The central bank raised the interest rate for short-term trade finance in foreign exchange by 50 basis points on Thursday, responding to appeals from bankers considering the prevailing global market trend and a high-interest rate scenario.
The all-in-cost ceiling per annum has been revised, incorporating a mark-up or margin of 4%, an increase from the previous 3.5%, added to benchmark rates such as the Secured Overnight Financing Rate (SOFR), Euribor, etc, a Bangladesh Bank circular says.
While acknowledging that the increased mark-up might impact the overall cost for importers seeking financing for their foreign trade activities, bankers assert that it will enable local banks to attract foreign funds, meet customer needs, and boost foreign exchange reserves that are falling.
Bankers were demanding to increase their mark-up for short-term trade finance in foreign exchange by 100 to 150 basis points as foreign lenders are not so interested with Bangladesh after a rise in interest rates in the international markets and Bangladesh’s country risk and downgrade in ratings.
Following the rate hike, a bank can now charge a customer a maximum of SOFR+4%, totalling 9.3%. This calculation is based on the 180-day average SOFR, which stood at 5.38% on Thursday.
The SOFR is a benchmark interest rate for determining short-term interest rates in financial markets.
“The decision will help Bangladesh get foreign funds,” said Sarwar Hossain, director of the Foreign Exchange Policy Department of the BB. It will also help facilitate cross-border trade finance.
Dwindling forex reserves and volatility in the exchange rate also make foreign lenders lukewarm about the Bangladesh market despite having potentials, they said.
“We lend local customers by borrowing from foreign sources, but our margin has gone down significantly and banks were making losses,” said the head of the treasury department of a leading private commercial bank.
After a 50 basis points hike in mark-up, banks that borrow from foreign lenders, such as Dubai-headquartered Mashreq, JP Morgan, Citi and the International Finance Corporation (IFC), would be encouraged to lend Bangladesh more, he added.
Bangladeshi banks avail $3 billion to $4 billion annually from foreign lenders as trade finance, also known as off-shore finance, according to treasury officials at different banks.
They said the move will boost the supply of dollars in the country. Besides, lending from the bank’s offshore unit will bring some profit which was at a loss.
This rate hike would impact importers as their borrowing cost will increase by 50 basis points, another top treasury official said. “As the interest rate in the local market has increased to over 12%, it needs to be adjusted with foreign currency loans also,” he said.