Offshore banking: Why it matters

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Offshore banking is mostly discussed in a negative light, simply because many people use it as a way to hide their money and avoid paying taxes while others use it for illicit purposes like money laundering and tax evasion. While these activities are criminal and can result in prosecution or heavy fines, offshore banking does not have to be illegal.

One of the key developments in the world of economics during the last few decades has been the growing international mobility of capital, and one major element in this process has been the growth of offshore banking.

Offshore banking is a segment of the finance industry whose birth can be traced back to Vienna, Austria. Offshore banking came into being when the neutrality of Switzerland was established during the Vienna Congress in 1815. Despite the contradictions, one thing is clear – that offshore banking was born out of the need for individuals to find a haven for their wealth.

During post-Napoleon Europe, wealthy families and merchants saw the need to find a safe place to keep their growing assets. This was an era in Europe defined by constant economic turmoil and political strife. Before long, offshore banking was open to the rich and opening account with these banks spread among the royals, industrialists and European elite families.

Offshore banking is a type of banking system regulated under the international banking licence often called offshore licence, which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment.

It is estimated that 45 percent of the world’s private wealth is now managed offshore. With the changing face of global financial architecture and the need to identify additional sources of cheaper investments funds, offshore financial centres have become an important vehicle through which this can be achieved.

In Ghana, offshore banking is also known as class banking (under the Banking Act, Act 673, 2004). The class banking licence allows the holder to conduct banking business or investment banking business with non-resident and other class banking licence holders in currencies other than the cedi, except to the extent permitted by the Bank of Ghana for trading on the foreign exchange market of Ghana and investment in money market instruments.

Although offshore banking is termed by some as complicated, many other banks however engage in offshore banking due to several reasons and advantages it poses.

The benefits of offshore banking include but are not limited to the following:

To begin with, offshore banking provides a larger scope of investing opportunity to the bank and its customers. Offshore banking allows the bank to invest in securities outside the country. ‘Outside the country’ means that the bank has the ability or tendency to invest in securities in the rest of the world. This gives the bank a wider range of securities which have better advantages financial wise and security wise. This will as well give the offshore bank advantage over the class-one banks, and this stresses banks to go into class-two banking.

Offshore banks can operate with a relatively lower cost base and provide higher interest rates rather than the legal rate in the home country, due to lower overheads and cash for government interventions. In operating an offshore bank, most of the cost incurred by class-one banking is avoided; and such cost includes brick and mortar branching. Due to less government intervention in class-two banks, their interest rates are relatively higher than class-one banks, and this draws more customers and also creates more revenue.

Offshore banking often serves as a tax shield for both the bank and its customers. Around the world, there are countries with tax incentives also known as tax havens, through offshore banking, the bank will be able to invest in countries with this. Through investing in tax havens, banks avoid huge tax expenses and through this the bank saves a lot of money which can be used for more investment. This also serves as a major incentive to banks to engage in class two banking.

In offshore banking, all the banking activities are done with foreign currencies other than the local currency in the home country where the local currency is vulnerable enough or there is a high risk of devaluation of the local currency; offshore banks possess a relatively higher advantage over the class-one banks which operate with the local currency. This is mainly because in the event of devaluating the local currency, all class-one banks operating in local currency will in turn also lose value in their assets; and virtue of customers’ finds will also diminish.

However, in class-two banking where banking is mainly done with a stable foreign currency, devaluation is unlikely; and with assets of the bank and those of customers financially protected, this is another factor that serves as an incentive for banks to engage in offshore banking.

In many countries, bank deposits do not have the same protection as you may have been used to at home. By engaging in offshore banking, banks and bank customers feel secure that their money is safe. Offshore banking however alerts banks to invest in other countries where political stability is ensured to a certain level, and through this the assets of both the bank and the customer is secured to some extent.

There is no doubt that International Financial Services Centres, and for that matter offshore banking, has a great potential for the economy of Ghana. Thus, Ghana stands to benefit from activities in offshore banking if things are done right.

Potential benefits include employment creation, increase in depth of the domestic financial sector through positive linkages, increase in tax revenue to government, increase in foreign direct investments and other indirect benefits.

>>>the writer is a Level 300 student at the Ghana Institute of Journalism reading Communication Studies with specialisation in journalism. He can be reached on [email protected] and 0540740097/0236853999

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