A prominent policy think tank says international capital market should be opened wider for the local investors to have greater access to foreign finances at cheaper interest rates. Bankers, however, pleaded for a cap on external borrowing by local entrepreneurs.
The Policy Research Institute of Bangladesh (PRI) came up with the recommendation at a policy-brief programme in Dhaka Tuesday, based on the findings of a study on capital inflow and its impacts on private investment.
Dr Ahsan H Mansur, the PRI executive director, conducted the study.
Currently, Bangladesh is allowing limited foreign funds being availed by local big corporate houses only. Since 2008, the central bank has approved overseas funds worth US$ 5.5 billion.
A high-powered committee headed by the Governor of Bangladesh Bank approves overseas loan for the local corporate majors.
The PRI executive director said the limited funding has been contributing to lowering the domestic lending rates.
Earlier, the borrowing rates used to be 16 per cent to 18 per cent in nominal terms and now it dropped to 12 per cent to 14 per cent.
On the other hand, the foreign financing interest rates are much cheaper.
They charge on foreign currency denominated loans provided to the private sector are generally set in the range LIBOR plus 3.0 per cent to 4.5 per cent.
Dr Ahsan H Mansur said this high domestic lending cost is affecting the local business sectors mainly the export-oriented manufacturing units.
When the local entrepreneurs compete with the international counterparts, they lose their competitiveness and one of the key reasons is high interest rate on lending by the banks in Bangladesh.
On the other hand, a number of top executives at the local banks said the central bank should give a cap on the foreign-currency credits otherwise it will affect the domestic banking sector.
Ali Reza Iftekhar, managing director and the CEO of the EBL (Eastern Bank), said: "We were not worried when its volume was low, but it will affect the banking sector at a time when its magnitude will increase sharply."
Mr Iftekhar, also chairman at the Association of Bankers, Bangladesh (ABB), said: "There should be a kind of cap on the foreign-currency loans for the eligible corporate houses."
Md Nurul Amin, managing director and the CEO of Meghna Bank, alleged that many corporate houses have been abusing the foreign- currency loans.
"Two companies have already been identified who repaid their domestic loans through borrowing from overseas sources."
He noted that local banking sector has adequate liquidity to lend to the local firms.
"We earn and give dividend to the shareholders and to the national exchequer as corporate taxes," Mr Amin made a point for limiting the scope of foreign borrowing.
However, the PRI study says the initial emphasis should be on policies which would facilitate enhanced market access for Bangladeshi investors and issues related to outflow should be considered in a properly sequenced manner. There said be established an automatic approval process for loans up to a certain limit necessary to boost the volume of foreign loans.
"Given the positive outcomes so far, it would be desirable that Bangladesh Government, like its Indian counterpart, considers a two- track approach for approval of request for foreign loans: an automatic window for borrowing up to a certain limit; and for higher amounts approval on the basis of current case-by-case approach," the study reads.
The paper noted that Bangladesh has just started its journey to access international capital market by allowing resident corporations to borrow abroad in foreign-currency terms on a case-by-case basis.
"Most other emerging economies in Asia and Latin America are way ahead of Bangladesh in terms of integration with the international capital market," it says.
With strengthened balance of payments-as reflected through surplus external current account and overall balances in most of the years-Bangladesh has gained the capacity to liberalise its capital accounts both in terms of inflows and, in selected cases, for outflows. The study, however, suggests fight against inflation in a higher gear. Domestic inflation should be brought down to less than 5.0 per cent for that end.
"Bangladesh interest-rate structure will never come close to the dollar or euro interest-rate structures as long as Bangladesh inflation remains significantly above the inflation rates of its major trading partners," it noted.
jasimharoon@yahoo.com
PRI for widening scope while bankers seek a cap
FE Report | Published: January 22, 2015 00:00:00 | Updated: November 30, 2026 06:01:00
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