Currency Swaps Collateralized by Confirmed Letters of Credit: A Framework for Generating Foreign-Currency Liquidity, Crowding Out Informal Channels, and Funding Real Enterprise in the Bangladesh–European Union Corridor

This paper proposes a structured mechanism whereby confirmed letters of credit arising from genuine Bangladesh–European Union trade serve as collateral for direct foreign-currency withdrawal rights or currency-swap facilities from European banks. Exposure is limited to verified, rules-of-origin-compliant trade flows whose productivity characteristics can be measured. The resulting additional currency-exchange frontier can finance non-LC-backed trade in goods and services, while the formal, document-based nature of the instrument crowds out hawala and other informal value-transfer systems. The framework creates real funding channels for real businesses, aligns with the initialled Partnership and Cooperation Agreement, and supports enterprise competitiveness during the least-developed-country transition. Implementation considerations, risk controls, and linkages to digital trade-finance infrastructure are examined.

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