Export finance is changing in Bangladesh
Over the last few weeks, PrimaDollar has signed up 8 of the major banking groups in Bangladesh who are adopting our trade finance technology platform to bring export finance to their clients. Combined these banks support 1,000s of export supply chains with an annual export volume of over US$7.5bn.
What’s happening to exporters?
Bangladesh is the second largest garment manufacturer and exporter in the world with an annual export volume for garments in the region of US$28bn in 2019 with over 4,500 factories in operation (source BGMEA).
Exporters in Bangladesh have been hit three ways by the pandemic:
- Most garments are exported to retailers, online and physical. As governments around the world closed down the shops, orders were cancelled by buyers. A large part of the cancelled orders were in production or even already shipped. This left the factories with stock that no one was buying.
- For three to four months, orders dried up. Export volumes dropped 87% in Q2 2020 (source Chittagong Customs House).
- And now buyers are returning but nearly all new orders are on open account with deferred payment. No more LCs, no more payments upfront. International buyers are managing their working capital more carefully now.
What does this mean for banks in Bangladesh?
Banks provide a hugely important service to the garment factories.
Bangladesh has labour and skills, but does not grow its own cotton and has a limited industrial complex supporting man-made fabrics. Materials are imported, and this requires finance. The local banks have financed the imports of materials that drive the garment industry – and the liquidity crisis that has hit the factories has compounded the stresses in the bank balance sheets.
That’s not to say that there is trouble ahead, but with an increasing volume of open account trades banks now need to find smarter ways to manage their risks and bring liquidity to their factory clients.
Driving change in Bangladesh
These pressures on the banks and their clients have led Bangladesh Bank (the central bank) to authorise banks to work directly with international platforms like PrimaDollar – see an article commenting on this here. With the regulator supporting the move, banks have rapidly focussed on sourcing liquidity for their clients.
At PrimaDollar, our business is very simple:
- When the exporter ships, we pay him in cash.
- The buyer can pay later. We take the buyer credit risk.
This very simple model is supported by a sophisticated trade finance platform that connects exporters, importers and local banks together. Our system allows the local bankers to review and monitor trades in real time – uploading shipping documents, reviewing approvals, and checking cash flow and credit notes as buyers evaluate what they are receiving and make payments themselves. This unparalleled visibility into the financial side of the supply chain is much needed to manage the increased risks of doing business on open account with deferred payment. Moreover, PrimaDollar provides the liquidity that the factories are sorely requiring, as payments are made up front against shipping documents with buyers able to pay much later – up to 150 days.
The practical operation of our platform is largely explained here.
Is this happening in other countries?
Liquidity has left manufacturing supply chains around the world as the triple whammy of (i) cancelled orders, (ii) then no orders and then (iii) new orders arriving but on deferred payment terms hits suppliers. The garment industry in Bangladesh is facing a tougher challenge than most due to the structural factors mentioned above. But a similar picture is playing out around the world, particularly across South and East Asia.
Supply chain trade finance – for buyers
All of this is happening against a backdrop of major change amongst multi-national buyers of manufactured products. The pandemic shock has triggered a re-evaluation of the way in which supply chains are managed and financed.
We are also now starting to work directly with global buyers to implement supply chain trade finance programs that operate at an enterprise level. This is in addition to the in-country supports mentioned above (eg: for Bangladesh). Without any major IT projects or significant implementation costs, CFO’s of large multi-national corporates are now able to move all of their exporting suppliers on to standard open account terms with deferred payment.
- Standardisation of finance reduces risks and costs and increases transparency in the supply chains.
- Getting exporting suppliers paid at shipment helps them and their local bankers to manage risk and cash flow – leading to lower landed prices for major buyers.
- And the magic of our technology platform is that all this is achieved without an IT project being required on the buyer side. It is simply “plug-in and go”.
Supply chain trade finance is a breakthrough product for large corporate buyers that have international supply chains. Our platform and structure enables them to put all their international suppliers onto standard open account with deferred payment terms – whilst ensuring that exporters who need support can be paid at shipment.
A revolution is underway
McKinsey recently commented that the pandemic has accelerated 10 years of behaviour change in retail into 90 days. The same is happening to the way in which international supply chains are being financed:
- Corporate buyers are moving to open account and deferred payments whilst suppliers have been hit three ways on the cash flows.
- Banks are urgently looking for smart ways to get more liquidity to their exporting clients.
- And corporate buyers needing to extend their own payment terms with their supply chains are also appreciating the pressures that suppliers are being put under – and looking for simple enterprise-level solutions that get cash to suppliers at shipment whilst allowing them to pay later.
PrimaDollar’s technology is at the heart of both of these developments – 10 years of change is happening in 90 days – this applies to the financing of supply chains just as much as other areas.
How can I find out more?
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