Fault of the regulators: Pakistan failed where Bangladesh didn’t

Published: July 27, 2014
In Bangladesh, sensible regulations ensure that neither bankers nor the factory owners are tested for their integrity. PHOTO: AFP

In Bangladesh, sensible regulations ensure that neither bankers nor the factory owners are tested for their integrity. PHOTO: AFP


In 1986, the Bangladeshi government introduced landmark regulations for its emerging garment export industry, called the back-to-back Letter of Credit (LC).

Under the rules, banks would pay the suppliers directly for raw material acquired by the factory. The buyer would tell the bank the specifics of the raw material — including the value, supplier’s name and the date when the material was needed.

The bank would ensure that as soon as the supplier delivered the raw materials and furnished proof of delivery, he got paid by the bank within a specified period. With this arrangement, the factory owners could raise funds up to 75% of the value of their orders. In short, a factory exporting $10 million every year could buy raw materials worth $7.5 million without spending its own money.

When the factory consumed these raw materials and shipped its orders, money the bank had already paid was deducted from factory’s export earnings. The balance was then transferred to the factory’s bank account — the only money the factory ever touched. Under these regulations, the factory owner had no access to capital but had an easy access to raw materials.

This is an important distinction. In Pakistan, factory owners can get preferential export credit for buying raw materials and meeting working capital requirements. But once they lay their hands on this easy money, it proves tragic. In the long run, they squander this money to enact their personal dreams of grandeur, and prematurely.

But, in Bangladesh, factory owners could only become rich by processing and shipping more orders. Ironically, in both countries, banks try to help the exporters but in radically different ways. In Bangladesh, banks lend indirectly by making thousands of relatively smaller payments to the suppliers of raw materials. There is no big, tempting tranche of working capital given to the factory.

These rules brought nothing short of a revolutionary change in the behavior of all players. The focus shifted to performing and fulfilling orders at hand. A playing field was set that systematically rewarded order performance and closed all access to cheaper credit. Everyone had to work hard to get paid with no danger of payment default; so long as one fulfilled the orders. Also, the only way for the factory owners to get rich was to increase their capacity and to export more orders.

However, the relationship between expansion and getting wealthier has remained muddled in Pakistan. Securing cheap credit and then defaulting on it has long been a risk-free road to riches.

Under these standards, the few large garment exporters in Pakistan must possess the integrity worthy of Jinnah. In Bangladesh, sensible regulations ensure that neither bankers nor the factory owners are tested for their integrity.

All garment factories start small. A large size makes no sense as in the beginning no buyer is ready to place large orders. But once they have gained customer confidence, larger orders follow.

In a Darwinian world, the size of a garment factory is an indication of how well it has operated and survived. Currently, out of the 5,500 garment factories in Bangladesh, 400 have an annual sales turnover that is greater than $50 million.

In Pakistan, starting a decade earlier than Bangladesh’s, there are less than a dozen factories of this size. In Bangladesh, a garment factory is 40 times more likely to cross the $50 million mark than a Pakistani factory. The Pakistan ones just do not live long enough to grow into large enterprises; they usually die a premature death.

These stark differences cannot be explained by some mystical quality of Bangladeshi entrepreneurship. Extremism, which is currently the single most important hindrance in our path to growth, did not seriously come into play until 2008. Bangladesh already had an unassailable lead by then.

That country is not naturally predisposed toward garment exports either. If anyone, it should have been Pakistan. Bangladesh does not produce any cotton. Instead, it imports yarn from India or Pakistan at a higher cost. Only recently, it has developed a small and nascent textile sector, mostly manned by Pakistani staff. On the other hand, Pakistan has been a major textile player for the last 50 years and has always produced its own fabric. Bangladesh imports it.

Always intrigued by Bangladesh’s success, during my frequent interactions with Bangladeshi owners of garment factories, my stock question to them has been to name the single most important factor that helped jump Bangladeshi garment exports from $100 million in 1986 to $23.5 billion in 2014. Their near identical response always acknowledges the regulations on back-to-back LCs as one of the most important reasons.

For long, our regulators have heeded to industry demands of more and cheaper credit. We can see through the textile packages that have been released, time after time right until the latest one in 2009-2014 Textile Policy. All these packages have common themes with little variations. They provide preferential interest rate, authorise duty-free import of machinery and raw materials, attempt to keep the income tax rate lower and offer subsidies on sales under various inventive names. And yet, our garment export sales have remained flat.

Clearly, the very few Pakistani success stories seem to be outliers in a playing field that encourages an entrepreneur to self-destruct and choke himself on cheap credit, while forgetting all about performing on his order or aim for expansion.

Making his access to credit even easier under ever newer policies is like lending to a casino guest already on a losing streak. Entrepreneurs are humans and shall always remain vulnerable to temptations. Good regulations can cause a world of change in their behavior and trigger a cascading effect that can lift an entire nation out of poverty. It certainly is not too late for Pakistan to learn from Bangladesh and enact similar regulations.

The writer is an entrepreneur who has worked in Bangladesh’s garment sector

Published in The Express Tribune, July 28th,  2014.

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Reader Comments (38)

  • Parvez
    Jul 28, 2014 - 4:51AM

    The failure was that the Bangladesh leaders are TRUE to their country……….wile are are true only to themselves.


  • Maria
    Jul 28, 2014 - 7:43AM

    @Parvez: Typical negative attitude without knowing and facts. Go and look at the state of people in Bangladesh and their political leaders. You think the political squabbling that goes on in Bangladesh is any better or worse than any other Muslim country? Guess again. Why are Bangladeshis moving illegally to India and Pakistan and not the other way around? The garment industry moves to wherever people will work the cheapest. Do you think your average Pakistani worker will accept the salary of a Bangladeshi garment worker?


  • Professor
    Jul 28, 2014 - 9:55AM

    The arrangement is called “Escrow” and it is the preferred way of doing business in most nations. Don’t know how that works in Islamic banking system though.


  • Insider
    Jul 28, 2014 - 9:56AM

    What do we expect from matric-fail think tanks sitting on the top? India, Bangladesh, China, Singapore etc. all have great think tanks and policy makers. Ours are busy in expanding their poultry and feed business, dairy farms and competing to take over each other in the milk industry. Retards!!!


  • Insider
    Jul 28, 2014 - 9:57AM

    What Modi is doing in India is unprecedented despite all his bias for us. He is reinventing Indian Economy on war footings. Out leaders stink and when you stink at the top, it trickles down fairly quickly.


  • WB
    Jul 28, 2014 - 10:09AM


    Pakistanis are also moving illegally into India.

    This is after hatefully taking a country away.

    shouldn’t that tell you what a tremendous, spectacular and mind-boggling failures you guys are?


  • WB
    Jul 28, 2014 - 10:11AM


    Are you sure the stink is only at the top?


  • ali salman
    Jul 28, 2014 - 10:12AM

    Very well argued article. Rules and regulations do influence behaviour and this just proves that.


  • amoghavarsha.ii
    Jul 28, 2014 - 10:48AM

    @author, I don’t think that back to back LC is the Major or single most contributor.
    Back to back LC takes care of fund flow / working capital.
    Before that you need to win orders from customer right, only after winning orders this so called advantage comes in to affect.

    There is also another benefit, CD exemption against exports.

    The main factor which really gets them business is there price/quality and timely delivery.
    I think, price is affected more by CD exemption, cheap labor, credit/fund generation and preferential trade agreements.
    Back to Back LC gives more flexibility that is all and yes some advantage on price too.

    Main benefit of Back to Back LC is
    Bank knows what factory is doing
    Bank is assured of payments, NO NPA
    Customer also gets confidence on Vendors.
    Suppliers also get confidence in working on LC.


  • Ali
    Jul 28, 2014 - 11:12AM


    No matter how bad the situation is, doubt any Pakistani wants to move to India.


  • iWish
    Jul 28, 2014 - 11:28AM

    Good article. I wish high Garment Export, by paying pennies from the profit to the worker, could be called a viable economy! I would also like to know what kind of salaries & benefits those poor factory workers are getting for every $50m they are helping the owners earned. There is must be something that Bangladeshis are coming back to Pakistan in Shiploads.


  • Shujaat
    Jul 28, 2014 - 11:34AM

    Ironically ! there is a need for many regulations but sad part of the story is government is making expenditures in areas of least interest..


  • WB
    Jul 28, 2014 - 11:52AM


    “No matter how bad the situation is, doubt any Pakistani wants to move to India.”

    No Pakistani wants to move to India. He needs to move to India for survival.


  • nrmr44
    Jul 28, 2014 - 12:04PM

    Inventory costs are only one part of Working Capital, the other significant parts being Receivables, and Cash (for salaries, power, travel, business development, etc). Therefore, the Bangladesh government is not providing all of WC, and the promoter also is shouldering a good part of the risk. Furthermore, before a bank will undertake this service with respect to raw material, they will verify the existence of purchase orders and fixed assets, so the promoter has to risk his own money for these as well. In short, the assistance that the Bangladesh government is providing still leaves a lot for the promoter to put in on his own.
    If the system in Pakistan is not working it means the promoters are not only diverting easy credit, but also fudging records of purchase orders, fixed assets, no. of employees, etc. Furthermore, the bank officials have to be conniving in all this, otherwise it would not be possible.
    The success in Bangladesh is, therefore, bigger than it appears. And the failure in Pakistan is rather more wide and deep than realized.
    Remember also, that success encourages copying by others and becomes, therefore, contagious. So does corruption and failure.


  • Rana Ajeet
    Jul 28, 2014 - 12:11PM

    But China is also doing same thing , laborers are paid very less thats why most manufacturing is moving to china to exploit the labors.Labor riots are very frequent but the news is usually suppressed



  • Kahkashan
    Jul 28, 2014 - 12:31PM

    Mr Saquib Saeed: Please do let us know about the ratio of electricity loadshedding in Bangladesh. How do the garment factory owners deal with it? I think if someone tries to replicate Bangladeshi model here in Pakistan, hours-long power outages won’t let her/him succeed. What do you say about it?Recommend

  • Udaya Bose
    Jul 28, 2014 - 12:45PM

    You are entitled to your doubts. The fact, however, is that many Pakistanis get “lost” in India every year. Not because they don’t know their way back but because they are no longer interested in finding the way back.


  • AVM Polpot
    Jul 28, 2014 - 1:22PM

    “Fault of the regulators: Pakistan failed where Bangladesh didn’t”
    Correctred Headlines: Fault of the regulators: Pakistan failed where Bangladesh succeeded.
    Choice of words reveals mindset.


  • kami
    Jul 28, 2014 - 3:11PM

    It is an unfair analysis. Bangladesh still has to go a long way (Good luck to them).
    Bangladesh is still behind Pakistan (check gdp per capita etc.). Textile is their only export (I mean really main export) and that is why they are ahead.
    Pakistan exports heavy machinery. We might not be into making small things, but we do export whole plants of factories (e.g. recently one Sugar industry plant sold to Brazil). We also make JF17 Thunder with Chinese collaboration and Al Khalid Tank.
    All good wishes for Bangladesh. I hope to see our brothers prospering.


  • amoghavarsha.ii
    Jul 28, 2014 - 3:25PM

    @nrmrr, this is Back to Back LC,
    meaning LC raised by customer, against this LC, Bank gives credit to factory, but this credit is paid as
    1. direct to suppliers for rawmaterials
    2. duties and clearing charges directly paid
    3. salary also covered up for that particular production only ( depending on no. of products running)
    4. ED or sales tax is also covered.

    so everything is covered basically but factory cannot take out cash for other than this project.
    any profit is available only after completion of the project/ supply of project.

    Also government only made this policy guidelines, but banks operate depending on industry.
    Bank has its own policy to protect its interests but with Govt guidelines.

    SO basically this is fully benefitial to factory and bank, as said earlier, factory should be competetive to win order.


  • Strategic Asset
    Jul 28, 2014 - 4:00PM

    @Professor: It is not escrow, it is simply trade financing. However this seems to be more specialized as it seems tailor-made (pun intended!) for the textile industry in Bangladesh as apparently the banks are paying the suppliers directly.


  • nrmr44
    Jul 28, 2014 - 4:15PM

    An LC is only a mode of payment, while the issue is about how many items are still left uncovered. Directionless comments add nothing to the discussion.


  • OldMethod
    Jul 28, 2014 - 5:58PM

    The practice is not new; The banks actually charges a very high interest for giving loan against a promise of future income. It’s kind of a strict “business cash advance”. The Western & European banks give similar “Cash Advance” to public ahead of customers’ expectations of Tax Refund from the Govt, but only after securing the proof of available tax refund coming to them, but they do charge a heavy fee for such monies. It’s only a bank’s own risk and the Govts don’t cover any bank loss coming out of this venture. The article above doesn’t go over the details.


  • HG
    Jul 28, 2014 - 5:58PM

    Those moving to Pakistan are orphan of 1971 war & they called Bihari Pakistani who live in ghetto around Dhaka. These people took side with Pakistan in that war & then Pakistan abandon them after that. Read some History.


  • HG
    Jul 28, 2014 - 6:00PM

    Your comment tickle me . LOL


  • Jul 28, 2014 - 7:07PM

    @Udaya Bose: As per report in Times Of India about 350 Pakistanis are over staying their visas in Nagpur city alone. Some of them are doing good business and running shops.


  • iWish
    Jul 28, 2014 - 7:08PM

    They are Bengalis! They look, speak and call themselves “Bengalis” not “Beharis”. There are Beharis in Pakistan and they are never mistaken for Bengalis. There were millions of Bengalis living in Pak before Bangladesh came into existence. They left after 1971, but now coming back with bonuses! I don’t mind them being here. Everyone has a right to earn a living wherever he can. Sadly, the dream they had did not feed them well, it never does.


  • Hash
    Jul 28, 2014 - 8:28PM

    That’s the problem with Pakistani national attitude. They are willing to beg, loot and steal rather than accepting lower salaries and smaller dreams. you mean to say that every pakistani labor is worth more (or qualified enough) than the salary offered for a textile labor role?
    And since law and order situation is poorest, the safest and most profitable job is to steal and loot. that’s the difference.


  • iMsorry
    Jul 28, 2014 - 8:55PM

    Where are you from, bro? I don’t see that “looting & stealing” you talking about! May you are talking about few political leaders and many tax evaders. They are found everywhere… given the chance. If you say our Law&Order and check & balance us poor, you are right there.


  • Lutfor
    Jul 28, 2014 - 11:45PM

    Check the current years Human Development Index. Pakistan has more poor population than Bangladesh.



  • someone
    Jul 29, 2014 - 2:29AM

    May be you have been out of touch with news for past few months. Hindus of Pakistan are moving in flocks to India, unless of course you don’t consider them Pakistanis.

    Read this


  • Iqbal
    Jul 29, 2014 - 3:33AM

    * Pakistan exports heavy machinery……. *
    You forgot another thing in which it ranks as number one. Terrorism.
    That was made official by the ex PM of UK, Gordon Brown.


  • Mehdi
    Jul 29, 2014 - 5:22AM

    @Maria – In Bangladesh factory workers receive better pay than their Pakistani counterpart. Just don’t twist facts.


  • Mirza
    Jul 29, 2014 - 8:52AM

    East Pakistan used to be the poorest province of Pakistan. After freedom and a few hiccups in the form of military coups democracy has taken hold. The generals and mullah are put in their place and economic engine has overtaken the corruption and other social evils. We are delighted to see our Bengali brothers making economic progress and moving ahead of us. However, we did not set the bar too high for us to start with.


  • BringOn!
    Jul 29, 2014 - 7:51PM

    @Lutfor: Oh Please! Have mercy on her. She didn’t know she shook a hornets nest! We know the hatred, we played cricket there. Lol! We saw all! We know!
    @someone: “Flocks”! Ha ha ha! You must have videos of these traveling “flocks” taken by drones, don’t you?
    @Iqbal: You guys really take politically charged comment very seriously, that’s not very smart. That’s was his favor to India to prove his friendship. You really believed that, didn’t you? Omg, what an innocent crowd!
    @Mirza: Oh, the emerging Super Power. Go on! Enjoy the Glory! Nothing is a secret these days, please don’t work do hard here.
    @Mehdi: Do you know the salary numbers, tell us please!


  • KC
    Aug 3, 2014 - 3:32AM

    Quick facts- Bangladesh has higher life expectancy and food sufficiency than both India and Pakistan, 100% school enrollment and a globally competitive shipbuilding industry, alongside emerging sectors in pharmaceuticals, ceramics, jute and leather. It has the highest renewable energy penetration in South Asia. Even more surprising are its banking boom and architecture companies. With the Bay of Bengal now free of Indian and Burmese claims, it plans to create a blue economy around offshore energy and seafood

    It’s not just garments. There is a tremendous lot more to Bangladesh. If only it were to get its politics and leadership in order (the two begums particularly), it could well have gone and become the next Asian tiger


  • Aug 3, 2014 - 10:26AM

    Really nice blog good information sharing about travel. I am really enjoyed read your article.


  • Aug 3, 2014 - 12:38PM

    @KC: Dear KC I agree with every word you have said as I have close knowledge of happenings in Bangladesh. Many of us look at you as a role model as your Government and majority people have stood to fight communalism. We wish you all the good and progress yes do become an Asian Tiger. Good luck.


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