Nepal | August 12, 2020

Offshore banking: Its utility

Girish P. Pant
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A country must meet certain sine qua non before the establishment of an OBC, namely low capital requirements, minimum license fees, smooth access, and an apposite regulatory mechanism

Banks. Illustration: Ratna Sagar Shrestha/THT

Currently, the creation of offshore banking centers (OBCs) has become a debatable issue. In contrast to this environment, a scrutiny  of offshore banking is conducted together with its feasibility in Nepal.

To start with, offshore banking is undertaken from a host country for the benefit of non-residents. Offshore banks primarily receive resources from non-residents and purvey them to other non-residents for investment and other related reasons.

A country must meet certain sine qua non before the establishment of an OBC, namely low capital requirements, minimum license fees, smooth access, and an apposite regulatory mechanism, talented manpower, immutable economic and political plight, and    suitable infrastructure are crucial. Furthermore, if exchange supervision and interference by monetary authorities are confined, offshore banking activities flourishes more effectively. Against the general circumstances outlined above, there are unambiguous situations that have paved way for the promotion of offshore banking in different countries. For instance, in Nassau (Bahamas) and Colombo (Sri Lanka), in addition to freedom from regulatory control, the time zone was the key component that nurtured the growth of OBC. In Taipei (Taiwan), it was political necessity and over protection of banks that played salient roles.

There are copious country-specific grounds for opening an OBC. Under the prevalent ones grouped are internationalization of commercial banking expertise, increased efficiency of the banking scheme  both through exposure to the practices of offshore banks and through increased competition, attraction of foreign capital to supplement domestic savings, and improvement in the market access for loans.

An OBC redounds to the promotion of the host country through augmented employment opportunities, enhanced infrastructural development, and as an origin of training ground for the domestic employees. Stimulation of other economic activities such as tourism and demand for services, housing and construction, and a new source of revenue to the host government where charges are collected upon the banks through license fees, profit taxes, liquidity and capital requirements also occur.

At present, more than three dozen OBCs function throughout the globe. Apart from Taiwan and Sri Lanka in Asia, as indicated earlier, they are operating effectively in Bahrain, Hong Kong, the Philippines, Singapore, and United Arab Emirates.

Different sui generis traits   account for the friction-less management of different OBCs. In Bahrain, international banks are additionally supplied with regulatory incentives in addition to fiscal incentives. They are exempted from the obligation to maintain any reserves with Bahrain Monetary Authority and to observe liquidity ratios.

On the other hand, Singapore has solicited domestic banks to integrate into one potent unit to compete successfully against larger expatriate banks. It also broached provisions pampering local depositors over foreign depositors in the event of bank liquidation. In Sri Lanka, a prominent characteristic of the expansion of offshore banking activity was the ability of certain Foreign Currency Banking Units to participate in international syndicated loans and orchestrate and participate in large scale transactions. Though the advent of an OBC procreates a gamut of benefits to the host country, there are normally costs involved. First, it is tricky to operate monetary policy, such as the control of money supply and credit growth. Second, the upshot of offshore banking business may act as a catalyst in aggravating inflation through inordinate lending.

Third, the presence of colossal foreign funds juxtaposed with domestic currency could result in a flow from the former to the latter whose spill-over effects would explicitly affect domestic interest rates and foreign exchange conversion rates. Eventually, in terms of resource collection, offshore banking business has higher potential for tax evasion than other types of business.

Nepal Government granted permission to open up branches of foreign banks on a joint venture basis quite some time ago. As a sequel, an array of joint-venture banks opened. Because of the positive responses received from foreign banks, it is timely to analyze the viability of setting up an OBC in Nepal, though it may sound a bit grandiloquent.

The potential gains of an OBC could be an influx of foreign capital for industrial growth and the advent of Kathmandu into a prestigious money centre in South Asia. Other peripheral benefits such as an augmentation in tax revenue and increased efficiency of the local financial organizations could also be obtained. Newfangled technology employed by the OBC would allow the domestic banks to endorse up-to-date technology in their daily operations.

Whether it is viable to open an OBC in Nepal hinges upon a number of considerations. First, the most vital infrastructural element is the telecommunication scheme which needs huge investments. There are two options with respect to the amendments of laws, namely, the amending of related sections of the present Commercial Banking Act or the promulgation of a new legislation especially drafted for attracting an OBC.

 


A version of this article appears in print on November 22, 2017 of The Himalayan Times.


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