Supply Chain Finance

&
International Factoring: Procedural Guidelines in
Bangladesh

Dr. Prashanta Kumar Banerjee

Professor, BIBM
&
Md. Ruhul Amin
Assistant Professor, BIBM
 Supply Chain Finance(SCF)

 SCF provides solution to open account trade to bridge the gap

between the needs of money of supplier, who wants to be paid as
early as possible and the buyer, who generally wants to delay
payment to improve cash flow.

 Open Account refers to trade transactions on credit for 30 days , 60

days and 90 days where transactions are not supported by any banking
or documentary trade instrument issued on behalf of the buyer or
seller. The buyer is directly responsible for meeting the payment
obligation in relation to the underlying transaction. Where trading
parties supply and buy goods and services on the basis of open account
terms, an invoice is usually raised and the buyer pays within an agreed
time frame.
 Traditional Trade Financing
and
Supply Chain Finance
 Trade Finance Products(TFP): TFPs are long-
established and include letters of credit, bank guarantees
and documentary collections, which are all used more
frequently when trading partners do not know each other
well, or at all.

 Supply Chain Finance: SCF refers to more recently

developed financing and risk mitigation techniques and is
far more likely to be used in relation to open account trade
where the buyer and seller have done business together
before.
 Benefits of SCF

• An exporter could be (and often is) a SME

enterprise, based in a developing or emerging
market, supplying to a large buyer, based perhaps
in the Americas or Europe. Here, SCF provides SMEs
supplier with a range of options for accessing
affordable financing, perhaps reducing the time
taken to collect payment and thus significantly
improving the company’s cashflow.
• Removes outstanding debts (Receivables) a
company is owed from their balance sheets
• Allows another party to assume the payment risk
on their behalf.
 Products Under SCF
 Receivables Discounting
 Forfaiting
 Factoring
 Payable Finance / Reverse Factoring
 Loans or advance Against Receivables
 Distributor Finance
 Loan or Advance Against Inventory
 Pre-shipment Finance
Contents of the Guidelines
Page
Sl. No. Particulars
Number
1. Member of Core Committee ii
2. Member of Technical Committee iii
3. Contents iv
4. Introduction 1
5. International Factoring 3
6. International Factoring: Procedures 4
7. Benefits of International Factoring in Boosting Exports and Imports 7
8. Organization and Sources of Finance 8
Membership of Factors Chain International (FCI) +International Factors Groups
9. 9
(IFG)
10. Rules for Governing International Factoring 10
11. Documentation: Invoice Processing, Schedule of Debt and Others 12
12. Assignment of the Export Invoice 12
13. Pricing 13
14. Legal Issues 15
15. Risk Involved With International Factoring and Procedures to Minimize Risk 17
16. Dispute, Fraud , Procedures for Handling and Arbitration 20
17. Annexure 23
Technical Committee on International
Factoring Dr. Prashanta Kumar Banerjee
Professor and Director (RD&C), Bangladesh Institute of Bank Management
(BIBM)

A. K. M. Mahmudul Hasan Khan

Trade Consultant, Ministry of Commerce

Md. Zakir Hossain Chowdhury

General Manager, Bangladesh Financial Intelligent Unit, Bangladesh Bank

Ataur Rahman
Secretary General, International Chamber of Commerce (ICC) Bangladesh

Md. Golam Sarwar Milan

Bangladesh Garment Manufacturers and Exporters Association (BGMEA)

Mansoor Ahmed
Bangladesh Knitwear Manufacturers & Exporters Association (BKMEA)

Ahmed Shaheen
Deputy Managing Director, Eastern Bank Ltd.

Md. Ruhul Amin

Assistant Professor, Bangladesh Institute of Bank Management (BIBM)
1. Introduction
 Percentage of open account transaction in international
trade payment is around 80% of world trade.
 ICC survey documented shifts in market momentum
towards open account terms.
 Especially, importers of North America, Europe and Asia
are moving from L/Cs to open account settlement.
 In recent years, open account trade has experienced
accelerated growth in Asia because exporters are facing
insistence by importers that trade be conducted on open
account terms.
 Bangladesh cannot be the exception in this regard.
 Like other countries, importers and exporters in Bangladesh
are growingly using documentary collection and open
account trade payment system for international trade
payment and finance.
1. Introduction
 Both banks and corporate houses face challenges like deferred
payment and default risk in case of documentary collection and
open account trade.
 Additionally banks face troubles to collect money from the
importers as documents do not go through banks rather documents
go to the importer directly.
 International factoring provides a simple solution of the above
problems.
 In international factoring, the role of the factor/bank is to collect
money owed from abroad by approaching importers in their own
country.
 A factor can also provide exporters with 100% protection against
the importer's inability to pay.
 International factoring lets exporters safely offer of competitive
credit terms to their foreign customers.
 As a result, international factoring is now a global industry with
turnover around 2.4 trillion euros having over 400 members across
more than 90 countries.
1. Introduction
 Both banks and corporate houses face challenges like deferred
payment and default risk in case of documentary collection and
open account trade.
 Additionally banks face troubles to collect money from the
importers as documents do not go through banks rather
documents go to the importer directly.
 International factoring provides a simple solution of the above
problems.
 In international factoring, the role of the factor/bank is to collect
money owed from abroad by approaching importers in their own
country.
 A factor can also provide exporters with 100% protection against
the importer's inability to pay.
 International factoring lets exporters safely offer of competitive
credit terms to their foreign customers.
 As a result, international factoring is now a global industry with
turnover around 2.4 trillion euros having over 400 members
across more than 90 countries.
1. Introduction (one)
 BIBM along with ICC Bangladesh, ADB and FCI is working
on this issues since long ago.
 Several training programs and research works were conducted
by BIBM for capacity building of bankers to launch this
international financial service.
 Moreover, in Export Policy 2015-2018, International Factoring
Services have been encouraged in financing international trade.
 These initiatives prompted regulator and policy makers to take
actions for launching this financial service.
 In this perspective, Bangladesh Bank has formed a core
committee and a technical committee to check the nitty-gritty
of this service.
 This document is the idea of these committees. It has been
prepared with a view to providing policy as well as a
framework of operation of international factoring for
practitioners as well as for the users of international factoring
2. International Factoring

 International Factoring is a simple extension of the

domestic factoring.
 International factoring means the seller and buyer are
in different countries.
Over the years, international factoring has taken
various forms with most dominant forms are
(a) Two Factor System
(b) Direct Export Factoring
(c) Direct Import Factoring
(d) Back to Back Factoring
(Details in Annex-I)
2. International Factoring
 The most common form of international factoring
“Two Factor system”.
 In this system, two factors - one in the Importer s
Country and the other in the Exporter’s country –
work simultaneously.
 Four parties are involved in an international
factoring transaction.
Exporter
Importer
Export Factor, (EF) the factor located in the
exporter’s country
Import Factor, (IF) the factor located in the
importer’s country.
International Trade Payment Methods

1.CASH-IN-ADVANCE
2. LETTERS OF CREDIT
3. DOCUMENTARY COLLECTIONS
4. OPEN ACCOUNT
5. CONSIGNMENT
 Trade Finance Method
1.Payment-in-advance
2. Working capital loans
3. Overdrafts
4. Factoring
5. Forfaiting
3. International Factoring: Procedures

 Most factoring transactions are done

through the two-factors system

 It is a two-stage procedures:
 Process Before Shipment
 Process After Shipment
Process Before Shipment
Process After Shipment
 Figure Process of Reverse
Factoring

Source: Adopted by FCI, Facilitating Open Account – Receivable

19 Finance
4. Benefits of International
Factoring in Boosting Exports
and Imports
Why International Factoring is a
Better Option over Letters of
Credit (L/C)
Loss Comparison with Bank Lending

Source: FCI
 5. Organization and Sources of
 Finance
Very few countries (e.g. Brazil)do not have
specific regulation or requirements on who can
operate factoring services.
 Almost all factoring service dominating countries
have regulations and requirements.
 Banks/financial institutions are suitable for
offering factoring services.
 Three types of organizations linked with banks/FIs
can offer factoring services:
(I) independent financial institutions offering
factoring services jointly backed by a number of
banks, financial institutions and insurance
companies,
(II) a subsidiary organization of a bank or financial
institution,
(III) a division of a bank and financial institution
 6. Membership of Factors
Chain International (FCI)

1.Associate membership : International factoring business via

FCI’s EDIfactoring platform) (One time entrance fee: 9,200 Euros
(@20% discount of 11,500) Can be amortized over 3 years and
Discounted annual fee for 3 years: 5,000 euros. After 3 years 7,500
euros.

2.Existing
affiliate members upgrading to associate
members: ( No entrance fees (previous agreement revoked),
Discounted annual fees 5,000 euros for two years. After 2 years
7,500 euros.

3. New applications for Affiliate membership (this type can network

and enroll to FCI’s education programs but cannot transact via
EDIfactoring): One time entrance fee: 4,600 Euros (@20% discount
of 5,750) Can be amortized over 3 years, Annual fee: 2,500 euros.
Rules for Governing
International Factoring
1. The General Rules for International Factoring
(GRIF)

2. The edifactoring.com Rules

3. The Rules of Arbitration

4. Specific Issues Relating to Regulation of

Factoring
8. Documentation: Invoice
Processing, Schedule of Debt
and Others
 A covering letter to the Importer indicating that
all documents are in order.
 Invoices – with the required number of copies
and signed and prepared as specified by the
importer.
 Notification (Format is provided by the IF).
 Bill of lading and the necessary copies.
 Packing list – As specified by the importer.
 Insurance Documents, Certificates of Origin,
Quality certificates and other documents
required by the Importer or the authorities of
the importers and exporters country.
 Schedule of Debts.
9. Assignment of the Export Invoice

 Exporter needs to assign the invoice to the IF very

carefully.
 Through assignment, exporter notifies the importer
about the export factoring transaction.
 The assignment of the invoice gives the right to the
IF to recover the money from the importer, which
in turn enables IF to provide the guarantee to the
EF on behalf of the importer.
 This guarantee is what enables EF to advance funds
to the exporter at the post shipment stage.
 As the invoice originates from the exporter’s
country, the EF has to ensure that the invoice is
properly assigned to the importer.
Information in Proforma Invoice
and Commercial Invoice

 Exporter’s company name, address and contact

details
 Importer’s company name, address and contact
details
 Method of Dispatch – Road, Rail, Air or Seafreight
 Type of shipment – FCL, LCL, Breakbulk or other
 Port of Loading and Port of Discharge (seaport or
airport)
 Reference Number and Date
 Delivery Date
Information in Proforma
Invoice and Commercial
Invoice
 Terms / Method of Payment
 Product Descriptions – including item codes,
product descriptions, Unit Quantity, Unit Type, Price
 IncoTerm – The selling term agreed
 Any additional information
 Bank Details – the Proforma Invoice can include
bank details requesting the buyer to make a
payment
 Name, date and signature of authorized company
representative
10. Pricing

Two cost components of Pricing:

(1) Service Charge

(2) Discount Charge

10. Pricing
 Service charges include the IF’s and the EF’s
charges and are generally computed as a percentage
of invoice value. The Exporter needs to bear these
charges. In quoting prices for the importer, the
exporter could always incorporate these factoring
charges into his selling prices.
 The EF gives his charges at the time of approving
the credit line. The total service charge and the
discount charge should be separately quoted by the
EF to the exporter and should be included in the
export factoring agreement which the EF signs with
the exporter. However, it is not obligatory for the EF
to give the exporter the respective services charges
of IF and EF separately.
Basis for Calculating Service Charge
Basis for Calculating Discount
Charge and Total Charge
11. Legal Issues in the Context of
Bangladesh

 Foreign Exchange Regulation Act

(FERA),1947

 Making of shipping Documents/ title

to the document

 General Rules for International

Factoring (GRIF)
12. Risk Involved With International
Factoring and Procedures to
Minimize Risk
 Risk related to Export Factoring
Performance Risk of the Exporter
Credit and Payment Risk of the
Import Factor

 Risk related to Import Factoring

Credit Risk of the Import
Performance Risk of the Exporter
Credit and Payment Risk of the Import Factor
Credit and Repayment Payment Risk of the
Import
13. Dispute, Fraud and
Procedures for Handling

 Dispute

 Frauds

 Consequence of Disputes and

Frauds

 Handling Disputes and Frauds

14. Arbitration

 Arbitration
Challenges Ahead
 A. Capacity Building of Supply side and Demand Side
 B. Fund (LIBOR + 3.5%)
 C. Assignment Legally Acceptable
 D. FERA 120 days,
 E. Credibility of Import Factor
 Networking to the Poor Country
 Thanks for
Patience Hearing