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# **Box 1. The BIBF**

The Bangkok International Banking Facility (BIBF) was established in March 1993 to facilitate the growth of international banking business in Thailand. As of the third quarter of 1996, 49 banks had been granted BIBF licenses, including Thai commercial banks and foreign banks with and without local branches in Thailand. The main operations of BIBF banks on the liability side are deposits or borrowing in foreign exchange from abroad, mainly through foreign inter-bank transactions and inter-office borrowings. On the asset side, their main activities are lending in foreign currency to Thai residents (out-in) and nonresidents (out-out). BIBF institutions also engage in other standard off-shore banking activities such as loan syndication and foreign exchange transactions in third country currencies, and are also authorized to undertake investnent banking activities.

BIBF banks are treated as residents by the Bank of Thailand for purposes of the BOP. As result, BIBF funding activities are counted as capital inflows under the BOP. While this should not affect the volume of inflows since no:rmally the two sides are matched, it can affect the maturity structure of Thailand's external debt. To the extent that BIBF out-in lending to Thai firms is replacing other sources of short- and _long-term_ foreign capital, the maturity structure of Thailand's external debt will shorten since most BIBF funding is short-term. And by reducing borrowing costs and indirectly easing access to foreign capital markets for smaller and less well-known Thai firms, the establishment of the BIBF may have increased the magnitude of short-term capital flows.

BIBF institutions benefited from several important tax advantages. Among the most important are a reduced corporate income tax (10 percent rather than 30 percent) and exemption from several sales taxes (3.3 percent of turnover), stanmp duties, and the permanent establishmen **t** ax. With regard to withholding taxes, all out-out transactions were exempt, while for out-in transactions the rate is 10 percent, compared to 15 percent for countries that do not have a double taxation agreement with Thailand. And importantly, cross border borrowings within the same institution were exempt from withholding taxes. Finally, unlike other deposit or deposit type instruments, short-term (under 12 months) BIBF monetary instruments were not subject to the seven percent cash reserve requirements favoring a short-term maturity structure.

_Source._ Bank of Thailand: " Analyzing Thailand's Short-term Debt." Bank of Thailand Economic Focus, Vol. 1, Number 3; July-September 1996.

# **2. Liberalization of the Financial System**

In 1990, the Thai government promulgated a comprehensive financial reforrn plan with the stated objectives of "coordinating, synchronizing several aspects of the reform with the ultimate objectives to enhance competitiveness, flexibility, efficiency, and stability of the financial sector."<sup>3</sup> The main components of the reform program are summarized in Table 4.

**_Dismantling of Interest Rate Controls._** Among the most important actions included in the reform program were the dismantling of interest rate controls over the period 1989 to 1992. Ceilings on commercial bank deposit rates were removed during 1989-91. In June 1992, ceilings on finance and credit foncier companies' deposit and lending rates, and on commercial banks' lending rates were removed. However, on October 1993, given the gap in interest rates (and spreads) between prime and non-prime

31 See Wibulswadi (1995).