The Islamic Development Bank's (IDB's) trade financing arm has offered to open letters of credit (L/Cs) for state-owned Bangladesh Petroleum Corporation (BPC).

But bankers appear to be cautioning officials at the energy ministry against the offer, as it appears that local banks would miss out on big commissions if they lose their L/C business with Bangladesh's only fuel importer.

Supply benefits

The IDB has reportedly told officials that pressure on Bangladesh's foreign exchange reserves would ease if BPC opens L/Cs with its trade finance wing, the International Islamic Trade Finance Corporation (ITFC), which would then pay suppliers direct.

The IDB, which already lends more than a billion US dollars a year to BPC, also reckons that import costs and shipping times will be reduced if the state-owned importer opens L/Cs through the ITFC.

Objections

But energy ministry officials were apparently told at a meeting with bankers in late November that if BPC opts to open L/Cs with ITFC, then Bangladesh's banks will lose the "hefty amount they earn as commission every year," according to local media.

Ministry officials also appear to be unclear about how much the L/Cs from the ITFC would cost or how much local banks charge in commission for opening L/Cs for BPC at the moment.

Officials are also concerned that Bangladesh's energy security will become too dependent on the IDB, since the government already relies on the Jeddah-based development bank to finance its fuel bill, which is expected to increase by around 50 per cent next year.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.