GAL A XY

Bangladesh Bank
Bangladesh Bank Monogram
Headquarters Dhaka
Established 16 December 1971
Governor Salehuddin Ahmed
Central Bank of Bangladesh
Currency Taka
ISO 4217 Code BDT
Website 1!
Preceded by S"a"e Bank o# $akis"an
1
GAL A XY
History of Bangladesh bank
A#"er "he libera"ion %ar& and "he e'en"ual inde(endence o# Bangladesh& "he )o'ernmen"
o# Bangladesh reorgani*ed "he Dhaka branch o# "he S"a"e Bank o# $akis"an as "he cen"ral
bank o# "he coun"r+& and named i" Bangladesh Bank, This reorgani*a"ion %as done
(ersuan" "o Bangladesh Bank Order& 1972& and "he Bangladesh Bank came in"o e-is"ence
%i"h re"ros(ec"i'e e##ec" #rom 16"h December& 1971,
The general su(erin"endence and direc"ion o# a##airs and business o# "he Bank are
en"rus"ed "o a nine member Board o# Direc"ors %hich consis"s o# "he )o'ernor as
chairman& a De(u"+ )o'ernor& "hree senior go'ernmen" o##icials and #our (ersons ha'ing
e-(erience and (ro'en ca(aci"+ in "he #ields o# banking& "rade& commerce& indus"r+ or
agricul"ure . all nomina"ed b+ "he go'ernmen", The board& %hich is "he highes" (olic+
making bod+& mee"s a" leas" si- "imes a +ear and a" leas" once e'er+ /uar"er under "he
chairmanshi( o# "he )o'ernor, The )o'ernor& a((oin"ed b+ "he go'ernmen" as "he chie#
e-ecu"i'e o##icer& direc"s and con"rols all "he a##airs o# "he Bank on behal# o# "he Board,
2
GAL A XY
The broad objectives of the Bank are:
a0 To regula"e "he issue o# "he currenc+ and "he kee(ing o# reser'es1
b0 To manage "he mone"ar+ and credi" s+s"em o# Bangladesh %i"h a 'ie% "o s"abili*ing
domes"ic mone"ar+ 'alue1
c0 To (reser'e "he (ar 'alue o# "he Bangladesh Taka1
d0 To (romo"e and main"ain a high le'el o# (roduc"ion& em(lo+men" and real income in
Bangladesh1 and "o #os"er gro%"h and de'elo(men" o# "he coun"r+2s (roduc"i'e resources
#or "he na"ional in"eres"
unctions
This de(ar"men" is basicall+ res(onsible #or issuing (ruden"ial guidelines "o ensure a
sound banking s+s"em in "he coun"r+, The ma3or areas co'ered are4
1, De"ermina"ion o# ca(i"al ade/uac+ re/uiremen"s& asse" classi#ica"ion and (ro'isioning
s"andards,
2, 5e'ie% and dra#"ing o# banking s"a"u"es,
6, 7raming (olicies regarding 5eser'e 5e/uiremen"s,
4, Su(er'ision o# "he in"ernal con"rol s+s"em o# "he banks,
8, 7ormula"e (olicies %i"h a 'ie% "o res"raining insider lending,
6, De"ermina"ion o# accoun"ing and disclosure s"andard "o "he banks,
7, Ini"ia"e disci(linar+ ac"ion agains" an+ Board or members o# "he Board o# Direc"ors o#
"he banks,
9, Issuance o# direc"i'es and com(liance "hereo# under Banking :om(an+ Ac"& 1991,
6
GAL A XY
!"#ET$%& P"'(C&
!onetary )olicy is "he (rocess b+ %hich "he go'ernmen"& cen"ral bank& or mone"ar+
au"hori"+ manages "he mone+ su((l+ "o achie'e s(eci#ic goals;such as cons"raining
in#la"ion or de#la"ion& main"aining an e-change ra"e& achie'ing #ull em(lo+men" or
economic gro%"h, <=suall+ "he goal o# mone"ar+ (olic+ is "o accommoda"e economic
gro%"h in an en'ironmen" o# s"able (rices,0 Mone"ar+ (olic+ can in'ol'e changing cer"ain
in"eres" ra"es& ei"her direc"l+ or indirec"l+ "hrough o(en marke" o(era"ions& se""ing reser'e
re/uiremen"s& ac"ing as a las".resor" lender <i,e, discoun" %indo% lending0& or "rading in
#oreign e-change marke"s,
History of monetary policy
Mone"ar+ (olic+ is associa"ed %i"h currenc+ and credi", 7or man+ cen"uries "here %ere
onl+ "%o #orms o# mone"ar+ (olic+4 decisions abou" coinage& and "he decision "o (rin"
(a(er mone+ "o crea"e credi", In"eres" ra"es& %hile no% "hough" o# as (ar" o# mone"ar+
au"hori"+& %ere no" generall+ coordina"ed %i"h "he o"her #orms o# mone"ar+ (olic+,
Mone"ar+ (olic+ %as seen as an e-ecu"i'e decision& and %as generall+ in "he hands o# "he
au"hori"+ %i"h seniorage& or "he (o%er "o coin, >i"h "he ad'en" o# larger "rading ne"%orks
came "he abili"+ "o se" "he (rice be"%een gold and sil'er& and "he (rice o# "he local
currenc+ "o #oreign currencies, This o##icial (rice could be en#orced b+ la%& e'en i# i"
'aried #rom "he marke" (rice,
>i"h "he crea"ion o# "he Bank o# ?ngland in 1694& %hich ac/uired "he res(onsibili"+ "o
(rin" no"es and back "hem %i"h gold& "he idea o# mone"ar+ (olic+ as inde(enden" o#
e-ecu"i'e ac"ion began "o be es"ablished, The goal o# mone"ar+ (olic+ %as "o main"ain "he
'alue o# "he coinage& (rin" no"es %hich %ould "rade a" (ar "o s(ecie& and (re'en" coins
#rom lea'ing circula"ion, The es"ablishmen" o# cen"ral banks b+ indus"riali*ing na"ions
%as associa"ed "hen %i"h "he desire "o main"ain "he na"ion2s (eg "o "he gold s"andard& and
"o "rade in a narro% band %i"h o"her gold back currencies, To accom(lish "his end& cen"ral
banks as (ar" o# "he gold s"andard began se""ing "he in"eres" ra"es "ha" "he+ charged& bo"h
"heir o%n borro%ers& and o"her banks %ho re/uired li/uidi"+, The main"enance o# a gold
s"andard re/uired almos" mon"hl+ ad3us"men"s o# in"eres" ra"es,
During "he 197@.192@ (eriod "he indus"riali*ed na"ions se" u( cen"ral banking s+s"ems&
%i"h one o# "he las" being "he 7ederal 5eser'e in 1916,B+ "his (oin" "he unders"anding o#
"he cen"ral bank as "he Alender o# las" resor"A %as unders"ood, I" %as also increasingl+
unders"ood "ha" in"eres" ra"es had an e##ec" on "he en"ire econom+& in no small (ar"
because o# "he marginal re'olu"ion in economics& %hich #ocused on ho% man+ more& or
ho% man+ #e%er& (eo(le %ould make a decision based on a change in "he economic
"rade.o##s, I" also became clear "ha" "here %as a business c+cle& and economic "heor+
began unders"anding "he rela"ionshi( o# in"eres" ra"es "o "ha" c+cle, <Be'er"heless& s"eering
a %hole econom+ b+ in#luencing "he in"eres" ra"e has o#"en been described as "r+ing "o
s"eer an oil "anker %i"h a canoe (addle,0
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GAL A XY
The ad'ancemen" o# mone"ar+ (olic+ as an engineering disci(line has been /ui"e ra(id in
"he las" 18@ +ears& and i" has increased es(eciall+ ra(idl+ in "he las" 8@ +ears, Mone"ar+
(olic+ has gro%n #rom sim(l+ increasing "he mone"ar+ su((l+ enough "o kee( u( %i"h
bo"h (o(ula"ion gro%"h and economic ac"i'i"+, I" mus" no% "ake in"o accoun" such di'erse
#ac"ors as4
shor" "erm in"eres" ra"es1
long "erm in"eres" ra"es1
'eloci"+ o# mone+ "hrough "he econom+1
e-change ra"es1
credi" /uali"+1
bonds and e/ui"ies <cor(ora"e o%nershi( and deb"01
go'ernmen" 'ersus (ri'a"e sec"or s(endingCsa'ings1
in"erna"ional ca(i"al #lo%s o# mone+ on large scales1
#inancial deri'a"i'es such as o("ions& s%a(s& #u"ures con"rac"s& e"c,
Developing countries & Monetary Policy :
De'elo(ing coun"ries ma+ ha'e (roblems o(era"ing mone"ar+ (olic+ e##ec"i'el+, The
(rimar+ di##icul"+ is "ha" #e% de'elo(ing coun"ries ha'e dee( marke"s in go'ernmen"
deb", The ma""er is #ur"her com(lica"ed b+ "he di##icul"ies in #orecas"ing mone+ demand
and #iscal (ressure "o le'+ "he in#la"ion "a- b+ e-(anding "he mone"ar+ base ra(idl+, In
general& cen"ral banks in de'elo(ing coun"ries ha'e had a (oor record in managing
mone"ar+ (olic+,
Ty)es of *onetary )olicy
!onetary Policy: Target !arket
+ariable:
'ong Ter* "bjective:
In#la"ion Targe"ing In"eres" ra"e on
o'ernigh" deb"
A gi'en ra"e o# change in "he :$I
$rice De'el Targe"ing In"eres" ra"e on
o'ernigh" deb"
A s(eci#ic :$I number
Mone"ar+ Aggrega"es The gro%"h in mone+
su((l+
A gi'en ra"e o# change in "he :$I
7i-ed ?-change 5a"e The s(o" (rice o# "he
currenc+
The s(o" (rice o# "he currenc+
)old S"andard The s(o" (rice o# gold Do% in#la"ion as measured b+ "he
gold (rice
Mi-ed $olic+ =suall+ in"eres" ra"es =suall+ unem(lo+men" E :$I
change
8
GAL A XY
Monetary policy tools
!onetary base
Mone"ar+ (olic+ can be im(lemen"ed b+ changing "he si*e o# "he mone"ar+ base, This
direc"l+ changes "he "o"al amoun" o# mone+ circula"ing in "he econom+, A cen"ral bank
can use o(en marke" o(era"ions "o change "he mone"ar+ base, The cen"ral bank %ould
bu+Csell bonds in e-change #or hard currenc+, >hen "he cen"ral bank disbursesCcollec"s
"his hard currenc+ (a+men"& i" al"ers "he amoun" o# currenc+ in "he econom+& "hus al"ering
"he mone"ar+ base,
%eserve require*ents
The mone"ar+ au"hori"+ e-er"s regula"or+ con"rol o'er banks, Mone"ar+ (olic+ can be
im(lemen"ed b+ changing "he (ro(or"ion o# "o"al asse"s "ha" banks mus" hold in reser'e
%i"h "he cen"ral bank, Banks onl+ main"ain a small (or"ion o# "heir asse"s as cash
a'ailable #or immedia"e %i"hdra%al1 "he res" is in'es"ed in illi/uid asse"s like mor"gages
and loans, B+ changing "he (ro(or"ion o# "o"al asse"s "o be held as li/uid cash& "he 7ederal
5eser'e changes "he a'ailablil"+ o# loanable #unds, This ac"s as a change in "he mone+
su((l+,
,iscount -indo- lending
Man+ cen"ral banks or #inance minis"ries ha'e "he au"hori"+ "o lend #unds "o #inancial
ins"i"u"ions %i"hin "heir coun"r+, The lended #unds re(resen" an e-(ansion in "he mone"ar+
base, B+ calling in e-is"ing loans or e-"ending ne% loans& "he mone"ar+ au"hori"+ can
direc"l+ change "he si*e o# "he mone+ su((l+,
(nterest rates
The con"rac"ion o# "he mone"ar+ su((l+ can be achie'ed indirectly b+ increasing "he
nominal in"eres" ra"es,
Mone"ar+ au"hori"ies in di##eren" na"ions ha'e di##ering le'els o# con"rol o# econom+.
%ide in"eres" ra"es, Bangladesh Bank can se" "he discoun" ra"e& as %ell as achie'e "he
desired :en"ral 7unds 5a"e b+ o(en marke" o(era"ions, This ra"e has signi#ican" e##ec" on
o"her marke" in"eres" ra"es& bu" "here is no (er#ec" rela"ionshi(,
In o"her na"ions& "he mone"ar+ au"hori"+ ma+ be able "o manda"e s(eci#ic in"eres" ra"es on
loans& sa'ings accoun"s or o"her #inancial asse"s, B+ raising "he in"eres" ra"e<s0 under i"s
con"rol& a mone"ar+ au"hori"+ can con"rac" "he mone+ su((l+& because higher in"eres" ra"es
encourage sa'ings and discourage lending, Bo"h o# "hese e##ec"s reduce "he si*e o# "he
mone+ su((l+,
6
GAL A XY
Currency board
A currency board is a mone"ar+ au"hori"+ %hich is re/uired "o main"ain an e-change ra"e
%i"h a #oreign currenc+, This (olic+ ob3ec"i'e re/uires "he con'en"ional ob3ec"i'es o# a
cen"ral bank "o be subordina"ed "o "he e-change ra"e "arge",
The 'ir"ue o# "his s+s"em is "ha" /ues"ions o# currenc+ s"abili"+ no longer a((l+, The
dra%backs are "ha" "he coun"r+ no longer has "he abili"+ "o se" mone"ar+ (olic+ according
"o o"her domes"ic considera"ions& and "ha" "he #i-ed e-change ra"e %ill& "o a large e-"en"&
also #i- a coun"r+2s "erms o# "rade& irres(ec"i'e o# economic di##erences be"%een i" and i"s
"rading (ar"ners,
Monetary policy of Bangladesh & Credit control policy
Bo"h in de'elo(ed and de'elo(ing economies& mone"ar+ (olic+ seeks "o main"ain (rice
s"abili"+ accom(anied b+ sus"ained s"able ou"(u" gro%"h in "he #ace o# in"ernal and
e-"ernal shocks "ha" are #aced #rom "ime "o "ime, 7or de'elo(ing economies like
Bangladesh %i"h signi#ican" underem(lo+men"Cunder e-(loi"a"ion o# (roduc"ion #ac"ors&
s"imula"ing higher gro%"h is im(era"i'e #or ra(id reduc"ion and e'en"ual elimina"ion o#
endemic (o'er"+& and is "here#ore an o'erriding (riori"+, The s"imulus (ro'ided b+
mone"ar+ (olic+ in accommoda"ing "he gro%"h as(ira"ions mus" no" ho%e'er 3eo(ardi*e
macroeconomic s"abili"+ and #u"ure gro%"h1 and "he (ursui" o# mone"ar+ (olic+ com(rises
o# 'arious su((or"i'e measures "o a""ain "he highes" sus"ainable ou"(u" gro%"h %hile
ad3us"ing smoo"hl+ "o in"ernal and e-"ernal shocks "ha" "he econom+ encoun"ers #rom
"ime "o "ime,
Ob3ec"i'es o# "he mone"ar+ (olic+ o# "he Bangladesh Bank as ou"lined in "he Bangladesh
Bank Order& 1972 com(rise o# a""aining and main"aining o# (rice s"abili"+& high le'els o#
(roduc"ion& em(lo+men" and economic gro%"h,
In "he decades o# se'en"ies and eigh"ies& mone"ar+ (olic+ in Bangladesh %as conduc"ed
%i"h #ull direc" con"rol on in"eres" ra"es and e-change ra"es& as also on "he 'olumes and
direc"ions o# credi" #lo%s,
The si"ua"ion began changing in "he nine"ies %i"h "he aboli"ion o# direc"ed lending and
gradual liberali*a"ion o# in"eres" ra"es1 "he change (rocess culmina"ing in "ransi"ion "o
marke" based e-change ra"e o# Taka #rom 61s" Ma+ 2@@6, 7rom "hen on& in"eres" ra"e and
e-change ra"e are bo"h marke" dri'en& e-change ra"e is no longer in "he role o# nominal
anchor #or (rices,
7
GAL A XY
Mone"ar+ (olic+ in Bangladesh is #ormula"ed around in#la"ion and ou"(u" gro%"h ra"es as
"he basic (olic+ "arge"s, De'els and gro%"h (a"hs o# rele'an" mone"ar+ aggrega"es such as
reser'e mone+& broad mone+ and domes"ic credi" are also (ro3ec"ed and moni"ored as
in"ermedia"e "arge"s in conduc"ing mone"ar+ (olic+,
:$I in#la"ion& e-(ressed as "he ra"e o# change o# :onsumer $rice Inde-& is used in
Bangladesh #or measuring (rice s"abili"+ in conduc"ing mone"ar+ (olic+, Some cen"ral
banks o(" #or sui"abl+ de#ined 2core in#la"ion2 e-cluding #rom consum("ion baske" i"ems
%i"h "+(icall+ high seasonal (rice 'ola"ili"+& 'ie%ed as be""er re(resen"ing "he ac"ual
underl+ing in#la"ion "rend,
The "arge" le'el o# :$I in#la"ion is chosen "aking in"o accoun" "he coun"r+2s (as" long run
in#la"ion (er#ormance& and "he domes"ic and e-"ernal #ac"ors dri'ing "he curren" "rend o#
domes"ic in#la"ion, 7rom "he earl+ nine"ies& annual a'erage :$I in#la"ion has consis"en"l+
been a" single digi" le'els& reaching a lo% o# 1,94 (ercen" in 7FO1 and edging u(%ards
"herea#"er& in line %i"h "he bo""oming ou" and subse/uen" u(s%ing o# global in#la"ion,
O"her "han "he adminis"ered energ+ (rices& consumer (rices in Bangladesh are marke"
dri'en& and as men"ioned earlier& "rends o# domes"ic (rices o# "radable in "he o(en
econom+ are increasingl+ mirroring global (rice "rends& "he di'ergence be"%een domes"ic
and global in#la"ion arising largel+ #rom "he (rice "rends o# "he non"a-able

9
GAL A XY
T(GHTE# THE .(T/$T("#
(nstru*ents e*)loyed0
(nterest rate: In "igh"ening "he mone"ar+ (olic+ s"ance& ke+ (olic+ ra"es <"reasur+ bill
bond auc"ion +ields& ra"io and re'erse ra"io& in"eres" ra"es o# Bangladesh Bank0 ha'e been
raised and main"ained on u("rend& #or "hese in "urn "o raise "he ra"es o# o"her #inancial
cos"s and re"urns& res"raining demand gro%"h in "he real sec"or,
%evision of the statutory ratios for scheduled banks: The marke"s are +e" "o gain
su##icien" de("h "o res(ond %i"h "he changes in (olic+ in"eres" ra"es, To com(ensa"e #or
"his inade/ua"e in"eres" ra"e res(onsi'eness o# marke"s& (olic+ in"eres" ra"e in"er'en"ions
in Bangladesh are a" "imes su((lemen"ed b+ changes in "he :ash 5eser'e 5e/uiremen"
<:550 and S"a"u"or+ Di/uidi"+ 5a"io <SD50 #or scheduled banks& "hus in#luencing "he
'olumes as %ell as cos"s o# #unds a'ailable #or credi" gro%"h,
In Oc"ober 2@@8& "he :55 and SD5 %ere re'ised u(%ard #rom 4,8 (ercen" and 16,@
(ercen" res(ec"i'el+ "o 8,@ (ercen" and 19,@ (ercen" o# "ime and demand liabili"ies o#
scheduled banks& %i"h a 'ie% "o slo%ing do%n o'erall domes"ic credi" gro%"h as %ell as
"he gro%"h o# credi" "o "he (ri'a"e sec"or,
Annual mone"ar+ (rograms based on "he in#la"ion and )D$ gro%"h "arge"s o# mone"ar+
(olic+ (ro'ide a con'enien" #rame%ork #or in"er'en"ions in mone"ar+ de'elo(men"s& and
#or moni"oring "he ou"come o# "he mone"ar+ (olic+ s"ance (ursued,
Based on "he assum("ion "ha" in#la"ion rises and #alls %i"h increase and decrease in "he
ra"e o# gro%"h o# mone+ s"ock& "he annual mone"ar+ (rogramme "arge"s a gro%"h (a"h #or
broad mone+ consis"en" %i"h "he in#la"ion and real )D$ gro%"h "arge"s o# mone"ar+
(olic+& allo%ing #or "he likel+ change in income 'eloci"+ o# mone+,
The mone"ar+ (rogram is ne'er"heless 'er+ use#ul as #rame%ork #or gauging "he gro%"h
su((or"i'eness and "he in#la"ion s"abili*a"ion e##ec"i'eness o# "he mone"ar+ (olic+ s"ance
(ursued, The broad mone+ gro%"h "arge" o# "he mone"ar+ (rogramme has #ur"her been
disaggrega"ed in"o sub "arge"s on "he asse" and liabili"+ side,
Our (resen" challenge is "o s"abili*e in#la"ion ra"e, One ca'ea" "he (ro.(oor gro%"h
momen"um is #acing.is "he rise in in#la"ion ra"e.no" onl+ caused b+ "he a#"erma"h o# "he
#lood las" +ear and ra(id credi" e-(ansion bu" also due "o rise in #uel and commodi"+
(rices around "he globe1 %hich is be+ond our con"rol, In#la"ion ra"e "ha" s"ood a" 7,68
(ercen" in Gune @8 rose "o 7,98 (ercen" in Bo'ember @8, >i"h a brie# do%n s%ing during
earl+ mon"hs o# 2@@6& i" again s"ar"ed mo'ing u( "o 6,17 (ercen" in March @6, >e ho(e
"he mone"ar+ s"ance and (ros(ec"i'e gro%"h along %i"h o("imis"ic global economic
scenario %ould bring do%n "he (rice le'el %i"hin a shor" (eriod,
9
GAL A XY
The "igh"ened mone"ar+ s"ance no% being (ursued is in"ended no" "o slo%do%n ou"(u"
gro%"h bu" "o curb e-cess demand arising #rom in#la"ionar+ e-(ec"a"ions& "hereb+
su((or"ing sus"ained s"able ou"(u" gro%"h o'er "he near and medium "erm, The #our"een
(ercen" gro%"h o# credi" "o "he (ri'a"e sec"or (rogrammed #or 7F@6 %ould be su##icien"
"o su((or" se'en (ercen" real )D$ gro%"h i# :$I in#la"ion is se'en (ercen"& e'en higher
real )D$ gro%"h %ill be su((or"ed %i"h lo%er in#la"ion, The mone"ar+ s"ance is sub3ec"
"o con"inuous re'ie% in "he ligh" o# e'ol'ing si"ua"ion& ma+ shi#" "o a neu"ral s"ance& and
ma+ e'en mo'e #ur"her "o an accommoda"i'e s"ance as 'alues o# ke+ macroeconomic
'ariables change o'er "ime,
1@
GAL A XY
Mone"ar+ sur'e+
(Taka in million)
November, 2005Percentage Changes of November, 2006 over :om(onen"s
November,
2006October, 2006
October, 2006
1.94 48.32
(a) BANGLADESH BANK 197507 190957 131487 3.43 50.21
() DE!"S#T $"NE%
BANKS
28897 3114& 2115& '7.22 3&.59
2. NET D"$EST#( ASSETS1702952 1&971&0 1450087 0.34 17.44
A. D"$EST#( ()ED#T
(a*)
1903425 1889597 1&01141 0.73 18.88
(a) BANGLADESH BANK 2&&821 277311 1907&& '3.78 39.87
(laim+ on !,li-
S.-/o0
2&5923 27&458 190098 '3.81 39.89
(laim+ on Go1/.(n./) 25&587 2&7122 180309 '3.94 42.3
(laim+ on "/2.0 !,li- 933& 933& 9789 0 '4.&3
(laim+ on !0i1a/.
S.-/o0
898 853 &&8 5.28 34.43
() DE!"S#T $"NE%
BANKS
1&3&&04 1&1228& 1410375 1.51 1&.04
(laim+ on !,li-
S.-/o0
2507&8 243157 244081 3.13 2.74
(laim+ on Go1/.(n./) 105708 97190 110210 8.7& '4.08
(laim+ on "/2.0 !,li- 1450&0 1459&7 133871 '0.&2 8.3&
(laim+ on !0i1a/.
S.-/o0
138583& 13&9129 11&&294 1.22 18.82
B. NET "THE) ASSETS '200473 '192437 '151054 4.18 32.72
(a) BANGLADESH BANK '207&58 '197730 '119049 5.02 74.43
() DE!"S#T $"NE%
BANKS
7185 5293 '32005 35.75 122.45
3. B)"AD $"NE%(1*2) 192935& 19192&3 1&02730 0.53 20.38
Source : Statistics Department, Bangladesh Bank
11
GAL A XY
Monetary policy and investment
O##iciall+& "he ra"e o# in#la"ion in Bangladesh is abou" 9 (er cen", The ra"e is considered as
a conser'a"i'e one b+ non.o##icial sources %ho main"ain "ha" "he in#la"ion ra"e is in "he
double digi"s, In#la"ion con"rol& "here#ore& is im(or"an" #or "he econom+& and #rom "ha"
(ers(ec"i'e& Bangladesh Bank2s "igh" mone"ar+ (olicies or e##or"s "o con"ain in#la"ion b+
decreasing "he #lo% o# mone+ ma+ be seen as a rou"ine a((roach "o regula"ing
in#la"ionar+ (ressure,
Bu" "he Bangladesh Bank <BB0 needs "o "ake o"her issues in"o considera"ion %hile
a((l+ing "radi"ional mone+ con"rols "hrough i"s (olicies, Bo econom+ can gro% %i"hou"
in'es"men" and al"hough "he cumula"i'e in'es"men" #igures #or "he curren" +ear are no"
a'ailable& "he same are an"ici(a"ed "o be a" a record high le'el, This in'es"men" le'el
needs "o be main"ained or #ur"her im(ro'ed #or "he econom+ "o #are be""er.. "han i" has so
#ar.. in "he Be% Fear, The econom+ needs "o gro% a" an accelera"ed (ace #rom i"s a'erage
8 (er cen" gro%"h "o higher gro%"h like 7 "o 9 (er cen" annuall+ "o be able "o more "han
co(e %i"h massi'e unem(lo+men" and "he (roblem o# (o'er"+,
The (rere/uisi"e o# higher in'es"men" is "he a'ailabili"+ o# #inance, In'es"ors do no"
in'es" en"irel+ "heir o%n resources on en"er(rises, The+ borro% #rom banks and o"her
#inancial ins"i"u"ions, $ro'ided "he in"eres" ra"es on loans #rom "hese ins"i"u"ions are seen
as #a'orable& in'es"or %ill borro% more and more and in'es" "he same& "oge"her %i"h "heir
o%n ca(i"al& in ne% en"er(rises or in e-(anding (roduc"i'e ac"i'i"ies in "he e-is"ing ones,
The lending ra"es #rom #inancial ins"i"u"ions are be"%een 9 and 18 (er cen", According "o
re(or"s& "he lending ra"e has increased b+ one (ercen"age (oin" more alread+ #rom "he
mone"ar+ (olicies im(lemen"ed b+ BB and i" could climb e'en higher in "he (ursui" o#
such (olicies, Thus& "he /ues"ion "ha" canno" hel( bu" arise is %ha" "he im(ac" o# "igh"er
mone"ar+ (olicies %ill be on in'es"men" or economic gro%"hH In'es"ors in an+ si"ua"ion
are ins(ired b+ lo% lending ra"es and no" b+ (rogressi'el+ higher ones, Iigher lending
ra"es ac"uall+ discourage in'es"men" %hich "hen im(ac"s nega"i'el+ on economic gro%"h,
There has been an ou"cr+ in "he coun"r+ "o lo%er "he in"eres" ra"e on lending "o (romo"e
grea"er in'es"men" ac"i'i"ies, I" a((eared "ha" "he meri" o# "his reasoning %as recogni*ed
b+ "he BB and in"eres" ra"es on loans %ere reduced no"abl+ #or a %hile, The higher
in'es"men"s in "he econom+ during "he las" "%o +ears had a rela"ionshi( "o "he lo%ered
lending ra"es, Bu" a re'ersal o# "his (olic+ and allo%ing "he in"eres" ra"es on leading "o
rise again could (ro'e "o be a dam(er on in'es"men" ac"i'i"ies,
Besides& "he BB also needs "o "ake in"o accoun" "he non economic #ac"ors behind (rice
12
GAL A XY
rises "ha" ha'e hardl+ an+ links %i"h in#la"ion, According "o "e-"book "heories& (rice rise
o# goods and ser'ices is "he inalienable com(anion o# a gro%ing in#la"ionar+ si"ua"ion,
Bu" (rice rises in "he (resen" con"e-" o# Bangladesh a((ear "o be more #or non economic
reasons like ou"come o# crimes such as hoarding& (ro#i"eering& and s+ndica"e #orma"ion "o
mani(ula"e (rices u(%ards& among o"hers,
Thus& BB ough" no" "o #rus"ra"e "he "rend "o%ards higher in'es"men" b+ e-ercising "igh"er
mone"ar+ (olicies, I" needs "o (ruden"l+ a((l+ con"rols in mone+ su((l+ so "ha" in'es"ors
are no" dishear"ened
!onetary Policy and (sla*ic Banking in Bangladesh

%EG/'$T("# " (.'$!(C B$#1(#G (# B$#G'$,E.H:
%"'E " B$#G'$,E.H B$#1
The banking s+s"em o# Bangladesh is com(osed o# a 'arie"+ o# banks %orking as
Ba"ionali*ed :ommercial Banks <B:Bs0& $ri'a"e Banks& 7oreign Banks& S(eciali*ed
Banks and De'elo(men" Banks, Io%e'er& 29 ou" o# 8@ banks in Bangladesh are (ri'a"e&
o# %hich onl+ 8& namel+ Islami Bank Bangladesh Dimi"ed& Al.Baraka Bank Bangladesh
Dimi"ed& Al.Ara#ah Islami Bank Dimi"ed& Social In'es"men" Bank Dimi"ed& and 7a+sal
Islamic Bank o# Bahrain ?,:, ha'e been o(era"ing as Islamic banks, Besides "hese #ull.
#ledged Islamic banks& "%o con'en"ional banks in "he (ri'a"e sec"or namel+ "he $rime
Bank Dimi"ed and Dhaka Bank Dimi"ed& ha'e o(ened "%o #ull.#ledged Islamic banking
branches and Islamic Banking :oun"er res(ec"i'el+ "o deal %i"h "he Islamic banking
business (arallel "o "heir con'en"ional o(era"ions, The o(era"ions and accoun"s o# "hese
branches and coun"er are main"ained se(ara"el+ #rom "he mains"ream business o# "he
res(ec"i'e banks,
The Genesis of Islamic Banking in Bangladesh
Bangladesh inheri"ed an in"eres" based banking s+s"em righ" #rom "he Bri"ish :ouncil
(eriod and em(lo+men" o# "he Muslim as in banks %as more or less res"ric"ed, During "he
(eriod 1947.1971 %hen coun"r+ %as a (ar" o# $akis"an& banking o# course came under
Muslim con"rol bu" "he s+s"em did no" changed <M,A,Ia/ue& 19940,Though $akis"an %as
crea"ed in "he name o# Islam& "he rulers did no" "ake an+ (rac"ical a""em(" "o es"ablish
economic s+s"em based on Islamic $rinci(les,
Since inde(endence& Bangladesh sa% a ne% "rend in banking bo"h a" home and abroad
during "he se'en"ies& Islamic De'elo(men" Bank <IDB0 a" "he in"erna"ional le'el and a
number o# Islamic banks a" na"ional le'els %ere es"ablished in "he Muslim %orld, A"
home& some en"re(reneurs %ere ac"i'el+ %orking #or in"roduc"ion o# Islamic banking,
16
GAL A XY
T%o (ro#essional bodies JIslamic ?conomics 5esearch BureauK <I?5B0 and JBangladesh
Islamic Bankers Associa"ionK <BIBA0 %ere "aking (rac"ical s"e(s #or im(ar"ing "raining
on Islamic ?conomics and banking "o a grou( o# bankers and arrange some na"ional and
in"erna"ional seminarsC%orksho(s "o mobili*e local and #oreign (eo(le in'es"ors, Their
(ro#essional and righ"."hough" ac"i'i"ies %ere s"reamlined b+ a number o# en"husias"ic
businessmen in Bangladesh, The+ concen"ra"ed mainl+ in mobili*ing e/ui"+ ca(i"al #or
"he (ros(ec"i'e Islamic bank, Due "o con"inuous and dedica"ed %ork o# "he abo'e grou(s
and indi'iduals and ac"i'e su((or" #rom "he )o'ernmen"& Islamic banking could be
es"ablished in earl+ eigh"ies, Islamic banks ha'e been o(era"ing in Bangladesh #or abou"
one and hal# decade alongside %i"h "he "radi"ional banks, Ou" o# o'er 8@ banks onl+ #i'e
banks <including one #oreign Islamic bank0 and "%o Islamic banking branches o# a
"radi"ional bank& $rime Bank Dimi"ed <$BD0 ha'e been %orking on Islamic (rinci(les,
Dike an+ o"her "radi"ional commercial banks& "he+ do mobili*e de(osi"s and (ro'ide
loans, Bu" "heir modes o# o(era"ion& based on Shariah& are di##eren" #rom "he o"her
"radi"ional commercial banks, Io%e'er& "he #i'e Islamic banks o(era"ing in Bangladesh
are4
1, Islami Bank Bangladesh Dimi"ed <IBBD01
2, Al Baraka Bank Bangladesh Dimi"ed <AD.Baraka01
6, Al.Ara#ah Islami Bank Dimi"ed <Al.Ara#ah01
4, Social In'es"men" Bank Dimi"ed <SIBD01 and
8, 7a+sal Islamic Bank o# Bahrain ?: <7IBB0,
Besides "he abo'e #i'e Islamic banks& $rime Bank Dimi"ed has o(ened "%o Islamic
Banking branches on 19 December& 1998 and 17"h December& 1997 res(ec"i'el+ %hile
Dhaka Bank Dimi"ed has s"ar"ed o(era"ion %i"h an Islamic :oun"er a" i"s $rinci(al O##ice
in con3unc"ion %i"h con'en"ional banking o(era"ions since ince("ion o# "he bank in Gul+&
1998,
Monetary Policy and Islamic Banking in Bangladesh
The cen"ral bank has "he sole au"hori"+ "o issue currenc+ and manage "he li/uidi"+ o# "he
econom+, Among o"hers& "he ob3ec"i'es o# "he mone"ar+ (olic+ are "o ensure s"abili"+ o#
"he 'alue o# Taka and regula"e "he banking s+s"em (ruden"l+, As a cen"ral bank&
Bangladesh Bank %as no" aloo# #rom "he ongoing changes in "he %orld #inancial s+s"em,
Bangladesh Bank had issued license in 1996 #or es"ablishmen" o# "he #irs" Islamic bank in
Bangladesh, The Bangladesh )o'ernmen" had (ar"ici(a"ed in es"ablishing "he Bank& b+
subscribing #i'e (ercen" share in "he (aid u( ca(i"al, :onsidering lack o# Islamic #inancial
marke"s and ins"rumen"s or (roduc"s in "he coun"r+& Bangladesh Bank had gran"ed some
(re#eren"ial (ro'isions #or smoo"h de'elo(men" o# Islamic banking in Bangladesh,
Among "he (re#eren"ial (ro'isions& "he #ollo%ing are im(or"an",
1, Islamic banks in Bangladesh ha'e been allo%ed "o main"ain "heir S"a"u"or+ Di/uidi"+
5e/uiremen" <SD50 a" 1@L o# "he "o"al de(osi" liabili"ies %hile i" is 2@L #or "he
con'en"ional banks, This (ro'ision had #acili"a"ed "he Islamic banks "o hold more li/uid
#unds #or more in'es"men" and "hereb+ genera"e more (ro#i",
2, =nder indirec" mone"ar+ (olic+ regime& Islamic banks %ere allo%ed "o #i- u( "heir
14
GAL A XY
(ro#i".sharing ra"ios and mark.u(s inde(enden"l+ commensura"e %i"h "heir o%n (olic+
and banking en'ironmen", This #reedom in #i-ing $DS ra"ios and Mark.u( ra"es had
(ro'ided sco(e #or "he Islamic banks "o #ollo% "he Shariah (rinci(les inde(enden"l+ #or
reali*ing goals o# Islamic Shariah,
Source4 International Journal of Islamic Financial Services Vol. 2 No.1
IMF suggests tighter monetary policy
In"erna"ional Mone"ar+ 7und <IM70 has sugges"ed #ur"her "igh"ening o# Bangladesh
Bank2s mone"ar+ (olic+ "o ease in#la"ionar+ (ressure,
AThis is "he ke+ challenge #or "he au"hori"ies in Bangladesh&A Thomas 5umbaugh& IM7
ad'iser #or "he Asia and $aci#ic& "old a (ress brie#ing a" "he IM7 5esiden" Mission in
Dhaka +es"erda+,
The IM7 o##icial said "his re(l+ing "o a /ues"ion %he"her "heir (rescri("ion "o con"ain
in#la"ion %ould be (ossible i# "he go'ernmen" raises "he #uel (rices #ur"her and "he
im(or" cos" increases due "o "he soaring dollar (rices,
Ie insis"ed on increasing "he in"eres" ra"es #ur"her as a means o# "igh" mone"ar+ (olic+,
ASome #ur"her increases in in"eres" ra"es ma+ be re/uired "o bring in#la"ion in line %i"h
o"her coun"ries&A he said,
The brie#ing %as organi*ed a" "he end o# an 9.da+ mission o# an IM7 "eam led b+
Thomas "ha" re'ie%ed "he recen" economic de'elo(men"s and "he im(lemen"a"ion o#
(olicies su((or"ed b+ "he $o'er"+ 5educ"ion and )ro%"h 7acili"+ <$5)70
arrangemen",
AI"2s ine'i"able "ha" "he go'ernmen" %ill ha'e "o ad3us" "he oil (rices&A Thomas said&
adding "ha" "he (rice hike %ill ha'e one"ime im(ac" on "he in#la"ion& no" a (ermanen"
one,
ATha"2s %h+ Bangladesh Bank needs "o kee( 'er+ (ruden" mone"ar+ (olic+ so "ha" "he
in#la"ion does no" go u(&A he said,
During "heir 'isi" "o Bangladesh& "he mission members me" 7inance and $lanning
Minis"er M Sai#ur 5ahman& 7inance Secre"ar+ Siddi/ur 5ahman :ho%dhur+&
Bangladesh Bank )o'ernor Dr Salehuddin Ahmed and senior go'ernmen" o##icials,
A)ro%"h momen"um in Bangladesh2s econom+ has been main"ained during "his #iscal
+ear&AThomas "old "he brie#ing on "heir obser'a"ions,
Ie e-(ec"ed "ha" "he )D$ gro%"h %ould be abou" 6 (ercen" bu" obser'ed "ha"
in#la"ion& "hough declined sligh"l+& a" 6,8 (ercen" %as s"ill higher "han desirable,
Thomas added "ha" "he e-"ernal curren" accoun" %as be""er "han e-(ec"ed in "he #irs"
18
GAL A XY
hal# o# 7F@6 %i"h s"rong gro%"h in e-(or"s and some slo%ing in non.oil im(or"s,
ADes(i"e "hese (osi"i'e de'elo(men"s& considerable macroeconomic challenges remain
"here&A he said& sugges"ing "ha" Bangladesh Bank should con"inue "he "igh"ened (olic+
during "he da+s "o come,
A(ar" #rom #ur"her raising "he in"eres" ra"es and "he (rices o# #uel oil& "he IM7 also
sugges"ed increasing re'enue collec"ion as a ma""er o# (riori"+ as "he go'ernmen" is
(re(aring "he budge" o# 7F@7,
On (e"roleum (rices& i" obser'ed "ha" "he (resen" (olic+ en"ails considerable and
gro%ing economic cos"s& mainl+ bene#i"ing higher income consumers& reducing
economic e##icienc+& and onl+ dela+ing "he ine'i"able ad3us"men"s as losses con"inue
"o moun" on "he B$: and "he B:Bs #inancial (osi"ion de"eriora"es,
5e(l+ing "o a /ues"ion& Thomas said "here are some li/uidi"+ (roblems in "he #oreign
e-change marke" %hile "he marke" needs some im(ro'emen"s in "erms o# e##icienc+,
In res(onse "o ano"her /uer+& he said i" %ould be (ossible "o regis"er #as"er )D$
gro%"h e'en i# "here are some di##icul"ies in agricul"ure as "he indus"r+ and ser'ices
sec"ors are sho%ing robus" gro%"h,
The 6.+ear $5)7 arrangemen" %as a((ro'ed in Gune 2@@6 %i"h a "o"al lending
commi"men" o# M496 million& being disbursed in se'en ins"allmen"s& %hich %ere la"er
augmen"ed b+ abou" M78 million under IM72s Trade In"egra"ion Mechanism <TIM0,
7i'e ins"allmen"s %or"h M4@9 million ha'e so #ar been released %i"h "he la"es" one
<M97 million0 in 7ebruar+, Discussions on "he release o# "he si-"h ins"allmen" %ill "ake
(lace in Ma+ "his +ear i# "he go'ernmen" con"inues "o im(lemen" (olicies& (ar"icularl+
on "he B:Bs and "he BB5,

16
GAL A XY
Conclusion
Through abo'e discussion& %e "ried "o e-(lain some im(or"an" issues in mone"ar+ (olic+
and i"s im(lica"ion in o'erall economic si"ua"ion o# Bangladesh,
Bangladesh Bank s"ill %ork heard "o ge" "he o'erall economic "rend o# "he coun"r+ s"able
b+ checking "he mone"ar+ (olic+ and im(lemen"ing some o"her rele'an" (olic+ %hich %ill
(ro'e "o be e##ec"i'e in "he long run as %ell as i" %ill hel( "o crea"e congenial economic
en'ironmen" in "he econom+,
17
GAL A XY
%eference
1. Banks and legal ?n'ironmen", Dr.R.M.Debnath
2. :ommercial Bank Managemen", Peter Rose
3. The Dail+ S"ar <7ri, March 1@& 2@@60
. Bangladesh bank >eb Si"e,
19
GAL A XY
E2ecutive .u**ary
Bangladesh Bank came in"o e-is"ence %i"h re"ros(ec"i'e e##ec" #rom 16"h December&
1971, The general su(erin"endence and direc"ion o# a##airs and business o# "he Bank are
en"rus"ed "o a nine member Board o# Direc"ors %hich consis"s o# "he )o'ernor as
chairman& a De(u"+ )o'ernor& "hree senior go'ernmen" o##icials and #our (ersons ha'ing
e-(erience and (ro'en ca(aci"+ in "he #ields o# banking& "rade& commerce& indus"r+ or
agricul"ure . all nomina"ed b+ "he go'ernmen", The board& %hich is "he highes" (olic+
making bod+& mee"s a" leas" si- "imes a +ear and a" leas" once e'er+ /uar"er under "he
chairmanshi( o# "he )o'ernor, The broad ob3ec"i'es o# "he Bank are "o manage "he mone"ar+
and credi" s+s"em o# Bangladesh %i"h a 'ie% "o s"abili*ing domes"ic mone"ar+ 'alue,
7unc"ions 5e'ie% and dra#"ing o# banking s"a"u"es& De"ermina"ion o# ca(i"al ade/uac+
re/uiremen"s& asse" classi#ica"ion and (ro'isioning s"andards, To (reser'e "he (ar 'alue o#
"he Bangladesh Taka1 #ormula"e (olicies %i"h a 'ie% "o res"raining insider lending,
Mone"ar+ (olic+ is "he (rocess b+ %hich "he go'ernmen"& cen"ral bank& or mone"ar+
au"hori"+ manages "he mone+ su((l+ "o achie'e s(eci#ic goals, Mone"ar+ (olic+ can
in'ol'e changing cer"ain in"eres" ra"es& ei"her direc"l+ or indirec"l+ "hrough o(en marke"
o(era"ions& se""ing reser'e re/uiremen"s& ac"ing as a las".resor" lender <i,e, discoun"
%indo% lending0& or "rading in #oreign e-change marke"s, Mone"ar+ (olic+ is associa"ed
%i"h currenc+ and credi", 7or man+ cen"uries "here %ere onl+ "%o #orms o# mone"ar+
(olic+4 decisions abou" coinage& and "he decision "o (rin" (a(er mone+ "o crea"e credi",
The "ools o# "he moni"or+ (olic+ are mone"ar+ base& reser'er re/uiremen"s& in"eren%es"
ra"e& currenc+ board& e"c, Mone"ar+ (olic+ in Bangladesh is #ormula"ed around in#la"ion
and ou"(u" gro%"h ra"es as "he basic (olic+ "arge"s,
19
GAL A XY
'etter of Trans*ittal

Da"e4 7
"h
March& 2@@7
To
Md, Iarunur 5ashid
Dec"urer
De(ar"men" o# Business Adminis"ra"ion
Dhaka :i"+ :ollege
Sub4 .ub*ission of %e)ort on !onetary Policy 3 (ts (*)lication of Bangladesh
Bank0
Dear Sir&
I" is a grea" (leasure "o submi" our re(or" J Mone"ar+ $olic+ N I"s Im(lica"ion o#
Bangladesh BankK, >e ha'e gi'en our bes" e##or" "o #urnish "he re(or" %i"h rele'an"
in#orma"ion "ha" %e ha'e collec"ed #rom man+ source,
>e ha'e concen"ra"ed our bes" e##or"s "o achie'e "he ob3ec"i'es o# "he %ork and ho(e "ha"
our endea'or %ill ser'e "he (ur(ose, >e shall be highl+ gra"e#ul and obliged i# +ou kindl+
acce(" our re(or" and e'alua"e i" %i"h +our sagacious 3udgmen",
Thank +ou
Sincerel+
G!"#
BBA 8
"h
Ba"ch
Sec. A
De(", o# Business Adminis"ra"ion
Dhaka :i"+ :ollege
2@
GAL A XY

21
GAL A XY
22