Commercial banks can deposit US Dollars to withdraw Bangladesh Taka: BB

Commercial banks will be allowed to deposit dollars and withdraw taka in an effort to meet their liquidity needs.

Bangladesh’s central bank informed banks of this new ‘currency swap’ system on Thursday.

Under the system, banks can withdraw money for a minimum of seven days and a maximum of 90 by depositing dollars at the central bank. They can receive the same amount by paying the money again.

The exchange rate will be set according to the dollar rate on the day of withdrawal, which Bangladesh Bank calls the ‘spot’ rate.

The interest rate in dollars will be determined by the 90-day interest rate of the Secured Overnight Financing Rate, or SOFR.

The CME Group is authorised by the UK Financial Conduct Authority to disclose this interest rate.

According to their website, the CME’s three-month interest rate was 5.35 percent on Thursday.

The interest rate for the taka will be determined according to the bank rate, which is the interest rate at which the central bank offers long-term loans to commercial banks. At present the bank rate is 4 percent.

For Sharia-based banks, the profit rate will be fixed per Sharia.

“Through this method, banks will have the opportunity to get money immediately,” said Mezbaul Haque, executive director and spokesman for Bangladesh Bank. “It will reduce the dependence of banks on other banks for liquidity management. The cost of fund management will also decrease.”

A minimum of 5 million in foreign currency or its equivalent in taka can be exchanged in the ‘currency swap’.

Currently, a bank can sell dollars to the central bank for taka, but they have no obligation to buy dollars from the bank when needed. The new system guarantees that their dollars will be returned after a certain set period of time.

The currency swap system will also benefit the central bank, a top official of the agency said.

The dollars given by the banks will be added to foreign exchange reserves. The banks will also be able to get dollars when the demand arises.

Currently, one bank can exchange foreign currency with another bank under a similar system. They can also borrow dollars. If they do not repay the dollar in time, they can pay their interest and extend the period.

The opportunity for extensions is also available in the ‘currency swap’ system.

A limit called the Net Open Position is set for how much foreign currency a bank can store according to central bank policy.

Previously, banks were allowed to reserve up to 20 percent of their regulatory capital in foreign currency. But in July 2022, to reduce the volatility in the dollar market, the central bank reduced that amount to 15 percent.

Banks are required to sell any dollars they have in excess of this limit to the central bank or other banks. To stabilise the currency market, Bangladesh Bank also withdrew dollars from it. It also sells dollars when necessary.

Due to the current dollar crisis, the central bank is now only selling dollars to commercial banks.

In the current fiscal year to January, the central bank sold $9 billion from reserves to commercial banks.