Financing Trade with Bangladesh

Bangladesh has made considerable progress in economic reform and growth, making the country a fairly attractive destination for international trade. In the 2015 economic freedom index, Bangladesh scored 53.9 points and was ranked the 131st freest economy in the world (Heritage, 2017). Though Bangladesh’s economy has moved from “repressed” status, significant deficiencies in the progress of reform remain. The country is still characterised by corruption, an inefficient judicial system, weak governance structures, an underdeveloped financial sector, and considerable government interference (The Financial Express, 2012; GlobalTrade.net, 2014; Heritage, 2017). These factors continue to hinder development as well as the achievement and sustenance of open markets. For American companies wishing to export goods to Bangladesh, these obstacles present significant risks. This paper highlights these risks and ways of minimising the risks. Recommendations are also provided.
Risks and Concerns in Financing Foreign Trade with Bangladesh
Trade plays a moderately important role in the economy of Bangladesh. Exports and imports combined account for approximately 42% of the country’s total GDP (Heritage, 2017). Nonetheless, high custom duties are a major obstacle to foreign trade (GlobalTrade.net, 2014). The government is addressing this challenge by implementing concessional tariffs, a customs reform plan, and export processing zones. Even so, the high custom duties present a major concern for American companies that want to finance foreign trade with Bangladesh. Bureaucratic barriers and the interference of the government in the financial sector are also major hindrances to foreign trade. Considerable government intervention in the financial sector is a particularly important concern for American companies that want to finance foreign trade with Bangladesh. Government interference means that export companies have to grapple with a great deal of bureaucracy before payments or transfers of money are completed. These bureaucracies could increase transactions costs, making exports to Bangladesh a daunting and expensive undertaking.
The challenge of government interference in the financial sector is further compounded by the country’s underdeveloped financial system. An efficient financial system is a vital enabler of foreign trade. Such a system is characterised by aspects such as stable interest rates, absence of interest rate ceilings, numerous financial products, minimal credit risk, adequate bank capital, as well as strong monetary management and financial regulation. Bangladesh has made some progress, but inefficiencies in the financial sector still exist (International Monetary Fund [IMF], 2010). Without an efficient financial system, American companies intending to export to Bangladesh could face substantial challenges given that foreign trade is heavily reliant on the financial system.
An underdeveloped financial system creates bank risk – bank instability. Importers and exporters have to consider the origin of financing documents used in foreign trade (Boland, 2012). For instance, when doing business with Bangladesh, American companies will consider the bank that issued a given backing document – whether a documentary credit or a guarantee. They will consider how stable the bank is. This usually involves considering the bank’s history of rejecting or accepting documents as well as behaviour in terms of delaying or reneging payments. It also entails considering foreign exchange restrictions and the overall risk in the bank’s country of origin. This information is crucial for determining the level of risk involved in dealing with a certain bank. With Bangladesh having considerable government interference in the financial sector, bank risk could be a major concern for American companies.
The above country characteristics often influence how fast a country honours its payment commitments (Boland, 2012). Bangladesh is characterised by a considerable degree of protectionism and economic controls. This means that it may take a while before importers in the country honour financial commitments. Accordingly, financing foreign trade with Bangladesh could be costly and risky.
Another risk emanates from foreign exchange rates. Trade between American companies and Bangladesh would certainly involve foreign currency. This presents a risk in itself given the volatile nature of foreign exchange rates (Boland, 2012). Unfavourable movements in exchange rates could negatively affect both the exporter and the importer. For instance, appreciation of the Bangladeshi currency against the U.S. currency could result in losses on the part of American companies doing business with Bangladesh.
Fraud should also be a concern for American companies financing foreign trade with Bangladesh. Common forms of fraud involved in foreign trade include counterpart fraud, cargo theft, documentary fraud, insurance rip-offs, as well as piracy and scuttling (Boland, 2012). The risk of fraud is particularly worth considering if the country in question has a weak regulatory system. A weak regulatory system means that fraudsters will be protected, resulting in the proliferation of fraud. Compared to developed countries, developing countries have much weaker regulatory systems. Bangladesh is no exception (Heritage, 2017). This means that financing foreign trade with Bangladesh could expose American companies to fraud.
Minimising Risks
The first step in risk management is to recognise the existence of risk. Once risk is recognised, measures must be put in place to mitigate the risk. One of the measures American companies intending to export to Bangladesh can take to minimise the associated risk is having specialised units within banks to address country risks. Such units according to Boland (2012) control the extent of exposure the bank will assume for every country. This helps in balancing institutional stability against transaction profitability. With specialised units, American companies would be comprehensively aware of the nature and level of risks trade with Bangladesh presents. Nevertheless, conflicts between these units and commercial bankers may occur often. The conflicts usually stem from commercial bankers feeling that the units are excessively stringent. These conflicts can pose a challenge for foreign trade financing. Specialised units can also be valuable in addressing bank risk (Boland, 2012). These units provide traders with the necessary guidance, helping traders establish limits for foreign trade. Any transaction going beyond the set limits would require the approval of the specialised unit, thereby minimising the associated risk.
Foreign exchange risk can be minimised by creating strong relationships with banks (Boland, 2012). This enables traders to remain updated of dynamics in the foreign exchange market. With such knowledge, traders can purchase forward contracts and other derivative instruments to minimise exposure to foreign exchange risk. Indeed, derivatives are valuable risk management strategies as far as foreign currency risk is concerned. Firms in diverse sectors and industries employ these instruments to cushion themselves against foreign exchange fluctuations. American companies intending to finance foreign trade with Bangladesh ought to consider these instruments if they are to minimise or mitigate foreign currency risk.
Addressing the risk of fraud would require American companies to undertake extensive reviews of the issuing entity. Prior to acknowledging documentary credits and other types of trade financing documents, American companies must put into consideration not only macro risks, but also the financial position of the importer as well as the nature of the goods being paid for (Boland, 2012). This is crucial for determining whether the provided documents are valid and workable, ultimately minimising the risk of non-payment. The risk of fraud in Bangladesh is considerable, meaning that thorough due diligence would be imperative for American companies.

Conclusion and Recommendations
Overall, trade with Bangladesh presents substantial risks for American companies. This is particularly due to weak and inefficient political, judicial, economic, and financial systems. Such systems undermine not only economic development, but also transaction efficiency and costs. Fraud and foreign exchange risk are also important risks. Though the risks and concerns are numerous, the major concern for American companies is arguably government interference in the financial sector. A vital hallmark of an efficient financial system is limited or no government interference. Government interference creates unnecessary bureaucracies, which could lead to delays in honouring financial commitments. Such delays can make trade transactions expensive to the disadvantage of exporters and importers. American companies can resort to several measures to minimise risk, but the best approach would be utilise specialised units within banks. These units play a crucial role in advising traders on country risk and scrutinising trade financing documents. Reviewing financing documents is especially essential for establishing document validity and practicality, and hence minimising fraud risk.
Given the associated macro risks, exporting to Bangladesh may not be a straightforward endeavour for American companies. Nonetheless, this does not necessarily mean that American companies should completely stay away from Bangladesh. In spite of political, economic, and financial inefficiencies, Bangladesh offers considerable trade and investment potential. Foreign trade is a key driver of the country’s economic growth, meaning that though risky, the country could provide an attractive return on investment for exporters and importers. With strong risk management strategies, American companies can succeed in the relatively risky business environment. In essence, it is recommendable for American companies to start financing trade with Bangladesh. If American companies fail to grab the opportunity as early as possible, there could be regrets in the future as other countries may have already exploited the opportunity by the time they start noticing the country’s potential.


References
Boland, P. (2012). Risks involved in international trade finance: A banker’s perspective. Retrieved from http://www.fita.org/aotm/0399.html
GlobalTrade.net. (2014). International trade in Bangladesh. Retrieved from http://www.globaltrade.net/m/c/Bangladesh.html
Heritage. (2017). Bangladesh. Retrieved from http://www.heritage.org/index/country/bangladesh
International Monetary Fund (IMF). (2010). Bangladesh: Financial system stability assessment. Country Report No. 10/38. IMF. Retrieved from https://www.imf.org/external/pubs/ft/scr/2010/cr1038.pdf
The Financial Express. (2012). Bureaucratic tangle, corruption blocking FDI, says GM Quader. Retrieved from http://print.thefinancialexpress- bd.com/old/more.php?news_id=94926&date=2012-01-18