The Offshore Banking Act 2024 is the primary legislation governing offshore banking operations in Bangladesh. The Act provides a dedicated legal basis for offshore banking units (OBUs), which were previously mainly regulated through central bank's guidelines. Under the Act, only scheduled banks operating in Bangladesh are eligible to provide offshore banking services and are required a license from central bank to establish an OBU. Existing OBUs approved before the Act are considered licensed under this new Act.
With the provisions of the Act, central bank issued guidelines which outline the operations of OBUs. As per the guideline, OBUs are allowed to execute transactions in freely convertible currencies declared by Bangladesh Bank. OBUs can extend admissible banking services to fully foreign owned enterprises located at specialized zones such as export processing zones, economic zones, hi-tech parks and any other zones declared by the Government from time to time.
The guidelines allow OBUs to extend trade finance to enterprises other than fully foreign owned ones located at specialized zones arranged through their designated banks in the form of buyer's credit, accepted bill financing, etc. for the permissible tenure. Trade finance can be extended by OBUs to enterprises located at non-specialized zones arranged through their banks in the form of admissible buyer's credit, accepted bill financing, etc. for the permissible tenure.
OBUs can extend finance to fully foreign owned enterprises located at specialized zones for import of capital machinery up to 3 years under buyer's credit, bill accepted framework, etc. Such financing is permissible to other enterprises in specialized and non-specialized zones arranged through respective banks. Deposits can be accepted from fully foreign owned enterprises located at specialized zones. OBUs are also allowed to accept deposits from persons resident outside Bangladesh without limiting to non-resident Bangladeshi nationals, persons of Bangladeshi origin, foreign nationals and enterprises, companies/firms registered and operating abroad, foreign institutional investors in approved foreign currency.
A special type of bank account termed as International Banking (IB) accounts can be maintained by OBUs in approved foreign currencies in the name of persons resident in Bangladesh and any industrial establishment and any other enterprise operating in specialized zones. IB accounts will be operated by account-holders on behalf of any non-resident. IB account-holders shall act as the facilitator of the non-resident remitter. IB accounts need to be credited with inward remittances received through only banking channel. Balances held in IB accounts shall be used for (a) transferring to domestic banking units for meeting necessary payments and investments; and (b) making outward remittances including interest or profit to the remitter.
OBUs can issue international cards (debit/prepaid/virtual) against foreign currency accounts. Interest/profit on deposits is applicable on banker-customer relations, the guideline noted.
External borrowing is not permitted by scheduled banks, but OBUs are allowed to borrow from external sources. This is the special privilege of OBUs. Repayment commitments such as bank guarantees can be issued in respect of the borrowing, subject to call for claims by beneficiaries up to drawdown amount. However, lending to persons not resident in Bangladesh is restricted. Such restrictions indicate that lending abroad is subject to approval from central bank.
On the other hand, OBUs are allowed to place funds to their domestic banking units (DBUs) without limiting to settle the import payment of capital machinery, industrial raw materials, and imports by the Government and other permissible payment obligations as per prevailing foreign exchange regulation. But they can borrow funds from their DBUs up to 30 percent of regulatory capital or the limit set by central bank from time to time.
It is found that regulations allow OBUs borrow funds from external sources without limits. They can maintain deposit accounts in favor of non-resident customers as well. But they are not allowed to extend financing facilities to non-residents. It may be a risky game to go beyond borders with lending packages. In addition, non-funded exposure such as payment commitments is also risky unless enforceable coverage is retained. Considering risk factors, central bank's regulations may not include the provisions to allow OBUs to take exposure on non-resident customers.
In addition to credit facilities both funded and non-funded, banks can extend various services within the regulatory framework. Examples can be cited that banks are not exposed for import under sales contracts. Banks receive documents from counterpart abroad. Payments are arranged on receipt from importers. Banks are, otherwise, required to return the documents to counterparts abroad without releasing the same to importers. Banks can provide services to merchanting traders which arrange delivery of goods and services to customers abroad through suppliers of another country. As per central bank's regulations, banks receive payments from buyers and retain the same in foreign currency. A major part of the receipts is used for settlement of payments to foreign suppliers. The balance between receipts and payments goes to merchanting traders. In this case, banks provide transactional services to their customers. Banks provide agencies services to resident customers, among others.
In case of OBUs, their scope of operations is well defined in central bank's regulations. Most of the functions are focused to enterprises operating in specialized zones. OBUs have access to customers abroad. They can maintain accounts with OBUs. But non-resident customers cannot access to financing facilities from OBUs. Maybe it is a risky game for dealing with foreign customers. But OBUs can accommodate different services to non-resident services without extending financial commitments. Is it possible? It is a question.
In addition to different services cited above, non-resident Bangladeshi can send money in their accounts maintained with OBUs. Such remittances are routed through banking channel which is costly. OBUs can be allowed to work with money transfer operators abroad. Such authorization can help non-resident Bangladeshis to send money in their account maintained with OBUs. Under the arrangement, OBUs can make repatriated fund available to other OBUs or DBUs in foreign currency where beneficiaries maintain accounts.
This can open up drawing arrangements in foreign currency with money transfer operators abroad. Presently, banks maintain Taka drawing arrangements. Foreign operators want to buy Taka from local banks at lower rates. This results in unhealthy competition among banks, as per business insiders. Under foreign currency arrangement, non-resident will send foreign currency, OBUs will receive same fund for credit to respective accounts or transfer to other banks in such currency. OBUs can be allowed for making arrangements with counterparts abroad.
OBUs themselves can be a financial hub in Bangladesh for global transactions. To materialize the idea, they should be allowed, without financial commitments, to provide transactional services to non-resident customers.
The writer is teaching in a business school
