Letters of Credit and Bills of Lading in
Commercial Transactions
Two
important documents are commonly required for a commercial transaction
involving the exchange and transport of a good between a buyer and a seller:
Letter of credit. A document issued by a financial institution that
provides a promise of payment for a trade transaction, implying that it
can be redeemed if certain conditions are satisfied. They are mainly used
in international trade for transactions between actors, such as a buyer
and a seller, in different countries.
Bill of lading. A document that establishes evidence and the terms of
a contract between a shipper, a transportation company and the agents
providing and receiving the cargo. It serves as a document of title, a
contract of carriage and a receipt for goods.
The
above figure provides the steps involved in a simple international transaction
between a seller and a buyer:
A buyer and a seller agree upon
a transaction through a contract that specifies price, quantity, time and
place of delivery. Then the buyer will contact its bank to have a letter
of credit issued with the seller as beneficiary. This letter of credit can
either be funded by a loan and simply debited from the buyers account
balance if sufficient funding is available. If a loan is used, it is
subject to standard underwriting procedures involving a down payment, a
line of credit and interest rate based upon the buyer's credit worthiness.
Insurance is commonly required as a condition to issue a letter of credit
so that various risks, such as damage and delays, can be mitigated. The
bank commonly levy a fee ranging from 1 to 8% of the transaction,
depending on its value and complexity.
With the letter of credit the
seller now has a line of credit available at its bank and final payment
will be made once the delivery conditions of the contract are satisfied.
The seller can then provide the consignment to a shipper in exchange of a
bill of lading promising that the consignment will be delivered at the
agreed destination. At this point the consignment is handled by the
transportation system and can involve the usage of port facilities,
warehouses, rail or trucks segments depending on the concerned transport
chain.
The seller can then present to
bill of lading to its bank as an additional condition being meet to secure
final payment. It is important to underline that payment is not
necessarily provided to the seller immediately after the bill of lading is
provided, but after the buyer has taken ownership of the consignment and
confirmed that it meets the specification stated in the contract
(quantity, quality and condition). The bill of lading is then forwarded to
the buyer's bank in exchange of payment and afterwards to the buyer so
that the consignment can be claimed once delivered.
The buyer is finally able to
provide the bill of lading to the shipper and claim the consignment. After
it has been confirmed, often by a neutral third party, that the
consignment meets the terms of the contract the seller can claim final
payment from its bank from the funds that were previously deposited.
It
is estimated that large commercial bank finance about 90% of all global trade
transactions. If for any reason the letter of credit cannot be cleared and
payment made the transaction cannot take place.
Letter of Credit L/c also
known as Documentary Credit is a widely used term to make payment secure
in
domestic and international trade. The document is issued by a financial
organization at the buyer request. Buyer also provides the necessary
instructions in preparing the document.
The International Chamber of
Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit
(UCPDC) defines L/C as:
“An arrangement, however named or
described, whereby bank (the Issuing bank) acting at the request and on
the
instructions of a customer (the Applicant) or on its own behalf:
Is to make a payment to or to the
order third
party (the beneficiary) or is to accept bills of exchange (drafts)
drawn
by the beneficiary.
Authorised another bank
to effect such payments or to
accept and pay such bills of exchange (draft).
Authorised
another bank to negotiate against stipulated
documents provided that the terms are complied with.
A key principle underlying letter of
credit (L/C) is that banks deal only in documents and not in goods. The
decision to pay under a letter of credit will be based entirely on
whether the
documents presented to the bank appear on their face to be in accordance
with
the terms and conditions of the letter of credit.
Parties to Letters of Credit
Applicant (Opener): Applicant which is also referred to as
account party is
normally a buyer or customer of the goods, who has to make payment to
beneficiary. LC is initiated and issued at his request and on the basis
of his
instructions.
Issuing Bank (Opening Bank) : The issuing bank is the one which create
a letter of credit
and takes the responsibility to make the payments on receipt of the
documents
from the beneficiary or through their banker. The payment has to be made
to the
beneficiary within seven working days from the date of receipt of
documents at
their end, provided the documents are in accordance with the terms and
conditions of the letter of credit. If the documents are discrepant one,
the
rejection thereof to be communicated within seven working days from the
date of
of receipt of documents at their end.
Beneficiary: Beneficiary is normally stands for a
seller of the goods,
who has to receive payment from the applicant. A credit is issued in his
favour
to enable him or his agent to obtain payment on surrender of stipulated
document and comply with the term and conditions of the L/c.
If L/c is a transferable one and he transfers the credit to another
party, then
he is referred to as the first or original beneficiary.
Advising Bank: An Advising Bank provides advice to the
beneficiary and
takes the responsibility for sending the documents to the issuing bank
and is
normally located in the country of the beneficiary.
Confirming Bank: Confirming bank adds its guarantee to
the credit opened by
another bank, thereby undertaking the responsibility of
payment/negotiation
acceptance under the credit, in additional to that of the issuing bank.
Confirming bank play an important role where the exporter is not
satisfied with
the undertaking of only the issuing bank.
Negotiating Bank: The Negotiating Bank is the bank who
negotiates the
documents submitted to them by the beneficiary under the credit either
advised
through them or restricted to them for negotiation. On negotiation of
the
documents they will claim the reimbursement under the credit and makes
the
payment to the beneficiary provided the documents submitted are in
accordance
with the terms and conditions of the letters of credit.
Reimbursing Bank : Reimbursing Bank is the bank authorized
to honour the
reimbursement claim in settlement of negotiation/acceptance/payment
lodged with
it by the negotiating bank. It is normally the bank with which issuing
bank has
an account from which payment has to be made.
Second Beneficiary: Second Beneficiary is the person who
represents the first or
original Beneficiary of credit in his absence. In this case, the credits
belonging to the original beneficiary is transferable. The rights of the
transferee are subject to terms of transfer.
Types of Letter of Credit
1. Revocable Letter of Credit L/c
A revocable letter of credit may be
revoked or modified for any reason, at any time by the issuing bank
without
notification. It is rarely used in international trade and not
considered
satisfactory for the exporters but has an advantage over that of the
importers
and the issuing bank.
There is no provision for confirming
revocable credits as per terms of UCPDC, Hence they cannot be confirmed.
It should
be indicated in LC that the credit is revocable. if there is no such
indication
the credit will be deemed as irrevocable.
2. Irrevocable Letter of CreditL/c
In this case it is not possible to
revoke or amended a credit without the agreement of the issuing bank,
the
confirming bank, and the beneficiary. Form an exporter’s point of view
it
is believed to be more beneficial. An irrevocable letter of credit from
the
issuing bank insures the beneficiary that if the required documents are
presented and the terms and conditions are complied with, payment will
be made.
3. Confirmed Letter of Credit
L/c
Confirmed Letter of Credit is a
special type of L/c in which another bank apart from the issuing bank
has added
its guarantee. Although, the cost of confirming by two banks makes it
costlier, this type of L/c is more beneficial for the beneficiary as it
doubles the guarantee.
4. Sight Credit and Usance
Credit L/c
Sight credit states that the
payments would be made by the issuing bank at sight, on demand or on
presentation.
In case of usance credit, drafts are drawn on the issuing bank or the
correspondent bank at specified usance period. The credit will indicate
whether
the usance drafts are to be drawn on the issuing bank or in the case of
confirmed credit on the confirming bank.
5. Back to Back Letter of
Credit L/c
Back to Back Letter of Credit is
also termed as Countervailing Credit. A credit is known as back-to-back
credit
when a L/c is opened with security of another L/c.
A back-to-back credit which can also
be referred as credit and counter-credit is actually a method of
financing both
sides of a transaction in which a middleman buys goods from one customer
and
sells them to another.
The parties to a BacktoBack Letter
of Credit are:
1. The buyer and his bank as the issuer of the original Letter of
Credit.
2. The seller/manufacturer and his bank,
3. The manufacturer’s subcontractor and his bank.
The practical use of this Credit is
seen when L/c is opened by the ultimate buyer in favour of a particular
beneficiary,
who may not be the actual supplier/ manufacturer offering the main
credit with
near identical terms in favour as security and will be able to obtain
reimbursement by presenting the documents received under back to back
credit
under the main L/c.
The need for such credits arises
mainly when:
The ultimate buyer not ready for a
transferable credit
The Beneficiary do not
want to disclose the source of
supply to the openers.
The manufacturer demands
on payment against documents
for goods but the beneficiary of credit is short of the funds
6. Transferable Letter of
Credit L/c
A transferable documentary credit is
a type of credit under which the first beneficiary which is usually a
middleman
may request the nominated bank to transfer credit in whole or in part to
the
second beneficiary.
The L/c does state clearly mentions
the margins of the first beneficiary and unless it is specified the L/c
cannot
be treated as transferable. It can only be used when the company is
selling the
product of a third party and the proper care has to be taken about the
exit
policy for the money transactions that take place.
This type of L/c is used in the
companies that act as a middle man during the transaction but don’t have
large
limit. In the transferable L/c there is a right to substitute the
invoice and
the whole value can be transferred to a second beneficiary.
The first beneficiary or middleman
has rights to change the following terms and conditions of the letter of
credit:
Reduce the amount of the credit.
Reduce
unit price if it is stated
Make shorter the expiry
date of the letter of credit.
Make
shorter the last date for presentation of
documents.
Make shorter the period
for shipment of goods.
Increase the amount of
the cover or percentage for
which insurance cover must be effected.
Substitute
the name of the applicant (the middleman)
for that of the first beneficiary (the buyer).
Standby Letter of Credit L/c
Initially used by the banks in the
United States, the standby letter of credit is very much similar in
nature to a
bank guarantee. The main objective of issuing such a credit is to
secure
bank loans. Standby credits are usually issued by the applicant’s bank
in the
applicant’s country and advised to the beneficiary by a bank in the
beneficiary’s
country.
Unlike a traditional letter of
credit where the beneficiary obtains payment against documents
evidencing
performance, the standby letter of credit allow a beneficiary to obtains
payment from a bank even when the applicant for the credit has failed to
perform as per bond.
A standby letter of credit is
subject to “Uniform Customs and Practice for Documentary Credit” (UCP),
International Chamber of Commerce Publication No 500, 1993 Revision, or
“International Standby Practices” (ISP), International Chamber of
Commerce
Publication No 590, 1998.
Import Operations Under L/c
The Import Letter of Credit
guarantees an exporter payment for goods or services, provided the terms
of the
letter of credit have been met.
A bank issue an import letter of credit
on the behalf of an importer or buyer under the following Circumstances
When an importer is importing goods
within its own country.
When a trader is buying good from
his own country and sells it to another country for the purpose of
merchandizing trade.
When an Indian exporter who is
executing a contract outside his own country requires importing goods
from a
third country to the country where he is executing the contract.
The first category of the most
common in the day to day banking
Fees and Reimbursements
The different charges/fees payable
under import L/c is briefly as follows
1. The issuing bank charges the
applicant fees for opening the letter of credit. The fee charged depends
on the
credit of the applicant, and primarily comprises of :
(a) Opening Charges: This would comprise commitment charges
and usance charged to
be charged upfront for the period of the L/c.
The fee charged by the L/c opening
bank during the commitment period is referred to as commitment fees.
Commitment
period is the period from the opening of the letter of credit until the
last
date of negotiation of documents under the L/c or the expiry of the L/c,
whichever is later.
Usance is the credit period agreed
between the buyer and the seller under the letter of credit. This may
vary from
7 days usance (sight) to 90/180 days. The fee charged by bank for the
usance
period is referred to as usance charges
(b)Retirement Charges
1. This would be payable at the time
of retirement of LCs. LC opening bank scrutinizes the bills under the
LCs
according to UCPDC guidelines , and levies charges based on value of
goods.
2. The advising bank charges an
advising fee to the beneficiary unless stated otherwise The fees could
vary
depending on the country of the beneficiary. The advising bank charges
may be
eventually borne by the issuing bank or reimbursed from the applicant.
3. The applicant is bounded and
liable to indemnify banks against all obligations and responsibilities
imposed
by foreign laws and usage.
4. The confirming bank’s fee depends
on the credit of the issuing bank and would be borne by the beneficiary
or the
issuing bank (applicant eventually) depending on the terms of contract.
5. The reimbursing bank charges are
to the account of the issuing bank.
Risk Associated with
Opening Imports L/cs
The basic risk associated with an
issuing bank while opening an import L/c are:
The financial standing of the importer As the bank is responsible to
pay the money on the behalf of the importer, thereby the bank
should make
sure that it has the proper funds to pay.
The goods Bankers need to do a detail
analysis against the risks associated with perishability of the
goods,
possible obsolescence, import regulations packing and storage, etc.
Price
risk is another crucial factor associated with all modes of
international
trade.
Exporter
Risk There is always the risk of
exporting inferior quality goods. Banks need to be protective by
finding
out as much possible about the exporter using status report and
other
confidential information.
Country Risk These types of risks are mainly
associated with the political and economic scenario of a country.
To solve
this issue, most banks have specialized unit which control the
level of
exposure that that the bank will assumes for each country.
Foreign exchange risk Foreign exchange risk is
another most sensitive risk associated with the banks. As the
transaction
is done in foreign currency, the traders depend a lot on exchange
rate
fluctuations.
Export Operations Under L/c
Export Letter of Credit is issued in
for a trader for his native country for the purchase of goods and
services.
Such letters of credit may be received for following purpose:
For physical export of goods and
services from India to
a Foreign Country.
For execution of
projects outside India by Indian
exporters by supply of goods and services from Indian or partly
from India
and partly from outside India.
Towards
deemed exports where there is no physical
movements of goods from outside India But the supplies are being
made to a
project financed in foreign exchange by multilateral agencies,
organization or project being executed in India with the aid of
external
agencies.
For sale of goods by
Indian exporters with total
procurement and supply from outside India. In all the above cases
there
would be earning of Foreign Exchange or conservation of Foreign
Exchange.
Banks in India associated themselves
with the export letters of credit in various capacities such as advising
bank,
confirming bank, transferring bank and reimbursing bank.
In every case the bank will be
rendering services not only to the Issuing Bank as its agent
correspondent bank
but also to the exporter in advising and financing his export activity.
Advising an Export L/c The basic responsibility of an
advising bank is to advise the credit received from its overseas
branch
after checking the apparent genuineness of the credit recognized by
the
issuing bank.
It is also
necessary for the advising bank to go through the letter of credit, try
to
understand the underlying transaction, terms and conditions of the
credit and
advice the beneficiary in the matter.
The main
features of advising export LCs are:
1. There
are no credit risks as the bank receives a onetime commission for the
advising
service.
2. There are no capital adequacy needs for the advising function.
Advising of Amendments to L/Cs Amendment of LCs is done for
various reasons and it is necessary to fallow all the necessary the
procedures outlined for advising. In the process of advising the
amendments the Issuing bank serializes the amendment number and
also
ensures that no previous amendment is missing from the list. Only
on
receipt of satisfactory information/ clarification the amendment
may be
advised.
Confirmation
of Export Letters of Credit It constitutes a definite
undertaking of the confirming bank, in addition to that of the
issuing
bank, which undertakes the sight payment, deferred payment,
acceptance or
negotiation.
Banks in
India have the facility of covering the credit confirmation risks with
ECGC
under their “Transfer Guarantee” scheme and include both the commercial
and
political risk involved.
Discounting/Negotiation of Export LCs When the exporter requires
funds before due date then he can discount or negotiate the LCs
with the
negotiating bank. Once the issuing bank nominates the negotiating
bank, it
can take the credit risk on the issuing bank or confirming bank.
However,
in such a situation, the negotiating bank bears the risk associated with
the
document that sometimes arises when the issuing bank discover
discrepancies in
the documents and refuses to honor its commitment on the due date.
Reimbursement of Export LCs Sometimes reimbursing bank, on
the recommendation of issuing bank allows the negotiating bank to
collect
the money from the reimbursing bank once the goods have been
shipped. It
is quite similar to a cheque facility provided by a bank.
In return,
the reimbursement bank earns a commission per transaction and enjoys
float income
without getting involve in the checking the transaction documents.
reimbursement
bank play an important role in payment on the due date ( for usance LCs)
or the
days on which the negotiating bank demands the same (for sight LCs)
Regulatory Requirements
Opening of imports LCs in India
involve compliance of the following main regulation:
Trade Control Requirements
The movement of good in India is
guided by a predefined se of rules and regulation. So, the banker needs
to
assure that make certain is whether the goods concerned can be
physically
brought in to India or not as per the current EXIM policy.
Exchange Control Requirements
The main objective of a bank to open
an Import LC is to effect settlement of payment due by the Indian
importer to
the overseas supplier, so opening of LC automatically comes under the
policies
of exchange control regulations.
UCPDC Guidelines
Uniform Customs and Practice for
Documentary Credit (UCPDC) is a set of predefined rules established by
the
International Chamber of Commerce (ICC) on Letters of Credit. The UCPDC
is used
by bankers and commercial parties in more than 200 countries including
India to
facilitate trade and payment through LC.
UCPDC was first published in 1933
and subsequently updating it throughout the years. In 1994, UCPDC 500
was
released with only 7 chapters containing in all 49 articles.
The latest revision was approved by
the Banking Commission of the ICC at its meeting in Paris on 25 October
2006.
This latest version, called the UCPDC600, formally commenced on 1 July
2007. It
contains a total of about 39 articles covering the following areas,
which can
be classified as 8 sections according to their functions and operational
procedures.
Serial No.
Article
Area
Consisting
1.
1 to 3
General
Application, Definition and
Interpretations
2.
4 to 12
Obligations
Credit vs. Contracts, Documents
vs. Goods
3.
13 to 16
Liabilities and
responsibilities.
Reimbursement, Examination of
Documents, Complying,
Presentation, Handling
Discrepant Documents
4.
17 to 28
Documents
Bill of Lading, Chapter Party Bill
of
Lading, Air Documents, Road Rail
etc. Documents, Courier , Postal etc.
Receipt. On board, Shippers’ count,
Clean Documents, Insurance documents
5.
29 to 33
Miscellaneous
Provisions
Extension of dates, Tolerance in
Credits, Partial Shipment and
Drawings. House of Presentation
6
34 to 37
Disclaimer
Effectiveness of Document
Transmission and Translation
Force Majeure
Acts of an Instructed Party
7
38 & 39
Others
Transferable Credits
Assignment of Proceeds
ISBP 2002
The widely acclaimed International
Standard Banking Practice (ISBP) for the Examination of Documents under
Documentary Credits was selected in 2007 by the ICCs Banking Commission.
First introduced in 2002, the ISBP
contains a list of guidelines that an examiner needs to check the
documents
presented under the Letter of Credit. Its main objective is to reduce
the
number of documentary credits rejected by banks.
FEDAI Guidelines
Foreign Exchange Dealers Association
of India (FEDAI) was established in 1958 under the Section 25 of the
Companies
Act (1956). It is an association of banks that deals in Indian foreign
exchange
and work in coordination with the Reserve Bank of India, other
organizations
like FIMMDA, the Forex Association of India and various market
participants.
FEDAI has issued rules for import LCs which is one of the important area
of
foreign currency exchanges. It has an advantage over that of the
authorized
dealers who are now allowed by the RBI to issue stand by letter of
credits
towards import of goods.
As the issuance of standby of letter
of Credit including imports of goods is susceptible to some risk in the
absence
of evidence of shipment, therefore the importer should be advised that
documentary credit under UCP 500/600 should be the preferred route for
importers of goods.
Below mentioned are some of the
necessary precaution that should be taken by authorised dealers while
issuing a
stands by letter of credits:
The facility of issuing Commercial
Standby shall be
extended on a selective basis and to the following category of
importers
Where such standby are required by
applicant who are
independent power producers/importers of crude oil and petroleum
products
Special category of importers namely
export houses,
trading houses, star trading houses, super star trading houses or
100%
Export Oriented Units.
·
Satisfactory credit report on the overseas supplier should be
obtained
by the issuing banks before issuing Stands by Letter of Credit.
·
Invocation of the Commercial standby by the beneficiary is to be
supported by proper evidence. The beneficiary of the Credit should
furnish a
declaration to the effect that the claim is made on account of failure
of the
importers to abide by his contractual obligation along with the
following
documents.
A copy of invoice.
Nonnegotiable
set of documents including a copy of non
negotiable bill of lading/transport document.
A
copy of Lloyds /SGS inspection certificate wherever
provided for as per the underlying contract.
·
Incorporation of suitable clauses to the effect that in the event
of
such invoice /shipping documents has been paid by the authorised dealers
earlier, Provisions to dishonour the claim quoting the date / manner of
earlier
payments of such documents may be considered.
·
The applicant of a commercial stand by letter of credit shall
undertake
to provide evidence of imports in respect of all payments made under
standby.
(Bill of Entry)
Fixing limits for Commercial Stand
by Letter of Credit L/c
Banks must assess the credit risk in
relation to stand
by letter of credit and explain to the importer about the inherent
risk in
stand by covering import of goods.
Discretionary
powers for sanctioning standby letter of
credit for import of goods should be delegated to controlling
office or
zonal office only.
A separate limit for
establishing stand by letter of
credit is desirable rather than permitting it under the regular
documentary
limit.
Due diligence of the
importer as well as on the
beneficiary is essential.
Unlike
documentary credit, banks do not hold original
negotiable documents of titles to gods. Hence while assessing and
fixing
credit limits for standby letter of credits banks shall treat such
limits
as clean for the purpose of discretionary lending powers and
compliance
with various Reserve Bank of India’s regulations.
Application
cum guarantee for stand by letter of credit
should be obtained from the applicant.
Banks
can consider obtaining a suitable
indemnity/undertaking from the importer that all remittances
towards their
import of goods as per the underlying contracts for which stand by
letter
of credit is issued will be made only through the same branch which
has issued
the credit.
The importer should give
an undertaking that he shall
not raise any dispute regarding the payments made by the bank in
standby
letter of credit at any point of time howsoever, and will be liable
to the
bank for all the amount paid therein. He importer should also
indemnify
the bank from any loss, claim, counter claims, damages, etc. which
the
bank may incur on account of making payment under the stand by
letter of
credit.
Presently, when the
documentary letter of credit is
established through swift, it is assumed that the documentary
letter of
credit is subject to the provisions of UCPDC 500/600 Accordingly
whenever
standby letter of credit under ISP 98 is established through SWIFT,
a
specific clause must appear that standby letter of credit is
subject to
the provision of ISP 98.
It
should be ensured that the issuing bank, advising
bank, nominated bank. etc, have all subscribed to SP 98 in case
stand by
letter of credit is issued under ISP 98.
When
payment under a stand by letter of credit is
effected, the issuing bank to report such invocation / payment to
Reserve
Bank of India.
Foreign Direct Investment (FDI) plays an important role in the economic development of a country. It denotes the connectivity and trade relation in the global arena. Although the trend of FDI was upward in the recent past in Bangladesh, its volume is comparatively low now. Corruption, weak governance and law and order situation, gas and power crisis are mainly obstructing the flow of FDI.
Environment is very important for any kind of investment. No environment is completely favourable for investment. But in Bangladesh, the environment is conducive for FDI as there is more or less stability in the political arena, cheap and good human resources, good climate for investment, cooperation of government etc. Besides, the government is generous to appreciate the investors for any kind of investment which relates to development.
But still much-sought-after FDI is not coming to Bangladesh as was expected. Analysts say a surge in domestic investment may help Bangladesh attract moreforeign investmentand log faster growth. But problems in power and infrastructure and inadequate investment opportunities for small and large local investors hinder the prospect of spike in domestic investment, and FDI.
Indeed, investors in rich countries are now looking for opportunities in Asia and emerging markets for growth, as well as to shield businesses after the global financial crisis. In the past two decades, Bangladesh has been growing by 5.0 percent a year, with global investment banks and multinational institutions praising the country's future potential. The country, which seeks to become a transport and connectivity hub in South Asia, holds the potential to grow fast. But it lacks the domestic resources and investment needed to solve the power and energy deficit and infrastructure bottlenecks.
Many labour-intensive factories in China, Taiwan and Korea are relocating to Bangladesh to benefit from low labour cost. To encourage more countries to relocate their sunset industries, Bangladesh should start building the manufacturing base. There is a inflow of portfolio investment. But the country should deal with such 'speculative' investment with great caution. Inadequate domestic investment opportunities encourage investors to put their funds in stocks, which many fear are overvalued.
The problem of power shortages might be solved by plans to generate 3,000 MW by 2013. Gas production is also being enhanced. It is possible that Bangladesh could be a top investment destination as 'all the ingredients for its flourishing are there.' And for that matter, hard actions are necessary to go for ground-level works that the investors are willing to see.
However, many experts feel inflow of fresh FDI to Bangladesh will shrink further. Domestic investment for the export-oriented industry has already taken a hit from global economic crisis. However, local investment, some claim, is set to rise with the confidence boosting up among entrepreneurs, thanks to a transition to democracy.
An analyst said it is possible for Bangladesh to get $5.0 billion FDI. He identified eleven sectors in Bangladesh that deserve this investment, such as energy, infrastructure, pharmaceuticals, textiles, agriculture, healthcare, telecom, climate change, education, shipbuilding and light engineering. To attract FDI, he recommended four types of investment activities: National image building, investment generation, investor servicing and policy advocacy. Investor servicing involves assisting committed investors to analyse business opportunities, establishinga businessand maintaining it. Policy advocacy encompasses initiatives aiming to improve the quality of the investment climate and identifying the views of the private sector in this area.
Other experts said the government should undertake proper plans to attract greater FDI to Bangladesh. A total of 154 foreign and local investment proposals worth Tk 42.70 billion were registered with the Board of Investment (BoI) in October, up by 23 per cent in September, 2010. Of the proposals, reports say, BoI data showed, 39 per cent proposal came from local textile entrepreneurs, reflecting the growing demand for backward linkage industry. The board's data showed a tepid response from foreign investors in October who registered only five proposals, compared to 139 by local entrepreneurs. Some 10 proposals came from joint-venture projects by local and foreign investors.
By contrast, local entrepreneurs registered highest investment proposals for setting up as many as 139 industrial units in the month. Local investors proposed to put into Tk 23.50 billion for industrial units. Local investment proposal also recorded a 19 per cent rise in October, compared to a month ago. In September, local entrepreneurs registered investment proposals for 92 industrial units, the investment of which amounted to Tk 19.71 billion.
Besides textiles, service sector accounted for 35 per cent, chemical 8.0 per cent, agro-based industries 8.0 per cent, engineering 7.0 per cent for and three per cent for other sectors. Five foreign and 10 joint-venture proposals amounted to Tk 19.15 billion in October. Foreign and joint-venture investment proposal data showed a 27 per cent increase in October against September. Sheikh Hasina, chairing aboard of directorsrightly identified the NRBs abroad as the key resource persons for investment.
Successive governments have repeatedly been inviting foreign entrepreneurs to take advantage of the 'most liberal investment policy.' But according to experts, liberal investment policy remain only on paper. From the airport up to registration of an investment proposal, a foreign investor has to wait months after months. 'One-stop service' which is there in the ledger book of the Board of Investment (BoI), did not work for a single day in the country.
The reality is that the BoI itself was not functioning properly. For long, the vital organisation ran without an executive chairman and did not convene board meetings. The BoI board, headed by the Prime Minister and industries minister as vice president, was scheduled to meet once every three months. Its purpose was mainly to determine vital policies to promoteforeign investmentin the country and exports. Such slow-going situation has apparently made the prime investment promotion and facilitation agency directionless and one of the most inefficient departments of the country.
According to a study, a staggering 83 per cent of foreign firms located in Bangladesh identified corruption as a major constraint. They also identified crime and lack of law and order as major business constraints. This negative image of Bangladesh as a corruption- and crime-riddled country is evidently taking a toll on its FDI inflow.
The study further says a higher percentage of foreign firms located in Bangladesh identified tax rates and administration, business licensing and permits, customs and trade regulations, and labour skill level as major business constraints. These perceptions are consistent with results found in the econometric model that human capital is a determinant of FDI. An educated and skilled labour force is the key to success for attracting foreign investors, it added.
Indeed, the BoI needs to overcome infrastructure bottlenecks, especially gas and electricity crisis, in attracting investments in industries. There is a need for a policy shift to promote 'less gas-consuming' industries, encourageinvestment in infrastructure, and focus on the service sector. The country needs to explore coal as an alternative source of energy and the government should endorse the Coal Policy at the earliest.