Financial System

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Establishment

Bangladesh Bank, the central bank as well as chief authority to regulate country’s monetary and financial system, was established in Dhaka as a body corporate vide the Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. Bangladesh Bank started functioning with all capital and liabilities of the then Dhaka branch of State Bank of Pakistan. At present it has got 9 branches and those are located at Motijheel, Khulna, Sadarghat, Bogra, Chittagonj, Sylhet, Barisal, Rangpur and Rajshahi in Bangladesh and total number of staffs stood at 7240 as on end December 2009.

Core Functions

BB as the central bank of Bangladesh executes all the functions that a central bank traditionally performs as elsewhere in the world. The core functions of BB are briefly discussed as follows:

BB formulates and implements monetary policy aiming at stabilizing domestic monetary value and maintaining competitive external per value of taka for fostering growth and development of country’s productive resources in the best national interest.
BB formulates and implements intervention policies in the domestic money market and foreign exchange market. BB intervenes the money market with some policy instruments such as
1. Open market operation (treasury bills/bonds, repo, reverse repo auctions)
2. Variations in reserve ratios such as cash reserve requirements (CRR) and statutory liquidity ratio (SLR)
3. Secondary trading
4. Discounting rate/ bank rate and
5. Moral suasion
BB monitors and supervises scheduled banks and non-bank financial instructions (NBFIs) that include off-site supervision and on-site supervision in order to enhance the safety, soundness, and stability of the banking system to ensure banking discipline, protect depositors’ interest and retain confidence in the banking system.
BB holds sole responsibility of the management of international reserve representing aggregate of BB’s holding of gold, foreign exchange SDR and reserve position in the IMF;
BB, as the central bank of Bangladesh reserves sole responsibility to issue bank note
BB performs as a clearing house for the scheduled banks to clear and settle inter-bank payment arising through drawing cheque, drafts, bills, etc to one another.
BB acts as a banker to the government;
BB functions as a lender of the last resort for the government as well as for the country’s scheduled banks;
BB acts as an advisor to the government;
BB directs the growth expediting programs for the national interest.

Additionally, BB’s functions include some other promotional activities such as development of new instruments, guidelines for money and financial market participants, providing training to the banks and NBFIs, monitoring and encouraging corporate social responsibilities (CSR) executed by banks and NBFIs and so on.

Highlights...

Bank and Central Banking: A Brief Concept

Concept in Brief

A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of whichever country the bank exists for, and to other commercial banks, typically as a 'lender of last resort'. However, a central bank is distinguished from a normal commercial bank because it has the monopoly on creating the currency of a nation, which is loaned to the government in the form of legal tender. It is a bank that can lend money to other banks in times of need. Its primary function is to provide the nation's Money Supply, but more active duties include controlling subsidized-LoanInterest Rates, and acting as a lender of last resort to the Banking Sector during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.

History

Strengthening the financial sector is a vital concern for an economy. Efficient banking or sound financial system serves as an effective channel for mobilizing funds from savers to productive sectors and thus helps to achieve economic growth. However, the idea of ‘Bank’ is so ancient and this concept is evolving over time. Around the time of Adam Smith (1776) there was a massive growth in the banking industry. Within the new system of ownership and investment, the state's role as an economic actor changed substantially. The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word 'Bank' was probably derived from the word 'bench' as during ancient time Jews used to do money lending business sitting on long benches. First modern banking was introduced in 1668 in Stockholm as 'Svingss Pis Bank' which opened up a new era of banking activities throughout the European Mainland.

In the South Asian region a major landmark was the establishment of the Hindustan Bank in 1700 at Kolcutta. Dhaka Bank started to operate in1806. Banks established in this region during the British period include Kurigram Bank (1887), Kumarkhali Bank(1896), Mahalaxmi Bank, Chittagong bank(1910), Dinajpur Bank(1914), Comilla Banking Corporation (1914) and Comilla Union Bank(1922). Major Indian Banks also had branches in this territory. In Europe prior to the 17th century most money was Commodity Money, typically Gold or silver. However, promises to pay were widely circulated and accepted as value at least five hundred years earlier in both Europe and Asia. The medieval European Knights Templar ran probably the best known early prototype of a central banking system. At about the same time, Kublai Khan of the Mongols introduced Fiat Currency to China, which was imposed by force by the confiscation of Specie. Although central banks are generally associated with fiat money, under the international Gold Standard of the nineteenth and early twentieth century’s central banks developed in most of Europe and in Japan, though elsewhere Free Banking or Currency Boards were more usual at this time. Problems with collapses of banks during downturns, however, was leading to wider support for central banks in the respective nations which did not as yet possess them, most notably in Australia.

As the first public bank to "offer accounts not directly convertible to coin", the Bank of Amsterdam established in 1609 is considered to be the "first true central bank". This was followed in 1694 by the Bank of England, created by Scottish businessman William Paterson in the City of London at the request of the English government to help pay for a war.

With the collapse of the gold standard after World War II, central banks became much more widespread. The banking system at our independence consisted of two branch offices of the former State Bank of Pakistan established in July 1948: one was in Bangladesh (former East Pakistan) and the other was in West Pakistan (present Pakistan).

Vision and Mission

VISION
To develop continually as a forwardlooking central bank with competent and committed professionals of high ethical standards, conducting monetary management and financial sector supervision to maintain price stability and financial system robustness, supporting rapid broad based inclusive economic growth, employment generation and poverty eradication in Bangladesh

MISSION
We at Bangladesh Bank are carrying out its following main functions as the country’s central bank:

	Formulating monetary and credit policies;
	Managing currency issue and regulating payment system;
	Managing foreign exchange reserves and regulating the foreign exchange market;
	Regulating and supervising banks and financial institutions, and advising the government on interactions and impacts of fiscal, monetary and other economic policies.

We are discharging these functions in a forward looking, proactive, responsive and consultative manner. In our aspiration for ever higher standards of performance we are aware of our limitations in independence, logistics, professional know-how and appropriateness of skill sets in staffing; we are persistent in effort to overcome these limitations. In our work we shall preserve and further strengthen the already earned confidence and trust of the nation, to continue being seen as a respected institution to be emulated. Towards achieving these, our performance commitments to our diverse broad stakeholder groups are as follows:

For the Nation
We shall catalyze and support socially responsible and environmentally sustainable development initiatives, inter alia including fuller financial inclusion of under-served productive sectors and bringing in needed new dimensions in financial markets and institutions; to facilitate broad based growth in output, employment and income, for rapid poverty eradication and inclusive economic and social progress.

For the government
We shall adopt and implement monetary and credit policies conforming with national priorities, in coordination with government's fiscal and other macroeconomic objectives. We shall optimize foreign exchange reserves and returns thereon, maintain stability in financial markets curbing excessive volatility, and provide analysis and advice to the government on issues in economic management and development.

For depositors in banks and financial institutions, investors in financial assets
We shall ensure safety of deposits in licensed banks and financial institutions with on-site and off-site supervision of their activities and with adequate financial information disclosure requirements, besides insuring small deposits. We shall maintain an interest rate structure that provides fair return on financial assets while also supporting growth in the real sector, and we shall promote and support development of markets in bonds and securities.

For banks and financial institutions in Bangladesh
We shall provide precise prudential regulatory, risk management and disclosure framework to protect solvency and liquidity of individual institutions and stability of the overall financial system, acting as lender of last resort if and when needed. We shall issue regulations and enforce compliance therewith inter alia on capital adequacy, asset classification, income recognition and provisioning, large exposure and risk management; through open consultative processes. We shall maintain external sector viability with exchange rate stability and adequate foreign exchange reserves. We shall provide a secure and quick payment settlement system. We shall promote and support development of new financial products, services and instruments.

For banks abroad
We shall maintain a solvent, liquid domestic financial system with precise prudential regulatory, risk management and disclosure framework in line with global best practice standards. We shall maintain external sector viability with exchange rate stability and adequate reserves. We shall maintain a secure, quick payment system for settlement of claims.

For the business community, including farm and non-farm SMEs
We shall maintain liquidity conditions and credit policies ensuring adequate credit flows at market driven flexible interest rates for all productive economic activities, including in sectors like agriculture and SMEs where markets have not been very responsive. We shall foster macroeconomic stability through monetary and external sector management. We shall promote and support development of new financial products, services and instruments. We shall maintain a secure and quick payment system for settlement of claims.

For Bangladeshis abroad
We shall facilitate remittances from your earnings abroad to Bangladesh through legitimate banking channels free of involvement of money launderers or terrorism financiers. We shall support and promote development of new investment opportunities for your remittances to Bangladesh.

For our employees
We shall maintain an environment that reinforces our pride in being employees of Bangladesh Bank with compensation structure adequate to attract and retain the best in the market, job assignments and logistically well resourced work situations encouraging continuous learning and rewarding innovativeness and performance excellence by fast tracking in career path, clear delegation and delineation of responsibilities and accountabilities, fairness and objectivity in performance appraisal and personnel placement decisions.

Central Bank and It's Policies

BB's Hierarchy

BB’s Governors

Acts, Laws, Regulations and Guidelines

Financial Inclusion and Growth Expediting Programs

Basic financial services such as deposit, credit etc. is considered as entitlement of all people in a society, this is particularly true in developed countries. Inclusiveness of a greater segment of people in financial system is pre requisite for economic development of a country like Bangladesh to facilitate employment to ease credit facilities. Despite a large number of bank branches and micro finance institutions in our country, a large segment of our population particularly rural poor have scant access to banking services. Bangladesh Bank has started to find a way out of this situation and services like deposit, small credit etc. need to be made available to the common people for the sake of poverty reduction also. Bangladesh Bank and the Government of Bangladesh (GOB) have adopted several remedial measures to bridge these gaps in financial inclusion.

Bangladesh Bank has introduced refinance schemes for banks against their loans to Small and Medium Enterprises (SMEs) multilateral development partners such as the IDA and ADB are supplementing BB’s refinance programs with their co-financing lines. BB’s refinance schemes for banks against their loans to Small and Medium Enterprises (SMEs) have been expanded from Taka 100 crore to Taka 600 crore for ensuring credit availability to this sector. To widen and strengthen SMEs, recently Bangladesh Bank has formed SME and Special Programs Department; to enhance investment in this sector especially to help women in increasing their contribution to industrialization, BB is detecting the hindrances on the way. In this regard it has been made mandatory that at least 15% of the credit will have to be disbursed among women entrepreneurs. Against the sector in total of Tk. 24000 will be disbursed in the current fiscal (FY 2009-10) through the banking channel.

The agriculture credit program announced by BB for FY 10 enjoins all banks to engage in lending for a comprehensive range of no-and off-farm rural economic activities, with refinance lines available to them from Bangladesh Bank. BB has announced its Annual Agricultural/Rural Credit Policy and Program for FY 2009-10 of TK. 11,500 crore and to ensure institutional credit facility for the share croppers, Bangladesh Bank for the first time has introduced a refinance scheme of TK.500 crore which will be disbursed using NGO linkages. To implement agricultural credit program BB has formulated a three stage monitoring system. Besides, the farmers are now allowed to open their bank account by ten taka only.

Bangladesh Bank is increasing its concentration on infrastructural development because it’s a vital prerequisite for economic development. A Taka 200 crore refinance line has been introduced in FY-10 against bank loans for environment friendly investments in solar energy, Biogas plants and Effluent Treatment Plants (ETP). Already Participatory Agreement with some banks for receiving refinance facility for loan against ETP is under process. In addition commercial banks have been persuaded to invest in power generation plant under Public Private Partnership (PPP). In the meantime BB itself has established a 20 kilo watt solar panel.

In addition, BB is always urging the financial institutions to be more committed to the society by fulfilling their Corporate Social Responsibilities (CSR) because the ultimate target of any business activity should be the maximization of social welfare.

According to vision 2021 of present Govt. poverty has been targeted to reduce below 15%. As a short term measure to achieve this target BB authority hopes the credit facilities for agriculture and SMEs will be very effective and will ease the implementation of long term strategies.
Nevertheless recently, BB has adopted the Strategic Planning in accomplishing 16 core objectives by 2010-14:

Revisit the current monetary policy framework to ensure continuing effectiveness of monetary polices
trengthen regulatory and supervisory framework to enhance financial sector resilience and stability
Further deepen financial markets in Bangladesh
Financial inclusion and broadening of access
Develop more efficient currency management and payment system
Enhance regulatory and supervisory framework against money laundering
Introduce separate and comprehensive guideline and supervision for Islamic banking
Develop more efficient management of government domestic debt
Streamline and transform data reporting, processing and dissemination through full fledged ICT framework
Full automation of credit information bureau (CIB)
Close the existing gaps in legal empowerment of BB in different functional areas
Attract, retain and develop people ensuring sound organizational development
Strengthen Risk-based internal control to add value to the Risk Management Process in Bangladesh Bank
romote CSR activities and preparedness for climate change in Bangladesh with conducive policy direction
Develop effective channels for communicating central bank’s policies and initiatives to stakeholders to enhance effectiveness of implementation
reate a ‘Strategic Planning and coordination Unit as a process owner of BB strategic plan

In order to improve the quality of customer service of Bangladesh Bank modernization program for the cash department has been initiated, such as, setting up CCTV as part of improved security system, help desk, separate counter for women, aged and physically handicapped people, using sophisticated machine for note processing sorting, banding etc. central display board for displaying up-to date directives and citizen charter and many others. Therefore, with the view to reduce poverty; accelerate economic activities with satisfying the credit needs, BB’s recent initiative in bringing the people outside the bank under banking services in line with financial inclusion is likely to contribute in economic development of Bangladesh.

Research and Publications

Economic Growth