Establishment Bangladesh Bank, the central bank as well as chief authority to regulate countrys 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, Chittagong, Sylhet, Barisal, Rangpur and Rajshahi in Bangladesh and total number of staffs stood at 5071 (Officials 3914 and Staff 1157) as of end FY 2010. 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: 1. 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 countrys productive resources in the best national interest. 2. 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 i. Open market operation (treasury bills/bonds, repo, reverse repo auctions) ii. Variations in reserve ratios such as cash reserve requirements (CRR) and statutory liquidity ratio (SLR) iii. Secondary trading iv. Discounting rate/ bank rate and v. Moral suasion 3. BB monitors and supervises scheduled banks and non-bank financial instructions (NBFIs) that include offsite 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. 4. BB holds sole responsibility of the management of international reserve representing aggregate of BBs holding of gold, foreign exchange, SDR and reserve position in the IMF; 5. BB, as the central bank of Bangladesh reserves sole responsibility to issue bank note 6. 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. 7. BB acts as a banker to the government; 8. BB functions as a lender of the last resort for the government as well as for the countrys scheduled banks; 9. BB acts as an advisor to the government; 10. BB directs the growth expediting programs for the national interest. Additionally, BBs 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. 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 centurys 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
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 countrys 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 its policies Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all banks and

non-bank financial institutions. It performs the traditional central banking roles of note issuance and of being the banker to the government and banks. Given some broad policy goals and objectives, it formulates and implements monetary policy, manages foreign exchange reserves and lays down prudential regulations and conduct monitoring thereof as they apply to the entire banking system. Its prudential regulations include, among others: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. The Bangladesh Bank has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problem arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime. Monetary Policy Monetary policy is a set of rules that aims at regulating the supply of money in accordance with predetermined goals or objectives. Monetary policy plays a very dominant role in altering the economic activity and the price level in a country. So, it should be very carefully formulated and implemented in achieving the goals and objectives as outlined in the Bangladesh Bank Order, 1972 below:

Price stability both internal & external Sustainable growth & development High employment Economic and efficient use of resources Stability of financial & payment system

Reserve Management Strategy Bangladesh Bank (BB) is empowered by section 7A of Bangladesh Bank Order, 1972 (Presidents Order No. 127 of 1972) to hold and manage the official foreign exchange reserve of Bangladesh. It maintains its foreign exchange reserve in different currencies to minimize the risk emerging from widespread fluctuation in exchange rate of major currencies and very irregular movement in interest rates in the global money market. BB has established Nostro account arrangements with different Central Banks. Funds accumulated in these accounts are invested in Treasury bills, repos and other government papers in the respective currencies. It also makes investment in the form of short term deposits with different high rated and reputed commercial banks and purchase of high rated sovereign/supranational/corporate bonds. Forex Reserve & Treasury Management Department of BB performs the operational functions regarding investment which is guided by investment policy set by the BBs Investment Committee headed by a Deputy Governor. The underlying principle of the investment policy is to ensure the optimum return on investment with minimum market risk. Exchange Rate Policy Towards liberalization of foreign exchange transactions, a number of measures were adopted since 1990s. Bangladeshi currency, the taka, was declared convertible on current account transactions (as on 24 March 1994), in terms of Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in capital account, resident owned capital is not freely transferable abroad. Bangladesh adopted Floating Exchange Rate regime since 31 May 2003. Under the regime, BB does not interfere in the determination of exchange rate, but operates the monetary policy prudently for minimizing extreme swings in exchange rate to avoid adverse repercussion on the domestic economy. In the forex market banks are free to buy and sale foreign currency in the spot and also in the forward markets. Interest Rate Policy Under the Financial sector reform program, banks are free to charge/fix their deposit (Bank /Financial Institutes) and Lending (Bank /Financial Institutes) rates other than Export Credit. At present, Loans at reduced rates (7%) are provided for all sorts of export credit since January 2004. With a view to controlling the price hike and ensuring adequate supply of essential commodities, the rate of interest on loan for import financing of rice, wheat, sugar, edible oil (crude and refined), chickpeas, beans, lentils, onions, spices , dates and powder milk has been temporarily fixed to a maximum of 12%. Now, banks can differentiate interest rate up to 3% considering comparative risk elements involved among borrowers in same lending category. With progressive deregulation of interest rates, banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may

change interest 1.5% more or less than the announced mid-rate on the basis of the comparative credit risk. Recently Banks have been advised to upload their deposit and lending interest rate in their respective website. Capital Adequacy of the Banks With a view to strengthening the capital base of banks and making them prepare for the implementation of Basel-II Accord, banks are required to maintain Capital to Risk-Weighted Assets ratio 10% at the minimum with core capital not less than 5% effective from December 31, 2007. However, minimum capital requirement (paid up capital and statutory reserve) for all banks will be Tk.200 crore as per Bank Company (Amendment) Ordinance, 2007. Banks having capital shortfall will have to meet at least 50% of the shortfall by June, 2008 and the rest by June, 2009. Revaluation reserves of held to maturity (HTM) securities (up to 50% of the revaluation reserves) has been added to the components of supplementary capital. Besides, 'Hedging the price risk of commodity transactions' has been included in Short-term self liquidating trade related contingencies. Loan Classification and Provisioning In order to strengthen credit discipline and bring classification and provisioning regulation in line with international standard, Bangladesh Bank issued a master circular on loan classification and provisioning through BRPD circular no 5 dated June 5, 2006. The revised policy covers an independent assessment of each loan on the basis of objective criteria and qualitative factors which is appended below : Any Continuous Loan/Demand Loan if not repaid/renewed within the fixed expiry date for repayment will be treated as past due/overdue from the following day of the expiry date. A Continuous Loan/Demand loan/Term Loan which will remain overdue for a period of 90 days or more, will be put into the "Special Mention Account(SMA)". Interest accrued on "Special Mention Account (SMA)" will be credited to Interest Suspense Account, instead of crediting the same to Income Account. A Continuous Loan/Demand loan is classified as 'Sub-standard' if it is past due/over due for 6 months or beyond but less than 9 months, classified as `Doubtful' if it is past due/over due for 9 months or beyond but less than 12 months and classified as `Bad/Loss' if it is past due/over due for 12 months or beyond. If any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid installment(s) will be termed as `defaulted installment'. In case of Fixed Term Loans, which are repayable within maximum five years of time- If the amount of 'defaulted installment' is equal to or more than the amount of installment(s) due within 6 (six) months, the entire loan will be classified as "Sub-standard", if the amount is equal to or more than the amount of installment(s) due within 12 (twelve) months, the entire loan will be classified as "Doubtful" and if the amount is equal to or more than the amount of installment(s) due within 18 (eighteen) months, the entire loan will be classified as "Bad/Loss". In case of Fixed Term Loans, which are repayable in more than five years of time and if the amount of 'defaulted installment' is equal to or more than the amount of installment(s) due within 12 (twelve) months, the entire loan will be classified as "Sub-standard". If the amount is due within 18 (eighteen) months, the entire loan will be classified as "Doubtful" and if the amount is due within 24 (twenty four) months, the entire loan will be classified as "Bad/Loss". The Short-term Agricultural and Micro-Credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be classified as 'Substandard ' after a period of 12 months, as 'Doubtful' after a period of 36 months and as 'Bad/Loss' after a period of 60 months from the stipulated due date as per loan agreement. Besides, if any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities

decreases or if the recovery of the loan becomes uncertain due to any other unfavourable situation, the loan will have to be classified on the basis of qualitative judgement. As regards the provision, banks are required to maintain General Provision against all categories of loans along with off-balance sheet items in the following manner:

Particulars

UC

Classified

Short Consumer Financing Small All other Term Other than Housing Loans for Enterprise Credit Agri. Housing Finance Professionals Financing Credit Finance & to set up and micro Loans for business credit Professionals to set up business Standard 5% 5% 2% 2% 1% 1% SMA 5% 5% 5% 5% 5% SS 5% 20% 20% 20% 20% 20% DF 5% 50% 50% 50% 50% 50% B/L 100% 100% 100% 100% 100% 100%

Besides, banks are required to maintain general provision against Off-balance sheet exposures in the following manner: (i) @ 0.5% provision effective from December 31, 2007 and (ii)@ 1% provision effective from December 31, 2008 . Other instructions such as Eligible securities in determining base for provision along with a revised format for submitting the report on classification of loans and advances are also provided in the respective circulars. Reference: BRPD circular no: BRPD circular no: BRPD circular no: BRPD circular no: 05, 08, 10, 05, dated dated dated dated June August September April 5, 2006. 07, 2007 18, 2007 09, 2005

Deposit and Insurance: The deposit insurance scheme (DIS) was introduced in Bangladesh in August 1984 to act as a safety net for the depositors aiming at minimizing the risks of loss of depositors' fund with banks in which all the commercial banks including foreign banks and the specialized banks operating in Bangladesh are the member of this scheme by compulsion as provided under Article of Bank Deposit Insurance Act 2000. The DIS is designed to minimize the risks that the depositors suffer a loss out of placing funds with a bank. The purpose of DIS is to help to increase market discipline, reduce moral hazard in the financial sector and provide safety nets at the minimum cost to the public in the event of bank failure. The direct rationale for the deposit insurance is customer protection. The indirect rationale for deposit insurance is that it reduces the risks of systemic crisis, involving, for example, panic withdrawals of deposits from sound banks and breakdown of payments system. A Deposit Insurance Trust Fund (DITF) has also been created for providing limited protection (not exceeding Taka 0.01 million) to a small depositor in case of winding up of any bank. The Board of Directors of Bangladesh Bank is the Trustee Board for the DITF. Bangladesh bank has adopted a system of risk based deposit insurance premium rates applicable for all scheduled banks effective from the half year January - June 2007. According to new instruction regarding premium rates, problem banks are required to pay 0.09 percent and private banks other than the problem banks and state owned commercial banks are required to pay 0.07 percent where the percent coverage of the deposits is taka one hundred thousand per depositor per bank. With this end in view, BB has already advised the banks for bringing DIS into the notice of the public through displaying the same in their display board.

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.