Offshore banking refers to performing banking operations in a country one doesn’t reside in. Offshore bank accounts allow you to make and receive payments, hold money, and set up savings and investment accounts in multiple currencies (in Bangladesh, the US dollar, the British pound, the euro, the yen, and the yuan are accepted). 

With funds deposited in an offshore account, individuals are free to collect the interest earned on their deposits and transfer them wherever they want. 

There are two ways offshore banking accounts of a particular bank are carried out.

1. If a bank offers offshore services, its domestic bank unit (branch within the country’s territory) can receive funds from an offshore banking operation (OBO).
2. Eligible customers can also deposit money in an offshore bank unit (a branch of a Bangladeshi bank located outside the domestic territory) to carry out OBO.

The first one lacks a physical branch of commercial banks abroad. The second one has branches located in different countries to collect deposits and provide offshore services. 

Banks like City Bank and Janata Bank have branches outside Bangladesh but are not specifically structured for the OBO. Offshore banking in Bangladesh is primarily conducted through Offshore Banking Units (OBUs) within the country. Currently, about 40 banks have offshore units.

BRAC Bank provides the highest interest rate (Up to 8.59% for dollar deposits), and the lowest minimum deposit (500 dollar/pound/euro) is required.

Offshore Banking Act 2024

Tax exemptions:

• Depositors can enjoy tax-free profits of up to 8.40 percent on fixed deposits in US dollars or euros for terms ranging from three months to five years.
• No fees or charges are imposed on accounts.
• The National Board of Revenue may increase the excise duty if a bank account’s credit or debit balance crosses Tk. 50 lakh at any time during next year. 

Deposit rules:

• Can accept deposits from 100% foreign-owned companies in EPZs, economic zones, and hi-tech parks.
• Banks can receive funds from the OBUs amounting to up to 40 percent of their regulatory capital to settle payment obligations.

The services offered are deposits, loans, derivatives, buying guarantees, etc. 

How does offshore banking contribute to increasing forex?

A country’s foreign exchange reserves are like its savings account in foreign currencies. These reserves are crucial for several reasons, such as importing goods, maintaining exchange rate stability, managing external shocks, etc. 

Bangladesh relies on imports for essential goods like machinery and fuel. Reserves allow the country to purchase these goods even when export earnings might be lower. Foreign reserves also help stabilize the exchange rate between the Bangladeshi currency (BDT) and other currencies. This is important for businesses and consumers who import or export goods. In unexpected economic events like a global recession, reserves can also act as a buffer.

‘Balance of payment’ refers to the net inflow and outflow of money from a country. Ideally, a country wants a surplus where more money comes in than going out. 

However, Bangladesh often experiences a current account deficit. This means the value of imports is higher than the value of exports, which puts pressure on the country’s foreign exchange reserves.

How offshore banking helps

Even though Bangladesh’s offshore banking deposits and foreign reserves are not directly related, the increase in deposits will help fight ongoing dollar erosion. Commercial banks buy dollars from Bangladesh Bank to make Letters of Credit payments, which reduces reserves. 

OBO is a fixed deposit considered an asset liability and an inflow in the government’s financial account. The outflow is more than the inflow in Bangladesh’s financial account. 

Since this deposit is the dollars owned by commercial banks, these banks will no longer need to buy dollars from Bangladesh Bank to pay for LC, ultimately reducing dollar erosion of foreign reserves. This helps to stabilize the exchange rate and conserve the country’s foreign exchange reserves. 

The dollars obtained through OBOs are sold on the interbank foreign exchange market. OBUs sell a portion of the foreign currency they acquire to the interbank foreign exchange market, increasing its liquidity. Dollars can be used for onshore payment purposes as well. 

Tax exemptions in offshore banking attract foreign deposits, boost offshore business, and stimulate FDI. This increases foreign currency flow, helping build foreign reserves. Tax breaks make the country more attractive to foreign investors and businesses. 

Foreign currency from offshore accounts can be swapped with the Bangladesh Bank for Bangladeshi Taka (BDT) at an 8% policy rate and 5.38% SOFR. This directly adds to the country’s foreign exchange reserves. Commercial banks can then invest in treasury bills at an 11% rate. 

Offshore accounts allow individuals and businesses to manage currency risk by holding assets in multiple currencies. This can protect against losses due to currency depreciation. OBO can also be used for speculative currency trading: buying and selling currencies with the expectation of profiting from fluctuations in their exchange rates.

What’s the future of OB here?

Most banks abroad offer an interest rate of 0.5%- 2% on offshore accounts. However, in a rising economy, Bangladeshi commercial banks offer an 8.5% interest rate, which is surprising. 

Since commercial banks are taking loans with almost 8-9% interest rate (with a total offshore loan of $6-$7 billion), only the interest is paid, and the banks do not have to worry about the capital amount. They can maintain a stable liquidity ratio. 

If faith is established, then offshore deposits will rise. Huge publicity is needed for this. City Bank bagged $21 million from offshore deposits, having a forthcoming position among other banks (May 2024). Brac Bank has secured $50 million to date. 

Mashrur Arefin, the Managing director of City Bank, hosted a roadshow in Portugal and Poland earlier this year. He mentioned that 50% of the participants in Portugal were depositors  (with relatively higher incomes). 

In Poland, 80% of the non-Bangladeshi residents were depositors. Hence, he assumes that offshore fixed deposits can also replace remittances as Bangladeshi migrant workers move away from low-skilled jobs in the future. 

However, there is a barrier in the nationwide offshore banking market. Banks need accounts in foreign countries (nostro accounts) to manage foreign money. Only 4 to 5 Bangladeshi banks have strong relationships with foreign banks due to the weak financial health of Bangladeshi banks. 

Banks with these relationships can offer better interest rates on offshore deposits because they can directly manage the money and earn income from it. Banks without strong foreign connections must rely on other banks, which increases their costs. This makes it harder for them to offer high interest rates on offshore deposits. In short, only banks with lots of international business can afford to pay high interest rates on offshore deposits.

International credit rating agencies like Moody’s, Fitch, and S&P have downgraded Bangladesh’s rating. Since foreign institutions rely on these ratings for funding decisions, improving the country’s rating is essential to promoting offshore banking among foreign nationals. 

This is why primarily non-Bangladeshi residents are considered the most significant source of offshore deposits. It takes years to generate the confidence that international depositors or investors need to keep their money. 

Other banks can develop software and mobile apps for offshore depositors, like Pubali Bank (under development).

Bangladeshi banks need to focus more on roadshows and credit ratings to build a strong network of offshore depositors.

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