Whom to approach for short-term finance by bank
You have several alternatives for locating funds for your business, especially to meet the requirements of short-term funding to expedite current operations. Besides the informal sources, which are no less important, the formal sources of funds comprise the financial sector of a country. The financial sector in Bangladesh has many diverse institutions, many of them keen to lend tö businesses on a short-term basis, especially for trade. To them, the risk is of short duration and therefore easier to assess and to cover. Being linked to transactions that are self-liquidating, the activity is also easier to monitor. In fact, some banks may be less interested in the size of your balance sheet than in your ability to trade profitably.
Before approaching a financial institution for short-term credit, it is useful to know a
little about the different kinds of lenders, who they are and how they function.
A. Financial Institutions
Financial institutions are Financial Intermediaries (Fls), as they mediate or stand between ultimate borrowers and ultimate lenders and help transfer funds from one to another. The term financial institution applies, in principle, to any company or other entity that mainly takes money from depositors, who are ultimate lenders and uses the funds generally to make loans. The term, however, tends to be employed in a very broad sense.
Depositors can be any persons or entities that formally entrust funds for investment in expectation of a return. Financial institutions help production, capital accumulation, and growth by (i) encouraging savings, (ii) mobilizing them and (iii) allocating them to alternative uses and users.
Financial institutions are generally classified under two main headings: (i) Banks and (ii)
Non-bank financial intermediaries. In Bangladesh, banking financial institutions comprise all commercial banks and specialized/development banks, namely BKB, RAKUB, BSB,and BSRS; non-bank financial institutions include ICB, leasing companies and merchant banks. All banks and non-bank financial institutions are regulated and supervised by the central bank, Bangladesh Bank. These institutions are discussed below. This guide is concerned essentially with institutions that lend money on a short-term basis to businesses that will use it for trading.
1. Central Bank
Bangladesh Bank is the central bank of Bangladesh that acts as the regulator for the banking and non-banking financial institutions. The functions of Bangladesh Bank include currency issuance, pursuing monetary policy and management of reserves. Bangladesh
The bank acts as banker to the government, it also acts as a banker to the commercial banks. All banks in Bangladesh keep and maintain their accounts with Bangladesh Bank and they borrow money from Bangladesh Bank when necessary. The central bank administers facilities and incentives offered by the Government for exporters that are channeled through commercial banks.
2. Commercial Banks
Commercial banks primarily raise funds by issuing checkable deposits, savings deposits, and time deposits. They then use these funds to make commercial, consumer and mortgage loans, and to buy government and private securities and bonds. Yet there are important differences from one commercial bank to another. All commercial banks perform two general functions: (i) acceptance of deposits from different sources and (ii) lending (direct lending to borrowers and indirect lending through investment in open-market securities).
The majority of commercial banks have a branch network throughout the country. These are typically known as retail banks, whose customers open current and deposit accounts, deposit excess liquidity and make payments to creditors. Most of them are purely local institutions and some of them are joint ventures with international capital. They are always involved in trade finance activities, including providing short-term credit, which is often their most profitable business. Local banks often have a wide local network and handle both small and large transactions.
Local commercial banks (nationalized and private) in Bangladesh are no less competent than international banks and are more suitable for SMEs. All banks, large or small, are involved in international trade and have set up a network of correspondent banks in other countries. These correspondent banks will often be the institutions that confirm a documentary credit or act as advising banks in transactions with sellers.
Small local commercial banks, with few or no branches, often specialize in short-term credit for trading activities and refinance these from the deposits they take from their customers. They are often highly motivated to find business and can offer more competitive terms than their larger rivals – the big local commercial and foreign banks. Being smaller and more flexible, their level of service is sometimes more attractive, their senior management more easily approached and their decisions are taken more promptly.
Foreign commercial banks are part of (or are managed by) an international group. They have the advantage of a worldwide network, which may be beneficial to you as a trader and borrower. There are now 12 foreign commercial banks in Bangladesh. If you are importing materials or commodities for production or transformation and re-export, these banks raw may be able to offer you a wide range of services and facilities. Their name and credit standing may be sufficient to prevent your suppliers overseas from insisting on having your documentary credit confirmed (at a high fee) by a better-known bank in their country.
On the other hand, if you are a relatively small and new company, you may find that some but certainly not, all) multinational banks prefer to deal with the large companies in Bangladesh because of the size of the transactions and the quality of the collateral they provide. Banks seldom like to spend time and effort on small transactions, which can entail just as much work as a large one but which are far less remunerative.
To illustrate some of the points made above, the range of services offered by a commercial bank in Bangladesh is shown in Box 8.
Import and Export Banks
Not all countries have import and export banks. They also vary from region to region, some being privately operated, other state-owned and still other regional or multilateral institutions.
Import and export banks (import-export banks or Eximbank, as they are referred to occasionally) specialize in financing foreign trade. They are sometimes highly subsidized to encourage local exporters and facilitate their access to short-term finance for specific transactions. They often work in conjunction with other institutions such as export credit guarantee and insurance agencies or they themselves act in such a capacity and provide
guarantees that enable borrowers to approach other institutions, such as their local banks.
Their value lies in their offering a wide range of trade payment and finance possibilities on advantageous terms, and a trader can benefit from their experience and advice. However, the larger organizations among them may sometimes not wish to handle transactions below a certain size.
TYPICAL SERVICES OFFERED BY COMMERCIAL BANKS
Acceptance of money on deposit (current, savings and time) from different economic
Issuance of credit to all sectors of the economy (loans and advances, discounting of bills,
and investment in open-market securities);
Collection of cheques, draft, bills, hundies, and other instruments for their depositors;
Issuing of performance and financial guarantees;
Provision of remittance facilities by the issue of drafts, MTS, TTs;
Provision of facilities of safe custody of deeds and securities and safe deposit vaults;
Purchase and sale of securities for their constituents.
Short-term facilities such as pre-shipment and post-shipment finance;
L/C advising (some banks provide same-day processing);
L/C confirmation (some banks provide same-day processing);
L/C negotiations (some banks provide same-day processing);
Outward collections, bills for collection ( some banks provide same-day processing);
Negotiations on export bills: advances of up to 100% of the value of shipment may be
granted on receipt of export documents;
Confirmation of L/Cs;
Pre-shipment loans, secured by current assets such as exportable commodities. These
facilities provide exporters with working capital to purchase raw materials, process goods
and package and export them.
Post-shipment loans, consisting of operations such as discounting of bills.
To importers :
L/C issuance (some banks provide same-day processing);
L/C amendment (some banks provide same-day processing);
Inward collections (some banks provide same-day processing);
Shipping guarantees, awaiting arrival of documents (some banks provide one-hour
Loans against trust receipt, allowing goods to be cleared or even sold before being paid for (some banks provide up to 100% financing and same-day processing).
3. Specialized/Development Banks
The primary purpose of the specialized/development banks, namely BKB, RAKUB, BSB, and BSRS is to provide medium to long term as well as short-term finance typically for agricultural and industrial projects. They also perform various promotional roles conducive to the economic development of the country. They are unlike ordinary commercial banks in three ways:
a. Though they seek or accept deposits from the public, deposits are not their major source of funds. Rather, the government/central bank, different donor agencies, and the commercial banks are the major providers of funds to specialized/development banks.
b. They are specialized in providing short, medium and long-term finances to agriculture/industrial sectors.
c. Their chief distinguishing role is the promotion of economic development by way of promoting investment and enterprise in their chosen areas.
However, all the specialized/development banks have also turned to provide trade finance facilities for their customers, realizing that production requires extra working capital, for example, to complete an order for export. In various respects, the trade financing facilities of the specialized/development banks are similar to those of commercial banks. As an exporter, you should examine the comparative advantages and disadvantages
of the offers of the different types of banking financial institutions.
B. Non-Bank Financial Institutions
Non-bank financial institutions are of two types:
(i) Investment Intermediaries
(ii) Contractual Saving Institutions
1. Investment Intermediaries (investment or merchant banks, securities brokers, mutual funds) involved in the purchase and sale of bonds, stocks, and other securities. One of. their functions are to help businesses to issue securities. Investment bankers study a firm’s financial soundness, advise the firm of an appropriate price of the stocks or bonds it wishes to issue, sell the securities to financial institutions and individuals and monitor the firm’s ability and willingness to fulfill the terms of the securities after they have been issued. The other function of investment intermediaries is to help others to manage their money. They may advise investors about the selection of stocks and bonds and advise borrowers about their financing alternatives, or take over the money-management task- making decisions rather than offering advice.
Although many, if not most, investment and merchant banks have funds of their own to finance trade and other activities, their specialty is to render financial services for which they earn fees. This does not mean that you should rule them out. On the contrary, in the same way, that the small commercial bank may prove more approachable, many investment or merchant banks are keen to assist traders and can provide them with original ideas and structured financing plans that may not occur to the larger institutions.
Many of the advantages and drawbacks of dealing with these institutions are similar to those of small commercial banks. However, investment and merchant banks tend to act more as intermediaries and, being fee-earning, are obviously more attracted to larger transactions that call for their specialized knowledge and skills. Typical of these skills is their ability to syndicate loan facilities for large trading deals. This could involve raising a pre-export facility from a pool of banks, including overseas institutions, to finance a crop- processing-and-exporting program.
2. Contractual Saving Institutions, such as insurance companies and pension funds, are FIS that acquire funds at periodic intervals on a contractual basis. Non-bank financial institutions of Bangladesh include ICB, Leasing companies, HBFC, SABINCO, and other finance companies and insurance companies. The full list of institutions licensed by Bangladesh Bank under the Financial Institutions Act, 1993 is given in appendix V Il.
Box-9 shows the types of banks which provide short-term credit for exporters. The categorization of banks has been done according to target groups and ownership patterns and source of origin.
*BANKING FINANCIAL INSTITUTIONS
• Rupali Bank Ltd.
• Al-Arafah Islami Bank Ltd.
• Al -Baraka Bank Bangladesh Ltd.
Arab Bangladesh Bank Ltd.
Bangladesh Commerce Bank Ltd.
Bank Asia Ltd.
• Dhaka Bank Ltd.
Dutch-Bangla Bank Ltd.
• Eastern Bank Ltd.
Export-Import Bank of Bangladesh
Ltd (EXIM Bank)
First Security Bank Ltd.
IFIC Bank Ltd.
Islami Bank Bangladesh Ltd.
Jamuna Bank Ltd.
Mercantile Bank Ltd.
• Mutual Trust Bank Ltd.
National Bank Ltd.
National Credit & Commerce
One Bank Ltd.
Premier Bank Ltd.
Prime Bank Ltd.
• Pubali Bank Ltd.
Shahjalal Bank Ltd.
Social Investment Bank Ltd.
Southeast Bank Ltd.
Standard Bank Ltd.
The City Bank Ltd.
• Trust Bank Ltd.
• United Commercial Bank Ltd.
• Uttara Bank Ltd.
American Express Bank Ltd.
Credit Agricole Indosuez
Habib Bank Ltd.
• Hanvit Bank
Muslim Commercial Bank Ltd.
National Bank of Pakistan
Shamil Bank of Bahrain EC
Standard Chartered Bank
Standard Chartered Grindlays
State Bank of India
The Hongkong and Sanghai
Banking Corporation Ltd.
Bangladesh Krishi Bank
Bangladesh Shilpa Bank
Bangladesh Shilpa Rin Sangstha
Bank of Small Industries &
Commerce Bangladesh Ltd.
• Rajshahi Krishi Unnayan Bank
* The list of banks (given in alphabetical order) has been drawn from various Bangladesh Bank publications.
C. Export credit guarantee and insurance agencies
These are institutions that act rather like insurance companies. For a premium, they cover your risk or your bank’s risk of not getting paid by your buyer. The guarantee or insurance coverage will assist you in obtaining short-term credit from your bank which will normally accept such cover as collateral for its facility.
Sadharan Bima Corporation (SBC), a government-owned institution; helps promote export by extending export credit guarantees. The premiums SBC charges are generally set in accordance with their perception of the country risk it is covering. If the risk is considered too high, the agency may not cover the country concerned.
D. Support from government and trade associations
The Bangladeshi government, like most governments in the developing world, places great importance on the export trade. The government has introduced measures to encourage exporters, especially those manufacturing or trading in non-traditional goods and commodities. Many of these measures are backed by funds made available to banks and other financial institutions by the central bank or other entities.
Information on government-sponsored schemes is usually disseminated by the Export Promotion Bureau (EPB), a local export promotion agency in Bangladesh. Besides, FBCCI, trade associations and chambers of commerce and industry can also provide information in this regard.
The Box-IO shows the government incentives to the exporters.
You should seek such information from your bank, export promotion agency or the professional organization to which you belong.
EXAMPLES OF GOVERNMENT SCHEMES
Bangladesh government offers exporters a range of incentives and benefits such as:
Recognition of small and medium export-oriented firms as industry;
Duty-free import of capital machinery by 100 percent export-oriented industry outside the EPZ;
Provision of a bonded warehouses to facilitate duty-free import of raw materials for export production;
Provision for duty drawback, if the bonded warehouse facility is not availed of;
Provision for sale of 20 percent of products of the 100 percent export-oriented industries in the local market
on payment of duties and taxes;
Exemption from income tax for 50 percent of income arising from export business;
Provision for tax holiday;
Provision for duty-free imports of samples.
Financial incentives, facilities, and services through:
Bangladesh Bank’s policies of liberalization of exchange controls;
Concessionary loans for the export sector through commercial banks;
Provision for local currency export credit at a concessional rate of interest within a band (the band is 8-
Provision for foreign currency export credit under EDF at a concessional rate of interest (the applicable
Extension of time limit for export credit from 180 days to 270 days;
Provision for the back-to-back letter of credit for imports of raw materials for export production, on deferred
Retention of export earnings by the exporters in their own foreign currency accounts to the extent of 40% in
general cases and 7.5% in lower value-added items like RMG
Facility for use of importers credit (from time to time, like US$ 25.00 million for CIS markets);
.25 percent compensatory cash benefit to the producers and suppliers of fabrics and other textile products for
the ultimate purpose of export, in lieu of bonded warehouse and duty drawback facilities;
Provision for 10 percent market development assistance for export of jute;
Installation of a separate line of credit for software product export;
Banking facility for a consignment sale and BMRE projects;
Export credit guarantee facility;
Travelers’ foreign currency quota is US$ 6000 per year and can be increased with the permission of
Recognition of leather industries exporting at least 80 percent of their products as 100 percent export-oriented
Enhancing the financial limit of dispatch for export samples abroad;
Provision for product and market development support under Export Development Fund;
National Trophy for export;
Reduced air freight for export of all crash program items including fruits and vegetables;
Withdrawal of royalty to facilitate the use of cargo services of foreign airlines for export purposes.
Institutional support and benefits through or from:
Bangladesh Export Processing Zone Authority;
Export Promotion Bureau.
N.B. For detailed information pertaining to foreign exchange regulations, one may utilize Guide for Foreign Exchange Transactions, Foreign Exchange Regulations Act, 1947, F.E circulars, circular letters, and import policy orders, etc.
Whom to approach for short-term finance by bank
Whom to approach for short-term finance by bank