Liberalising offshore banking to serve export sector better

MS Siddiqui | Published: September 06, 2019 21:12:00 | Updated: September 15, 2019 21:12:42

Offshore banking was allowed in 1985. Bangladesh Bank (BB) announced its policy on setting up offshore business units (OBU) on December 17, 1985. The primary objective of offshore banking was to activate financing business and industrial activities at the newly established Export Processing Zones (EPZ).

OBU is a window of a scheduled bank that is engaged in arranging foreign currency by borrowing, depositing and placing foreign currency from international foreign currency holders. Almost all the local banks have permission to operate OBU but around 35 banks are now operating OBUs.

Offshore banking is increasingly getting popular among both overseas and local investors because of the low cost of funds. The interest rate is around 6.0 per cent while the interest rate at home is at double digit.

Foreign currency loans are helping local producers, mostly garment manufacturers, with bill discounting immediately after shipment. The availability of foreign currency loan at lower interest rate has also helped bring down, to some extent, the overall interest rate in the banking sector.

In most of the jurisdictions, OBU does not have any local capital requirement or it is extremely low and taxes including withholding taxes on internal income and other forms of levies are practically non-existent; foreign banks/local banks have entry to conduct offshore business; license fee for registration and operation is either nil or very low; there is protection against lawsuit and avoidance of double taxation; operational cost is low, and there are unlimited market opportunities.

Offshore banking is banking at the international level within the country and can accept deposits and provide investment in freely convertible foreign currencies. The transactions/operations of OBU are free from set rules/regulations of the central bank and other local regulators. Bangladesh was following an identical practice until recently.

Until recently there was no statutory capital and reserve or liquidity requirement for an OBU. The OBU was allowed to carry on transactions in freely convertible foreign currency. The overseas industrial units inside or outside the EPZs were permissible clients for OBU. The system was allowed to render bill discounting services to the AD (authorised dealer) branches in Bangladesh under Usance Payable at Sight (UPAS) system.

However, BB in the circular ref no 26 dt 19th August has imposed Cash Reserve Ratio (CRR)

and Statutory Liquidity Ratio (SLR) on offshore banking limiting the liquidity of offshore banking in Bangladesh.

The OBU is a part of a bank whether incorporated in Bangladesh or outside Bangladesh but it maintains its own separate accounts relating to offshore banking business. The OBU operating in Bangladesh will have to obtain license from the Bangladesh Bank and is subject to the relevant laws of Bangladesh.

The OBU will be free to accept deposit and borrow from abroad, make advances/investments abroad and also make permissible transactions with different categories of overseas investors at EPZ of Bangladesh.

However, local enterprises may also enjoy foreign currency loan from the offshore banking units subject to the approval of the Board of Investment (BOI).

One of the services provided by offshore units is UPAS. With the introduction of offshore banking, UPAS arrangement and it has become the main function of the OBUs in the country.

Practically, the major lending functions as a part of core banking activities are captured by the OBUs belonging to foreign banks due to availability of low-cost fund and global network. They are basically concentrating on discounting business of its different Ads' import bills under UPAS credit arrangement.

The idea was introduced to meet the unique need of some bulk volume importers where sellers demand immediate payment against a deferred L/C by way of discounting, prepayment or negotiation but the supplier's bank is not ready to do so. In order to find out a solution, the letter of credit is opened on deferred basis (180 days to 360 days depending on the nature of import). But in the payment clause of the L/C, a provision is incorporated indicating that, payment against the L/C will be made at sight basis by the L/C opening bank from its own source or through its offshore unit or its correspondents.

However, in recent times, OBUs have started discounting services to the ADs local export bill as well. Banks render UPAS credit facilities to its valued customers in the following two ways: either UPAS credit service through own offshore banking unit (OBU) or UPAS credit service through overseas Correspondent Bank.

The central bank believes that OBU service has created imbalance in demand and supply situation in the domestic market and created additional pressure on the domestic foreign currency situation.

The central bank issued a new policy on February 25, 2019 to regulate offshore banking operation (OBO) of the banks in Bangladesh properly for mitigating their risks.

The offshore banking operation/transactions with fully foreign-owned enterprises now in EPZs, PEPZs, EZs and Hi-tech Parks include nothing other than accepting deposits, making short-term loans/ advances and investments, discounting bills, negotiating bills, issuing letter of credit and guarantee.

However, prior permission from the Foreign Exchange Investment Department of the Bangladesh Bank is required in accordance with the instructions/circulars issued from time to time before making any medium and long-term financing facility to the said enterprises.

All the local scheduled banks have been asked to comply with cash reserve requirement (CRR) and statutory liquidity ratio (SLR) rules for their OBOs. Under the new policy, three-fourths of total offshore operations' assets will have to be invested in Bangladesh.

The banks will have to maintain capital requirements under Basel-III framework along with the implementation of Asset Liability Management (ALM) guidelines for their offshore banking operations. The banks have been asked to renew the approval of OBUs in line with the new policy by applying to the central bank within three months.

Under the new policy, the banks are prohibited from some activities including placement of fund with domestic banking unit (DBU) in offshore banking operations. Besides, at the close of business on any day, the value of offshore banking assets in Bangladesh will not be less than 75 per cent of the liabilities of offshore banking.

The policy imposes limit on transferring foreign currency to offshore units from onshore units. OBU would be allowed to use funds mobilised from domestic banking operation with a limit not exceeding 20 per cent of its total regulatory capital for offshore units. The OBUs will not be allowed to collect any deposit from Bangladeshi nationals, except expatriate Bangladeshis. Banks will not be allowed to channel remittances using the OBUs.

The currency is transferred by banks to offshore banking units for investing mainly in buyer's credit. Earlier there was no limit on transferring or mobilising fund in the offshore banking units from onshore banking units.

For maintenance of CRR, total demand and time liabilities of the bank shall include liability of offshore banking operation. SLR shall also be maintained accordingly. For the maintenance of CRR and SLR that entails to offshore banking, if required, banks may use funds from offshore banking operation and convert to Bangladesh currency (Taka).

The strict regulation and limiting the sources of fund curtailed the finance to UPAS of exports by discounting documents. The alternative for exporters is loan from local banks. The local banks' loans are available against mortgage of properties and higher interest rate.

Exporters believe that the central bank would consider withdrawing strict regulations of offshore finance upon improvement of conditions in the financial sector


MS Siddiqui is a legal economist.


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