Local banks, enterprises and trade bodies are in favour of introducing 'international factoring' on an experiment basis at the initial stage as the practice is still unfamiliar to most of the local stakeholders like banks and exporters, a study has revealed.
It also said only 35 per cent of total export is being conducted through Letters of Credit (LCs) as the LC- based trade payment mechanism has been losing its acceptance gradually in Bangladesh due to various hassles.
The survey found several reasons for less acceptance of LCs. These include more bank charges, involvement of many parties and more International Chamber of Commerce norms and practices. But local enterprises and banks feel more secured under LC-based trade payment mechanism.
The survey result was presented during a roundtable discussion on 'Should Bangladesh introduce international factoring services for financing open account trade?' at the BIBM auditorium in the city.
Bangladesh Bank (BB) deputy governor Nazneen Sultana was present as the chief guest while BIBM director general Toufic Ahmad Choudhury chaired the discussion.
BIBM professor Prashanta Kumar Banerjee presented the concept paper on the theme.
The survey was carried out by the Bangladesh Institute of Bank Management (BIBM) during the last two months among 30 representatives from local banks, enterprises and trade bodies.
The role of the factoring is to collect money owed from abroad by approaching importers in their own countries in their own language and in the locally accepted manner. As a result, distances and cultural differences cease to be a problem.
'International factoring' can also provide exporters with 100 per cent protection against the importer's inability to pay.
Many businesses that turn to factoring companies are reassured to know that the industry is closely associated with the banking sector. Although factoring companies remain highly specialised institutions, nearly all major banks now have factoring subsidiaries. This has enabled the industry to promote its services with great success and to work for businesses of every size.
The survey, presented as part of the concept paper, showed the respondents are of the view that they feel less secured in case of international trade under documentary collection and open account trade although the world trade is moving towards the international trade payment mechanism.
They also said they are not at all ready to do transactions under open account trade as risk of non-payment under this method is too high.
The survey respondents said mechanism of international trade payment will reduce the hassles of importers and will surely increase export from any country. But international factoring is unfamiliar to most of them although the financial services are used all over the world.
In his presentation, Prashanta Kumar said LC-based trade payment mechanism is troublesome as the banks want margin and security from the importers. On the other hand, for a big importer, there may be 100 exporting companies for which it is quite troublesome for the importer to open so many LCs.
There will be an agreement in case of international factoring for one year under which the exporter can export within the credit line approved by the import factor.
Mr Kumar suggested following the example of China as the country dominates the Asian region having the highest share of factoring of 60.15 per cent in 2012. The share of India is 17 per cent.
Annual growth rate of factoring in the Asian region was 39.59 per cent in 2011. In Bangladesh, domestic factoring is being offered by some non-bank financial institutions, Mr Kumar added.
He suggested banks/financial institutions intending to offer international factoring must get permission from the Bangladesh Bank and must join Factors Chain International (FCI). Initially, a number of financial institutions and banks may jointly form financial institutions for offering international factors.
A supervising committee can be formed comprising representatives from the BB, the BIBM, commercial banks, the Commerce Ministry, trade bodies and academicians to oversee the benefits and problems of international factors, Mr Kumar suggested.
Both banks and corporate houses face challenges in case of non-L/C methods particularly of open account trade, which means that payment is received many weeks or even months after delivery.
Exporters find that open account terms may create cash flow and default risk problem. On the other hand, banks also face certain challenges in financing open account transactions. They face troubles to collect money from the importers as documents do not go through banks rather documents go to importers directly.
In her speech, Nazneen Sultana said international factoring provides a simple solution of problems being faced in case of non-L/C trade payment. As international factoring lets exporters safely offer competitive credit terms to their foreign customers, this international trade payment and financing mechanism is now popular among both exporters and importers.
She said contract-based payment methods, particularly documentary collection and open account trade mechanism, are also growing even in Bangladesh. As it is already mentioned, open account trade has its own set of challenges.
"Documentary collection is not also as secured as documentary credit. In this perspective, international factoring may be a solution," Ms Nazneen added.
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