Foreign Credit Cap Disrupts Bangladesh Import Finance Sector

The Association of Bankers, Bangladesh (ABB) has formally appealed to the central bank to review its newly imposed interest rate ceiling on foreign currency trade financing. In an official letter dated 14 May 2026, the representative body argued that restricting the maximum interest rate to the Secured Overnight Financing Rate (SOFR) plus 3% threatens the commercial viability of short-term import credit. The association cautioned that this regulatory tightening could severely restrict the ability of commercial banks to service international trade transactions, creating supply chain bottlenecks for industrial raw materials and consumer goods.

Comparative Analysis of Trade Finance Frameworks

Bangladesh Bank’s recent circular lowered the maximum allowable interest rate spread on foreign trade credit from SOFR plus 4% to SOFR plus 3%. This regulatory shift has directly compressed the returns on Usance Payable at Sight (UPAS) Letters of Credit (LC), which serve as the primary short-term financing mechanism for Bangladeshi importers.

The financial divergence between the previous and current trade financing rules, compared against alternative domestic market options, is detailed in the table below:

Operational Squeeze and Sovereign Rating Factors

Managing directors of several private commercial banks have indicated that operating an import-financing portfolio under the revised 3% cap is unsustainable. Domestic commercial banks typically source their foreign currency liquidity from international wholesale lenders via their Offshore Banking Units (OBUs) at rates ranging between SOFR plus 2.50% and SOFR plus 2.75%. When mandatory Statutory Liquidity Requirement (SLR) costs are factored in, the baseline all-in cost rises to roughly SOFR plus 2.80%, leaving an operational spread of just 0.20%.

Bank executives stress that a minimum net margin of Taka 1.00 per US dollar is necessary to cover cross-border default risks. This operational challenge is further complicated by recent sovereign credit assessments. Fitch Ratings recently revised Bangladesh’s Long-Term Issuer Default Rating outlook from “stable” to “negative” due to pressures on external buffers, while maintaining the country’s credit rating at B+.

Bank managing directors noted that this negative outlook has made global correspondent banks more risk-averse. Consequently, international lenders are increasing their LC confirmation charges or demanding interest rates right at the 3% regulatory ceiling, leaving domestic lenders unable to absorb the remaining operational costs.

Macroeconomic Ramifications and Systemic Risk

The ABB memorandum warned of severe systemic consequences if the rate restriction remains unchanged. If local commercial banks scale back dollar-denominated UPAS LCs due to unviable margins, importers will be forced to shift to local currency (Taka) credit lines to purchase spot dollars for trade settlement. This trend could trigger several negative economic outcomes:

Importers heavily favour foreign currency trade options because dollar-denominated loans remain significantly cheaper than domestic Taka credit lines, which carry interest rates between 12% and 13%. Dr Zahid Hussain, former lead economist at the World Bank’s Dhaka office, validated these concerns, pointing out that external sources of trade finance will inevitably dry up if domestic banks are legally barred from pricing risk appropriately.

He warned that if trade credit contracts, importers will be forced to buy spot dollars directly from the local open market, driving up the exchange rate. This shift would simultaneously increase local Taka liquidity demand, expand the domestic money supply through alternate borrowing, and ultimately fuel higher inflation.

While a senior central bank official revealed that initial proposals had actually suggested an even lower cap of 2%, an official spokesperson for Bangladesh Bank stated that a formal position will be articulated after completing a full review of the ABB’s petition.