Rules need further reforms for smooth global trade finance

The main modes of international trade are export and import and they involve four common methods of payment: cash in advance, open account or supplier credit, documentary collection, and documentary credit or letter of credit (LC).

The rules of Bangladesh Bank (BB) and the import policy order of the government allowed all modes of payments for export. But for import, the cash in advance is not allowed except for small transaction such as the purchase of books.

In the course of time, the BB allowed the advance payment against the commercial import, which was limited to $5,000 for an importer and only in 2019 the amount was increased to $19,000 per annum.

There was another option of prior permission for the higher amount of transactions.

The restriction was relaxed for a limited period during the pandemic for up to $500,000 or equivalent other foreign currency for importing coronavirus-related life-saving drugs, medical kits or equipment and other essential medical items.

The rule of the BB and the import policy order of the government restricted the import transactions through LC. It is expensive and time-consuming.

The LC has become obsolete since it has involvements of different parties, namely the nominating bank, the reimbursing bank, and the confirming bank.

Some of them are involved only to ensure the creditworthiness of the issuing bank against a certain percentage of commission.

On January 14, the BB issued a rule on advance payments against imports under buyer's credit to open up the transaction of import, if the money is directly paid by the external financiers and/or offshore banking operations of scheduled banks.

The additional condition of repayment guarantees irrespective of amount acceptable to ADs comes from banks abroad.

Cash in advance is a popular method of a transaction as this is the cheapest mode. There is no universally accepted regulation on cash in advance. It is guided by the purchase or sale agreement. In this mode, the interest of exporter is fully protected, and the interest of importer is not protected.

Banks are involved in the process of transferring payment. Documents and shipments are directly handled by the exporters and importers.

The import policy order of the government allows import against LCs having at sight or at deferred payment basis. Import against LC authorisation is also permissible under certain conditions. These international transactions usually involve finance as well. Trade finance has another purpose of reducing risks involved in cross-border trade transactions, which would otherwise be borne by the importers and exporters.

Trade finance mechanism has a range of financing methods and tools to facilitate the payment for goods to exporters, who require payment for the goods and services in advance.

Import financing is a specialised segment of trade finance that exclusively provides financing for imports. Import financing includes a variety of financial products and financial services that have in common the similar purpose or objective of providing the international financing and methods of payment that are needed to purchase and import goods from another country.

Factoring, one of the tools of international trade finance, is a global financial product for trade financing for both domestic and international trade. It is an effective mean of short-term funding for easy access to working capital. The domestic factoring can revolutionise the financing of working capital of the production of goods and services.

Factoring is known as invoice factoring, or invoice trading or invoice discounting in case of export. Exporters by selling their account receivables can get quick access to cash while they wait for their overseas importers to pay for the goods they received. They can reinvest that cash or use it to cover other expenses as well as day-to-day operations. The traditional bank finances rely on the security of the mortgage, but the factoring does not require such mortgage of fixed assets and others.

Bangladesh has introduced a system of trade financing close to factoring for export transactions. The BB circular issued on June 30 under the subject of "Export under open account credit terms against payment undertaking/payment risk coverage with the option of early payment arrangement on the non-recourse basis" is mooted as credit guarantee. This is a rule of factoring mostly focusing on recovering export proceeds but not full factoring services such as export trade finance. There are some shortcomings of this rule.

The recently issued rule on advance payment to the exporter for advance payment for import seems to be a tool of import financing and not truly factoring. It is conditional and has a provision of advance permission of advance remittance for imports of goods and services into Bangladesh and against acceptable repayment guarantee from a bank abroad.

The supplier furnishes repayment guarantee acceptable to the authorised dealer from a bank abroad, to be invoked for a refund of the amount paid in advance in the event of the supplier's default in delivering the goods or services as per contract.

The procedure has many compliance obligations of reporting to the BB and presentation of evidence of the release of consignments on time. The importer must submit within four months from the dates of remittances the relevant authenticated copy of the customs bill of entry.  

With this rule, the BB has extended the upfront import payment regime, allowing offshore banks and external financiers such as bank and trade finance company to pay under the buyer's credit.

From now on, the external foreign financiers, as well as the representatives of local banks like the offshore business units, will be able to meet such advance payments required under the condition of return of moneyguaranteed by the financing mechanism.

The recent opening up of payment methods for two-way international trade by the BB rules – "Advance payments against imports under buyer's credit" for import trade and "Export under open account credit terms against payment undertaking/payment risk coverage with the option of early payment arrangement on the non-recourse basis" for export trade -- are mainly focused on the security of foreign currency and recovery of export proceeds. It should be used as a credit facility for international trade.

Modern global trade funding and other trade finance tools provide the platform and financial infrastructure to minimise risk for importers and exporters. Financial institutions in Bangladesh are yet to introduce the software-backed platform and set up the relevant infrastructure for international transactions. Instead, they use old-fashioned transactions.

The beauty of modern trade finance is extending financing without a mortgage or third-party guarantee as those have in-built methods of security. BB's both-way payment method reforms are a major change in the foreign exchange policy. These conservative policies are not in conformity of trade finance of globally accepted standards. Both rules need further reform to allow smooth trade finance of other countries.

International trade involves traders and banks of different countries and needs a uniform policy.

The author is a legal economist. He can be reached at mssiddiqui2035@gmail.com