The first of a three-part series titled 'The role of banking in RMG trade '.
In Bangladesh, banks have noteworthy role and involvement in trade facilitation in the readymade garment (RMG) from its inception. With the help of back-to-back letter of credits (LCs), both the garment and the primary textile sectors or backward linkage industries flourished in Bangladesh. Banking industry of the country has been facilitating payment, finance and risk management services to the traders including RMG and thus contributing to growing global trade integration of the country. With the growing business complexities, technological changes, market expectations and financial crimes, trade services are becoming increasingly challenging for the banks. However, banks must continue to offer efficient services to the key trading sector of the country, RMG. For the economic sustainability of Bangladesh, RMG sector needs due support through adequate, smooth and effective trade services by banks which, on their part, must ensure proper risks identification, management and compliance issues in the process of offering the required trade services.
China has been the market leader in the global RMG market. Bangladesh's share of the global clothing market is improving and it is now the second largest exporter of apparel products, despite sluggish export growth in recent times. A recent McKinsey report has identified Bangladesh as the top sourcing hotspot over the next five years. However, there are evidences and indications that competition is becoming increasingly intense; a few Asian and African countries (like Ethiopia) are coming up very strongly.
RMG is the most important trade item in Bangladesh. The success story of the RMG began with the introduction of the back to back LC practices in the late 1970s. In some literature it is claimed that the Desh Garments Ltd came up with the first big push in this connection. At the end of 1990, this sector captured 50 per cent share of the country's total export. Now it claims the lion share of total export volume.
The economy of Bangladesh is largely dependent on the RMG sector, and this sector is considered as the lifeline of the country`s economy. It also plays an indispensable role in maintaining social stability. Nearly two million women workers are directly and more than ten million people are indirectly associated with this industry. Today, the RMG export sector consists of multibillion dollar manufacturing and export industries in the country. The overall impact of the readymade garment export is certainly one of the most significant social and economic developments in contemporary Bangladesh. Manufacturing in Bangladesh has for the last 30 years been defined by the RMG industry and for good reason. The nearly 7,000 RMG facilities in Bangladesh produce close to one-fifth of all manufactured goods and employ over half of all workers in the manufacturing sector.
This sector creates about 4.0 million employment opportunities and contributes significantly to the gross domestic product (GDP). The sector is powered by young workers and most of them are women. Country's total export earning has increased over time with continued high share of RMG. The sector earned about US$ 30,000 million in 2017. Of the total earnings, woven garments and knitwear constituted around 52 and 48 per cent respectively. Data on product-wise export earnings showed contribution of over 40 per cent each in terms of the total volume of export earnings of the country. Currently about 4.0 million people are working in about 4500 garment factories.
RMG exports accounted for over four-fifth of the country's total exports after 2014. According to Bangladesh Bank data (2018), import price of raw materials stood at $3,716 million during the first half of FY18 through back-to-back LC, which is around 25 per cent of the country's total RMG export value. Thus, the gross value addition from this sector stood around 75 per cent. The yearly data on RMG export and back-to-back raw materials import shows that the average value addition from FY10 to FY17 and the first half of FY18 through export of RMG is almost 75 per cent. The major importing countries of Bangladesh's RMG products are the US, UK, Germany, France, Spain, Italy, Belgium, Netherlands and Canada. For maintaining the growing trend of RMG sector and addressing future risks, the country needs to focus on factors such as changes in trade relations, costs and access to shipping and logistical routes, raw material costs, compliance issues, consumer tastes and attitudes etc.
Of the total number of trade payment transactions, survey data of Bangladesh Institute of Bank Management (BIBM) clearly indicate the extensive use and growing dominance of documentary credit in import transactions here. Similar trends can be seen in case of RMG sector as well. In case of exportation of RMG, again LC is the most prominent method of payment. However, compared to the overall export figure, use of LC is slightly lower in RMG. As a whole, LC remained the most widely used method of payment to receive payment by the Bangladeshi exporters. Of the different types of LC, a significant number is back-to-back, which is mainly related to RMG trade transactions. More specifically, this is because of the garments sector that imports/procures raw materials from home and abroad to meet their export orders.
Out of the total export LC used in Bangladesh's RMG sector, a significant number is local back-to-back LC. And of the total, a certain proportion is transferable LC. In recent time, decrease in transferable LC indicates the growing trend of receiving direct LC by ultimate exporters. Existence of a large number of buying houses is one of the reasons for the use of transferable LC. Buying houses (of the garment products) are not the actual manufacturers and therefore, they are required to transfer the LCs to the real manufacturers for procuring the goods. Moreover, the practice of subcontracting by the garment manufacturers is also very common for which an LC is transferred.
Of the different types of LC, back-to-back ones are understandably the most commonly used. However, it is the local back-to-back LC that is dominating. In case of export LC, the documentary requirements are almost the same. It can be observed from the survey data that insurance documents are less frequently asked in the LCs sent to the exporters here (not very different from the LC opened by banks located in Bangladesh for foreign exporters). Ocean bill of lading or multimodal has been the most commonly used type of transport document. In exportation of RMG, other than these, a pre-shipment inspection by the buying houses or by a buyer selected party is a very common requirement. Late shipment and late presentation have been the most common discrepancies in both export and import documents in CY 2017 in the RMG sector.
According to the survey observation, late shipment and late presentation in exportation are the most common discrepancies; these are relatively less in case of importation. Sometimes, these discrepancies of late shipment and late presentation are evidenced due to non-availability of pre-shipment inspection certificate. In RMG, it is difficult to accurately estimate lead time in exportation, and this sometimes causes payment discount Pre-shipment inspection requirement is also misused in certain instances against the RMG exporters. According to the opinions of the practitioners, the proportion of compliant LC has marked increase. Banks are, however, coming across increasing number of spurious discrepancies. (Next installment on Saturday).
Dr. Shah Md. Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM).