International factoring: A respite for Bangladeshi exporters
For a long time, a major issue that has plagued international trade is that payments are received many weeks, and sometimes even months, after the delivery of the goods. Such delays inevitably lead to cash flow problems for exporters, especially the small and medium-sized enterprises ("SMEs"), and can be further worsened by non-payment by the importers. International factoring provides a solution to such a lack of cash flow in cross-border trade, as the factoring companies (commonly known as "factors") provide advance payments to exporters for the goods supplied by them - thereby safeguarding their interest from the importers' potential inability to pay. It may be said that international factoring is a method of trade financing which serves as a form of export insurance for the exporters. Additionally, when factors are engaged, they may also check the creditworthiness of importers and the exporters may greatly benefit from such knowledge when dealing with the same. In recent times, international factoring is proving to be an attractive mode of financing to exporters as it is an excellent alternative to other typical (and costly) forms of trade financing such as Letters of Credit (the "LCs"). When compared to LCs, international factoring provides a number of benefits such as, inter alia, improved cash flow because the factors can pay the invoices assigned to them in a prompt manner - thereby ensuring a regular flow of working capital, whereas to get payments through LCs may be more time consuming. Additionally, it ought to be remembered that factoring is not a loan of the exporter, and therefore will not result in an addition to the exporters' debts or tie up any of their collateral that may be required to secure bank financing. Another noteworthy benefit is that factoring also, in effect, outsources the whole process of credit collections – which is crucial in international trade, especially those transactions which are based purely on sales contracts without any involvement of LCs. This is a great respite for the SMEs, especially those based in Bangladesh, who may not have the necessary means to pursue recovery claims against defaulting importers.
Despite having such numerous benefits, international factoring was not expressly recognized in Bangladesh, until very recently. Although such trade financing was being encouraged by the Government of Bangladesh (as is evident from its Export Policy 2015-2018), there were no statutes or guidelines specifically dealing with international factoring in Bangladesh. The draft "Guidelines on International Factoring" prepared by the Bangladesh Bank is yet to be approved and implemented in Bangladesh. Until recently, international factoring had various legal obstacles in Bangladesh and these obstacles primarily stemmed from the strict restrictions contained in our Foreign Exchange Regulations Act 1947 ("FERA"). Under Section 5 of the FERA, unless a special or general permission is granted by the Bangladesh Bank, no person in, or resident in Bangladesh was permitted to create or transfer his/her right (whether actual or contingent) in favour of any person to receive a payment outside Bangladesh. As a result, Bangladeshi exporters were not being able to take advantage of international factoring and assign their interest in the receivables (i.e, export proceeds) from the importers in favour of international factors, unless prior permission was sought from the Bangladesh Bank in this regard. Moreover, due to lack of guidelines (especially in relation to the costs and charges to be paid to the international factors and the mode of their payment), many Bangladeshi exporters, especially the SMEs, were refraining from using the beneficial services of factors in fear of breaching the provisions of FERA and money-laundering laws.
Whilst appreciating the numerous benefits of international factoring and to allow easy access to finance for the benefit of exporters in Bangladesh, the Bangladesh Bank and its team have been working tirelessly on easing the statutory restrictions under the FERA by issuing relevant circulars, from time to time. For example, on 17 November 2019 (FE Circular No. 43), the Bangladesh Bank granted general permission to assignments by Bangladeshi exporters of their rights to export receivables from importers in favour of a non-resident licensed bank/financing institution provided that the receivables were paid by these entities in full, final and on a 'without recourse' basis.
However, most recently, on 30 June 2020 (FE Circular No. 25) (the "Circular"), the Bangladesh Bank expressly permitted international factoring and provided comprehensive guidelines on the subject matter (including the issue of costs and charges) and, for the first time, expressly recognised the provision of trade finance services by international factors to Bangladeshi exporters. As a result of the Circular, scheduled banks in Bangladesh are now permitted to allow Bangladeshi exporters to ship goods on sales contracts under open account credit terms. The Circular also expressly allows exports to take place against payment undertaking or payment risk coverage by international factors. With respect to costs and charges, the Circular also clarified that the costs by the Bangladeshi exporters against the payment undertaking or payment risk coverage by the international factors (along with interest and relevant charges for early payment) must not exceed 6-month USD London Interbank Offer Rate (LIBOR) plus 3.50 per cent annually (excluding normal bank charges required for such transactions). s
Although there is always room for further improvement and enactment of detailed regulations on international factoring in order to establish a much-needed legal framework for the factoring business in Bangladesh, the implementation of the Circular is surely a timely change which will be welcomed by many businesses, especially in the garments and textile sectors. As the world advances, it is important that we do so too. The benefits associated with this form of trade financing will be of great help to the Bangladeshi exporters, especially the SMEs, and will surely provide better protection to these enterprises - thereby encouraging further international trade. Moreover, international factoring is almost globally accepted as a vital tool in international trade and has garnered the support of many Governments and central banks in various countries and, as international trade continues to grow, the opportunity for the factoring industry will also continue to grow at the same pace. Therefore, it is commendable that the Bangladesh Bank has taken such a timely step to formally introduce international factoring in Bangladesh in order to keep Bangladeshi exporters competitive with the global market. Such a step will undoubtedly see a great influx of foreign remittance, which in turn will support the economy as a whole. Especially, after the COVID-19 pandemic, as the global economy and international trade continues to heal, it will be very important that Bangladeshi exporters are provided with every weapon possible to combat the global depression.
The writer is an Advocate of Bangladesh Supreme Court and the Head of Firm of Sattar&Co.