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Offshore banking refers to the international banking business involving non resident foreign
currency denominated assets and liabilities. It refers to the banking operation that covers only
non-residents and do not mix with the domestic banking. An offshore banking center is a place
where purposeful attempt is made to attract international banking by offering many concessions
in the from of taxes and levies being imposed at lower rates or not being charged. A more
important relaxation is the exemption of the offshore banks from restriction on operations.
Offshore banking units in these centers can carry on their activities of deposit taking from and
lending to international enterprises or investors without conflict with the domestic fiscal and
monetary policy. In short; offshore banking is international banking kept separate from domestic
banking coupled with freedom of functioning.
Offshore banking is carried our in about 20 centers throughout the world which offer the
following benefits:
1.
2.
3.
4.
Salaries paid by offshore banks and local expenditure incurred by them contribute to the
welfare of the economy. For smaller countries the benefit would be of grater
significance. For a larger country like India. However this may not form a significant
portion of the total income.
3. This country may earn revenue in the form of license fees, profit taxes imposed on the
banks operating in the area. It may also get the benefit of banks funds in the form of
capita and liquidity requirements.
4. The country can gain improved access to the international capital markets.
5. The domestic financial system may become more efficient through increased competition
and through exposure of the domestic banks to the practices of offshore banks.
6. The offshore banking centre will provide opportunities to train the local staff which will
in turn contribute to a faster growth of the domestic economy.
persistent
7. The offshore banking units would help channelise no resident Indian investments.
8. Setting of and offshore banking centre would trigger enforced development off more
advanced communication facilities which is must for its functioning.
9. As the exporters could get cheaper finance from this centre, the expenditure on export
interest subsidy can saved.
10. Such centre will add to the prestige of the country and establish India firmly on the world
financial map.
The establishment of and offshore centre involves some cost to the host country:
1. An offshore centre requires certain infrastructure in the form of good telecommunication
system, education and training facilities, etc. The host country may have to incur heavily
on these if the facilities are non-existing. The cost involved may not be justified by the
benefits derived.
2. The supervision and regulation of offshore banks may involve substantial costs.
3. Encouraging offshore banking may result in the diminution in autonomy of domestic
monetary policy, since it is difficult to draw a line always between the offshore and
onshore operation, particularly in the absence of exchange control.
4. Offshore banking provides scope for tax evasion by residents. For example in Hong
Kong, it was fund that residents place deposits with offshore banks and take loans of the
same amount. The interest on loan would be deductible expenditure for taxation while the
income from interest on deposits is not taxed.
5. Offshore banks ray prove to be deleterious competitions to the local banks and may
inhibit their growth.
6. Offshore banks may increase demand for domestic resources like space (land for office
and housing) and skill (professionals). Since the supply in the short run is inelastic, the
increased demand may cause inconvenience to local residents.
It may observed from the above discussion that the cost of having and offshore banking centre
would be substantial to a country with limited resources and undeveloped infrastructure. For a
country of the size of India, the cost involved may not be significant. There is, therefore, a strong
case for India to develop and offshore banking centre for international banking centre of its own.
Bombay is suitable centre for establishing offshore banking in India. It has all the requirements
goods infrastructure in the form of telecommunication and services, abundant and well-trained
manpower and presence of many international banks, both Indian and foreign, already engaged
in international banking. Besides Bombay is having and ideal location in the eastern time zone. It
is active along with Singapore and Bahrain and has marginal overlap with London and Frankfurt.
The setting up of the International Banking Centre in Bombay would throw the door open for the
free flow of international trade and without any strings attached. The foreign loans or aid are
generally available only with certain conditions, which can be avoided by utilizing the funds
from offshore bank.
08. The OBUs will be free to take out insurance abroad and not be subject to local insurance
laws.
09. The OBUs regardless of its locations in Bangladesh. Would get coverage under EPZ Act.1980.
10. Ntional Credit and Commerce Bank Limited, Head Off\ice, 7-8 Motijheel Commercial
Area, Dhaka-1000 will be held liable to make payment of any liability created by the
OBUs.
11. The OBUs have been allowed exemption from the purview of provisions of the Banking
Companies Act.1991 except those of Sections 31, 32, 36(2) , 37 44, 45, 49 109(2),
109(4), 109(7), 113,121 and 122. The OBUs have been allowed exemption from Article
36(1) of Bangladesh Bank Order.1972.
12. Date of commencement of OBUs operations should be communicated to the Bangladesh
Bank within 7 (seven) days of such commencement.
13. The operations of OBUs shall not be closed without prior permission of the Bangladesh
Bank.