said the LC confirmation charges are set by the banks outside Bangladesh based on their own pricing strategies. The pricing may vary from bank to bank, or from country to country even within the same bank, she added.

“From within Bangladesh, we have no visibility as to how these prices are set by those banks,” she said.

Helal Ahmed Chowdhury, former managing director of Pubali Bank, said a bank will charge the least for a trusted and big client (importer), but it will be higher for many others.

Central bank data shows that Bangladesh imported goods worth $36.57 billion (freight on board) in fiscal 2013-14 and $23.1 billion in July-January of this fiscal year.