Chapter-1

1
Introduction

1.1 Origin of the Report

As a part of the EM-528 course Banking Management of our MBA (Evening) program, we were
instructed to analyze a Corporate Governance in Banking & submit a report on its overall
activities on the basis of Bangladesh perspective. Our effort was to understand Corporate
banking system in bank managerial activities so that we can relate this learnings with practical
life in future.

1.2 Background of the Study

Recent financial scams and increasing default loan size have brought the banking sector of
Bangladesh under criticism. Banking sector portraits the whole economy of a country.
Undoubtedly, the industry is increasing day-by-day with new banks and their branches. Deposits
and credits of these banks are also increasing which have contributed to the economic
development of the country. Unfortunately, the health check fails to conceal the problems
suffered by the sector from time to time. The current situation of large financial frauds and high
non-performing loans (NPL) of banks call for a close scrutiny of this sector and necessitates
taking required measures Corporate governance can be defined as a combination of fairness,
precision, accountability and sustainability of corporate behavior. Good Corporate governance is
a key factor to achieve the improved performance of an organization. It is fundamental element
to safeguard interest of shareholders. For continuous and sustainable growth of an organization,
there is no alternative to effective Corporate Governance. The positive effect of corporate
governance on different stakeholders ultimately is a strengthened economy, and hence good
corporate governance is a tool for socio-economic development. This report on Corporate
Governance Practices in Banking sector in Bangladesh

1.3 Purposes of the Report

This report is made for the completion of EM: 528 Bank Management course as a part of our
MBA (Evening) program. The purpose of the report is to gather knowledge & experience of a
2
practical example of green banking. This report is a foundation for us to learn about green
banking.

1.4 Problem Statement

The present study was designed to identify Corporate banking practices in Bangladesh.

1.5 Objectives of the report

To see the Corporate Governance guidelines of Bangladesh. To see the risk-return features of
security stocks and their relationship with Corporate Governance practices. To see the Corporate
Governance practices of other countries.

1.6 Methodology of the Study

Methodology defines how we go through all the processes of report and how we proceed on.
Here include the steps of conducting report and the explanation of the sources of data. This
report is mainly descriptive in nature. We have used secondary source for collecting information
and completing the report.
Secondary Sources
Method of collecting Secondary Data:
Company Web site
Internet
Journals
Articles
Bangladesh Bank

1.7 Scope of the study

The scope of the term paper is restricted to the Corporate Governance in banking sector. We have
tried to provide a view of its overall condition of green banking focusing more on Bangladesh
perspective.
3
1.8 Limitations of the study

The limitations, in preparing this report are given below:

Corporate Governance Practices of MBL. We had no previous experience to direct a

survey program thats why this report might not bring the same result what the authority
expects.
There was a limited scope for me to deal with the banking activities directly.
Within the short period of time, it is not possible for us to study ever thing about the
Mercantile Bank Limited.

4
Chapter-2

5
2.0 Corporate Governance & Corporate Governance in Banking
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting
the way a corporation is directed, administered or controlled. Corporate governance also includes
the relationships among the many stakeholders involved and the goals for which the corporation
is governed. The principal stakeholders are the shareholders, board of directors, management
committee, executive committee and other stakeholders including labor or employees,
customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at
large. For non-profit organizations or other membership organizations the shareholders means
the members. Corporate governance is a multifaceted subject. An important theme of corporate
governance is to ensure the accountability of certain individuals in an organization through
mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate
thread of discussions focuses on the impact of a corporate governance system in economic
efficiency, with a strong emphasis on shareholders welfare. There has been renewed interest in
the corporate governance practices of modern corporations since 2001, particularly due to the
high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc.
(formerly WorldCom). Sarbanes-Oxley Act was passed by US federal government in 2002
aiming to restore public confidence in corporate governance. According to Gabrielle ODonovan,
corporate governance is an internal system encompassing policies, processes and people, which
serve the needs of shareholders and other stakeholders, by directing and controlling management
activities with good business savvy, objectivity, accountability and integrity. Sound corporate
governance is dependent on external marketplace commitment and legislation, along with a
healthy board culture which safeguards policies and processes. ODonovan also stated that the
perceived quality of a companys corporate governance can influence its share price as well as
the cost of raising capital. Quality is determined by the financial markets, legislation and other
external market forces in addition how policies and procedures are executed and how people are
directed. External forces are outside the circle of control by any board. Internal environment
offers a company the opportunity to differentiate from competitors through their board culture.
Many debates have been cantered on legislative policy of corporate governance, to deter
fraudulent activities and transparency policy which misleads executives to treat the symptoms
and not the cause. It is a system of structuring, operating and controlling a company with a view
to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and
6
suppliers, and complying with the legal and regulatory requirements, apart from meeting
environmental and local community needs. Report of SEBI committee (India) on Corporate
Governance defines corporate governance as the acceptance by management of the inalienable
rights of shareholders as the true owners of the corporation and of their own role as trustees on
behalf of the shareholders. It is about commitment to values, about ethical business conduct and
about making a distinction between personal and corporate funds in the management of a
company. The definition is drawn from the Gandhian principle of trusteeship and the Directive
Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral
duty. Deposits are blood of a bank which are customers money that are financed by the banks as
investments. If the investments become faulty then it will be the depositors money that the
banks would lose. Such risks demand priority in protection of depositors that ushers in a broader
view of corporate governance that suggests the interest and benefits of the suppliers of funds for
a firm should be upheld (Shliefer and Vishny, 1997). Macey and OHara (2001) also argue that a
broader view of corporate governance should be adopted in the case of banking institutions,
arguing that because of the peculiar contractual form of banking, corporate governance
mechanisms for banks should encapsulate depositors as well as shareholders. Arun and Turner
(2003) supported the need for the broader approach to corporate governance for banking
institutions and also argue for government intervention to restrain the behaviour of bank
management. In many countries, deposit insurance is used as a mechanism to safeguard the
banking system as well as the depositors. However, Macey and OHara (2001) argues that in
many instances, the presence of deposit insurance mechanism by the governments may
encourage many bank insiders to embark upon self-benefiting risky deals taking the advantage of
insurance protection. The self-dealing activities by the bank insiders are very dangerous to the
performance and survival of the banks as scores of previous bank failures have been caused by
risky self-dealing by the bank insiders. The presence of heavy liquid assets and potential lack of
depositors interest to actively control and monitor banks risky decisions as a result of the
insurance guarantees simplifies and aggravates the sharking in the banking firms. Banks in
developing countries are faced with high risk of sharking as a result of heavy government
ownership, lack of prudential regulation, weak legal protection and presence of special interest
groups (Arun and Turner, 2003). The independent regulatory agencies are important in
developing countries to act against the frequent collusion among government, businesses and

7
bankers to serve special interest groups (Shleifer and Vishny, 1997; Arun and Turner, 2003).
However, there is an argument that active role by regulators may cause problems as well, as
regulators may not have a convincing/sufficient motivation to monitor the banks as they do not
have much at stake in case of bank failures. Recently, the financial markets of developing
economies have experienced rapid changes due to the growth of wider range of financial
products. As a result of this, banks have been involved with high risk activities such as trading in
financial markets and different off-balance sheet activities more than ever before (Greuning and
Bratanovic, 2003), which necessitates an added emphasis on quality of corporate governance of
banks in developing economies.

Asian Round Table on Corporate Governance (ARCG) Task force developed the Policy Brief on
Corporate Governance of Banks in Asia (June 2006). The main issues and priorities for reforms
in Corporate Governance of banks in Asia that were identified are:

The responsibility of individual board members fiduciary duties of bank board

members, need of skills, personal abilities, training programs on integrity and
professionalism.
The roles/functions of the board guiding, approving and overseeing strategies/policies
rather than being immersed in day-to-day operations. Creating clear accountability lines
and internal control systems. Sufficient flows of information and managerial support.
The composition of the board banks are more encouraged to have independent
directors than other firms. Separation between Chairman and CEO.
The committees of the board audit committee, the Risk Management Committee, The
Governance Committee with combined responsibilities of Nomination, remuneration,
succession planning, training, performance evaluation, etc.
Preventing abusive related party transactions inspection of the existing firewall.
Creation of specialized committee to monitor and approve related part transaction.
Publicly disclose such transaction.
Bank holding companies and groups of companies holding banks a banks parent
company should not impede the full exercise of the Corporate Governance of the bank
within the banking group.
Disclosure effort on meeting into international standards on accounting, etc. should be
encouraged.
Banks autonomy in relation to the state state as owner should respect the legal
corporate structures of State Owned Commercial Banks (SOCB).
8
Banks monitoring of the Corporate Governance structure of its corporate borrowers Extent to
which banks should assess/monitor Corporate Governance of their corporate borrowers or seek
to improve it. Corporate governance practices in Bangladesh are quite absent in most companies
and organizations. In fact, Bangladesh has lagged behind its neighbors and the global economy
in corporate governance. One reason for this absence of Corporate Governance is that most
companies are family oriented. Moreover, motivation to disclose information and improve
governance practices by companies is felt negatively. There is neither any value judgment nor
any consequences for corporate governance practices. The current system in Bangladesh does not
provide sufficient legal, institutional and economic motivation for stakeholders to encourage and
enforce corporate governance practices; hence failure in most of the constituents of corporate
governance is witness in Bangladesh. Poor bankruptcy laws, no push from the international
investor community, limited or no disclosure regarding related party transactions, weak
regulatory system, general meeting scenario, lack of shareholder active participations are some
of the individual constituents of corporate governance (Ahmad and Yusuf, 2005). Bangladesh
bank is very much concerned regarding the banking sector of Bangladesh. The 5 state owned
banks have more than 2/3 of total classified loans. These banks have 25% of the total deposits
but still they also have 63% of classified loans in their possession. Bangladesh bank said,
inefficient fund management, loan sanction for the political purpose and social and economic
responsible compelled them to fall in this situation. The condition of the banking sector is such
that if top three borrowers becomes classified then 24 banks among 41 banks will face the capital
shortage. Again, if the top 10 borrowers of each bank become classified then capital adequacy
will lower to 3.5% though the condition to have capital minimum 10%. According to central
bank loan classification and provisioning report, state owned commercial banks such as Sonali,
Janata, Agrani, Specialized Krishi Bank and Rajshahi Krishi Unnayan Bank have the higher
classified loans. The situation is worst for the rest for banks except Krishi Bank reported till
June-2013. The report has also disclosed that in 2012 the bank made BDT 0.60 profits against
every BDT 100 assets. In 2011, it was BDT 1.30. In 2011 the capital adequacy ratio was 11.30%
against risky asset but lowered in 2012 to 10.46%. The report from Bangladesh Bank disclosed
that the banking sector has BDT 42725 crore of classified loan till December-2012. Among them
three state owned banks and two specialized banks have BDT 26800 crore which consist 62.70%
of total classified loan. It increases in 2013 till June to BDT 52309 crore. That means 63% of

9
classified loan is possessed by the five banks 67% of this classified loan is bad loan which means
less chance to be recovered. The other 42 banks consist 37.3% of classified loan. From the last 5
years the banking sector has been deteriorating but the last 2 years was critical time for the
banking sector. The state is the owner of these banks and this is the benefit for them. The
government is trying to secure the banks by providing capital from tax from the general people.
These banks have 25% of total deposits. State owned basic bank disbursed more than 3500 crore
taka fraud loan from malpractice. Without this, the bank associated with the fraud of Hallmark,
Bismillah and other big scandal which make them more critical condition. But risk management
and corporate governance provided by Bangladesh bank can help them to improve their
condition.

10
Chapter-3

11
3.1 Analysis and Discussion of Corporate Governance Disclosure and Impact on
Classified Loans
The six banks i.e. Sonali Bank Ltd, Rupali Bank Ltd, Janata Bank Ltd, Basic Bank Ltd, Shahjalal
Islami Bank Ltd and The City Bank Ltd disclosed their Corporate Governance compliance
provided by Bangladesh bank that all the banks must follow. All the credit policies of each bank
must be approved by the board of directors. Top management and chief finance officers
formulate the credit policies and the policies are approved at board meeting. Sometimes banks
failed to communicate their credit policies down the line. In order to make the policies efficient
and effective, all the associated officials must know the policies very well. The Sonali bank and
Rupali bank lagged behind to communicate their credit policy with down the line properly. But
other four banks found sincerely maintain their policy. The credit policy of each bank must
reflect the roles and responsibilities of all related officials such as who make proposal, who
analysis the loan applications, who disburse loans, who supervise and monitor clients and who
recover the loans. From the questionnaire survey, it was found that all the six banks credit policy
show specific roles and responsibilities of the associated people but in the informal discussion it
was observed that the assigned people do not do their duty properly. As a result, the banks
classified loans are increasing day-by-day. The conventional banks follow the Credit Risk
Grading and the Islamic Shariah based banks follow Investment Risk Grading. Relationship
managers search for the loan clients and that is why they may be biased about their clients. To
remove such problem relationship managers should be separated from investment department. In
case of lending, age of the borrower should be considered as well. If the person is more than 60
years the banks try to avoid that person from lending. Collateral is very important for the banks
for recovery purpose in case of default loans. All the banks ask for collateral but Sonali bank and
basic bank failed to investigate mortgaged property properly. The banks have separate teams for
reviewing the amount and type of proposed loan, purpose of the loan, the loan structure (i.e.
tenor, covenants, repayment schedule, and interest rate), security arrangement etc. The City Bank
officials informed that there is no political and management influence on credit department. But
other five banks have some pressure on such issues. Among those five, Sonali and Basic bank
has acute pressure. Officials from all banks informed that the efficiency of audit team is
important in case of detecting fraud and scam. The audit committee must disclose the detected

12
scams to the board of directors to take necessary steps. Sometimes the audit committee has
nothing to do because of political and management pressure. From the discussion, it was found
that conflict of interest exists between the board of director and audit committee. An invisible
clash between them were found in some cases i.e. the audit committee tries to detect shortfalls
but some members of the board want to ignore those shortfalls. Half yearly operating profit of
the most banks fall short in 2013 due to an increase in default loans, sluggish import and political
unrest. Of the 30 banks 20 marked a decline in operating profit, while 10 witnessed a slight rise.
Data of the rest was not available at the time of this study. A Bangladesh bank official said that
political unrest along with countrywide blockade and violence negatively affected banking
business in the first half of the year 2013. The private sector credit growth was 12.7% in April
213, down from 16.6% in December 2012, according to Bangladesh Bank data. According to
Bangladesh Bank statistics, classified loans were 11.9% compared to the total outstanding in
March 2013, which was 10.03% last year. Another reason behind lower profit was the fall of
interest rate on credit as the liquidity in the banks gone up. On the other hand, the banks interest
rate on deposit could not be lowered much which also brought down their profit.

From the figure below, it can be found that the classified loan amount of Sonali Bank Ltd. In
2010 was BDT 68,314.83 million which was 23.88% of total investment. In the following year
the amount went down but still it was higher at 17.80% comparing to other banks. But in the year
2012, the amount of classified loan was increased at an alarming rate, 33.31% of its total
investment. Every 100 tk of its investment, there was 33.31 taka of classified loan! That means
deposit collected from the general people was in under high risk.

2012 2011 2010

33.31
Million Taka

17.80 23.88
125,975.30

68,314.85
61,588.17

Sonali Ba nk Ltd. Year

Figure 1: Classified loans and advances of Sonali Bank Ltd in year 2010, 2011 & 2012

13
Janata Bank succeeded to keep consistency in its classified loan ratio for the year 2010 and 2011
but the rate went up like a bullet and became 17.16% in 2012 which also pushed the peoples
deposit under risk.

17.16 2012 2011 2010

52,405.89

5.60
5.30

11,192
14,343
Ja na ta Bank Ltd. Year

Figure 2: Classified loans and advances of Janata Bank Ltd in year 2010, 2011 & 2012

In 2010, Rupali Bank Ltd lost its control over the investment and recovery of the loan. For that
reason, the amount of classified loans became much higher, 11.96% of its total investment. But
in 2011, the percentage of classified loans drastically went down at 5.94 % but in 2012 it again
raised drastically.

24.96 20120 2011 2010

2262.79 11.96
5.94
789.88
454.66

Rupa li Ba nk Ltd. Year

Figure 3: Classified loans and advances of Rupali Bank Ltd in year 2010, 2011 & 2012

Now a day, one of the most controversial banks is the Basic Bank Ltd, but this bank was able to
control its classified loans amount in the year 2010 and 2011 but in 2012 the bank lost its control
over the investment system and as a result the classified loans went up at 8.22% of its total
investment.

14
 8.22
2012 2011 2010

7,065.68 4.38 4.83

2,489.79 2,239.96

Ba sic Ba nk Ltd. Year

Figure 4: Classified loans and advances of Basis Bank Ltd in year 2010, 2011 & 2012

Shahjalal Islami Bank Ltd is one of the Islamic Shariah based banks operating in Bangladesh.
With the blessings of Islamic Shariah the bank succeeded to limit its classified loan not more
than 3.00% in the previous years.

2.96

2012 2011 2010

1.89
2,842.27 1.91
1,522.50 1,173.12

Sha hja la l Isla mi Ba nk Year

Ltd.

Figure 5: Classified loans and advances of Shahjalal Islami Bank Ltd in year 2010, 2011 & 2012

The City Bank Ltd, one of the successful banks in Bangladesh, also faced the problem of rising
classified loans throughout the country. In 2010 and 2011 percentages of classified loan were
only 3.4% and 4.4% respectively but in 2012, it went up to 7.5%.

15
 Figure 6: Classified loans and advances of The City Bank Ltd in year 2010, 2011 & 2012

3.2 Discussions

Borrower Selection Criteria: Some banks are unable to select the right individuals or
organizations for lending. If the selection of borrower becomes faulty then the whole lending
process will fail. The persons or organizations should be selected as the borrowers who are
financially as well as mentally fit for the borrowing. If the banks select the fraud people whose
intentions is not to repay the loan then the bank will face higher classified loans thus their
banking operations be collapsed. So, in case of selection of right borrower, the bank should be
knowledgeable or aware of the information of the borrower that is proper KYC (Know Your
Customer).

Political Influence: Though the officials informed that there is no political influence in the
lending decision making process, there is a suspect of having acute political pressure in this
issue. Politically biased decisions lead the loans towards being default and the banking sector
towards a vulnerable position. The fraud borrowers are very cunning and they make webs for the
people who are associated in lending as well as auditing and reporting process. Politically
exposed persons make pressure on the banking sector for themselves as well as for their small
fry. For example, in Basic Bank evidence were found that the investment department sent
proposal to Head Office as negative but the higher authority made that positive and approved the
loan in favour of the client. Investment department and branch manager assumed that the client
could be detrimental for the bank and made the proposal negative. But due to having link with
high officials and belongingness to a political party, the client became successful to turn the table
16
on him. So, political influence or pressure has an important impact on the banking sector of the
Bangladesh.

Management Influence: Like political influence, banks management has influence on the
lending process. The management influence in the credit decision making process and the
consequences is higher classified and default loans. The higher management such as Chairman,
board of directors, Managing Director, and other high officials have an important command on
the lending process. They sometimes show nepotism to their near and dear ones. Sometimes they
order and instruct the branch managers to prepare lucrative proposal on behalf of their chosen
clients though their loan availing ability is not much lucrative for the bank. Sometimes the
management approve loans at a special rate; even with shortage of documents; and not having
enough collateral as security.

Involvement of Bangladesh Bank Officials: In an informal discussion with some high officials
of different commercial banks as well as with some Bangladesh Bank officials, it has been
revealed that some dishonest officials of Bangladesh Bank are also associated in the forgery.
Corrupted and dishonest officials take bribe and help to conceal sensitive information of client
by not properly analysis the data given by different commercial banks. Sometimes they
intentionally overlook fault done by commercial banks during auditing.

Unaware of Bangladesh Bank Circulars: Bangladesh Bank provides circular to the

commercial banks time to time for their smooth operation and own safety and security. All
commercial banks must have to follow those circulars. It was found that sometimes officials are
unaware of those circulars. This may lead the bank towards operational as well as reputational
risks.

Incomplete Sanction Advice: Sometimes the credit department sends proposal with incomplete
information of the borrower to the Head Office and based on that HO also issue incomplete
sanction advice in favour of the client.

Obligation of Margin in FEX: In foreign exchange, there is an obligation of having minimum

10% margin of the total Letter of Credit (LC) amount. If the client is unknown to the bank then
cash margin should be 100%. But the client makes arrangement with the branch officials and
keeps the margin to 5% or sometimes they do not keep the cash margin at all. This is a complete

17
violation of corporate governance of the bank. In case of LC, banks deal with papers not goods.
When the documents of LC come to the bank, it must pay the LC amount to the exporter on
account of the client/importer. If the client does not repay the amount which was paid to the
exporter, the bank then sells the mortgaged property. If the collateral is not enough to secure the
loan, the bank cannot be able to recover the full amount which was invested.

Providing Extra Benefits to the Client: Another bad practice was found in the branches is
providing extra benefit to the clients. Here the meaning of extra benefit can be defined in
different ways. For example, a clients collateral may not enough to get certain amount of loan
but getting more than that. In case of foreign exchange, a minimum cash margin is a must but the
clients are given extra facility that they do not need to deposit cash prior to the FX transactions.
Due to having good relationship with bank officials, sometimes clients ask for deferral of
submitting required documents for conducting a specific transaction which is also availing extra
benefit. The problem arises when some crucial documents may miss which were mandatory for
that transaction. When the fraud was committed, the banks remain unable to show proper
documents. A Bangladesh Bank official informed that the classified loan of a certain branch of
Prime Bank Ltd was only 2% to 3% last year, but for providing extra benefit to the client the
classified loan reached to 82% to 83% when that client collapsed.

Wrong Information Provided by Head Office: Bangladesh Bank is the central bank and
guardian of all commercial banks in Bangladesh. So, the commercial banks have to submit
different information to Bangladesh Bank through different statements. Based on that
information provided by different banks, the central bank takes different decisions and makes
policy. Branch offices of each bank provide statements to their respective Head Office. Those
statements are finally submitted to Bangladesh Bank. Sometimes branches or even Head Offices
temper the actual information. A Bangladesh Bank official informed that when he was doing
audit in a branch of Prime Bank, he found a clients loan was classified by the branch office but
not by the HO. Such practice is unethical and violation of the rules and regulations of the
corporate governance of the bank.

Insufficient Personal Guarantee: Personal guarantee is a popular term in the banking sector.
For taking loan from banks guarantee is a must whether it is personal guarantee or collateral. If
the loan amount is lower, then the personal guarantee can be taken as the mode of security. But if
18
the amount is higher, then personal guarantee is insufficient and further collateral required. In
case of recovery of default loans, personal guarantee is becoming risky.

Lack of Proper Information about Importer and Exporter: Hallmark and Bismillah Group
financial scam took place because the bank had not enough and proper information about the
importer and exporter. In case of Hallmark, the arrangement of LC was arranged among the
different wings of the Hallmark itself. They did not transfer or produce the goods but they
submitted the papers to the bank for the payment and the bank made payment of the LC without
verification. The Bismillah Group opened its wing in abroad and made the same type of fraud
with the bank. So, it is necessary for the banks to have complete and proper information
regarding the importer as well as the exporter before doing any type of dealings with them.

Investment in Risky Project: The branches have business target to fill up every year and now-
a- days the competition has increased so much. To survive in the competitive market, banks try
to find out different projects where they can invest and get a healthy return. Where there is good
return there is also high risk. Investing in high risk projects could make the banks profitable as
well as looser sometimes. Another bad practice of competition is hunting of clients at any cost.
This practice makes the banks to find clients desperately. For example, a person is capable of
getting loan from a bank of amount of taka 50.00 lac as his collateral valuation can support that
amount maximum but another bank could have snatched away that client by offering him more
amount. This is very risky and bad practice by the banks. If that client collapses or makes any
fraud with the bank, then the bank will be unable to recover its money by selling that collateral.

Monitoring and Supervising Borrower: A banks main earnings come from loans and
advances. So, the selection of clients should be done more cautiously by the bank. If the clients
businesses are profitable then they can repay the loan amount to the bank and the bank can also
make profit. So, it is the responsibility of the bank not only to disburse loan to the clients but also
to monitor and supervise how they use the amount and doing their business. This will also
prevent fund diversion.

Fund Diversion: Fund diversion is one of the major problems in Bangladeshi banking sector
which becomes more crucial now-a-days. The main differences between Islamic and
conventional banking system is the mode of disbursement of money. Conventional banks
disburse the money directly to the clients account and the clients can do anything with the money
19
they want. They took loan from bank for doing business but if they spend money in any
unproductive sector such as invest in share market, buy cars, purchase land, and spend without
any goal then the fund becomes diverted. Fund diversion makes the clients unable to make
enough return to repay the loan thus the loan fall ultimately. So, strong monitoring and
supervision is a must to prevent fund diversion. On the other hand, Islamic banks buy goods for
the clients rather disburse money to the clients directly. So, a little chance of fund diversion
exists here. But monitoring and supervising is also needed there.

Corrupted Bank Officials: Corrupted bankers are quite responsible for the financial fraud or
scams. They make linkage with the clients and associated with these fraudulent activities. As
they know the banking rules and regulations very well and they find the way to do fraud by
showing their thumbs to the bank.

Fake Mortgage: Mortgaged property which is used to secure the loan in case of default should
be evaluated properly. Sometimes the clients make arrangements of the fake property by making
linkage with land officials, legal advisor of the banks and sometimes with the bank officials.
Audit team is also responsible because they sometimes overlook such activities intentionally or
unintentionally. Hallmark made this type of fraud with Sonali Bank. They mortgaged land as
collateral but the land does not exist or the owner is not the Hallmark Group.

Lack of Proper Documentation: Proper documentation is a pre-requisite of every transaction

with the clients. If there is any shortage in documentation then the problem might raise during
the time of recovery. If the bank becomes unable to show proper documents then it will not get
any legal protection while recovering default loans. One instance can be shown that Basic Bank
provided loan against fixed deposit which is 100% secured but in the meantime the client
withdrawn the fixed deposit from the bank without settling the loan.

Insufficient Audit: Proper auditing is the main tool that can eradicate all the fraud and scams
from the banks. But the audit process cannot be made properly for various reasons. People who
are auditing may remain under management pressure or they may be corrupted as well. In some
banks, only one audit takes place in a year whereas minimum two audits are mandatory as per
rules.

20
Chapter-4

21
Corporate Governance In MBL
Corporate Governance is the process of practicing accuracy, accountability, smart stewardship,
effective internal control, customary corporate behavior in an organization. It is the means, by
which an organization is operated and controlled. It protects the interests of all stakeholders of an
organization. Good Corporate Governance should be ensured in the banks, as they deal with
huge public money and interests of the depositors. Fairness, Transparency, Accountability and
Responsibility are the minimum standard of acceptable corporate behavior today. At MBL, the
Board is committed to maintaining high standards of corporate governance with a view to
enhancing stakeholder value, increasing investor confidence, establishing customer trust and
building a competitive organization to pursue the Banks corporate vision to be a financial
services leader in the country. The Boards fundamental approach in this regard is to ensure that
the right executive leadership, strategy and internal controls for risk management are well in
place. Additionally, the Board is committed to achieving the highest standards of business
integrity, ethics and professionalism across all of the Banks activities. A key objective of our
governance framework is to ensure compliance with applicable legal and regulatory
requirements and with best governance practice as set out in the concerned Securities and
Exchange Commissions Notification. MBL also examines developments in corporate
governance standards of leading and reputable organizations and institutions in the region and
around the world to ensure that its approach in Bangladesh and in countries the Bank has
presence is in line with the latest international best practices.

The Board continuously reviews its governance model to ensure its relevance and ability to meet
the challenges of the future.

Mercantile Bank Limited was established in June 2, 1999 as a private commercial bank and
started its operation. The then Prime Minister Sheikh Hasina inaugurated the bank. The
renowned 30 industrialists establish this bank with everybodys consent. Mr. Abdul Jalil elected
as the chairman. Mercantile Bank Limited is a private commercial bank with Head Office at 61,
Dilkusha C/A, Dhaka, Bangladesh started operation on 2nd June 1999. The Bank has 93
branches spread all over the country and introducing some branches. With assets of TK.
155143.746 million, the bank has diversified activities that cover all the areas of
corporate/commercial, retail/personal, SME banking business and international trade.

22
Mercantile Bank is playing an important role while giving loan for the small and medium
enterprises. In the terms of credit mercantile bank has introduced new schemes mostly for the
business people in Bangladesh. Different categories of loan been provided to the businessman.
Total loans and advances of the Bank stood at BDT 93,610.87 million as on December 31, 2012
its main investing projects are business, garments, micro credit, construction and others.
Consumer Credit Scheme: Mercantile Bank has been providing loan to medium and low-income
peoples. This policy has gained a great popularity among consumers.

MBL is working with the slogan of "efficiency is our strength" and their logo contains a dialogue
Banglar Bank.

4.1 Core Values of MBL:

For the Customers: Providing with caring services by being innovative in the development of
new banking products and services

For the Shareholders: Increase shareholders' value

For the Employees: Respecting worth and dignity of individual employees devoting their
energies for the progress of the bank

For the Community: Strengthening the corporate values and taking environment and social
risks and reward into account.

4.2 Organizational Structure of MBL:

The organization structure and corporate of Mercantile Bank Limited (MBL) strongly reflect its
determination to establish, uphold and gain a stronger footing as an organization which is
customer-oriented and transparent in its management.

23
 Managing Director (MD) and CEO

Additional Managing Director 8 Corporate Governance Practices of MBL

Deputy Managing Director

Senior Executive Vice President (SEVP)

Executive Vice President (EVP)

Senior Vice President (SVP)

Vice President (VP)

First Vice President (FVP)

First Vice President (FVP)

Assistant Vice President (AVP)

First Assistant Vice President (FAVP) 9 Corporate Governance Practices of MBL

Principal Officer

Senior Executive Officer

Executive Officer

Officer

Assistant Officer

4.3 Main Principles:

To ensure Corporate Governance, MBL always sticks to the principles, which cover the
following areas:

Board of Directors, its formation, roles and responsibilities;

Delegation of financial, business and administrative power to the Management;
Accountability and Internal Control;
Transparent and neutral Audit Function;
All-out compliance in Legal Matters;
24
 Effective Communication with the Stakeholders.

The state and nature of corporate governance in Bangladesh are guided by several factors: a)
company law, b) government regulations, c) Bangladesh Securities & Exchange Commission
(BSEC) requirements and d) pressure from buyers. The cumulative impact of these factors
results in a corporate behavior which is followed in Bangladesh. Bangladesh Securities and
Exchange Commission (BSEC) vides its notification no. BSEC/CMMRRCD/2006-
158/Admin/02-08 dated 20 February 2006 has issued guidance for corporate governance
practice. The guidelines include areas like board size, independent directors, chairman and chief
executive officer, internal control and audit function of company secretary, audit committee and
appointment of external auditor.

4.4 The Board of Directors:

Composition of the Board: MBLs Board of Directors currently comprises 22 (twenty-two)

members, including the Managing Director & CEO. It is well-structured with a Chairman and
Vice Chairmen. Alhaj Akram Hussain (Humayun) is the Chairman, while A. S. M. Feroz Alam
are the Vice Chairmen of the Board.

The Board is committed to ensure diversity and inclusiveness in its deliberations. The Directors
bring to the Board a wealth of knowledge, experience and skills in the key areas of accountancy,
law, international business operations and development, finance and risk management, amongst
others.

Appointment of Board Members and their Remuneration: There is a formal and transparent
procedure for the appointment of Directors to the Board. The members of the Board are
appointed each year in the Annual General29 Corporate Governance Practices of MBL

Meeting (AGM) by the Shareholders of the Bank. The members of the Board are appointed in
compliance with Central Banks Guidelines and other applicable rules of the country. As per
Bangladesh Banks Guidelines, the Board of Directors is paid remuneration as they compensate
their valuable time and efforts.

25
Board Meetings and Agenda: Board meetings are normally held to discuss and decide on major
corporate, strategic and operational issues, as well as to evaluate major investment opportunities.
The consent of the Board is normally given by majority votes at Board meetings. The agenda and
materials for each Board meeting are provided to the Directors well in advance of the Board
meeting for their convenience to take preparation on the agenda. They are provided substantial
input and comments on agenda items. The Board Agenda is prepared by the Company Secretary
as per directives of the Chairman of the Board. All Board papers are organized and circulated by
the Company Secretary of the Bank. In 2011, 20 (twenty) Board Meetings were held wherein;
policies and major business strategic decisions were formulated.

Role and Responsibilities of the Board of Directors: MBLs Board of Directors, the prime
policy making Body always remains concerned to protect the interests of all Stakeholders,
including the Depositors. The Board has the responsibility to periodically review and approve the
overall strategies, business, organization, and significant policies of the Bank. The Board also
sets the Banks core values and adopts proper standards to ensure that the Bank operates with
integrity and complies with the relevant rules and regulations.

Key Responsibilities of the Board of Directors:

The Board has a formal schedule of matters reserved for its decision which include, amongst
others, the following:

Determine the objectives and goals of the Bank; formulate strategies and work plans to
achieve the goals;
Determine the Key Performance Indicators for the Managing Director & CEO and other
Executives in formulating annual plan of the Bank and apprise the performance indicators
time to time;
Approve policies, strategies and action plans for recovery of loans, rescheduling, interest
rebates and write off abiding by existing laws and regulations;
Formulate policy for risk management and scrutinize the implementation status of the
policy;
Review the report presented by the Audit Committee, regarding the implementation status
of recommendation made by the Bangladesh Banks inspection team, internal auditors
and the external auditors;
26
 Formulate and approve policy regarding appointment, promotion, transfer, Code of
Conduct, human resources development and job rules;
Concentrate on sufficient training facilities for improving the efficiency of the
employees, ensure that information systems and technology are sufficient to operate
banking activities effectively and maintain competitiveness;
Approve the Budget and Financial Statements of the Bank; review the achievement of
Budget and modify the Budget as per varying economic and business environment;
Review the income-expense, liquidity management, past due claims, capital base and its
adequacy, maintenance of provisions, and initiatives of loan recovery including legal
actions;
Formulate and approve purchase policy; Capital Plan of the Bank;
Ensure that the Bank complies with all relevant laws and regulations, including Central
Banks Guidelines, Dhaka and Chittagong Exchanges Listing Regulations and Securities
& Exchange Commissions Notifications;
Approve the minutes of Executive Committee, which is formed to resolve on regular
business and also approve the minutes and findings of Audit Committee, which is formed
in order to ensure compliance at Head Office and Branch level in every aspect so that
Stakeholders right is protected to the extent of highest degree;
Ensure the Codes of Corporate Governance, codes of best business practice, emphasizing
importance on effective operating infrastructures and system of control;
Ensure financial transparency, integrity of accounting and sustainable corporate behavior
is in right place;
Appoint External Auditors, Consultants, and other Advisors, after having approval in the
AGM of the Shareholders;
Encourage and ensure the Banks active participation in Corporate Social Responsibility
activities

4.5 Role and Responsibilities of the Chairman of the Board and the Managing
Director & CEO:

In line with the best practices and to ensure appropriate supervision of the Management, the roles
and responsibilities of the Chairman and the CEO are separated with clear division of
responsibilities, defined and documented as approved by the Board

27
Chairman:

The Chairman leads the Board and is also responsible for the effective performance of the Board.
The Chairman continuously works together with the rest of the Board members in setting the
policy framework and strategies to align the business activities driven by the senior management
with the Banks objectives and aspirations and monitors its implementation. The Chairman
ensures orderly conduct and proceedings of the Board, where healthy debate on issues being
deliberated is encouraged. The Chairman takes the lead to ensure the appropriateness and
effectiveness of the succession-planning program for the Board and senior management levels.
He also promotes a healthy working relationship with the CEO and provides the necessary
support and advice as appropriate. He continues to demonstrate the highest standards of
corporate governance practices and ensures that these practices are regularly communicated to
the stakeholders.

Managing Director & CEO:

Managing Director & CEO is primarily accountable for overseeing the day-to-day operations to
ensure smooth and effective operation of the Bank. Furthermore, he is responsible for mapping
the medium to longer term plans for Board approval, and is accountable for implementing the
policies and decisions of the Board, as well as coordinating the development and implementation
of business and corporate strategies. The CEO ensures that the financial management practice is
performed at the highest level of integrity and transparency for the benefit of the shareholders.
The CEO, by virtue of his position as a Board member, also functions as the intermediary
between the Board and the management.

4.6 Role of the Company Secretary:

The Company Secretary of the Bank provides assistance to the Board of Directors and the
Management. He is responsible for advising the Board audit members on issues relating to
compliance with the relevant laws, rules, procedures and regulations, as well as best practices of
governance. The Company Secretary keeps the records of the Banks compliance non

28
compliance status of the conditions imposed by Bangladesh Securities and Exchange
Commission (BSEC) which has been shown in the Compliance Report on BSEC Notification.

4.7 Board Committees:

As per Bangladesh Banks guidelines, all banks have to form an Executive Committee and an
Audit Committee of the Board to take decisions on urgent matters of the banks. Without
Executive Committee and Audit Committee, Banks cannot form any other Committee or Sub
Committee of the Board. MBLs Board of Directors has formed 2 (two) Committees i) Executive
Committee and ii) Audit Committee, complying with Central Banks guidelines. The Board
delegates some of its governance responsibilities to the following Board Committees, which
operate within clearly defined terms of references, primarily to assist the Board in the execution
of its duties and responsibilities. Although the Board has granted such discretionary authority to
these Board Committees to deliberate and decide on certain operational matters, the ultimate
responsibility for final decision on all matters lies with the entire Board.

4.8 Executive Committee:

The Role of Executive Committee:

Executive Committee (EC) considers, approves business and operational proposals. EC decides
upon all routine and day-to-day operational functioning of the Bank beyond delegated power of
the Management. In the year 2012, forty meetings of Executive Committee were held to consider
the proposals placed by the Management. Among others, Executive Committee according to its

Charter discharges the following duties:

Decides upon all routine and day-to-day operational functioning of the Bank beyond the
power delegated to the Management;
Ensures implementation of policies, as per approval from the Board of Directors;
Reviews the policies and guidelines issued by the Central Bank regarding credit, foreign
exchange, treasury and other operations of the Bank;
Approves the credit proposals as per the approved policy of the Board of Directors.

29
4.9 Audit Committee:
The Role of Audit Committee:

The Audit Committee of the Board plays significant role to ensure implementation of policies,
guidelines etc. provided by Bangladesh Bank, other regulatory bodies and the Board of Directors
of the Bank. The committee also reviews the policies, audit plan and its execution, financial
statements, audit reports, internal control and compliance report etc. In the year 2012, eleven
meetings of Audit Committee were held. The Audit Committee of the Board plays significant
role in proper functioning of the Bank, some of which are as follows:

Reviews the implementation status of guidelines, provided by Bangladesh Bank and other
regulatory bodies;
Reviews Banks own policies and procedures; such as Credit Policy, Foreign Exchange
Policy, Human Resources Policy etc.;
Reviews the Banks audited and un-audited Financial Statements, discusses and
exchanges views with the External Auditors and Tax consultants on the adequacy of
disclosures of Financial Statements;
Reviews the corrective measures taken by the Banks Management as recommended by
the Board Audit Division, Internal Control and Compliance Division, Bangladesh Banks
Inspection Team and External Auditors relating to deficiencies in internal control or other
similar issues;
Reviews whether Internal Control strategies recommended by the Board of Directors
have been implemented by the Management;
Reviews the Human Resource management and evaluates whether the Management is
setting the appropriate compliance culture by communicating the importance on Internal
Control;
Reviews the audit plan of Banks internal audit and inspection;
Reviews the internal audit report of Head Office and Branches.

Salient Features of the Audit Committee Charter

MBLs Board of Directors has set some salient features for its Audit Committee Charter,
such as: The Audit Committee should be composed of at least 3 (three) members from the
Board;

30
 The Chairman of the Audit Committee should have professional knowledge and relevant
financial expertise;
The Chairman of the Board of Directors shall not be a member of the Audit Committee;
Audit Committee meetings must be held quarterly to monitor internal and external audits;
Audit Committee must prepare reports on all meetings for the Board of Directors and
report annually to Shareholders;
The Managing Director & CEO or the Chairman of the Board may be invited to attend on
the Audit Committee meetings as and when required.

4.10 Management Committees:

MBL has formed a number of committees with a view to support the management in carrying out
banking operation smoothly. Management Committee (MANCOM), Asset Liability Committee
(ALCO), Basel II Implementation Unit, Risk Management Committee, ICAAP Preparation
Committee, Management Reporting System (MRS) Committee, Investment Committee, Credit
Assessment Committee, Purchase Committee have been supporting the Banks management in
discharging its duties efficiently and effectively.

As per directives of Bangladesh Bank and for setting a strong internal control framework, each
bank must have an effective Management Committee (MANCOM), which is responsible for
overall management of the Bank. MANCOM is considered the highest decision and policy
making authority of the Bank

Responsibilities of MANCOM:

MANCOM of the Bank is primarily responsible to:

Formulate procedures to identify, measure, monitor and control all risks;

Assign clear responsibility, authority and reporting relationship;
Monitor adequacy and effectiveness of the internal control system;
Review overall effectiveness of the control system of the Bank;
Recommend/ rectify alternatives in case of any deviation from desired goal.

31
4.11 Asset Liability Committee:
Asset Liability Committee (ALCO) is mainly accountable for managing the market risks. The
results of Balance Sheet analysis along with recommendations are placed before ALCO meeting
to aid the decision-making process of the Senior Management. In each ALCO meeting following
issues are addressed:

Review of actions taken in previous ALCO;

Review of the assets and liabilities pricings;
Review of interest rate structure in different economic scenarios;
Liquidity risk related to the Balance Sheet;
Economic and market scenario

4.12 Supervisory Review Process:

Under Pillar-2 of Basel-II (Supervisory Review Process), all banks are required to design their
own Supervisory Review Process to ensure maintenance of adequate capital to fully cover all
risk exposures. As per Guidelines on Supervisory Review Evaluation Process, the level of
Capital Adequacy will be determined after evaluation and dialogue between Bangladesh Bank
and the SRP Team.

Functions of The SRP Team:

BBs SREP Team will arrange dialogue to evaluate Minimum Capital Requirements (MCR)
against Credit, Market and Operational risks; Risks not fully covered under MCR (e.g. Residual
Risks deriving from risk mitigation techniques, securitization risk, and model risk); Risks which
to be covered under SRP (Credit concentration risk, Country risk, Interest rate risk in the banking
book, Liquidity risk, Settlement risk, Reputation risk, Strategic risk, Other material risks, etc.);
Risks deriving from external factors (such as, change in economic and regulatory environment);
Adequate capital against comprehensive risks of the Bank. SRP Team of the Bank will attend on
the dialogue arranged by BBs SREP Team. BBs SREP Team will also evaluate the Banks SRP
findings. In the SRP findings capital allocation against each category of risks is to be disclosed.
SRP Team of the Bank will discuss and allocate capital against above-mentioned Risks. SRP
Team of the Bank will also describe the assessment procedures for these risks and rationale for
selecting any particular method and discuss the assessment techniques used (model based,
scenario analyses, and stress testing) and quantitative results of each risk. SRP Team will discuss
32
and explain present challenges faced by the Bank to improve the risk management framework
and will develop action plans with suitable timeline to adopt/develop the sophisticated advanced
techniques or assessment and measurement of all material risks.

4.13 BASEL II Implementation Unit:

Bangladesh Bank has implemented Basel II Capital Standard in the banking sector solely from
January 2010. MBL has formed a Committee, namely Basel II Implementation Unit. The
Committee acts for successful adoption of Basel II.

Functions of BASEL II Implementation Unit:

In its each meeting, Basel II implementation Unit discusses the implementation progress of Basel
II Capital Accord. Moreover, it

Reviews the Total Risk Weighted Assets (RWA) of the Bank;

Reviews the current total Capital Fund (Core and Supplementary) of the Bank;
Assesses the Capital requirement of the Bank;
Formulate the strategies to raise the capital to cope with Basel II, if required;
Reviews the Capital Adequacy Ratio and compare with the Standard set by Bangladesh
Bank;
Ensures timely submission of Basel II Report to Bangladesh Bank;
Takes initiatives for corporate clients rating of the Bank;
Recommends the Management to raise Capital, if necessary;
Arranges training programs for the Reporting Officers of the Branches so that they can
prepare Basel II report efficiently and precisely.

4.14 ICAAP Preparation Committee:

MBL has formed ICAAP Preparation Committee to prepare the Internal Capital Adequacy
Assessment Process for the Bank. The Committee assesses the overall capital adequacy of the
Bank in relation to risk profile. The Committee clearly bears primary responsibility for ensuring
that MBL has adequate capital to support its risks.

33
4.15 Management Reporting System (MRS) Committee:
MBL has formed a committee as per Central Banks requirement, namely, Committee for
Management Reporting Systems (MRS). MRS fulfills the following objectives:

Collection of information from the internal as well as external sources against any
product of the Bank which is apparently found ineffective or unacceptable to the ultimate
user;
Identify the actual weakness / defects for taking appropriate decision by the Management/
Board of Directors;
Locate the reason of weak performance of any of the branches through collection of
relevant information of other banks of the same locality;
Other internal/external issues may be raised by the Committee to the Management/ Board
of Directors for proper solution.

4.16 Purchase Committee:

A Purchase Committee is functioning with a group of executives headed by a senior most
Executive to examine the procurement procedure of goods, services or works whether it has been
placed on the basis of actual requirement and maintained necessary formalities as per guidelines
44 Corporate Governance Practices of MBL of the purchase policy. Among others, the
followings are the main responsibilities of Purchase Committee of the Bank:

To evaluate the proposal (s) received and find out the effectiveness of each proposal;
To prepare a report on the basis of evaluation of the purchase proposal (s) with
recommendation and send to concerned division for obtaining approval from the
competent authority against procurement of goods, services or works;
To supervise the entire activities against procurement.

4.17 Investment Committee:

With a view to achieve diversification in asset portfolio and generating a healthy revenue (as
income from buy/sale of shares through secondary market), MBL has formed an Investment
Committee, which is primarily responsible to take investment decision in shares. Responsibilities
of Investment Committee are:

34
 The Committee will sit for meeting at least once in a week, or as and when necessary
after having consent from the Chair;
The Committee will take primary decision for investment in shares;
The Committee will ensure compliance of investment policy while maintaining portfolio
of shares;
The Member Secretary will prepare a weekly report on status of investment and report
the same to Managing Director & CEO through Chairman;
The Committee will determine buy range, sale range and loss limit for every share in the
portfolio and Member Secretary will convey the same to the Front Office.

4.18 Accountability & Internal Control:

4.18.1 Accountability:

Accountability is central to the concept of good corporate governance. Accountability mainly

ensures that managements action is reviewed by the Board. MBLs Board of Directors is
accountable to the Shareholders (owners of the Bank). The Management is accountable to the
Board for their activities. MBLs Board of Directors Responsibilities in preparing Financial
Statements MBL Board of Directors ensures that the financial statements of the Bank reflect a 45
Corporate Governance Practices of MBL true and fair view of the state of affairs of the Bank as
at the end of the accounting period and of the profit and loss and cash flow for the period then
ended. In preparing the financial statements, the Directors have applied suitable accounting
policies and applied them consistently and made judgments and estimates that are reasonable and
prudent. The Directors have also ensured that all applicable accounting standards have been
followed and financial statements are prepared on a going concern basis as the Directors have a
reasonable expectation, having made enquiries that the Bank has adequate resources to continue
in operational existence for the foreseeable future.

Accountability in Disclosure of Material Facts:

The Board has a Responsibility and takes it upon itself to present to the shareholders and the
public at large, a clear, balanced and meaningful evaluation of the Banks financial position,
performance and prospects. In order to meet the Fiduciary Responsibility expected of the Board,
the Board with the assistance of the Audit Committee oversees the financial reporting process
35
and the quality of the Banks financial statements to ensure that the reports present a true and fair
view of the Banks performance.

Accountability in Maintaining Confidentiality of Information:

Information of the customers, prospective customers, suppliers, shareholders and employees is

kept confidential. Information is used solely for corporate purposes and never to be discussed
with or divulged to unauthorized people including family, friends and acquaintances. Examples
of confidential information broadly include: (a) customers account or business details, (b)
shareholders holding or transaction details, (c) employees job records, pay perquisites, benefits,
tax issues etc. (d) suppliers price, sales strategy etc. (e) Internal documents like strategy papers,
Product Program Guidelines (PPG) etc.

4.18.2 Internal Controls:

MBLs Board of Directors has established a management structure that clearly defines roles,
responsibilities and reporting lines for Internal Control and Compliance. The Board has overall
responsibility for maintaining sound internal control systems that cover financial controls,
operational compliance controls and risk management to ensure that shareholders investments,
customers interests and the Banks assets are safeguarded. The systems of internal controls are
46 Corporate Governance Practices of MBL

continuously reviewed to ensure that they are working via the ongoing review through internal
audit process. The Audit Committee (AC) reviews audit recommendations and managements
responses to these recommendations. Lending to the members of the Board or Controlling
Shareholders is strictly prohibited by the Bank.

Internal Control on Key Risks Faced by The Bank and Risk Management Policies:

There exists risk in every transaction of a bank. So, Risk Management is important in financial
sector. Bangladesh Bank has identified six Core Risks and provided guidelines to identify and
thereafter minimize the risks. The Board of Directors of the Bank formulated policies for
identifying, measuring and controlling the risks involved with banking activities. The Board

36
makes sure that employees have been assigned responsibilities for managing risks, and proper
training has been provided to enable them to understand, identify and minimize risks as well.

4.19 Audit Function:

In the case of financial audits, a set of financial statements are said to be true and fair when they
are free of material misstatements - a concept influenced by both quantitative (numerical) and
qualitative factors. Traditionally, audits were mainly associated with gaining information about
financial systems and the financial records of a company or a business. However, recent auditing
has begun to include non-financial subject areas, such as safety, security, information systems
performance and environmental concern and compatibility.

Internal Audit Function:

Board Audit Function:

A separate Audit Division, namely, Board Audit Division has been formed within the Bank.
Board Audit Division reviews the compliance status of Policy Guidelines of the Board of
Directors of the Bank and also of the regulators. Board Audit Division visits the Branches and
Other Divisions of the Bank for verification and inspection purpose.47 Corporate Governance
Practices of MBL

Internal Control and Audit Function Compliance:

For an effective control system, a separate and independent Internal Control and Compliance
Division (ICCD) has been established in the Bank. ICCD provides assurance to the Banks
Management that systems are operating effectively; internal controls are effective; laid down
procedures are followed; financial and other information being produced is sound and reliable.
The Bank, by its Internal Audit Team conducts regular audit functions on the business activities
of the Bank based on different manuals, instructions, guidelines and procedures laid down by the
Bank as well as by the regulatory bodies from time to time.

Information Technology (IT) Audit:

37
MBL service delivery is designed on IT platform and hence a number of inherent risks such as
data collapse, data loss, data modification, unauthorized access to data etc. may arise within the
Bank. IT Audit Team has been formed as per the Central Banks Guidelines to identify the
inherent risks and manage those risks in an effective and efficient manner. IT Audit Team follows
the prescribed guidelines, solves the unsettled issues and also suggests the higher Management
for needful action.

External Audit Function:

External Auditors:

Khan Wahab Shafique Rahman & Co., Chartered Accountants and K. M. Hasan & Co. have been
appointed as the External Auditors of the Bank in the 13th AGM of the Shareholders. They
audited the Financial Statements of the Bank namely, Balance Sheet, Profit and Loss Account,
Cash Flow Statement, Statement of Changes in Equity, Statement of Liquidity Analysis and put
explanatory notes to financial statements. External Auditors were entitled to enquire from the
Banks employees such information and explanation as they thought necessary for the
performance of their duties as External Auditors. Bank employees provided accurate, timely
information and explanations as and when required by the External Auditors.

4.20 Central Banks Inspection:

Bangladesh Bank conducts comprehensive inspection at Head Office and Branches of the Bank.
Central Banks Inspection Team exchanges their views with the Banks Auditors regarding
Financial Operation, Treasury Operation, IT Operation, and various process of the audit. 48
Corporate Governance Practices of MBL

Inspection report of the Central Bank is reviewed by the Board of Directors and corrective
actions are taken for the lapses mentioned in the report.

4.21 Compliance with Regulatory Matters:

Compliance with relevant Rules and Regulations:
MBL runs its business activities in full compliance with relevant rules and regulations. While
conducting its operation, the Bank follows strictly Bank Companies Act 1991, The Companies
Act 1994, Central Banks Guidelines, Bangladesh Securities and Exchange Rules 1987, Dhaka
38
Stock Exchange and Chittagong Stock Exchange Listing Rules, Bangladesh Accounting
Standards (BAS), Bangladesh Financial Reporting Systems (BFRS), IAS/IFRS guidelines, SAFA
& CAPA guidelines, BIS and UCPDC and other ICC rules.

4.22 Environmental Promotion:

MBL concentrates on environment preservation by financing Projects in the field of renewable

energy, organic agriculture across the entire value chain including health food shops and
environment technology such as recycling companies and nature conservation projects. MBL
always encourages projects which take care of following points while financing them viz., (a)
sustainable development and use of renewable natural resources (b) protection of human health,
bio-diversity, occupational health and safety, efficient production, delivery and use of energy (c)
pollution prevention and waste minimization.

4.23 Communication with Stakeholders:

Communication with Shareholders:

MBL takes critically its corporate responsibility to provide shareholders with the information
necessary to form an informed opinion of the Banks performance. Press releases, interim and
final results announcements, interim and annual reports, and other information of interest to
shareholders are uploaded to Companys corporate website www. mblbd.com. Half Yearly and
Annual Reports of the Bank are also sent to shareholders within the respective deadlines
stipulated by the regulatory bodies.49 Corporate Governance Practices of MBL

Communication with Employees: To enhance mutual understanding and promote

cooperation at all levels, the Board of Directors and the senior management of the Bank
always maintains communication with the employees; discuss matters such as safety and
the work environment, as well as broader issues relating to staff welfare.
Communication with the General Public: The Banks website www.mblbd.com serve
as a easy access for key information source for business, financials and other relevant
information about the businesses of the Bank. In addition, from time to time, the Bank
publishes reports and information brochures which set out specific aspects of the Banks
operations for the general public.

39
4.24 Compliance Report on SEC Notification:

The Securities and Exchange Commission has issued a notification for all listed companies in
order to improve Corporate Governance in the interest of the investors and capital market on
Comply or Explain basis. Status report on compliance with the conditions imposed by SEC is
given below in prescribed format:

40
41
42
43
44
45
46
4.25 Status of Compliance Bangladesh Bank Guidelines for Corporate Governance:

47
48
Chapter-5

49
5.1 Findings:

Board Members do not have necessary trainings on the updated circular. The Policy on
training of Directors includes providing training and updated information on all the latest
policy guidelines, circulars and Acts issued by the regulatory/legislative authorities.
One third of the members did not attend the meetings regularly. From the report, we can
see that only one board member has attained all the meetings.
The CEO, CFO, Head of Internal Audit does not have any shares in the company.
No implementation of Whistle Blowing policy. The whistle blowing policy of the Bank
aims to promote transparency and serves as a channel of corporate fraud risk
management. The policy enables an employee, who has a legitimate concern on an
existing or potential wrong-doing, to raise the issues and bring the same to the notice of
the competent authority.
No remuneration review Committee.
MBL does not have any succession planning process.
Employee productivity analysis is not done and there is no measurement scale to evaluate
it.
Annual reports and other information of interest to shareholders are uploaded to
Companys corporate website www.mblbd.com. But for last year no annual or half yearly
report was published in the website.
General Public does not hold more than 50% of shares. Al most 40% shares are hold by
the directors.
Lack of efficient executives or officers especially in the general and credit division
hampers the customer service process.
Lack of dedication of some employees is the main obstacle of the growth of this
particular branch.
There are various products and schemes of loans and advances but customer is not known
to all of them.
There was lack of employees to meet the needs of the customers.

5.2 Recommendations

The Policy on training of Directors includes providing training and updated information
on all the latest policy guidelines, circulars and Acts issued by the regulatory/legislative

50
 authorities. So proper training has to be given so that the MBL can perform in a better
way.
Central Complaint Cell has been established and a vigilance team has also been formed to
protect fraud and error. Risk Management Wing (RMW) also acts as the whistleblower of
the Bank.
Board members must attend the meetings regularly. Though Bangladesh Bank Guidelines
do not permit to form a separate committee of Board on remuneration. As such, MBL
does not have such committee. However, the Board of Directors should time to time
review and evaluate the remuneration paid to all level of employees, director and others
and decides on the issue. In addition, Board Members should directly involve in
recruitment, promotion and remuneration process of top executives (Up to two-level
below the rank of the Managing Director & CEO) as per the Bangladesh Bank Circular
(BRPD Circular No.11dated 27 October 2013.
Efficient succession planning is an integral part of efficient employee management and
MBL should possesses a sound HR Policy covering succession planning to carefully
avoid the problems of leadership vacuum under any circumstances
Employee productivity should be measured in terms of total deposit, investment, income
profit.
Annual Reports need to be published annually.
Percentage of the shares of the directors should be reduced.
It should give more concern in their management quality to improve it satisfactory
position.
The Bank has to go through the proper online banking for better service to the customer.
The Bank should try to follow modern marketing system.
The Bank should promote their product by advertisement.
The Bank should introduce new and attractive product to their customer.
The Bank should emphasize on training its employee on a frequent basis.
5.3 Conclusions
Banking sector portraits the whole economy of a country due to its linkage with all other sectors.
It plays a vital role in developing countries like Bangladesh which is now transforming from
agriculture based economy to industry based economy. Being the largest unit of financial sector,
banks must operate at its best with utmost efficiency to contribute in the economic development
of the country. Any shortfall or even a slight instability in this sector would wreck long term
havoc on the countrys development. Presence of sound corporate governance and its proper
practices is the key requirement for efficient and stable banking system. Country like Bangladesh
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where prudential regulations and supervision is inadequate to provide a safety net for the
depositors and stakeholders of the banks, special attention on corporate governance is required
on a priority basis. Except few foreign and private commercial banks, most other banks lack
quality credit analysis and asset management practices. Insufficient execution of creditors rights
has raised the numbers of classified as well as non-performing loans. Various initiatives have
been taken by Bangladesh Bank to improve the asset quality conditions at banks. Still banks have
considerable scope to include stringent financial requirements as well as corporate governance
factors. Inadequate enforcement of bankruptcy law has made it nearly impossible for a company
to close or declare bankrupt which need to be revised for winding up or bankruptcy process
specifically for overdue indebtedness reasons. Banking practices and legal ineptitudes regarding
financial issues have put the health of the banking sector in a serious qualm. Each factor
identified in this study should be examined carefully in order to improving corporate governance
practices among the banks for strengthening the banking sector.

52
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