Offshore Banking Framework: A Development Partner

 

It is reported that a new law is going to be framed for offshore banking operations. The draft is found on display in the website of the ministry concerned. The draft articulates operational procedures of offshore banking.

It is allowed to provide banking facilities to foreign owned enterprises operating in specialized zones like export processing zones, economic zones, hi-tech parks, and other authorized zones. However, medium and long term lending is subject to the guidelines of central bank. In addition, offshore banking can extend funded and non-funded facilities to other enterprises including non-resident enterprises in accordance with the specified guidance in this regard. Non-resident persons and enterprises can maintain deposits with offshore banking. Trade financing in the form of bill discounting and bill purchases is allowed by offshore banking to resident trade operators such as importers and exporters.

The draft law allows resident persons and enterprises including those operating in specialized zones to maintain international banking accounts in approved foreign currencies. The accounts so opened are to be credited by inward remittances. In this case, account-holders will be treated as facilitators of remitters abroad. The accounts are allowed to be credited with interests and profits. The balance held in the accounts can be transferred to resident bank accounts for local payments and investments. The draft law permits offshore banking to effect remittances abroad out of balances held in the accounts along with interests and profits.

The draft law gives waiver of taxes applicable for interests and profits against foreign deposits and borrowing. This is the unique feature of the draft law.
Presently offshore banking is in operation as per the guidelines of central bank. They are free to borrow and take deposits from external sources. History indicates that offshore banking started operations to facilitate foreign owned enterprises operating export processing zones. Its scope was expanded later in need of time.

Offshore banking can extend term loans under approval route to resident enterprises including those situated in specialized zones. Import bill discounting services by offshore banking is allowed to facilitate import in the form of buyer’s credit. This is commonly known as UPAS (usance payment at sight) letters of credit. This facilitates imports of inputs contents in bulk. 

Bangladesh economy is found picking up with the development of export oriented industries, particularly by readymade garment industries, in 80s of last century. This is the turning point of the country. For the development of readymade garment sector, back to back letters of credit (LCs) supported a lot, among others.

The back to back LC method is said to be invented in Bangladesh banking system. In the current century, the economy is set to a new jump with the development of manufacturing industries. As the country is in lack of inputs contents, it needs to source the same from external sources. Import needs financing under sight payment. Under local currency finance, it is possible but it cannot make payments in settlements of imports in foreign currency.

 As such, foreign currency support is essential. In this case, introduction of UPAS method supported a lot to work as alternative to buyer’s credit for manufacturing industries in procurement of inputs contents. In addition to import finance, post shipment financing in foreign currency was brought under the net of offshore banking. This supports exporters to receive payments before maturity of export bills against export credit terms.

It is said that Bangladesh is the birthplace of UPAS method through offshore banking. It supports a lot to bring the country out of LDC net, leading to an upper level in economic status.

The introduction of offshore banking in Bangladesh was to facilitate foreign owned enterprises of export processing zones. Later its role was expanded to a greater extent, as noted earlier. It became a true friend of Bangladesh economy in both ways for development of manufacturing industries and export oriented industries.

Offshore banking is in matured stage by now. The regulations are found revised in early 2019. Different regulations are imposed on it like maintenance of reserves, limit of transfer of funds to offshore banking from main operations, and so on. As it is known that interest income generated in banking system against deposits is subject to source taxes, same is applicable for interest payments against foreign borrowings. Recently the authority has given waiver for source tax against external borrowings up to a certain time. Business insiders indicate that earlier regulations did waive requirements of regulatory reserve, all types of taxes, etc. for offshore banking operations. Such waivers placed offshore banking to a better position under which it could easily borrow funds from external sources without requirement of maintaining reserves and payments of sources taxes. But these facilities seem to be away in the prevailing regulations.

The prevailing offshore banking is in operation with the support of external borrowings and funds from main operations of relevant banks. Short term financing and trade loans are extended under automatic route by offshore banking. Term lending to residents and external parties are subject to specific approval. Recently restriction has been imposed for placement of funds from main operations of banks to offshore banking. Short term financing is used for import payments whatever the source is. As such, fund movement from main operations to offshore banking would be a support to facilitate buyer’s credit operations without dependency on external sectors. In this context, restriction should have been imposed for term lending in foreign currency to eligible parties by local funds.

Very recently, trade finance cost has been reset with increase by 50 basis points. Considering global interest rate situation, this can support offshore banking to extend trade finances against funds borrowed from external sources. Another point is that this enhancement can facilitate to ease liquidity crunch for settlement of import payments. 

The prevailing regulations facilitate banks to operate offshore banking as separate windows. This is not a separate entity. Under the new draft law, the same status seems to be given to offshore banking. Other operational facilities are as good as existing ones. However, the unique beauty of the draft law is that offshore banking will be given tax waivers. With the enactment of the law, offshore banking will be given a legal footing. It is a good initiative for which authorities concerned deserve thanks. However, few issues need to be considered. 

Offshore banking should be made a subsidiary of a scheduled commercial bank. The draft law should clearly specify that offshore banking can borrow funds from external sources. In addition to legitimate sources of funds particularly from customers of specialized zones, offshore banking depends on funds borrowed from external sources. As such, it should be allowed to extend banking facilities to offshore or foreign customers including residents providing merchanting trade services. Under the framework, Bangladeshi traders can go beyond borders for trading in third countries. This can make Bangladesh as a financial center like Hong Kong, Singapore, Dubai, etc. As a result, Bangladesh can open a new window for income in foreign currency from external sources.

The draft law may take time to be in operation. We should not miss the opportunities which can be received from offshore banking services. As such, existing framework can be revisited. For its smooth operations, few issues can be addressed before enactment of the law on offshore banking. These may be, without limiting to, relaxation for maintenance of reserves with central bank and waiver of taxes on interests and profits generated from offshore banking including customers’ deposits, external borrowings, etc. In case of relaxation on reserves maintenance, central bank can issue a regulatory instruction. Tax authority can do the needful for waiver of taxes. Let offshore banking extend supports to our economy in a better way as a development friend.


Mehdi Rahman works in the
development sector.