Bangladesh finally has an offshore banking law. But it's nothing to write home about

Thirty-eight years after introducing offshore banking, Bangladesh has finally gotten its first law to regulate the activity. 

The Parliament passed the Offshore Banking Act 2024 on 5 March, aiming to enhance the country's reserves of foreign currency and attract foreign investment. Before that, offshore banking activities were regulated through guidelines issued by the central bank. 

Economists, though satisfied with the enactment of the law, have called for strict implementation to achieve its objectives.

According to the law, non-resident individuals or foreign firms who will invest in Bangladesh can open offshore bank accounts. An offshore banking unit (OBU) will require the Bangladesh Bank's licence to operate, and only scheduled banks working in Bangladesh can provide offshore banking services.

The law also states that offshore banking operations can be executed with five currencies — the US Dollar, Pound, Euro, Yen, and the Yuan.

Moreover, no income tax or any direct or indirect charges will be imposed on the interest or profit earned by the OBUs, and no fees or levies will be imposed on the accounts of depositors or foreign lenders. 

OBUs can take deposits from 100% foreign-owned companies located in Export Processing Zones (EPZs), economic zones and hi-tech parks. The units can also provide short-term loans, open letters of credit, provide guarantees, bill discounting, bill negotiating and other foreign trade-related outsourcing services. 

In case of resident Bangladeshis, such units can provide deferred export bill discounting facilities on imports, and direct and indirect exports. Subject to approval from the Bangladesh Bank, they can also provide medium and long-term loans to local industrial enterprises.

But how does the law differ from the previous guidelines, if at all? 

Muhammad A Rumee Ali, a former central bank deputy governor, believes that the previous guidelines lacked certain provisions. 

"So improvement was needed. Investors, and particularly the users, needed confidence that the OBUs would function; that they could deposit and trade through dollars. These issues needed to be addressed. So I appreciate this law," he explained.

On the other hand, Zahid Hussain, former lead economist at World Bank's Dhaka office, says there is nothing remarkable about the act. 

"The previous guidelines have been accommodated in a legal framework. That's it. But the advantage of the law is that from now on, the regulatory body cannot change the offshore banking provisions abruptly. Without amending the act, no abrupt change will happen."

Hussain too believes that investors need confidence in investing in foreign currencies. 

"In case of uncertainty due to abrupt changes in policies, do they feel confident? No. A law could be amended, but it takes a specific parliamentary process. So investors can have a wider planning horizon."

How offshore banking evolved over four decades

In Bangladesh, offshore banking came into being in 1985 through a notice issued by the central bank, aimed to create greater financing opportunities at the EPZs. 

The OBUs were given the capacity to attract global settlements and foreign currency financing facilities. According to the 1985 notice, an OBU was free to accept deposits or borrow from overseas entities, including non-resident Bangladeshis, and was free to lend to either fully foreign-owned (Type-A) or partially foreign-owned (Type-B) enterprises. 

Local enterprises (Type-C) were also allowed to avail OBU term loans, subject to approval from the Board of Investment (now Bangladesh Investment Development Authority or BIDA). 

The Bangladesh Bank would later relax regulations to allow various businesses access to OBU facilities, including discounting facilities for import and export bills. The OBUs were exempted from certain provisions of the Banking Company Act 1991, including waivers from maintaining cash reserve or liquidity ratios. OBUs were also exempted from interest payable on foreign currency liabilities and payment of income tax.

On 25 February 2019, the central bank came up with a comprehensive guideline on offshore banking operations, particularly imposing restrictions on export financing and others. However, two months later, it eased the policy by amending a few of its clauses. 

The amendments allowed local companies to avail foreign currency loans subject to approval from the Bangladesh Bank, exporters to avail short-term financing against shipments, and joint venture companies operating in EPZs, economic zones, and hi-tech parks to avail short-term loan facilities without prior central bank approval. 

The revised policy also allowed banks to borrow or lend from or to other OBUs in Bangladesh without maintaining separate nostro accounts.

Earlier, only foreign banks could lend in foreign currencies to foreign enterprises in EPZs and hi-tech parks in the country. Under the revised policy, local banks were allowed to open accounts with OBUs with the ability to lend in foreign currencies. However, local banks were bound to form separate funds with deposits from non-resident Bangladeshis and foreign companies and borrowing from financiers abroad.

But the conditions were then relaxed afterward, allowing foreign lending to local companies that do not have foreign currency earnings. This change resulted in a major balance sheet problem for the banks that were in shortage of foreign currencies. 

The biggest challenge of the new policy was to apply Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on OBU liabilities which had not been waived or restated despite appeals from different bodies. The magnitude of the bank's OBU for managing this additional liquidity (CRR: 5.50% and SLR: 13.00%) would be challenging while the industry was already facing a liquidity crisis.

The new law waives OBUs from maintaining any CRR with the Bangladesh Bank. Similarly, OBUs will not need to pay income tax and source tax. Earlier, this provision along with applying SLR seemed a big challenge for local banks. 

"These are the standard practices. These waivers, perhaps, are to encourage the OBU officers to collect more foreign currency deposits. These facilities are given considering the current circumstances. However, the new law enables the Bangladesh Bank to change it if required. This is a part of the monetary policy," according to Hussain. 

Could it boost foreign investment?  

Economists do not think it realistic that this new law will create a fountain of foreign investment as, whether investors feel interested in depositing dollars in an OBU is solely dependent on how confident they feel about the entire system. 

During the process of the Offshore Banking Act being passed into law, opposition parties in and outside the parliament warned that unscrupulous businesses would use offshore banking to launder money through to island countries like the Bahamas.

Economists, though, take this criticism merely as political rhetoric. 

"Money laundering happened even before the enactment of the law. This crime is still unabated. No one will guarantee that an act for OBUs prevents money laundering. Risks are there. But there should be risk minimisation measures. A simple kite can stop the operation of the metro rail. Should we stop the metro rail then? Not at all," Hussain said. 

So, how could an OBU check suspicious transactions? 

"There is a high chance of detecting suspicious transactions if the process is transparent," Hussain said. 

Rumee Ali added that a bank's internal risk mechanism has two prongs — preemptive factors, meaning system inspection, and remedial factors, i.e., transactional audits. 

"If these two factors are monitored properly, there is zero chance of money laundering," Ali said. 

He emphasised that law enforcement and exemplary punishment of rule violators are crucial. 

"We have not seen such a good example though. We saw people get arrested for money laundering, but seldom punished. But I believe the government is serious about checking money laundering and that is why the previous central bank guidelines have now been shaped into a law," he added.