Comparative Banking

Course Code: BIN-206

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Recommended Books:
1. Banking Theory and Practice
-K. C. Shekhar and Lekshmy Shekhar
2. The Evolution of Central Banking: Theory and History
-Stefano Ugolini
3. Articles, Manuals etc.

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Overview of Financial system of Bangladesh

Financial System
• The Financial system is the mechanism through which loanable
funds reach borrowers. Through the operation of the financial
markets, money is exchanged for financial claims in the form of
stocks, bonds and other securities.

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Overview of Financial system of Bangladesh

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Overview of Financial system of Bangladesh

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Overview of Financial system of Bangladesh

The financial system of Bangladesh is comprised of three broad

fragmented sectors:
▪ Formal Sector,
▪ Semi-Formal Sector,
▪ Informal Sector.
The sectors have been categorized in accordance with their
degree of regulation.

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The formal sector includes all regulated institutions like
▪ Banks,
▪ Non-Bank Financial Institutions (FIs),
▪ Insurance Companies,
▪ Capital Market Intermediaries like Brokerage
Houses,
▪ Merchant Banks etc.;
▪ Micro Finance Institutions (MFIs).

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The semi-formal sector includes those institutions which are
regulated otherwise but do not fall under the jurisdiction of
Central Bank, Insurance Authority, Securities and Exchange
Commission or any other enacted financial regulator.

This sector is mainly represented by

▪ Specialized Financial Institutions like House Building
Finance Corporation (HBFC),
▪ Palli Karma Sahayak Foundation (PKSF),

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 ▪ Samabay Bank,
▪ Grameen Bank etc.,
▪ Non-Governmental Organizations (NGOs and separate
government programs).

The informal sector includes private intermediaries which are

completely unregulated.

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The financial market in Bangladesh is mainly of following types:
1. Money Market: The money market comprises banks and
financial institutions as intermediaries.
Interbank clean (or clearing house) and repo based lending,
BB's repo,
reverse repo auctions,
BB bills auctions,
treasury bills auctions
are primary operations in the money market, there is also active
secondary trade in treasury bills (up to 1 year maturity).
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2. Taka Treasury Bond market: The Taka treasury bond market
consists of primary issues of treasury bonds of different
maturities (2, 5, 10, 15 and 20 years), and secondary trade
therein through primary dealers.
20 banks performing as Primary Dealers participate directly in
the primary auctions.
Other bank and non-bank investors can participate in primary
auctions and in secondary trading through their nominated
Primary Dealers.
Non-resident individual and institutional investors can also
participate in primary and secondary market, but only in
treasury bonds.
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3. Capital market: The primary issues and secondary trading of
equity securities of capital market take place through two
(02) stock exchanges-Dhaka Stock Exchange and Chittagong
Stock Exchange.
The instruments in these exchanges are
equity securities (shares),
debentures and
corporate bonds.
The capital market is regulated by Bangladesh Securities and
Exchange Commission (BSEC).

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4. Foreign Exchange Market: Towards liberalization of foreign
exchange transactions, a number of measures were adopted.
Bangladeshi currency, the taka, was declared convertible on
current account transactions.
Repatriation of profits or disinvestment proceeds on non-
resident FDI and portfolio investment inflows are permitted
freely.
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.
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Investment abroad of resident-owned capital is subject to prior
Bangladesh Bank approval, which is allowed only carefully.
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 effect on the domestic economy.
The exchange rate is being determined in the market on the
basis of market demand and supply forces of the respective
currencies.

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In the forex market banks are free to buy and sale foreign
currency in the spot and also in the forward markets.
However, to avoid any unusual volatility in the exchange
rate, Bangladesh Bank, the regulator of foreign exchange
market remains vigilant over the developments in the
foreign exchange market and
intervenes by buying and selling foreign currencies
whenever it deems necessary to maintain stability in the
foreign exchange market.

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Government Securities Market

Government securities market of Bangladesh is consist of

tradable and non-tradable securities.
Non-tradable securities include National Savings Certificates i.e.
Sanchayapatras and Sanchayabonds which are only for retail
investors.
The tradable securities include Treasury Bills (T-Bills) of 91, 182
and 364 days maturities and
Bangladesh Government Treasury Bonds (BGTB) of 2, 5, 10, 15
and 20 years maturities.
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T-Bills and BGTBs are issued through auctions.
Only Primary Dealers (PD) can submit bids in the auctions.
Other institutions and individuals can submit bids in auction
but through the PDs.
At present 20 banks are performing as Primary Dealer. T-Bills
and BGTBs can be sold in the secondary market.

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Non-resident individual and institutional investors also eligible
to buy BGTBs through a Non-Resident Foreign Currency
Account and Non-Resident Investor's Taka Account
maintained with commercial banks of Bangladesh.

Bangladesh Bank have its own depository system for the

transaction and settlement of Government securities in the
Market Infrastructure (MI) Module.

In 2011 BB introduced this automated system to expedite the

primary auction and secondary market

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Regulators of the Financial System
Central Bank
Bangladesh Bank acts as the Central Bank of Bangladesh which
was established on December 16, 1971 through the
enactment of Bangladesh Bank Order 1972- President’s
Order No. 127 of 1972 (Amended in 2003).
The general superintendence and direction of the affairs and
business of BB have been entrusted to a 9 members' Board
of Directors which is headed by the Governor who is the
Chief Executive Officer of this institution as well.
BB has 45 departments and 10 branch offices.
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In Strategic Plan (2010-2014), the vision of BB has been stated as,

“To develop continually as a forward looking 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”.

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The main functions of BB are (Section 7A of BB Order, 1972) –

1. to formulate and implement monetary policy;

2. to formulate and implement intervention policies in the
foreign exchange market;
3. to give advice to the Government on the interaction of
monetary policy with fiscal and exchange rate policy, on
the impact of various policy measures on the economy
and to propose legislative measures it considers necessary
or appropriate to attain its objectives and perform its
functions;

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4. to hold and manage the official foreign reserves of
Bangladesh;
5. to promote, regulate and ensure a secure and efficient
payment system, including the issue of bank notes;
6. to regulate and supervise banking companies and
financial institutions.

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Core Policies of Central Bank
Monetary policy
Monetary policy is a set of tools used by a nation's central bank to
control the overall money supply and promote economic growth
and employ strategies such as revising interest rates and changing
bank reserve requirements.
The main objectives of monetary policy of Bangladesh Bank are:
• Price stability both internal & external
• Sustainable growth & development
• High employment
• Economic and efficient use of resources
• Stability of financial & payment system 25
Bangladesh Bank declares the monetary policy by issuing
Monetary Policy Statement (MPS) twice (January and July) in
a year.

The tools and instruments for implementation of monetary

policy in Bangladesh are
Bank Rate,
Open Market Operations (OMO),
Repurchase agreements (Repo) &
Reverse Repo, Statutory Reserve Requirements
(SLR & CRR).
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Reserve Management Strategy
Bangladesh Bank maintains the foreign exchange reserve of the
country 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 (A nostro account is a bank
account that a domestic bank holds in a foreign country,
denominated in the foreign country's currency. The term "nostro"
comes from the Latin word for "ours".) arrangements with
different Central Banks.
Funds accumulated in these accounts are invested in Treasury
bills, repos and other government papers in the respective
currencies.
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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.
A separate department of BB performs the operational
functions regarding investment which is guided by
investment policy set by the BB's 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.
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Interest Rate Policy
Under the Financial sector reform program, a flexible interest
policy was formulated.
According to that, banks are free to charge/fix their deposit
(Bank /Financial Institutes) and Lending (Bank /Financial
Institutes) rates other than Export Credit.
Banks can differentiate interest rate up to 3% considering
comparative risk elements involved among borrowers in
same lending category.

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Capital Adequacy for Banks and FIs
Basel-III has been introduced with a view to strengthening the
capital base of banks with the goal of promoting a more
resilient banking sector.
The Basel III regulation will be adopted in a phased manner
starting from the January 2015, with full implementation of
capital ratios from the beginning of 2019.
Now, scheduled banks in Bangladesh are required to maintain
minimum capital of Taka 4 billion or Capital to Risk Weighted
Assets Ratio (CRAR) 10%, whichever is higher.

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For FIs, full implementation of Basel-II has been started in
January 01, 2012 (Prudential Guidelines on Capital
Adequacy and Market Discipline (CAMD) for Financial
Institutions).
Now, FIs in Bangladesh are required to maintain Tk. 1 billion or
10% of Total Risk Weighted Assets as capital, whichever is
higher.

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Deposit Insurance
The deposit insurance scheme (DIS) was introduced in
Bangladesh in August 1984 to act as a safety net for the
depositors.
All the scheduled banks Bangladesh are the member of this
scheme Bank Deposit Insurance Act 2000.
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.

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A Deposit Insurance Trust Fund (DITF) has also been created for
providing limited protection (not exceeding Taka 0.01 m) to
a small depositor in case of winding up of any bank.
The Board of Directors of BB is the Trustee Board for the DITF.
BB has adopted a system of risk based deposit insurance
premium rates applicable for all scheduled banks effective
from January - June 2007.
According to new instruction regarding premium rates, problem
banks are required to pay 0.09% and private banks other
than the problem banks and state owned commercial banks
are required to pay 0.07% where the percent coverage of
the deposits is taka one hundred thousand per depositor per
bank. 33
Insurance Authority
Insurance Development and Regulatory Authority (IDRA) was
instituted on January 26, 2011 as the regulator of insurance
industry being empowered by Insurance Development and
Regulatory Act, 2010.
This institution is operated under Ministry of Finance and a 4
member executive body headed by Chairman is responsible
for its general supervision and direction of business.
The mission of IDRA is to protect the interest of the policy
holders and other stakeholders under insurance policy,
supervise and regulate the insurance industry effectively,
ensure orderly and systematic growth of the insurance
industry. 34
Regulator of Capital Market Intermediaries
Securities and Exchange Commission (SEC) performs the
functions to regulate the capital market intermediaries and
issuance of capital and financial instruments by public
limited companies.
It was established on June 8, 1993 under the Securities and
Exchange Commission Act, 1993. A 5 member commission
headed by a Chairman has the overall responsibility to
administer securities legislation and the Commission is
attached to the Ministry of Finance.

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The mission of SEC is to protect the interests of securities
investors, to develop and maintain fair, transparent and
efficient securities markets and to ensure proper issuance of
securities and compliance with securities laws.

The main functions of SEC are:

▪ Regulating the business of the Stock Exchanges or any

other securities market.
▪ Registering, monitoring and regulating of collective
investment scheme including all forms of mutual funds.

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▪ Registering and regulating the business of stock-
brokers, sub-brokers, share transfer agents, merchant
bankers and managers of issues, trustee of trust deeds,
registrar of an issue, underwriters, portfolio managers,
investment advisers and other intermediaries in the
securities market.
▪ Monitoring and regulating all authorized self regulatory
organizations in the securities market.
▪ Prohibiting fraudulent and unfair trade practices in any
securities market.

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▪ Promoting investors’ education and providing training
for intermediaries of the securities market.
▪ Prohibiting insider trading in securities.
▪ Regulating the substantial acquisition of shares and
take-over of companies.
▪ Undertaking investigation and inspection, inquiries and
audit of any issuer or dealer of securities, the Stock
Exchanges and intermediaries and any self regulatory
organization in the securities market.
▪ Conducting research and publishing information.

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Regulator of Micro Finance Institutions
To bring Non-government Microfinance Institutions (NGO-MFIs)
under a regulatory framework, the Government of
Bangladesh enacted "Microcredit Regulatory Authority Act,
2006’" (Act no. 32 of 2006) which came into effect from
August 27, 2006.
Under this Act, the Govt. established Microcredit Regulatory
Authority (MRA) with a view to ensuring transparency and
accountability of the NGO-MFIs in the country.
The Authority is empowered and responsible to implement the
said act and to bring the microcredit sector of the country
under a full-fledged regulatory framework.
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MRA’s mission is to ensure transparency and accountability of
microfinance operations of NGO-MFIs as well as foster
sustainable growth of this sector. In order to achieve its
mission, MRA has set itself the task to attain the following
goals:
▪ To formulate as well as implement the policies to
ensure good governance and transparent financial
systems of MFIs.
▪ To conduct in-depth research on critical microfinance
issues and provide policy inputs to the government
consistent with the national strategy for poverty
eradication.
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▪ To provide training of NGO-MFIs and linking them with
the broader financial market to facilitate sustainable
resources and efficient management.
▪ To assist the government to build up an inclusive
financial market for economic development of the
country.
▪ To identify the priorities in the microfinance sector for
policy guidance and dissemination of information to
attain the MRA’s social responsibility.

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According to the Act, the MRA will be responsible for the three
primary functions that will need to be carried out, namely:

▪ Licensing of MFIs with explicit legal powers;

▪ Supervision of MFIs to ensure that they continue to
comply with the licensing requirements; and
▪ Enforcement of sanctions in the event of any MFI
failing to meet the licensing and ongoing supervisory
requirements.

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Banks
After the independence, banking industry in Bangladesh started its
journey with 6 Nationalized commercialized banks, 3 State
owned Specialized banks and 9 Foreign Banks.
In the 1980's banking industry achieved significant expansion with
the entrance of private banks. Now, banks in Bangladesh are
primarily of two types:
• Scheduled Banks: The banks that remain in the list of banks
maintained under the Bangladesh Bank Order, 1972.
• Non-Scheduled Banks: The banks which are established for
special and definite objective and operate under any act but
are not Scheduled Banks. These banks cannot perform all
functions of scheduled banks. 43
There are 61 scheduled banks in Bangladesh who operate under
full control and supervision of Bangladesh Bank which is
empowered to do so through Bangladesh Bank Order, 1972
and Bank Company Act, 1991. Scheduled Banks are classified
into following types:
▪ State Owned Commercial Banks (SOCBs): There are 6
SOCBs which are fully or majorly owned by the Government
of Bangladesh.
▪ Specialized Banks (SDBs): 3 specialized banks are now
operating which were established for specific objectives like
agricultural or industrial development. These banks are also
fully or majorly owned by the Government of Bangladesh.
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▪ Private Commercial Banks (PCBs): There are 43 private
commercial banks which are majorly owned by
individuals/the private entities. PCBs can be categorized
into two groups:
➢ Conventional PCBs: 33 conventional PCBs are now
operating in the industry. They perform the banking
functions in conventional fashion i.e interest based
operations.
➢ Islami Shariah based PCBs: There are 10 Islami Shariah
based PCBs in Bangladesh and they execute banking
activities according to Islami Shariah based principles
i.e. Profit-Loss Sharing (PLS) mode.
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 ▪ Foreign Commercial Banks (FCBs): 9 FCBs are operating in
Bangladesh as the branches of the banks which are
incorporated in abroad.

There are now 5 non-scheduled banks in Bangladesh which are:

▪ Ansar VDP Unnayan Bank,
▪ Karmashangosthan Bank,
▪ Grameen Bank,
▪ Jubilee Bank,
▪ Palli Sanchay Bank

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FIs
Non-Bank Financial Institutions (FIs) are those types of financial
institutions which are regulated under Financial Institution Act,
1993 and controlled by Bangladesh Bank.
Now, 34 FIs are operating in Bangladesh while the maiden one was
established in 1981.
Out of the total, 2 is fully government owned
(Bangladesh Infrastructure Finance Fund Limited and
Infrastructure Development Company Limited), 1 is the subsidiary
of a SOCB, 15 were initiated by private domestic initiative and 15
were initiated by joint venture initiative.
Major sources of funds of FIs are Term Deposit (at least three months
tenure), Credit Facility from Banks and other FIs, Call Money as
well as Bond and Securitization. 47
The major difference between banks and FIs are as follows:
• FIs cannot issue cheques, pay-orders or demand drafts.
• FIs cannot receive demand deposits,
• FIs cannot be involved in foreign exchange financing,
• FIs can conduct their business operations with diversified
financing modes like syndicated financing, bridge financing,
lease financing, securitization instruments, private placement
of equity etc.
Securitization is the process in which certain types of assets are
pooled so that they can be repackaged into interest-bearing
securities. The interest and principal payments from the assets are
passed through to the purchasers of the securities.

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Recent Developments in Financial Sector of Bangladesh
Automation and Technological Development:
Banking sector experienced remarkable progress in respect of
automation in functioning in last several years.
For the pro-active and forward-visioning approach of
Bangladesh Bank, numbers of automation initiatives have
been implemented in banking sector.
These initiatives include:
▪ Bangladesh introduced the Market Infrastructure (MI)
Module for automated auction and trading of government
securities.
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▪ To create a disciplined environment for borrowing,
the automated Credit Information Bureau (CIB)
service provides credit related information for prospective
and existing borrowers.
With this improved and efficient system, risk management will
be more effective.
Banks and financial institutions may furnish credit information
to CIB database 24 by 7 around the year; and they can
access credit reports from CIB online instantly.
▪ L/C Monitoring System has been introduced for
preservation and using the all necessary information
regarding L/C by the banks through BB website. This system
allows the authorized users of banks to upload and
download their L/C information.
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▪ In terms of article 36(3) of Bangladesh Bank Order, 1972,
all scheduled banks are subject to submit Weekly
Statement of Position as at the close of business on every
Thursday to the Department of Off-site Supervision.
This statement now is submitted through on-line using the
web upload service of BB website within o3 (three)
working days after the reporting date which is much more
time and labor efficient that the earlier manual system.
▪ The e-Returns service has been introduced which is An
Online Portal Service for Scheduled Banks to submit
Electronic Returns using predefined template for the
purpose of Macro Economy Analysis through related BB
Departments.
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▪ Online Export Monitoring System is used for monitoring
export of Bangladesh.
▪ Bangladesh Automated Clearing House (BACH) started to
work by replacing the ancient manual clearing system which
allows the inter-bank cheques and similar type instruments to
be to settled in instant manner.
▪ Electronic Fund Transfer (EFT) has been introduced which
facilitates the banks to make bulk payments instantly and
using least paper and manpower.
▪ The initiation of Mobile Banking has been one of the most
noteworthy advancement in banking. Through this system,
franchises of banks through mobile operators can provide
banking service to even the remotest corner of the country.
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▪ Almost every commercial bank is now using their own core
banking solution which has made banking very faster and
efficient.
Usage of plastic money has much more increased in daily life
transactions.
Full or partial online banking is now being practiced by almost
every bank.
▪ Inauguration of internet trading in both of the bourses
(DSE & CSE) in the country is the most significant
advancement for capital market in last several years.
▪ Micro Finance Institutions submit their reports to the
regulator through the Online Report Submission Tools for
MFIs.
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Institutional Development:
Through the Central Bank Strengthening Project, there have
been a good number of achievements regarding the
institutional development in BB which can be observed
below:
▪ The implementation of Enterprise Resource Planning (ERP)
has been a big step in automation of operational structure
of BB.
▪ The establishment of Enterprise Data Warehouse (under
process) will bring the whole banking and FI industry
under a single network through which data sharing,
reporting and supervision will enter in a new horizon.
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▪ Bangladesh Bank now possesses the most informative and
resourceful website of the country regarding economic
and financial information.
▪ Internal networking system with required online
communication facilities have been developed and in
operation for the officers of BB.
▪ BB has hosted number of international seminars on
different economic and financial issues over last several
years.

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Regulatory Development:
Banking and FI industries have experienced diversified
regulatory development over last few years:
▪ Basel-III has been introduced in a phased manner starting
from the January 2015, with full implementation of
capital ratios from the beginning of 2019.
▪ Guidelines on Environmental and Climate Change Risk
Management for banks and FIs have been circulated.
Policy guidelines on Green Banking also have been issued.

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▪ Guidelines on Stress Testing for banks and FIs have been
issued which is aimed to assess the resilience of banks and
FIs under different adverse situations.
▪ Number of Policy initiatives for Financial Inclusion has
been undertaken.
▪ Banks have been asked to build up separate Risk
Management Unit for comprehensive and intensive risk
management.
▪ Banks have been instructed to create separate subsidiary
for capital market operations and capital market
operations of banks are now minutely monitored.
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▪ Supervision has been intensified to increase the
participation of banks in Corporate Social Responsibility
(CSR).
▪ For the efficient and timely action of BB, foreign
exchange reserve of Bangladesh did not face any
adversity during global financial turmoil of 2007-09.
▪ To meet international standard on Anti Money
Laundering (AML)/Combating Financing of Terrorism
(CFT) issues, guidelines for Money Changers, Insurance
Companies and Postal Remittance have already been
circulated.
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