Topic :- OFFSHORE BANKING

Subject :-International Business

OFFSHORE BANKING
Offshore banks are banking units set up by foreign banks in territories where the restrictions and regulations are limited and there is minimal intervention by the Host Country. Offshore banking units bring foreign currency funds from nonresidents and the international money market, and invest them in the host country or in projects set up by the host country in third country.

ESTABLISHMENT OF OFFSHORE BANKING UNITS

The origin of offshore banking units can be traced to the growth of financial activity in tax havens. A tax haven is a place where non-residents can receive income or own assets without paying high taxes. Some such places are Bahamas, Bermuda, Hong Kong, the Netherlands, Panama and Switzerland.

Some features of these tax havens are:

1. Low rate or complete absence of income tax on foreign investment and income. 2. High degree of economical and political stability and a political system, which directly or indirectly encourages and fosters business activity at the center. 3. Strict and well enforced rules of banking secrecy. 4. Absence of exchange control 5. Availability of supporting infrastructure such as an efficient communications and transportation network. 6. Presence of well developed legal system and professional accounting expertise. 7. Investors confidence due to past credential. 8. No incidence of violence or criminal activities.

Operations Of Offshore Banks

Offshore Banking centres are an integral part of foreign currency markets. The Operations of Banking Units set up at these centres comprise foreign currency transactions in the form of the acceptance and placement of funds in foreign currency outside the country of issue .

The functional Offshore centres engage in the issuance and placement of foreign currency certificates of deposits, loan/ credits, bonds

Advantages of Offshore Banking

Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil, who fear their assets may be frozen, seized or disappear. However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability. Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.

Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world.
Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income.
Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals.

Disadvantages of Offshore Banking

Offshore banking has been associated with the underground economy and organized crime, through money laundering. Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or nonstate actors. The existence of offshore banking encourages tax evasion, by providing tax evaders with an attractive place to deposit their hidden income.

Offshore jurisdictions are often remote, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem. Accounts can be set up online, by phone or by mail.

Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counter parts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Developing countries can suffer due to the speed at which money can be transferred in and out of their economy as hot money. This Hot money is aided by offshore accounts, and can increase problems in financial disturbance.

ROLE OF OFFSHORE BANKS AND INVESTMENTS

In todays highly integrated global network international Offshore Financial Centers (OFCs) have come to play a vital role in facilitating investment worldwide. OFCs are jurisdictions where offshore banks are exempted from a wide range of regulations, which are normally imposed on onshore institutions. Specially, deposits are not subject to statutory reserve requirements.

OFFSHORE BANKING METHOD OF OPERATION

Offshore banks deal mostly with other financial institutions and transact wholesale business in currencies other than that of the country hosting the OFC. Offshore banking is carried out typically through offshore establishments that are offshore branches. Offshore branches are legally indistinguishable from parent banks onshore, which facilitate intra-branch transfers. Offshore banks are mainly engaged in three types of transactions; I. Foreign currency loans and deposits. II. The under writing of bonds. III. Over the Counter (OTC) trading in derivatives.

OFFSHORE FINANCIAL CENTRES IN SINGAPORE

Singapore is an established financial centre. Singapore is the fourth largest foreign exchange trading centre in the world, the fifth largest trader in derivatives and the ninth largest offshore lending centre. The Asian Dollar market (ADM) in one of the premier offshore banking centres in Asia.

There are three categories of Commerical banks in singapore: Full Banks :-Full banks are allowed to carry out the full range of banking services under the banking Act. Restricted Banks:-Restricted banks may engage in the same range of domestic Banking activities as the full banks except that they can only have one main branch and cannot accept singapore dollar savings accounts and singapore dollar fixed deposits of less than SGD 250000 from non-bank customers. Offshore Banks:- Offshore bank have same opportunities as the full and restricted banks in business transacted, their scope of business in the singapore dollar retail market is slightly more limited.

Malaysia
Malaysia established an International Offshore Financial Centre (IOFC) in Labuan in 1991. The Offshore Banking Act of 1990 Provides a regulatory framework for Offshore Banking operations in Labuan. Confidentiality is the hallmark of an Offshore Financial centre, an Offshore bank has to maintain strict secrecy in the affairs of its customers. Offshore banks are expected to observe a strong self-regulatory code of conduct that places emphasis on Knowing your customer.

Mauritius
Mauritius is fast becoming an international financial and business centre. Offshore transactions are normally conducted with non-residents and in currencies other than the Mauritius Rupee. In 1989, offshore banks were allowed to be set up in Mauritius and subsequently the incorporation of offshore companies was allowed.

INDIA AS OFFSHORE BANKING, AN EMERGING SECTOR

The concept and practices are not new to Indian banks. Indian public sector banks such as Bank Of India, State Bank Of India, Punjab National Bank and Bank Of Baroda already had operations in other countries. They have developed systems and expertise to handle offshore operations.