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Repatriation of export proceeds: Making a Factoring law

M S Siddiqui | April 28, 2019 00:00:00

Both developed countries and developing countries prefer factoring as a

sophisticated payment method for short term financing purposes. This is a
unique method of financing trade without collateral, and is very much
suitable for SMEs. Currently, some financial institutions (FIs) in Bangladesh
are financing local trade through discounting Invoices but without guarantee
of collection of payments. This financing also does not need mortgage of
immovable properties. The rate o f interest is very high than that in regular
loan and against collaterals.

Recently, Bangladesh Bank has drafted a new policy "Export under open
account and repatriation of export proceeds by factoring arrangement on
non-recourse basis" to allow open transaction for export uasance term and
with arrangement of Factoring under certain strict conditions. Usance means
period of credit or term. Usance bill is a bill of exchange which allows the
drawee to have a period of credit or term. The draft has been circul ated for
opinion of experts and stakeholders.

There was a discussion for long time to introduce Factoring in Bangladesh.

Bangladesh international trade mostly transacts through letter of credit
although global market is reducing the use of Lc and using ope n account
transactions. Bangladesh Bank prepared a concept paper through an expert
team headed by Professor Prashanta Banarjee of BIBM in 2016. The export
policy 2015-18 incorporated a clause expressing interest of promoting
Factoring for financing exports although Factoring is used in import and
export as well as local transactions.

Open Account transaction occurs on the basis of contract. An open account

transaction is a sale where the goods are shipped and delivered before
payment is due, which is generally few months. Open Account is the least
secure method of payment for the exporters. But it is the most attractive
method for the importers. It is equally attractive to both importers and
exporters as it is less expensive for transaction. The open account is on the
basis of trust between buyer and seller. Factoring is one of the methods to
secure payment of Open Account transaction. Unfortunately, Open Account
is not allowed for export trade in Bangladesh as this is restricted with many
rules and regulations.

Export factoring is a complete financial package that combines export

working capital financing, credit protection, foreign accounts receivable
bookkeeping, and collection services. A factoring house or factor is a bank or
a specialised financial firm that performs financing through the purchase of
invoices or accounts receivable.

The factors usually make partial advance payment to the exporter to extend
95 per cent of Invoice value. Usually, Factors provide services of (a)
payment guarantee of invoices, (b ) collection of export proceeds and (c)
management of receivables. Export factoring is offered under an agreement
between the factor and exporter, in which the factor purchases the exporter's
short-term foreign accounts receivable for cash at a discount fr om the face
value, normally without recourse. The factor also assumes the risk on the
ability of the foreign buyer to pay, and handles collections on the
receivables. In case of nonpayment by the buyer, the risk is assumed by the
factor which cannot request the payment back to the seller under 'without
recourse methods'. Factoring foreign accounts receivables is a viable
alternative to export credit.

According to the draft BB rule, the authorised dealer (AD) branches of Bank
of exporter must be satisfied as to the surety of payment of export proceeds
(section- a). AD should be satisfied that export price is competitive and
loaded with usance interest and commensurate with prevailing interest rate in
the concerned currency (sec- b). On the other hand there wi ll be cap on the
interest rate of factoring service to maximum of 6 per cent for all expenses of
interest, commitment/guarantee, charges, fees etc (sec - c). In the globalised
market central bank wants to make sure that export is at competitive price
and cap the interest rate. The method of determining the competitive price
has not been elaborated.

Section-d of the draft made mandatory to make an arrangement / relation

with Factors operating under licence of the central bank or other authority,
and AD as the counter party may join the global professional bodies. It
means that AD banks will have partnership /agency agreement with Factoring
Companies having licence of Bangladesh Bank. The AD branches will be
either local agent /partner of Factoring Companies an d also take membership
of global professional bodies.

International factoring business involves networks of professional bodies,

which are similar to correspondents in the banking industry. There are three
sources for global networks-Factors Chain International (FCI), International
Factors Group (IFG) and International Factoring Association (IFA). This
indicates that Factors may be local or overseas and shall register with
Bangladesh Bank or any other regulating authority and the factor will have
partnership with AD.

In factoring, presentation of documents is a major issue. According to the

draft, AD may send documents to any organisation other than the bank to be
fully satisfied with the arrangement of repatriation of payment (sec - e).
Moreover, as an extra comfort, AD may at discretion, obtain personal
guarantee from firm / company to ensure realisation of export proceeds
under this arrangement. This seems that central bank encourages obtaining
personal guarantee from firm / company that are Factors. It may also be
presumed that Factor or exporting firm / company will give guarantee.

The major challenge for factors is the proposed interest rate of maximum 6
per cent, and it also proposes for personal guarantee from someone, but the
draft has not given any cl ear direction in this regard. The draft has given
responsibility of Factoring at the 'discretion and full satisfaction' of the AD.
Experience says AD will ask for mortgage of properties from the exporter for
Factoring service.

Global Factoring also work wi th dual Factoring involving two Factors in

exporting and imploring countries each. The Factors are usually member of
internationals association of Factoring and they abide by rule of transactions
and guarantee of payment. The draft has no direction regardi ng single or
dual factoring etc.

The rule should clarify the relationship between AD branch and Factors. AD
shall be the banker of the exporter and at the same time cannot be agent /
partner of Factors, rather remain a counter party in Factoring agreement. The
interest should be negotiable and not fixed at highest 6 per cent. Any
excessive paper work and guarantee will increase the cost of Factoring
services. Such increase of cost will defeat the concept of low cost and
mortgage-free finance of SMEs for local and overseas transactions.

BB drafted Factoring policy is only meant to ensure repatriation of export

proceeds. The focus should be financing local and international trade
financing without collateral and reform traditional transaction based on LC
and other formalities.

Many countries have law for Factoring and Bangladesh may consider passing
a law on the basis of international convention and practices of Factoring.

M S Siddiqui is a Legal Economist. mssiddiqui2035@gmail.com