Bangladesh Bank has issued new directives allowing foreign trading partner banks to open and maintain "Taka Vostro Accounts" without any initial deposit, aiming to expand the scope of using local currency in international trade.
The initiative will enable the settlement of import and export trade transactions in Bangladeshi Taka, reducing reliance on foreign currencies.
The Foreign Exchange Policy Department-1 of Bangladesh Bank issued a circular in this regard on Wednesday. The circular was signed by Dr. Md. Abu Bakar Siddique, Director (Current Charge) of the FEPD.
International commercial transaction funds can be deposited and settled in Bangladeshi Taka through these accounts maintained with local banks, creating an opportunity to lessen foreign currency dependence in trade settlements.
The circular stated that Letters of Credit (LCs), contracts, and invoices for imports and exports can still be executed in freely convertible foreign currencies.
However, during final settlement, the funds must be converted into Taka at the prevailing exchange rate.
Even though commercial agreements can utilise US dollars or other freely convertible currencies, the ultimate settlement can be executed in Taka, thereby broadening the scope of local currency usage in international business.
Bangladesh Bank also directed local banks to ensure safe, rapid, and efficient exchange of banking documents and communication with partner banks abroad.
Importers will have to settle their transactions through local banking channels or the respective Vostro accounts. Subject to fulfilling specified conditions, overdraft facilities may also be granted against these accounts.
This will institutionalize the local currency-based transaction framework between Bangladeshi banks and foreign partner institutions.
A key aspect of the new policy is the option to invest surplus funds lying in these Vostro accounts within Bangladesh.
Bangladesh Bank noted that surplus balances in these accounts can be directly invested in Foreign Direct Investment (FDI), portfolio investments, alternative investment funds, and open-end mutual funds.
Additionally, subject to approval from relevant authorities, funds held in Vostro accounts can be used to settle dues of local entities or remitted abroad as foreign currency transfers.
As a result, funds in these accounts will not be limited solely to import-export settlements but can also be channeled into investments and other lawful financial transactions under specific conditions.
Despite expanding local currency usage in trade, the central bank emphasised strict compliance with existing foreign exchange regulations.
The circular stated that rules regarding IMP (Import) and EXP (Export) forms must be strictly followed for import and export transactions, respectively.
Banks must also implement necessary measures to prevent money laundering and combat the financing of terrorism (AML/CFT). The "Know Your Customer" (KYC) guidelines must be rigorously enforced when verifying customer identities and credentials.
The directive also addresses trade with countries whose local currencies are not freely convertible.
With prior approval from Bangladesh Bank, local banks will be permitted to maintain foreign Nostro accounts to settle trade transactions with such nations, providing a structured framework for trade with countries lacking internationally convertible currencies.