‘Factoring reduces hassle of international trade’

International trade factoring, which does not require much documentation, can reduce both costs and time for importers. On top of that, in this process, there is a third-party guarantee to ensure timely payment, experts said at a webinar. 

Bangladesh needs to move to use factoring facilities, the experts said while speaking at the discussion organised by the International Business Forum of Bangladesh (IBFB).

Dr Mashiur Rahman, economic adviser to the prime minister, said that mortgages are important in the traditional banking of Bangladesh but mortgages are difficult in international trade.

He mentioned that if there are any weaknesses in the case of factoring, they will be rectified in stages.

Dr Prashanta Kumar Banerjee, director (Research, Development and Consultancy) of the Bangladesh Institute of Bank Management, in his keynote presentation, mentioned that in international trade payment, open account transactions account for around 80 percent of world trade.

A survey by the International Chamber of Commerce (ICC) documented shifts in market momentum towards open account terms. Specifically, importers of North America, Europe and Asia are moving from letter of credits (L/C) to open account settlement.

"In recent years, open account trade has experienced accelerated growth in Asia because exporters are facing insistence by importers that trade be conducted on open account terms. Bangladesh cannot be the exception in this regard," Dr Prashanta said.

Like other countries, importers and exporters in Bangladesh are growingly using documentary collection and open account trade payment systems for international trade payment and finance.

Both banks and corporate houses face challenges, like deferred payment and default risk, regarding documentary collection and open account trade.

Additionally, banks face trouble collecting money from importers; as documents do not go through banks but instead, directly to importers.

International factoring provides a simple solution to the above problems.

In international factoring, the role of the factor or bank is to collect money owed from abroad by approaching importers in their own country. A factor can also provide exporters with 100 percent protection against the importers' inability to pay.

International factoring lets exporters' safe offers of competitive credit terms go to their foreign customers. As a result, international factoring is now a global industry with turnover of around 2.4 trillion Euros, with over 400 members across more than 90 countries.

MS Siddiqui, legal economist and vice-president of IBFB, Helal Ahmed Chowdhury, chairman of Economic Development Committee at IBFB, and Syed Mahbubur Rahman, managing director of Mutual Trust Bank, spoke as designated discussants.

The discussants said Bangladesh has a projected export target of $50 billion by 2021. While the domestic banking system has limited resources, factors can tap funds from the global banking system. These finances do not require any security mortgage.

These factors assume the full risk of collection, including credit losses. There are two basic types of factoring: discount factoring, in which the factor discounts the receivables before the maturity date, and maturity factoring, in which the factor pays the client purchase price of the factored accounts at maturity.

Factors in importing countries perform all servicing functions in connection with accounts receivable and deal with factors in exporting countries; because the factor takes on credit risk.

Considering this, the Bangladesh Bank has recently issued a guideline on factoring to widely introduce this facility in international trade.

Thompson Lui, regional manager for South and Southeast Asia at the department of Open Account Facilitation - Receivable Finance of the Factoring Chain International, said that developing countries face many problems at an early stage.

"These problems need to be solved in stages of trial and error. Since the factoring service is a new service, everyone should be informed about this policy."

IBFB President and Managing Director of Energypac Power Generation Humayun Rashid presided over the webinar.