Offshore banking commonly indicates the banking services offered in a low tax jurisdiction. The offering institutions i.e. the offshore banks are the banks with insignificant domestic regulations that mainly deal with the non-resident lenders and borrowers. Offshore banking industry is comparatively new in the context of developing countries. It has emerged in a big way and expanded to the developing world with the ICT (Information and communications technology) revolution at the end of the 20th century.
Alongside benefits, offshore banking is exposed to significant foreign exchange-related risks. There are also allegations of crimes through offshore banking centres. These centres, which provide great secrecy, are often associated with underground economy and organised crimes like avoidance of tax and money laundering.
In line with the global offshore banking practices, Offshore Banking Units (OBUs) of Bangladesh are free from several restrictions and reserve requirements that are commonly applied to domestic banks. However, offshore banking activities of the country cannot be tagged with tax exemption feature which is common in global offshore banking centres.
INCENTIVES: The government of Bangladesh offers a large number of incentives for offshore banking customers. Though the first offshore bank was permitted in late 1980s, its services came into focus mainly in 2001 when a few foreign bank branches were given OBU licenses by the Bangladesh Bank. However, OBU activities received momentum only in recent years with their extensive and growing engagements with trade facilitation and expansion of foreign currency borrowing/lending services.
In this expansion stage of offshore banking in Bangladesh, the problems, difficulties and associated risks with OBU activities should be handled carefully to obtain net gain out of this banking system.
The Bangladesh Bank has circulated detailed information on the 'Establishment of Off-shore Banking Units in EPZs' where certain terms and conditions have been framed. As per the decision of the government, the operations of the OBUs have been exempted from certain provisions of banking laws of the country. OBUs, regardless of their location in Bangladesh, would get coverage under the BEPZA Act, 1980. Its license is given by the Bangladesh Bank and the bank applying for license for off-shore banking unit is expected to have well-established links with important international financial centres. There is no restriction on the physical location of OBUs i.e. these may be located both in the EPZs or any other convenient location outside. Even existing branches of banks may be allowed to operate such units through a completely separate counter.
As part of a bank whether incorporated in Bangladesh or outside the country, it has to maintain its own separate accounts relating to off-shore banking business. With regard to banking products, OBUs are allowed to offer banking services targeting selected group of clients and non-residents. These are free to accept deposits or to borrow from persons/institutions not resident in Bangladesh including Bangladesh nationals working abroad.
Offshore banks are also free to accept deposits from or to borrow from Type - A (wholly foreign-owned) units in the EPZs in Bangladesh. However, such banks are not to accept deposits from persons/institutions resident in Bangladesh including Type - B and Type - C units in the EPZs in the country. Local banks may also maintain foreign currency accounts with OBUs in the manner they maintain such accounts with their foreign correspondents. OBUs of the country are permitted to transact in the following currencies: US Dollar, Pound Sterling, Canadian Dollar, Deutsch Mark, Japanese Yen, Swiss Franc, Dutch Guilder, French Franc, Swedish Kroner and Singapore Dollar.
RECENT CHANGES: Some recent changes with regard to the offshore banking services (through different circulars of the Bangladesh Bank) have brought momentum in the activities of OBUs. In February, 2010, the Bangladesh Bank permitted OBUs to discount bill against deferred letter of credit (LC) issued by our ADs (authorised dealers). This is also an attempt to save foreign currency as we need to pay higher amount of interest for usance (time between the date of the bill and the payment of the bill) period. On February 06, 2012, the Bangladesh Bank enhanced the interest ceiling from LIBOR to 6.0 per cent for buyers' and suppliers' credit. This enhancement brought real opportunity for the PCBs' (private commercial banks) and Islamic banks (IBs) OBU (offshore banking unit) to increase their asset size. UPAS (Usance Pay at Sight) transactions for the importers expanded remarkably since early 2013. The central bank allowed bill discounting in foreign currency of direct and deemed exports though their respective ADs.
The country has 51 OBUs that are owned by 32 banks of the country i.e. 57 per cent banks have been awarded OBU licenses. In terms of number, 42 i.e. around 82 per cent are owned by the private commercial banks. Only one OBU license has been granted to a state-controlled bank, and that was the first OBU in the country in the year 1987. According to the available information, total volume of assets of the OBUs was US$2500 million as of end 2013. Though FCBs (foreign commercial banks) hold only around 16 per cent market share in terms of number, in terms of assets these were holding around 60 per cent of the total assets of the OBUs of the country during 2012-2013. Expansion of OBUs in terms of total assets was remarkable in between 2012 and 2103. During the period, the volume of assets of OBUs increased by a staggering 58 per cent. Profits of OBU units of the country also increased remarkably in recent times with the expansion of their activities. Net profit in OBU increased by over 58 per cent in between 2012 and 2013. Available information indicates that the huge increase in net profits of the OBUs is attributed to the huge increase in income of the FCBs from their UPAS operations.
According to a recent BIBM (Bangladesh Institute of Bank Management) survey, the asset portfolio of OBUs may broadly be classified into: balance with institutions with Bangladesh, balance with institutions outside Bangladesh, money at call and short notice, loans, cash credits, overdrafts etc and bills purchased and discounted. All categories are generally dominated by the PCBs and the FCBs excepting 'bill purchasing and discounting'. FCBs are extensively engaged in bill purchasing and discounting which have attained remarkable growth in recent time. Most of the OBUs' loan transitions are with ADs and nature of lending is of short term. Though, due to the nature of lending by OBUs, the volume of non-performing loans as a whole is insignificant. A few instances of non-performing loans on the part of OBUs owned by the local banks are a matter of concern.
OBUs cannot obtain deposit from entities other than type A industries of EPZ or foreign sources. Deposit base of OBUs of the country is extremely narrow. In the liability portfolio, borrowing is the main component and deposits are very insignificant. It indicates the extensive reliance of OBUs on borrowing funds which is relatively costly as compared to the deposits. Currently, major source of fund of the offshore units are borrowing from foreign correspondent, the IFC, the ADB or banks' own onshore unit.
With regard to the activities of OBUs, 'trade services' are at the heart. Facilitation of trade payment through contract-based trade payment methods (mainly open account and documentary collection) is a notable feature of the OBU transactions. In terms of the number of cases, about 70 per cent transactions were open account or documentary collection during 2012 and 2013 in importation. The use of LC in importation was limited to around 30 per cent in 2013. In case of exports through OBUs, use of documentary collection is even more prominent. However, the figures are significantly different from the onshore transactions, as revealed in the BIBM survey.
CHALLENGES: Handling some challenges and problems could bring positive changes in the offshore practices. OBU practitioners need handy guide for their smooth operation and greater efficiency. A concrete guide covering all requirements can help handle the problem. OBUs also need clear guidelines on the applicability of exiting risk management guidelines of the Bangladesh Bank. Excessive reliance on borrowing by the OBUs may not serve in the long run. It affects the interest expenses of the OBUs. Development of attractive deposit products targeting specific client is a challenge to the OBUs.
Dr. Shah Md Ahsan Habib is Professor and Director (Training) of Bangladesh Institute of Bank Management [BIBM], Dhaka and Team Leader of the BIBM research team on 'Offshore Banking'.
ahsan@bibm.org.bd