Assignment On

Financial Institutions & Market

Submitted To
Palash Saha
Course Instructor
Institute of Business Administration
Jahangirnagar University
Submitted By
Aqib Raf
ID: 1811
Batch: 23rd
Date of submission: 28/08/16

Bangladesh Bank: Formulation

and Operation
Bangladesh Bank, the central bank and apex regulatory body for the
country's monetary and fnancial 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.
The paid up capital of Bangladesh Bank is Tk. 30 million divided into 300,000
shares of Tk. 100 each that are fully paid up by the government. A board of
directors comprising the Governor as the Chairman, one deputy governor
and seven other members oversees the affairs of the bank. The Governor
and the deputy governors of the Bank are appointed by the government for a
period not exceeding fve years and are eligible for reappointment. The
Governors who have served since its inception are: ANM Hamidullah (197274); AKN Ahmed (1974-76); M Nurul Islam (1976-87); Shegufta Bakht
Chaudhuri (1987-92); Khorshed Alam (1992-96); Lutfar Rahman Sarkar
(1996-98); Dr. Mohammed Farashuddin (1998-2001); Dr. Fakhruddin Ahmed
(2001-2005); Dr. Salehuddin Ahmed (2005-2009); and Dr. Atiur Rahman
(2009-till date).
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 C
hittagong; each is headed by a general manager. Headquarters are located
in the Bangladesh Bank Building in Motijheel, which has two general
managers.

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-Loan Interest Rates, and acting as a lender of last resort to the
Banking Sector during times of fnancial crisis (private banks often being
integral to the national fnancial system). It may also have supervisory
powers, to ensure that banks and other fnancial institutions do not behave
recklessly or fraudulently.

Bangladesh Bank and its policies

Bangladesh Bank (BB), as the central bank, has legal authority to supervise
and regulate all banks and non-bank fnancial 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 classifcation
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 is a)Price stability both internal & external ,b)Sustainable growth &
development,c)High employment,d)Economic
and
efficient
use
of
resources,e) Stability of fnancial & payment system
Reserve Management Policy
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 th 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 31st 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/fx 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 fnancing of rice, wheat,
sugar, edible oil (crude and refned), chickpeas, beans, lentils, onions,
spices , dates and powder milk has been temporarily fxed 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 interest1.5% 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 Policy

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.Revaluationreserves 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 Policy

In order to strengthen credit discipline and bring classifcation and

provisioning regulation in line with international standard, Bangladesh Bank
issued a master circular on loan classifcation 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 such type of loans like continuous loans, demand loan, term loan,
fxed term loan and others short term loan.
Operations:
The operations of Bangladesh Bank are as follows:
Money Market Control
Bangladesh Bank acts as the guardian of countrys money market 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.
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
economical transactions.
Foreign Financial Transaction
On behalf of the Bangladesh government Bangladesh Bank accomplish all
sorts of foreign fnancial 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 fnancial transaction with abroad
on behalf the Bangladesh government.
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
economical issues such as-import and export policies, investment policies
etc. Bangladesh Bank acts as the fnancial 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 fnancial policy without the help of
Bangladesh Bank it is much more complicated for the Bangladesh
government to implement fnancial 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.
Enlistment of Commercial Bank
Through enlistment commercial banks take various privileges of Bangladesh
Bank; there is need of permission of Bangladesh Bank for establishing
conducting &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
profling 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 fnancial 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.