FINANCING OF TEXTILE INDUSTRY IN PAKISTAN

The funds are mainly required for business assets and working capital which is mostly fulfilled
by their own personal savings or cash flows from the business, some businesses also use banks to
meet funding needs. The percentage is relatively higher and encouraging as compared to some
other business in Pakistan. Among the fixed assets, finance requirements mainly centered on
machinery and equipment of the business. The segment is generally well aware and exposed to
financing and banking products and is keen to obtain financing/ lending products and have a
more far reaching relationship with banks and financial institutions.

Equity Financing

Equity financing is the process of raising capital through the sale of shares. Companies raise
money because they might have a short-term need to pay bills or need funds for a long-term
project that promotes growth. By selling shares, a business effectively sells ownership in its
company in return for cash.

Corporate Bonds

Corporate Bond is a debt security which is issued by company and sold to investors to meet its
financial requirements. In Pakistan this is commonly known as Term Finance Certificate (TFC),
It also includes SUKUK Certificates, Registered Bonds, Corporate Bonds etc., and all kinds of
debt instruments issued by any Pakistani company or corporation registered in Pakistan.

Banking Sector proposes the following for social and economic growth of Textile Industries in
Pakistan:

Overdraft / Revolving Finance Facility

Business overdrafts are a very common way of financing small and medium-sized enterprises
(SMEs), and are ideal for those with fluctuating finance requirements. They are either provided
over a fixed period of time or as a rolling facility with no end date. Loan amount will be directly
transferred to suppliers’ accounts against invoices § Pre-approved suppliers of Thread and Grey
fabric for Textile manufacturers will be provided with the facility. Three major suppliers will be
pre-approved by banks based on supply arrangements to major manufacturers. Flexible
repayment conditions: lump sum payment on the due date or partial repayments § Multiple
withdrawals are allowed during the tenure of loan

Particulars Details
Initial deposit  Minimum initial deposit of PKR 10,000
Loan Limit  Minimum Limit - PKR 500,000
 Maximum Limit - PKR 5,000,000
 Loan limit will not exceed Raw
Material Usage for up to six months
 determined on the basis of the average
six months usage over the last three
years
Markup  As per prevailing KIBOR
Markup charges  Mark up will be charged only on the
amount utilized by the borrower
Penalty  No early repayment penalty will be
imposed on the borrower

Textile Machinery Leasing

Equipment & machinery leasing will be provided for expansion capital only to businesses with
an operational history of 3 or more years § A pre-approved list of equipment and machinery
manufacturers will be developed based on information received from trade association and
market reputation § Leasing facility will be provided up to the limit of existing installed capacity
§ Credit facility will be offered directly through pre approved equipment and machinery vendors.
Repayments will be based upon preset Equal Monthly Installments.

Particulars Details
Down Payment  Minimum down payment of 20%
Loan Limit  Minimum Limit - PKR 1,500,000
 Maximum Limit - PKR 20,000,000
Markup  As per prevailing KIBOR and spread
Penalty  As per existing bank policies and cost
of charges
Tenure  3-5 Years

Business Vehicle Leasing

Business vehicle leasing will be provided for expansion capital only to businesses with an
operational history of 3 or more years § Leasing facility will be provided up to the limit of
existing capacity § Credit facility will be offered directly through pre-approved vehicle suppliers.
Repayments will be based upon preset Equal Monthly Installments. Mandatory Insurance
Requirement of the banks.

Particulars Details
Down Payment  Minimum down payment of 20%
Loan Limit  Minimum Limit - PKR 1,000,000
 Maximum Limit - PKR 10,000,000
 Minimum and maximum loan limits are
reviewed annually
Markup  As per prevailing KIBOR and spread
Penalty  As per existing bank policies and cost
of charges
Tenure  3-5 Years

Industrial Power Generator Leasing

Loan amount will be directly transferred to suppliers’ accounts against invoices § Credit facility
will be offered directly through pre-approved generator suppliers. Repayments will be based
upon present Equal Monthly Installments. Mandatory Insurance facility Requirement of the
banks

Particulars Details
Down Payment  Minimum down payment of 20%
Loan Limit  Minimum Limit - PKR 500,000
 Maximum Limit - PKR 3,000,000
Markup  As per prevailing KIBOR and spread
Penalty  As per existing bank policies and cost
of charges
Tenure  3-5 Years

Trade Fair Financing

Financing will be provided to business owners and exporters to attend trade fairs § The facility
will be provided through TDAP and event organizers by making payments to them directly and
arranging a trip for trade fairs via authorized travel agents. § Costs will include detailed expenses
for travel as well as costs for set up product displays for export fair. No hidden charges as per
SBP/GOP decision.

Particulars Details
Indicative Tenure  6 Months - 1 Year
Loan Limit  Minimum Limit - PKR 300,000
 Maximum Limit - PKR 1,000,000
Markup  As per prevailing KIBOR and spread
Collateral  No Collateral

FINANCING OF TEXTILE INDUSTRY IN BANGLADESH

The Bangladesh financial sector can be divided into the formal sector, the semi formal sector and
the informaI sector. For the purpose of this study, the focus is on the formal sector and its actors,
to the exclusion of the semi -formal and informaI sectors. The formal sector consist of:
  The Money Market: banks, non-banking §nancial institutions ,NBFIs).
 The Capital Market: investment hanks, stock exchange and credit rating companies.
 The Foreign Exchange Market

EQUITY SHARE CAPITAL

The most common method of financing a Bangladeshi business is issuing shares. The number of
shares a company may issue is subject to the authorized share capital as specified in the
Memorandum of Association of a company. The authorized share capital may be increased
subject to permission. Equity capital invested by a foreign company may be repatriated in the
event of liquidation or share transfer.

Bond

A bond is a type of security that is issued by govt. or corporations to obtain funds from people. It
may promise periodic interest payments or a face value at maturity or both. A bond is a type of
security that is issued by govt. or corporations to obtain funds from people. It may promise
periodic interest payments or a face value at maturity or both.

Bangladesh Bank, the country's central bank, oversees the financial sector, which consists of 56
scheduled and non-scheduled banks, as well as 31 NBFIs. Bangladesh Bank also oversees
multiple stock exchange players and 59s Micro-finance Institutions. The sector is characterized
by a large number of operating banks and financial institutions, and overall a low level of service
sophistication, high interest rates, and long bureaucratic processes for obtaining loans.

Trade Financing

Trade financing includes Letters of Credit (LCs), Back to Back LCs, and Export Financing
through the Export Development Fund (EDF). LCs are designed to help enterprises import raw
materials. The bank guarantees payment in full to the supplier provided certain conditions are
met. The bank assumes the risk of the purchaser defauIting on payment. In Bangladesh,
repayment terms are usually has been 90 to 180 days, depending on the individual enterprise 's
cash cycle.
Working Capital Financing

Working capital financing to RMG factories often comes via packing credit products; these are
designed to help support manufacturers with their production processes. These products are
usually short term financing, utilized solely for expenses relating to shipping goods under letters
of credit mentioned in the packing credit letter. A packing credit is granted once an RMG
company receives a purchase order from a client, and tends to be in the form of a revolving
credit facility between the manufacturer and its long-term bank. The usual value of packing
credit lines is – 10% of the Freight on Board (FOB) value of the export.

Loans in Foreign Currency

Interest rates for loans in foreign currency (USD) are much lower than loans issued in BDT. For
this product, interest rates are supposed to be set at LIBOR + 4.5% but banks are actually able to
apply a sub-set of fees and commissions to the loans, thereby making the effective rate paid by
the borrower around 6% above LIBOR. Under the Companies Act 1994, enterprises are allowed
to raise financing in foreign currency from different sources

 International banks, international capital markets, multilateral financial institutions (such

as IFC & WB)
 Export credit agencies
 Suppliers of Equipment
 Foreign equity holders.

IFC Credit Facility

In July 2015, International Finance Corporation (IFC) announced the launch of a credit facility
specifically targeted at supporting financing of electrical, fire and limited structural remediation
in textile factories in Bangladesh. The total value of the facility is USD 4O Million, distributed
among four participating banks. Under this facility, each participating bank borrows USD 10
Million directly from IFC and commits to using the funds to finance textile factories to pay for
the work necessary in their factory as identified in the corrective action plan (CAP) from either
an Accord or Alliance inspection.

GREEN RE-FINANCING MECHANISM THROUGH BANGLADESH BANK

In 2009, Bangladesh Bank set up a revolving green re-financing scheme of BDT 2 Billion (-
USD 25. 6 Million) as a financing option for green products (solar energy, bio-gas, efficient
treatment systems, etc.). In 2013, Bangladesh Bank expanded the amount of products that could
be re- financed under the facility to 16 products, which was then further extended in 2015 to 47
including products specificaIIy designed for the textile sector.

Under this scheme, banks and NBFIs will provide financing (in BDT currency) to an textile
factory, using capital previously sourced by the bank at higher interest rates. Banks and NBFIs
will then submit a request to Bank of Bangladesh for re-financing. If the loan is approved within
the mandate of the scheme, Bangladesh Bank then re-finances the financial institution at an
interest rate of 5%. One key condition for the bank to obtain re-financing is that the interest rate
charged to the borrower should not exceed 9%.

JICA CREDIT FACILITY

The Japan International Cooperation Agency (JlCA) launched a financing facility to support the
textile sector in financing the retrofitting, rebuilding and relocating of factory buildings. The
USD 13 Million facility was made available through a Government to Government Loan (GzG)
between japan and Bangladesh at an annual rate of 0.01%. Participating financial institutions
(banks and NBFIs) obtain a sub-loan from the Bangladesh Bank at 5% interest, then loan to
factories at an additional rate of up to 5%. This means qualifiied factories receive loans at an
annual interest rate between 5 and 10%. It should be noted that this facility is specifically
targeting small and medium garment factories (employing up to 2,ooo workers)

AFD CREDIT FACILITY

The Agence Frangaise de Développement (AFD) is currently in the process of securing capital to
launch a new credit facility that will add on to the aforementioned IFC, USAID and jICA
programs.. The AFD facility will include a variety of components and supporting partnerships.
The basis of the credit facility will be a total fund of EUR 50 Million, of which tentatively 67%
(EUR 33.5 Million) will target safety remediation work, and 33%(EUR 16,5 Million) will target
environmental activities. Funds will be distributed following the same GzG approach as the JICA
facility, with AFD lending to the Ministry o[ Finance (in Euros), who will provide sub-loans to
Bangladesh Bank (in BDT), which then on-lends to textile factories (in BDT).

EQUITY SHARE CAPITAL

The most common method of financing a Bangladeshi business is issuing shares. The number of
shares a company may issue is subject to the authorized share capital as specified in the
Memorandum of Association of a company. The authorized share capital may be increased
subject to permission. Equity capital invested by a foreign company may be repatriated in the
event of liquidation or share transfer.

Bond

A bond is a type of security that is issued by govt. or corporations to obtain funds from people. It
may promise periodic interest payments or a face value at maturity or both. A bond is a type of
security that is issued by govt. or corporations to obtain funds from people. It may promise
periodic interest payments or a face value at maturity or both.