The Association of Bankers, Bangladesh (ABB) has formally requested Bangladesh Bank revise its 14 May 2026 circular capping foreign currency trade financing at SOFR plus 3%. The ABB warns the cap shrinks bank margins to ~1%, citing effective funding costs of SOFR plus 2.80% and a minimum required Tk1/dollar margin. Previously, UPAS LC rates stood at 7.51%; now capped at 6.51%, versus 12–13% for taka loans. Fitch’s May 2026 negative outlook on Bangladesh’s B+ rating exacerbates foreign lender reluctance. ABB projects increased FX demand, higher taka rates, and inflationary pressure if banks shift importers to local currency lending.
According to www.tbsnews.net, the Association of Bankers, Bangladesh (ABB) has formally urged Bangladesh Bank to revise its 14 May 2026 circular imposing a SOFR plus 3% ceiling on foreign currency trade financing interest rates.
Profit Margins Squeezed to Near Zero
The ABB letter—dated 14 May 2026—states that well-rated banks currently access foreign currency trade financing at approximately 2.75%, and after factoring in statutory liquidity requirement costs, the effective all-in funding cost rises to nearly 3%. This leaves banks with a margin of only about 1%, rendering the business commercially unviable under the new cap. Bank managing directors told The Business Standard that maintaining at least a Tk1 margin per dollar is essential for viability. They noted offshore banking units source foreign currency funding from overseas lenders at SOFR plus 2.50%–2.75%, and statutory costs push the effective cost to SOFR plus 2.80%.
Rate Shifts and Market Consequences
Prior to the 14 May circular, banks charged around 7.51% on UPAS (Usance Payable at Sight) Letters of Credit; the new cap reduced that to approximately 6.51%. In contrast, local currency lending carries rates of 12–13%. The central bank’s initial proposal had even suggested lowering the cap further—to 2%—before settling on 3%. Fitch Ratings revised Bangladesh’s Long-Term Issuer Default Rating outlook to “negative” from “stable” in May 2026 while retaining its B+ rating.
Risk-Aversion and Liquidity Pressures
The ABB warned that global lenders may grow more risk-averse under the cap, especially given Bangladesh’s sovereign rating context. A senior bank official stated that foreign banks providing dollar funding “may start demanding 3%” in light of Fitch’s negative outlook. If domestic banks scale back dollar-denominated lending, importers—who prefer UPAS LCs due to lower USD financing costs—could shift to taka loans to purchase dollars for settlement. This would increase short-term foreign exchange demand, push the exchange rate higher, lift local currency interest rates, and expand money supply—potentially fueling inflation.
Broader Supply Chain Implications
For supply chain professionals operating in Bangladesh’s import-dependent sectors—including RMG, pharmaceuticals, and agro-processing—the tightening of dollar-based trade finance directly affects working capital cycles and landed cost predictability. With over 70% of Bangladesh’s imports settled via LCs (per Bangladesh Bank’s 2025 Annual Report), any contraction in trade financing liquidity risks delays in raw material procurement, production halts, and order cancellations. Industrial groups acknowledge lower rates could reduce borrowing costs—but stress that systemic disruption outweighs marginal savings. As one managing director observed:
“Difficult to operate trade financing under new ceiling” — Managing Director, private commercial bank
The ABB letter explicitly cautions that the cap could trigger upward pressure on foreign exchange demand, tighten liquidity, and raise the overall cost of doing business across export-oriented industries.
Source: www.tbsnews.net
Compiled from international media by the SCI.AI editorial team.
