Ready Made Garments industry in Bangladesh

The Ready-Made Garments (RMG) industry occupies a unique position in the Bangladesh economy. It is the largest exporting industry in Bangladesh, which experienced phenomenal growth during the last 25 years. By taking advantage of an insulated market under the provision of Multi Fiber Agreement (MFA) of GATT, it attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a key role in employment generation and in the provision of income to the poor. Nearly four million workers are directly and more than twelve million inhabitants are indirectly associated with the industry. Over the past twenty five years, the number of manufacturing units has grown from 180 to over 4000. The sector has also played a significant role in the socio-economic development of the country.

The quota came to an end at 2004 but it continued to show robust performance, competitive strength and, of no less importance, social commitment. RMG’s contribution to Bangladesh economy is well-known, well-appreciated and well-respected.

Garments industry is the largest export industry for our country and it contributes 75% of total export. The industry is associated with its strength, weakness, threat and opportunity

In this study an attempt has been made to describe the overall scenario of Bangladesh Ready Made Garments industry . At this time of free economy everyone may be interested to know about the largest export industry and the mechanism of doing business here. The present study has been undertaken with consideration of this fact.

Origin of the study

This report has been prepared by Md. Abdul Matin, Roll no. 13, 30^TH  batch : session:2011/2012 as a requirement of the internship program. The report was based upon “ The Ready – made garments industry IN Bangladesh . The  supervisor is Md. Ruhul Amin, Faculty of Business Studies, . Honorable institute supervisor duly approved the topic- “Bangladesh Ready Made Garments industry  which was decided for doing the report. The report will definitely increase the knowledge of other students to know the garments industry of Bangladesh.

Objectives of the study

The general objective of preparing this report is to fulfill the requirement of Internship Program as well as completion the EMBA Program through gaining the practical job experience and view the application of theoretical knowledge in the real life. The report focuses on two parts. They are:

   Primary Objective

The broad project objective is to analyze the garments sector of Bangladesh and relate the knowledge with the practical experience.

  Secondary Objective

In order to reach the broad objective, some specific objectives are identified.

1. To know the different aspect of garments industry, its prospects and problems.

2. To show some statistics of RMG industry.

3. To analyze the statistical data related to RMG industry.

Methodology

Sources of data

Data regarding the completion of this report are collected from both primary and secondary sources.

• Primary source:

Direct conversation with the respective officers of the company.

• Secondary sources: 

1. Various data source like Bangladesh bank, Export Promotion Bureau
2. Internet Browsing
3. Annual report of the company
4. Different published material. Such as books and articles.

Analysis of data

For analyzing the collected data different statistical tools are used.

• For showing the trend of export, contribution of export to GDP, time series analysis has been used.
• For determining the significance of RMG export and Total export simple regression analysis has been used.
• For measuring the significance of profit and commission simple regression analysis has been used.

Limitation

1. In many cases, up to date information was not published.

2. In some cases, access to relevant papers and documents were strictly prohibited.

3. In some other cases, access was denied to procedural matters conducted directly by the top management in the operations of foreign exchange business.

Bangladesh RMG INDUSTRY

Agriculture has been the backbone of economy and chief source of income for the people of Bangladesh, the country made of villages. Government wants to decrease poverty by getting highest productivity from agriculture and achieve self-reliance in food production. Apart from agriculture, the country is much concerned about the growth of export division. Bangladesh have accelerated and changed her exports substantially from time to time. After Bangladesh came into being, jute and tea were the most export-oriented industries. But with the continual perils of flood, failing jute fiber prices and a considerable decline in world demand, the role of the jute sector to the country’s economy has deteriorated (Spin anger, 1986). After that, focus has been shifted to the function of production sector, especially in garment industry.

An overview of Bangladesh garments industry 

The RMG industry is the only multi-billion-dollar manufacturing and export industry in Bangladesh. Whereas the industry contributed only 0.001 per cent to the country’s total export earnings in 1976, its share increased to about 75 per cent of those earnings in 2005. Bangladesh exported garments worth the equivalent of $6.9 billion in 2005, which was about 2.5 per cent of the global total value ($276 billion) of garment exports. The country’s RMG industry grew by more than 15 per cent per annum on average during the last 15 years. The foreign exchange earnings and employment generation of the RMG sector have been increasing at double-digit rates from year to year. Some important issues related to the RMG industry of Bangladesh are noted in table

Important issues related to the Bangladesh ready-made garment industry 

Source: Compiled by the databases of the Bangladesh Garment Manufacturers and Exporters Association, and the Export Promotion Bureau, Bangladesh.

Currently, there are more than 4,000 RMG firms in Bangladesh. More than 95 per cent of those firms are locally owned with the exception of a few foreign firms located in export processing zones (Gonzales, 2002). The RMG firms are located mainly in three main cities: the capital city Dhaka, the port city Chittagong and the industrial city Narayangonj. Bangladesh RMG firms vary in size. Based on Bangladesh Garment Manufacturers and Exporters Association (BGMEA) data, Mainuddin (2000) found that in 1997 more than 75 per cent of the firms employed a maximum of 400 employees each. Garment companies in Bangladesh form formal or informal groups. The grouping helps to share manufacturing activities, to diversify risks; horizontal as well as vertical coordination can be easily found in such group activities. Ready-made garments manufactured in Bangladesh are divided mainly into two broad categories: woven and knit products. Shirts, T-shirts and trousers are the main woven products and undergarments, socks, stockings, T-shirts, sweaters and other casual and soft garments are the main knit products. Woven garment products still dominate the garment export earnings of the country. The share of knit garment products has been increasing since the early 1990s; such products currently account for more than 40 per cent of the country’s total RMG export earnings (BGMEA website). Although various types of garments are manufactured in the country, only a few categories, such as shirts, T-shirts, trousers, jackets and sweaters, constitute the major production-share (BGMEA website; and Nath, 2001). Economies of scale for large-scale production and export-quota holdings in the corresponding categories are the principal reasons for such a narrow product concentration.

Foreign buyers are concerned about the different compliance of law. So, they were bothered about the child labor issue of Bangladesh. But later on this problem is salute and now garments are restricted to employ child labor. In 2005 the quota facilities for Bangladesh was withdrawn. Everybody thought it would be a great shock for garments industry. But in reality Bangladesh has faced this challenge with great courage. The fact is that the export of garments product has increased after the withdrawn of this quota. And the last two years were really good time for garment industry. The political situation was stable under the country’s state of emergency and this boost the growth of the industry.

Size of the garments industry of Bangladesh

The garment industry is by far the country’s most important manufacturer, earning around $5 billion annually and accounting for about two thirds of all exports. Bangladesh has about 4,000 garment factories with up to 10 million livelihoods dependent on it directly or indirectly. In 2006 it provided jobs for 2.2 million people, accounted for 10.5% of the country’s GDP, and contributed 40% of its manufacturing output. Exports have been growing at an impressive rate in recent years. In 2006/07 alone, they increased by 18.2% to reach US$9.6 billion, a record level for the fifth consecutive year. The contribution to GDP increases at 13.25% in 2007. About 80 per cent of garment workers are women. The Ready Made Garments sector has more potential than any other sector to contribute to the reduction of poverty. Despite the phenomenal success of the RMG sector the working conditions and wages of workers in the industry are cause for serious concern. Bangladesh’s current position as a leading garments exporting nation needs to be consolidated. The economy-wide reverberations of failure would be disastrous. We believe it is in everybody’s interest to sustain this industry – an industry which changed the lives of so many people, particularly women, in Bangladesh.

Bangladesh garments industry is now matured

Bangladesh garments industry has just woke up one morning and find itself a matured one. If we follow DS reports on the conditions of Bangladesh garments industries, we may as well have the same idea. Until 1/11/2007, as per some media, everything was a mess. Now a day, while teachers and lawyers can’t hold elections, garments industries owners hold elections under direct government patronage. And DS must also speak well of the team mates. Maturation of a large industry like RMG sector in Bangladesh is not an overnight phenomenon. The industry was trying to be in a matured stage from last ten years but the unrest political situation was the main obstacle. Bangladesh’s garments exports have experienced a boom from the last two years because of a stable business climate under the country’s state of emergency.  The nation’s exports of knitted and woven items rose by nearly 17 percent to a record 10.7 billion dollars in the financial year to June 2008. And now the industry is at the matured stage.

Strength, Weakness, Opportunity & Threat of Garments sector of Bangladesh at a glance

Strength

• Considerable Qualified/keen to learn workforce available at low labor charges.
• Energy at low price
• Easily accessible infrastructure like sea road, railroad, river and air communication.
• Accessibility of fundamental infrastructure, which is about 3 decade old, mainly established by the Korean, Taiwanese and Hong Kong Chinese industrialists.
• FDI is legally permitted.
• Moderately open Economy, particularly in the Export Promotion Zones.
• GSP under EBA (Everything But Arms) for Least Developed Country applicable (Duty free to EU).
• Improved GSP advantages under Regional Cumulative.
• Looking forward to Duty Free Excess to US, talks are on, and appear to be on hopeful track.
• Investment assured under Foreign Private Investment (Promotion and Protection) Act, 1980 which secures all foreign investments in Bangladesh.
• Overseas Private Investment Corporation, USA insurance and finance agendas operable
• Bangladesh is a member of Multilateral Investment Guarantee Agency (MIGA) under which protection and safety measures are available.
• Adjudication service of the International Centre for the Settlement of Investment Dispute (ICSID) offered.
• Excellent Tele-communications network of E-mail, Internet, Fax, ISD, NWD & Cellular services.
• Weakness of currency against dollar and the condition will persist to help exporters
• Bank interest@ 7% for financing exports
• Convenience of duty free custom bonded w/house
• Readiness of new units to enhance systems and create infrastructure accordant with product growth and fast reactions to circumstances

Weakness

• Lack of marketing tactics
• Absence of easily on-hand middle management
• A small number of manufacturing methods
• Low acquiescence: there is an international pressure group to compel the local producers and the government to implement social acquiescence. The US GSP may be cancelled and purchasing from US & EU may decrease significantly
• M/c advancement is necessary. The machinery required to assess add on a garment or increase competence are missing in most industries.
• Lack of training organizations for industrial workers, supervisors and managers.
• Autocratic approach of nearly all the investors
• Fewer process units for textiles and garments
• Sluggish backward or forward blending procedure
• Incompetent ports, entry/exit complicated and loading/unloading takes much time
• Speed money culture
• Time-consuming custom clearance
• Unreliable dependability regarding Delivery/QA/Product knowledge
• Communication gap created by incomplete knowledge of English
• Subject to natural calamities 

Opportunity

• EU is willing to establish industry in a big way as an option to china particularly for knits, including sweaters
• Bangladesh is included in the Least Developed Countries with which US is committed to enhance export trade
• Sweaters are very economical even with china and is the prospect for Bangladesh
• If skilled technicians are available to instruct, prearranged garment is an option because labor and energy cost are inexpensive.
• Foundation garments for Ladies for the FDI promise is significant because both, the technicians and highly developed machinery are essential for better competence and output
• Japan to be observed, as conventionally they purchase handloom textiles, home furniture and garments. This section can be encouraged and expanded with continued progress in quality. 

Threat

• The exporters have to prepare themselves to harvest the advantages offered by the opportunities.

Major market of RMG industry

The RMG industry of Bangladesh fully depends on the export. The major importer of RMG products are USA and Europe. But there is other country that has a contribution to the total RMG export. The following table contains the list of major importer of our RMG products.

Major market of RMG industry                        

(Tk in million)

                         Source: Bangladesh bank ( April to June)

Contribution to Economy

The Ready-Made Garments (RMG) industry contributes to the Bangladesh economy in a distinctive manner. The last 20 years witnessed unparalleled growth in this sector, which is also the largest exporting industry in Bangladesh. It has attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a significant role in terms of employment generation. Nearly two million workers are directly and more than ten million inhabitants are indirectly associated with the industry. In addition to its economic contribution, the expansion of RMG industry has caused noticeable changes by bringing more than 1.12 million women into the workforce. Hence it is quite apparent that this sector has played a massive role in the economic development of the country.

RMG’s contribution in terms of GDP is highly remarkable; it has reached 13 percent of GDP which was only about 3 percent in 1991. It also plays a pivotal role to promote the development of other key sectors of the economy like banking, insurance, shipping, hotel, tourism, road transportation, railway container services, etc.

One of the key advantages of the RMG industry is its cheap labor force, which provides a competitive edge over its competitors. The sector has created employment opportunities for about two million people of which 70 percent are women who mostly come from rural areas. Thus the industry helps in the country’s social development, women empowerment and poverty alleviation. Currently RMG earns the lion’s share of foreign exchange earnings.

• Contribution to Export and GDP

The Bangladesh RMG industry, with its woven and knit sub-components, is a pre-dominantly export oriented sector, with 95 per cent of the woven and 90 per cent of the knit exports being directed to foreign markets. The cumulative foreign currency earnings by the sector, since 1978, when first export was registered, is estimated at 70.56 billion US dollars. Bangladesh’s RMG export earning stood at 9.21 billion US dollars in FY2007. In 2007 this sector contributed 75.64% of the total Bangladesh export of 12.78 billion dollars in the same year. RMG export in FY2007 was equivalent to 13.25% of Bangladesh’s GDP over the corresponding year. At present the local value addition by the RMG sector is estimated to be 45%. Accordingly, local value addition by the sector in 2007 was about 4.15 billion US dollars which was equivalent to 5.96% of GDP for the same year. The value addition created by the sector itself is estimated at 25% of total RMG export earnings which amounted to about 2.30 billion dollars or equivalent to 3.32% of GDP [ Appendix Table-4].

• Employment Creation and Wage Bill

RMG sector is one of the major employers in the economy. Around three million people are employed in RMG industry and about 70 per cent of which are women. As a matter of fact in the 1990s a large part of the incremental labor force in the manufacturing sector was absorbed by the RMG sector. The RMG workers received USD 315.25 million as their wage in FY 2007. This purchasing power contributed significantly to the growth of the economy through its multiplier impact in terms of consumption expenditure and savings.

RMG industry contribution to different sector

Growth of RMG sector has spawned a whole new set of linkage industries and facilitated expansion of many service sector activities. The RMG industry not only propelled the growth of spinning, weaving, dyeing and finishing industries, production of accessories and spare parts, but also rendered large externalities by contributing to other economic activities in such areas as banking, insurance, real estate, packaging, hotels and tourism, recycling, consumer goods utility services and transportation. RMG sector has overwhelmingly high backward linkage with textile sector providing fabrics, yarn and other ancillaries. It has important backward linkage with utilities such as electricity, gas, and machinery and spare parts supplying.

• Banking and Insurance

Growth of the RMG sector and the related activities has contributed a lot to the robust growth of the financial sector in Bangladesh. In FY 2007 the banking sector earned about 72.77 million dollars from business with the RMG sector in the form of interest and charges and L/C charges. More than one-tenth of the commercial banks’ asset portfolio belongs to the RMG and textile sector in the country. A World Bank survey revealed that almost all firms (98%) are the clients of the commercial banks for working capital and procurement of machines and equipment (57%).

The RMG sector has also contributed to the growth of the country’s insurance sector. On average, every year the premium paid by the RMG sector to the insurance companies was about 6 million dollars. All firms have their machines and plants insured and, additionally, 87% of importers of input and 15% of the RMG exporters get their imports/exports insured.

• Shipping and Logistics

The RMG sector has contributed to the shipping business in Bangladesh and stimulated setting up of several container yards, expansion of port facilities to handle large container carrying trains, increase of cargo handling and storage facilities. RMG manufacturers also extensively use services of Clearing & Forwarding Agents for the purpose of customs clearance of inputs and finished goods. It is estimated that port usage fees earned from the RMG sector account for more than 40% of the income of the port authority. RMG sector contributed about US$130.80 million in FY2007 to earnings of the Shipping business of the country by way of port charges, C&F Agent’s commissions, freight charges, forwarding charges etc.

• Transport Communication

The growth and development of inland transport services to a considerable extent owe to the growth of the RMG industry. Both wheel transport service and railway service are widely used by RMG sector for activities related to manufacturing and cargo movement. The concept of covered van emerged in Bangladesh for safe transportation of the RMG products in particular. In 2007 the inland transport industry received about 55.27 million dollars as revenue from the RMG sector.

• Contribution to Government Exchequer

The RMG sector contributes to the government exchequer both directly and indirectly. In FY 2007 the sector paid 10.13 million dollars as stamp and postage, license renewal fee etc. The sector also paid USD 4.61 million to the government as direct taxes in FY 2007.

• Professional Services

The RMG sector extensively uses professional services from CA firms, legal agencies, and business consultants. In FY 2007 total payment for professional services is estimated at 7.37 million dollars.

• Engineering Sector

The RMG industry paid 28.55 million dollars to the engineering sector which included payments to repairing and maintenance service industry (USD 8.29 million), electrical engineering (USD 9.21 million), transport vehicle maintenance service ( USD 5.53 Million), and machine tools service (USD 5.52 Million).

• Utility Services

Payment of Electricity bill by the RMG industry is estimated to be 29.47 million dollars in FY2002. Utility payments for gas, WASA etc. amounted to an additional 7.37 million dollars.

• Real Estate

Demand for real estate development by the garment industry to accommodate offices and factories of over 4000 garment units has generated a lot of activities in the Construction Industry. The RMG industries paid approximately 52.50 million dollars as factory, office and garage rent in FY 2007.

• Information and Communication Technology

The RMG sector also plays a catalytic role in the growth of the country’s ICT sector. The services consumed by the RMG industry generated revenue for the ICT sector. Payments for ICT services which include communication, hardware and software services are estimated at 19.34 million dollars in FY 2007.

• Hotel and Tourism

A large number of overseas apparel buyers and their representatives visit Bangladesh every year for business purpose. In FY2007 the RMG industry created a business of approximately 9.21 million dollars for the country’s tourism industry.

• Waste Recycling Industry

Approximately 0.5 million people are engaged in waste (mainly, the waste out prices of fabrics) recycling industry of the country which get their materials from the RMG industries. With these waste materials, they are making stuff toys, patterns, quilts, cushions etc.

• Emerging Consumer Market

The 2.2 million workers in the industry have created a large demand for consumer goods. A regular source of earning increases the basic consumption needs such as improved diet, better healthcare, improvements in family utensils and housing conditions etc. The sector has created an increasing demand for consumption of low cost commodities, cosmetics items, dresses, footwear, fast food and other products. A whole industry has been created to service this growing demand and created employment opportunities for hundreds of thousands of people.

(Source of all the above used data is Appendix Table 4)

Social impacts of the RMG Sector

• Women Empowerment

It is well recognized that women’s participation in income generation activities lends them a better status within the family and provides them with considerable freedom. A job ensures equitable access to household resources (nutrition) and larger investment on female human capital (health and education). Employment opportunities draw attention to women’s needs for public facilities such as transportation, communication, safety etc. and create a demand for policy response in these areas. It also has created a demand for education and health. As the income by the female member reduces dependency on male income it reduces their vulnerability. It also reduces the possibility of domestic violence against women. Expansion of women’s employment has contributed positively to the improvement of the savings behavior of the poor people since women tend to be better savers.

Employment in the RMG industry has provided direct access to cash income for the first time to many poor women. A survey, conducted by the BIDS in 1997 showed that for 96 percent of the female workers in the non-EPZ areas, work in the garment industry was the maiden wage employment8. The survey also showed that women were taking up such roles paying for house rents and schooling expenses for their children or brothers and sisters. Despite the fact that they have lower incomes, the female garment workers were spending the same amount as the male workers on the studies of their family members. The same survey further showed that female workers were spending their earnings on their marriage, thus taking a big burden off their families. The independent earnings also allow these women to have a greater share in household decision making. Evidently, wage work at the garment industry has empowered women and improved their status.

• Savings

Regular earning enables a large number of the garment workers to go for some savings. Workers investments on family pension schemes etc. create savings. A BIDS survey conducted in the early 1990s found that 21 percent of both male and female workers aged 15 years and above had their own bank accounts. A higher proportion of workers (30 percent) had bank accounts in the EPZ. Findings showed that women are on average better savers than men and save about 7.6 percent of their otherwise small income.

• Child Labor

In recent years, international debate on child labor has intensified. The elimination of child labor is also among the core labor standards in the ILO Convention. The Harkin Bill placed at the US Senate entitled “The Child Labor Deterrence Act of 1993” which called for the elimination of child labor in the export oriented manufacturing and mining industries. As a consequence many garment industries had to retrench child workers from their factories. In many countries these retrenched children ended up in more strenuous and less-remunerative jobs, or worst, turned to begging in the street. The Bangladesh RMG sector set a unique example through collective efforts which eventually led to the development of a safety-net program for the child labors. The BGMEA/ILO/ UNICEF Child Labor Project in the garment industry of Bangladesh, funded by the US Development of Labor was the first of a series of child labor programs executed by the International Program on the Elimination of Child Labor of the ILO. This project, initiated in 1995, is based on a Memorandum of Understanding (MOU) signed by the BGMEA and two international organizations, the ILO and UNICEF, with the aim of progressively phasing out child labor from more than 2,500 factories that are members of the association.

The key elements of the MOU were:

(a) A fact-finding survey to determine the extent of child labor in the garment industry;

(b) The establishment of an education program in which identified child workers should be enrolled;

(c) The establishment of a monitoring and verification system;

(d) The provision of income compensation in the farm of a monthly stipend of Tk. 300, the equivalent of (at that time) US$ 7. The costs are to be shared by on fifty-fifty basis by BGMEA, the ILO and other donors.

Many of the retrenched child workers have been placed in schools and are receiving a monthly stipend. Football manufacturing industry of Pakistan has been following the globally acclaimed BGMEA Model of Child Labor Elimination. BGMEA has so far spent over 600,000 US dollars for the project. Successfully addressing of this issue has created a very favorable image about Bangladesh abroad and has promised continued market access for the sector.

• Population Control

Employment opportunities especially for women created positive impact on family planning and population control in the country. Independent working-women are getting more conscious about the advantage of a small family, and are exposed to modern family planning methods. Working adolescent girls tend to avoid early marriage as they have their own source of income and are self-dependent. The mean age at marriage for girls working in RMG factories tend to be higher than the national average.

Condition of workers of RMG sector

• According to BGMEA about 3 million people are employed in the RMG sector (around 80% are female). Growing apprehension is the already deprived garment workers may face further retrenchment which may worsen the existing poor working and living standard of the workers.

• A “decent employment” means rising productivity and real wages by ensuring rights to work, employment, social protection, freedom of association and social dialogue in an integrated approach. The concept of decent work has significant gender implications in Bangladesh RMG sector since women constitute a vast majority of the labor force, and women and the worst victims of violations of decent work conditions.

• Women workers are particularly deprived of their special legal rights (e. g. maternity benefits) and remain more exposed to exploitation within their particular spheres of work. The female workers tend to be underpaid and exposed to physical assault by both fellow colleagues and employers.

• Results of a study for ILO re-confirmed us the absence of decent work in most of the RMG industries as they offer low wage, long working hours, poor health and safety protection and in most cases there is no formal contract for job security and social protection.

• The national labor movements are continuously demanding for National Minimum Wage. The minimum wages rule for the garment sector, endorsed in 2006. The minimum wage is Tk 1650.

• No formal appointment letter is issued to the employees’ contractually defining their terms of employment. In most cases the industries do not follow proper dismissal procedure for their workers. Since the workers do not get any formal contract, the employers can hire and fire them at any time without showing any reason.

• The exhaustive and prolonged work schedule of RMG industries sometimes causes occupational disease among the workers, which ultimately impacts negatively on their productivity.
• The recent collapse of a garment factory building at Savar shows how insecure and vulnerable the workers are in the RMG sector. Therefore it is now urgent to improve OSH condition at workplaces for the business interest of the RMG owner in quota free market.

• Bangladesh does not have any national social safety net program like contributory provident fund, medical allowances, unemployment allowances etc. Small and one time retrenchment benefits are not adequate for workers and their families in situations of massive income losses. In most cases the workers do not have their own savings and are not prepared to face any adverse situation.

• Though export-oriented apparel industry is the lifeblood of Bangladesh’s foreign exchange earning, the basic rights, welfare issues of garment workers are severely neglected.

• The basic problem of the ordinary workers and labor movement in garments sector are low scope of operation, non-recognition of legally registered unions at the factory level, long working hours and practically no weekly holiday that left hardly anytime for workers to participate union activities, non-compliance of existing labor laws, high occupational accidents etc. On the other hand, creation of yellow trade unions by the garments owners, imposition of self-made code of conduct, apathy to active social dialogue made ordinary workers and trade unions more vulnerable.

• Closer cooperation between employers and employees are important to ensure the sustainability of an industry. However, it was evident that there is a lack of adequate communication between employees and employers and role of such social dialogue in building a healthy working relationship at factory level are always absent. It is absolutely difficult for workers to form legally registered in house union as a systematic tool to carry on social dialogue with employers at workplace.

Some tragedies of RMG sector

“It is heartbreaking that year after year women and men are killed while making clothes for stores in our communities,” said Ineke Zeldenrust of the Clean Clothes Campaign International Secretariat, an international network that for years has highlighted the safety risks plaguing the Bangladesh garment industry.fire, possibly caused by an electrical short circuit, destroyed the four-story KTS Textile Industries in Bangladesh’s port city of Chittagong. Initial reports stated that 54 were killed and at least 60 were injured, however other sources peg the death toll at several hundred in what local garment workers rights’ advocates are calling the worst tragedy in the history of the Bangladesh garment industry. Over 1,000 workers were reportedly in the factory at the time of the 7 p.m. fire. According to the workers, the exits were locked. In 2005 two electricians reportedly died at this same facility, located in the Kalurghat Industrial Area, when they were electrocuted. This facility reportedly produced for US companies Uni Hosiery, Mermaid International, ATT Enterprise, and VIDA Enterprise Corp. Meanwhile, authorities have apparently sealed off three other factories connected to this facility (Vintex Fashion, Cardinal Fashion and Arena Fashion) citing unplanned construction and inadequate safety measures as life-threatening for their more than 6,000 workers.

The PhoenixBuilding in the Tejgaon industrial area collapsed following unauthorized renovations to convert the upper stories of the building that housed various offices and factories, including a garment factory, into a 500-bed private hospital. One hundred fifty construction workers and an as yet unreported number of garment workers were reportedly in the building Saturday morning when it collapsed. Rescue operations, hampered by lack of equipment, are still underway, as many are feared to be trapped under tons of concrete rubble. Hundreds of activists from workers’ rights groups marched through Dhaka on Saturday demanding compensation for the victims families and punishment for the factory owners. Police have reportedly been searching for the building’s owner Deen Mohammad, also chairman of the City Bank of Bangladesh, but have been unable to locate him. Phoenix Garments exports clothing mainly to Europe.

That same day in Chittagong, 57 workers at the Imam Group of Industries (reportedly housing the Moon Fashion Limited, Imam Fashion, Moon Textile, Leading Fashion and Bimon Inda garment factories) were injured when a transformer explodes and fearing fire, they tried to exit through a narrow exit. Four are reportedly in critical condition following the stampede.

There is a clear need for a long-term wide scale program to address health and safety in the garment/textile sectors. The failure to implement safety measures in these sectors in Bangladesh has resulted in a conditions where the death and injury of workers has become alarmingly routine: in 2000 53 workers died at Choudury Knitwear, 24 died in 2001 at Maico Sweater, nine died in 2004 at the Misco Supermarket building, and 23 died at Shan Knitting and 64 died at the Spectrum-Shahriyar factory in 2005.

Step need to be taken to minimize the risk

• A real and effective national consensus should be the prime concern to get prepared for post MFA Bangladesh needs to prepare a time bound national action plan to minimize the potential risks. It needs to priorities its immediate actions from a number of possible solutions.

• As most of the labor laws have become old and not time befitting, government should formulate a National Policy on Ready Made Garments to establish a development trajectory for the sector to survive, in a quota-free world.

• The growth of RMG sector was facilitated by the supply of low cost labor and since the female workers could easily learn the sewing techniques, the management took very limited or no effort for any further development of its workers. The apprehension regarding the post-MFA also discouraged the employers to arrange further training programs for their work force. However this not only limited workers skill, but also contributed to loss of production through lose of production time, low labor productivity, re-working, quality inconsistence, materials wastage, etc.
• Improved working conditions can help to increase productivity level. Investment in human resources, e.g. training, betterment of working conditions, maintenance of proper safety and health measures, protection from physical and psychological harassment, freedom of association and rights to collective bargaining at factory/enterprise level etc will certainly improve the productivity of the workers.

• Rights and welfare of the employees working in the subcontracting garments factories of the multinational companies should be ensured under corporate social responsibility. The multinational companies should be enforced to make regular visit to the subcontracting factories to ensure core labor standards. Employers associations may works as the watchdog of such initiative. The role of trade unions is to monitor the implementation of CSR at both large companies and subcontractors.

• The CCC believes that follow-up to these tragedies from local and international stakeholders must include

1. support for adequate rescue and relief efforts and financial compensation for the injured workers and the families of the dead;
2. full, independent and transparent investigation and follow-up for all these incidents; and
3. Immediate structural measures to prevent future, similar incidents.

• Industry, along with public authorities (at the local and international levels) must commit to launch an immediate initiative to take on the safety issues that plague the garment industry in Bangladesh, including a structural review of multi-story buildings and facilities inspection mechanisms, explained Zeldenrust.

• Introduction of Labor Standard Stickers on the exported goods, the monitoring and issuance of such stickers may be made under joint supervision of the government and the trade unions. The international buyers, government, trade unions may also encourage the employers to opt for Social Accountability.
• To protect the rights and interests of livelihood security of RMG workers, it is necessary to set up a Social Safety Net programs (contributory provident fund, gratuity, retrenchment fund) and compulsory Workers Insurance. Also an effective Special Fund (easily accessible for affected ordinary workers) can be made to deal with any adverse situation in the post-MFA environment.

• The workers at the garment sector lives under a terrible socio-economic condition with unstable and temporary employment, poor working conditions, long working hours, forced overtime & sexual harassment.

• The promotion o ILO’s “decent work” program would be the most comprehensive effort to protect the workers of RMG sector in a quota-free world.

Possible way to Face the Coming Challenges for RMG sector in Bangladesh:

To face the upcoming challenges in RMG sector, the country should take the following measures:

Formulation of a national policy on RMB industry and workers for post MFA period.

Unconditional and quick implementation of core labor standards and labor laws at workplace of all RMGs.

Establishing a compulsory social safety net package for RMG workers.

Exploration of new market for RMG to protect the industry and the workers and take maximum advantage of free excess to Canadian, Australian and other markers.

Capacity building training and re-training activity for employers and workers in RMG sector to develop productivity and efficiency level.

Develop backward linkage industries for RMG.

Export and product diversification.

Building alliances with likeminded neighbors and competitors within the LDCs.

Continuous training program to sensitize the workers about their rights and interest should be undertaken in cooperation with and financial assistance from the fraternal organizational abroad.

Prospects of the RMG Industry

Despite many difficulties faced by the RMG industry over the past years, it continued to show its robust performance and competitive strength. The resilience and bold trend in this MFA phase-out period partly reflects the imposition of ‘safeguard quotas’ by US and similar restrictions by EU administration on China up to 2008, which has been the largest supplier of textiles and apparel to USA. Other factors like price competitiveness, enhanced GSP facility, market and product diversification, cheap labor, increased backward integration, high level of investment, and government support are among the key factors that helped the country to continue the momentum in export earnings in the apparel sector. Some of these elements are reviewed below.

• Market Diversification

Bangladeshi RMG products are mainly destined to the US and EU. Back in 1996-97, Bangladesh was the 7^th and 5^th largest apparel exporter to the USA and European Union respectively. The industry was successful in exploring the opportunities in markets away from EU and US. In FY06, a successful turnaround was observed in exports to third countries, which having a negative growth in FY05 rose three-fold in FY06, which helped to record 23.1 percent overall export growth in the RMG sector. It is anticipated that the trend of market diversification will continue and this will help to maintain the growth momentum of export earnings. At the same time a recent WTO review points out that Bangladesh has not been able to exploit fully the duty free access to EU that it enjoys. While this is pointed out to be due to stringent rules of origin (ROO) criteria, the relative stagnation in exports to EU requires further analysis.

Region-wise Share of RMG Export

Source: Export promotion Bureau

• Product Diversification

The growth pattern of RMG exports can be categorized into two distinct phases. During the initial phase it was the woven category, which contributed the most. Second phase is the emergence of knitwear products that powered the recent double digit (year-on-year) growth starting in FY04.

Growth Pattern of Woven and Knitwear Categories

                       Source: Bangladesh Bank

In the globalize economy and ever-changing fashion world, product diversification is the key to continuous business success. Starting with a few items, the entrepreneurs of the RMG sector have also been able to diversify the product base ranging from ordinary shirts, T-shirts, trousers, shorts, pajamas, ladies and children’s wear to sophisticated high value items like quality suits, branded jeans, jackets, sweaters, embroidered wear etc. It is clear that value addition accrues mostly in the designer items, and the sooner local entrepreneurs can catch on to this trend the brighter be the RMG future.

Export performance of different Apparel items(in million USD)

Source : Bangladesh Bank

• Backward Integration

RMG industry in Bangladesh has already proved itself to be a resilient industry and can be a catalyst for further industrialization in the country. However, this vital industry still depends heavily on imported fabrics. After the liberalization of the quota regime some of the major textile suppliers Thailand, India, China, Hong Kong, Indonesia and Taiwan increased their own RMG exports.

If Bangladesh wants to enjoy increased market access created by the global open market economy it has no alternative but to produce textile items competitively at home through the establishment of backward linkage with the RMG industry. To some extent the industry has foreseen the need and has embarked on its own capacity building. The trend of back-to-back import has been declining over the years implying a rising contribution of domestic value addition (Figure 2). This is an optimistic indication that a well equipped and modern backward linkage industry may well prove cost effective and thus helping Bangladesh to meet the challenges in the post-MFA era.

• Flow of Investment

It is plausible that domestic entrepreneurs alone may not be able to develop the textile industry by establishing modern mills with adequate capacity to meet the growing RMG demand. It is important to have significant flow of investment both in terms of finance and technology. The investment outlook in this sector is encouraging, although the uncertainties before the MFA phase-out period caused a sluggish investment scenario. In part the momentum in the post-MFA phase-out period is indicative of the efforts underway towards capacity building through backward integration. This is evident in the pace of lending to the RMG sector and in the rising import share of RMG related machinery. However further progress would be necessary to improve and sustain competitiveness on a global scale.

• A Supportive Policy Regime

Government of Bangladesh has played an active role in designing policy support to the RMG sector that includes back-to-back L/C, bonded warehouse, cash incentives, export credit guarantee scheme, tax holiday and related facilities. At present government operates a cash compensation scheme through which domestic suppliers to export-oriented RMG units receive a cash payment equivalent to 5 percent of the net FOB value of exported garments. The FY04 budget also lowered the corporate income tax rate for the RMG industry from 30 to 10 percent for the period up to June 30, 2006. From FY05 the tax regime has been further changed, and a 0.25 percent tax at source will be deducted from the value of the export proceeds of Woven and Knitwear category. At the same time, income tax rate for textile manufacturers were reduced to 15 percent from its earlier level for the period up to June 30, 2008. The reduced tax rates and other facilities are likely to have a positive impact on the RMG sector.

• Lead Time

‘Lead time’ is a crucial factor maintaining export competitiveness. Bangladesh happens to feature the longest lead time in the RMG world. The lead time for Bangladesh is 120 days on an average, while the corresponding period for Sri Lanka is about 19-45 days and for India it is only about 12 days. Various factors like the distance from major markets, importation of raw materials, port congestion, strikes, poor roads, etc. are some of the factors responsible for this. At present the fashion seasons are becoming short with a changing trend, it would not be possible to compete if the lead time extends beyond 30-40 days. Therefore, bringing down the ‘lead time’ to about 30-40 days is a major challenge for the country’s RMG sector. Clearly more business can be captured only if the lead time could be improved.

• Infrastructural Impediments

The existence of sound infrastructural facilities is a prerequisite for economic development. In Bangladesh, continuing growth of the RMG sector is dependent on the development of a strong backward linkage in order to reduce the lead time. However, other factors constraining competitiveness of Bangladesh’s RMG exports included the absence of adequate physical infrastructure and utilities (e.g., transportation, telecommunication, stable power supply, efficient seaport, political tolerance, quality control and a smoothly functioning bureaucracy). According to a recent World Bank-IFC publication (2006) records that a businessman in Bangladesh needs 35 days to export and incurs USD 902 per container, whereas his counterpart in India requires 27 days and spends USD 864 per container. The comparable figures for Pakistan, Sri Lanka and Vietnam are 24 days and USD 996, 25 days and USD 797, and 35 days and USD 701, respectively.

• Labor Productivity

The productive efficiency of labor is more important determinant for gaining comparative advantage than the physical abundance of labor. In Bangladesh, the garment workers are mostly women with little education and training. The employment of an uneven number of unskilled labors by the garment factories results in low productivity and comparatively more expensive apparels. Bangladesh labor productivity is known to be lower when compared with that of Sri Lanka, South Korea and Hong Kong SAR. Bangladesh must look for ways to improve the productivity of its labor force if it wants to compete regionally if not globally.           

• Cheap Labor Force

The strength of a firm depends on its specific comparative advantages, which its competitors do not possess. To date the local industry has flourished in spite of the challenges cited above (e.g., lead time, infrastructure, and bureaucratic red tape) on the back of cheap female labor. The wages paid to RMG workers in Bangladesh are the lowest even by the South Asian regional standard. Figure 4 illustrates the comparative average hourly wages in apparel industry of selected developed and developing countries.

• Research and Training

The country has no dedicated research institute related to the apparel sector. RMG is highly fashion oriented and constant market research is necessary to become successful in the business. Here India has had a head start and Mumbai and Delhi are on line to become fashion centers on a global scale. At present whatever design work is done in the country, these are mostly carried out with foreign workers and experts. BGMEA has already established an institute which offers bachelor’s degree in fashion designing and BKMEA is planning on setting up a research and training institute. These and related initiatives need encouragement possibly intermediated by donor-assisted technology and knowledge transfer. A facilitating public sector role can be very relevant here.

Recent riots and strikes by the garments worker

Garments worker raise their voice in different times to attain their rights. From analyzing different news it can be viewed that the bursting riots of 2006 has not created in a day. There is a long way behind this and a lot of reasons. In July 4, 2001 the national strike took place throughout the garment industry. The strike, planned months in advance, was called by the NGWF and six other union federations. The garment workers called the strike across the country demanding implementation of their six point charter. At least 17 garment factories were damaged in the city by elements hired by some owners, alleged the striking workers. Police arrested 13 garment workers from Mohakhali area for their alleged involvement in demanding the factories.

The death sparked more violence as thousands of garments workers took to the streets in Savar, creating chaos and huge traffic deadlocks around the capital. A section of 800-1000 violent protesters with sticks lead by motorcycle processions resorted to widespread damage of vehicles, attacked about 300 garments factories, and torched many of them. Widespread lootings were also reported and finally extra security forces were deployed to prevent this from going further.

Then Government took some initiatives to sort out the problem and made some promise about the demand to the garments worker. As a result the garments sector became stable again. But the demand was not fulfilled. The worker’s demand for wage was not fulfilled. So the protest started again.

On October 5th 2006, the Bangladesh Minimum Wage Board announced the first raise to the minimum wage for garment workers since 1994. The gross minimum monthly wage was announced as Tk 1,662.50 (€20.12) including basic salary plus house rent and other allowances for entry-level workers. Previously this was Tk 930.The announcement means the basic wage without benefits is around Tk 1,100, far below the Tk 3,000 basic wage called for by Bangladeshi trade unions and supported by the Clean Clothes Campaign.

Garment workers in different parts of Bangladesh have demonstrated against this new proposal and a series of strikes was occurred. As we previously stated, whilst garment workers and their supporters had been demanding wage increases for several years it wasn’t until May 2006, following the outbreak of massive labor unrest by workers unable to tolerate the extreme exploitative conditions any longer, that any kind of action was taken by the Bangladesh government and the minimum wage board was formed. This riot came to an end under the state of emergency.

Reason behind the riot

Around 2.2 million people are employed in the garments sector and around 70% of whom is woman. From the beginning of the industry the rights of the worker is violating. The workers wage was determined as Tk 930 for a new worker in 1994. And this rate was continued till 2006. The other facilities like safety, healthy working environment, security etc. were not provided to the worker. The reason behind the riot can be listed as below.

1. A new wage structure for the garment workers on the basis of a basic minimum wage of tk 3000 (unskilled).
2. Ensure the health and safety of garment workers.
3. Necessary steps for the development and expansion of the garment industry and its markets.
4. Implementation of trade union rights in the garment sector. Trade union rights for the EPZ workers.
5. Separate industrial zones for the garments industry. Settlements, schools and hospitals in the zones.
6. Implementation of the Memorandum of Agreement signed between the MGMEA and the BGWUC in 1997 and 2000 (appointment letter, identity card, service book, weekly holiday, maternity leave, etc.)

Effect of world ongoing financial crisis on Bangladesh Garments Sector

The ongoing financial crisis has not affect the Bangladesh Garments Industry at a large extent till now. But no one no what will happen. And there is a controversy about the future effect of this financial crisis on RMG sector. Some argues that it will affect the industry in a positive manner. The arguments behind this is that the western buyers are cutting their prices because of the financial crisis but China and other garment manufacturing countries can’t afford the price cut, but Bangladesh can because our labors are cheaper and they can work overtime.

But many exporters are really worried about the effect of financial crisis on this sector. The Bangladesh Knitwear Manufacturers Association (BKMEA) reported a ten per cent drop in knitted items such as T-shirts and pullovers. Buyers are now renegotiating prices and delaying orders citing the ongoing financial turmoil.

It’s true some of the top retailers are downsizing their inventories due to the crisis. But Bangladeshi exporters have to be careful. If they can make shipment timely and keep the quality intact, global financial crisis will not affect the RMG sector of Bangladesh.

RMG export growth and percentage as the total export

RMG export growth and percentage as the total export (In million US$)

This table reveals the RMG export from the initial stage of the industry till 2007 and its contribution to total export. The RMG sector enjoys a continuous growth from the beginning of the industry but the initial level was tough. From the last ten years it is viewed that RMG export is contributing 75% of the total export. The following graph can give clear view of growth in RMG export for the last 10 years.

Share of RMG Export in Country’s GDP

Share of RMG Export in Country’s GDP (US$ in Million)

Source:  CPD, IRBD Database

Statistical analysis on RMG sector

This chapter reveals the statistical analysis on the RMG Sector for last ten years, its growth and the significance of RMG export to total export and the significance of RMG export growth to GDP growth. For analyzing the performance of RMG industry of Bangladesh some statistical tools has been used. The overview of performance analysis is presented bellow in figure-

Findings

After explaining different aspect of Bangladesh RMG sector different issue is pointed out. The major issue related to this industry is present here.

• The garment industry is by far the country’s most important manufacturer, earning around $5 billion annually and accounting for about two thirds of all exports. Bangladesh has about 4,000 garment factories with up to 10 million livelihoods dependent on it directly or indirectly. In 2006 it provided jobs for 2.2 million people, accounted for 10.5% of the country’s GDP, and contributed 40% of its manufacturing output. Exports have been growing at an impressive rate in recent years. In 2006/07 alone, they increased by 18.2% to reach US$9.6 billion, a record level for the fifth consecutive year. The contribution to GDP increases at 13.25% in 2007. About 80 per cent of garment workers are women and the current minimum wage is Tk.1650.

• The major strength for the garments sector of Bangladesh is the low labor charge, free economy, infrastructural support, improved GSP, low energy price and so on. Major weakness of this sector is lack of marketing tactics, small number of manufacturing method, low acquiescence, fewer process units for textile and garments, risky working environment etc. There are also some opportunities associated with threat that can be captured by the sector to acquire more profit.

• The major importer of RMG products are USA and Europe. But there is other country that has a contribution to the total RMG export. The other countries are Belgium, Canada, France, Germany, Netherlands and more.

• The RMG industry not only propelled the growth of spinning, weaving, dyeing and finishing industries, production of accessories and spare parts, but also rendered large externalities by contributing to other economic activities in such areas as banking, insurance, real estate, packaging, hotels and tourism, recycling, consumer goods utility services and transportation. RMG sector has overwhelmingly high backward linkage with textile sector providing fabrics, yarn and other ancillaries. It has important backward linkage with utilities such as electricity, gas, and machinery and spare parts supplying.

• The basic problem of the ordinary workers and labor movement in garments sector are low scope of operation, non-recognition of legally registered unions at the factory level, long working hours and practically no weekly holiday that left hardly anytime for workers to participate union activities, non-compliance of existing labor laws, high occupational accidents etc. On the other hand, creation of yellow trade unions by the garments owners, imposition of self-made code of conduct, apathy to active social dialogue made ordinary workers and trade unions more vulnerable.

• 80% of garments workers are women. In the early stage they could be paid much less than men with equivalent skills and be treated as a largely informal workforce to whom employers had no obligation aside from paying their wages. Today, things are beginning to change. Female education has gone up steadily; there has been widespread dissemination of ideas about women’s rights through non-governmental organizations (NGOs), state pronouncements and the media, while microfinance has increased and diversified employment opportunities in the countryside. Women enter the industry not just because of poverty, but also for the prospect of improving their family’s standard of living, sending their children to school, saving for their dowries or supporting ageing parents. They have been able to leverage their earnings into increased decision-making power within their families and independent purchasing power in the market place. They have also become increasingly visible in collective actions in support of their rights, which have linked local and global movements.

• The working environment of garments factory is really risky.  Year after year women and men are killed while making clothes for stores in our communities.  There is a clear need for a long-term wide scale program to address health and safety in the garment/textile sectors. The failure to implement safety measures in these sectors in Bangladesh has resulted in a conditions where the death and injury of workers has become alarmingly routine: in 2000 53 workers died at Choudury Knitwear, 24 died in 2001 at Maico Sweater, nine died in 2004 at the Misco Supermarket building, and 23 died at Shan Knitting and 64 died at the Spectrum-Shahriyar factory in 2005.

• From the time series analysis it is found that RMG export will be increased by US$ 519.15 million per year. The regression analysis reveals that there is a significant relationship between the RMG export and Total export. The GDP growth and RMG export growth is also significant at 5% significant level.

• The quota came to an end at 2004 but it continued to show robust performance, competitive strength and, of no less importance, social commitment. RMG’s contribution to Bangladesh economy is well-known, well-appreciated and well-respected. In 2005-06 the industry faced a great instability due to the protest of the worker. After that under the state of emergency the sector enjoyed a stable growth and finally reaches at the matured stage. The ongoing financial crisis has not affect the Bangladesh Garments Industry at a large extent till now but it can be. So, Bangladeshi exporters have to be careful. If they can make shipment timely and keep the quality intact, global financial crisis will not affect the RMG sector of Bangladesh.

 Letter of Credit

A Letter of Credit is a payment term generally used for international sales transactions. It is basically a mechanism, which allows importers/buyers to offer secure terms of payment to exporters/sellers in which a bank (or more than one bank) gets involved. The technical term for Letter of credit is ‘Documentary Credit’. At the very outset one must understand is that Letters of credit deal in documents, not goods. The idea in an international trade transaction is to shift the risk from the actual buyer to a bank. Thus a LC (as it is commonly referred to) is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer. The Buyer is the Applicant and the Seller is the Beneficiary. The Bank that issues the LC is referred to as the Issuing Bank which is generally in the country of the Buyer. The Bank that Advises the LC to the Seller is called the Advising Bank which is generally in the country of the Seller.

The specified bank makes the payment upon the successful presentation of the required documents by the seller within the specified time frame. Note that the Bank scrutinizes the ‘documents’ and not the ‘goods’ for making payment. Thus the process works both in favor of both the buyer and the seller. The Seller gets assured that if documents are presented on time and in the way that they have been requested on the LC the payment will be made and Buyer on the other hand is assured that the bank will thoroughly examine these presented documents and ensure that they meet the terms and conditions stipulated in the LC.

Types of Letters of Credit

• Revocable
•  Irrevocable
•  Unconfirmed
•  Confirmed
•  Transferable Credit
•  Assignment of Proceeds
•  Revolving
•  Standby

BENEFITS OF THE LETTER OF CREDIT

The letter of credit is the safest, most secure and most convenient settlement method for international transactions. There are a number of advantages both for the seller/exporter and the buyer/importer.

Benefits of sellers

• Assures the security of payment from an international bank once the terms of the letter of credit are met.

• Seller can determine when payment will be satisfied and ship the goods accordingly.

• Bank bears the responsibility of oversight.

• Seller does not have to open an account and grant payment terms to buyer. Credit risk is nearly eliminated. The risk of exchange control created with payment delays is greatly reduced.

• Provides seller easier access to financing once the letter of credit has been issued.

• Once the bank confirms the letter of credit, political and economic risk and questions regarding the buyer’s ability to pay are eliminated. The confirming bank is obliged to pay, even if the buyer goes bankrupt, provided the terms of the letter of credit are met.

Benefits to buyers

• Facilitates financing–for example, creating banker’s acceptances.
• Buyer can confirm that the merchandise is shipped on or before the required date.
• It is safer to deal with bank than to prepay.

• Buyer may get better terms and prices.
• No cash is tied up in the process. Buyer does not have to pay cash up front to a foreign seller before receiving the documents of title to the goods purchased. This is particularly helpful when the buyer is unfamiliar with local suppliers and laws.
• Protects the buyer since the bank only pays when the supplier complies with the specific terms and conditions and produces the documents required by the buyer.
• The buyer can build safeguards into the letter of credit, including inspection of the goods and quality control, and set production and delivery times.

Typically the documents requested in a Letter of Credit are the following:

• Financial Documents

Bill of exchange, Co-accepted Draft

• Commercial Documents

Invoice, packing list

• Shipping Documents

Transport Document, Insurance Certificate, Commercial, Official or Legal Documents

• Official Documents

License, Embassy legalization, Origin Certificate, Inspection Cert , Phyto-sanitary Certificate

• Transport Documents

Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan etc.

• Insurance documents

Insurance policy or Certificate but not a cover note, pre shipment packing list.

The Letter of Credit Process

Participants in LC Process:

• Buyer
• Issuing Bank
• Advising Bank
• Seller (Beneficiary)

Nine (9) Steps in the Letter of Credit Process 

1. Buyer and seller agree to terms including means of transport, period of credit offered (if any), and latest date of shipment acceptable.

2. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer’s credit standing, and may require cash cover and/or reduction of other lending limits.

3. Issuing bank issues LC, sending it to the Advising bank by airmail or electronic means such as telex or SWIFT.

4. Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary).

5. Seller should now check that LC matches commercial agreement and that all its terms and conditions can be satisfied.

6. Seller ships the goods, then assembles the documents called for in the LC (invoice, transport document, etc.).

7. The Advising bank checks the documents against the LC. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank.

8. The Issuing bank now checks the documents itself. If they are in order, it reimburses the seller’s bank immediately.

9. The Issuing bank debits the buyer and releases the documents (including transport document), so the buyer can claim the goods from the carrier.