Third party needed to cushion possible risks from open account transactions

Since the pandemic struck the globe, foreign buyers have not been keeping with their trade commitments to Bangladeshi suppliers in the forms of price cut pressure, work order cancellation, and payment deferment, say experts.

Under such a situation, exporters might plunge into a new kind of risk if international trade is operated using the open account transactions system instead of the traditional payment mechanism – letters of credit (LC), they expressed fear at a webinar on Thursday.

An open account export transaction in international trade is a sale, in which goods are shipped and delivered before the payment is due.

Using this method instead of the LC will save time and money, but the financial risk that exporters will be facing should be minimised by forming a globally recognised third party, like the Asian Development Bank (ADB) and the International Finance Corporation, they said.

The speakers were addressing a virtual discussion on global awareness on open account export transactions and recent policy changes in Bangladesh jointly organised by the Bangladesh and Dubai chapters of the International Chamber of Commerce (ICC) and the ADB.

Mahbubur Rahman, president of the ICC, Bangladesh, says the challenges of international transactions are causing disruptions in trade and making it difficult to finance trade amid Covid-19.

Traders, exporters, and importers are meeting obstacles while preparing, shipping, and receiving goods, and making and receiving payments. Order cancellations, commitment failures, cash crunch, and failure to make payments as obligated are also impeding exports and imports, Mahbubur said.

In this evolving and increasingly uncertain environment, banks, traders, and policymakers have become anxious and sceptical about the interpretations of "certain situations of commitment failures" within the regulatory frameworks and guidelines.

"Under these circumstances, the conditional open account transactions is a good initiative but only the introduction of the system cannot ensure benefits," he said adding all stakeholders need to work to optimize the benefits.

Muhammad A (Rumee) Ali, chairman of the ICC Bangladesh Banking Commission and CEO of the Bangladesh International Arbitration Centre (BIAC), said open account trade is flexible compared to the traditional LC system.

"It is also cost-effective. But the system newly introduced is riskier for the exporters."

Dr Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), told the event buyers are preferring the open account transaction system and that there is some pressure from their end to introduce the system.

Both exporters and importers could benefit from such types of transactions only if the trade is made between parties who have an existing relationship, she observed.

The BGMEA president also suggested that the Bangladesh Bank could reduce the condition to introduce foreign guarantors in this regard.

Md Fazlul Hoque, former president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), at the event, said more factories are needed because of rising demand.

Factories in Bangladesh are not operating at full capacity, there is no unified rate of exportable products, and the price rates are lower than the competitive level.

"Importers are asking for more discounts after the Covid-19 pandemic and are deferring export payments. That is why open account trade will create some risks," said, Fazlul Hoque, also managing director of Plummy Fashions Limited.

He proposed a comprehensive policy for formulating the model of the open account trading system and demanded close monitoring of the model's execution.

Syed Nasim Manzur, former president of the Metropolitan Chamber of Commerce and Industry (MCCI) and managing director of Apex Footwear Limited, found some risks such as non-payments of importers, their non-acceptance of consignments and bankruptcy, in the open account trading system.

He suggested an export credit guarantee scheme to mitigate these risks and utilise the benefits of reduced costs, digital payments and export funding from abroad through the open account trading system.

Dr Prashanta Banerjee, professor and director of the Bangladesh Institute of Bank Management (BIBM), presented the keynote at the event.

There should be awareness among exporters and importers to spread the use of the open account trading system. The system is effective between an SME exporter from a developing country and a well-known importer from a developed country.

The system is also effective for a developing country to import consumer goods, which are being imported frequently. But the system will not be effective for capital goods, which are not imported frequently, he added.

Syed Mahbubur Rahman, managing director of the Mutual Trust Bank, said open account factoring is now a reality and more than 80% of the global trade are being settled through the system.

Organisers of the event said on 30 June 2020, the Bangladesh Bank issued a circular allowing conditional open account transactions.

According to the circular, the export under open account credit terms is a modified version of financing under factoring and supply chain to exporters against their exports with external payment undertaking.

The policy would facilitate exporters' access to appropriate finance up to the value-added portion, and back-to-back payment would be settled on receipt of final payment on maturity.

The facility offered under the changed policy has been in operation for the last seven months. But the exporters still prefer exports through Letters of Credit instead of the open account system.