The financial system of Bangladesh consists of Bangladesh
Bank (BB) as the central bank, 4 nationalized commercial banks
(NCB), 5 government owned specialized banks, 30 domestic private
banks, 10 foreign banks and 28 non-bank financial
institutions. The financial system also embraces insurance
companies, stock exchanges and co-operative banks. Central Bank and its
policies
Bangladesh Bank (BB), as the central
bank, has legal authority to supervise and regulate all the banks.
It performs the traditional central banking roles of note issuance
and of being banker to the government and banks. It formulates and
implements monetary policy, manages foreign exchange reserves and
supervises banks and non-bank financial institutions. Its
prudential regulations include: minimum capital requirements,
limits on loan concentration and insider borrowing and guidelines
for asset classification and income recognition. BB has the power
to impose penalties for non-compliance and also to intervene in the
management of a bank if serious problems arise. It also has the
delegated authority of issuing policy directives regarding the
foreign exchange regime. Interest Rate Policy
Under the new interest rate policy which became effective in
January 1990, all deposit (Bank / Financial
Institutes)
rates are decontrolled. Lending (Bank / Financial
Institutes)
rates are all freely determined by the market, except for
exports. Capital Adequacy
In January 1996, BB announced a new policy on Capital Adequacy
along the lines recommended by the Basle Committee on banking
supervision. The Revised policy on capital adequacy requires
scheduled banks to maintain at least 9% of off-balance sheet risk
and risk in different types of assets as capital. Loan Classification and Provisioning
Bangladesh Bank introduced new accounting policies with respect to
loan classification, provisioning and interest suspense in 1989
with a view to attaining international standards over a period of
time. A Revised policy for loan classification and provisioning was
introduced from 1st January,1999.The Revised policy calls for an
independent assessment of each loan on the basis of qualitative
factors and objective criteria. Each loan is branded with the worst
level of classification resulting from these independent
assessments. If a Continuous Credit or a Demand Loan remains
non-performing for 6 months or more it is classified Sub-standard.
It is classified as Doubtful if it remains non-performing for 9
months and classified as Loss if non-performing for 12 months or
more. In the case of a Term Loan, which is repayable within a
maximum period of 5 years, if any installment is not repaid within
the specified period and if the time-equivalent of such unadjusted
balance is 6 months, it is classified Sub-standard. A Term loan is
classified Doubtful and Loss if the time-equivalent of unadjusted
balance is 12 months and 18 months respectively. Agricultural Loan and Micro-Credit is classified
Sub-standard if non-performing for 12 months, Doubtful if
non-performing for 36 months and Loss if non-performing for more
than 60 months. Under the existing system scheduled banks are required to
maintain provisions against unclassified and substandard loans in
addition to doubtful and loss loans. They are allowed to book
interest against classified loans only on cash
basis. Whether a credit is classified or not under the objective
criteria, it is subjected to classification under qualitative
judgement if any doubt arises regarding repayment of
loan. Foreign Exchange System
On March 24, 1994 Bangladesh Taka (domestic currency) was declared
convertible for current transactions in terms of Article VIII of
the IMF Articles of Agreement. Consequent to this, current external
settlements for trade in goods and services and for amortization
payments on foreign borrowings can be made through banks authorized
to deal in foreign exchange, without prior central bank
authorization. However, because resident owned capital is not
freely transferable abroad (Taka is not yet convertible on capital
account), some current settlements beyond certain indicative limits
are subject to bonafides checks. Direct investments of non-residents in the industrial
sector and portfolio investments of non-residents through stock
exchanges are repatriable abroad, as also are capital gains and
profits/dividends thereon. Investment abroad of resident-owned
capital is subject to prior Bangladesh Bank approval, which is
allowed only sparingly. Exchange Rate Policy
The exchange rate policy of Bangladesh Bank aims at maintaining the
competitiveness of Bangladeshi products in the international
markets, encouraging inflow of wage earners' remittances,
maintaining internal price stability, and maintaining a viable
external account position. Prior to the inception of floating
exchange rate regime, adjustments in exchange rates were made while
keeping in view the trends of Real Effective Exchange Rate (REER)
index based on a trade weighted basket of currencies of major
trading partners of Bangladesh and the trends of other important
internal and external sector indicators. Under the existing
floating exchange rate regime (that started from 31/05/2003), the
interbank foreign exchange market sets the exchange rates for
customer transactions and interbank transactions based on
demand-supply interplay; while the exchange rates for the
Bangladesh Bank's spot purchase and sales transactions of US
Dollars with ADs is decided on a case to case basis. Bangladesh
Bank does not undertake any forward transaction with ADs. The ADs
are free to quote their own spot and forward exchange rates for
interbank transactions and for transactions with non-bank
customers. However, along with intervention in the taka money
market, the US dollar purchase or sale transactions take place by
the Bangladesh Bank as needed, to maintain orderly market
conditions. Bank
Licensing
Bank Company Act, 1991, empowers BB
to issue licenses to carry out banking business in Bangladesh.
Pursuant to section 31 of the Act, before granting a license, BB
needs to be satisfied that the following conditions are
fulfilled: "that the
company is or will be in a position to pay its present or future
depositors in full as their claims accrue;
that the affairs of the company are not being or are not likely to
be conducted in a manner detrimental to the interest of its present
and future depositors;
that, in the case of a company incorporated outside Bangladesh, the
Government or law of the country in which it is incorporated
provides the same facilities to banking companies registered in
Bangladesh as the Government or law of Bangladesh grants to banking
companies incorporated outside Bangladesh and that the company
complies with all applicable provisions of Bank Companies Act,
1991." Licenses may be cancelled if the bank fails to comply
with above provisions or ceases to carry on banking business in
Bangladesh. Commercial Banks
The commercial banking system dominates Bangladesh's financial
sector with limited role of Non-Bank Financial Institutions and the
capital market. The Banking sector alone accounts for a substantial
share of assets of the financial system. The banking system is
dominated by the 4 Nationalized Commercial Banks , which together
controlled more than 54% of deposits and operated 3388 branches
(54% of the total) as of December 31, 2004. Specialized Banks
Out of the 5 specialized banks, two (Bangladesh Krishi Bank and
Rajshahi Krishi Unnayan Bank) were created to meet the credit needs
of the agricultural sector while the other two ( Bangladesh Shilpa
Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) )
are for extending term loans to the industrial
sector. Financial Institutions (FIs)
Twenty-eight financial institutions are now operating in
Bangladesh. Of these institutions, 1(one) is govt. owned, 15
(fifteen) are local (private) and the other 12(twelve) are
established under joint venture with foreign participation. The
total amount of loan & lease of these institutions is Tk.29,729
million as on 30 April, 2003. Bangladesh Bank has introduced a
policy for loan & lease classification and provisioning for FIs
from December 2000 on half-yearly basis. To enable the financial
institutions to mobilize medium and long-term resources, Government
of Bangladesh (GOB) signed a project loan with IDA, and a project
known as ``Financial Institutions Development Project (FIDP)`` has
started its operation from February 2000. Bangladesh Bank is
administering the project. The project has established ``Credit,
Bridge and Standby Facility (CBSF)`` to implement the financing
program with a cost of US$ 57.00 million. Capital
Market
The Capital market, an important
ingredient of the financial system, plays a significant role in the
economy of the country. 1.Regulatory Bodies
The Securities and Exchange Commission exercises powers under the
Securities and Exchange Commission Act 1993. It regulates
institutions engaged in capital market activities. Bangladesh Bank
exercises powers under the Financial Institutions Act 1993 and
regulates institutions engaged in financing activities including
leasing companies and venture capital companies. 2. Participants in the Capital Market
The SEC has issued licences to 27 institutions to act in the
capital market. Of these, 19 institutions are Merchant Banker &
Portfolio Manager while 7 are Issue Managers and 1(one) acts as
Issue Manager and Underwriter. i) Stock Exchanges
There are two stock exchanges ( the Dhaka Stock Exchange
(DSE) and the Chittagong Stock Exchange (CSE) ) which deal in
the secondary capital market. DSE was established as a public
Limited Company in April 1954 while CSE in April 1995. As of 30
June 2000 the total number of enlisted securities with DSE and CSE
were 239 and 169 respectively. Out of 239 listed securities with
the DSE, 219 were listed companies, 10 mutual funds and 10
debentures. ii) Investment Corporation of Bangladesh (ICB)
The Investment Corporation of Bangladesh was established in 1976
with the objective of encouraging and broadening the base of
industrial investment. ICB underwrites issues of securities,
provides substantial bridge financing programmes, and maintains
investment accounts, floats and manages closed-end & open-end
mutual funds & closed-end unit funds to ensure supply of
securities as well as generate demand for securities. ICB also
operates in the DSE and CSE as dealers. iii) Specialized Banks
Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha
(BSRS), BASIC Bank Ltd., some Foreign Banks and NCBs are engaged in
long term industrial financing. Insurance
The insurance Sector is regulated by the
Insurance Act, 1938 with regulatory oversight provided by the
controller of Insurance on authority under the ministry of
commerce. General insurance is provided by 21 companies and life
insurance is provided by 6 companies. The industry is dominated by
the two large, state-owned companies--SBC for general insurance and
JBC for life insurance--which together command most of the total
assets of the insurance sector. Microfinance Institutions
(MFIs) The member-based Microfinance Institutions (MFIs)
constitute a rapidly growing segment of the Rural Financial Market
(RFM) in Bangladesh. At present, Grameen Bank is the only formal
financial institution among them, established in 1983 under a
special law with the initial support from Bangladesh Bank. The poor
borrowers of Grameen bank who are mostly women own the bank and it
is the pioneer organization of this type. Besides Grameen Bank
there are more than 1000 semi-formal institutions operating mostly
in the rural sector of the country; BRAC, ASA, and PROSHIKA are
being considered three big NGO-MFIs. These institutions have an
explicit social agenda to cater to the needs of the poorer sections
of population, and have a focus towards women
clients. Till June 2002 the total coverage of microfinance
programs in Bangladesh is approximately 13 million households. Four
big institutions including Grameen Bank dominate the microfinance
market of Bangladesh. Grameen Bank, BRAC, ASA, and PROSHIKA account
for 60% of the total amount of outstanding loans made by all MFIs,
and it is widely believed that top 20% institutions account for 80%
of the total market. The Grameen Bank alone provides about
one-third of the total amount of outstanding microloans. There is
no cap or spread on interest rate offered for deposit and loan in
case of NGO-MFIs. However, in practice on average NGO-MFIs offer
mostly 5-7% interest on deposits to the members and charge 15%
interest on loan in flat method. At present NGO-MFIs are not regulated or supervised or
monitored by any single authority in Bangladesh; they are under the
system of off-site supervision by the authorities that provide them
registration as non-government organizations (NGOs). However, the
regulatory issue has come to the forefront because MFIs are
providing financial services and products to the poor, outside the
formal banking system. Considering the need to develop an
appropriate regulatory and supervisory system for this sector the
Government of Bangladesh has established a Unit named
"Microfinance
Research and Reference Unit (MRRU)" in Bangladesh Bank. A high power national
Steering Committee under the leadership of Governor of the bank
looks after the various functions of the unit. The Committee is
also responsible for formulating a uniform guideline and the legal
framework of a regulatory body for this rapidly growing financial
sector. The unit has already published an operational guideline
for these NGO-MFIs with the help of the committee and has been
collecting quarterly information since January 2004 on governance,
savings, credit, receipt and payment from them. The unit is also
providing training to these institutions on the operational
guideline supplied to them. Recently the committee has submitted a
draft law to the Government, hence it is expected that after the
promulgation of the law this sector will be under formal financial
system in near future. All these programs mentioned above
(guideline, training and information collection) going on under the
unit are being considered as the background work towards the
formulation of a full-fledged regulatory framework for the
microfinance sector in Bangladesh. | 
