Offshore-banking operations face setbacks following regulatory instructions downsizing the cost-ceiling rate on foreign-currency lending to businesses that dents profitability of commercial banks and may ultimately affect the economy.
As the spread on foreign-currency loans squeezes under the current macroeconomic sluggishness, some of the banks decide to lessen their concentration on offshore-banking operations, with the risk of disruption to trade financing and increase in pressure on the economy, according to the market players.
The Foreign Exchange Policy Department-1 (FEPD-1) of Bangladesh Bank earlier on May 11 issued a circular lowering the all-in-cost ceiling on short-term trade finance to the benchmark rate plus 3.0 per cent from 4.0 per cent.
Under the revised rule, the borrowing cost for short-term permissible trade finance in foreign currencies will be capped at a maximum of 3.0 per cent per annum over benchmark rates, including SOFR (Secured Overnight Financing Rate) and Euribor,
All in costs includes interest, commissions, fees and other charges associated with such trade and term financing in foreign currency.
Seeking anonymity, a BB official says, the central bank issued the latest instruction aiming to bring borrowing costs in line with global market trends.
He says many of the commercial banks can borrow foreign currency from the correspondent banks at rates in-between 2.20 per cent and 2.50 per cent per annum over the benchmark rates. "So, the spread (0.80 per cent to 0.50 per cent) is still lucrative as far as businesses concerned. But we want to reduce the import costs," the central banker adds.
According to market insiders, the market size of offshore banking operations is around $6.0 billion. By end of 2025, the major market players were BRAC Bank ($877 million), Prime Bank ($608 million), Pubali Bank ($464 million), Eastern Bank ($436 million), City Bank ($427 million) and Bank Asia ($238 million).
Shortly after the issuance of the circular by the banking regulator, the Association of Bankers, Bangladesh (ABB) requested the central bank to reconsider the recently revised all-in-cost ceiling for short-term import- trade finance in foreign exchange, warning that the new pricing framework could disrupt trade financing and increase pressure on the country's economy.
In a letter to BB Governor Mostaqur Rahman, the ABB expressed concerns over the circular which fixed the ceiling for short-term import-trade finance at the benchmark rate plus 3.0 per cent per annum.
According to the apex body of the country's top commercial bank executives, commercial banks are heavily dependent on offshore borrowings and interbank foreign-currency markets because of the country's limited foreign-currency deposit base.
The prevailing market conditions and sovereign-risk premium have pushed the cost of foreign- currency funding close to the newly imposed ceiling, leaving little room for banks to operate profitably, the bankers argue.
Currently, well-rated private commercial banks secure short-term trade base financing in foreign currency lines at approximately SOFR+2.75 per cent. Once statutory costs are incorporated, the effective all-in cost rises to approximately SOFR+3.00 per cent for the banks.
Additionally, the funding cost exceeds SOFR+3.00 per cent in securing long-term funding, when upfront-arrangement fees on term facilities are amortized.
"In practice, the entirety of funds from long-term borrowing may not be exactly matched with long-term lending book. Banks often have to utilize these funds for short-term financing as well," the letter reads.
Unfortunately, banks face challenges to negotiate expected price with foreign counterparties at current country rating. With the imposed revised pricing level, the banks may face new challenges. It may result in banks not being able to adequately facilitate short-term financing needs of customers,
To address the issue, the ABB proposes two alternatives. The first recommendation calls for a phased reduction in the ceiling over a transition period, allowing banks sufficient time to adjust their funding structures and complete ongoing negotiations. The second proposal suggests setting the ceiling at benchmark rate plus 3.50 per cent and deferring its implementation by at least six months.
On condition of not being quoted by name, the offshore banking head of a private commercial bank says only three to four banks can make profit in doing offshore-banking business after the sharp reduction in the ceiling but majority will not be able to sustain.
"In fact, our bank decides to lessen concentration on the business as it will not be viable for us under the current circumstances," he told The financial Express.
Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB) Syed Mahbubur Rahman says the 1.0-percentage-point reduction in the ceiling will certainly hit profitability in banks at a time when the space of making profit keeps squeezing due to prolonged economic sluggishness.
He says there are many banks that may lose interest as they will not be able to make some gains in offshore-banking business. "So, the income that the local banks can book would go outside and it will put more pressure on local currency," the experienced banker alerts.
ABB Chairman Mashrur Arefin says they have already sent a letter explaining the market situation to the central bank governor to reconsider the matter.
"We'll soon meet the BB governor with this serious issue," informs Mr. Arefin, also Managing Director and Chief Executive Officer of City Bank PLC.
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