Bangladesh Institute of Bank Management

Training Course
On

INTERNATIONAL TRADE PAYMENT AND FINANCE

Assignment
On

The Challenges of Trade Finance in

Bangladesh

Prepared for
Antara Zareen
Assistant Professor
Bangladesh Institute of Bank Management
&
Tofayel Ahmed
Lecturer
Bangladesh Institute of Bank Management

Prepared by
DR. Hasanul Haque, Sr.Officer, Agrani Bank Ltd.
Bilkis Akhter, Executive Officer, ESIBL
Sujoy Kumar Sanyal, Sr. Officer, DBBL
Md. Zahidul Hasan, Executive Officer, NCC Bank Ltd
Sohel Rana, Officer, FSIBL
Md. Saidul Alam Rajan, Officer, EXIM Bank Ltd.

Submission date:
12 December, 2017
Abstract:

Steady growth of Bangladesh in the past two decades and the average annual GDP growth more than 6
percent over the last five years and drop of almost 10 percent in the poverty rate - are both very
respectable. The past decade’s boom in exports – particularly the apparel sector is very significant to
country’s economic growth. Instead of consistent economy growth over the past decades, investments
opportunities constrained deficiencies in energy, transportation infrastructure; restricted regulatory
environment and political turmoil have prevented Bangladesh from achieving higher growth. A lack of
adequate skilled people, problems with access to finance and poor infrastructure are the key challenges
for Bangladeshi businesses. Besides, Shortage of land, natural gas, and power remain major
impediments to investment. Apart from these, corruption is also widely perceived to be endemic at all
levels of society and discourages investments and inhabits economic growth. To make the most of its
export opportunities on the changing international playing field, Bangladesh needs to follow a strategic
game plan, invest in infrastructure, technology and skills, streamline policies, and improve quality and
safety standards.
 The Challenges of Trade Finance in Bangladesh

Introduction:

Trade, in large part across the globe, is undeniably dependent on trade financing, including the
availability of financing and/ or risk mitigation. This reality is increasingly appreciated in business,
policy and academic circles, and directly relates to the effectiveness of trade as a driver of economic
recovery, growth and international development–perhaps even stability and security. This overarching
observation puts trade finance and supply chain finance in its appropriate macro context, and illustrates
clearly why a previously underappreciated branch of finance has garnered such attention. When
analyzing the global and regional impacts and trends in trade finance, it is important to distinguish
between trends in the volume of international trade in goods and services versus trends in the monetary
value of international trade in goods and services. Trade finance limits, trade finance fees and business
development within banks are based on forecasts and evaluations in monetary and currency terms.

Bangladesh is a developing poor country. It has huge natural resources. But due to lack of
capital and technology, proper utilization of our natural resources is not possible. As a result, we have to
depend on foreign trade for importing industrial goods and exporting raw materials. International trade
is the basic activity by which a country establishes its economic relationship with other countries. Trade
is an integral part of the total national development and growth of an economy. This is in fact a crucial
instrument for industrialization while access to foreign exchange is essential for sustained economic
development. Export and import are potential weapons of developing the Bangladesh economy and can
play an important role in achieving the country's socioeconomic objectives including poverty reduction
goals. In a capital-poor country like Bangladesh, export and import can emerge as a significant factor to
build up physical capital, create employment opportunities, develop productive capacity and help
integrate the domestic economy with the global economy. This has resulted in sustained fall in the
external value of our currency, which means a steady increase in exchange rate over the whole period.
Literature Review several researches have been conducted on various aspects.

1
 The Challenges of Trade Finance in Bangladesh

Bangladesh Trade Overview

Bangladesh economic growth over the last half decade is more than 6 percentages and fastest
real trade growth country rank 13th out of 152 countries is emerging economy in South Asia. The real
export growth is more than 9 percent higher than all other south Asian countries except India.
Bangladesh export share to GDP was 10 percent which was the lower than India, Pakistan, Sri Lanka,
even Cambodia just higher than some least developed Countries in Africa. The export share to GDP has
been increasing over the year but not very significant. The export share to GDP is 17 percent. However,
Bangladesh launched comprehensive trade reforms in the early 1990s that included substantial reduction
of tariffs, removal of quantitative restrictions, and moves from multiple to a unified exchange rate and
from a fixed to freely floating exchange rate system to increase its export performance. Nonetheless, the
economy is still saddled with one of the least liberal trade policy regimes in the world, reflected in its
rank near the bottom on the latest Trade Tariff Restrictiveness Index. The MFN applied simple tariff
average of 14.14 percent is lower than its late 1990s average of 21.8 percent and similar to the regional
mean, which however is lower compared to India. The garments export industry is allowed duty free
import of raw materials. The maximum tariff rate has declined from a high of 300 percent in the late
1990s to just 25 percent. The country has liberalized its banking and telecommunication sectors.
Although, Bangladesh did not make any commitment in financial sector under GATS but the rate of
liberalization in the financial sector has been quite rapid. This is a sector where Bangladesh has limited
export but very crucial for country’s economic development. However, the low overall GATS
commitment suggests ample room for greater future multilateral commitments to services liberalization.

2
 The Challenges of Trade Finance in Bangladesh

Current Status of Export-Import in Bangladesh:

Bangladeshi international trade is extremely small relative to the size of its population,
although it experienced accelerated growth during the last decade. It is not very diversified and depends
on the fluctuations of the international market. The Bangladeshi government struggles to attract export-
oriented industries, removing red tape and introducing various financial and tax initiatives. Between
1990 and 1995 Bangladesh doubled its exports from US$1.671 billion in 1990 to US$3.173 billion and
then almost doubled them again from US$3.173 billion to US$5.523 billion. During the 1990s, the
United States has been the largest trading partner for Bangladesh, with its exports to the United States
reaching 35.7 percent. This percentage consisted mainly of Ready-Made Garments (RMG). Germany is
the second largest export market, with the proportion of goods reaching 10.4 percent; and the United
Kingdom is in third place at 8.3 percent.

Comparative Performance of Bangladesh’s Exports:

The performance of Bangladesh’s export sector in recent years is quite impressive especially in
the 1990s when we compare it with that of world and SAARC countries. The average annual growth rate
of Bangladesh export (11.91%) is higher than those of the world (9.48%) and SAARC countries
(10.69%) during. Because of the lower export performance, annual average growth rate of this sector
during is not as impressive compared to other Asian countries and the world, though this sector shows
competitiveness compared to other SAARC countries (IMF various years). Over the period of
Bangladesh’s exports as a percentage of the world’s exports remain around 0.11% to 0.12% with the
exception of 1984, when it was0.14%, and 1990-1994, when the ratio was around 0.09%. Bangladesh’s
exports as a percentage of SAARC countries’ exports show slightly increased trend especially in
2000and 2001.For these two years Bangladesh’s exports are 11% and 12% of the SAARC countries
‘exports respectively. Bangladesh’s share of SAARC country’s’ exports was the lowest, 7.72%, in 1983.
Bangladesh’s exports share in the Asian developing countries, however, shows a decreasing trend in the
1990s compared to the1980s though the ratio is slightly higher in 1998 and 1999 compared to immediate
earlier years. The ratio dropped to0.59% in 2003 from 1.46% in 1980 though it was 0.75% in 2001 (IMF
various years)

Bangladesh Exports: Commodities Here are the major export commodities of Bangladesh:
 Garments
 Frozen fish and seafood
 Jute and jute goods
 Leather
Export Partners the following were Bangladesh’s export partners:
 United States: 24%
 Germany: 15.3%
 United Kingdom: 10%
 France: 7.4%
 The Netherlands: 5.5%
 Italy: 4.5%
 Spain: 4.2%

3
 The Challenges of Trade Finance in Bangladesh

Commodities Here are the major import commodities of Bangladesh:

 Machinery and equipment
 Chemicals
 Iron and steel
 Textiles
 Foodstuffs
 Petroleum products
 Cement

The following were Bangladesh’s import partners as of 2008:

 China: 15.8%
 India: 15.7%
 Kuwait: 8.1%
 Singapore: 7.6%
 Japan: 4.4%

General Condition of Export-Import of Bangladesh:

Year Import (Billion US $) Export (Billion US $)
2001-02 8.54 5.99
2002-03 9.66 6.55
2003-04 10.90 7.60
2004-05 13.15 8.65
2005-06 14.75 10.53
2006-07 17.16 12.18
2007-08 20.37 14.11
2008-09 21.44 15.57
2009-10 33.66 16.20
2010-11 35.52 22.92
2011-12 34.81 24.30
2012-13 32.47 27.02
2013-2014(July-Dec) 17.60 14.68

A Review of Trade Balance:

During the last decade, Bangladeshi exports shifted from the sale of agricultural products and raw and
processed natural resources to labor-intensive manufactured goods(including clothing, footwear, and
textiles), but the country, unlike neighboring India, could not catch up with the exporters of skill-
intensive products. The problem of balance of trade in Bangladesh is well known: ever since the
independence of the country, export earnings have persistently fallen behind import payments.
Consequently, every year the country incurs a huge trade deficit. However, foreign trade is of vital
importance to the economic development of Bangladesh. The country’s import needs are large and the
imperative to increase exports is immediate. In order to finance those imports and also to reduce the
country's dependence on foreign aid grants, the government, since liberation, has been trying to enhance
foreign exchange earnings through planned and increased exports. The significance of foreign trade to
the economy is manifest in a number of facts and figures.

4
 The Challenges of Trade Finance in Bangladesh

Major challenges of trade finance in Bangladesh:

There are many obstacles/barriers/problems of trade finance in Bangladesh which are categorically
described below:
i) Over and under-invoicing of goods and services, over and under-shipment of goods and
services, multiple invoicing and falsely- described goods and services. Though the main
motive behind the trade-based money laundering is to hide the proceeds of crime, in some
cases, government subsidies and tax/duty evasion instigate perpetrators to engage in money
laundering.
ii) Weakness of Infrastructure;
iii) Transportation problem;
iv) Lack of knowledge about foreign market;
v) Invention of Synthetic fiber;
vi) Import dependant export goods;
vii) Lack of diversification of exporting product.
viii) Lack of skilled manpower;
ix) Lack of modern technology;
x) Administrative weakness;
xi) Limitation of publicity of Product;
xii) Mismanagement and corruption;
xiii) Higher production cost;
xiv) Attitude of dishonesty;
xv) Black marketing;
xvi) Problem of storage and packaging;
xvii) Imposing conditions by Byers;
xviii) Political instability;
xix) Low quality of exportable product;
xx) Lack of capital; xxi) Unhealthy environment; xxii) Government control.

5
 The Challenges of Trade Finance in Bangladesh

Recommendations for promoting trade finance in Bangladesh:

 Export Promotion Bureau (EPB), Bangladesh under the Ministry of Commerce is a government
agency of the country, entrusted with the responsibilities of promoting export of the country.
 Coordinating export and import development efforts at different sectors and production levels;
 Formulating and adopting of policy and program for active promotion of exports;
 Coordinating, monitoring and evaluating national export performance and analyzing export
trends;
 Carrying out promotional activities in product development & expansion of supply side capacity
 Exploring markets of exportable abroad;
 Collecting and disseminating trade information to the stakeholders;
 Organizing participation in international trade fairs abroad;
 Imparting training for Human Resources
 Conducting studies, surveys, research etc. for expansion and diversification of export and
Administering and monitoring of RMG quota.
 More research and development activities should be conducted
 Formulating policies related to export and import of the country.

6
 The Challenges of Trade Finance in Bangladesh

Conclusion:

As an entrusted trade finance institution specially banking sector, we have integrated our home-build
technology across all the related bodies including regulatory bodies such as compliance is at the core of
our operations and part of the ethos of our business. With our agile approach incorporating market
leading all-based due diligences systems and credit checking software informed specialist knowledge,
swift capability, competitive pricing structure and embracing rather the fearing compliance, we are able
to facilitate global trade competitively, effectively and efficiently.

Ultimately, we are firmly confident that we would meet and beat the challenges of compliance through
purposely sharing and implemented tight compliance measures, technology investment and system
integration. Thus, we look forward to further growing our international footprint and reputation as the
institution of choice for global client looking for trade finance instrument for cross border trade.
However, regulatory compliance and extensive monitoring and reporting, and at the same time
promoting trade financing to minimize trade finance gap are a critical challenge to the policy-makers of
all developing countries including Bangladesh.