OBU and UPAS implied for IBBL, Buyers Credit and Supplier credit

Off Shore Banking business in Bangladesh took off in 1985 in line with Bangladesh Bank policy guideline 1985. Off Shore Banking operations of Islami Bank Bangladesh Limited started in 2011 .The list of OBUs of IBBL and date of starting operations are as follows:

Sl No.	Name of OBU
1	Head Office Complex Branch, Dhaka
2	Agrabad Branch, Chittagong
3	Uttara Branch, Dhaka

   Products of Off-shore Banking 

Products	Rate of Return as fixed by BB/ BIDA for OBU
Hire Purchase under Shirkatul Milk (HPSM) in Foreign Currency	3 months USD LIBOR+4%
Mudaraba Documentary Import Bill (MDIB)_ Mura UPAS.	All in cost maximum 6%
MDB (Musharaka Documentary Bills) in Foreign Currency	All in cost maximum 6%

 Challenges of Off-shore Banking:

ü The major lending functions as a part of core banking activities are basically captured by the OBUs belonging to foreign banks due to availability of low cost fund and global network. OBUs of the local banks are basically concentrating on discounting business of its different ADs import bills under UPAS credit arrangement.

ü  Absence of comprehensive guideline/ policy on off-shore Banking

ü OBUs cannot obtain deposit from entities other than type A industries of EPZ or foreign sources i.e. deposit base of OBUs are narrow

ü Extensive reliance of OBUs on borrowing funds which is relatively costly as compared to the deposits.

ü Trade Based Money Laundering (TBML)

Buyer credit is a short term credit available to an importer (buyer) from overseas lenders such as banks and other financial institution for goods they are importing. The overseas banks usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by the importer's bank. For this service the importer's bank or buyer's credit consultant charges a fee called an arrangement fee.

Buyer's credit helps local importers gain access to cheaper foreign funds that may be closer to LIBOR rates as against local sources of funding which are more costly.

The duration of buyer's credit may vary from country to country, as per the local regulations. For example, in India, buyer's credit can be availed for one year in case the import is for tradable goods and for three years if the import is for capital goods.

1.       Benefits of Importer

2.       Steps Involved

3.       Cost Involved

4.       Risk Involved

Benefits to importer

Buyer's credit has several advantages for the importer. The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows. The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing. The funding currency can be depending on the choice of the customer and availability of LIBOR rates in the exchange market. The importer can use this financing for any form of payment mode, such as: open account, collections, or LCs.

Steps involved

1.     The customer requests the Buyer's Credit Arranger to arrange the credit before the due date of the bill

2.     Arrange to request overseas bank branches to provide a buyer's credit offer letter in the name of the importer. Best rate of interest is quoted to the importer

3.     Overseas bank to fund Importer's bank Nostro account for the required amount

4.     Importer's bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment)

5.     Importer's bank will recover the required amount from the importer and remit the same to overseas bank on due date.

6.     It helps importer in working capital management.

Cost involved

Interest cost is charged by overseas bank as a financing cost.

Risk involved

Buyer's credit is associated with currency risk. Thus, Hedging may be required as foreign currency is involved, making Buyer's Credit risky at times.

Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk) is a financial risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the company. 

Types of exposure

1.Transaction risk

2. Economic risk

3. Translation risk

4. Contingent risk

steps can be taken to manage (i.e. reduce) the risk.

Transaction risk:  firm has transaction risk whenever it has contractual cash flows (receivables and payables) whose values are subject to unanticipated changes in exchange rates due to a contract being denominated in a foreign currency. To realize the domestic value of its foreign-denominated cash flows, the firm must exchange foreign currency for domestic currency.

Economic risk

A firm has economic risk (also known as forecast risk) to the degree that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm's market share position with regards to its competitors, the firm's future cash flows, and ultimately the firm's value.

Translation risk

A firm's translation risk is the extent to which its financial reporting is affected by exchange rate movements. As all firms generally must prepare consolidated financial statements for reporting purposes, the consolidation process for multinationals entails translating foreign assets and liabilities or the financial statements of foreign subsidiaries from foreign to domestic currency. While translation risk may not affect a firm's cash flows, it could have a significant impact on a firm's reported earnings and therefore its stock price

The international Fisher effect (sometimes referred to as Fisher's open hypothesis) is a hypothesis in international financethat suggests differences in nominal interest rates reflect expected changes in the spot exchange rate between countries.^[1][2]The hypothesis specifically states that a spot exchange rate is expected to change equally in the opposite direction of the interest rate differential;

For example, if country A's interest rate is 10% and country B's interest rate is 5%, country B's currency should appreciate roughly 5% compared to country A's currency. The rationale for the IFE is that a country with a higher interest rate will also tend to have a higher inflation rate. This increased amount of inflation should cause the currency in the country with the high interest rate to depreciate against a country with lower interest rates.