Bangladesh Bank has introduced a new financial facility aimed at shielding importers from fluctuations in international interest rates, allowing businesses that obtain foreign currency loans for imports to lock in future borrowing costs through forward rate agreements (FRAs).
The central bank announced the measure in a circular issued on Thursday, describing it as a step towards reducing uncertainty in import financing by enabling borrowers to fix interest rates in advance with their banks. The initiative is expected to provide greater certainty for businesses exposed to changing global benchmark rates at a time of continued volatility in international financial markets.
Under the new framework, authorised dealer (AD) banks will be allowed to enter into forward rate agreements with importers receiving foreign currency financing. The facility will apply to usance import transactions financed through supplier’s credit and buyer’s credit.
According to Bangladesh Bank, the policy has been introduced in response to fluctuations in internationally recognised benchmark interest rates, particularly the Secured Overnight Financing Rate (SOFR), which has become the primary reference rate for US dollar-denominated lending since replacing the London Interbank Offered Rate (LIBOR).
Because import loans linked to SOFR carry variable interest rates, changes in global financial conditions can significantly alter borrowing costs over the life of a loan. By allowing importers to fix interest rates for a future period, the central bank hopes to give businesses greater certainty over financing expenses and strengthen long-term financial planning.
The circular specifies that forward rate agreements may only be used for hedging genuine interest rate risk arising from import financing. The agreements must be directly linked to actual import transactions and cannot be used for speculative purposes or to create uncovered market positions.
Under the arrangement, the importer and the bank will agree on an interest rate applicable to a specified future period. When that period begins, the financial settlement will be calculated based on the difference between the agreed forward rate and the prevailing benchmark interest rate at that time. This mechanism enables borrowers to offset the impact of unexpected movements in market interest rates without changing the terms of the underlying import loan.
Bangladesh Bank has also introduced a number of safeguards to ensure that banks do not accumulate additional market risk while providing the new facility.
Banks must fully hedge every forward rate agreement through corresponding offsetting transactions executed on the same day. This requirement is intended to eliminate open interest rate exposure from banks’ own balance sheets and maintain sound risk management practices.
To protect borrowers from excessive charges, the central bank has capped banks’ pricing margin at 10 basis points for forward rate agreements.
The regulator has also imposed an exposure limit. A bank’s total outstanding forward rate agreements cannot exceed 25% of its average monthly foreign currency inflows over the previous 12 months, helping to ensure that institutions maintain prudent levels of market exposure.
The circular further instructs banks to adopt internationally recognised contractual standards when offering these products. They must conduct daily mark-to-market valuations, maintain robust internal risk management systems and preserve comprehensive documentation for every transaction.
Where a forward rate agreement is terminated before maturity, settlement must be carried out at prevailing market rates in accordance with standard market practice.
The introduction of forward rate agreements marks another step in Bangladesh Bank’s efforts to modernise the country’s financial risk management framework and align domestic banking practices with international standards. As Bangladeshi businesses become increasingly engaged in global trade, exposure to movements in international interest rates has become an important financial consideration, particularly for companies importing capital machinery, industrial equipment and raw materials through foreign currency loans.
By introducing a recognised interest rate hedging instrument, the central bank aims to help importers better manage borrowing costs, reduce uncertainty arising from global rate fluctuations and strengthen financial planning. The new framework is also expected to encourage wider adoption of risk management tools within Bangladesh’s banking sector while supporting more predictable financing conditions for international trade.