BB unveils framework for alternative trade finance mechanisms

Bangladesh Bank (BB) has introduced a comprehensive policy framework aimed at expanding the use of alternative trade finance mechanisms, marking a significant step toward aligning the country's trade financing practices with evolving global standards.

The initiative seeks to provide greater flexibility to exporters, importers, and financial institutions while maintaining robust risk management and regulatory oversight, said a BB circular issued on Thursday (11 June).

The central bank noted that although Documentary Letters of Credit (LCs) remain a cornerstone of Bangladesh's international trade transactions, global trade practices are increasingly embracing complementary instruments such as Open Account Trade, Supply Chain Finance (SCF), and factoring.

The new framework is designed to facilitate the gradual adoption of these mechanisms, allowing businesses to choose financing solutions that best suit their commercial needs.

Under the guidelines, Authorized Dealer (AD) banks have been granted wider authority to facilitate various alternative trade finance instruments.

For import transactions, ADs may process advance payments of any amount if supported by a repayment guarantee from a foreign bank.

In the absence of such guarantees, advance payments of up to US$20,000 are permitted, while payments of up to $50,000 may be made from Export Retention Quota (ERQ) accounts.

Bangladesh Bank has also committed to considering urgent requests beyond these limits on a case-by-case basis, generally within 48 hours.

The framework also expands opportunities for exporters by allowing shipments on open-account credit terms, provided that exporters comply with existing regulations regarding the realization of export proceeds.

In addition, the central bank has encouraged the use of documentary collection methods, including Documents against Payment (DP) and Documents against Acceptance (DA), in line with internationally recognized Uniform Rules for Collections (URC).

A major feature of the policy is its emphasis on Supply Chain Finance, an area that has become increasingly important in global trade. Bangladesh Bank has authorized banks to develop financing solutions based on genuine trade flows, including reverse factoring arrangements that allow exporters to receive early payment against buyer-approved invoices.

The guidelines further permit banks to extend financing to creditworthy importers for usance imports and to discount accepted import bills on a non-recourse basis, thereby improving liquidity across supply chains.

To ensure proper oversight, banks intending to introduce Supply Chain Finance products will be required to obtain regulatory acknowledgment from Bangladesh Bank's Foreign Exchange Policy Department-1.

Institutions must submit detailed product structures and risk management frameworks before launching such services.

The central bank has also placed strong emphasis on digital transformation within trade finance.

Banks are encouraged to adopt electronic processing systems and accept digital trade documents, including electronic invoices and transport documents.

This move is expected to enhance efficiency, reduce processing time, and support the modernization of Bangladesh's trade infrastructure.

While promoting greater flexibility and innovation, Bangladesh Bank underscored the importance of maintaining prudent risk management practices.

Authorized Dealers have been instructed to conduct rigorous credit assessments, establish clear exposure limits, and ensure strict compliance with anti-money laundering and counter-terrorism financing regulations, as well as tax and foreign exchange requirements.

Industry observers view the new framework as an important milestone in the modernization of Bangladesh's trade finance ecosystem.

By facilitating alternative financing options and encouraging digital trade solutions, the policy is expected to improve liquidity, lower transaction costs, strengthen supply chain resilience, and enhance the competitiveness of Bangladeshi businesses in international markets.

Bangladesh Bank has clarified that the new measures are intended to broaden the range of available trade finance instruments rather than replace Letters of Credit. LCs will continue to serve as a key financing tool, particularly for transactions involving higher risks or new trading relationships.