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Making Open Account transaction secure


M S Siddiqui | March 13, 2018

There are four methods in international trade payment against export. Those
are: Cash in Advance or prepayment; Open Account; Documentary
Collection; and Documentary Letter of Credit (LC).

The foreign exchange transaction of Bangladesh for both import and export
are generally made through Letter of Credit. The Import & Export Policy,
Foreign Exchange Regulation Act 1947 and rule of Central Bank encour age
importers, exporters and Commercial Banks to make transaction through LC.
For example, a) import without LC is restricted for up to $35,000 per year
and to some restricted items like books, journals, etc., and b) import against
advanced payment is comparatively complex and subject to prior approval
from Bangladesh Bank (BB) and for limited amount only. The export
proceeds must come to Bangladesh within four (4) months of export
otherwise the exporter and bankers will be held responsible. Considering the
situation, LC is the most popular international trade payment method in
Bangladesh.

Payment against LC is a more secure method for an exporter than open


account trading, as the exporter's documents are sent from the exporter's
bank to the importer's bank involving many banks in transaction. LC is
believed to be secure for making payment a nd reportedly distributes risks in
most balanced way in which both exporters and importers are almost equally
protected. But the cost of transactions are very high due to involvement of
banks and also because of many formalities and documentations. The Cas h
in Advance or prepayment method payment is expected by the exporter, in
full, prior to goods being shipped. This is the most secure method of payment
for the exporters and consequently the least attractive for importers.

Open Account transaction occurs on the basis of contract. Seller ships


consignments without payment or LC and buyer sends money according to
agreed terms of payment. 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. Unfortunately, Open Account is not allowed.
Exporters of Bangladesh use LC in 60 per cent cases and only 30 per cent
transactions against Payment against Documents (PAD), a setup in which the
buyer can receive delivery documents only after the full payment of the bill of
invoice used. The rest transaction of about 5.0 per cent is by Cash in
Advance. There is another method of USANCE LC with payment at sight by
local banks but deferred payment by the overseas importers. The commercial
bank do not issue 'EXP form' only after duly recording in Export Register as
per guidelines of Bangladesh Bank. Statutory declaration is to be furnished
by exporters under FE Regulation Act, 1947 before shipment of goods about
possible transaction of foreign exchange. The exporter has to declare that
they have made arrangements for the realisation of the export proceeds of
the goods declared on this form within the stipulated peri od. Exporters also
declare that they are satisfied about the bona fides of the
importers/consignees abroad and their credentials, etc.

Though Open Account is widely used in trades among developed countries,


its use in Bangladesh is completely absent. Absen ce or insignificant cases of
use of Cash in Advance and Open Account might be attributed to the
regulatory requirement of the country, relative bargaining power, reputation
of the country's traders and mutual trust and relationship of the domestic
traders with their overseas counterparts.

Interestingly, the Open Account for import is allowed but there is hardly any
such transaction. Again, importers cannot remit money in advance against
documents up to a nominal amount of a few thousand dollars per annum.

The credential of Bangladesh is very poor in the global market. US


government advised all US exporters to export to government or private
companies against irrevocable, confirmed LCs to secure payment, preferably
from a US bank unless the importer is a mult inational company operating in
Bangladesh or a reliable, long-standing Bangladeshi customer. This is true
whether the importer is a private firm or part of the government and whether
or not a multilateral institution or bilateral donor agency or government is
financing the importer.

An Open Account transaction means that the goods are shipped and
delivered before payment is due by an agreed date as per contract between
the buyer and the seller, usually in 30 to 90 days. It gives an advantage to
the buyer in cash flow and cost terms, but it is consequently the highest -risk
option for an exporter. The extension of credit by the seller to the buyer is
more common in transactions. The exporters can attract more buyers with
competitive price and favourable paymen t terms. Exporters also offer better
price for order against payment by deferred open account. Because of the
intense competition for export markets, foreign buyers often press exporters
for open account terms. These transactions are also possible after
thoroughly examining the political, economic, and commercial risks, as well
as cultural influences to ensure that payment will be received in full and on
time.

There are many remedies for exporters for transaction against Open
Account. Open Account terms may be offered with the use of one or more of
trade finance techniques: (1) Export W orking Capital Financing, (2)
Government-Guaranteed Export W orking Capital Programs, (3) Export Credit
Insurance, (4) Export Factoring, and (5) Usance LC.

The Export W orking Capital Financing offered to the exporter, who lacks
sufficient liquidity, needs export working capital financing that covers the
entire cash cycle from purchase of raw materials through the ultimate
collection of the sales proceeds. Export working capital facilities can be
provided to support export sales in the form of a loan or revolving line of
credit. The government may guarantee such Export W orking Capital
Programmes. Bangladesh has no such scheme for export finance.

Export credit insurance provides pr otection against commercial losses -


default, insolvency, bankruptcy, and political losses -war, nationalisation,
currency inconvertibility, etc. It allows exporters to increase sales by offering
liberal open account terms to new and existing customers. Insur ance also
provides security for banks providing working capital and financing exports.
Bangladesh has identical Exports Finance Guarantee scheme for bankers not
for exporters. Sadharan Bima Corporation has introduced Export Credit
Guarantee scheme to promote national exports and offering guarantees to
banks and financial institutions to enable exporters to obtain easily better
loan facilities from them both at the pre -shipment & post-shipment stage.

Factoring in international trade is the discounting of a s hort-term receivable


under certain law of the countries involved in transaction. The exporter
transfers title to its short -term foreign accounts receivable to a factoring
house for cash at a discount from the face value. It allows an exporter to ship
on open account as the factor assumes the financial ability of the importer to
pay and handle collection on the receivables. Bangladesh does not have any
such law or rule to guarantee of payment for transactions.

Usance LC is a method of trade financing that al lows the exporter to sell his
medium-term receivables to financial institutions (FIs) at a discount, in
exchange for cash. W ith this method, the FI assumes all the risks, enabling
the exporter to extend Open Account terms and incorporate the discount into
the selling price. Exporters of Bangladesh get this banking product from
banks but subject to mortgage of security against high interest rate.

These methods of Export W orking Capital Financing, Government -


Guaranteed Export W orking Capital Programs, Export Credit Insurance,
Export Factoring, and Usance are very useful to promote our export and
make the payment secure. According to a report in the Financial Express,
First Security Islami Bank (FSIB) has entered into a unique agreement with
Prima Dollar Finance Ltd, a British non-banking financial institution (NBFI),
for export trade finance. Prima Dollar will make the payment as sight to
exporters in Bangladesh and collect the payment from importers after agreed
period. Prima Dollar will check the credibility of importers and stand
guarantee of payment. They are also promoting export against documents
and propose to guarantee the payment against open account transaction.
Their offered financial products are close to Open Account. Although Open
Account is not allowed in Bangladesh, customers can now try 'Open Account -
like' transactions on a limited scale since there is a guarantee of payment by
an overseas NBFI.

M S Siddiqui is a Legal Economist.

mssiddiqui2035@gmail.com