Reclaiming trust and confidence on banks

Afzalul Haq in the first of a two-part article, 'The bible of ICC vis-a-vis banking at home and abroad' Nowadays banks are part and parcel of local as well as international trade and business. Involvement of banks in a business is treated as the symbol of reliability, which raises confidence of the concerned stakeholders. To establish the uniformity of practice in trades in a more regulated and disciplined way, the guardianship of most of the worldwide business is assumed by the ICC or the International Chamber of Commerce. The most successful private regulation published by the ICC is the UCPDC or Uniform Customs and Practice for Documentary Credits (commonly called UCP). The latest publication titled 'The UCP 600,' being its sixth revision, is undoubtedly a sign of continuous improvement over the earlier ones. Although 'non-government' or private in nature, the ICC has attained the status of global guardian or referee in connection with trades, especially the cross-border ones. So significance of the role and influence of the ICC in this respect is beyond doubt. In true sense, the UCP enjoys the status of the most important global business regulator. To indicate its importance, this publication sometimes attains the reference as the Bible of the ICC. In today's discussion, we shall concentrate on a famous Article of this UCP. In the latest revision i.e. the UCP 600, the issue in question is placed as Article 5. This Article states: "Banks deal with documents and not with goods, services or performance to which the documents may relate." We are concerned over severe abuse of the Article. By this time, this particular Article has become the root of evils in creating notorious events like Hall-Mark scandal, for (our local) example. Fate of stakeholders: In this connection, we must remember that bank is an organisation where non-owner stakeholders possess the substantial stake. Clients, particularly the depositors of a bank, are in fact the prime stakeholders. This is because of the fact that the depositors' fund is the lion's share of the sources of the fund of any bank. Cheating in a bank thus affects many such stakeholders and of course the economy of the country as a whole. So any detected flaw which paves the way for indulging in corruption must be repaired. Banks must not be allowed to be used as a vehicle for foul ride, because doing so would tarnish the image of banks as a symbol of trust. We understand that Article 5 has been provided in the UCP to release a bank from the responsibility in the process of delivery of produces of practical business. This provision is most suitable for a bank, basically when its transaction reaches beyond a single territory i.e. importer and exporter are in different countries. In such a case, obviously there might be a lot of multilateral processes such as clearing and forwarding, stevedoring, inspecting, carrying, insuring, offloading, negotiating, paying, reimbursing and so on. These processes all together automatically ensure movement of goods. All these parties involved in a foreign trade may operate under different regulations of their own. In such varied circumstances, the common platform is the UCPDC, which reconcile all such divergences. From another platform, on the other hand, the Basel accord has been trying to strengthen the banking sector by way of precautionary handling of risk factors. In this backdrop, we must not admit any blank loophole in any other relevant regulation associated with banking. But we observe that sometimes reckless application of the said Article of the UCP leads to banking transactions to be fraught with extreme risk. Usage of its provision, irrespective of the concerned parties, territories and the ethical worth of the bankers, is now violating the boundaries of fairness. But in banking, fairness and transparency must be maintained at any cost; otherwise the whole economy must suffer. Ignoring the real transaction, against a Letter of Credit on the plea of provision of Article 5 of the UCP and consequently incurring loss arising from any fraud, is suicidal. This article provides a scope for undue deals, as it exempts banks from watching the actual trade. Therefore, the UCP needs updating in the light of the Basel accord to arrive at a balanced and well-reconciled publication. The next version of the UCP should have provision for satisfaction of the bank/s in respect of real buying and selling before concluding an LC deal. Woes of Cyprus: Misuse of the existing Article may invite the base for 'systematic risk', leading to a crisis for the industry as a whole. Failure of the banking industry arising from a systemic risk costs a lot. To understand the aftermath of serious banking defaults, as the latest, we may have a peep into the case of Cyprus. We must not welcome the fate of Cyprus for our own. People of this Mediterranean tiny island sparked like anything and its parliament protested the agreement between its government and the International Monetary Fund (IMF) and the ECB (European Central Bank) which proposed to impose tax on bank accounts. The whole economy was on the verge of collapse. The banking industry was closed thereon for around two weeks. What is the background of the fall of the island into this danger? Reportedly banks' loan in Cyprus reached as high as around 9 times of the country's GDP. Imagine the extent of bubble! Moreover, a substantial portion of such loans was non-performing with different organisations in another extremely economic crisis-laden Greece; where even our Bangladeshi expatriates faced gunshots as they asked for their six months' due salaries. Cyprus is now struggling to bring the economy under control after a series of mishaps. At this moment, the island desires to stand on the international rescue package of €10 billion to prevent the meltdown of its trouble-ridden banking sector and its exit from the euro. Naturally such a big loan cannot be unconditional. As price of the bail-out of the stricken island, the IMF demands Cyprus cut state pension costs and reform its welfare system. They are now to apply capital control with limits on credit card transactions, withdrawals, money transfers abroad and encashing cheques. Depositors with more than €1,00,000 in the Bank of Cyprus could lose up to 60 per cent of their funds. Laiki, the second largest Cypriot bank, is going to be closed. The island has got numerous downgrades of its credit rating and has been cut off from international money markets. Its offshore banking centre, a huge source of income and employment, has been destroyed. Yet we hope Cyprus may stay better than the Irish crux where the drive to bail out its oversized banks dragged down the government too. But undoubtedly, the island state has already fallen into a great fix. The scenario makes us understand that oversizing a bank with bad assets is dangerous like preserving foods with deadly formalin or fattening animals with steroid. Virtually such a misdeed accelerates death. Any such premature death is tantamount to suicide or killing as the case may be. So it is obvious that constant irregularities by banks ultimately cause the whole nation to pay high price. But to remove the immediate risk of banking collapse, the nation finds no other alternatives but to accept the austerity and all other burdens levied as stated above. All the experiences of such banking storms around the world have led us to rethink over the said Article of the UCP. As the facilitator of a business or trade, banks must not be blind to the real movement of the goods. In the language of law, 'consideration' is a fundamental issue for a valid business transaction. Business goods are the prime consideration behind an LC. So the main financial transaction related to an LC is supposed to be the counter value of those goods. Without those goods, the transaction becomes a fake one. A feast on the occasion of a marriage ceremony, without the wedding of the bride and the bridegroom is misleading. We are, therefore, eager to see a replacement of the said Article. This objection to the Article in question is more or less applicable for any country of the world. But we know that ethical standard and law and order situation vary from country to country, organisation to organisation and even from person to person. It is very likely that in an ideal country, none can think of selling out the fabrics in the open local market which are imported as duty-free raw materials for the purpose of 'cutting and making' of garments to be exported under back-to- back LC arrangement. There may be countries where the public or the proposed buyers themselves would protest such an unauthorised sale offer, not to talk of the customs or bonded warehouse authority and other law and order enforcing agencies of the countries. It goes without saying that imported materials under bonded warehouse facilities are not allowable to be sold away in the local market whereas in many countries, the buyers would be tempted to buy as more of such unauthorised raw materials as possible. They would simply consider lower price. They may not care about who is cheating, to whom those fabrics actually belong and what is the purpose of import of these materials. Masses of a poverty-laden country like ours belong to this group of 'not to care'. They are not interested to check whether the goods are brought to the market in a legal way or not. Thus misuse of the said Article is most likely in a country like ours. On the plea of a global standard, we have designed a faulty module of Local Bill Purchase/ Discounting. Riding on this vehicle, fraudulent parties take the opportunity to siphon off billions of money from banks. Opportunity for such a corruption cannot continue any more. The Hall-Mark scam: The very reason to include Article 5 (which reads as 'Banks deal with documents and not with goods, services or performance to which the documents may relate' in the UCP) is justified mainly by the fact that a bank only intermediates in a trade. Bankers are not directly involved in the businesses or trades of commercial goods. In an ideal situation, it is assumed that in any trade, handing over and taking over of goods take place naturally. So under the circumstances above, no chasing behind the goods by any intermediary is usually required. In respect of LCs, banks would look for the related documents only. Movement of goods would be ensured by others concerned, not the banks. But it is also true that in case of LCs, although banks are relieved of the responsibility to ensure physical transfer of products, monitoring of their delivery process is not ignored all together. How? In a foreign trade, different agencies and organisations of the countries concerned monitor and ensure the transfer /shipment of goods. The UCP recognises concerned documents issued by different authorities, although those authorities are not related to each other. The writer is Head of Islamic Banking of Bank Asia Limited. Views expressed in the article are of the writer and not necessarily of the organisation he is serving. afzal@bankasia.com.bd