Export trade: challenges of credit sales



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The EXPORT model has changed to a new dimension. The change in circumstances requires exporting on credit under sales contracts. Sight export is being phased out. These are simply bilateral arrangements between exporters and importers. Third parties like banks function as a window to take over transactions. Importer banks do not take risks on importers. Certainly commerce depends on faith. If exporters trust importers to make payments, exporters do not have to face any detrimental impacts. Exporters will be in a favorable position if they can procure inputs under credit sales contracts. In such cases, bank support is not required for import financing, such as lines of credit for letters of credit and working capital loans.

But the reality is different; exports are executed on sales contracts, while input imports are rarely possible through sales contracts. Exporting under credit sales contracts does not provide payment guarantees since the shipments are cleared, based on the acceptance of the documents by the importers. The information is relayed by the banks without payment obligation to the banks of the exporters. Importer banks disburse funds if importers make funds available to banks when due. No payment will be made if importers do not make the funds available to their banks.

There is no answer on what action exporters will take in the event of non-payment. Mainly, they will try to negotiate with the importers. Later, they could seek help from professional associations and embassies. Finally, they can try to take legal actions which may be appropriate if the judgment is received as soon as possible. But we learn that legal actions against importers in offshore locations are very expensive and also take a long time. In addition, commercial transactions in consumer goods are regular trade flows for which formal contracts such as concluded against the export of capital goods with payments for longer periods or loan agreements are rarely found. Trade for current transactions is based on simple terms and conditions, the enforceability is not so easy in such agreements. As usual, there is a trade-off between costs and benefits. If the costs outweigh the benefits, none will go for an expensive business. As such, exporters are exploring different alternatives other than legal action for non-payment. Trade experts say sales contracts should be made with all issues in mind. But trade is not an academic matter for which the so-called documentary formalities will not ensure the continuity of production activities. Even ratification to UNCITRAL will not ensure prompt resolution of non-payment issues, but formal complaints to the Dispute Resolution Board are required, resulting in a bureaucratic process. But commerce is on the move, despite various bottlenecks, including a slow bureaucratic system. Thus, all of these global rules are unlikely to bring fruitful results.

It is well known that transactions through LCs offer reasonable guarantees to exporters. We export goods under sales contracts. Foreign importers nominate some suppliers but they do not provide entry content without a LC. What a strange equation! Exporters are responsible for settling LC payments whether or not the export proceeds are realized. If our exporters adhere to LCs, they would be safe. But our position is not so strong to put pressure on foreign importers for LCs. We have to be on the export trade with what importers impose on us.

The question of whether there is a solution is a relevant question. There are different types of trade finance available around the world. Roughly speaking, these are known as supply chain finance. But two sub-categories are well practiced in the world: funding receivable and funding payable.

We can import goods with buyer’s credit. Under this mechanism, importers take out loans from lenders abroad. The loan proceeds are used to make payments to suppliers overseas. This type of financing is called payable financing.

On the other hand, debt financing is a means of financing whereby export invoices are paid to exporters before their due date by financiers exposed to importers. This is also known as reverse factoring of export invoice receivables. The cost of previous payments must be borne by the exporters. In our case, the Bangladeshi importers, bearing the costs, arrange payable financing to make cash payments to overseas suppliers against the content of the inputs. Exporters obtain financing to be received on export invoices before the due date. In either case, Bangladesh has to bear additional costs. To bring about a win-win situation, our importation on deferred terms must be settled with the Bangladeshi banks according to the mode of financing of the receivables, the cost of which must be borne by the suppliers. Why we cannot impose such conditions on overseas suppliers is a question.

Central bank regulations allow offshore banking operations to make payments to foreign suppliers against accepted import invoices. The instructions make it clear that beneficiaries abroad will receive their payments at discounted prices through offshore banking. But offshore bakery operations make full import payments by creating loans to banks that have accepted the bills. Ultimately, the cost of remission is imposed on importers in Bangladesh. It is as good as the payable financing like the buyer’s credit. But it must be financing to be received at the end of suppliers abroad in the same way that our exporters are paid their invoices at reduced prices from external financing institutions.

Failures in the Bangladesh banking system to settle their liabilities are rare. Despite this, a US-based credit rating agency recently said credit risk in Bangladesh remains extremely high, with foreclosure laws and low underwriting standards, and weak governance at some banks. Such a proposal made by the rating agencies mainly supports external parties. Whatever the situation, Bangladesh is a destination for global business operators. When policy based on theory does not work, administrative instructions can be useful, as seen in setting the interest limit for loans.

At the initial stage, we need time for adaptability for which rules-based political support is required. What will be the rules-based policy to be identified. Bangladesh is an import destination of around $ 60 billion. Who would dare to lose the market? The import price would be cheaper if there were no costs left on behalf of LC commission, confirmation, interest for buyer’s credit, costs involved in discount payments at the cost of the importer, etc. Thus, transactions via LCs should be phased out. Globally, LCs are being phased out, according to reports. But its existence is still dominant in South Asia, mainly due to the influence of rating agencies and the various boasting of LC professionals at home and abroad.

Instead of LCs, sales contracts must be introduced administratively. On the other hand, export payments must be kept conditional by purchasing payment commitments from external sources. This should be mandatory for export under credit sales contracts. Business organizations should work with government to find ways to support business activities. We should always keep in mind that failure to pay for a shipment can lead an exporting house to close its door.

Tashzid Reza works in a trade finance company acting as a liaison office in Bangladesh.

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