We were doing a “large China corporate” portfolio review for a British bank in Hong Kong in 1998. My co-reviewer colleague from Zimbabwe asked me an interesting question about Bangladeshi RMG letter of credit (L/C). His question was: “What is this back to back L/C? Isn’t it conflicting with the UCPDC (ICC guiding rules for cross border trade)?”
In reply, I explained to him the entire architecture of master L/C received from overseas buyers by our local RMG producers, opening of the back-to-back import L/Cs for import of fabric and accessories, and most importantly, settlement of the import liabilities upon receipt of the export proceeds.
I also told him how the back-to-back L/Cs, conceived predominantly by our colleagues at state-owned banks, have built up the basic platform for our fabulous rise in RMG exports. Yes, it was conflicting with the stipulations of international guidelines for driving cross-border trade, popularly known as UCPDC (uniform customs and practice for documentary credit), however, our bankers, with much handholding from our central bank, put up a process under “red clause L/Cs.”
Last year, Bangladesh saw a $24.5bn RMG export, looking to double this within the year 2019, if not earlier. When we celebrate our RMG successes we also express our gratitude to the founding fathers of our RMG regime and a few leading bankers of our country who were the architects of this back-to-back L/C regime that facilitated the fantastic growth of Bangladesh’s apparel industry with many new entrepreneurs.
When JC Penney from USA started to push their vendors for “open account trade” or export under contract, Mr Kazemi – possibly the most intelligent central banker I have met in Bangladesh – told me: “It might expose our small and medium exporters to unusual risks. They are likely to be unprotected against receipts of exports proceeds.”
However, looking at the global market realities, we thought more and more importers would follow JC Pennys’ route in order to reduce their financial or import costs. Soon, open account trading became the market norm. Most of our exporters adjusted with the new market realities. Soon, we will be seeing contract-based exports taking over master L/C-based exports.
Over the years, the market has settled to newer export financing products too. While Usance L/Cs, or deferred L/Cs, set the market rolling, they were discounted at sight at the counter of the global banks’ foreign affiliates or branches, or at the counter of the local banks’ offshore banking units (OBU). Smarter buyers like JC Penney or Gap started to help out their suppliers with intermittent financing. Global banks merrily discounted Bangladesh-bound exports and paid to the suppliers. Fewer banks opened their trade discounting or financing shops in Hong Kong to smoothen the supply chain finance for imports from greater China.
Few are in the run to put up a multi-bank solution in this opportunity space. Global banks operating in Bangladesh or outside also came up with their home country buyers or clients for a “vendor financing program” or U-Pass facility covering the Usance or deferred period.
Though the related cost is still high for the perceived Bangladesh cross-border risk, or country risk, our business community has continued to survive because of the good spread available for Bangladesh’s proven expertise and relatively cheap labour. A survey conducted by a British bank in Asia proved that the commercial officials at Bangladeshi RMG factories were the fastest in putting the shipping documents after exports in the region.
On the import side as well, a lot of fiscal and banking measures were taken up. Global banks kept on confirming the Bangladesh-bound L/C payments. Bangladesh Bank, at frequent intervals, came up with prudential guidelines in support of facilitating large project imports. This was required more in absence of an updated foreign exchange guideline. Usance, or deferred L/Cs, financed at international market price, or Libor-based, also helped Bangladeshi entrepreneurs to avoid the onslaught of high local interest rates at least in the interim and up to one year. Bangladesh Banks’ EDF (export development fund) also helped many exporters to survive with delivery in time.
Many may not appreciate the mammoth fiscal or banking measures put up to keep our trade regime gaining momentum.
The journey goes on, and has to continue in a dynamic global trade regime with shifting trade realities. With e-commerce increasingly taking up pieces of the pie, the relevant regulatory regime also has to change. We hope and pray that our trading community, our bankers, and our regulators work together in taking our trade to newer heights.
Bangladesh is closely following its competitor Vietnam, where the country’s external trade is equivalent to or more than its national GDP. In order to make this sustainable, we need to continuously liberalise our trade regime.
To increase our exports, we need to further liberalise our import regime. Trade is the ultimate answer for Bangladesh, not aid. Increased trade can usher increasing investment, ensure increasing employment, and alleviate poverty faster than the past.
