The history of offshore banking in Bangladesh
The concept of offshore banking emerged to attract more FDI and other benefits, such as transfer of technological know-how from foreign entrepreneurs working in the EPZs
Offshore Banking Operation (OBO) was introduced in 1985 through a circular by Bangladesh Bank after enactment of BEPZ Act in 1980 with a vision to enable active foreign financing opportunities at Export Processing Zones (EPZs).
The concept of offshore banking emerged to attract more foreign direct investment (FDI) and other benefits such as transfer of technology know-how from foreign entrepreneurs within the Bangladeshi workforce who had the scope to work in the EPZs.
OBO has a history of offering critical financing opportunities, contributing to the growth of our EPZs, reducing costs for Bangladeshi importers and expansion of the industrial sector.
Banks operated offshore services with approval from the Bangladesh Bank. However, there was no separate law for this banking system.
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Banks used to operate offshore banking by taking loans from foreign sources and lending to local businesses. The size of the offshore banking portfolio in the banking sector was $6 billion to $7 billion, the entire amount of which was borrowed from foreign sources.
After the government enacted the Offshore Banking Act 2024 in March, it allowed banks to promote fixed deposit products, opening up a new horizon for Bangladeshi banks in the global arena.
Exporters used to leave the dollars with us for payment of foreign back-to-back LCs. Then we took their dollars and invested those in offshore banking. In fact, it was very risky because the customer might need it at any time, and if we did not pay them, that would have created problems. Now the central bank has stopped it.
According to the Offshore Banking Act, no income tax or any direct or indirect charges will be imposed on the interest or profit earned by the offshore banking business through the offshore banking units.
Furthermore, no income tax or direct or indirect charges will be levied on the interest or profit given by banks to depositors or foreign lenders and no fees or levies will be imposed on the accounts of depositors or foreign lenders.
Offshore Banking Units (OBUs) can take deposits from 100% foreign-owned companies located in EPZs, PEPZs, economic zones and hi-tech parks.
Besides, these institutions can provide short-term loans, opening letters of credit, guarantees, bill discounting, bill negotiating and other foreign trade-related outsourcing services.
Both foreign and Bangladeshi individuals can open offshore banking accounts in Bangladesh. Bangladeshi residents can open an International Bank (IB) account on behalf of their relatives or friends residing abroad.
After opening the bank account, the Bangladeshi account holder can use this account for transferring money abroad any time and spend money from this account for traveling or investment. In this case no travel quota will be applicable for the account holder in spending dollars from an IB account abroad. IB account holders can encash dollars in taka at any time.
How did offshore banking operate before the new law?
When talking with The Business Standard, Jamuna Bank Managing Director Mirza Elias Uddin Ahmed said, "We mostly used to do bill discounting through offshore banking in the past. We used to bring some funds from foreign banks here for support through term placement."
Besides, most of the foreign currency was taken from banks' Domestic Banking Units (DBUs), he also said, adding, "And we used to invest the dollars we had in the OBUs. Now, however, due to the central bank's circular instructions, the transfer of funds from these DBUs has been stopped."
Mirza Elias further said that usually most of the dollars that the DBUs had belonged to customers. "Exporters used to leave the dollars with us for payment of foreign back-to-back LCs. Then we took their dollars and invested those in offshore banking. In fact, it was very risky because the customer might need it at any time, and if we did not pay them, that would have created problems. Now the central bank has stopped it."
