Assignment
Financial Institutions and Markets
Submitted to,
Palash Saha
Course Instructor
Institute of Business Administration
Jahangirnagar University
Submitted by,
Shajidur Rashid Sajid
ID: 1793, 23rd Batch
Institute of Business Administration
Jahangirnagar University
Date of Submission: 28.08.2016
Bangladesh Bank: Formulation and its Operation
Bangladesh Bank is the central bank of Bangladesh and is a member of the Asian Clearing
Union. The bank is active in developing green banking and financial inclusion policy and is an
important member of the Alliance for Financial Inclusion. Bangladesh Financial Intelligence
Unit (BFIU), a department of Bangladesh Bank, has got the membership of Egmont Group.
Bangladesh Bank is the first central bank in the world to introduce a dedicated hotline (16236)
for the general populace to complain any banking related problem. Moreover, the organization is
the first central bank in the world to issue a "Green Banking Policy". To acknowledge this
contribution, then-governor Dr. Atiur Rahman was given the title Green Governor at the 2012
United Nations Climate Change Conference, held at the Qatar National Convention
Centre in Doha.
History
After the Liberation War and the eventual independence of Bangladesh, the Government of
Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of
the country, naming it Bangladesh Bank. This reorganization was done pursuant to Bangladesh
Bank Order, 1972, and the Bangladesh Bank came into existence retroactively from 16
December 1971.
The 1971 Mujib regime pursued a pro-socialist agenda. In 1972, the government decided to
nationalize all banks in order to channel funds to the public sector and to prioritize credit to those
sectors that sought to reconstruct the war-torn country - mainly industry and agriculture.
However, government control of the wrong sectors prevented these banks from functioning well.
This was compounded by the fact that loans were handed out to the public sector without
commercial considerations; banks had poor capital lease, provided poor customer service and
lacked all market-based monetary instruments. Because loans were given out without
commercial considerations, and because they took a long time to call a loan non-performing, and
once they did, recovery under the erstwhile judicial system was so expensive, loan recovery was
abysmally poor. While the government made a point of intervening everywhere, it didnt set up a
proper regulatory system to diagnose such problems and correct them. Hence, banking concepts
like profitability and liquidity were alien to bank managers, and capital adequacy took a
backseat.
In 1982, the first reform program was initiated, wherein the government denationalized two of
the six nationalized commercial banks and permitted private local banks to compete in the
banking sector. In 1986, a National Commission on Money, Banking and Credit was appointed to
deal with the problems of the banking sector, and a number of steps were taken for the recovery
targets for the nationalized commercial banks and development financial institutions and
prohibiting defaulters from getting new loans. Yet the efficiency of the banking sector could not
be improved.
The Financial Sector Adjustment Credit (FSAC) and Financial Sector Reform Programme
(FSRP) were formed in 1990, upon contracts with the World Bank. These programs sought to
remove government distortions and lessen the financial repression. Policies made use of the
McKinnon-Shaw hypothesis, which stated that removing distortions augments efficiency in the
credit market and increases competition. The policies therefore involved banks providing loans
on a commercial basis, enhancing bank efficiency and limiting government control to monetary
policy only. FSRP forced banks to have a minimum capital adequacy, to systematically classify
loans and to implement modern computerized systems, including those that handle accounting. It
forced the central bank to free up interest rates, revise financial laws and increase supervision in
the credit market. The government also developed the capital market, which was also performing
poorly.
FSRP expired in 1996. Afterwards, the Government of Bangladesh formed a Bank Reform
Committee (BRC), whose recommendations were largely unaddressed by the then-government.
Establishment
Bangladesh Bank, the central bank and apex regulatory body for the 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 16 December 1971. At present it has ten offices
located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra, Rajshahi, Sylhet, Barisal, Rangpur
and Mymensingh in Bangladesh; total manpower stood at 5807 (officials 3981, subordinate staff
1826) as of 31 March 2015.
Vision and mission
The vision of the Bangladesh Bank aspires, through ensuring the quality of services and the
competence of its staff, shall operate as a modern, dynamic, effective, and a forward-looking
central bank to manage the countrys monetary and financial system with a view to establishing
the internal and external value of Bangladesh Taka conductive to the rapid growth and
development of the economy. To uphold the vision, BBs mission is to manage the monetary and
credit system of Bangladesh with a view to establishing domestic monetary value and
maintaining a competitive external per value of the Bangladesh Taka towards fostering growth
and development of countrys productive resources in the best national interest. In order to
achieve these objectives Bangladesh Bank mainly (i) Conduct monetary policy and (ii) Regulates
banks and NBFIs to develop a sound financial system.
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: (1) Price stability both internal and external; (2) Sustainable growth and
development; (3) High employment; (4) Economic and efficient use of resources; (5) Stability of
financial and payment system.
Organization
The bank's highest official is the governor (currently Fazle Kabir). His seat is in Motijheel,
Dhaka. The governor chairs the board of directors. The executive staff, also headed by the
governor, is responsible for the bank's day-to-day affairs. Bangladesh Bank also has a number of
departments under it, namely Debt Management, Law, and so on, each headed by one or more
general managers. The Bank has 10 physical branches: Bangladesh, Mymensingh,
Motijheel, Sadarghat, Barisal, Khulna, Sylhet, Bogra, Rajshahi, Rangpur and Chittagong; each is
headed by a general manager. Headquarters are located in the Bangladesh Bank Building in
Motijheel, which has two general managers.
Hierarchy
The executive staff is responsible for daily affairs, and includes the governor and four deputy
governors. Under the governors, there are executive directors and an economic analyst. The
general managers of the departments come under the directors, and are not part of the executive
staff.
The four deputy governors are:
Md. Abul Quasem, Abu Hena Mohd. Razee Hassan, Shitangshu Kumar, Sur Chowdhury,
Nazneen Sultana.
Board of directors
The board of directors consists of the governor of the bank and eight other members. They are
responsible for the policies undertaken by the bank.
Operations
Money Market Control
Bangladesh Bank acts as the guardian of countrys money market, also as the director and
controller of money market. It also controls the money currency, controls credit, stability in
the money supply and exchange rate of foreign currency etc. It establishes a countrys well
organized and develops money market.
Foreign Exchange Control
The countrys export and import as well as international trade success rate largely depend on
the good conduct and control of foreign exchange. So the foreign exchange system is also
controlled by Bangladesh.
Determination of Foreign Exchange Rate
By purchasing commodities from other country one country paid its value through foreign
currency. The value of all foreign currencies are not the same, so right determination of
foreign exchange rate is needed by performing this task central bank made easy the foreign
trade.
Keeping the Gold Standard
The precondition of countrys economic stability is to control the countrys gold standard. If
the money market is stranded on the basis of gold Standard, the main task of the central bank
is to keep gold standard.
Creating Job Opportunity
By permitting and adopting developing project for opening new bank and branch.
Bangladesh Bank creates enormous opportunity for employment in Bangladesh.
Maintain of Governments Fund
As Bangladesh Bank is the bank of Bangladesh government. So it protects all sorts
of governments fund as a bank of government, Bangladesh Bank keeps to itself the whole
amount of governments income and expenditures from this fund according to government
needs.
Keeping the Government Account
Besides receiving and transferring government fund, Bangladesh Bank maintains the account
of various governments division, ministry and organizations i.e. Bangladesh Bank keeps the
account of all monetary and economic transactions.
Foreign Financial Transaction
On behalf of the Bangladesh government Bangladesh Bank accomplish all sorts of foreign
financial transaction. It purchases and sells foreign currency and collects foreign currency on
behalf of the Bangladesh government in a word Bangladesh Bank perform all sorts of
financial transaction with abroad on behalf the Bangladesh government.
Loan Issue and Supervision
This bank issue loan in case of crisis of government in different terms and also helps in case
of collecting loan from different sectors.
Maintenance of Relationship with Foreign Bank
To make and maintains a good relationship with other foreign country. This is also a function
of Bangladesh Bank. Bangladesh Bank does this task on behalf of the Bangladesh
government. Without this, Bangladesh Bank also maintains good relationship with others
regional and international organization, such as World Bank, IMF, A.D.B, I.D.B etc.
Counselor and Representative of Government
This bank suggests and advises government in various behinds of economic issues such asimport and export policies, investment policies etc. Bangladesh Bank acts as the financial
adviser of Bangladesh government. Not only as advisor but also Bangladesh Bank acts as the
agent of Bangladesh government. It performs various kinds of contracts and transactions with
foreign and abroad.
Implementation of Financial Policy of Government
It doesnt merely give advice to government. It also helps in implementing different types of
financial policy without the help of Bangladesh Bank it is much more complicated for the
Bangladesh government to implement financial policies and economic developments.
Revenue Collection
As the bank of govt. Bangladesh Bank helps to collect revenue by collecting different types
of tax, duty.
Maintenance of Information
Bangladesh Bank makes the task of collecting and reserving all sorts of informations which
are much helpful in case of various governmental planning.
Co-coordinator
Bangladesh Bank plays the role of co-coordinator by maintaining relationships with others
foreign banks & international economic organizations.
Enlistment of Commercial Bank
Through enlistment commercial banks take various privileges of Bangladesh Bank, there is a
need for permission from Bangladesh Bank for establishing conducting and enlisting any
other kind of banks
Custodian of the Cash Reserve of the Commercial Banks
Every enlisted bank deposit a certain amount of their cash reserve compulsorily according to
law. In Bangladesh this rate is 8%. As a result, Bangladesh Bank supervises all kinds of
commercial banks & helps by profiling loan & distributing billing times of economic crisis.
Formation & Expansion of Bank
Bangladesh Bank plays a vital role in case of formatting & expanding any kinds of new &
old bank in our country. Actually, without the permission of Bangladesh Bank, no new bank
can be formatted as well as no branch of old bank can be opened.
Clearing House
Among the various functions of the central bank, the most one is accomplishing the internal
transactions of all enlisted bank. For this purpose Bangladesh Bank mange a clearinghouse
by the coordination of all member banks. Bangladesh Bank meets up the all sorts of
relative/reciprocal transactions within the banks.
Audit of Accounts
For building fair banking environment in the country and for controlling all other banks
Bangladesh Bank arranges the accounts of audit for several times for all kinds of enlisted and
all other banks.
Maintenance of Deposit
Bangladesh Bank deposits a certain amount of their reserve so that commercial banks cannot
use this fund as their awards.
Act As an Advisor
Bangladesh Bank delivers suggestions or an instruction to commercial banks providing
various kinds of financial information. Bangladesh Bank helps the commercial banks as well.
Assist To Collect Credit
Bangladesh Bank assists to collect credit through commercial banks. Regarding this,
Bangladesh Bank suggests the government apply law at a time, it also takes lawful schemes.
It makes a list of countries bankrupts & assists the government to collect credit.
