Although the letter of credit or LC is the standard payment method for international trading, sales contract, which can be categorised into three types- in the first type, the buyer reportedly pays before the shipment while in the second, the payment is reportedly made after the shipment reaches the port of the exporting country, and in the third one, the buyer is allowed to release the product from the port before payment is made – have gained popularity mostly among small exporters due to various reasons, say industry insiders even as many are facing various issues, in terms of payments because of it. Since sales contracts are not recognised by banks in global trade transactions, banks cannot help the exporters in case of being defrauded or faced with payment issues.
Once more than 90 per cent of the exports were through LCs, but more than 50 per cent of the exports are now made through sales contracts, reportedly underlined Mohammad Hatem, Vice-President of BKMEA while interacting with the media even as reports suggest many small and medium-sized manufacturers, especially those into manufacturing home textiles, have become victims of the same. And such a development, when Bangladesh’s exports continue to be on the roll — both apparels and home textiles — is emerging as a matter of concern for the industry.
It may be mentioned here that merchandise shipment fetched US $ 4.72 billion in October even as the earnings were 60.37 per cent higher year-on-year, according to the data from the Export Promotion Bureau (EPB), the state-owned agency, located within the Ministry of Commerce, responsible for developing the Bangladesh’s export-oriented industries.
October’s receipts shattered the previous single-month highest export earnings posted in September when overseas sales brought home around US $ 4.17 billion, thanks to rebound in apparel shipments, which contributed to the surge in the earnings last month as RMG export, which usually account for around 85 per cent of the total shipments, surged owing to several factors, which include relocation of work orders from China, Vietnam, India, and Myanmar as the cost of production has risen in those countries while a good portion of October earnings was owing to the settlement of the deferred payments — if one may recollect, the international buyers suspended or put on hold orders worth US $ 3.18 billion owing to the severe fallout of COVID-19 last year — while US and European buyers also bought substantial volume of apparel items from Bangladesh in the run up to Christmas and holiday season, all of which combined to give a further boost to exports.
Also, to be considered in this direction is buyers reportedly offering better prices for the garment items sourced from Bangladesh as they took into account the higher freight cost and prices of raw materials.
Meanwhile, in July to October, the first four months of the current fiscal year, the earnings from garment shipment were US $ 12.62 billion, up 20.78 per cent year-on-year, of which around US $ 7.21 billion came from the knitwear shipment, which grew 24.27 per cent while woven garment shipment rose 16.41 per cent to US $ 5.41 billion even as speaking to the media BGMEA Vice-President Shahidullah Azim reportedly underlined apparel export would continue to grow if exporters could expand their capacity since they were receiving a handsome quantity of orders from the buyers, who were diverting orders from China, India and Vietnam.
Speaking to the media, Mohammad Hatem said, “The international market of garment is robust now. Our orders have increased…It appears that the apparel export outlook will remain buoyant for the next few months.”
Apart from apparels, home textiles too performed very well in the export front as sales of terry towels in the export markets posted 31.90 per cent growth to take the earnings to US $ 16.83 million during the four-month period (July to October) even as overall home textile exports went up by 16.52 per cent to US $ 412.78 million.
However, even as overall exports continue to perform well, concerns related to sales contract, especially when it comes to small exporters and home textile makers is emerging as a major concern, a trade short cut that many smaller players reportedly resort to, to save money time and certain other complexities.
According to industry people, the third option of sales contract (where the buyer is allowed to release the product from the port before payment is made) is very risky, even as speaking to the media, former BGMEA Director Ashiqur Rahman reportedly added that some exporters take the risk only for the so-called trusted buyers.
Meanwhile, as per media reports, many home textile manufacturers including names like Anzir Textile, Virgin Grace Ltd, Al Muslim Textile, HN Cotton Products Ltd, Bangladesh Towel, Miray Towel and Moltex, all of which are small and medium-sized home textiles exporters, which had reportedly resorted to sales contract, took a massive hit. They have cumulative amount of US $ 1.3 million (Anzir Textile and Virgin Grace Ltd alone reportedly have unpaid dues amounting to US $ 8.5 lakh) pending with the buyers even as some industry insiders reportedly added eight home textile exporters have used the third and most risky method – the buyers released the products from the port and vanished, leaving them in limbo even as some sector people claimed many exporters opt for the third option even for new importers, thanks to fierce competition at home.
Meanwhile, speaking to the media, Chairman of Virgin Grace, Abdullah Hil Aziz reportedly claimed his business has been good until his US buyer stopped clearing the payments in 2019, adding “The buyer neither answers call nor is clearing the payment for the last couple of months.”
Faced with the grim situation, Abdullah reportedly had to sell his land in capital city Dhaka to cover the export proceeds with banks to avert money laundering charges — when anything is shipped to a foreign market, the central bank of the country (Bangladesh Bank) logs the export first and the export earning later and, if any export count does not meet with the export proceeds, it is reportedly flagged as a potential money laundering case — while also downsizing workforce from 350 to 50 even as he has reportedly been forced to take sub contracts now to stay afloat.
Given the scenario, one might tend to think why are trade bodies not intervening to sort things out and more so considering the fact that last year during the peak of the pandemic, when global buyers cancelled orders in bulk while also allegedly holding back payments, BGMEA took up the cudgels for the factories at large, thanks to which, a substantial volume of orders have been reinstated later on.
However, with the sales contract, there’s apparently not much that trade bodies can do!
“…we cannot do anything unless the victims file complaints officially,” reportedly maintained the Chairman of Bangladesh Terry Towel & Linen Manufacturer and Exporters Association (BTTLMEA) Shahadat Hossain Sohel, who reportedly claimed the trade body is aware of the issue even as BKMEA Vice-President, Fazlee Shameen Ehsan, who is also the CEO of Fatullah Apparels, reportedly claimed that he even lost US $ 32,000 to an export sales contract, while underlining that since the payment method for such international trade is not recognised by banks, they cannot offer any help to the exporters with non-payments.
What’s worrying is the fact that more and more entities are increasingly resorting to sales contract, so it seems and given the nature of the sales contract and the risks involved with the same, it is in the interest of the exporters to keep away from the sales contract as far as possible, so it seems.
