MAINTENANCE OF CRR WITH BB : Rule relaxed for offshore banking

Staff Reporter :
To foster the growth of offshore banking operations, the Bangladesh Bank (BB) has announced that banks will no longer be required to maintain a Cash Reserve Ratio (CRR) for these activities.

This significant change was communicated through a circular issued to banks on Thursday, signaling the central bank’s intention to stimulate foreign currency deposits by relaxing regulatory demands.

The CRR is a regulatory mandate that dictates the minimum fraction of customer deposits commercial banks must retain as reserves, either in cash or as central bank deposits.

Previously, a 2 percent CRR was mandatory for offshore banking operations (OBO), a rule now abolished to ease financial operations in foreign currencies.

Moreover, the recent circular permits offshore banking units (OBUs) to transfer funds to their domestic counterparts without restrictions on import payments for capital machinery, industrial raw materials, government imports, and other allowable foreign exchange transactions.

This amendment marks a departure from the prior limit, which capped fund transfers at 40 percent of the OBU’s deposits.

A senior central bank official highlighted this change as a strategy to enhance foreign exchange liquidity by attracting more foreign currency deposits into OBUs.

Currently, Bangladesh hosts 34 OBUs across various banks, which had disbursed foreign currency loans totaling Tk83,826 crore by September 2023, with default loans amounting to Tk1,755 crore.

The inception of offshore banking in Bangladesh dates back to 1985, initially launched in the Export Processing Zones (EPZs) without the provision for interest on current accounts, a policy now revised to include interest payments on offshore banking deposits.

In a related development, the cabinet, led by Prime Minister Sheikh Hasina, approved the draft of the Offshore Banking Act 2024, introducing a tax exemption on interest earned by depositors in these units.

This legislative move is part of broader efforts to address the foreign exchange shortage and the depreciation of the taka over the past two and a half years, amid declining inflows from remittances, exports, loans, and investments compared to the outflows for payment obligations, including import bills.

The Offshore Banking Act 2024, receiving principal and final approval in a cabinet meeting, is set to facilitate non-resident individuals and foreign organizations in investing in Bangladesh by allowing them to open offshore accounts and conduct banking in five major currencies: the US Dollar, Pound, Euro, Japanese Yen, and Chinese Yen.

This initiative is expected to bolster Bangladesh’s financial stability by attracting international investment and enhancing the country’s foreign exchange reserves.

At the end of the meeting, Cabinet Secretary Md Mahbub Hossain said that through this law, non-resident individuals or any outside organisation who will invest in Bangladesh can open an offshore account.

Offshore banking can be done in five currencies – US Dollar, Pound, Euro, Japanese Yen and Chinese Yen.