BANKS work as intermediaries. They take savings from savers and extend loans to borrowers/investors. Once upon a time their function was referred to as 3-6-3, meaning that banks take deposits at 3 per cent rate of interest, lend at 6 per cent and bankers leave offices at 3pm. This is the basic function under closed economy having no relations with external sectors. But we now live in an open economy for which external sectors are part and parcel of our national economy. The relations with external sectors come into being for the transactions through trading of goods and services across borders and cross-border financial activities in respect of investment — equity and debt. In both cases, no transactions are possible without the help of banking services. As such, the role of banks has been extended to a wider extent, along with traditional activities.
As a traditional work for cross-border trading of goods and services, banks arrange for the settlement of payments between exporters and importers, and vice versa. Operational process against trade is of different types based on underlying arrangements such as payment in advance, letters of credit, documentary collection and open account. International trade in Bangladesh is beset with peculiar features. We import goods with payments at sight for which we arrange finance and bear expenses on account of interest costs. On the other hand, our export trade is being converted to open account. Trade under open account is a method of movement of goods on credit terms under sales contracts for which importers make payments after a certain period. Regulatory framework in Bangladesh allows such tenure up to 120 days from the date of shipment. Exporters need to meet working capital requirements during this credit period. As such, they look for arrangement of early realisation of export payment before maturity. To avail early payments from external financial institutions, exporters need to bear extra costs. At both sides of imports and exports, Bangladeshi importers and exporters are bearing extra costs against the transactions. But the stated cost should be borne either by the exporters or the importers.
Our economy is trying to promote export trade through diversification of products and exploration of markets for which different policy supports are extended to exporters in the form of low cost finance, duty free imports or cash incentive or both, and other fiscal measures. These facilities are to offset their extra cost burdens.
It is said that market access by way of bilateral/free trade agreements, multilateral trade agreements under the World Trade Organisation framework can support exporters for easy market access since importers of respective countries under agreements enjoy duty free imports. Easy market access does not, in reality, ensure increased trade. Reality is that exporters need to export under sales contracts with credit period to importers. Importers will pay after the credit period. This seems to be ‘pay after you sell’ type situation. So, official trade facilitation does not ensure increase in exports. But it may be possible to be enhanced, provided that post-shipment financing including the arrangement for payment commitments is available from external financial/guarantee institutions. The export trend shows that our exporters exporting goods to Europe and America make arrangement with foreign banks/financing institutions for early payment including payment commitments. This costs exporters, but gives safety for export payments.
Still our export trade is concentrated to developed countries due to easy accessibility of post-shipment finance. Many financial institutions in those countries are ready to make payment to exporters in Bangladesh with exposure on importers. Payment before maturity requires exporters to bear costs. Whatever the cost is, the process gives safety to exporters. In addition to financing the exporters, external financial institutions give payment guarantees at a cost on bill values to the effect that they will make payment in case of payment default by the importers.
Our export basket is full of products but we depend on few ones, with apparel covering more than 85 per cent. Export market is still dependent on Europe and North America. We have a good track record in exports with USA without duty free market access due to post-shipment financing windows easily available therein. We have potential markets in Latin America, Africa, CIS countries including central Asia. Bilateral trade agreements are not so useful since countries from where we import more do not show interests in these cases. We need to cross risky paths for export under sales contracts on credit terms. Importers’ banks will not give robust support to explore markets. We need to set arrangements for payment commitment with post-shipment financing solution, anyhow.
We need product diversification and market exploration within buyers’ dominated markets, which require selling on credit. This results in adverse situation cash conversion cycle which is vital for business entities. Longer operating cash conversion cycle leads financial sufferings or cost bearing loans to exporters. So, export transactions need minimum cash conversion cycle for their sustainability. Keeping financial flows in mind, exporters need to address many issues for export on credit terms under sales contracts. Early payment arrangements from external sources, without limiting to payment guarantees from reputed institutions abroad, are needed. The cost for these safeguards should also be bearable to exporters.
Exporters can explore markets along with product diversification for which they need supports from the trade hubs. But trade hubs such as Singapore, Hong Kong, Dubai, and other cities are not supportive enough. In the absence of trade hubs, banks can be suitable alternatives. Banks work with counterparts through relationship arrangements. They can provide extra support to arrange external financial institutions to repatriate early payments including payment commitments against exports under open account.
Banks execute cross border transactions with the help of their counterpart banks abroad under correspondent relations. The relations can explore external financial institutions for getting post-shipment finance against export on credit terms. There comes a question why banks seek external supports. The simple answer is that resident banks can extend post-shipment finance, but they cannot give payment commitments against exports since foreign importers are not their customers. In this situation, exporters are in risky position. They cannot arrange commitments from external financial/insurance institutions against export under sales contracts on credit terms unless importers or resident banks stand behind them.
Banks should extend support to exporters to safeguard their pre-shipment finance. Exporters should also depend on banks before taking appropriate decision regarding acceptance of export orders. Based on the preliminary information, exporters should seek help from banks who, in turn, make arrangements for payment commitments through their foreign correspondents. On receipt of the necessary commitments, exporters should go for acceptance of the same. This needs extra cost but safeguards payment defaults.
Whether banks are able to extend such services is a question. Trade services are provided by the trade team of a bank. On the other hand, correspondent relations are maintained by the international division of a bank. There is another unit, known as the financial institutions division which arrange for different types of services from external sources like letter of credit confirmation, external borrowing and the like. Within a bank, there is found an absence of coordination among different divisions and a confusion about who will lead the role. Definitely the financial institutions division should take the lead in association with relevant divisions. The Financial Institutions Division should move to a further extent to maintain external relations beyond traditional duties. Relations with multilateral financial institutions such as the trade and supply chain finance of the Asian Development Bank, the International Islamic Trade Finance Corporation of the Islamic Development Bank and the like need to be established since these institutions have operations in countries where it is difficult to get commitments from financial institutions.
In view of the changing environment, banks need to widen their services, without limiting them to the traditional ones. The issues need to be formalised through necessary steps by the central bank.
Tashzid Reza works in a trade finance company operating as a liaison office in Bangladesh.
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