Offshore banking in Bangladesh: A place for attracting FDI for

accelerated economic growth

An offshore bank is a bank located outside the country of residence of the depositor, typically in a low
tax jurisdiction or tax haven that provides financial and legal advantages. These advantages typically
include: (i) greater privacy; (ii) low or no taxation; (iii) protection against local political or financial
instability. While the term originates from the Channel Islands being "offshore" from the United
Kingdom and most offshore banks are located in island nations until this day, it is, thus, used figuratively
to refer to such banks, regardless of location.

Offshore banking has now become an important segment of the international financial system. The term
offshore bank basically means a foreign bank. Offshore banks provide a continuum of services in
connection with financial management such as deposit taking, money transmissions, creation of
provision of foreign exchange, trade finance, credit facilities, investment and fund management,
corporate administration, and trustee services. Often, offshore banks are willing to accept deposits from
depositors who are the citizens of a variety of countries, instead of requiring all deposits to come from
citizens in their own countries. More depositors mean more money for the bank for its operations and
investments. As such, banks may have good reasons for having foreign depositors with them.

The government of Bangladesh is offering a good numbers of facilities/advantages/incentives for

offshore banking customers, operating in other countries. It provides access to politically and
economically stable jurisdictions. This is an advantage for residents in areas where there is risk of
political turmoil, who fear their assets may be frozen, seized or disappear. Since it provides a broad
range of features, offshore banking provides absolute safety and security. However, it is often argued
that the developed countries with regulated banking systems offer the same advantages in terms of
stability.

Offshore banks like Bangladesh operate with a lower cost base and can provide higher interest rates
than the rate in the home country due to lower overheads and a lack of government intervention.
Advocates of offshore banking often characterise government regulation as a form of tax on domestic
banks, reducing interest rates on deposits.

Offshore finance is one of the few industries, along with tourism, in which geographically remote island
nations can competitively engage themselves in related operations. As offshore banks are mostly
located in a jurisdiction with sound economic and political conditions, it provides stability. It helps
developing countries to source investment and promote accelerated growth in their economies, and
redistribute world finance from the developed to the developing world. It is then a great way for
developing countries to enhance their economic growth. The most prominent feature of the offshore
banking is tax benefits, i.e., most of the offshore banks make payment of interest without deducting the
tax.
In Bangladesh, there is a ten-year period of tax holiday for companies based in Export Processing Zones
(EPZs) companies. Offshore banks are free to accept deposits or to borrow, from persons/institutions
not residents in the Bangladesh including Bangladesh nationals working abroad. Offshore banks are also
free to accept deposits from, or to borrow from, Type - A (wholly foreign owned) units in the EPZs in
Bangladesh. However, such banks are not to accept deposits from persons/institutions residents in
Bangladesh including Type - B and Type - C units in the EPZs in Bangladesh.

Offshore banks offer banking services that may not be available from domestic banks such as higher- or
lower-rate loans, based on risk and investment opportunities, not available elsewhere. Above all,
offshore banking system provides flexibility, i.e., it provides a flexible structure to business owners and
expatriates requiring global access to their fund.

Foreign direct investment (FDI) plays an extraordinary role in global business. It can provide a firm with
new markets and marketing channels, cheaper production facilities, access to new technology, products,
skills and financing. For a host country or the foreign firm which receives the investment, it can provide
a source of new technologies, capital, processes, products, organisational technologies and
management skills. All these can provide a strong impetus to economic development.

In its classic definition, FDI is defined as a company from one country making a physical investment into
building a factory in another country. The direct investment in buildings, machinery and equipment is in
contrast with making a portfolio investment, which is considered an indirect investment.

In the recent years, given rapid growth and changes in global investment patterns, the definition has
been broadened to include the acquisition of a lasting management interest in a company or enterprise,
outside the investing firm's home country. As such, it may take many forms such as a direct acquisition
of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a
local firm, with the attendant input of technology and licensing of intellectual property.

Bangladesh is strategically located as a potential hub of regional trade. Roads, bridges, and ports are
being developed for facilitating transit routes for regional trade through Bangladesh. Regional energy
grid is being developed for enhancing energy security. Bangladesh offers excellent opportunities and
facilities for foreign investment. No prior permission is required for investment in industrial sector
(except for four reserved sectors including defense equipment, reserve forestry, atomic energy,
currency printing and minting). Investment proposals need only to be registered with the Board of
Investment (BoI). There is no ceiling on percentage of foreign ownership; both wholly foreign owned
and joint ventures are permissible. In order to stimulate rapid economic growth of the country,
particularly through industrialisation, the government has adopted an 'Open Door Policy' to attract
foreign investment to Bangladesh.

Bangladesh needs to develop offshore fund to fulfill its policy of attracting foreign investment. Private
capital in Bangladesh is not plentiful and technical know-how is limited. Because of this, there is ample
scope and, indeed, a strong need to encourage investment from abroad.
The Bangladesh Export Processing Zones Authority (BEPZA) is the official organ of the government to
promote, attract and facilitate foreign investment in the EPZs. The primary objectives of an EPZ is to
provide special areas where potential investors would find a congenial investment climate, free from
cumbersome procedures. Attracting foreign and local investment is the prime objectives of EPZs
towards economic development. An EPZ is defined as a territorial or economic enclave in which goods
may be imported and manufactured and re-shipped with a reduction in duties/and/or minimal
intervention by custom officials. An EPZ provides: (i) plots/factory building in custom bonded area; (ii)
infrastructural facilities; (iii) administrative facilities; and (iv) fiscal and non-fiscal incentives. In our
country, there are eight (08) EPZS in the concentration around 30 industries/sectors ranging from textile
to musical instruments that are in places locating at its different parts.

As far as facilities in Bangladesh EPZa are concerned, some positive points can here be highlighted: (i)
law and order situation of the country; (ii) infrastructure facilities in EPZ areas; (iii) reduction of lead
time; (iv) cost of doing business; (v) friendly policy of govt.; (vi) incentives; (vii) win-win ventures; (viii)
auccess story; (ix) signatory to MIGA (Multilateral Investment Guarantee Agency); (x) signatory to ICSID
(International Centre For Settlement Of Investment Dispute); (xi) member of WIPO (World Intellectual
Property Organisation) (xii) member of OPIC (Overseas Private Investment Corporation); and (xiii) Asia's
low cost production base.

In order to cater to the need of financial support, off-shore banking facilities are being provided to the
foreign owned/join venture units in the EPZs of Bangladesh. Presently, 06 (six) foreign banks operating
in Bangladesh have been licentiated for doing off-shore banking. Apart from that, 23 local banks of
Bangladesh also provide off-shore banking. Besides, according to the Bangladesh Bank (BB), more local
banks are in the pipe-line to have off-shore banking licence from them.

As far as fiscal incentives are concerned, some advantages in favour of Bangladesh, can be pointed out
here. These include: (i) 10 years' tax holiday; (ii) duty-free import of construction materials; (iii) duty-
free import of machineries, office equipment and spare parts etc.; (iv) duty-free import and export of
raw materials and finished goods; (v) relief from double taxation; (vi) exemption from dividend tax; (vii)
availability of Generalised System of Preferences (GSP) facility; (viii) accelerated depreciation on
machinery or plant; ix) remittance of royalty, technical and consultancy fees; (v) duty- and quota-free
access to the European Union (EU), Canada, Norway, Australia etc.

Again, as far as non-fiscal incentives are concerned, the following points can be highlighted: (i) 100 per
cent foreign ownership permissible; (ii) enjoyment of MFN (most favored nation) status; (iii) no ceiling
on foreign and local investment; (iv) full repatriation of capital and dividend; (v) foreign currency loan
from abroad under direct automatic route; (vi) permission for Non-resident Foreign Currency Deposit
(NFCD) Accounts; and (vii) facility for operation of foreign currency (FC) accounts by 'B' and 'C' type
industries.

A good number of facilities, in a true sense, are available for offshore banking customer towards
attracting FDIs. Such facilities can be summarized: (i) no UD, IRC, ERC and renewal of Bond license; (ii)
work permits issued by BEPZA; (iii) secured and protected bonded area; (iv) allowing of import on
Documentary Acceptance (DA) basic; (v) Bank of Back L/C; (vi) facility for import and export on CM basis;
(vii) import from DTA (Domestic Tariff Area); (viii) 10 per cent sale to DTA (Domestic Tariff Area); (ix)
customs clearance at factory site; (x) sub-contracting with export-oriented Industries inside and outside
EPZ allowed; (xi) relocation of foreign industries; (xii) advantage of getting residentship and citizenship;
(xiii) one-window same day service and simplified procedures.

According to the BB, our overall balance of payment (BoP) was negative few months back and the
situation has improved a little bit. But this is not convincing at all. The BB is concerned about the matter
and taking necessary steps to solve the liquidity problem and reduce the pressure on BoP. In this
context, the BB is encouraging our corporate houses to avail finance from foreign investments. Some of
the local corporate houses such as Apex, and Pran Group have already availed themselves of US dollar-
denominated foreign currency loan from our offshore banks against a kind of refinancing from the BB
and the same has been extended with special permission from the BB. However, now the refinancing
facility is on the verge of being withdrawn by BB as the International Monetary Fund (IFM) raised their
flag as it has a dual impact on foreign reserve of the country.

In addition to this arrangement, some of our offshore banks arranged foreign currency from external
sources like IFC, FMO, DEG etc., with a view to extending financing facility to local corporate houses.
This will ultimately enable them to have a sound footing as well as help improve their competitiveness a
lot, vis-a-vis the multinational companies. All such arrangements are mainly for export-oriented
companies except one who is engaged in power generation which will, in due course, contribute to
foreign exchange reserve.

In September 2010, the BB clarified that the offshore banks may discount bills accepted by authorised
dealers (Ads) in Bangladesh against import L/Cs opened on deferred/usuance basis and subsequently
the same facilities are also extended to domestic banking area against strong lobbying by non-offshore
licensing banks. This is also another attempt to save foreign currency as we need to pay higher amount
of interest for usance period.

We know international borrowing rates are more competitive than local banks' rates. Currently London
inter-bank exchange rate is less than 0.5 per cent. Our firms can finance with foreign currency loans at a
rate of London Inter-Bank Offer Rate (LIBOR) plus 3.00 to 5.00 per cent. In spite of foreign currency risk,
this type of loan financing would yield around 6.00 to 8.00 per cent of savings as our local banks charge
13 to 16 per cent per annum.

The operational performance of existing units of EPZs in Bangladesh have already borne out the positive
aspects of offshore banking in Bangladesh towards attracting FDI. Now, the question is whether the
government should allow all the industrial units to set up their business in the EPZs in Bangladesh. It
needs to offer very exclusive facilities to the investors. It did earlier decide not to go for allocating
further any new land for EPZs. In EPZs, around 70 per cent to 80 per cent factories are engaged directly
and indirectly in ready-made garments (RMG) and textile business. A good number of foreign investors,
mainly from neighboring India and China, are looking for opportunities to make investments in RMG
sector in Bangladesh. Such investors are showing interest to invest in Bangladesh because of the zero-
tariff duty facility the country enjoys from 27 member-countries of the European Union (EU) under the
new Generalised System of Preference (GSP) rules, made effective from January 01 last year.

Until 2000, foreign-owned companies were not allowed for investment in RMG sector outside the
export processing zones (EPZs) by the BoI at the request of the Bangladesh Garments Manufacturers &
Exporters Association (BGMEA). The BoI eased later this FDI policy. It allowed foreign investment in this
sector from 2005. Meanwhile, the Bangladeshi companies operating in the same industrial sector
outside the EPZ are recognised by the world-reputed buyers like Wall Mart, H & M (Sweden), GAP etc.,
for quality of their products. Relentless persuasion, acquisition of international technology and know-
how and dedicated workforce are the main reasons for the country's success story about the RMG
sector. By this time, we have been able to maintain our position among those on the top on a global
scale in this sector.

There is hardly any need for attracting FDI to the sector as it is not capital-intensive. The government
should seriously consider the matter about whether any new industry in the RMG sector should be
allowed or encouraged in the country's EPZs. The foreign investors can rather be encouraged through
further liberalization moves, if required, in areas like light or heavy engineering industries. This will in
due course facilitate transfer of technology to the country and will serve the purpose of import-
substitution.