Absence of a sovereign bond that reflects the country’s creditworthiness, some banks’ failure to make LC payments on maturity and the deteriorating health of the banking industry are the main reasons for the high charge
Bangladesh's importers have to pay a much higher amount than importers in other South Asian nations to confirm their letters of credit (LCs), thus pushing up the cost of doing business for local entrepreneurs.
The reasons bankers and businesses give for this are: Absence of a sovereign bond that reflects the country's creditworthiness, some banks' failure to make LC payments on maturity, and the deteriorating health of the banking industry.
Even importers in Pakistan, which is a high-risk country with a dwindling economy, be it foreign exchange reserve, exports or GDP growth, have to pay 50 percent less than Bangladeshi importers for confirming an LC.
An importer in Bangladesh has to pay up to 3.5 percent of their import value as confirmation fees on LCs per year.
In India, the confirmation charge is 0.75 percent for an LC worth upto Rs 10 crore, and the charge goes down to 0.50 percent for an LC above Rs 10 crore. In Pakistan, the confirmation charge is 1 to 1.5 percent of LC value.
Naser Ezaz Bijoy, chief executive officer of Standard Chartered Bangladesh (SCB), said a high LC confirmation charge is a big problem for Bangladesh.
"Bangladesh has no sovereign bond, so the country's risk is totally unknown to foreign banks and investors," he added.
A sovereign bond can set a country's benchmark pricing, which Pakistan now has after launching such a bond last year, said Bijoy.
"As a result, Pakistan's trade (LC) confirmation charge is 50 percent less than that in Bangladesh," said the CEO of SCB that confirms more LCs from Bangladesh than the other two major foreign banks – HSBC and Citi NA.
LC confirmation fees are a security tool that reduces risks for exporters. When exporters in Europe or America are not satisfied with the LC-issuing bank (in Bangladesh), mainly for its insolvency risk, or the importing country for its political risks, or both, they may seek an additional guarantee for the payments. Confirmation is a definite and legal undertaking from the importer's bank to the exporter's bank.
Bangladesh imported $55 billion worth of goods in the last fiscal year. Bankers said that of the total imports, at least 25 percent or $14 billion was backed by LC confirmation by a third party bank. If the average LC confirmation was considered 2 percent, then local importers paid an additional $280 million or over Tk2,300 crore as the charge.
Rahel Ahmed, managing director of Prime Bank, said a LC confirmation charge depends on four major issues – bank risk, country risk, importers and products.
"Our country risk is totally unidentified to global investors in the absence of a tool that can assess the country's creditworthiness for global investors," Rahel told The Business Standard, explaining why local importers have to pay more for confirming an LC by a foreign bank than importers in peer countries.
He said it is high time for Bangladesh to introduce a sovereign bond that can reduce the cost of doing business.
Bangladesh launched a $19 million taka-denominated bond in the London Stock exchange in November last year, which, according to Rahel, is a drop in the ocean.
Businesses in the apparel sector that accounts for most imports, do not need to confirm their LCs because they source things from sellers nominated by their buyers. Also, there is no need for confirmation in case of back-to-back LCs.
Bankers say that commodity imports such as sugar, edible oil and fuel oil, need to be backed by a third bank in the name of LC confirmation. But chemicals and capital machinery face higher LC confirmation charges than other products.
"LC confirmation fees were rising a few months ago because of an increase in non-performing loans. But thanks to lower import payments and the coronavirus outbreak, this charge could have shot up by now," said a treasury head of a leading private commercial bank.
In addition to the absence of a sovereign bond, some banks' failure to respect LC payments on maturity, and the deteriorating condition of the banking sector, have compelled Bangladesh's businesses to pay more as LC confirmation fees, he noted.