Offshore banking is becoming increasingly significant in Bangladesh, emerging as a pivotal sector for attracting foreign currency through enhanced investment and international trade facilitation.
Industry experts believe offshore banking could play a crucial role in mitigating the nation’s foreign currency crisis by injecting much-needed liquidity and stabilising the local currency.
As the foreign exchange crisis intensifies, the renewed focus on offshore banking highlights its potential benefits.
Experts point out that as foreign currency reserves remain under pressure, offshore banking provides a valuable new source of dollar inflows, complementing traditional revenue streams such as exports and remittances.
The sector’s capacity to attract foreign investment and offer more affordable financing options positions it as a critical component for future economic stability and growth.
Offshore banking in Bangladesh commenced in 1985 following a Bangladesh Bank circular aimed at expanding financing opportunities for businesses in the country’s Export Processing Zones (EPZs).
Over time, it has grown into a key financial service, recognised for its role in attracting global settlements and providing foreign currency financing to local businesses.
Initially, Offshore Banking Units (OBUs) were set up to provide foreign currency loans at lower interest rates, facilitate trade finance, and support long-term project financing.
The scope of offshore banking has since broadened to include a wide range of services related to international trade and investment.
In light of the sector’s increasing significance, Bangladesh Bank implemented a comprehensive set of regulations for offshore banking on February 25, 2019.
These guidelines were introduced to enhance transparency, compliance, and stability within the sector, reflecting its growing importance in the country’s financial landscape.
Under the revised guidelines introduced in February 2019, Offshore Banking Units (OBUs) were required to comply with specific operational and reporting standards to ensure their activities met both domestic and international regulatory requirements.
At that time, most offshore banking transactions focused on discounting local import and export bills via Usance Payable at Sight (UPAS) arrangements, with only a small portion allocated to long-term project financing.
However, the passage of the Offshore Banking Act 2024 in March marked a significant shift for the sector.
This new legislation aims to bolster Bangladesh’s foreign currency reserves and attract foreign investment, which had been declining due to higher outflows than inflows in recent years.
The Offshore Banking Act 2024 introduced several key changes, including the relaxation of previous restrictions to allow both Bangladeshi nationals and foreign residents to access offshore banking services.
Additionally, banks are now permitted to promote fixed deposit products in foreign currencies, creating new opportunities for competition in the global market.
As Bangladesh continues to face a foreign currency shortage, offshore banking is emerging as a critical tool for stabilising the local currency.
OBUs can provide medium- to long-term loans to local enterprises, injecting liquidity into the domestic market and potentially alleviating pressure on the local currency.
This is especially important given the strain on Bangladesh’s foreign exchange reserves from external debt obligations and rising import costs.
One of the most notable benefits of offshore banking is access to lower-cost financing from foreign sources.
With central banks worldwide reducing interest rates to support their economies, Bangladesh can now borrow on more favourable terms, despite high local currency interest rates.
With the passage of the Offshore Banking Act 2024, Bangladeshi banks are now authorised to promote fixed deposit products in foreign currencies.
Offshore Banking Units (OBUs) are also permitted to offer interest or profit rates above benchmark rates on term deposits.
Eligible customers for these services include non-resident Bangladeshis, foreign nationals, companies registered abroad, and external institutional investors.
Additionally, the central bank has relaxed restrictions on domestic banks’ interactions with OBUs.
Domestic banking units can now receive funds from OBUs up to 40 per cent of their regulatory capital to meet payment obligations.
In August 2024, the central bank also allowed banks to transfer up to 30 per cent of their regulatory capital in foreign currency from domestic units to offshore accounts.
Offshore banking is becoming a crucial mechanism for Bangladesh to enhance its foreign currency reserves.
The sector not only provides capital for businesses involved in international trade but also serves as a new source of US dollars for financing imports and other obligations.
Offshore fixed deposits are increasingly utilised to cover import costs, while dollars acquired through OBUs are traded on the interbank foreign exchange market, contributing to the stabilisation of the overall foreign currency supply.
The expansion of offshore banking services now includes operations in five major currencies: the US dollar, British pound, euro, yen, and yuan.
Selim RF Hussain, managing director and CEO of BRAC Bank PLC, emphasised the significant opportunities for institutional deposits in offshore banking, noting that companies registered and operating abroad, along with foreign institutional investors, can open OBU fixed deposits.
According to Selim RF Hussain, as customers deposit foreign currency, the OBU foreign currency balance can significantly improve banks’ forex liquidity.
‘This boost will facilitate a broader range of foreign trade financing, making international trade more efficient and cost-effective,’ he said.
He also highlighted that offshore banking, with its tax benefits and favourable regulatory environment, is expected to attract more individual savings and investments in foreign currencies.
This influx will provide a stable source of foreign exchange liquidity and bolster the country’s foreign exchange reserves, he said.
Currently, around 40 banks in Bangladesh have established offshore units, underscoring the growing significance of this sector.
OBUs are also authorised to accept deposits from 100 per cent foreign-owned companies based in economic zones and hi-tech parks, further integrating Bangladesh’s economy with global trade networks.
The Offshore Banking Act 2024 introduces several incentives to promote sector growth.
It exempts offshore banking businesses from income tax and other direct or indirect charges on the interest or profit earned through their OBUs.
Similarly, no taxes or charges are imposed on the interest or profit given to depositors or foreign lenders, nor on their accounts.
This tax-friendly environment is anticipated to enhance Bangladesh’s attractiveness as an offshore banking hub, contributing to an increase in foreign currency reserves.
OBUs are also permitted to offer a range of services, including short-term loans, letters of credit, guarantees, bill discounting, and other foreign trade-related outsourcing services.
Additionally, they can transfer funds internationally without restrictions, along with any associated profits.
The combination of operational flexibility and a low tax burden positions offshore banking as a key strategic asset for Bangladesh’s economic development.
With its steady growth, the offshore banking sector is set to play an even more prominent role in the country’s financial landscape.
