Can offshore financial centres be a viable monetary policy tool?

Illustration: TBS

The current offshore banking structure in Bangladesh, where Offshore Banking Units (OBUs) can utilise up to 30% of regulatory capital from Domestic Banking Units (DBUs), may not merely contribute to inflation—it can actively fuel it. This arrangement enhances OBUs' lending capacity, expanding the money supply without a proportional rise in real economic output.

As credit grows, deposits multiply, and as the velocity of money accelerates, financial activity increases. However, if this liquidity injection surpasses the supply of goods and services, demand-driven inflation becomes likely.

Unlike conventional offshore models that source funds from non-residents, Bangladesh's OBUs primarily rely on domestic regulatory capital, circulating local money through offshore channels without generating foreign inflows. This raises inflationary risks while failing to strengthen foreign reserves.

Additionally, if the Bangladesh Bank does not sterilise excess liquidity, the Taka could face devaluation, jeopardising price stability. While OBUs enhance trade and financial integration, dependence on regulatory capital without sufficient oversight may amplify macroeconomic vulnerabilities. Prudent regulation and coordinated monetary tools are essential to mitigate these risks.

Traditionally, central banks manage liquidity through tools such as interest rate adjustments, reserve requirements, and open market operations. However, in today's globalised economy, Offshore Financial/Business Centres (OFCs/OBCs) can serve as indirect but strategic monetary instruments. These centres, typically operating under low-tax, flexible regulatory regimes, influence capital flows and liquidity via financial account movements. Depending on their convertibility structure, OFCs affect the money supply in different ways.

For instance, in the case of a non-convertible Offshore Financial Center (OFC), if a deposit of $100 is made, it results in an investment of $100, and similarly, borrowing $200 leads to an investment of $200. However, these transactions have no impact on the domestic money supply, keeping it neutral.

In contrast, a fully convertible OFC has a direct effect on domestic liquidity. The placement of foreign funds and borrowing activities results in capital inflows and outflows, which influence the money supply. For example, a foreign inflow increases the liquidity of the Bangladeshi Taka, whereas a repayment in USD from the Domestic Banking Unit (DBU) leads to a reduction in local liquidity.

Bangladesh's strategic location near major South and Southeast Asian markets enhances its potential as a regional hub for OFCs/OBCs. The interim government's declaration of a Free Trade Zone (FTZ) and growing global interest in investment facilitation signal a pivotal transformation.

OFCs are now being envisioned not just as economic zones but as active tools for monetary management—capable of supporting liquidity control, exchange rate stabilisation, and even inflation targeting, particularly across both conventional and Islamic banking systems.

The April 2025 Investment Summit with DP World, where Chairman Sultan Ahmed bin Sulayem expressed interest following discussions with Chief Advisor Prof. Muhammad Yunus, further reinforced confidence in Bangladesh's offshore vision. Following examples like the Jebel Ali Free Zone in the UAE, a national committee has been formed to study integrated global OFC models.

The Offshore Banking Unit Act (2024), enacted through FF Circular 11 (January 30, 2025), represents the country's first dedicated offshore banking legislation in nearly four decades. While OBUs currently operate as divisions within commercial banks, full-fledged OFC/OBC development is crucial for strengthening investor confidence and unlocking broader macro-financial benefits. Such centres could play instrumental roles in monetary operations—enhancing net foreign assets, managing liquidity, stabilising the Taka, and influencing foreign benchmark interest rates.

Globally, OFCs in jurisdictions like the Cayman Islands, Singapore, and Luxembourg serve as key facilitators of capital flow, currency liquidity, and alternative financing. Bangladesh aspires to emulate these models to bolster its monetary resilience. Cities like Singapore, Dubai, and India's GIFT City demonstrate how OFCs can attract foreign direct investment (FDI) and stabilise currencies through market-responsive policy tools. Hong Kong, for instance, maintains low inflation and high liquidity by linking its offshore currency pool to the U.S. dollar.

For Bangladesh, the case is further strengthened by the growing share of Islamic banking—now exceeding 30% of market assets—yet lacking robust Shariah-compliant liquidity tools. Offshore Islamic financial hubs could diversify liquidity management beyond interest-based mechanisms, introducing instruments like Islamic repos, Sukuk-based reserves, and Wakala agreements. Such developments would improve financial inclusion and institutional collaboration, following successful examples from Bahrain and Malaysia.

Nonetheless, potential risks must be addressed. Challenges include regulatory arbitrage, money laundering, limited public understanding, and a lack of market instruments—particularly for Islamic liquidity. Legal reforms, FATF-aligned AML/CFT frameworks, and enhanced financial literacy are crucial to mitigate these threats. Furthermore, the absence of sovereign Sukuk limits Islamic banks' liquidity options, hampering monetary efficiency.

Strategically, Bangladesh should prioritise pilot OFC/OBC zones in high-potential coastal areas such as Matarbari, Moheshkhali, and Sabrang (Marine Drive). These regions can offer streamlined regulation, tax incentives, and international-standard compliance—positioning them as platforms for ASEAN and South Asia connectivity, Islamic finance, tech investment, and green bonds.

The integration of OBU regulations into a wider OFC framework will enhance both monetary sovereignty and investor appeal. Properly designed OFCs can align with monetary goals by supporting the Taka's stability, expanding capital sources, and fostering innovation in Islamic finance. Institutional collaboration—with partners like DP World and regulatory ecosystems modelled on the DIFC—will be key to developing sustainable, secure offshore financial zones.

OFCs influence the money supply through capital repatriation, offshore lending, and FX swaps—indirectly supporting domestic liquidity, much like central bank instruments. Bangladesh's OBUs, for example, utilise DBU regulatory capital for offshore credit, expanding the domestic money supply via a multiplier effect. Simultaneously, OFCs can attract FDI, enable currency risk management, and hedge global exposures, acting as stabilisers against economic volatility.

With foreign reserves at $21 billion and M2 reaching Tk 17 trillion (as of 2024), Bangladesh's macroeconomic stability will increasingly depend on innovative monetary strategies. Notably, offshore assets declined from $8.1 billion (2021) to $5.9 billion (2022), while OBUs now hold over Tk83,826 crore ($9.5 billion) in offshore loans—impacting both liquidity and FX dynamics.

Globally, OFCs support liquidity, risk mitigation, and investment mobilisation through tools such as SBLC monetisation, structured trade finance, and simplified regulation. Bangladesh can leverage these models to build a globally competitive, resilient financial architecture—particularly for the Islamic finance segment.

Strategically positioned and well-regulated offshore financial centres—embedded within Free Trade Zones—offer Bangladesh an innovative path to monetary stability, capital attraction, and inclusive economic growth. 

By embracing OFCs not just as liberalisation tools but as dynamic levers of monetary policy tools, Bangladesh can enhance financial innovation, currency resilience, and global integration, particularly in alignment with its Islamic finance aspirations.

Md Saidul Islam CDCS is the First Vice President and Head of OBU Gulshan of The Premier Bank PLC, Gulshan Branch. Email: sayedcdcs@gmail.com  

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.