Regulators in Bangladesh are looking to incorporate factoring as a financing option to help expedite the country’s import/export activities and to provide a means for its manufacturers and exporters to avoid problems associated with deferred payments from buyers.
Though factoring, instead of securing a loan, business owners sell accounts receivable (invoices) at a discount to a third-party funding source to raise capital. The source, or factor, then advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party.
During a roundtable presentation last week on “Factoring: A Better Alternative to Letter of Credit,” jointly organized by the Dhaka Chamber of Commerce and Industry and Bangladesh Institute of Bank Management, participants suggested Bangladesh bring the country into accordance with international practices and start factoring on a limited scale. They also urged Bangladesh Bank to ease letter-of-credit rules to expedite the country’s export-import business, according to an article in The Independent.
Among the roundtable participants were Toufic Ahmad Choudhury, institute director general; M.S. Siddiqui, member of the Standing Committee on Export Policy, Promotion, Diversification, Multilateral and Bilateral Trade Agreements; S.A. Chowdhury, chairman of Janata Bank board of directors; and M. Masud Miswas, general manager of the Foreign Exchange Policy Department at Bangladesh Bank.
About 90 percent of the country’s business community consists of small and midsize enterprises on which the growth of country’s economy is largely dependent, Prashanta Kumar Banerjee, director of Bangladesh Institute of Bank Management, said during a separate keynote presentation at the event. Lack of working capital or a large cash-conversion cycle are common problems for such organizations, he said in The Independent article, suggesting factoring could help them obtain needed capital.
Factoring use growing
In 2012, acceptance of factoring in international trade increased 60.9 percent in European countries, 8.81 percent in the U.S. and 26.8 percent in Asian countries, Banerjee said. In Bangladesh, some nonbank financial institutions are supporting the factoring system for payments in domestic trade, but the country has yet to follow the system in international trade, according to a report in the Daily Star.
“The international figures indicate that the practice of factoring has been increasing worldwide for its easy and risk-free payment method,” Banerjee was quoted as saying in the article. “So Bangladesh should also amend rules and join the international factoring association.”
The country’s government appears poised to do just that by amending foreign-exchange regulations. A draft of the amendment already has been prepared, according to the Daily Star article, which cites M. Aslam Alam, secretary to the bank and financial institutions division under the finance ministry, as the roundtable source for the information.
“We are seeking opinions from businesses about the changes to the regulations,” Alam said in the article, dubbing factoring as “a bit expensive, but risk-free.” “We have to scrutinize the positive and negatives sides of factoring before introducing it in Bangladesh so that it could not open up new avenues for forgery activities.”
Also during the roundtable discussion, Siddiqui noted that many Bangladeshi exporters’ contracts have been cancelled because of letters of credit complexities, suggesting the country’s exporters could benefit from international factoring.
“The importers of Bangladesh have to pay millions of additional dollars to international trading partners for some unfavorable rules in the [letters of credit] system,” the Daily Star noted, citing Siddiqui as the source.