Bangladesh’s 3% trade-finance cap risks pushing local banks out

Bangladesh’s ceiling on foreign-currency trade-finance charges is placing severe pressure on local banks’ margins and could reduce their access to international funding, less than three months after the measure took effect.

Bangladesh Bank introduced an annual all-in-cost ceiling of the relevant benchmark rate, such as SOFR or Euribor, plus three percentage points on 11 May. The limit applies to short-term import finance, the discounting of usance export bills and early payments for exports conducted under open-account terms. It replaced the previous four-percentage-point ceiling.

The policy was intended to reduce financing costs for importers and exporters. However, recent reporting from Trade Finance Global suggests the reduction has removed much of the margin available to banks borrowing foreign currency from correspondent institutions and then lending it to domestic companies.

Before the change, banks were reportedly earning spreads of around 100 to 125 basis points on some foreign-currency facilities. Reducing the permitted mark-up by 100 basis points has therefore made parts of the business marginal or unprofitable, particularly for weaker banks that cannot borrow internationally at the same rates as larger institutions.

The pressure is most acute in offshore banking units, which rely heavily on borrowed foreign-currency funding rather than deposits. If correspondent banks price funding above the level at which Bangladeshi institutions can lend profitably, local banks may reduce activity or become unable to offer certain facilities altogether.

That could produce an uneven market. Better-capitalised banks with established international relationships may continue to obtain competitive funding, while smaller institutions lose business and corporate borrowers become concentrated among a narrower group of lenders.

For importers, the ceiling may initially appear beneficial because it limits interest and fees. However, a lower regulated price does not guarantee that sufficient finance will remain available. A bank facing a negative or negligible margin may restrict approvals, shorten maturities or withdraw from particular transactions rather than lend at uneconomic rates.

The development is particularly important for letters of credit, export bill discounting and open-account trade, where reliable access to foreign currency supports the movement of goods and conversion of receivables into cash.

The rule itself is not new, but evidence of its commercial effects has now begun to emerge. Bangladesh Bank may ultimately face a choice between retaining the lower ceiling and accepting greater market concentration, or adjusting the framework to preserve broader participation by local banks.

Source: https://www.tradefinanceglobal.com/