Will The Offshore Banking Act help increase foreign currency inflow?

Illustration: TBS.

There has been much talk about the draft Offshore Banking Act 2024. The Parliament passed the Act 2024 on 5 March this year. It was finally made public by the government on 14 March 2024. 

This Act aims to boost our foreign currency reserves and attract more foreign investments from foreign firms registered abroad, foreign investors, foreign nationals and non-resident Bangladeshis (NRBs). 

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 license 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 American Dollar, British Pound, Euro, Japanese Yen and Chinese Yuan.

The Offshore Banking Act comes at a time when the country has been experiencing regular depletion of foreign currency reserves and facing challenges in maintaining the balance of payments.

Though the government has enacted the Offshore Banking Act to boost foreign currency reserves and attract foreign investments, offshore banking operations have been present in Bangladesh since 1985 through Bangladesh Bank (BB) guidelines. 

This time, the government enacted the Offshore Banking Act to provide more confidence and ease to foreign firms, foreign nationals, foreign investors and non-resident Bangladeshis. The Act aims to protect their interests.

Initially, to facilitate foreign firms with foreign currency loans and receive foreign currency deposits in the EPZ areas, the BB allowed local banks to offer banking services through the Off-Shore Banking Unit (OBU). 

In the earlier BB's OBU guidelines, it was mentioned that OBUs could mobilise foreign currency deposits from foreign firms, individuals and EPZ entities, and also offer them lending in foreign currency. Later, they extended OBU facilities to joint venture companies and local companies in the EPZ areas.

Furthermore, local companies now have access to a wider range of offshore banking services, including line-of-credit (LC), import and export bill discounting, purchase and bill negotiation, and foreign currency loans through OBU.

Now, the OBU has been conducting several activities, such as mobilising foreign currency deposits, lending in foreign currency to foreign/local firms in EPZ/Hi-Tech/Economic Zones, arranging foreign currency loans to foreign/local firms, import and export bill discounting, bill negotiating, etc. 

Foreign firms registered overseas, foreign nationals, foreign investors and non-resident Bangladeshis can get attractive interest rates on term deposits ranging from 6% to 8.50%, based on tenors and benchmark reference rates, if they keep term deposits in any of the five foreign currencies listed above with OBU. This is one of the features of the newly passed Offshore Banking Act 2024.

The interest received from offshore banking deposits is free of direct and indirect taxes and levies. Moreover, both principal and interest can be freely repatriated abroad.  

There are two ways offshore banking accounts can be opened. Firstly, foreign firms, foreign nationals and NRBs can open offshore banking term deposits by themselves. 

Secondly, any representative of NRBs, such as family members and relatives, or the partner of a foreign investor residing in Bangladesh, can open accounts. These accounts will be referred to as International Business (IB) accounts.

Eligibility criteria for opening an Offshore Banking Account include a person resident outside Bangladesh, including NRBs, foreign nationals, a Bangladeshi holding foreign citizenship, companies/firms registered and operating abroad, foreign institutional investors, and type A units in EPZs, private EPZs, Economic Zones, and Hi-tech parks. 

Any resident Bangladeshi individual aged 18 years and above, any Bangladeshi firms and any Type A, Type B, or Type C industrial enterprises operating in EPZs, Economic Zones or High-tech parks can open and operate International Banking (IB) accounts. 

Previously, there were no such lucrative interest rate offers in the OBU. Recently, the BB announced high interest rates for OBU deposits and investments. The interest received from OBU term deposit accounts is not subject to any deduction of income tax and levies; income is free from any direct and indirect taxes and levies. 

In line with the Offshore Banking Act, the National Board of Revenue (NBR) has issued a circular exempting offshore banking deposits from taxes and levies. 

Moreover, it is easy to repatriate the OBU deposits, both principal and interest, abroad. Depositors and investors may en-cash their funds in taka and use them or make investments in onshore banking. The Bangladesh Bank possesses the authority to periodically issue guidelines aimed at safeguarding the interests of depositors and investors.

To attract foreign currency deposits through offshore banking, some banks have already been offering attractive interest rates and other facilities. 

Since the Act's passage, some have criticised the special benefits offered for offshore banking deposits. Critics argue that the purpose of offering these benefits is to reintegrate the laundered money, stolen from our country, into our financial system to address the foreign reserves crisis.

However, in the new global scenario after the Covid-19 and Russia-Ukraine conflict, many countries have been withdrawing funds from China and other Asian countries and relocating their investment to nearby countries. Bangladesh can leverage the fund diversion by OBU. 

Last but not least, offshore banking deposits and investments can be a good source for our foreign currency in times of volatility in foreign exchange reserves. It will replenish our foreign currency reserves if banks can bring attention to their beneficiaries. 

To attract offshore banking products to their targeted customers, the government, the Bangladesh Bank and scheduled banks should arrange roadshows and campaigns overseas.   

Sketch: TBS.

Mohammad Zonaed Emran is a banker. 

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.