Bank-Insurance
Bangladeshi Banks Seek Foreign Funds for Dollar-Denominated Loans Amid Tax Exemption
Commercial banks in Bangladesh are actively pursuing foreign funds to strengthen their offshore portfolios, aiming to offer customers dollar-denominated loans. The recent removal of a 20% tax on interest from foreign loans has reduced borrowing costs, sparking renewed interest in foreign financing, particularly from four local private commercial banks: City Bank, Prime Bank, Eastern Bank, and Bank Asia. These banks are currently in talks with the International Finance Corporation (IFC) to secure a total of $160 million to meet immediate US dollar liquidity needs and provide loans.
The exemption of the 20% tax on foreign loans has made foreign borrowings more attractive, with expectations that they will contribute to reducing the deficit in the country’s financial account by increasing dollar inflows. The IFC has sought the opinion of the Economic Relations Division of the Finance Ministry regarding potential investments in these banks to support working capital, trade-related dollar lending programs, and the broader Bangladeshi economy affected by the COVID-19 pandemic and global economic challenges.
Banks such as City Bank are now engaged in negotiations with the IFC, emphasizing that the tax exemption makes foreign borrowing more viable. These funds are crucial for improving dollar liquidity, facilitating dollar lending to importers and exporters, and contributing to reducing the overall deficit. Eastern Bank also expressed interest in securing foreign currency loans to address import bills and support businesses relying on imported raw materials.
Industry insiders suggest that, with IFC funds, banks could lend in dollars at an approximately 9% interest rate to local enterprises, compared to the 11% rate after the tax imposition in the current budget. The initial tax imposition was aimed at curbing foreign loan borrowing by both banks and businesses, leading to a decline in short-term foreign loans and contributing to a negative balance in foreign deposit accounts.
While the negative balance in foreign deposit accounts initially put pressure on financial accounts, the situation has been gradually improving as banks resume borrowing from foreign sources. The recent exemption of the tax until February has further incentivized banks to seek foreign financing, with imports hitting a 37-month low in December. The ongoing efforts by banks to source foreign funds aim to support economic activities, stabilize the forex market, and address dollar liquidity challenges faced by businesses in Bangladesh.
The Bangladesh Bank has adjusted the dollar price to Tk117 from Tk110 by introducing the crawling peg exchange rate mechanism.
Under this new approach, the bank will buy and sell dollars with Tk117 as the mid rate.
This decision was reached during a meeting of the monetary policy committee on Wednesday, May 8th.
Additionally, the committee has opted to discontinue the SMART lending rate mechanism, allowing banks to set their lending rates based on dollar demand and supply, according to a circular issued after the meeting.
The crawling peg system permits a currency with a fixed exchange rate to fluctuate within a specified band of rates, combining features of both fixed and floating exchange rate regimes.
On May 5th, Bangladesh Bank Governor Abdur Rouf Talukder announced the adoption of a market-based interest rate and the implementation of a crawling peg system to stabilize the foreign exchange rate.
He stated that the central bank is collaborating with prominent economists and bankers to devise a contractionary monetary policy aimed at curbing inflation and restoring macroeconomic stability.
Earlier, on April 2nd, the World Bank stressed the importance of a crawling peg mechanism aligned with market-clearing exchange rates to narrow the gap between formal and informal exchange rates, as outlined in the latest Bangladesh Development Update report.
Meanwhile, the International Monetary Fund (IMF) has advocated for a market-based dollar rate. In January 2023, the IMF attached several conditions to a $4.7 billion loan facility over a three-and-a-half-year period. Bangladesh has received two installments of the loan by fulfilling nearly all conditions, except for the reserve requirement.
On Sunday (May 5), the Bangladesh Bank (BB) once again dissolved the board of directors of the National Bank.
In a letter addressed to the managing director of the National Bank, the central bank announced the cancellation of the existing board of directors.
Furthermore, the banking regulator established a new board of directors and appointed Khalilur Rahman, the bank’s sponsor director, as the new chairman, according to the BB’s communication.
Mezbaul Haque, spokesperson for the Bangladesh Bank, commented on the development, stating that the action was taken to bolster the bank’s board of directors.
This move comes after a similar action in 2023 when the central bank ordered the dissolution of the National Bank’s board and formed a new one.
Prime Bank PLC has recently received Bancassurance Business commencement approval from Bangladesh Bank.
Mohammad Shahriar Siddiqui, director, BRPD, Bangladesh Bank handed over the approval letter to Nazeem A Choudhury, deputy managing director – consumer banking of Prime Bank PLC, at a ceremony held at Bangladesh Bank recently.
Mohammad Ashfaqur Rahman, additional director, BRPD, Bangladesh Bank, Ashraful Alam, joint director, BRPD, Bangladesh Bank, Miah Mohammad Rabiul Hasan, chief bancassurance officer, Prime Bank PLC were also present at the ceremony.
Bancassurance is a partnership between a bank and insurance company that will allow a Bank to sell insurance products of the insurance company through its distribution channels.
To offer a wide range of products to its customers and ensure best in class service, Prime Bank has partnered with leading insurance companies National Life Insurance Company Ltd. and Reliance Insurance Ltd.
Being one of the leading banks of the country, Prime Bank hopes to cater to the needs of insurance requirements of its customers through Bancassurance, in Bangladesh market.
