VIII. TRADE AND PROJECT FINANCING Brief Description of Banking System Financial institutions in Bangladesh are a mix of large government-owned banks, smaller private domestic and foreign banks. After Bangladesh won independence in 1971, the BDG nationalized local and Pakistani-owned businesses, including financial institutions. Commercial practices such as credit analysis, capital adequacy, provisioning for classified debts were relaxed or abandoned. Although banking licenses were issued and two of the six large nationalized commercial banks (NCBs) were "denationalized" under the Ershad government in the 1980s, the BDG continued to set interest rates and to direct lending, not only to parastatals, but increasingly to friends of the BDG. With parastatals often unable to repay and BDG cronies mostly unwilling to repay, a "default culture" took root. By the mid-1980s, the banking system was moribund. Plagued by high levels of arrears and poor loan recovery performance, the government banks were also saddled with expensive government employment policies which raised the costs of intermediation. As a pre-condition for donor assistance, the BDG embarked on a first set of financial reforms in 1989. These reforms addressed capital adequacy, with loan classification standards devised for the first time since independence. Although a modest step going only part way towards developed country standards, they were nonetheless highly significant as a start. Loans were classified and provisioning for classified loans was begun. The government also began recapitalization of the NCBs by issuing $460 million in Bangladesh Bank (central bank) bonds to the banks. In addition, interest rates were deregulated, loan courts were established, tax rules for banks adjusted, and new legislation for the commercial banks was passed. In June 1990, the BDG signed an agreement for a financial sector adjustment credit with the World Bank and a complementary agreement for technical assistance with the U.S. Agency for International Development. The Bangladesh Bank regulates the NCBs, other government banks (development finance institutions and agricultural banks), and the private banks. Collectively, these banks make up the "scheduled" banking system. As in many developing countries, the central bank is not independent and is in fact controlled by the Ministry of Finance. The Bangladesh Bank is headed by a Governor, who reports de facto to the Secretary, Finance Division of the Ministry of Finance. Overall banking activity is dominated by the four NCBs--Sonali Bank, Janata Bank, Agrani Bank, and Rupali Bank. NCB deposits as of then end of 1992 were estimated at $4.6 billion of total scheduled bank deposits of $9.0 billion, with some market share loss to the private banks over the preceding five years. It is unclear what percentage of total financing (term lending and revolving credit) in Bangladesh is done by the scheduled banking system and what percentage is done by non-financial institutions and informal sector moneylenders. Estimates of the scheduled banking system's share run from as low as 25 percent to as high as 67 percent. Local private banks are noted for having to offer higher rates than private foreign banks and the NCBs in order to attract depositors, and for insider lending. These banks include Pubali Bank, Uttara Bank, Arab Bangladesh Bank, Islami Bank, National Bank, The City Bank, IFIC Bank, United Commercial Bank, Al-Baraka Bangladesh Bank, Bank of Small Industries and Commerce Bangladesh, and Eastern Bank (the successor to BCCI, and 60% BDG- controlled). The six private foreign bank branches are American Express Bank, ANZ Grindlays Bank, Banque Indosuez, Standard Chartered Bank, State Bank of India, and Habib Bank. Foreign Exchange Controls Affecting Trading Provided a local importer can obtain trade financing, which is widely available and competitive, from a local bank, foreign exchange availability is not an issue. The taka is almost without exception freely convertible for current account transactions. Currently, foreign exchange availability is also not an in issue in terms of government reserves, which stand at $2.7 billion, the equivalent of eight months of import cover. However, in one recent case, an exporter which shipped undersized shrimp to a U.S. importer and agreed to pay the U.S. importer a partial refund has claimed difficulties in getting Bangladesh Bank permission to remit the funds. General Financing Availability Trade finance, working capital, and term loans are generally available from local banks, particularly to multinational companies. Foreign companies involved in manufacturing commonly obtain trade financing and working capital loans from the foreign bank branches. The foreign bank branches are also generally interested in project lending for foreign investments in Bangladesh and can arrange offshore syndicated loans. How to Finance Exports/Methods of Payment Unless the importer is either a multinational company operating in Bangladesh or a reliable, long-standing Bangladeshi customer, the Embassy strongly recommends all U.S. exporters to require irrevocable, confirmed letters of credit to secure payment. This is true whether the importer is private or part of the BDG, and whether or not the importer is being financed by a multilateral institution or bilateral donor agency or government. U.S. exporters should also be aware that it is a normal business practice for BDG government procurement to require exporters to post performance bonds. Performance bonds can be arranged with any of the local banks, but the Embassy recommends that U.S. exporters contact American Express Bank, fax 880-2-863808, tel.: 880-2-866705/6 or 866618/9. Types of Available Export Financing and Insurance As indicated, trade financing for private sector importers is widely available, and local banks are competitive with each other for this business. There are no multilateral or local sources for directly financing U.S. exporters for sales to Bangladesh. However, there are significant export sales opportunities in the government procurement market. These opportunities can either be in the context of straightforward procurement of goods by BDG agencies and parastatals, increasingly financed by the BDG itself, or in the context of projects, which are usually donor financed. Although BDG ministries and agencies from time to time encourage companies interested in promoting projects and making sales to approach donors directly, until the BDG has gone through its internal process of approving and making a request for assistance, such approaches are of minimal value. Exim Bank facilities are available for U.S. exporters; initial inquiries should be made directly to Exim Bank. There are no existing Exim Bank bundling facilities in Bangladesh. Project Financing Available As indicated, the Bangladesh government procurement market is large, and a great deal of procurement is in the context of a wide range of projects, which are usually financed by donors, although from time to time the BDG may finance its own projects or ask bidders to propose financing. In the latter cases, donor financing is usually not available or not preferred for whatever reason. The market for government procurement for which U.S. firms are eligible to compete is approximately $1.0 billion per year. As of April 1993, estimated donor commitment levels (in million USD) for Bangladeshi fiscal year ending June 1994 were as follows: Japan, 425 (of which 209 was loans, up to 50 percent of which per loan may be untied, and 137 was untied food and commodity aid); World Bank (IDA), 400; Asian Development Bank, 362; and U.S., 159 (U.S. FY94, of which 72 was grant aid and 87 was food aid). The Asian Development Bank and the World Bank's IFC are also interested in taking small equity positions in large private sector projects. 1. The International Bank for Reconstruction and Development (IBRD), a member of the World Bank group makes long-term loans at market- related rates primarily to developing nations. The International Development Agency (IDA), the soft loan window of the World Bank, lends to the poorest of the development countries. Both the IBRD and IDA work to promote broadly based economic growth and frequently focuses on structural adjustment, sectoral reform and individual project lending and operate under the same set of procurement guidelines. Typically the World Bank does not finance the entire cost of a project. Rather, it finances the components of a project purchased with foreign exchange, which on average is about 40 per cent of the total project cost. Each project may cover a wide variety of sectors and can involve anywhere from one to hundreds of separate contracts providing export business opportunities for suppliers worldwide. CONTACTS: U.S. Department of Commerce Liaison to the U.S. Executive Directors Office International Bank for Reconstruction and Development 1818 H. St., NW Washington D.C. 20433 Tele: (202) 458-0118 Fax: (202) 477-2967 Office of Multilateral Development Banks U.S. Foreign Commercial Service U.S. Department of Commerce Room H-1107 Washington D.C. 20230 Tele: (202) 482-3399 Fax: (202) 273-0927 2. The Asian Development Bank is a multilateral institution that lends and invests exclusively in the Asian and Pacific countries, as well as selected Central Asian Republic countries. The ADB makes loans and equity investments for economic and social advancement of developing member countries; provides technical assistance for the preparation and execution of development projects, programs, and advisory services; promotes investment of public and private capital for development purposes; and responds to request for assistance in coordinating development policies and plans for developing member countries. The Bank is required to give attention to the needs of the smaller or less developed member countries and give priorities to regional, sub-regional and national projects and programs which will contribute to the harmonious economic growth of the region as a whole. CONTACTS: U.S. Department of Commerce Liaison Office to the Asian Development Bank Thomas Jefferson Cultural Center U.S. Embassy Manila Makati, Manila Manila, Philippines Tele: (632) 813-3248 Fax: (632) 816-7684 Office of Multilateral Development Banks U.S. & Foreign Commercial Service U.S. Department of Commerce Room 1107 Washington, D.C. 20230 Tele: (202) 482-3399 Fax: (202) 273-0927 List of Banks with Correspondent U.S. Banking Arrangements Of the government banks and local private banks, the following have correspondent U.S. banking arrangements: - Sonali Bank - Agrani Bank - Janata Bank - Rupali Bank Ltd. - Arab Bangladesh Bank - IFIC Bank Ltd. - National Bank Ltd. - City Bank Ltd. - Uttara Bank Ltd. - Islami Bank - Pubali Bank - United Commercial Bank The U.S. banks which maintain correspondent relationships in Bangladesh include: - American Express Bank - Citibank - Chase Manhattan Bank - Bank of America - Chemical Bank