On March 15, Bangladesh Bank issued a circular allowing banks and finance companies to extend admissible Taka loans to resident companies against overseas bank guarantees (BGs) or standby letters of credit (SBLCs). The circular grants general authorisation under the Foreign Exchange Regulation Act, 1947 for certain lending arrangements that previously required case-by-case approval from the central bank.
At first glance, the circular appears progressive. Allowing local lenders to rely on overseas guarantees can facilitate access to credit, especially for companies that maintain relationships with foreign sponsors or banks. Multinational corporate groups often support subsidiaries through guarantees issued by parent companies or international financial institutions. In principle, recognising such instruments can improve credit availability and strengthen financial intermediation. However, beyond the initial appearance of liberalisation, the circular also exposes deeper weaknesses in the way foreign exchange transactions are regulated. Rather than establishing a coherent rule-based framework, the system continues to rely heavily on discretionary approvals and administrative conditions. The result is a regulatory environment where banks often depend on central bank permissions even for routine financial arrangements.
The new circular itself illustrates this contradiction. Although it grants general permission for loans backed by overseas BGs and SBLCs, the authorisation applies only if the issuing foreign institution meets specified credit rating requirements. Guarantees issued by institutions below the required rating level still require approval from the central bank. In other words, the supposed ‘general permission’ is conditional and incomplete. This condition may appear prudent from a risk management perspective, but in practice it reinforces the approval culture that already dominates the foreign exchange regime. Instead of relying on banks to assess counterparty risk through their own credit policies and exposure limits, the regulation implicitly assumes that the central bank must determine which counterparties are acceptable.
The regulatory requirement therefore duplicates a function that the financial market already performs naturally. Rather than enhancing risk control, it introduces an additional administrative layer that may require banks to approach the regulator for approval whenever a transaction fall outside predefined category. Another problematic feature of the circular relates to the requirement that lending banks ensure the governing law, dispute resolution framework, and enforceability of overseas guarantees through legal vetting. In the real world, the effectiveness of a bank guarantee or standby letter of credit does not depend primarily on legal wording. Payment under a guarantee ultimately depends on the issuing bank’s credit standing and its exposure relationship with the beneficiary bank. Requiring legal vetting as a regulatory condition therefore creates a procedural exercise that adds little to actual risk management.
The circular thus illustrates a recurring problem in regulatory practice: a tendency to substitute procedural controls for market-based risk management. Instead of relying on the judgment and internal controls of financial institutions, regulations often attempt to micromanage transaction structures through conditions that may have limited practical relevance. This approach becomes even more problematic when combined with the broader approval culture that has developed in recent years. During the foreign exchange pressures that emerged around 2022, Bangladesh Bank introduced a range of administrative measures aimed at protecting the country’s external reserves. Among these measures was the practice of monitoring import prices and commercial parameters on a transaction-by-transaction basis. While the objective was to prevent over-invoicing and protect foreign exchange reserves, the method relied heavily on administrative judgment rather than on transparent rules.
Price monitoring of this nature inevitably places the central bank in the position of evaluating commercial decisions that normally belong to businesses and banks. Determining the ‘correct’ price of internationally traded goods is rarely straightforward. Market prices fluctuate continuously depending on quality, contractual terms, logistics costs, and global supply conditions. When regulators attempt to review such transactions individually, the process can become arbitrary and unpredictable. Banks may hesitate to process legitimate trade transactions for fear that they might later be questioned. Businesses, in turn, may experience delays in importing raw materials or fulfilling commercial contracts. This environment encourages a regulatory culture in which financial institutions prefer to seek prior approval from the central bank even when regulations do not explicitly require it. More importantly, excessive reliance on approvals can weaken institutional accountability within the banking sector.
A more effective approach would be to strengthen rule-based regulation rather than administrative approvals. Under a rule-based framework, the central bank defines prudential standards – such as capital requirements, exposure limits, and reporting obligations – while banks retain operational autonomy to conduct transactions within those boundaries. Such systems are common in mature financial markets. Central banks do not approve individual loans or trade transactions unless they involve exceptional circumstances. Instead, regulators supervise institutions through periodic inspections, prudential ratios, and risk-based oversight. Applying this philosophy to Bangladesh’s foreign exchange regime would require a gradual shift in regulatory thinking. Rather than issuing circulars to approve specific types of transactions – such as loans backed by overseas BGs or SBLCs – the central bank could establish broader principles governing cross-border credit support.
The March 2026 circular therefore highlights both progress and limitations. On the positive side, it removes the need for approval in certain lending arrangements involving overseas bank guarantees. On the negative side, it continues to reflect the broader approval-oriented philosophy that characterizes much of the foreign exchange regulatory framework. Conditions such as rating thresholds, legal vetting requirements, and the exclusion of other common credit support instruments reveal a regulatory mindset that remains cautious about delegating decision-making authority to financial institutions. For a rapidly integrating economy like Bangladesh, this approach may increasingly prove inadequate. As businesses expand their international relationships, financial transactions will inevitably become more complex and time-sensitive. A regulatory system that depends heavily on permissions may struggle to keep pace with these developments.
The real challenge therefore lies not in issuing additional circulars to authorise particular arrangements, but in moving toward a coherent rule-based foreign exchange regime. In such a system, banks would operate within clearly defined regulatory parameters, and central bank approvals would be required only in exceptional situations. Achieving this transition would require confidence in the governance and risk management capabilities of financial institutions. It would also require the central bank to focus more on systemic supervision rather than on individual transactions.
Ultimately, the effectiveness of financial regulation depends not on how many permissions regulators grant, but on how clearly and consistently the rules of the system are defined. The recent circular offers a limited step in that direction. Whether it becomes part of a broader shift toward rule-based governance remains an open question. The more a system depends on approvals, the greater the delays in business operations. Unless the culture of excessive licensing and approvals is dismantled, the path to development will remain uneven and constrained.
The views expressed in this article are solely those of the author
The writer is a teacher at a business school
