All types of financing are associated with risks. Banks or financial institutions want to increase their financial operation without increasing their risks. Supply chain financing is a short-term financing facility that reduces the risk among suppliers, distributors and financial institutions. It's a popular concept of domestic as well as international trade financing all over the world. This financing facility has recently been introduced in many financial institutions in Bangladesh.
Supply chain finance is a mode of financing for suppliers against the account receivables arising out of supply of goods or delivery of services on credit. It is the use of financial instruments and technologies to optimise the management of working capital. Supply chain financing is also known as supplier finance or reverse factoring.
It is called reverse factoring when the buyer approaches the bank to finance its group of suppliers. Reverse factoring is a financing solution initiated by the ordering party (the buyer) in order to help its suppliers to finance its receivables more easily. It is a win-win situation both for the buyer and the supplier. In this process buyer optimises working capital and the supplier generates additional operating cash flow, thus minimising risks across the supply chain.
GLOBAL PRACTICE: Supply chain financing (SCF) requires the involvement of a SCF platform and an external finance provider, who settles supplier invoices in advance of maturity date of the invoice. The SCF process has some steps. All the steps are followed by the SCF software provided by SCF partners. The steps are as follows:
Step-1: Buyer/importer send purchase order to supplier/exporter.
Step-2: Supplier/exporter fulfills the order and sends goods/services and invoices to the buyer/importer.
Step-3: Buyer/importer approves the invoices and confirms to financial intermediary of payment at maturity.
Step-4: Supplier/exporter requests a discount facility to financial intermediary.
Step-5: Supplier/exporter receives funds or demand short-term loan through invoice discounting from financial intermediary.
Step-6: Buyer/importer pays to financial intermediary as agreed at maturity of invoice.
These are the steps usually followed in the global SCF processes where technology plays a vital role. In Bangladesh, we are yet to introduce world class technology into the SCF system and we are following almost the same process as in a manual or non-technical environment.
TRADITIONAL TRADE FINANCING VS SUPPLY CHAIN FINANCING: Traditional trade financing is most popular in Asian countries which refers to Documentary Credit (DC), Documentary Collection, Standby LC or other bank guarantees. Now-a-days, most trade is conducted by open account terms. But in the vast majority of cases, traditional trade finance refers to letter of credit (LC).
Banks are now-a-days developing trade finance products and services by introducing Bank Payment Obligation (BPO), factoring, forfeiting and supply chain finance. In most cases, supply chain financing refers to approved payables financing. SCF techniques comprise receivables purchase and loans plus an enabling framework (endorsed by ICC) through the ICC Bank Payment Obligation of the International Chamber of commerce (ICC).
Under this process, the financial intermediary invites large corporate and commercial clients to join the supply chain financing platform through SCF partners and connect their suppliers and distributors. SCF partners enable financial institutions to facilitate easy and instant financing to the suppliers and distributors of large corporates through seamless supply chain financing transactions. The selected suppliers and distributors are then able to raise financing requests from their computer or mobile phone applications without having to visit the financial institutions or their branches. They only need to forward their supply and purchase requests to financial institutions. In recent times, modern technologies like block-chain, artificial intelligence, distributed ledgers technology, smart contracts, cloud computing and big data facilitate contact with global banks and financial institutions and also ensure the involvement of Fin-Tech companies.
Recently ICC has published a report on "Global Survey on Trade Finance and Supply ChainFinance 2017". This is the industry's most widespread survey on trade finance trends and is based on 255 responses from banks located in 98 countries around the globe. Almost 30 per cent of survey respondents identified SCF as the most important area for development and strategic focus in the coming 12 months.
The fundamental differentiation (and value) of SCF as an offering distinct from traditional trade finance is now well established. The market demand of SCF is clearly growing. SCF is now considered as a strategic priority while making financial decision of any type of financial institutions.
SUPPLY CHAIN FINANCING PRACTICES IN BANGLADESH: Letter of credit (LC) is the most popular trade term in Asian markets. A Bangladesh Institute of Bank Management (BIBM) study found that 84 per cent (in terms of number of cases) and 88 per cent (in terms of volume of imports) of import payments from the country were made through LC in 2014. LC is thus the most popular trade payment method in Bangladesh. South Korea, Bangladesh, China, India, and Hong Kong transmit LCs through the SWIFT network for their imports. As a popular method, LC creates traffic in trade finance over the world.
SCF is one of the growing financing technologies which can reduce trade finance traffic. Some commercial banks in Bangladesh have recently introduced SCF. Their target customers at present are regular suppliers, service providers of multinational corporations (MNCs) and large local companies. The commercial banks are interested to finance in poultry industry, pharmaceutical industry and telecom industry. They may operate this financing through invoice discounting. Reverse factoring might be the financing vehicle for small and medium enterprises (SMEs) sector in Bangladesh.
There are scopes of supply chain financing in ready-made garment (RMG) sector, pharmaceuticals, SME sector, agricultural products, contact growers, cottage industries etc. Digitisation of SCF and trade financing should be the ultimate destination of the financial institutions.
Rafiqul Islam is Chief Operating Officer of Shimanto Bank and S. M. Ahsan Habib, Principal
Officer of Uttara Bank Ltd.