Nearly half of all loans extended under trade finance have turned non-performing, according to a new study by the Bangladesh Institute of Bank Management (BIBM), highlighting growing stress in one of the banking sector’s key financing segments.
The study found that 40 to 50 per cent of trade finance loans are now classified as non-performing, while banks with higher overall default loan ratios are facing more severe deterioration in their trade finance portfolios.
The findings were presented on Wednesday at a BIBM workshop titled “Trade Services Operations of Banks” held at the institute’s campus in Mirpur, Dhaka.
Presenting the study, Professor Shah Md Ahsan Habib said banks’ trade finance portfolios had become increasingly vulnerable.
“The non-performing loan ratio in trade finance currently stands at 40 to 50 per cent. In banks where the overall NPL ratio is already high, the default rate in trade finance exceeds 80 per cent,” he said.
Trade finance covers working capital financing, export operations, imports of consumer goods and transactions involving the purchase and sale of goods and services in the domestic market.
According to the study, banks have significantly expanded their trade finance exposure in recent years for imports of capital machinery, cotton and other industrial raw materials, sugar, fertiliser, fuel and scrap vessels. However, the expansion has been accompanied by a sharp rise in loan defaults.
The report also found that non-performing loans are increasing not only in domestic trade finance but also in export financing.
Ahsan Habib said the study identified a major structural weakness in export finance.
“Almost all bankers surveyed believe that the use of back-to-back letters of credit without legally enforceable sales contracts is creating non-performing loans in export financing,” he said.
The study noted that back-to-back letters of credit are intended to finance imports of raw materials required for export production. However, weak contractual arrangements and financing based on disputed or legally unenforceable agreements have increased credit risks.
As a result, export proceeds often fail to arrive on time. When exporters cannot repay their obligations, banks are forced to convert trade finance facilities into forced loans, further increasing non-performing loans across the banking system.
Ahsan Habib recommended modernising Bangladesh’s trade finance framework, saying stronger contractual standards and improved trade finance processes are essential to curb the rising volume of default loans.
Speaking as chief guest, BIBM Director General Ejajul Islam said Bangladesh needs modern legal and digital infrastructure to facilitate electronic trade documents and make international trade faster, safer and paperless.
The joint research was conducted by BIBM Assistant Professors Tofayel Ahmed and Rahat Banu, Lecturer Rajib Kumar Das, Bangladesh Bank Additional Director Mohammad Arafat Ali of the Foreign Exchange Policy Department and Mutual Trust Bank Executive Vice-President ATM Nesarul Haque.
The workshop was attended by senior banking professionals, including BIBM Supernumerary Professor and NRBC Bank Chairman Ali Hossain Pradhania, Islami Bank Bangladesh Deputy Managing Director Mahmudur Rahman, Prime Bank Deputy Managing Director Syed Sajjad Haider Chowdhury and City Bank Deputy Managing Director Faruk Ahmed.
