Government College Women University, Faisalabad

INTRERNATIONAL BUSINESS
ASSIGNMENT
TOPIC:
Critical analysis of impact of offshore banking on
the domestic banking system
SUBMITTED BY:
 Zahra Abbas
 Roll no. 03
 2017-GCWUF-1478
 8TH SEMESTER
 BS COMMERCE
SUBMITTED TO:
 MAM HIRA
OFF-SHORE BANKING
Offshore banking is simply a term used to refer to the use of banking
services in a foreign jurisdiction outside of the country where one
resides. So any individual who owns a bank account in a foreign country
outside of their country of residence is engaging in offshore banking.
Offshore banking involves securing assets in financial institutions in
foreign countries, which may be limited by the laws of the customer’s
home nation—much like offshore investing. Think of the famed Swiss
bank account— that James Bond-like account that puts rich people’s
money out of reach of their own country’s government.

People and companies can use offshore accounts to avoid the

unfavorable circumstances associated with keeping money in a bank in
their home nation. Most entities do this to avoid tax obligations. Holding
offshore bank accounts also makes it more difficult for them to be seized
by authorities.
For those who work internationally, the ability to save and use funds in a
foreign currency for international dealings can be a benefit. This often
provides a simpler way to access funds in the needed currency without
the need to account for rapidly changing exchange rates.

Offshore banking is a bank performing banking operation on beyond

one's own borders and the bank is not permitted to do business in the
domestic market, but only with other offshore banking units or with
foreign on institutions. In other words, the term offshore banking can be
used to describe the banking operations of financial institution which
although physically located in a. country but has little or no connection
with the hosts country’s financial system.

In this case, the world beyond one's own border is often referred to in
financial parlance as offshore; where home country's regulations do not
apply, for regulatory purposes, it is virtually stateless wor1d Offshore
banking has been on increase j-n the recent years when the volume of
offshore bond and equity financing, involving transactions between
national market has grown very rapidly. Linkage between these markets
have increased to an extent that conditions in one market affect those in
others, leading us to conceive of world financial markets as having
become globalized. In the case of major industrialized countries, barriers
to cross-border financial. transactions have declined to almost nothing.
Deregulation of the financial sector in many countries has led to increase
competition and exposure to international market.

It can be noted that in onshore or domestic financial market transaction

is fully subjected to domestic government supervisory, regulatory and
monetary policy controls. In onshore banking system the markets is
strictly a matter. for national political decisions which normally leads to
systematic protection from outside competition as against what is being
obtained in offshore banking. Offshore banking activities on the
domestic financial markets are being preferred through 1ocal branches
and local subsidiaries wholly or partly owned by major international
banks. These international banks often maintain representative offices
within other countries most especially in the developing countries.

These offices do not, however, have sources of local funds and

consequently do not lend in local currencies. These representative
offices perform the function of managing locally the cross-border
portfolio and therefore, strictly speaking, are not a part of the domestic
banking market. Reside, offshore ban1~ing can take place also through
maintaining friendly service relations within local correspondent banks
which considered within the cross-border category and most of these
transactions are in other domestic currencies, in order to abide to the rule
governing offshore banking operation.

DOMESTIC BANKING
The term domestic bank shall mean any branch or office within
the United States of any of the following which is not a national of a
designated foreign country; any bank or trust company incorporated
under the banking laws of the United States or any State, territory, or
district of the United States, or any private bank or banker subject to
supervision and examination under the banking laws  Domestic
banks refer to the banks that operate within the boundaries of a country.
The banks registered and incorporated within the country are called
domestic banks.
CRITICAL ANALYSIS OF IMPACT OF OFFSHORE
BANKING ON THE DOMESTIC BANKING SYSTEM
The major impacts of offshore Banking to the domestic banking system
is that it increases the efficiency of the domestic banking system either
by making it more competitive or by making it more efficient.
A 1979 U.S Treasury Department report suggests that the offshore
(international) banks, would benefit from having discriminatory
practices against them in the local banking market eliminated: but the
report emphasizes that the domestic economies would likewise: gain, in
the process through increased competition and heightened efficiency.
Majority of the offshore banks is being engaged in remit ability of
domestic earnings on their cross border exposure and on their local -
currency business. Cross- border exposures are compensated by payment
in international currencies, this makes it interesting to the domestic
banking sectors hence the needed foreign currency are being made
available through this their foreign exchange business, to finance their
international traders in the domestic market.
Foreign exchange restrictions have often impeded remit ability of local -
currency earnings of the international banks. Consequently, international
(offshore) banks entering into this line of activity face the very real-
additional risk that their local (domestic) hanks activities will be -
successful.
Through offshore banking operation, it becomes impossible to reduce
domestic country's currency value either by the purchasing power posing
value through inflation and devaluation. Banks operating offshore
business are in a better position to alert their domestic banks about latest
trend in Global eurornarket, to enable them hedge against any negative
risks in their host country's currency value.
Offshore banks typically operate only in major urban centers of the
world, their investment in real estate have proved to be quite successful
in the postwar period, especially because of rapid urbanization in the
developing world.
Moreover, unremitted earnings represents a source of funding for the
local domestic banks operating offshore thereby making their domestic
branches haw adequate funding all the time.
Offshore banking operation in one form or the other, it has created the
much needed competition atmosphere for the domestic bank, thus giving
rise to good bank management in the economy and helping the domestic
banking industry.
The domestic banks enjoy a lot of privilege from the, government is not
same with the offshore banks, which is been faced with one from or
other hindrance from the host government as a way of protection
domestic banks. relatively, offshore banks have small market share as
they don't do business within the domestic market.