Bankers Warn 3% Rate Cap Threatens Trade Finance

The Association of Bankers, Bangladesh (ABB) has formally requested Bangladesh Bank to reconsider its newly implemented ceiling on foreign currency trade financing interest rates. In a letter dated 14 May 2026, obtained by The Business Standard, the bankers’ representative body warned that capping the maximum interest rate at the Secured Overnight Financing Rate (SOFR) plus 3% could render short-term international trade finance commercially unviable. The association cautioned that this regulatory restriction could severely compress commercial margins, limit access to short-term credit, and subsequently disrupt nationwide industrial imports and broader economic activity.

Comparative Analysis of Financial Indicators

The central bank’s directive tightened the previous interest rate ceiling from SOFR plus 4% down to SOFR plus 3%. This regulatory adjustment has contracted the gross yields available to domestic banks handling Usance Payable at Sight (UPAS) Letters of Credit (LC)—the primary financial instrument utilized by Bangladeshi importers to source foreign goods.

The financial divergence between local currency lending and foreign currency trade instruments under the new mandate is structured in the table below:

Margin Compression and Sovereign Rating Vulnerabilities

Managing directors of several private commercial banks stated that operating profitable trade finance operations under a 3% spread has become difficult. Local institutions typically secure foreign currency funding for import financing from international lenders through their Offshore Banking Units (OBUs) at rates between SOFR plus 2.50% and SOFR plus 2.75%. When factoring in regulatory Statutory Liquidity Requirement (SLR) costs, the baseline funding cost rises to nearly SOFR plus 2.80%.

Bankers note that a minimum margin of Tk 1.00 per US dollar is necessary to cover operational risks. Furthermore, global credit rating actions have exacerbated fundraising challenges. Fitch Ratings recently revised Bangladesh’s Long-Term Issuer Default Rating outlook from “stable” to “negative” while maintaining its B+ speculative grade. While a B+ rating indicates an ongoing capacity to meet financial obligations, the negative outlook has made international lenders risk-averse, leading them to demand higher confirmation charges on Bangladeshi LCs or pitch their funding rates closer to the 3% maximum cap.

Macroeconomic Ramifications and Inflationary Risks

The ABB letter outlined several systemic risks associated with the rate restriction. If the 3% cap causes offshore dollar funding to dry up, banks may be forced to shift importers from foreign currency financing to local currency (Taka) loans. This structural shift could trigger a chain reaction across the broader economy:

Importers prefer UPAS LCs because dollar-denominated loans remain considerably cheaper than borrowing in local currency. Dr Zahid Hussain, former lead economist at the World Bank’s Dhaka office, warned that capping the rate could cause external sources of trade finance to dry up, as no commercial entity can absorb sustained losses.

He noted that if access to trade finance contracts, importers will be forced to purchase greenbacks directly from the local spot market to settle their obligations. This sudden shift would deplete central bank foreign exchange reserves, heighten liquidity pressures within the domestic banking network, expand the local money supply via defensive Taka lending, and ultimately fuel domestic inflation.

In response to these developments, a spokesperson for Bangladesh Bank stated that an official response would be issued following a formal evaluation of the ABB’s petition, though a senior central bank official revealed that initial internal proposals had suggested cutting the trade finance cap even further to 2%.