Final Report Draft PDF

Chapter One: Background of the
Report
1|Page
1.1 Introduction
Import financing accounts for the lion's share of a country's foreign trade financing. It needs to
be made available by banks on easy terms and conditions to facilitate the smooth import
operations in a country. Each import deal has huge amount of financial involvement, which
many import firms cannot afford to arrange from their own or institutional fund. This is why,
they are to rely heavily on banks or other financial institutions for the supply of import finance.
Keeping this in view, most commercial banks have devised import financing programs on
various terms and conditions. These banks have designed programs to offer import credit to the
clients at various stages of import transaction. In essence, import firms must possess sufficient
creditworthiness to make use of the import financing facilities of banks. A cordial bank-client
relationship is also a sine-qua-non for availing import financing of the commercial banks.
In Bangladesh, public banks have been working side by side with the foreign commercial banks
and local private banks to serve the financial market. Most of these banks are found to offer
import credit through the letter of credit mechanism. These banks have established relationship
with the foreign banks to handle import financial transactions smoothly and efficiently. The
entire import financing operations are guided and controlled by Bangladesh Bank's foreign
exchange control operations and import policy.
Bangladesh is an import-dependent country. It has to import goods for catering to the national
scarcity in the supply of essential goods, import of raw materials, accessories and machines to
foster the industrialization process. Its import expenditure has been increasing rapidly. In the
backdrop of the situation, the country is in need of efficient, diversified, effective and time
befitting import financing programs. But at present, it seems to be lacking greatly in the country.
It can be said that our banking system is lagging far behind the expectations of our import firms
in respect of import financing. Large import firms also allege that their import financing needs
cannot usually be met without syndicate import financing. As our capacity and technological
capacity and advance suggests, Bangladesh has to import a lot of things from Countries like
India and China. According to the import trade payment volume with these countries, India holds
the top position in terms of receiving payment from Bangladesh.
2|Page
Despite the fact that banks tend to have positive attitude towards providing import credit to the
clients because of comparatively less perceived risks in such credit, all import firms cannot avail
the import financing programs of banks smoothly as per their needs. The paucity of foreign
exchange at the disposal of banks often creates bottlenecks in providing LC-based import
financing. In case of margin to be paid to the banks by clients for opening letter of credit,
commercial banks are found to show discriminatory behavior. LC margin is found to vary from
10 to 100 percent depending upon the bank-client relationship and perceived risk in each export
transaction. Clearly, this is contrary to the interest of small importers and natural justice. The
import of goods in planned quantity at the right time is inhibited due to strict foreign exchange
and customs rules.
1.2 Objective of the Report
1.2.1 Broader Objectives
o To bring into focus the different import financing programs offered by the commercial
banks of Bangladesh.
o To examine the different categories of import financing payments that is in vogue in the
country.
o To identify the problems faced by Bank Al Falah and customers regarding import
financing.
o To identify the biggest success or failure factors of Bank Al Falah Motijheel Islamic
Banking branch.
o To suggest some measures that may help improve the overall import financing in
Bangladesh and in Bank Al Falah. The current loopholes in the overall system may
require new trade financing packages that will make the situation better for small
importers in their business.
o To find the statistical relationship between the availability of trade financing services in
BAFL, Motijheel Islamic Banking Branch and the import performance of a general
importer in its transactions with Bank Al Falah Motijheel Islamic Banking branch.
3|Page
o To identify the existent level of relationship between the financing availability and the
performance of the importers who are doing business with Bank Al Falah Motijheel
Islamic Banking branch. The accomplishment of this objective will expose the necessary
steps to boost up the performance of the existing trade financing programs.
1.2.2 Specific Objectives
The specific core objective of the report is to expose any existing relationship between the
quality of trade financing services provided by Motijheel Islamic Banking Branch of Bank Al
Falah Limited Bangladesh and the customers performance in the trade business of Bank Al
Falah Motijheel Islamic Banking branch. The analysis will reveal the most influential trade
finance service factor of BAFL (Motijheel Islamic Banking Branch) in the trade success of an
average firm doing foreign trade business in Bangladesh. That will help the banks identify its
weak links for the branch of the bank.
1.3 Origin of the Report
The B.B.A program under Department of Finance, University of Dhaka requires submitting an
internship report on a specific topic determined by the internship course teacher. According to
this rule, honorable internship supervisor Junnatun Naym assigned me an internship report on
"Trade Financing activities of Bank Al falah Limited, Motijheel Islamic Banking Branch,
Dhaka" for the completion of my internship credit.
1.4 Scope of the Report
This report mainly focuses on the trade financing services provided by Islamic Banking Branch
of Bank Al Falah Limited, Bangladesh. The present scenario of trade financing of that
particular bank has been mostly emphasized in the report. In doing so a comparative analysis
has been initiated among different sized clients, with varied operations and trade finance
requirements. Pran Dairy and Foods Limited, Square Pharmaceuticals Limited, Square Textiles
Limited and Walton BD are among the biggest customers of the trade services provided by Bank
4|Page
Al Falah Limited. A comparative analysis will show how the quality of service provided by
Motijheel Islamic Banking Branch of Bank Al Falah Limited has affected the success or failure
of the top 30 trade financing clients of that particular branch of that particular bank. This is the
core focus of the report regarding the trade finance activities operated in Motijheel Islamic
Banking Branch of Bank Al Falah Limited.
1.5 Methodology
1.5.1 Sources of Data
The report mainly used secondary data from various sources. As the report has mainly focused
on international trade performance of the trade financing service clients of Bank Al Falah
Limited, the export and import data of the clients was available from the stock reports of the
Bank Al Falah Motijheel Islamic Banking branch clients that they submit to the Credit
department of the bank every month. The parameters of bank service were given score from the
data available from the Bank Al Falah Motijheel Islamic Banking branch servers. Some
parameters are given scores from the credit files registered for the particular client of the
Motijheel Islamic Banking Branch, Bank Al Falah Limited.
Main Sources of the Data:
Bank Al Falah servers

Bank Annual report
Relevant journals
Relevant research papers
Credit files of BAFL
Bangladesh Bank and BBS Website
Foreign Articles about Trade Finance
Other Relevant Websites
5|Page
1.5.2 Methods Used For the Core Analysis
The existence of any relationship between the trade finance service provided by the Motijheel
Branch of Bank Al Falah Limited and its top 30 customers' success is the main question of the
analysis. Here, through some variables, the answer to the question will be exposed- "How much
convenient Bank Al Falah's trade financing services are for its top 30 customers?" Then the
analysis exposed any existent relationship between the convenience and the success of foreign
trade customers using these convenient services.
For the analysis, the proxy used for foreign trade success was the yaerly volume of trade finance
service availed by top 30 customers of BAFL, Motijheel Islamic Banking Branch. This was the
dependent variable of the analysis.
As the independent variable, the service that Bank Alfalah provides for its trade finance
customers has been used. I used three different proxy variables for banks level of service. They
are: The limit Bank Al Falah provides for its funded trade finance customers, The interest/
Charge Bank Al Falah takes from its different customers, The time a trade financing proposal
takes to get approval at BAFL. All the variables discussed above was attributed values according
to the data taken from the BAFL server for the years 2012 to 2015.
Dependent variable:
The level of foreign trade finances BAFL top 30 trade financing customers took from
Bank Al Falah for 4 years.
Independent variables:
Financing Limit provided by BAFL to its customers (Higher limit, Higher Score in
customer service )
Commission charged by BAFL from its customers (Higher commission, Lower Score in
customer service )
The time a trade financing proposal takes to get approval at BAFL (Higher time
requirement, Lower Score in customer service)
6|Page
These are three common measures of customer convenience in the trade financing scenario of
BAFL. A simple linear regression analysis uncovered the extent of relationship between the trade
finance customer service standard of BAFL and the level of actual foreign trade financing
volume taken by the top 30 trade financing customers of BAFL.
The relationship among the variables has been exposed in the analysis using normal linear
regression program in MS Excel. But Normal linear regression can accurately measure upto a
different equation for each of the years taken for the analysis. For a combined regression
equation for the four years used in the analysis, the Stata program of data analysis has been used.
1.6 Limitations of the Report
The report was conducted in the midst of various constraints. The following limitations of the
report are worth mentioning:
o It has been found difficult to elicit classified statistics on import financing from the
banks. Other publications also do not provide detailed data on various aspects of import
financing. This made the research efforts very difficult.
o This report had to be completed in the midst of serious workloads from the internship
office. As such, ample devotion was not possible to complete the report although given a
good amount of time.
o There is a severe shortage of research articles on import financing not only in the context
of Bangladesh, but also from the perspective of other countries. This made the task of
literature review on the research issue in a systematic way quite arduous.
o The core analysis part of the report mainly focuses on the data and customers of one
particular bank only. This is why the report lacks reliability of supreme extent.
o The report could not cover all important aspects of import financing of commercial banks
operating in Bangladesh due to no availability of concerned data.
7|Page
Chapter Two: Basic Theoretical
Insight on Trade Financing
8|Page
2.1 Definition of Trade Finance
In its simplest form, an exporter requires an importer to prepay for goods shipped. The
importer naturally wants to reduce risk by asking the exporter to document that the goods have
been shipped. The importers bank assists by providing a letter of credit to the exporter (or the
exporter's bank) providing for payment upon presentation of certain documents, such as a bill of
lading. The exporter's bank may make a loan to the exporter on the basis of the export contract.
The type of document used in the process depends on the nature of the transaction and how
evidence of performance can be shown (i.e. bill of lading to show shipment). It is useful to note
that banks only deal with documents and not the actual goods, services or performance to which
the documents may be relating to.
Trade finance includes such activities as lending, issuing letters of credit, factoring, export credit
and insurance. Companies involved with trade finance include importers and exporters, banks
and financiers, insurers and export credit agencies, as well as other service providers. Trade
finance is of vital importance to the global economy, with the World Trade Organization
estimating that 80 to 90% of global trade is reliant on this method of financing.
Trade form works by reconciling the divergent needs of an exporter and importer. While an
exporter would prefer to be paid upfront by the importer for an export shipment, the risk to the
importer is that the exporter may simply pocket the payment and refuse shipment. Conversely, if
the exporter extends credit to the importer, the latter may refuse to make payment or delay it
inordinately. The most common solution to this problem is through a letter of credit, which is
opened in the exporter's name by the importer through a bank in his or her home country. The
letter of credit essentially guarantees payment to the exporter by the bank issuing the letter of
credit upon receipt of documentary proof that the goods have been shipped. Although this is a
somewhat cumbersome process, the letter of credit system is one of the most popular trade
finance mechanisms.
As the range of intermediary services from the banks are getting expanded day by day, a proper
definition of trade financing is getting more and more elaborated day by day.
9|Page
Providers of trade finance:
Figure 01: Providers of Trade Finance (Source: tradefinanceanalytics.com)
Syndicates
Trade
Banks Finance
Houses
Suppliers
Buyers
BORROWER
Trade finance is used when financing is required by buyers and sellers to assist them with the
trade cycle funding gap. Buyers and sellers also can also choose to use trade finance as a form
of risk mitigation. For this to be effective the financier requires
Control of the use of funds, control of the goods and the source of repayment
Visibility and monitoring over the trade cycle through the transaction
Security over the goods and receivables
Trade finance helps settle the conflicting needs of the exporter and the importer. An exporter
needs to mitigate the payment risk from the importer and it would be in their benefit to accelerate
the receivables. On the other hand the importer wants to mitigate the supply risk from the
exporter and it would be in their benefit to receive extended credit on their payment. The
function of trade finance is to act as a third-party to remove the payment risk and the supply risk,
whilst providing the exporter with accelerated receivables and the importer with extended credit.
The function of the banks as a provider of the trade finance is on the rise with the increasing
regulations imposed by the governments all over the world.
10 | P a g e
Users of trade finance:
Figure 02: Users of Trade Finance (Source: tradefinanceanalytics.com)
Manufacturers Importers
Traders
Producers
Exporters
TRADE FINANCIER
Almost all the ends of the economy need financing when they deal with foreign goods. In
practice, there are hardly any party that has the time and financial capability of dealing with
counterparties that deal from a different country. In cases like these, although companies have
the financial solvency to complete the transaction with their own financing, they have to take the
help of the trade financing facilities provided by the commercial banks. Because, the trade
financing services of the banks save time and give the convenience to focus on other important
aspects of the business simultaneously. The breach of contract among the parties during recent
decades has forced the central banks all over the world to be stricter in the foreign trade
operations between the firms of different countries.
So drawing a perfect line among the users of trade finance in now more difficult than ever
before. More and more groups of stakeholders are emerging as the user of trade financing
services from banks and other Non-Bank financial organizations. Better money exchange
facilities to the remote corner of the world are creating more edges for the financers of
international trade.
But with the increasing opportunities of serving more people, banks now have the increasing
responsibility to exhibit expertise in more and more diverse areas that increase the transaction
cost of the bank too.
11 | P a g e
2.2 Trade Finance VS Trade Credit
The principal alternative to bank trade finance is inter-firm trade credit between importers and
exporters, which is commonly referred to as trade credit. This includes open account
transactions, where goods are shipped in advance of payment, and cash-in-advance transactions,
where payment is made before shipment. Inter-firm trade credit entails lower fees and more
flexibility than trade finance, but leaves firms bearing more payment risk, and potentially a
greater need for working capital. Hence, the reliance on inter-firm trade credit is more likely
among firms that have well established commercial relations, form part of the same multinational
corporation and/or are in jurisdictions that have reliable legal frameworks for collection of
receivables. Firms ability to extend trade credit is supported by possibilities to discount their
receivables, e.g. via factoring, and the availability of financing from banks and capital markets
not directly tied to trade transactions. Firms can also mitigate payment risk by purchasing trade
credit insurance.
But as the range of trading areas of the firm is increasing day by day, the method of trade credit
is becoming more and more vulnerable day by day. The formal trade financing facilities by the
commercial banks are also getting rising importance from the importers and exporters all over
the world.
2.3 The Dependence of External Finance in

Foreign Trade:
The literature initially introduces the notion of financial dependence in the Heckscher-Ohlin
Samuelsons international trade model. Using two-country two-sector models, this approach
reveals that differences in financial development give rise to comparative advantages and mutual
gains from specialization and trade, even when countries have identical endowments, consumer
preference and technologies. The crucial aspect of these theoretical contributions is the
assumption that, in each country, the two sectors differ in financial needs and degrees of
financial dependence.
12 | P a g e
The model developed by Bardhan and Kletzer (1987) focuses on an important function of
financial systems that consist to mobilize savings and to allocate funds to investors. The authors
assume that in each country, one sector produces an intermediate good while the other produces
a final consumable good. Producing the final consumable good requires the use of the
intermediate good as an input and committing this resource one period before the output
becomes available. The final consumable good sector thus requires external funds to finance
working capital. However, due to information asymmetries between the concerned firms and
funders, external financing entails moral hazard problems. In this context, a weekly developed
financial system is unable to alleviate information asymmetries and implies rationing.
Conversely, a highly developed financial system makes it possible to reduce frictions and finance
working capital more efficiently. As the intermediate goods sector does not require outside
financing, financial development is only beneficial to the final consumable good sector. Finally,
the relatively more financially developed country has a comparative advantage in the final
consumable good while the relatively less financially developed country specializes in the
intermediate good. Beck (2002) extends this analysis by showing that trade patterns depend on
differences in financial development even when both sectors rely on external financing.
The theoretical literature also considers another function of financial systems: the diversification
of risk. In Baldwins (1989) model, one of the two sectors in each country is assumed to face
demand shocks while the other sector does not. Unlike the latter, the former thus requires access
to the financial system to diversify risk. Because it allows for a decreased risk premium, a high
level of financial development primarily benets the risky sector. Therefore, the pattern of trade
between the two countries crucially depends on differences in financial development. Having a
relatively well developed financial system allows a country to specialize in the risky good while
having a weakly developed financial system leads to specialize in the non risky good.
All the empirical evidences presented above and the recent events of malpractices in this sector
are putting more and more force in the necessity of formal trade financing providers every day.
Banks, known as a partial provider of trade financing services two or three decades ago, are now
facilitating every step of the foreign trade transactions between parties from remote distances.
The volume of daily trade and efficiency of this sector are also boosted by various facilities
provided by banks.
13 | P a g e
Chapter Three: Services Provided
by BAFL & General Classification
14 | P a g e
3.1 Bank Al Falah Limited and Its Own Trade
Financing Services
3.1.1 About Bank Al Falah Limited
Bank Al falah Limited was incorporated as a public limited company on June 21, 1992 under the
Companies Ordinance 1984. The Bangladesh operations started in 2005 with the acquisition of
Shamil Bank of Bahrain. Its banking operations commenced from November 1, 1997. The Bank
is owned and operated by the Abu Dhabi Group and is the sixth largest bank in Pakistan.
The Bank does business through a network of over 500 branches in more than 170 cities in
Pakistan. The Bank has an international presence in Afghanistan, Bangladesh, Bahrain and a
representative office in the UAE. Since 2005, Bank Al falah has grown from a single branch
operation to seven branches across Dhaka, Chittagong and Sylhet. The Bank provides financial
solutions to consumers, corporations, institutions and governments through a broad spectrum of
products and services, including corporate and investment banking, consumer banking and
credit, commercial, SME, agro-finance, Islamic and asset financing. The Bank looks ahead with
optimism at the future it aims to continue investing in its core strengths to provide best in
class products and services to its diverse range of clients.
Bank Al-Falah offers a wide range of trade services designed to meet a range of its corporate
clients needs. It has industry specialists who are professional and seasoned to make sure that all
your trade finance requirements are taken care of with precision and skill. The team is strongly
supported by a wide and effective correspondents network spread worldwide. Its team of
specialists goes the extra mile to ensure that our customers` experience with the below
mentioned services is nothing but exceptional.
Vision of BAFL:
To inspire and empower people to do things differently and shape their own path in life and
business
15 | P a g e
Mission of BAFL:
We look at the market with fresh eyes to find new opportunities, and seek new ways of enabling
our customers to succeed and advance the world of finance.
Values of BAFL:
We do all we can to understand and anticipate what will help our customers find their own way
and achieve their ambitions. We do things differently, challenging the status quo to find new and
better ways to move ourselves and our customers forward. We always act with integrity and
transparency in everything we do. It is the cornerstone of our business and brand.
3.1.2 Range of Trade Financing Services by BAFL
LC Based Financing:
Import financing to the clients is basically extended by means of letter of credit mechanism.
Under this method, letter of credit is opened in favor of import firm to provide financial
guarantee to the foreign supplier of goods or export firm regarding the payment of necessary
import dues to the beneficiary on compliance of certain terms and conditions as stipulated in the
letter of credit. To avail LC-based import financing, the importer is required to follow certain
formalities as specified in the exchange control rule of Bangladesh Bank. At first, the import
firm has to apply for the issue of Letter of Credit Authorization Form (LCAF) to its bank. The
bank will issue LCA Form if it is satisfied regarding the business status and reputation of the
applicant. It must be accompanied with the following required documents:
Pro-forma" Pro-forma Invoice supplied by the export firm or indent issued by indenting firm.
Import Registration Certificate (IRC) duly renewed.
Marine Insurance Policy issued by an approved General Insurance Company regarding the
coverage of marine risks of the imported merchandise with money receipt and KHA form.
Assigned documents of the applicant that the bank is authorized to have the pledge of
document and goods covered by the credit.
IMP form duly signed.
16 | P a g e
Attested copy of TIN and Vat Certificate.
Then the bank will evaluate the LCA Form along with the supporting documents to ensure that
the financial position and credit worthiness of the importing firm is quite satisfactory and the
imported merchandise has good demand in the market. Meanwhile the credit report of the
overseas supplying firm will also be procured through the exporters' bank or negotiating bank.
Based on satisfactory report from the Trade Financing Department, the bank authority will
accord permission to open letter of credit subject to LC margin decided by the bank authority
depending upon the bank-client relationship and business reputation of the client. The finalized
letter of credit is then typed in several copies so that this can be sent to the exporters' bank or any
other negotiating bank and the import firm. The letter of credit must be signed by the authorized
executives of the bank before dispatching it to various parties through registered air mail or any
other telecommunication mode. After receiving LC the exporter bank will ask the export firm to
verify LC conditions thoroughly to make sure that these are in conformity with the import/export
contract. Any point of discrepancies needs to be identified, raised and settled with the import
firm through the issuing bank of LC. If all points of disagreement are settled amicably between
the export firm and importer, then the exporter will confirm the letter of credit through its bank.
The confirmed letter of credit will then guide all phases of the import transaction. In this regard,
the export firm should be extremely careful to ensure strict compliance of letter of credit terms
and conditions to complete the transaction successfully and receive the payment from importers.
The payment is made in foreign exchange as specified in the letter of credit. For this purpose, the
importer is asked by the concerned bank to deposit the balance amount after deducting LC
margin from total amount of payment to be made to the foreign supplier. The importer is also in
need of paying interest due on credit and other charges to the bank. It is the responsibility of the
issuing bank to convert the local currency into specified foreign currency for onward payment to
the export firm by using banking channel.
Non-LC Based Financing available

Packing Loan
Pre-shipment financing against irrevocable LCs are available. Company could apply packing
loan financing under L/C at our branch if encounters financing gap due to the problems of stock,
17 | P a g e
manufacture and shipping after the L/C is received. Moreover, Company could refund the loan
after goods are shipped.
Export Letter of Credit Confirmation/ Discounting
Export Letter of Credit Confirmation: ICBC is able to confirm export LCs, giving our guarantee
of payment for document presented in compliance with the credit.
Export Letter of Credit Discounting: With Export Letter of Credit Discounting, documents, if
found to contain no discrepancies after checking, can be negotiated and the discounted value of
the invoice can be advanced.
Forfeiting
Forfeiting service is provided by our branch after the credits of deferred payment from issuing
bank is received if company needs financing
Import T/T Financing
The import T/T financing is offered when company chooses COD to make payment to supplier
and encounters capital turnover.
Invoice Financing
Invoice Financing of non-LC, invoice-based trade transactions is facilitated by discounting on

export receivables against the presentation of invoice and transport documents, evidencing sales
of goods on open account basis.
Import Factoring
Factoring is designed for those companies who choose sell on credit or documentary against
acceptance to make import trade and need to increase trust. Our branch could offer credit
guaranty and other financial management service.
Import Factoring Financing
We are able to provide financing against Import Factoring and pre-pay for import for those
companies who have already applied the import factoring service at our branch.
18 | P a g e
3.2 General Classification of Trade Financing
There are four general ways a bank can finance foreign trade for its clients. They are:
Open account
This is the trade financing option that involves least amount of risk for the importers of various
goods as payment is fully made only after the ordered goods are received from the exporters.
Documentary collection
The option of offering documentary collections is another low risk available payment option for
concerned importers as payment is, in fact, implemented in exchange for the valuable documents
which hold the important title to the goods.
Documentary credit
A documentary credit trade financing facility is actually a written undertaking by a selected
bank which is issued on the particular instructions of a foreign importer to an exporter to effect
payment for the goods under stated conditions. However, importers require facilities to apply for
documentary credits.
There are various options for taking the advantage of documentary credit:
Standby
Transferable
Back to Back
Revolving
Red Clause credits
Advance payment
This is regarded among the riskiest available trade finance options for the associated importers
because the trade payment comes into implementation before getting the good originally
received.
There are other sources of giving trade finance services by the banks to its customers. Those
services include:
19 | P a g e
Documentary collection for export
Documentary collections methods offer a pretty simple, at the same time cost-effective and
secure means of trading exportable goods internationally. If your concerned buyer does not issue
general documentary credits, collections offer the next available safest alternative to start
account trade.
During a collection, banks act as intermediaries, ensuring that documents are only released
against payment or acceptance. Collections offer the seller comfort that they will not lose control
of the goods without payment, or the promise to pay.
Meanwhile, from your buyers perspective, collections offer a simple and cheaper alternative to
the DC and hence may enable you to negotiate better terms. We offer a choice of documentary
collection methods, each offering you peace of mind while helping you to reduce costs. These
include:
Documents against payment (D/P)

Documents are released to importers upon payment.
Documents against acceptance (D/A)

Documents are released to importers against their promise to pay.
Documentary collection confirmation

With a DC contract confirmed by the concerned Commercial Bank, the trader can enjoy the paid
security of payment assurance from both the DC Issuing assigned bank and the assigned
Commercial Bank, which is also called the confirming bank in some countries, helping you to
reduce bank and country risk. If your documents are presented in compliance with the terms and
conditions of the DC, payment from Commercial Bank will be final.
Documentary collection advice

Commercial Bank can check the authenticity of DCs issued in your favor, enabling you to start
arranging shipment quickly by pre-advising the full text of the DC to you by telephone or fax.
Our electronic advice service provides electronic copies of all incoming SWIFT-based export
DCs and advices via email, helping you improve communication and efficiency.
20 | P a g e
Chapter Four: Overall Trade
Finance Landscape of Bangladesh
21 | P a g e
4.1 Categorical Division of Import Payment
Figure 03: Import Payments by Category of Financing: (Taka in Crore)

Import under IDB Imports (C&F)
Loan 6%
4%
Import under
Loans and
Other Unclassified
Grants
0%
1%
Import under Cash

89%
The Pie chart presented above is a depiction of categorical division of trade finance payments in
Bangladesh for four fiscal years from 2010-11 to 2013-14. It is quite obvious that the largest
amount of trade finance payment is done through importing under the cash system. Import of the
EPZs in Bangladesh is another category of import that should be mentioned here because this
sector holds the second most significant source of categorical import.
Table 01: Categorical payment of Trade Finance (Source: ICMAB Trade Financing
Journal 2015)
(Taka in Crore)
Category of Total Average
Payment percentage of
2010-2011 2011-2012 2012-2013 2013-2014 four years
Import
under Cash 139,995.30 147,762.80 213,849.90 247,665.20 749,273.20 89.20%
Import
under
Loans and 578.00 376.40 322.10 1,711.50 2,988.00 0.36%
22 | P a g e
Grants
Import
under IDB
Loan 4,782.20 5,764.90 9,651.30 13,950.70 34,149.10 4.06%
Other
Unclassified
Imports
(C&F) 509.70 564.40 931.50 862.20 2,867.80 0.34%
Import of
EPZ (C&F) 8,956.00 9,774.90 15,273.10 16,774.30 50,778.30 6.04%
Grand
Total 154,821.20 164,243.40 240,027.90 280,965.70 840,058.20 100%
From the data collected, it is quite obvious that importing foreign trade under cash (C&F) is the
prime form of economy's financing imports contributing 89.20% of the total import payment
available in Bangladesh. Then It is followed by the imports of EPZ (6.04%), then importing
under IDB loan (4.06%) and import under various other loans and grants (0.36%) serially.
Basically the commercial banks provide trade finance to the imports under cash through various
ways, although mainly through letter of credit mechanism.
Import works under IDB loan, another main source, is mainly utilized in our country for meeting
different public sector imports. The local and foreign export firms operating in EPZ in our
country perform their import operations under back to back L/C facility. Foreign trade operations
under loans and grants are basically used by the public sector of Bangladesh but there are some
private sector import firms that also conduct their import operation regularly under this very
financing mode. Another important factor to be noticed here is the increasing share of the Import
from the IDB Loans. From the base year level of 4 thousand crores taka, the sector rose to almost
14 thousand crores level.
23 | P a g e
4.2 Country Based Division of Trade Payment
Figure 04: Import Payments of Bangladesh with top 10 countries
India People's Republic

14% of China
17%
Other countries
45%
Singapore
5%
Japan
Hongkong 4%
Malaysia USA South Korea Taiwan 3%
4% 2% 4% 2%
The figure presented above is reflection of our dependence on India and China for the parties
concerned with foreign trade in Bangladesh. Almost 30% of our total external payments go to
these particular two countries of Asia. Other than the countries in Asia, USA has a significant
share with 2% of the total payment. There is a detailed explanation of the above mentioned chart
in the table presented above. In case of China, where the import payment was 3137 million US
dollars in the fiscal year of 2009-10, the payment rose to almost double (6440 million US
dollars) in the fiscal year 2013-2014. This sudden rise of China as the centre of our main import
payment is due to the technological advances they made through these periods. On a different
note, the level rose in case of India because of our increasing dependence on them for various
agricultural and consumer goods. Import payments to Japan and Korea come mainly from the
sources of superior technological goods these two countries produce in their country.
24 | P a g e
Table 02: Country Wise Payment Schedule from Bangladesh (Source: Bangladesh Bank
Annual foreign payment journal)
(In Million US Dollars)
Major
countries
(In
Million 2009- 2010- 2011- 2012- 2013- Average
USD) 2010 2011 2012 2013 2014 Total %
India 3393 2864 3214 4569 4743 18783 13.71%
People's
Republic of
China 3137 3452 3819 5918 6440 22766 16.61%
Singapore 1273 1768 1550 1294 1710 7595 5.54%
Japan 832 1015 1046 1308 1455 5656 4.13%
Hongkong 821 851 788 777 703 3940 2.87%
Taiwan 478 498 542 731 792 3041 2.22%
South
Korea 620 864 839 1124 1544 4991 3.64%
USA 490 461 469 677 709 2806 2.05%
Malaysia 451 703 1232 1760 1406 5552 4.05%
Other
countries 10134 10031 10239 15500 16014 61918 45.18%
Total 21629 22507 23738 33658 35516 137048 100%
The table presented above clearly shows that China is the most influential supplying country that
represents 16.61 percent of our total imports for different Bangladeshi imported foreign goods
during the period from 2009-10 to 2013-2014. India, not surprisingly, has secured the second top
position (13.71%), where Singapore got third (5.54%), Japan got fourth (4.13%) and Malaysia
got fifth (4.05%) position in the quantity of supplying imported goods to Bangladesh. In fact,
major portion of these import expenditures are made to the Asian countries. Affluent western
25 | P a g e
countries like European countries occupy very insignificant position in the role of supplying
nations of Bangladeshi imported goods. This is basically the result of cost considerations that
Bangladesh has to do.
4.3 Bank Based Division of Trade Financing
Table: 03 Volume of LC of Local Government Banks (All figures in Million Taka)

Name of the Import LC Opened Total of Two Average
Bank Years Percentage
2012 2013 594765 38.3%
Sonali Bank 307478 287287 385568 24.83%
Janata Bank 197285 188283 458396 29.51%
Agrani Bank 268768 189628 114371 7.36%
Rupali Bank 69263 45108 1553100 100%
Total 842794 710306 594765 38.3%
The table presented above describes that in Bangladesh, two types of commercial banks are
basically engaged in opening letter of credit for the various sectors' import firms in our country.
Four governments owned public banks have very strong involvements in the creation of import
LC opening in our economy despite the existence of some variations.
Figure 05: Yearly Ups and Downs of the LC opening of Government Banks
350000
300000
250000
200000
2012
150000
2013
100000
50000
0
Sonali Bank Janata Bank Agrani Bank Rupali Bank
26 | P a g e
The government owned banks in the country have also come forward in this perspective.
Among the public banks share of LC opening, Sonali Bank Limited has the highest
percentage with 38.30% of the total LC opening of the public banks portion. The next
positions are taken by Agrani Bank Limited with 29.51%, Janata Bank Limited with
24.83% and Rupali Bank Limited with 7.36% of the overall share of the public banks
LC opening.
On a different note, it should be mentioned as a symbol of caution for the economy that
the total volume of LC opened by the government bank has decreased in the year 2013
compared to the year of 2012. The lower involvement of the government banks in the
financing of the foreign trade, at the same time, indicates growing dependence on the
private sector for the financing of foreign trade.
Table: 04 Volume of LC of Foreign Commercial Banks (Source: Bank and Financial

Institution Division, Ministry of Finance, GOB Statistics)
(All figures in Million Taka)
Name of the 2012 2013 Total of Two Average
Bank Years Percentage
Standard
Chartered Bank 126085 169019 295104 29.74%
Habib Bank 3576 2793 6369 0.64%
State Bank of
India 2245 4551 6796 0.68%
Commercial
Bank of Ceylon 19568 23439 43007 4.34%
National Bank
of Pakistan 4477 6822 11299 1.14%
City Bank N. A 69699 56193 125892 12.69%
Uri Bank 8678 9747 18425 1.86%
HSBC 195900 278996 474896 47.86%
Bank Al Falah 4899 5496 10395 1.05%
27 | P a g e
Total 435127 557056 992183 100%
From the total contributions of foreign banks in this regard, HSBC tops this list with contributing
47.86%, which is followed by Standard Chartered (it contributes 29.74%), City Bank N.A.(it
contributes 12.69%), Commercial Bank of Ceylon ( it contributes 4.34%) and other foreign
banks represented less than 2% of overall L.C. opening of that category. The success of HSBC,
Standard Chartered Bank Limited and Citi Bank N/A can be largely attributed to the global
Table 05: Import LC opened by the Local Commercial Banks in Bangladesh

(All figures in Million Taka)
Name of the Bank Import LC Opened Total of Two years Average Percentage
2012 2013
Pubali Bank 90569 108120 198689 4.61%
Uttara Bank 33038 35419 68457 1.59%
AB Bank 79463 100370 179833 4.18%
The City Bank 43474 58420 101894 2.37%
Islami Bank 301207 284587 585794 13.6%
IFIC Bank 71517 80710 152227 3.53%
UCBL 90920 94844 185764 4.31%
ICB Islami Bank 549 992 1541 0.04%
EBL 100639 103171 203810 4.73%
NCC Bank 55044 45283 100327 2.33%
Prime Bank 174384 168532 342916 7.96%
Southeast Bank 99509 111537 211046 4.9%
Dhaka Bank 71377 76650 148027 3.44%
Alarafa Islami Bank 76112 71930 148042 3.44%
Social Islami Bank 34975 42712 77687 1.8%
Dutch Bangla Bank 83434 108878 192312 4.46%
Merchatile Bank 95008 113434 208442 4.84%
28 | P a g e
Standard Bank 45356 48500 93856 2.18%
One Bank 53831 57690 53831 1.25%
Exim Bank 128446 143314 271760 6.31%
Bangladesh
Commerce Bank 7389 5426 12815 0.29%
Mutual Trust Bank 36945 39426 76371 1.77%
Premier Bank 44165 35357 79522 1.85%
Bank Asia 99414 106746 206160 4.79%
Trust Bank 38429 43138 81567 1.89%
Shahjalal Islami
Bank 82341 111837 194178 4.51%
Jamuna Bank 55907 57705 113612 2.64%
Brac Bank 5610 11203 16813 0.39%
Total 2099052 2208241 4307293 100%
It is depicted in the above presented table that overall twenty eight private commercial banks in
Bangladesh have played very central role in opening letter of credit for the various import firms
from different sectors. Among them, the contribution of Islami Bank of Bangladesh was the
biggest (13.6%). The list then includes Prime Bank (with 7.96% share), EXIM bank (with 6.31%
share), Southeast Bank (with 4.90% share) Merchantile Bank (with 4.84% share), Bank Asia
(with 4.79% share), EBL (with 4.73% share), Pubali Bank (with 4.61% share), Shahjalal Islami
Bank (with 4.51% share) and AB bank (with 4.18% share) which were also found to have major
contributions and involvements in import LC opening. Other private commercial banks which
have not been mentioned here have less than 4% shares, which are very insignificant, to L.C.
opening of this segment. The above scenario exists in our economy due to fewer amounts of
perceived risks existing in import financing. It is obvious and true that opening letter of credit
does not necessarily refer to the extension of the total import financing by commercial banks
involved in the LC opening. When the associated import firms are totally incapable of making
payments to the foreign suppliers even after complying with all the LC conditions and provisions
of import contracts, the commercial banks, associated in the import trade, generally come
forward to extend an import based loan to the concerned incapable import firms.
29 | P a g e
4.4 Comparative Trade Picture of Bangladesh
Figure 06: Comparative Trade Picture of Bangladesh in 2015 (In Billion Taka) (Source:
BBS publication of Foreign Trade Data)
450
400
350
300
250 Import Volume
200 Export Volume

Trade Deficit
150
100
50
0
1-Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep
The figure presented above is the depiction of comparative trade picture of Bangladesh. They are
the total foreign trade volume of Bangladesh for several months. The gap between the export
volume and the import volume is the trade deficit experienced by an economy. The trend of the
figure obviously shows that Bangladesh has consistently experienced trade deficit in the year
2015. But the level of deficit reached its peak during the month of April because the level of
export rose to a very high point in that particular month.
On the other hand, the level of import showed somewhat consistent picture. Actually, in all the
months of 2015 presented here, the fluctuation in the trade deficit mainly results from the rise of
the export. Because in most of those months presented here, the level of total import of the
country remained to somewhat same level. This statement can be again verified by the July, 2015
case presented here. The trade deficit stooped to the lowest level during this July 2015. But what
is the reason for that? The volume of import, like all other months remained at the same around
200 billion taka level while the volume export touched the floor of 250 (the ceiling goes to even
to the level of 400).
30 | P a g e
Chapter Five: Analysis of Trade
Financing Service Factors of BAFL
31 | P a g e
5.1 The Raw Input Selection
The core objective of the report is to reveal any existent relationship between the volumes of
trade financing taken by the top customers of Bank Al Falah Limited and the quality of the
service provided by BAFL. So, the yearly volume of the trade financing services taken by the
customers is the dependent variable of the analysis. On the other hand three different measures of
BAFL services (the level of limit provided to the selected customers of BAFL, profit charged by
the bank from those customers and time consumed for the approval) are the independent variable
of the analysis.
Table 06: Raw input set of the analysis for 2012
Name of the Company/ Client Foreign trade Limit Profit of Time Taken
dealing volume Provided Bank (In for approval
with BAFL (In by BAFL annual (Measured
Million Taka) (In Million percentage) in working
Taka) days)
ACS Tex 56.32 450 12 7
ACI Godrej 311.11 500 7.5 6
ANWAR Ispat Limited 118.89 250 9 10
ANWAR Landmark Limited 121.21 130 7.5 8
Bombay Sweets & Company
Limited 221.11 250 6.5 12
Tricepack LTD 176.43 245 7.25 8
GDS Chemicals Bangladesh
Limited 27.98 280 11.75 8
Jaantex Industries Limited 67.75 400 14.5 9
PRAN Foods Limited 66.92 250 7.25 7
Square Pharma 121.89 300 10 9
Square Textiles 143 350 7.5 9
Walton Hi-Tech 367.78 480 8 14
32 | P a g e
Tanveer Oils 127 475 9.25 7
Tanveer Foods 151 475 7.5 7
City Sugar 202 475 8 7
Farzana Oils 109.9 475 9 7
SHAMPA Flour Mills Limited 121.24 243 7.25 7
Kamal Yarn Limited 54.09 485 11.25 9
Kamal Trade International 61.98 485 11.25 9
Sal-Sabeel Cars 54 130 12 11
Greenland Auto 31 180 12.25 13
Seven Circle Cements 109.9 110 6.5 10
KSRM Steel Plants Limited 49.99 200 11 12
Anwara Trade International 12.21 200 13.75 13
Apex Limited 12.21 160 13.25 7
RBS International 51.11 190 10.5 10
AMAN Tex Limited 38 130 10.25 7
AKBAR Cotton Mills Limited 26.09 120 16.5 12
MACCA Trading 42.43 200 12.25 7
SR International 5.12 150 13.75 7
This was the basic set of collected data for the analysis for the year 2012. Similar kind of data set
was made for next three years 2013, 2014 and 2015. But the basic problem of doing regression
analysis with this kind of data is the existent variance between their units.
For example for an average customer's volume of foreign trade finance service taken in a year
goes up to 400 million for a single year where the value in the profit variable can go up to 14 or
15 percent. This huge difference among the values of dependent and independent variables make
sure that the results of the basic regression analysis get distorted in some ways. The equations of
the regression analysis do not show the proper picture of interrelated movement among the
variables.
33 | P a g e
5.2 Scoring the Values of the Variables:
5.2.1 Scoring the Trade Financing Volume Variable:
Table 07: Scores of the dependent variable
34 | P a g e
For a better result from the regression analysis, the yearly volume of trade financing for each of
the customers has been converted into a comparative score out of 10 keeping in mind the limit
provided to that particular customer of BAFL. For example, if a customer has a yearly volume of
trade financing of 200 million BDT for a particular year and it has an annual limit of around 400
million, the score for that particular company for this dependent variable will be calculated as
(200/400)*10=5.
So the basic background of the scoring is that the higher the volume of trade finance of a
customer compared to its given limit for that particular year, the higher the score of the variable.
So, ultimately higher trade financing volume throughout a year ensures a higher score in this
variable's scoring method.
5.2.2 Scoring The Limit Provided To Each Selected Customer:
The standard level of limit provided to the large corporate customers is approximately 500
million in BDT while the limit is almost 200 million for the small corporate customers of BAFL.
The scoring for large corporate customers have been done on a scale of 10 keeping in mind the
extent of the limit they were provided. For example, if a large corporate customer of BAFL is
provided a limit of 450 million for a year (when the standard limit for a large corporate customer
is 500 million), it will get a score of 9 out of 10. This score is calculated like this with the help of
MS excels: (450/500)*10= 9
Here the limitation of this kind of scoring is that this method of scoring doesnt take into
consideration the cases of two or three extreme cases. Here, the standard limit for all the large
corporate customers is taken as 500 million taka. But some sectored downgrade or economic
periods of blockages can make the standard limit way below than that previously set level of 500
million for the large corporate companies and the previously set level of 200 million for the
small corporate companies. But calculating the standard limit for the particular company requires
that there should be detailed calculation of the companys capacities, revenues and detailed mode
of operation. So, the standard limit for each of the companies has been taken as the
predetermined consistent level.
35 | P a g e
Table 08: Scores of the Independent Variable (Limit Provided Each Year)
36 | P a g e
For the small corporate customers, the limit is hold up to 200 million. This is how the scores for
all thirty customers for the selected four years have been calculated. The higher the limit
provided to a customer, the higher the score and the particular value for this variable. Higher
score for this variable will ensure that customer was provided higher limit and customer was
provided higher service. If any significant relationship is traced between this variable and the
dependent variable (volume of yearly trade finance used by each of the customers), it can be
inferred that the limit provided by BAFL is an important indicator of the fact how much trade
financing service a customer will take from Bank Al Falah Limited.
5.2.3 Scoring The Profit Rate Variable and Time Taken

Variable:
As the values under the profit rate variable are well comparable with the scores under the
previous two variables, there is hardly any necessity of scoring these variables differently. For
making the values of the variable 'Profit for the bank' more synchronized with the values of the
other two variables shown before, the existing bank rate of the economy has been subtracted
from each of the values of this variable.
The values under the variable time required for approval is directly used in the analysis. The
general indication is that if there is any significant relationship among these variables and
dependent variables, the relationship should be inverse relationship. The higher the score of these
two variables, the lower the level of services provided from BAFL. So, any significant inverse
level of relationship defines the fact that services provided in the form of lower interest rate and
lower level of time required for the approval have significant effect on the movement of the
dependent variable "the level/ volume of trade financing services availed by each of the
customers."
The first independent variable's scores (level of limit provided) are supposed to have a positive
relationship with the independent variable because higher score here ensures higher level of
service. The second and third dependent variables, on the other hand, should have an inverse
relationship with the dependent variables because in these cases, higher level of scores defines
the availability of lower level of services from BAFL.
37 | P a g e
5.3 The Results of the Regression Analysis and
Explanation:
5.3.1 The Basic Regression Statistics
Table 09: Basic Regression Statistics for the year 2012
Regression Statistics
Multiple R 0.860049924
R Square 0.739685872
Adjusted R Square 0.709649626
Standard Error 1.452634194
Observations 30
The value of the R-square here (About 73%) states that the three independent variables available
here in the analysis ( Limit provided to each of the customers, Profit charged from each of the
customers and Time taken for approval from each of the customers) can explain 73% variation in
the y variable or independent variable. In other words 73% of the values fit the model.
The adjusted R-square value in the regression analysis gives a more accurate measure than
general R-square value because this adjusted value takes the explanatory power only of the
independent variables that have strong power with the dependent variables. Adjusted R-squared
provides an adjustment to the R-squared statistic such that an independent variable that has a
correlation to Y increases adjusted R-squared and any variable without a strong correlation will
make adjusted R-squared decrease. Where general R-square is around 0.73 here, the value of the
adjusted R-square is around .7 here. This means that the adjustment with the independent
variables with better explanation power has reduced the R-square value by .03 here.
The measure of standard error in the regression analysis is a measure of correctness of the
sample collected for the analysis. The higher the dispersion of the values of the sample collected
from their means, the greater the standard error. A standard error of 1.45 means that the level of
38 | P a g e
standard error is quite low and the sample will provide a proper result that explains the real
relationship among the variables.
Table 10: Basic Regression Statistics for the Years 2013-15
Regression Statistics (2013) Regression Statistics (2014) Regression Statistics (2015)

Multiple R 0.829247505 Multiple R 0.815684926 Multiple R 0.727655176
R Square 0.687651425 R Square 0.665341899 R Square 0.529482056
Adjusted R Adjusted R Adjusted R
Square 0.651611204 Square 0.626727502 Square 0.475191524
Standard Error 1.619342916 Standard Error 1.786589302 Standard Error 1.726814742
Observations 30 Observations 30 Observations 30
Like the basic regression statistics of 2012, the basic regression statistics of the following years
2013, 2014 and 2015 have maintained a consistent trend. For example, R-square, which is a
measure of fitness of the data with the model, has always showed a value around 0.60. That
means more than 60% of the values have always fitted the model. The level of standard error has
always moved in between 1.6 to 1.8 and the level of standard error doesnt distort the
interpretation of the analysis.
5.3.2 The Regression Equations and Explanations
2012
Table 11: Regression Results 2012
Standard Lower Upper Lower Upper

Coefficients Error t Stat P-value 95% 95% 95.0% 95.0%
Intercept 6.89 1.43 4.82 0.00 3.95 9.83 3.95 9.83
Limit -0.39 0.13 -3.00 0.01 -0.66 -0.12 -0.66 -0.12
Profit -0.72 0.11 -6.73 0.00 -0.94 -0.50 -0.94 -0.50
Time 0.38 0.12 3.12 0.00 0.13 0.63 0.13 0.63
39 | P a g e
This is the result of the regression analysis run through the scored input discussed before. Before
going through the inner results of the regression analysis, there are several factors to be kept in
mind. As most of the inputs of the research are given separate scores to better define their inside
relationship, the absolute values of the variables have been ignored largely.
But scoring the variables in this way opens opportunity for the regression analysis to expose the
inner relationship of the variables in a better way. So, in this regression analysis the intercept of
the regression equation should be ignored as much as possible.
So, this is the regression analysis done for the three independent variables and one dependent
variable taken for the analysis. This regression will expose whether the level of service provided
by BAFL, Motijheel Islamic Banking Branch is influential in determining the volume of trade
financing availed by the top 30 trade financing customers of BAFL, Motijheel Islamic Banking
Branch.
The regression equation for 2012 inputs from BAFL, Motijheel Branch server:
Score from Yearly Trade Finance volume= 6.88 - 0.39 (Score from Limit provided variable) - 0
.72 (Score from Profit charged Variable) + 0 .38 (Time taken variable)
As a matter of fact, from the equation we can notice that the trade finance volume of the trade
finance customers of BAFL, Motijheel Islamic Banking Branch has the strongest relationship
with the Profit Charged by the bank variable. The relationship is an inverse relationship because
higher value in this variable denotes a lower level of service from the end of the bank.
So, a -0.72 slope denotes that for 1 unit of trade financing volume to increase the value of the
variable Profit charged by BAFL must decrease by .72 unit. The lower the profit charged by
the BAFL, Motijheel Islamic Banking Branch, the higher the value in the independent variable
(yearly trade finance volume score of the trade finance clients).
Lets go through the results from the other two variables. The first independent variable Score
from the Limit provided should have a positive relationship with the dependent variable Score
from the trade financing volume of the customers. In fact, it has a negative slope of -0.39 and
this slope is not significant in defining the extent of relationship between the independent and
dependent variable.
40 | P a g e
The other varibale Score from time taken has a similar slope of 0.38 with the dependent
variable and that does not define any significant relationship between the variables taken for their
relationship.
The bottom line of the regression analysis derived from 2012 data is that only one of the three
independent variables has that significant type of relationship with the dependent variable
presented here in this analysis. Profit Charged by BAFL, Motijheel Islamic Banking Branch is
nearly inversely related to the Score from Trade Financing Volume by the trade financing
customers of BAFL, Motijheel Islamic Banking Branch. The other two independent variables
available in the analysis have hardly any significant relationship with the dependent variable of
the analysis.
2013

Intercept 8.99 1.48 6.05 0.00 5.94 12.04 5.94 12.04
Limit -0.18 0.13 -1.38 0.18 -0.44 0.09 -0.44 0.09
Profit -0.89 0.13 -7.14 0.00 -1.15 -0.64 -1.15 -0.64
Time 0.12 0.08 1.42 0.17 -0.05 0.28 -0.05 0.28
The 2013 regression analysis shows a similar trend where the regression equation stands as:
The regression equation from the 2013 analysis leaves a similar kind of relationship as that of
2012 where the relationship has become more extreme than the previous year. The score from
limit provided variable, which had a slope of -0.39 in the previous year, has shown a less
significant relationship with the dependent variable this year with a slope of -0.18. The time
41 | P a g e
taken variable showed a similar trend in the year 2013 with a slope of 0.11. This relationship too,
like the previous one, is quite an insignificant one.
But the score from profit charged has played a more significant inverse relationship with the
dependent variable Score from trade finance variable of the customers. The -0.89 slope
definitely shows that the inverse relationship has only got better from the previous year.
So, it can be inferred that although the relationship of the independent variable Score from trade
finance volume of that particular customer with the independent variables like Score from
limit provided to the customers and Score from time taken has become more insignificant this
year, the relationship with the independent variable Score from profit charged from customers
has become more significant with time.
The significance of the relationship means the sensitivity of the service variable Profit charged
from the customers and trade finance customers have become more sensitive to the rise or fall
of the profit charged by BAFL, Motijheel Islamic Banking Branch. For a particular amount of
rise in the interest rate, the volume of trade finance has decreased in a larger amount in 2013
compared to 2012.
2014

Intercept 7.50 2.06 3.63 0.00 3.26 11.74 3.26 11.74
Limit -0.15 0.13 -1.11 0.28 -0.42 0.13 -0.42 0.13
Profit -0.81 0.12 -6.93 0.00 -1.05 -0.57 -1.05 -0.57
Time 0.24 0.17 1.38 0.18 -0.12 0.60 -0.12 0.60
42 | P a g e
The variables which were deemed insignificant in the previous years regression analysis have
shown similar extent of relationship although the quantities of slopes have increased or
decreased somewhat.
So, the dependent variables relationship with the first and third independent variables has
remained in the same non-explainable state.
The -0.81 slope of the second variable has again demonstrated a strong relationship between the
dependent and independent variable of the analysis. The relationship still continues in the similar
way- One unit fall in the score profit charged boosts up the score from trade finance volume
equally.
Among the three indicators of service of BAFL, Motijheel Islamic Banking Branch, the level of
profit charged from the trade finance customers has been proved important for forcing the trade
finance customers to avail more and more trade finance services from the bank. The 0.24 or 0.15
slope of the regression equation comes from the error that comes from the deficiency in the
sampling of the data. Otherwise, they dont define any sort of significant degree of relationship.
2015

Intercept 8.01 1.64 4.89 0.00 4.65 11.38 4.65 11.38
Limit -0.34 0.13 -2.64 0.01 -0.60 -0.08 -0.60 -0.08
Profit -0.89 0.18 -4.84 0.00 -1.26 -0.51 -1.26 -0.51
Time 0.33 0.16 2.08 0.05 0.00 0.65 0.00 0.65
43 | P a g e
The intercept of the regression analysis has remained to the same level of 8.01 although it has
been stated earlier that the intercept of the regression here defines no straight relationship
between the determination of the dependent and independent variables.
The strong negative slope with the independent variable Score from profit charged prevails in
the year 2015 too. On the contrary, the slope of the relationship with the other two independent
variables, although rising to some extent, still remains in the same insignificant level of
relationship. The 0.33 and .32 slopes, although not close to zero relationship, are nothing good
enough to draw any kind of legitimate relationship among the variables.
So, again in the latest year of banks operation has proved the fact that the most dominating
factor on the trade financing customers of BAFL, Motijheel Islamic Banking Branch has
consistently been the profit charged by BAFL, Motijheel Islamic Banking Branch. The other two
measures of services, although having some extent of slope with the dependent variable, cant be
called to be related with the dependent variable.
Combined Regression
Table 15: Multiple regression results from STATA
The combined regression for the four years using STATA reflects a similar picture of the yearly
regression equations done before. The slope of the time taken for approval variable is 0.04 which
is very close to zero and this slope can be easily neglected. Among the other two independent
variables, -0.30 slope of the limit provided is not close to zero. But it doesnt show a significant
relationship between the dependent variable and the independent variable either.
The remaining independent variable, Profit Charged by the Bank, with a -0.73 slope still holds
the most significant degree of relationship with the dependent variable. The analysis from the
44 | P a g e
STATA again proves that only Profit Charged by the Bank of the three independent variable is
a deciding and influential measure of service which can actually play the role in deciding the
level of yearly volume of foreign trade financing availed by the customers
5.4 Findings from the Regression Analysis
1. As there are quite a lot of options available for the firms to avail trade financing, the limit
provided by the banks doesnt play a big role in attracting the customers for trade
financing. Actually idle money available in the banks has played a big role in doing this.
So, the limit provided by banks, although treated as an important measure of the service
provided by bank, doesnt play the crucial role in attracting the trade finance customers.
2. The time taken for the approval, although held important for the first time approval,
becomes quite insignificant for the customers in the subsequent phases because there are
not much differences in the time required for approval after the first time approval.
3. The profit charged by the bank gets an important role in attracting the trade finance
customers because a 1% deduction in the banks profit reduces the overall cost structure
of the trade finance customers to great extent because there are large bulks of transactions
involving large amounts of money in the foreign trade landscape of the commercial
banks. Moreover, most of the trade finance contracts are short or medium term and this is
why trade finance customers of BAFL, Motijheel Islamic Banking Branch are at the
freedom to switch their sources for trade financing.
4. The charging of the profit of BAFL, Motijheel Islamic Banking Branch varies not only
for straightforward economic reasons, but also for the nature of trade finance customers.
The trusted trade finance customers of BAFL, Motijheel Islamic Banking Branch are
charged lower level of profits while the first time and less trusted customers are charged
higher level of profit from the risk that is involved in trading with them.
5. The periods of political blockades in the year 2011 and 2012 have experienced a
decreased volume of business operations in the country. In those periods, the rise or fall
in the volume of the trade financing availing is not mostly attributable to the variables
used in the analysis. During these periods the behavior of the dependent variable is not
fully related to the independent variable.
45 | P a g e
Chapter Six: Problems and
Recommendations
46 | P a g e
6.1 Trade Financing Problems Faced By
Commercial Banks
A) Breach of Commitment: The problem arises when the export firm does not comply with the
terms and conditions of letter of credit. In such case, payment of money as per LC commitment
becomes different for issuing banks of letter of credit. This often results in litigation problem for
the import firm.
B) Problem of Depositing Margin of LC: Commercial banks normally charge high margin for
opening letter of credit from the import firms especially when banks are not satisfied with the
credit-worthiness after making financial and economic analysis of the clients. The import firms
intend to open letter of credit with reasonable margin because they may not possess adequate
ready cash to deposit as L.C margin in the bank.
C) Paucity of Trade Financing Based Manpower: Many commercial bank branches are not
well-equipped with qualified and competent executives capable of dealing in import financing
related foreign exchange operations. So, it may not be possible for such bank branches to provide
time-befitting and need-based import financing services to their clients. Obviously, such banks
loose the opportunity of earning significant amount of revenue from import financing operations
in such situations.
D) Bankruptcy of the Import Firms: If the import firm becomes bankrupt for various reasons,
the LC issuing bank has to face enormous problems to recover its outstanding dues. Sometimes,
the bank is compelled to sell the imported merchandise under its pledge or any other mortgaged
assets to recover the money. This process is also not so easy to handle. These problems affect the
bank's financial solvency, if the bank is not careful about maintaining the security aspects of the
import loans.
E) Fluctuation of Currency and Profit Rates: The ever existent fluctuation and instability in
the economy of Bangladesh have hampered the credibility of the commercial banks trade
financing programs of Bangladesh. The rise and fall in the foreign currency values hamper the
commercial banks from earning their required profitability from their trade financing facilities.
47 | P a g e
F) Power Of Informal Hawala Networks: The hawala networks perform much better than the
formal banking system in terms of simplicity, speed, transaction costs, and reliability, and that
for these reasons they are not only financing much of the informal bootleg smuggling trade from
India to Bangladesh, but also substantial parts of the exports to Bangladesh that go through the
legal routes. Remittances from the Bangladeshi workers in the Gulf countries and from
Bangladeshi residents in India provide the foreign exchange, usually as US dollars or as Rupees
in India, and Taka are provided by the Bangladesh importers. As regards imports into
Bangladesh through formal Customs channels, some form of hawala payment would generally
be needed to balance accounts if there is technical smuggling. For example, prices and
quantities in a shipment as given in the shipping documents and an accompanying LC might
match, but additional payments to the exporter will be needed if the quantities exceed the
declared quantities or the products are different from the descriptions given in the documents.
The problems faced by commercial banks in Bangladesh have mainly been caused by the
regulations of Bangladesh and lack of integrity from the end of the importers.
6.2 Problems Faced By the Importers
a) Inadequate Fund Position: Import firms need to posses sound financial background to
handle import trade smoothly. But some firms cannot spend needed fund for this purpose. These
firms do not have adequate credit worthiness to attract the commercial banks in lending for
import trade. Traditionally, commercial banks come forward to open letter of credit (LC) for the
wealthy and large importers where banks do not perceive so much credit risks.
b) Large Bulks of Informal Exports and Imports With India: In addition to hawala
payments, informal exports from India to Bangladesh are also paid for by gold and Taka
smuggled into India. According to some recent journals, recorded Customs seizures in India of
gold and currency are very small but are only the tip of the iceberg as the Indian Customs
officials at the border avoid this kind of seizure owing to involved judicial procedures in gold
and currency cases. The smuggled Taka are used to buy Rupees from informal foreign exchange
traders who offer considerably more favorable Taka/Rupee rates than can be obtained from the
48 | P a g e
banks, which are obliged to first convert the taka to US dollars and then to Rupees, as there is no
official direct Taka/Rupee foreign exchange market. The report points out that the lack of such
an official market means that remittances of the Bangladeshi immigrant community to
Bangladesh (estimated at about $260 million a year) go entirely by the informal hawala
networks.
c) Problem of Opening Letter Of Credit of Large Amount: There are some firms associated
with bulk import of goods like charter party. Such import transaction calls for opening letter of
credit of unusually large amount. Most commercial banks cannot provide such huge amount of
L.C. opening facility without syndicate financing. Paucity of foreign exchange/ liquidity problem
in banks usually creates such problem.
d) Problem of Export Documentation Resulting In Bottlenecks in Import Financing: Import

firms are to face problem in the clearance of goods from the Customs & Port Authority, if there
exists errors in export documentation. This eventually creates problem in the completion of
import transaction through payment to the foreign suppliers by LC opening bank. When the
goods are not at the disposal of the bank authority, release of import finance from the bank
cannot be ensured.
e) Non Co-Operation and Procrastination in the Opening of Letter Of Credit by

Commercial Banks: Reportedly, import firms do not often get proper support from the bank
officials regarding the opening of letter of credit despite possessing credit worthiness by the
clients. This happens when the bank officials intend to gratify their selfish ends through speed
money. This is definitely very undesirable act. The bank officials should also recognize that this
may hamper their institutional business reputation in the competitive banking sector.
f) Absence of Proper Advisory Services on Import Financing: New and experienced import
firms are in need of proper advisory services to simplify the processing of import financing. Very
few banks usually render such services for the benefit of importers. As a result, such import
firms are found to commit various mistakes in complying with documentary formalities for
import financing. This causes delay in the opening of letter of credit for import along with their
natural consequences.
49 | P a g e
g) High Transaction Costs: There are several reasons of higher comparative transaction cost in
Bangladesh. This is principally due to high charges (up to 3% of the transaction) for LC
confirmation by a prime US or other developed country bank. In addition, until December 2003
Bangladesh importers were required by Bangladesh Bank to deposit compulsory margins which
tied up working capital and involved a substantial extra cost as the margins generally exceeded
the margins that would have been required by the banks issuing the LCs. Adding these costs to a
variety of other transaction costs makes LC financing prohibitively expensive for most
Bangladesh importers, so most LCs are not confirmed by prime foreign banks and therefore do
not provide working capital to the Indian exporters since they cannot be discounted.
6.3 Recommendations for Improving Trade

Financing Activities in Bangladesh
a) Improvement of Supply Position in the Foreign Exchange Market: It is true that paucity
of foreign exchange hinders import operations. The imbalance between demand and supply
position gives rise to increasing price of foreign exchange making imports relatively more
expensive. As such, Bangladesh Bank may come forward to enhance the supply position of
different foreign currencies in the foreign exchange market to improve the position.
b) Margin for opening letter of credit should be rationalized: Presently, importers are found
to face discriminatory behavior from the banks as regards to the margin to be deposited for
opening letter of credit, which is found to vary from 10 to 100 percent. Bangladesh Bank may
prepare a set of well-thought guidelines to overcome this problem of LC margin for the benefit
of importers.
c) Capacity Building of Banks in the Handing of Foreign Exchange Operation Including

Import Financing: Foreign exchange operations represent a vital component of bank services.
For extending this service efficiently, bank executives must be equipped with modern
knowledge, skills and technical know-how by means of offering tailor-made training programs
by the authorized foreign exchange dealing banks. This will help in the capacity building of
banks in the area of foreign exchange transaction and in avoiding mistakes as far as possible.
50 | P a g e
d) Malpractices Of Banks Regarding Import Financing Must Be Ironed Out: It has been
found that import firms are to suffer due to various malpractices of the bank officials, willful
delay in the opening of letter of credit, use of speed money for processing of import financing
application, unreasonable charges from the importers, lack of supportive mentality can be
avoided if the bank authority enforces strong code of ethics in dealing with in import financing
cases.
e) Introduction of Modern Communication and Service Rendering Devices in the Foreign

Exchange Department: In various facets of import financing, modern IT devices should be
introduced for increasing overall efficiency of the service. Communication of letter of credit to
the negotiating banks, negotiation regarding LC conditions, conformation of letter of credit and
payment of import bills are the areas where modern IT devices should be employed specially in
those banks where there exist room for improvement.
f) Developing Hearty Banking Relationship with Foreign Banks in Important Parts of

Business World: For handling import trade systematically and effectively, there is a need for
developing sound relationship with foreign banks which can operate as negotiating banks for the
bank issuing letter of credit. This relationship building can facilitate prompt handling of import
operations including the payment aspects.
g) Strict Adherence To Bangladesh Bank Guidelines in Processing Import Financing: The

foreign exchange department of the bank must follow the Bangladesh Bank guidelines strictly to
avoid any future problem in the management of import financing. Bank officials dealing in
foreign exchange must be thoroughly conversant with these rules and in evaluating application
for letter of credit. All points must be examined with utmost care and prudence. This may also
help to protect national interest.
h) Strengthening Advisory Services By The Bank for the New and Inexperienced Import
Firms: New and inexperienced import firms experience problems in handing various aspects of
import financing. These firms need sound advisory services from banks to handle all technical
aspects precisely. Bank officials in the foreign exchange department can work as helping hand to
assist these firms. For this purpose, technically sound team must work in the advisory cell of the
foreign exchange department of the bank.
51 | P a g e
Chapter Seven: Conclusion
The success of a bank in the trade financing wing of itself is dependent upon several factors.
Although factors like time taken for approval and limit provided look important in a general
point of view, there are hardly any source of differentiation in those sectors for the commercial
banks. But the cost of fund for different banks varies largely among them. Better rationalization
of the margin for the opening of the LC is one factor that small and medium clients of the trade
financing services are badly in need of. Higher margin requirement, summing up with regulation
from authorities, keep the medium and small parties of foreign trade transactions into
inconvenient edges. Moreover, the transaction cost required for banks to finance foreign trades
varies from one bank to another. This is another reason there are scopes for differentiations as to
how much profit bank will charge from a particular trade finance customer. For ensuring better
profitability from foreign trade, the exporters and importers always try to increase their margin
by reducing their costs from various sources. This is the reason the profit charged by the financer
bank plays a very influential role in the availing of the trade finance services of the trade finance
customers of BAFL, Motijheel Islamic Banking Branch. The documentation process of trade
financing sometimes becomes a deciding factor for the customers of the trade finance because
sometimes the trade finance customers are left with the necessity of urgent needs of trade
finance. In cases like these, the time taken for approval may be a deciding factor. But in most of
the general transactions, the importers in our country look into the profit they have to pay to the
banks for availing a facility. But the presence of large bulks of idle money in the banking sector
in the country keeps the clients of the trade financing services in such a situation that they
differentiate between options only because of the profit bank charges from them. The limit
provided by BAFL for a single customer doesnt change significantly from year to year.
Although the profit charged varies from period to period, the limit hardly rises or falls although
there are huge fluctuations in the frequency of clients from one year to another. The limit
provided by the commercial banks play an important role in the economy where the supply of
money is comparatively scarce compared to the size of the economy. The picture is different in
Bangladesh and so the analysis has shown somewhat contradictory result against the general
assumption of economy. But in the case of Bank Al Falah Limited, there are other factors that
52 | P a g e
make the documentation process of the bank slower compared to the other competitive banks in
the industry. The Islamic Banking Branch of Motijheel of the bank, at times, has to undergo two
step approval processes both from their country office and their head office at Karachi, Pakistan.
This rigorous approval process is sometimes a big impediment for the bank management and a
big reason the management fail to serve its trade finance clients in the best way. The intense
competition of buying fund efficiently keeps the commercial banks in the trade financing sector
into some kind of intense competition. The efficiency of other global banks like HSBC, Standard
Chartered Bank Limited and Citi N/A in keeping their cost of capital into very lower level forces
Bank Al Falah Limited to earn lower level of spread compared to the competitors mentioned
above. Moreover for better risk management of exchange rate and trade situation fluctuation, a
better risk management team with better expertise in foreign trade situation is required. The
competitors like Standard Chartered Bank and Citi N/A have got a strong tradition and expertise
of dealing with these sorts of risk from exchange rate fluctuation throughout different economies
of the world and downward business situations from various political and economic reasons.
This is the reason Bank Al Falah Limited has to rely largely on small and medium corporate
clients in its trade financing for the major part of the banks profitability which, at the same time,
involves greater risk from the breach of contract in the trade financing transactions and greater
trade off in charging a higher level of margin from those customers. On a different note, imports
of goods other than generalized consumer goods or technological goods sometimes create
complexities in the clearing and dispatching departments both from the port of the producers
country and the importers country. The capacity of the foreign trade department of a bank, in
these cases, determines how well the bank can deal with such kind of events in the port when the
dispatching of the goods is urgent both from the point of view of the bank and client of the bank.
As the picture of trade finance is getting wider and banks are coming with more off-the-funding
trade finance services like consultancy, the profit charged by the bank is getting justified from
various sources. The age-old days of looking into the profit charged by bank as only the cost of
capital are far gone by. The profit charged by the bank is now reflection of various other costs
banks have to incur these days. Although the cost and time required for transferring money have
got into a way better position than it was two or three decades ago, the transaction costs of the
bank emerge from various sources. But if taken individually, the cost gets much bigger for the
53 | P a g e
actual foreign traders. So, the number of roles played by the trade financers like banks is always
on the rise.
54 | P a g e
References
1. ICMAB (2 July 2014) ICMAB directories for improving trade finance in Bangladesh
2. Bangladesh Bureau of Statistics (September, 2015). Monthly release of Foreign Trade

Statistics by Bangladesh Bureau of Statistics
3. Ministry of Finance, Government of Bangladesh (2014) Yearly publication by Bank and

Financial Institutes Division of MOF (Government of Bangladesh)
4. Bank for International Settlements (2013). CGFS Paper for Trade Finance Development
and Issues
5. Bangladesh Bank (2016), Monetary Policy Statement (January 2016) by Monetary Policy
Department & Chief Economists Unit
6. https://tradefinanceanalytics.com/
7. http://www.bankalfalah.com/
8. http://www.investopedia.com/
9. http://excel.tips.net/
10. http://www.bbs.gov.bd/
11. http://www.mof.gov.bd/en/
12. https://www.bb.org.bd/
55 | P a g e

Final Report Draft PDF

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Final Report Draft PDF

Caricato da

Copyright:

Formati disponibili

Chapter One: Background of the

1.2 Objective of the Report

1.2.1 Broader Objectives

1.2.2 Specific Objectives

1.3 Origin of the Report

1.4 Scope of the Report

1.5.1 Sources of Data

Main Sources of the Data:

Bank Al Falah servers

1.6 Limitations of the Report

Figure 01: Providers of Trade Finance (Source: tradefinanceanalytics.com)

2.3 The Dependence of External Finance in

3.1.1 About Bank Al Falah Limited

3.1.2 Range of Trade Financing Services by BAFL

Import Registration Certificate (IRC) duly renewed.

IMP form duly signed.

Non-LC Based Financing available

Export Letter of Credit Confirmation/ Discounting

Import T/T Financing

Invoice Financing of non-LC, invoice-based trade transactions is facilitated by discounting on

Import Factoring Financing

Documents against payment (D/P)

Documents against acceptance (D/A)

Documentary collection confirmation

Documentary collection advice

Figure 03: Import Payments by Category of Financing: (Taka in Crore)

Import under Cash

Figure 04: Import Payments of Bangladesh with top 10 countries

India People's Republic

4.3 Bank Based Division of Trade Financing

Table: 03 Volume of LC of Local Government Banks (All figures in Million Taka)

Table: 04 Volume of LC of Foreign Commercial Banks (Source: Bank and Financial

Table 05: Import LC opened by the Local Commercial Banks in Bangladesh

250 Import Volume

200 Export Volume

Table 06: Raw input set of the analysis for 2012

SR International 5.12 150 13.75 7

5.2.1 Scoring the Trade Financing Volume Variable:

Table 07: Scores of the dependent variable

5.2.2 Scoring The Limit Provided To Each Selected Customer:

5.2.3 Scoring The Profit Rate Variable and Time Taken

5.3.1 The Basic Regression Statistics

Table 09: Basic Regression Statistics for the year 2012

Table 10: Basic Regression Statistics for the Years 2013-15

Regression Statistics (2013) Regression Statistics (2014) Regression Statistics (2015)

5.3.2 The Regression Equations and Explanations

Standard Lower Upper Lower Upper

Standard Lower Upper Lower Upper

Standard Lower Upper Lower Upper

Standard Lower Upper Lower Upper

5.4 Findings from the Regression Analysis

6.2 Problems Faced By the Importers

d) Problem of Export Documentation Resulting In Bottlenecks in Import Financing: Import

e) Non Co-Operation and Procrastination in the Opening of Letter Of Credit by

6.3 Recommendations for Improving Trade

c) Capacity Building of Banks in the Handing of Foreign Exchange Operation Including

e) Introduction of Modern Communication and Service Rendering Devices in the Foreign

f) Developing Hearty Banking Relationship with Foreign Banks in Important Parts of

g) Strict Adherence To Bangladesh Bank Guidelines in Processing Import Financing: The

2. Bangladesh Bureau of Statistics (September, 2015). Monthly release of Foreign Trade

3. Ministry of Finance, Government of Bangladesh (2014) Yearly publication by Bank and

Potrebbero piacerti anche