Off-shore banking: New zone of benefit
OFFSHORE banking refers to international banking involving non-residents' foreign currency- denominated assets and liabilities. It covers only non-residents and does not mix with domestic banking. A non-resident is a person, bank or firm who/which resides outside Bangladesh. Non-residents also include Bangladesh nationals who reside abroad. Offshore banking units can carry on their activities of deposit taking from and lending to international enterprises or investors without conflict with the domestic fiscal and monetary policy. In short, offshore banking is international banking kept separate from domestic banking with freedom of functioning.
An offshore banking center is a place where deliberate attempt is made to attract international banking offering many concessions in the form of taxes and levies being imposed at lower rate or not being charged. By their very nature, offshore markets are outside the regulatory framework of any monetary authority. It is also outside the control of the monetary authority of the home county because the transaction takes place outside the country in foreign currency. It is a foreign territory within a country.
Offshore banking units are branches of international banks or other subsidiaries or affiliates. They do not carry retail business and generally provide wholesale banking services, namely, project financing, syndicated loans, issue of short term and medium term instruments like negotiable certificates of deposits and capital notes, as well as merchant banking activities in foreign currency denominated bonds and equity shares.
One important aspect of offshore currency markets is that, basically it is a short-term market, 3 or 6 months deposits being the most popular. Also, it is a wholesale market with participants limited to banks, financial institutions, international investors, major corporate and high net worth individuals.
Apart from customer transactions, there is an extremely active inter-bank market in offshore currencies. Banks acting in the market are continuously trading deposits in the inter-bank market. Such active banks would readily offer a two-way quote -- the rate at which they are willing to take a deposit (bidding for deposit), and the rate at which they are willing to place (offer) deposits.
The two rates are referred to as bid and offer rates - hence the terms, London Inter-Bank Bid Rate (LIBID) and London Inter Bank Offer Rate (LIBOR) - and the difference between the two represents the trading margin of the bank. The offshore market is both a capital and a money/banking market in which a variety of instruments (bonds, equities etc) are issued and traded, and bank loans arranged.
Advantages of Off-shore Banking (OBU) :
a) Off-shore Banking Unit (OBU) mostly deals with banks or with large borrowers or multinational corporations. Multinational corporations prefer transacting at offshore financial centers because of certain apparent advantages - i) avoidance of high tax incidence, ii) freedom from exchange control, iii) maintenance of secrecy of deals etc. b) OBU earn sizeable profits as these ventures involve relatively low operating costs. c) With multi-currency deposit bases the banks would be able to serve better the needs of their customers who have set up joint venture abroad in the form of foreign currency finance. d) The banks would be strengthening the balance of payment of the country through repatriation of profits from the ventures. e) Exporters would benefit in terms of finer margins on loans and better foreign exchange rates available. In our country only Type A & B units in could may avail such benefits so far. f) The benefits of multi-currency operations which, to an extent, minimize currency fluctuation risk, will be an added advantage. g) Salaries paid by offshore banks and local expenditure incurred by them contribute to the welfare of the economy. h) The country may earn revenue in the form of licence fees, profit taxes imposed on the banks operating in the area. It may also get the benefit of banks' funds in the form of capital and liquidity requirements. i) The country can gain improved access to the international capital markets. j) The domestic financial system may become more efficient through increased competition and through exposure of the domestic banks to the practices of offshore banks. k) The offshore banking centre will provide opportunities to train the local staff which will in turn contribute to a faster growth of the domestic economy. l) The OBUs would help canalize non-resident Bangladeshi investments. OBU can play an important role to satisfy the banking needs of the industries operating in the Export Processing Zones (EPZ) of the country extending all sorts of credit facilities. With the growing demands for banking facilities due to establishment of more and more industries in the EPZ, avenues have been created for the local banks to earn substantial amount of foreign exchange by operating OBUs. As per existing policy of Bangladesh Bank, presently AD Branches can extend credit facilities to Type A & B industrial units in EPZ interalia for purchasing of their export bills and to settle payment of LCs sight up to 50 percent of the global NFCD balance of the respective bank. This facility covers only a small segment of their banking needs and as such, Type A & B Units have to depend largely on the borrowed funds from overseas sources to meet their requirements. Besides, for capital investment, Type A units have to arrange FC funds from own source or borrowing from overseas banks. And Type B units may get loan in Taka from local banks for procurement of capital machinery upto the local partners' share of ownership of the unit. The foreign banks thus reap the benefits of such industrial advancement in our country. The OBUs are entitled to obtain deposit as well as borrowing from abroad and will be free to extend credit facilities to the industries in EPZ. OBUs can also undertake lending activities in the overseas countries. Local banks may also maintain NOSTRO A/C with the OBUs like foreign banks. With multi-currency deposit bases the banks would be able to serve better the needs of their customers who have set up joint venture abroad, in the form of foreign currency finance. But in the absence of OBU facility with local banks such businesses are being diverted to international banks. As soon as the local banks feel encouraged to start operation OBUs and once those activities take place, a tremendous opportunity will open up for our banks and the country itself to derive benefits from the global economy where, however, the supportive role of Bangladesh Bank is imperative.
a) Off-shore Banking Unit (OBU) mostly deals with banks or with large borrowers or multinational corporations. Multinational corporations prefer transacting at offshore financial centers because of certain apparent advantages - i) avoidance of high tax incidence, ii) freedom from exchange control, iii) maintenance of secrecy of deals etc. b) OBU earn sizeable profits as these ventures involve relatively low operating costs. c) With multi-currency deposit bases the banks would be able to serve better the needs of their customers who have set up joint venture abroad in the form of foreign currency finance. d) The banks would be strengthening the balance of payment of the country through repatriation of profits from the ventures. e) Exporters would benefit in terms of finer margins on loans and better foreign exchange rates available. In our country only Type A & B units in could may avail such benefits so far. f) The benefits of multi-currency operations which, to an extent, minimize currency fluctuation risk, will be an added advantage. g) Salaries paid by offshore banks and local expenditure incurred by them contribute to the welfare of the economy. h) The country may earn revenue in the form of licence fees, profit taxes imposed on the banks operating in the area. It may also get the benefit of banks' funds in the form of capital and liquidity requirements. i) The country can gain improved access to the international capital markets. j) The domestic financial system may become more efficient through increased competition and through exposure of the domestic banks to the practices of offshore banks. k) The offshore banking centre will provide opportunities to train the local staff which will in turn contribute to a faster growth of the domestic economy. l) The OBUs would help canalize non-resident Bangladeshi investments. OBU can play an important role to satisfy the banking needs of the industries operating in the Export Processing Zones (EPZ) of the country extending all sorts of credit facilities. With the growing demands for banking facilities due to establishment of more and more industries in the EPZ, avenues have been created for the local banks to earn substantial amount of foreign exchange by operating OBUs. As per existing policy of Bangladesh Bank, presently AD Branches can extend credit facilities to Type A & B industrial units in EPZ interalia for purchasing of their export bills and to settle payment of LCs sight up to 50 percent of the global NFCD balance of the respective bank. This facility covers only a small segment of their banking needs and as such, Type A & B Units have to depend largely on the borrowed funds from overseas sources to meet their requirements. Besides, for capital investment, Type A units have to arrange FC funds from own source or borrowing from overseas banks. And Type B units may get loan in Taka from local banks for procurement of capital machinery upto the local partners' share of ownership of the unit. The foreign banks thus reap the benefits of such industrial advancement in our country. The OBUs are entitled to obtain deposit as well as borrowing from abroad and will be free to extend credit facilities to the industries in EPZ. OBUs can also undertake lending activities in the overseas countries. Local banks may also maintain NOSTRO A/C with the OBUs like foreign banks. With multi-currency deposit bases the banks would be able to serve better the needs of their customers who have set up joint venture abroad, in the form of foreign currency finance. But in the absence of OBU facility with local banks such businesses are being diverted to international banks. As soon as the local banks feel encouraged to start operation OBUs and once those activities take place, a tremendous opportunity will open up for our banks and the country itself to derive benefits from the global economy where, however, the supportive role of Bangladesh Bank is imperative.
For all latest news, follow The Daily Star's Google News channel.
Comments