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bd/views-reviews/restrictions-on-offshore-banking-affect-exports-
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Bangladesh Bank declared its policy for setting up of offshore business unit
(OBU) on December 17, 1985. The primary objective of offshore banking was
to activate financing business and industrial activities at the new Export
Processing Zones (EPZ).
In most of the jurisdictions, for OBU is preferred because (a) local capital
requirement is either non-existent or extremely low, (b) taxes including
withholding taxes on internal income and other forms of levies are practically
non-existent, (c) easy entry of foreign banks/ local banks to conduct off -
shore businesses, (d) licence fee for registration and operation is either nil or
very low, (e) there is protection against lawsuit judgments, (f) double taxation
can be avoided, (g) there are low operation al costs and (h) 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 similar
practices 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.
UPAS arrangement has been the main function of the OBUs in the country.
Practically, the major lending functions as a part of core banking activities
are under the grasp of the OBUs of foreign banks due to availability of low
cost fund and global network. They are basically concentrating on
discounting business from different ADs import bills under UPAS credit
arrangement.
This step was taken in order to meet the unique needs of some bulk volume
importers when sellers demand immediate payment against a deferred Letter
of Credit (L/C) by way of discounting, prepayment or negotiation , but the
supplier's bank mat not be prepared to do so. As a solution, Letter of Credit
is opened on deferred basis (180 days to 360 days depending on the nature
of import). However, 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.
In recent times, OBUs started discounting services for the local export bills
at the AD branches as wel l. Banks render UPAS credit facilities to its
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 as a result of the OBU services, an imbalance
in demand and supply situation in the domestic market has occurred creating
additional pressure on the domestic foreign currency situation.
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 b anks 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
the 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.
Strict regulations and limitation regarding the sources of funds for offshore
banking have curtailed finance to UPAS of exports through discounting
documents. As alternatives, exporters now have to borrow from local banks.
These loans are available against mortgage of properties and higher interest
rates. Exporters now have limited alternatives including trade finan ce and
financing available from some overseas Non -Bank Financial Institutions
(NBFI). The central bank could consider the withdrawal of these strict
regulations on offshore financing as soon as the condition of the financial
sector improves.
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