Unlocking Economic Growth: Offshore Banking’s Promise for Bangladesh

In a strategic move to position Bangladesh as an attractive offshore banking hub, private banks in the country are stepping up their global outreach efforts. Leading the charge, City Bank has recently conducted roadshows across Europe, introducing lucrative offshore deposit products with interest rates nearing 9% for foreign investors. As a pioneer under the new Offshore Banking Act 2024, City Bank aims to amass a $1 billion offshore reserve by 2024, specifically targeting non-resident Bangladeshis (NRBs) around the world.

IFIC Bank is also actively engaging in this initiative, having held a successful roadshow in Manchester. The bank has ambitious plans for a major event in New York’s Times Square to coincide with the Bangla New Year, signaling its commitment to capturing the interest of the global Bangladeshi diaspora. Other banks are quickly following suit, developing competitive offshore deposit products and planning extensive promotional campaigns post-Eid.

The offshore banking sector in Bangladesh already boasts substantial assets, with a total standing at approximately Tk 83,000 crore (nearly $8 billion). This significant base underscores the sector’s potential to attract even more foreign investment. By doing so, Bangladeshi banks aim to boost dollar liquidity and strengthen the country’s foreign exchange reserves. This sector’s growth is further supported by the recent Offshore Banking Act 2024, aimed at boosting the US dollar supply through relaxed rules and policies.

Non-resident Bangladeshis (NRBs) can significantly benefit from offshore banking. They are among the eligible customers for offshore banking services, which allow them to open accounts and make deposits in foreign currencies. NRBs can leverage these accounts to manage their finances more efficiently, transfer funds internationally without restrictions, and earn competitive interest rates on their deposits. This accessibility to foreign currency accounts provides NRBs with a secure and profitable avenue for managing their investments and savings.

The tax benefits associated with offshore banking in Bangladesh are particularly attractive. Investors can enjoy tax-free profits of up to 8.40 per cent on fixed deposits in major currencies like the US dollar and the euro for terms ranging from three months to five years. This tax exemption significantly enhances the appeal of offshore banking, encouraging more deposits from both local and foreign entities.

Direct Account Opening: Seamless International Access

For non-residents, the process is straightforward and user-friendly. You can open an offshore account directly from abroad through your bank’s online portal. This option allows you to manage your finances from anywhere in the world, providing a seamless and convenient banking experience.

Indirect Account Opening: Bridging Local and Global Needs

For those residing in Bangladesh, the indirect account opening option offers a unique solution. You can open an offshore account at a local branch on behalf of someone living abroad. This requires an undertaking form signed by the remitter who will send funds to the account. Once the account is active, the resident has the flexibility to use or encash dollars anytime and spend beyond the annual travel limit of $12,000 set by the Bangladesh Bank.

As of May 21, of this year, five prominent banks from Bangladesh are poised to launch extensive campaigns in New York to promote offshore banking. Recognizing the significance of this initiative, Colors Business engaged in discussions with the Managing Directors of four of these banks to delve into the most pressing topic in the banking sector of Bangladesh. Below are excerpts from these insightful conversations:

Mashrur Arefin, Managing Director & CEO of City Bank

Transformative Impact on Banking and Economy

Both the Foreign Currency Account (RFCDA) and offshore banking are revolutionary for our banking sector and economy. As a result, two new sources have been added to the dollar supply, alongside export and expatriate income. One is the RFCDA or cash dollar supply, and the other is fixed deposits in offshore banking. Both are used to cover import expenses. Although RFCDA involves cash dollars, we can still meet import expenses through various legal methods. The dollars obtained through these two systems can also be sold in the interbank market. By swapping or exchanging dollars with the central bank for local currency, we can increase the supply of local currency. The country’s cash dollar balance had recently fallen to $800,000. Thanks to RFCDA, it exceeded $50 million a few days ago, with about $17 million of this being from City Bank. Currently, we have $17 million deposited in 5,582 RFCDA accounts. Furthermore, it is much better for the country’s people to take fixed deposits with 7.5% interest rather than paying off import liabilities with foreign loans at 8.5% interest under offshore banking. At present, the interest rates for various term fixed deposits in offshore banking range from 6.8% to 8.4%, and this income is completely tax-free.

Response to Offshore Banking Deposits and Goals

We now have $18 million in deposits under offshore banking, with another $5 million coming in one account. Anyone residing in Bangladesh can now visit any of our 175 branches and sub-branches to open a current dollar account for offshore deposits. Then, they can ask their relatives, friends, or business partners abroad to send dollars to that account. We call this an international bank account. It is also an offshore deposit account for people residing in the country. We have received $2.9 million in such accounts. If people are well informed, $50 billion or 5 trillion dollars can come into offshore deposit accounts in our banks. If offshore deposits in a $15 billion economy like Mauritius can be $800 billion, why can’t a $470 billion economy like Bangladesh have $50 billion in offshore deposits? Offshore deposits will one day become the second largest source of dollars in this country.

Market-Based Exchange Rate for Taka and Dollar

A market-based exchange rate for Taka and Dollar will have a significant impact on the overall economy. However, it should be noted that the dollar rate is not yet fully market-based. The Bangladesh Bank has set the midpoint rate at 117 Taka per dollar. Although it is called a midpoint rate, no upper or lower limit has been set yet. With the dollar rate being somewhat market-based, expatriate income will increase. Exports will remain competitive compared to other countries. More foreign investment will come in, leading to increased production and employment. Our economy relies on imports and exports, so while the depreciation of the Taka might seem to have a negative impact on the microeconomy, it will positively affect the macroeconomy.

Potential Rise in Inflation

Inflation may increase somewhat because imports are a significant factor in this country. However, in reality, banks were already meeting import expenses at 116-117 Taka per dollar, even though the official rate was 110 Taka. This means that import costs will only rise for government imports, such as fuel, which were done at 110 Taka per dollar. Inflation was already high. Now, the need is to increase economic activity so that wages and salaries rise. If that happens, the impact of inflation will not be felt as much. There is no benefit in sitting idle due to fear of inflation. The main issue in the economy is whether people can maintain their standard of living with their income. If they can, then we need to see how comfortably they can do so. In Japan, one kilogram of potatoes costs 450 Taka, but the per capita income in Japan is $34,017. In Bangladesh, one kilogram of potatoes costs only 40 Taka, but the per capita income is $2,688. Who can shop more comfortably? A Japanese person earns 13 times more than I do, so the price of potatoes is tolerable for them. Therefore, we need to improve the balance of transactions to increase production and employment. Both domestic and foreign investments need to be increased, and people’s incomes need to rise. If that happens, inflation will not be an issue.

Md. Murshedul Kabir, Chief Executive Officer (CEO), Agrani Bank PLC

Positive Impact of Fixed Dollar Deposits in Offshore Banking

The decision to allow fixed dollar deposits in offshore banking is positive. We have been operating Offshore Banking Units (OBUs) for a long time, and FC (Foreign Currency) accounts have always existed. However, accepting deposits is a completely new idea. Customers will earn over 8 per cent interest on their dollar deposits, and the significant change is that now, the source of the money will no longer be questioned, which was a previous practice that caused inconvenience and embarrassment to expatriates. This has been stopped by a circular from the Bangladesh Bank. An 8 percent profit is substantial.

Increased Banking Capability and Expatriate Benefits

When expatriates keep dollars in fixed deposits instead of money, it will enhance the banks’ capability in foreign trade and transactions. Agrani Bank has been involved and advanced in offshore banking for a long time. We have been providing loans to garment businessmen in the EPZs through this sector. They used to import capital machinery with these low-interest loans from abroad. Now expatriates will benefit as well. A significant advantage is that if an expatriate nominates a family member to manage the account as a nominee, that person can easily keep fixed dollar deposits at high interest rates while residing in the country. They can also convert it to local currency if desired.

Advantages of Dollar Deposits

You know, the value of the local currency might depreciate, but the value of the world’s strong currency, the dollar, will not. Therefore, the government’s initiative has multiple benefits. Customers will enjoy tax-free, interest-free, and unchallenged benefits by keeping dollars in this manner. Simultaneously, expatriate income, exports, and reserves will increase in the country. We will now raise awareness and encourage expatriates about this initiative.

Selim RF Hossain, Managing Director and CEO, BRAC Bank PLC

New Government Initiative for Foreign Currency Deposits

Although offshore banking activities in foreign transactions exist in Bangladesh, there has not been any prior government effort to make the collection of foreign currency deposits mandatory by law. This step is a new concept.

Simplified Regulations by Bangladesh Bank

The Bangladesh Bank has simplified the regulations to increase the supply of foreign currency. As a result, customers can now open accounts in domestic banks online from abroad, save dollars at high and attractive interest rates, convert them to local currency if needed, and even withdraw them if desired.

Comparison with Foreign Banks

Foreign banks offer minimal interest on savings. Conversely, when domestic banks receive foreign currency deposits from any foreign or non-resident individual or entity, there is security since it is a standard banking procedure.

Account Management for Expatriates

A Bangladeshi citizen residing in the country can open an account on behalf of a Bangladeshi living abroad. They can manage the account as an assistant. They can bring dollars into the country or send them out through this account if they wish.

Impact on Foreign Currency Supply

Essentially, this is a product of the Bangladesh Bank. This will increase the supply of foreign currency

Abul Kashem Md. Shirin, Managing Director, Dutch-Bangla Bank Ltd. PLC

Dependence on Loans in Offshore Banking

In offshore banking, foreign investments have primarily been dependent on loans. Thus, ordinary customers were not directly involved in it. Now, by legislating measures to collect dollars in fixed deposits through offshore banking, it will increase the country’s foreign currency flow, alleviate reserve crises, and encourage more foreign investment by facilitating the opening of letters of credit for importing goods.

Comparative Interest Rates and Benefits

Not only that, but offshore banking systems will also play a positive role in maintaining consistency with the international financial system, even at the customer level. Currently, customers who keep dollars in American banks receive only 2 to 3 per cent interest, whereas in domestic banks, it exceeds 8 per cent. This is a significant difference. Through legal channels, dollars can be brought into the country for higher interest rates, and similarly, they can be taken out of the country.

Tax Implications and Exemptions

In the current offshore banking system, if there is no Tax Identification Number (TIN), a 15 per cent tax is levied on the earnings from deposits. With a TIN, the tax is 10 per cent. Under the new law, no tax will be imposed if any expatriate makes a fixed deposit. Additionally, no tax will be imposed on the interest earned from offshore banking transactions. There will be no interest or charge for account maintenance. This will benefit customers, banks, and even increase the country’s foreign currency reserves.

Customer Trust and Account Management

There is no trust issue for expatriates because the Bangladesh Bank itself is responsible for it. Customers will manage their accounts online from abroad through the relevant bank’s online platform. The bank will merely create the option, and the password will be sent to the customer’s email. The customer will decide whether to keep the dollar as a fixed deposit for 3, 6, or a longer period. However, above all, the customer must make their own decision about opening an account based on the bank’s financial health.

Dutch-Bangla Bank’s Strategy

Dutch-Bangla Bank has 15 million customers. We do not rely on any corporate entity for deposit collection in the country. We prioritize small customers. Our operating costs are also much lower, with a cost of funds at just 2 per cent, whereas many banks exceed 8 per cent.

Developing Offshore Banking Products

Now, the noise around receiving foreign currency deposits in offshore banking won’t be beneficial; rather, related products need to be developed. We need to ensure the product is sound. Simultaneously, the Bangladesh Bank, relevant government ministries, and Bangladeshi embassies abroad need to campaign to regain customers’ trust in availing of this service. Only then will roadshows and other initiatives be effective.