Presentation review 2015

Review of the Trade Services Operations of
Banks 2015
The Review Team
• Dr. Shah Md. Ahsan Habib, Professor & Director (Training), BIBM
• Ms. Antara Zareen, Assistant Professor, BIBM
• Mr.Tofayel Ahmed, Lecturer, BIBM
• Mr. Anisur Rahman, Joint Director, Bangladesh Bank
• Mr. Kamal Hossain, Joint Director, Bangladesh Bank
• Mr. Mahmudur Rahman, SVP, Islami Bank Bangladesh Ltd.
• Mr. A.T.M. Nesarul Hoque, SAVP, Mutual Trust Bank Ltd.

Objectives
• one, to discuss overall activities of trade services
operations of banks for the year 2015;
• two, to discuss regulatory and operational aspects
of trade services of banks in Bangladesh; and
• three, to examine the trends and challenges of
trade services operations of banks for the period
CY2011-CY 2015.

Table 1: Sampling Distribution (Branches/Head
Offices of Banks)
Offshore
Banking Units
Bank
Group
Bank Bank Branches
Dhaka Outside
Dhaka
SCBs 3 6 8
PCB 25 28 17 8
FCB 4 4 1 4
Total 32 37 33 12

Organization of the Review Report

2. Market Trends, Products and Regulatory Setup for Trade
Services by Banks: Global Context
2.1 Trends in Trade and Trade Services in the Global Market
2.2 Regulatory Framework of Global Trade Service Market
and Documents
2.3 Trade Services/Finance Products in Global Context
2.4 Challenges in Global Trade Service Market

3. Regulatory Environment,Products,and Operational
Procedures of Trade Services in Bangladesh
3.1 Regulatory Environment of Trade Services in Bangladesh
3.2 International Trade Payment and Financing Process in
Use in Bangladesh
3.3 Trade Finance Services by Banks
3.4 Other Trade Related Services by Banks
3.5 Operational Efficiency Issues of Trade Services
3.6 Malpractices in Trade Services
3.7 Monitoring and Reporting of Trade Services

SCB
7%
PCB
81%
FCB
12%
Export 2015
SCB
15%
PCB
73%
FCB
12%
Import 2015
4. Trends and Relevant Issues in Trade Services during
CY2011-CY2015 in Bangladesh

4.1 Methods of Payments used in Import Payment
Figure-23:Use of Methods in Import Payment[No. of Cases] in Percentage
During CY2011-2015
1
5
3
4
8
0
1
2
3
4
5
6
7
8
9
2011 2012 2013 2014 2015
Cash in Advance
1 1 1 1
0.5
0
0.2
0.4
0.6
0.8
1
1.2
2011 2012 2013 2014 2015
Open Account
1
10
13
11
4
0
2
4
6
8
10
12
14
2011 2012 2013 2014 2015
Documentary Collection
97
84
83
84
87.5
75
80
85
90
95
100
2011 2012 2013 2014 2015
Documentary Credit

4.1 Methods of Payments used in Export Receipt
Figure-27: Use of Methods in Export Receipts (No. of Cases) in percentage during CY2011-2015
2
3 3 3
6.8
0
1
2
3
4
5
6
7
8
2011 2012 2013 2014 2015
Cash in Advance
2 2
0.5
1
1.2
0
0.5
1
1.5
2
2.5
2011 2012 2013 2014 2015
Open Account
30
35
44.5
40 39.6
0
5
10
15
20
25
30
35
40
45
50
2011 2012 2013 2014 2015
Documentary Collection
66
60
52
56 52.4
0
10
20
30
40
50
60
70
2011 2012 2013 2014 2015
Documentary Credit

4.2 Use of Documentary Credit: Different Types
34.5
4
42
18
0.05 1.45
0
5
10
15
20
25
30
35
40
45
Irrevocable LC
(Cash LC)
Confirmed LC Back to Back
LC [Local]
Back to Back
LC [Foreign
including
EPZs]
Transferable
LC
Others
Different Types of Import LC Issued[ No. of
Cases] in Percentage During CY2015
33
2
37
28
0
5
10
15
20
25
30
35
40
Irrevocable LC Confirmed LC Back to Back LC from
Local Banks
Transferable LC from
Foreign Banks
Different Types of Export LC Received[ No. of
Cases] in Percentage During CY2015

4.2 Use of Documentary Credit: Different Types
4.3 Documents Required in Documentary Credit
4.4 Margin, Issuance of LC, Amendments, Credit Availability
and Examination
4.5 Trade Finance in Banks in Bangladesh

10
1
9
-6.72
-8
-6
-4
-2
0
2
4
6
8
10
12
2012 2013 2014 2015
Overall Growth in Trade Finance 2012-2015
13
-4
6
-16
-20
-15
-10
-5
0
5
10
15
2012 2013 2014 2015
Growth in Trade Finance 2012-2015:SCBs
7
4
12
3
0
2
4
6
8
10
12
14
2012 2013 2014 2015
Growth in Trade Finance 2012-2015:PCBs
15
34
4
-51
-60
-50
-40
-30
-20
-10
0
10
20
30
40
2012 2013 2014 2015
Growth in Trade Finance 2012-2015:FCBs

SCB
33%
FCB
3%
PCB
64%
Trade Finance for 2015

4.7 Remittance Services by Banks
4.6 International Bank Guarantee in Bangladesh
4.8 Maintenance of Foreign Currency Accounts
4.9 Activities of Correspondent Banks/Offices in the
Country and Outside Bangladesh
4.10 Cost, Risk and Exchange Rate Issues of Trade Services
in Bangladesh

4.12 Regulatory Compliance- A Critical Challenge
4.11 Non-Performing Loans in Trade Financing
4.13 Malpractices in Trade Financing in Bangladesh
4.14 Sanctions and trade services in Bangladesh
4.15 Correspondent Banking- A New Challenge

4.17 Information about Customers
4.16 Product Information Gap and Improved Capacity
4.18 Trade Finance Gap in Bangladesh
4.19 Trade based Money laundering
4.20 Monitoring and Reporting Trade Services

5. Summary Observationsand Recommendations
In connection with trade financing, one notable observation in
CY2015 is that the volume of total trade financing by banks
decreased as compared to the previous year. This is in line with
the overall credit demand condition of the country. All broad
bank groups experienced negative growth in trade financing
especially, FCBs came across remarkable decline. PCBs were also
the most dominant share holder as a bank group in trade
financing, remittance services, and maintenance of foreign
currency accounts. However, only in export financing, it was the
SCBs that contributed most in CY2015. As a whole the market
share of PCBs increased in CY 2015. Offshore banking market that
mainly offer trade services in the country however remained
dominated by the FCBs.

Documentary credit remained the most prominent payment technique in
import and export transactions in Bangladesh in CY2015, not different from
the previous years. Though the extensive use of documentary credit started
in response mainly to the regulatory compulsion, LC remained the most
dominant even after removing restrictions on some areas of transactions.
This is sharp contrast to the global practice in general where most payment
transactions take place through open account. Increase in Cash in Advance
in import transactions is a notable development in CY 2015 which may be
attributed to the change in the regulatory requirement of the BB in CY 2014
because of which in many cases importers are paying cash in advance for
relatively small imports. Documentary collection remained the second most
important trade facilitation tool in the country. In EPZs however, the
situation is different where documentary collection is the most commonly
used method followed by open account that are facilitated by the offshore
units of banks.

Like in CY 2014, of the pre-shipment finance, PC was not the
main component rather SOD or Export Cash Credit accounted for
about half of the total pre-shipment credit in CY 2015. It has
been observed that banks were more interested to offer SOD or
Export Cash Credit in place of PC to charge relatively higher
interest returns. It is against the spirit of the BB’s policy of
supporting exporters with lower interest rate and government’s
stand to support exporter with soft loan facilities. It has also
been observed that a considerable proportion of eligible
exporters do not avail the low-cost EDF facilities. It could be
because of the lack of awareness of the customers, inadequate
information to the bankers, and lack of co-ordination between
the bankers and customers. There should be more transparency
between banks and the policy makers regarding these issues to
identify the right kind of solutions.

Global data clearly indicate trade financing gap in the context of
developing countries including Bangladesh, especially, a
considerable number of small traders do not get access to trade
financing in the country. Though corporate guarantees are
replacing collateral requirements for big players, collateral
requirement remained the key obstacle for the relatively small
traders. Even a reputed trader exporting a new product does face
difficulty in obtaining trade financing or related support services.
In some instances, even clients were required to offer full margin
and collateral. Of course, there are arguments of minimizing risk
on the part of banks, however, overcautious and conservative
approach could prove to be a big challenge for the traders. To
ensure the access to trade finance, customized mechanism needs
to develop for small traders.

It has been observed that global banks have started to revisit its
correspondent banking relationships. The ultimate impact came
in the form of cutting down correspondent relationships with
banks with low capital base. There are also instances when a
global bank has withdrawn its correspondent relationship from
entire country. There are now more regional banks in Bangladesh
market that are actively engaged in trade finance business of the
country. In addition to that, recently, a few third parties are also
playing very important roles of intermediaries between banks
and earning fees and commissions. Some local banks are already
facing the difficulties. Banks and the regulators together need to
work on the issue to minimize this problem

In several instances banks had to create forced LIM and LTR due
to the non-compliance of the importers. Non-compliance on the
part of exporters resulted in NPL in some cases. There are also
instances of fund diversion, cancellation of the contacts, and
non-professional behavior on the part of banks that results NPL.
Generally, the available data on trade financing indicates very
insignificant volume of NPL. Sometimes these data could
mislead, as the classified data are commonly shown as part of
term loans. The NPL data on trade financing should be disclosed
separately for better transparency.

Incidences of trade based money-laundering is a growing
concern for policy makers and central banks throughout the
globe. Though the available sets of AML rules are in line with
globally accepted standards, still there is lot of scopes to improve
their enforcements. ADs need to be more serious regarding legal
compliance and identifying right prices for the exportable and
importable products, as observed from the discussion with
Bangladesh Bank. Compliance is already is the greatest concerns
for the banks, and banks should be ready for the cost
implications of such developments. Compliance of AML rules
should be a collective concern. Collective efforts from FEPD and
BFIU of BB and custom authority are the prerequisite for greater
enforcement of AML rules.

Enforcement of online reporting and monitoring system by the
Bangladesh Bank have brought positive changes in terms of
decline in irregularities by banks and improvement in data
accuracy. Especially, reporting practices by banks improved
remarkable in terms of accuracy. BB is working to improve
reporting efficiency by offering training; however, this should be
considered as a continuous process to ensure greater efficiency
and minimizing information gap. Improvements were observed
in regard to the monitoring and coordination among
stakeholders. AD Forum is a good initiative by the Bangladesh
Bank for ensuring greater coordination among Bangladesh Bank
and authorized dealers. Introduction of Dashboard, integrated
online arrangement and greater coordination among customs
and BB helped identifying several cases of irregularities and
frauds in recent time. Since the obligation of ensuring the prices
of importable items are 'competitive' and the price of exportable
item are 'fair' lays with banks so, they have to find out an
effective mechanism to implement the obligation. A consolidated
trade database needs to be established to facilitate the issue.

• Dr. Shah Md. Ahsan Habib, ahsan@bibm.org.bd
• Ms. Antara Zareen, antara@bibm.org.bd
• Mr.Tofayel Ahmed, tofayel@bibm.org.bd
• Mr. Anisur Rahman, feod.import@bb.org.bd
• Mr. Kamal Hossain, kamal.hossain@bb.org.bd
• Mr. Mahmudur Rahman, mahmudur@islamibankbd.com.
• Mr. A.T.M. Nesarul Hoque, nesarulh@gmail.com

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