13 Jul International Factoring: A new door opened for exporters
Wahid Sadiq Khan, Associate, Mahbub & Company
International factoring is a service dedicated forcompanies which are involved in the business of import and export of goods and services. Companies transacting in international trade, regardless of its size and industry often face a demand from the importers for an account trade and longer payment terms, i.e. receiving the payment a considerable time after the invoice date.
Through international factoring, the exporters are guaranteed of payment of their goods and services instantly after shipment of the same. In this situation, a factor is hired by an exporter who pays the import price of the goods to the exporter. Accordingly, the factor takes the responsibility of receiving the payment of the goods and services from the importer when it is due. On the other hand, the exporter is not required to worry about the payment of its goods and services from the importer anymore.
International factoring aids both the exporters and importers since exporters are having regular cash flow in their business while importers get the opportunity of paying for the goods and services at a later date, may be upon selling the imported goods.
Previously, international factoring was restricted in Bangladesh mainly through section 5 of Foreign Exchange Regulations Act (“FERA”) 1947. Section 5 stated that without a special or general permission from Bangladesh Bank, no person in, or resident in Bangladesh was permitted to create or transfer his/her rights (whether actual or contingent) to receive a payment in favour of a person residing outside Bangladesh.
As such, the exporters of Bangladesh were not able to take advantage of international factoring and delegate their responsibilities to international factors of collecting payments from the importers. This also hindered the growth of the businesses as it suffered from regular cash flow in the business.
Nevertheless, the Foreign Exchange Policy Department (“FEPD”) of Bangladesh Bank through a Circular dated 17 November 2019 allowed the exporters to assign their rights of collecting the export receivable to non-resident licensed bank/financial institutions provided that such institutions makes the payment of the receivables in full, final and without recourse basis.
Recently, on 30 June 2020, the FEPD through a Circular gave permission to International Factoring and issued detailed guidelines on the matter. The Scheduled Banks has been given permission to allow exporters to ship goods on sales contracts under open account credit terms subject to compliance with the following instructions:
(a) Exports shall be executed against payment undertaking/payment risk coverage for settlement of export bills/receivables within the permissible statutory period by international factoring companies/ foreign banks/foreign financial institutions/trade financiers/insurance entities arranged in association with importers and/or exporters.
(b) Payment undertaking/payment risk coverage by designated institutions abroad shall be, in case of default by importers, received in such a way so as to be ensured of payment on priority basis in accordance with appropriate underlying arrangements for settlement on the basis of physical/electronic presentation of export invoices/bills/documents.
(c) Payment undertaking/payment risk coverage from designated institutions abroad may contain option for early payment arrangement before maturity against the relative export bills/receivables. Early payment shall be arranged on non-recourse basis from designated institutions or designated financiers based on the payment undertaking/payment risk coverage.
The Circular has also stated that interest with relevant charges for early payment against export bills/receivables shall not exceed 6-month USD London Interbank Offer Rate (LIBOR) plus 3.50 percent annually excluding any required bank charges. Moreover, the export price as declared in the EXP Form is required to be competitive with the necessary costs for underlying periods of export under open account credit terms. The issuance of the Circular dated 30 June 2020 may be seen as a bold step from the Bangladesh Bank amidst the Covid-19 pandemic where many exporters particularly in the RMG sector have fallen into financial difficulty due to non-receipt of export proceeds from buyers. If proper advantage can be taken of international factoring, a regular cash flow for our export-oriented businesses can be maintained and Bangladesh can be saved from loss of foreign exchange earnings in challenging times.