The central bank announced the policy through a circular issued on Monday
In a bid to bring offshore banking under a regulatory framework and to prevent financial irregularities, Bangladesh Bank has come up with a policy for offshore banking.
The central bank announced the policy through a circular issued Monday.
The policy includes a definition of offshore banking, approval for conducting offshore banking in Bangladesh, limitation on activities, prudential regulations, and termination and amendment of the approval for offshore banking.
As per the new policy, banks will have to file an application with the central bank within three months of issuance of the circular to continue operating their offshore units.
Besides taking permission from the central bank, each bank must also adopt their own written guidelines—subject to approval from banks' board of directors—for their respective offshore banking units.
Source of funds for offshore banking operation will be limited only from deposits and borrowings received by the unit.
Furthermore, banks will be allowed to use funds mobilized from domestic banking operations "with a limit not exceeding 20%" of its total regulatory capital, according to the circular.
Previously, there was no limit in transferring or mobilizing funds to an offshore banking unit from the onshore banking units.
Central bank officials said that many of the banks were transferring foreign currency to its onshore banking unit in excessive amounts—especially for investing in buyer’s credit—without Bangladesh Bank's knowledge.
This has lead to an imbalance in demand and supply in the domestic money market, along with a shortage in the country's foreign currency reserves.
On the other hand, onshore units of the banks were delaying clearing letters of credit (L/Cs) due to a liquidity crisis in the sector.
"Anticipating that the imbalance in foreign currency would lessen effectiveness of monetary policy formulated by the regulator to control the money market, we decided to formulate the offshore banking policy," said a central bank source.
The circular also reads that "all previous directives and circulars related to offshore banking have been repealed".
"Offshore banking units will have to take period permission from the central bank’s foreign exchange investment department to issue any medium and long term financing facility to fully foreign-owned firms," the circular adds.
Additionally, only persons not residing in Bangladesh will only be allowed to deposit funds in the offshore banking unit.
Approval for conducting offshore banking in Bangladesh
According to the policy, a bank willing to operate offshore banking units has to apply to the Banking Regulation and Policy Department (BRPD) of Bangladesh Bank, along with the necessary information and documents.
Bangladesh Bank will then assess the bank’s performance and evaluate its capacity to operate offshore banking and do due diligence before giving the approval.
Commencement of operation
Banks shall commence their offshore banking operation within six months or the time period subsequently extended by Bangladesh Bank from the issuing date of approval.
"Non-compliance regarding commencement of operation within the stipulated time period will automatically lead to cancellation of the permission for offshore banking," reads the circular.
Date of commencement of offshore banking operation of a bank or of an OBU (Offshore Banking Unit) shall be notified in writing to all concerned parties and the central bank within seven days of commencement.