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Bangladesh Economic Review 2018

CHAPTER 5
MONETARY MANAGEMENT AND FINANCIAL
MARKET DEVELOPMENT
The monetary policy pursued during FY2017-18 aimed at limiting inflation within
tolerable level and achieving desired economic growth through promoting investment.
The monetary policy strategy for FY2017-18 was targeted to maintain an annual average
inflation rate below 6.0 percent. To keep inflation within desired level the Monetary
Policy Statement (MPS) for FY2017-18 set targets for broad money and reserve money
growth at 13.3 percent and 12.0 percent respectively. However, at the end of June 2018
broad money and reserve money growth stood at 9.24 percent and 4.04 percent against
10.88 percent and 16.28 percent increase in FY2016-17 respectively. On the other hand,
though lending rate and deposit rate both have slightly increased from June 2017 to June
2018, the intermediation spreads lid down to 4.45 percent at the end of June 2018 from
4.72 percent at the end of the previous fiscal year. Besides emphasizing on financial
inclusion a broad range of activities to bring a large number of financially excluded
people under the umbrella of conventional financial services have been undertaken by the
Government. Although, in case of Dhaka Stock Exchange, the price index slightly
decreased but market capitalisation slightly increased from June 2017 to June 2018. On
the other hand, both the price index and market capitalisation of Chattogram Stock
Exchange stirred in upward direction in FY2017-18. For ensuring stable and smooth
operation of the capital market and restoring the confidence of general investors several
restructuring activities were carried out during this period.

Monetary Policy and Monetary this regard, Bangladesh Bank focused on


Management various macro-prudential measures including
intensive surveillance on adherence to
The monetary policy stances for FY2017-18
prescribed Asset-Liability Management
aimed at attaining price and macro-financial
(ALM) and Forex Risk Management
stability along with sustainable economic
guidelines along with a new directive
growth. Like previous years, Bangladesh
requiring banks to rationalize their
Bank (BB) has put emphasis on inclusive,
Advance/Deposit Ratios to curb their over-
employment supportive and environment-
exuberance in lending
friendly green initiatives for attaining
sustainable economic growth in line with the The monetary policy stances for FY2017-18
government’s SDG-focused sustainable was formulated with the target of keeping
development agenda. Macro-Prudential inflation below 6.0 percent as well as
initiatives have taken in the 2nd half of attaining GDP growth rate at 7.4 percent. At
monetary policy stance aimed at providing the first half of the fiscal year export growth
credit flows to the productive sectors along remained moderate, import growth was strong
with ensuring quality of the credit growth. In and private sector credit growth remained
Chapter 5-Monetary Management and Financial Market Development | 55
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Bangladesh Economic Review 2018

uptrend, and constraint on expansion of FY2017-18 compared to 9.68 percent


investment activities was also eased to some increase in the previous fiscal year.
extent. Government borrowing from the Bangladesh Bank reduced repo rate by 75
banking system followed downward trend in basis points and re-fixed at 6 percent from
1st half of FY2017-18 owing to increase 6.75 percent, while reverse repo rate
government’s earning stemming from soaring remained unchanged at 4.75 percent
revenue income and a high receipts from net considering the increased credit demand
sale of national saving certificates. Assuming stemming from strong private sector credit
the downward trend of government growth, buoyant domestic demand and
borrowing from the banking system would investment activities and also considering
create a room for the private sector. Credit to monetary aggregates being kept below the
private sector revised up at 16.8 percent in 2nd target level for FY2017-18. Bangladesh Bank
half of FY2017-18. Broad money (M2) and also reduced CRR by 100 basis points and re-
reserve Money (RM) were projected at 13.3 fixed at 5.5 percent on bi-weekly average
and 12.0 percent subsequently and basis with a provision of minimum 5 percent
considering swelling of liabilities from import on daily basis effective from 15 April 2018.
payments, net foreign asset (NFA) was
projected at nearly zero percent (0.1%) at the Money and Credit Situation
second half of monetary policy stance. From Trends in Monetary Aggregates
the latest available data, broad money growth
stood at 9.24 percent during FY2017-18 The average growth of narrow money (M1),
which was 10.88 percent in FY2016-17. reserve money and broad money (M2) were
Broad money growth slowed down due 14.07 percent, 14.90 percent and 14.15
mainly to negative growth in net foreign percent respectively during the last seven
assets (NFA). It can be noted that net foreign years. During this period, the highest growth
assets (NFA) decreased by 0.86 percent for narrow money (M1) and reserve money
during FY2017-18, while it was increased by was attained in FY2015-16. In FY2015-16,
14.40 percent in the previous fiscal year. the broad money growth was more than the
However, private sector credit experienced a average growth for the previous seven years
robust growth of 16.95 percent during as well. Broad money growth has declined
FY2017-18, well above the target level of and stood at 9.24 percent at the end of June
16.8 percent emanated from strong domestic 2018 as compared to targeted growth rate of
demand and investment activities. Net 13.3 percent for the FY2017-18 and actual
domestic assets (NDA) as well as domestic growth of 10.88 percent at the end of June
credit also experienced a strong growth in 2017 due mainly to a downward trend of net
FY2017-18 due mainly to increase in private credit to the government from the banking
sector credit growth. Net domestic assets system. Table 5.1 shows the growth trends in
(NDA) grew by 12.84 percent during monetary aggregate from FY2011-12 to
FY2017-18.
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Bangladesh Economic Review 2018

Table 5.1: Trends in Monetary Aggregates


(Year-on-year Growth)

Indicator 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18


Narrow Money (M1) 6.42 12.65 14.60 13.53 32.10 13.01 6.17
Broad money (M2) 17.39 16.71 16.09 12.42 16.35 10.88 9.24
Reserve Money (RM) 8.99 15.02 15.46 14.33 30.12 16.28 4.04
Source: Bangladesh Bank
Narrow Money (M1) Broad Money (M2)
Narrow money (M1) increased by 6.17 Broad money (M2) increased by 9.24 percent
percent during FY2017-18, which is lower during FY2017-18, which is lower than 10.88
than 13.01 percent growth in FY2016-17. percent growth of the previous year. Table
This decline in the year-on-year growth of M1 5.2 shows the movement and growth of the
was mainly attributable to the significant components of broad money (M2) and
decrease in the growth of both currency notes domestic credit. Figure 5.1 and Figure 5.2
and coins with the public as well as demand show the growth of Broad Money & its
deposit. components and percentage share of the
components of Broad Money respectively.

Table 5.2: Money and Credit

Indicators June 2015 June 2016 June 2017 June 2018


End period stock (In crore Tk.)
1. Net foreign assets of the banking system 189228.8 233135.6 266697.0 264407.0
2. Net domestic assets of the banking system 598385.3 683242.3 749379.1 845570.9
a. Domestic credit 701526.5 801279.9 890670.7 1021707.3
a.1. Government sector (net)1 110257.3 114219.5 97334.0 94878.0
a.2. Public sector (other)1 16669.8 16051.1 17280.2 19207.4
1
a.3. Private sector 574599.4 671009.3 776056.5 907621.9
b. Other assets (net) -103141.2 -118037.6 -141291.6 -176136.4
3. Narrow money 160814.2 212430.7 240078.5 254890.6
a. Currency notes and coins with the public 87940.8 122074.5 137531.8 140917.5
b. Demand deposit2 72873.4 90356.2 102546.7 113973.1
4. Time deposit 626799.9 703947.2 775997.6 855087.3
5. Broad money [(1)+(2)] or [(3)+(4)] 787614.1 916377.9 1016076.1 1109977.9
Year-on-year percentage change (percent)
1. Net foreign assets of the banking system 18.23 23.20 14.40 -0.86
2. Net domestic assets of the banking system 10.70 14.18 9.68 12.84
a. Domestic credit 9.97 14.22 11.16 14.71
a.1. Government sector (net) -6.19 3.59 -14.78 -2.52
a.2. Public sector (other) 30.88 -3.71 7.66 11.15

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Bangladesh Economic Review 2018

a.3. Private sector 13.19 16.78 15.66 16.95


b. Other assets (net) 5.96 14.44 19.70 24.66
3. Narrow money 13.53 32.10 13.01 6.17
a. Currency notes and coins with the public 14.34 38.81 12.66 2.46
b. Demand deposit 12.57 23.99 13.49 11.14
4. Time deposit 12.13 12.31 10.24 10.19
5. Broad money 12.42 16.35 10.88 9.24
Note: 1. including accrued interest, 2. including deposits of other financial institutions and government agencies
Source: Bangladesh Bank

Fig 5.1: Composition of Broad Money


35
Year-on-year growth

30

25

20

15

10

0
June'12 June'13 June'14 June'15 June'16 June'17 June'18

M1 Time Deposit M2

Source: Bangladesh Bank

Fig 5.2: Percentage share of the Components of Broad money

100%
Share (in percent )

80%
78.78 79.52 79.78 79.58 76.82 76.37 77.04
60%
40%
20% 9.92 9.29 9.24 9.25 9.86 10.09 10.27
11.30 11.19 10.98 11.17 13.32 13.54 12.70
0%
June'12 June'13 June'14 June'15 June'16 June'17 June'18

Currency outside Bank Demand Deposit Time Deposit

Source: Bangladesh Bank

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Domestic Credit domestic credit stood at 9.29 percent and


88.83 percent respectively.
The growth of domestic credit stood at 14.71
percent in FY2017-18 compared to 11.16 Reserve Money
percent in FY2016-17. Of which private In FY2017-18 Reserve money stood at
sector credit growth stood at 16.95 percent in Tk.2,33,739.9 crore, which is 4.04 percent
FY2017-18 against 15.66 percent of the higher than the previous fiscal year. The
previous fiscal year. Net credit to the growth of reserve money was 16.28 percent
government decreased by 2.52 percent at the and 30.12 percent in FY2016-17 and
end of June 2018 compared to 14.78 percent FY2015-16 respectively. Components and
decrease in the previous year. In FY2017-18, sources of reserve money and its changes
the share of government (excluding others over time have been shown in Table 5.3 and
public sector) and private sector credit to total Table 5.4 respectively.

Table 5.3: Reserve Money and Its Components


June June June June June
Particular 2014 2015 2016 2017 2018
Period end stock (in crore Tk.)
1. Currency issued 85485.2 98153.9 132305.2 151265.2 154940.5
2. Balances of scheduled banks with BB 43997.7 49838.9 60299.0 72732.7 78043.4
3. Reserves of other financial institutions with the 392.4 489.2 597.1 661.5 756.0
BB
4. Reserve Money [(1)+(2)+(3)] 129875.3 148482.0 193201.3 224659.4 233739.9
Year-on-year percentage change (%)
1. Currency issued 13.42 14.82 34.79 14.33 2.43
2. Balances of scheduled banks with BB 19.55 13.28 20.99 20.62 7.30
3. Reserves of other financial institutions with BB 25.09 24.67 22.06 10.79 14.29
4. Reserve Money 15.46 14.33 30.12 16.28 4.04
Source: Bangladesh Bank

Table 5.4: Reserve Money and Its Sources


Particular June 2014 June 2015 June 2016 June 2017 June 2018

1. Net foreign assets of BB 147496.6 177401.3 218904.1 251326.9 253242.4

2. Net domestic assets of BB -17621.3 -28918.8 -25702.8 -26667.5 -19502.5


a. Domestic credit 15595.2 13276.1 26380.7 25171.7 35702.7
a.1. Claims on Government sector(net) 3840.6 810.5 13373.7 12978.2 22570.2
a.2. Claims on other public sector 1202.7 2160.8 2015.5 2157.80 2367.8
a.3. BB's claims on DMBs 6279.2 5659.2 6024.5 5056.9 5599.7

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Bangladesh Economic Review 2018

Particular June 2014 June 2015 June 2016 June 2017 June 2018

a.4. BB's claims on NBDCs 4272.7 4645.6 4967.0 4978.8 5165.0


b. Other assets (net) -33216.5 -42194.9 -52083.5 -51839.2 -55205.2
3. Reserve Money [(1)+(2)] 129875.3 148482.5 193201.3 224659.40 233739.9
Year-on-year percentage change (%)
1. Net foreign assets of BB 42.86 20.27 23.39 15.13 0.48
2. Net domestic assets of BB -290.64 64.11 -11.12 6.48 -28.74
a. Domestic credit -63.58 -14.87 98.71 -4.60 41.87
a.1. Claims on Government sector (net) -85.81 -78.90 1550.06 -2.96 73.92
a.2. Claims on other public sector -11.21 79.66 -6.72 7.06 9.73
a.3. BB's claims on DMBs -38.55 -9.87 6.45 -16.10 10.79
a.4. BB's claims on NBDCs 2.21 8.73 6.92 0.20 3.79
b. Other assets (net) -1.08 27.03 23.44 -0.87 5.08
3. Reserve Money 15.46 14.33 30.12 16.28 4.04
Source: Bangladesh Bank

At the end of FY2017-18 net foreign assets Income Velocity of Money


of Bangladesh Bank increased by 0.48 Income velocity of money is showing a
percent which was15.13 percent in FY2016- declining trend over the decades excluding a
17. On the other hand, claims on government hardly increase in FY2017-18 and FY2016-
sector (net) increased by 73.92 percent in 17. This gradual declining trend of income
FY2017-18 compared to 2.96 percent velocity of money was the indication of
decrease in FY2016-17. Claims on deposit monetisation in the economy of Bangladesh.
Table 5.5 shows the trends of income
money banks (DMBs) increased by 10.79
velocity of money and broad money as a
percent and claims on other public sector percent of GDP from FY2005-06 to
increased by 9.73 percent in FY2017-18. FY2017-18. Table 5.5 shows that the income
Money Multiplier Velocity of money was 2.67 in FY2005-06
which declined to 2.02 in FY2017-18.
Money multiplier increased to 4.75 in Income velocity of money decreased
FY2017-18 as compared to 4.52 in FY2016- gradually and broad money as a percent of
17 due to higher growth of broad money GDP has increased due mainly to faster
compared to reserve money. The ratios of growth of broad money than the GDP at
current market price. Broad money as
money multiplier as reserve-deposit ratio
percent of GDP was 37.46 percent in
slightly decreased to 0.098 in FY2017-18 FY2005-06 which increased gradually and
from 0.103 of FY2016-17 and currency- stood at 49.59 percent in FY2017-18.
deposit ratio decreased to 0.153 in FY2017- Movement of broad money as a percent of
18 from 0.157 of FY2016-17. GDP has been shown in Figure 5.3.

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Bangladesh Economic Review 2018

Table 5.5: Income Velocity of Money

GDP Broad Money Broad Money Income velocity of


FY
(in billion Tk.) (in billion Tk.) (as percent of GDP) money (GDP/M2)

2005-06 4823.40 1806.74 37.46 2.67


2006-07 5498.00 2115.04 38.47 2.60
2007-08 6286.80 2487.95 39.57 2.53
2008-09 7050.70 2965.00 42.05 2.38
2009-10 7975.40 3630.31 45.52 2.20
2010-11 9158.30 4405.20 48.10 2.08
2011-12 10552.00 5171.09 49.01 2.04
2012-13 11989.20 6035.05 50.34 1.99
2013-14 13436.74 7006.23 52.14 1.92
2014-15 15158.02 7876.14 51.96 1.92
2015-16 17328.64 9163.78 52.88 1.89
2016-17 19758.15 10160.80 51.43 1.94
2017-18 22384.98(p) 11099.78 49.59 2.02
Source: Bangladesh Bank

Fig 5.3 : Movement of M2 as percentage of GDP


60
M2 as %of GDP

55
50
45
40
35
30
2007-08

2009-10
2005-06

2006-07

2008-09

2010-11

2011-12

2012-13

2013-14

2014-15

2016-17

2017-18
2015-16

Rationalising the Rate of Interest except high-risk consumer credit (including


credit card) and SME loans. The trends of
With a view to rationalising the rate of weighted average lending and deposit rates
interest on deposit and lending through from June 2017 to June 2018 show that both
competitive environment among the banks, rates have slightly increased gradually. Figure
Bangladesh Bank has giving instructions to 5.4 shows the trend of weighted average
banks on regular basis for taking proper interest rates on lending and deposit rates
initiatives. Besides, banks are advised to limit from June 2017 to June 2018.
the difference between lending and deposit
rates or spread within lower single digit

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Fig 5.4: Weighted Average Interest Rate on Lending and Deposit


12

9
Interest Rates (in %)

0
Jun-17

Aug-17

Nov-17

Jun-18
Oct-17
Jul-17

Sep-17

Dec-17

Feb-18

Apr-18

May-18
Jan-18

Mar-18
Interest Rate Spread Weighted Average Deposit Rate Weighted Average Lending Rate

The weighted average lending rate of Banking Sector


commercial banks increased to 9.95 percent
As on June 2018, there are 57 scheduled
at the end of June 2018 from 9.56 percent of
end June 2017. Similarly, the deposit rate banks in Bangladesh and the number of bank
increased to 5.50 percent in June 2018 from branches increased to 10,114 from 9,720 as of
4.84 percent in the same period of previous June 2017 due to opening of new branches by
year. The interest rate spread slightly the banks during the year. Among 57
decreased to 4.45 percent at the end of scheduled banks, there are 6 state owned
FY2017-18 from 4.72 percent at the end of commercial banks (including BASIC Bank
Preceding fiscal year.
and Bangladesh Development Bank Ltd), 2
Financial Market Management specialised banks, 40 local private
Financial market in Bangladesh basically commercial banks and 9 foreign commercial
consists of banks, non-bank financial banks. Apart from these banks, 6 non-
institutions and stock market which include scheduled banks such as Ansar VDP Unnayan
State Owned Commercial Banks (SOCBs), Bank, Palli Shanchay Bank, Karmasangsthan
State Owned Specialised Banks (SBs), Bank, Grameen Bank, Jubilee Bank Ltd. and
Private Commercial Banks (PCBs), Foreign Probashi Kalayan Bank are also operating in
Commercial Banks (FCBs), Non-Bank the banking sector in Bangladesh. Structure
Financial Institutions (NBFIs), Investment of the banking system and their share in total
Corporation of Bangladesh (ICB), House deposits and assets by types of banks are
Building Finance Corporation (HBFC) and shown in Table 5.6.
Bangladesh Securities and Exchange
Commission (BSEC).

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Table 5.6: Structure of the Banking System in Bangladesh


(End June 2018)
Type of No. of No. of Branches Percentage of Percentage of Total
Banks Banks Urban Rural Total Total Assets Deposit

SCBs 6 1760 1981 3741 26.16 27.02


SBs 2 298 1113 1411 2.40 2.65
PCBs 40 3092 1796 4888 66.85 66.14
FCBs 9 74 0 74 4.59 4.19
Total 57 5224 4890 10114 100 100
Source: Bangladesh Bank

Table 5.6 shows that as on June 2018, 57 housing NBFIs also invest in capital market
scheduled banks with 10,114 branches are which stood at Tk.1,855.54 crore at the end
performing their banking business in of June 2018. At the end of same period,
Bangladesh of which the numbers of urban total outstanding loan/lease by the NBFIs
and rural branches are 5,224 and 4,890 stood at Tk.64080.36 crore. To ensure
respectively. Around 66.85 percent of total transparency and control of risk of financial
assets and 66.14 percent of total deposits are institutions various measures (e.g.
being handled by PCBs. On the other hand, guidelines, circulars & circular letters etc)
SOCBs covers 26.16 percent of total assets have been taken at different times. Earlier
and 27.02 percent of total deposits. guidelines on products and services, base
rate system, early warning system for weak
Non-bank Financial Institutions (NBFIs)
and problem FIs, commercial paper etc. have
Non-Bank Financial Institutions (NBFIs) are
been introduced for better direction and
playing a significant role in providing
effective measures intending to prosperity of
funding in different sectors like industrial,
the sector. With a view to increase the
commercial, housing, transportation and IT
integrity, morality, efficiency and
sectors of the country. At present 34 licensed
responsibilities of banks and financial
non-bank financial institutions are working
institutions, to ensure transparency in their
in the country. These NBFIs have a wide
products and services delivery and to
network through 262 branches and they are
promote rationale behavior amongst banks,
operating in Dhaka city along with other
NBFIs and their stakeholders, a 'Code of
districts of the country. Total paid up capital
Conduct for Banks and Non-Bank Financial
and reserve of these financial institutions
Institutions', as part of formulation and
stood at Tk.10,928.42 crore as on 30 June
implementation of National Integrity
2018. Of which paid-up capital and total
Strategy (NIS) has been introduced. To
deposit are Tk.7973.36 crore and
ensure the protection of customer interest
Tk.48,010.52 crore respectively. Besides,
and to bring uniformity in the schedule of
investment in industry, commerce and
fee/charges/commission against the
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Bangladesh Economic Review 2018

loan/lease accounts by financial institutions, Bangladesh Bank has instructed all the
a decision has been taken during the same commercial banks operating in
period. Bangladesh to open Tk10 bank accounts
of the inhabitants of the 111 former
Financial Inclusion
enclaves, which have been included in
In recent times, financial inclusion seems to the map of Bangladesh. With the
be the most willful tool to ensure inclusive initiatives of Bangladesh Bank the
and sustainable economic development in the number of these account reached to 1.76
world. With a view to building a sustainable crore at the end of March 2018.
economic infrastructure of the country and
realising the importance of financial 2. With a view to facilitate the farmers for
inclusion, Bangladesh Bank has been keeping their Tk10 account effective by
engaged in the exploration and promotion of providing credit under minimum
innovative and successful policy initiatives conditions, Bangladesh Bank has created
to bring the financially excluded marginal a revolving refinance fund worth of
population under the umbrella of financial Tk.200 crore from its own source. Small,
inclusion. The major policy initiatives taken marginal, and landless farmers are the
by Bangladesh Bank to promote financial main target groups of this refinance
inclusion are as follows: scheme. About Tk.95.95 crore has been
disbursed under this scheme up to June
1. Bangladesh Bank has issued various
2018. Presently 40 commercial banks
circulars time to time to open bank
have signed participation agreement with
account (popularly known as TK 10 bank
Bangladesh Bank and providing loans
account) with a minimum deposit of
under this scheme.
Tk10 to include the under-privileged and
financially excluded population in the
3. Bangladesh Bank has relaxed the
formal banking services. Bangladesh
regulations for opening the Tk.10 special
Bank has also instructed all the banks to
accounts of the street and working
operate these accounts without any
children which was introduced in 2014 to
service charges or any minimum balance
make these children financially
requirements. People from various
independent, safeguard their hard earned
classes and professions such as farmers,
money and secure their future. Now if
hardcore poor, workers of city
the biological parents of these children
corporation, shoe and leather, and RMG,
are available, then the account can be
physically challenged persons,
operated by the joint signature of the
beneficiary under the social security
street children and their father/mother.
program and freedom fighters along with
The number of these accounts and the
other financially excluded groups are
balance of these accounts stood at 4,381
included in this category. In 2016,

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Bangladesh Economic Review 2018

and Tk.0.26 crore up to March 2018. and Chattogram Metropolitan Area,


With a view to providing a safe, secured, which will enhance the scope of access to
and sound alternative delivery channel finance for these groups. Under the
for banking services to the non- supervision of Financial Institution
privileged, underserved population Division of Ministry of Finance,
especially from geographically remote Bangladesh Bank will implement the
location, Bangladesh Bank has project by June 2021(fixed term). Under
introduced Agent Banking in June 2014. this project about Tk.1.6 billion has been
Through Agent Banking, it becomes easy disbursed up to June 2018. Presently 32
to provide affordable banking services commercial banks and Non- Bank
for the non-privileged, underserved and Financial Institutions have signed
poor segment of population especially participation agreement with Bangladesh
from geographically remote location. As Bank and are disbursing loans under this
of June 2018, 20 Banks have got project.
approval from Bangladesh Bank to
School Banking
provide agent banking services whereas
17 banks out of them have started With the objective of creation financial
operation. Total number of agents stood literacy among the youngsters for building a
at 3,588 in June 2018 from 1,844 in strong future financial base for the nation,
December 2017. Number of outlets Bangladesh Bank (BB) has introduced
increased by 28.72 percent to 5,351 in School Banking facilities as a part of its
June 2018 compared to 4,157 in financial inclusion drive in November 2010.
December 2017. Total number of Bangladesh Bank also issued a guideline the
accounts stood at 17,77,400 which is school-banking programme in 2013 to
31.67 percent higher than December provide necessary banking services for the
2017. students by ensuring more transparent,
encouraging and dynamic institutional
4. Financial Inclusion Department is financial supports. This financial net covers
working to broaden the scope of financial students up to age of 18 years with an initial
inclusion activities all over the country. deposit of Tk.100. The number of School
At present, Bangladesh Bank is working Banking accounts and the total balance of
with a new project named ‘Second Small these account stood at 1.46 million and
and Medium Sized Enterprise Tk.14.41 billion up to March 2018.
Development Project (SMEDP-2)’ Banking, Monetary and Credit Policy
jointly funded by ADB and GoB. Under Reforms
this project credit facilities are being
Some reform initiatives relating to banking,
provided to small and women
monetary and credit policy taken during
entrepreneurs residing outside of Dhaka
FY2017-18 are briefly described below:
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Bangladesh Economic Review 2018

Reforms in Bangladesh Bank the IT Governance and IT management


of the Bangladesh Bank to lay a robust
With a view to improving financial market
and secured financial platform for
infrastructure, regulatory and oversight
advanced financial market. Necessary
capacity of Bangladesh Bank and access to
capacity building and knowledge transfer
long term financing for manufacturing sector
initiatives will also be taken to make the
in Bangladesh for ensuring stability and
officials of the central bank and its
greater resilience of the financial sector, the
associated organisations to embrace the
Financial Sector Support Project (FSSP) is
new technologies and align their regular
being implemented with the assistance of
functions with the technology based new
International Development Association
processes.
(IDA). The total approved project cost is
Tk.2,751 crore (US$350million), of which 2. Strengthening Regulatory and
IDA will provide Tk.2,358 crore (US$300 Supervisory Capacity
million) and Bangladesh Bank will provide The project expects to provide technical
Tk.393 crore (US$50 million). The project assistance towards the development and
has been commenced on 01 July 2015 and adoption of the comprehensive risk-
will end on 31 March 2021.The project will based integrated approach to banking
be implemented through three major regulation and supervision, which would
components over the project term. The include related documentation and
components are as follows: training. Currently, Rules based approach
1. Strengthening Financial Market is in place to regulate and supervise the
Infrastructure banking system. However, the risk based
This component aims to improve approach evolves the supervisory process
financial IT infrastructure of the country toward one that is more anticipatory.
further, especially focusing on: (a) This component will help Bangladesh
development of Payment and Settlement Bank to migrate to a risk-based approach
System to ensure a large scale shift to to supervision to discharge its
electronic payments in Bangladesh, responsibilities to ensure a safe and
specially of the government payments, sound banking system.
(b) expanding and modernising Credit
Information Bureau (CIB) by including 3. Supporting Long Term Finance to
credit information of the Microfinance Productive Sector
Sector and increasing reliability of credit One of the deficiencies of the current
reporting system, (c) strengthening the financial market structure is inadequate
systems of BFIU by integrating with sources of long term fund to meet the
systems of other stakeholders thereby demand of the productive sector of the
leading to safety and integrity of the country. As a result, the financing need
financial systems and (d) strengthening for long term investments are met with
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Bangladesh Economic Review 2018

relatively shorter maturity funds creating Banks and Non-bank Financial Institutions.
maturity mismatch both at banks and This Act was last amended in 2010. As per
investors book. Hence there is a demand the provision of chapter 5 (section 22-25) of
for long term financing for the the Artha Rin Adalat Ain, 2003, all scheduled
manufacturing sectors for maintaining banks have already been instructed to
growth through up-gradation of accelerate the loan recovery process through
technology and production lines and Alternative Dispute Resolution (ADR). In
improve compliance with the international addition, banks are being given necessary
standards on social and environmental instructions from time to time to dispose the
practices. This prime component of the suits more quickly through ADR process. A
project will provide long term funds, Guideline (Guidelines on External Audit of
especially in US Dollar, which would be Banks) has also been drafted jointly by
channeled by Bangladesh Bank to eligible Bangladesh Bank and Ministry of Finance
participating financial institutions (PFIs) based on Section 38, 39, 39 (ka), 39 (Kha) &
based on eligibility criteria for lending. 40 of the Bank Company Act 1991 (amended
The fund will be available, on demand, to up to 2013), Financial Reporting Act-2015
the manufacturing enterprises for and the core principle no-27 of Basel
procurement of capital machineries, Committee.
equipment and other needs of the industry
Reforms in State Owned Commercial
for setting up of new firm, expansion
Banks
and/or up-gradation. The project would
extend technical assistance to support The state-owned commercial banks (except
PFIs to build appraisal skills (including on BDBL) are being monitored under the MoU
assessing safeguards risks) and to funded in FY2017-18 similar to previous years.
borrowers. The PFI agreement has been Under the MoU signed with Sonali, Janata,
signed with 31 scheduled banks and Agrani, Rupali and Basic Bank Ltd along
US$228.90 million has been sanctioned with a view to improving the quality of loan
from which US$163.35 million has been management, ensuring the efficiency of
disbursed till June 2018. Besides, an liability-management, controlling the
Environmental Regulations Compliance operational expenses, improving the quality
Specialist and a Long Term Project of risk management and internal control
Financing Advisor have been recruited system, Bangladesh Bank has been
under this component. extensively monitoring the compliance of
Internal Control and Compliance (ICC)
Legal Reforms Policy which was developed and
implemented by the respective banks.
The Artha Rin Adalat Ain, 2003 has been
Bangladesh Bank has also been regularly
enforced for the purpose of quick disposal of
monitoring the implementation status of MoU
suits related to loan recovery of scheduled
against the certain targets fixed up therein. On
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Bangladesh Economic Review 2018

the other hand, monitoring of specialized deposit growth, ADR/IDR ratio has been
banks (Bangladesh Krishi Bank and Rajshahi revised.
Krishi Unnayan Bank) has also been carried
out under the MoU for FY2017-18.  Bank's investment in commercial paper is
being monitored in quarterly basis.
Money and Financial Market Reforms
Development of Payment System
With a goal of developing existing banking
system of Bangladesh to international To establish a public interest oriented modern
standard through competitive management payment system in Bangladesh some
and stabilising and strengthening the initiatives such as - formalise the ‘Strategy
financial base of the overall banking system, Paper for Bangladesh Bank’ payment system,
a number of initiatives including establishment of ‘Bangladesh Automated
restructuring of money and financial market Clearing House (BACH)’ and manage its
have been taken by Bangladesh Bank in overall activities, approval of Mobile
FY2016-17. In continuation to that following Financial Services and appropriate oversight,
measures have been undertaken in FY2017- development of ‘National Payment Switch’
18: and to establish e-payment system, formalise
 In order to strengthen the Asset-Liability the rules and regulatory infrastructure related
management of the banks and its liquidity to payment system, start Electronic Fund
position, two new statements namely Transfer (EFT) activities, accelerate
‘Wholesale Borrowing’ and remittance flow and implementing Real Time
‘Commitment Limit’ have been Gross Settlement System (RTGS) have been
introduced in light of Asset-Liability undertaken. Some mentionable improvements
Management Guidelines issued by are as follows:
Bangladesh Bank in March 2016.
To expand the usage of mobile technology as
 Bank's exposure (in the form of loans and an Alternative Payment Channel in banking
advances, deposit or in any other form) sector, 29 banks have been permitted to carry
with financial institutions is under strict out mobile based financial services. Among
monitoring process. them 18 banks including a subsidiary
company have started providing Mobile
 With a view to strengthening the financial Financial Services following the Guidelines
indicators of the banking industry such as issued by Bangladesh Bank. These banks are
capital base, Liquidity condition, continuing their activities of inward
interbank dependency, LCR & NSFR as remittance disbursement, transaction through
per Basel-III requirement and to ensure agent/bank branch/atm/mobile operator
harmonious advance growth in line with outlet, bill payment by individuals (such as
Utility bill payment), payment by commercial
institutions (for example: to pay wage of
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Bangladesh Economic Review 2018

corporate/industrial mills/offices), payment of Intelligence Unit (BFIU) conducted


individuals by government (for instances: several on-site inspections to examine the
elderly allowances, allowances of freedom compliance status of the banks.
fighter), to pay bill of government through
individuals (such as tax payment) , person to  A comprehensive circular has been issued
person transaction (from one registered by the BFIU on 17 September 2017 for
mobile account to other registered mobile commercial banks and mobile financial
account) and other transactions including services providers for prevention of
microfinance, withdrawn facility, insurances money laundering, terrorist financing and
premium. Under the Mobile Financial proliferation financing of weapons of
Services- the total number of agents stood at mass destruction. With a view to using a
8,29,783 up to June 2018 and the number of uniform KYC (Know Your Customer)
registered clients stood at 618.63 lakh of form 20 September 2017, the BFIU also
which the number of active accounts was issued a circular letter for Insurance
about 272.05 lakh. In June 2018, a total of Companies.
Tk.33,213.12 crore was transacted through  In order to identify and assess the
19,25,94,506 numbers of transactions. The terrorism and its financing risk and to find
amount of average daily transaction was any link between the domestic and
1,107.10 crore. With a view to paying the bill international terrorist organisations,
of online marketing, 28 banks are providing Public Security Division of the Ministry
internet banking service to the clients. The of Home Affairs has formed a committee
amount of average daily transaction through on 01 January 2018. Members from
internet banking was Tk.74.52 crore. Through Bangladesh Police, Rapid Action
e-commerce, the amount of average daily Battalion (RAB), BFIU, National Security
internal and external transactions were Intelligence (NSI) and Directorate
Tk.1.88 crore and Tk.1.46 crore respectively. General of Forces Intelligence (DGFI)
Prevention of Money Laundering and have been included in the committee.
Combating Financing of Terrorism
 BFIU has continued its effort to create
Major initiatives undertaken to prevent awareness among the officials of different
money laundering and terrorism financing are reporting organizations. It has encouraged
given below: the banks to conduct a number of training
 All the scheduled banks had been programs for their officials on AML/CFT
instructed to be alert and build utmost in 56 districts and provided its support to
awareness so that no person/entity could make the programme successful.
abuse the banking channel to aid the
 National Board of Revenue (NBR) of
terrorist or terrorist organisation.
Bangladesh and BFIU has signed a MoU
Moreover, Bangladesh Financial
on 04 February 2018 to exchange
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Bangladesh Economic Review 2018

information related to AML & CFT and IMF etc. to boost international efforts in
increase the cooperation between the this arena. Bangladesh actively
organisations. participated in various international
initiatives undertaken by these
 For prevention of money laundering (ML) organizations and other foreign FIUs in
and combating terrorist financing (TF) FY2017-18. Furthermore, as the main
and proliferation financing (PF), the coordinating agency for prevention of
BFIU, as the central agency of the country ML, TF and PF, BFIU actively
has been maintaining continued participated in a number of local
engagement with all the international conference/meeting/workshops arranged
bodies such as APG, Egmont Group, by other government agencies.
FATF, BIMSTEC, UNODC, World Bank,

Box 5.1: Implementation of Basel III


Implementation of Basel III has been started with a transitional arrangement starting from January 1, 2015 and
will be completed by January 2020. In this context, Bangladesh Bank (BB) issued ‘Guideline on Risk Based Capital
Adequacy-Revised Regulatory Capital Framework for Banks in line with Basel III’ in December 2014 and declared
a road map with an action plan of the phase-in arrangements for the implementation of such. Now, scheduled
banks in Bangladesh maintain minimum capital in relation to their risk profile and form a strategy for maintaining
capital at an adequate level.
Basel III increases the level of capital that banks must hold in addition to increasing the quality of capital. Banks
are expected to maintain a minimum total capital ratio of 10.00 percent, where 6.00 percent is to be maintained as
Tier-1 capital. Under Basel III, banks will have to build up additional capital conservation buffer. Maintenance of
capital conservation buffer has started from 0.625 percent in 2016 and will end up at 2.50 percent in 2019. All
banks must hold Common Equity Tier 1 (CET1) capital (the highest quality and most loss absorbing form of
capital) in an amount of at least 4.50 percent of total risk weighted assets at all time.
Banks are advised to prepare capital adequacy reports/statements following new Basel III accord from the quarter
ended in March 2015. It is evident that at the end of March 2018, CRAR of the banking industry stood at 10.11
percent while CET1 was 6.98 percent which accomplished Basel III capital adequacy requirements. However, at
individual level, 8 banks out of 57 banks had failed to maintain both CET1 and CRAR requirements.

As a step towards implementation of Pillar II of Basel III, BB is working for implementation of Internal Capital
Adequacy Assessment Process (ICAAP) in the banks of Bangladesh. Banks evaluate their internal processes and
strategies to ensure adequate capital resources covering all material risks through ICAAP reports. BB reviews and
evaluates banks’ ICAAP and the strategies using information and observations found during Supervisory Review
Evaluation Process (SREP) inspection. If a bank fails to produce their own ICAAP backed by proper evidence and
rigorous review of their internal risk management process, BB applies prudence and provides directions regarding
compliances. Based on the findings of ICAAP reports and Supervisory Review Evaluation Process (SREP)
inspection based on December 2016; a series of bilateral meeting with the banks were held from February 2018 to
June 2018.

From the experience of recent meetings (held for 2016, 2015 and 2014) it has been observed that, additional
capital requirement against residual risk (mainly due to documentation error) is the highest among the pillar 2
risks. Apart from that, strategic risks and appraisal of core risks management practice are the other major
concerns for the banks.

December 2015.

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Bangladesh Economic Review 2018

Capital Market Reforms for Maintaining Stability and


Development and Reform Activities of the Transparency of the Capital Market
Capital Market For the interest of a stable capital market and
An efficient, tranparent and fair capital raising confidence among the investors, it is
market plays an important role in necessary to increase supply of shares,
industrialisation and economic development institutional investors and also to ensure
of a country. Bangladesh Securities and transparency and accountability in activities
Exchange Commission (BSEC) was of all the capital market stack holders.
established to develope such a fair and Recently, BSEC has taken some steps for
accountable capital market. ensuring transparency and accountability
along with long term stability capital market,
The commission carries out all its activities
notables among them are as follows:
to meet purposes of the securities law. Major
activities of the commission are listed below:  IOSCO, for the first time, declared
 Approval of issuance of securities October 02-08, 2017 as the ‘World
 Formulation of rules and regulations Investor Week 2017’ to create awareness
 Protection of investors through market worldwide among the investors on
monitoring and surveillance, corporate investment protection and education. The
governance, enforcement actions and Commission organised a range of
investors education programme etc activities to promote awareness about
 Enforcement actions investor protection and education such as
 Regulation of capital market and its organizing rally, seminar, symposium,
intermediaries workshops, publishing bulletin, souvenir
and TV talk show
 Conducting research and publishing
information.
 The Commission arranged higher
Promulgation and Amendment of training programs for 1400 master
Necessary Laws and Rules trainers with the help of National
 Formulation of the Bangladesh Institute of Securities Market, India for
Securities and Exchange Commission nationwide Financial Literacy program
(Market Maker) Rules, 2017
 The Commission under innovation
 Formulation of the Bangladesh activities introduced E-notice board and
Securities and Exchange Commission presented rules and notifications framed
(Clearing and Settlement) Rules, 2017 under securities laws in its website

 Amendment of the Bangladesh Securities  Effectiveness of rule 3(5) of Margin


and Exchange Commission (Public Rules, 1999 has been suspended till 31
Issue) Rules, 2015. December 2018
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Bangladesh Economic Review 2018

 An Order has been issued regarding The number of listed securities (including
negative equity in case of Margin Loan mutual funds and debenture) of Dhaka Stock
for Merchant Banks Exchange (DSE) has increased from 563 at
the end of FY2016-17 to 572 at the end of
 A Notification has been issued regarding FY2017-18. At the end of June 2018, total
time extension in respect of provision for issued capital of all listed securities stood at
unrecovered loss; Tk.1,21,966.51crore, up by 4.65 percent from
Tk.1,16,551.08 crore at the end of previous
 The Commission has introduced E- fiscal year.
tendering for tender advertisement
Total market capitalisation of all listed
securities was Tk.3,80,100.10 crore in June
 The 20% quota for affected small
2017 which increased to Tk.3,84,734.78 crore
investors has been extended till June 30,
in June 2018 representing an increase of 1.22
2018 for IPO
percent.

 BSEC has arranged ‘Investors & The DSE Broad Index (DSEx) decreased by
Entrepreneur Conference and Investment 4.43 percent from 5,656.05 points at the end
Education Fair’ in Rajshahi, Khulna, of FY2016-17 to 5,405.46 points at the end of
Sylhet and Barishal FY2017-18. DSE Broad Index (DSEx), which
was introduced on 28 January 2013 where the
 a2i made presentation on e-filing system first day closing was 4,090.47 points which
to BSEC, trained its officials and created reached its highest points at 6,336.88 in 26
user ID in the systems for 84 users. November 2017.

Market Situation
Dhaka Stock Exchange (DSE) Ltd

Table 5.7: Securities Trading Information of Dhaka Stock Exchange


End of No. of Listed No. of Issued Market Securities DSE DSE
Period Securities IPOs Capital Capitalization Traded in General Board
(Including (Tk. in (Tk. in crore) Value (Tk. in index Index
Mutual Funds crore) crore) (DSEX)**
& Debentures
2002-03 260 3 3608.11 6920.10 3059.67 830.46
2003-04 267 10 4893.91 13664.09 2477.02 1318.92
2004-05 277 5 6639.19 22204.56 7556.42 1713.17
2005-06 303 18 8572.26 21542.19 4600.82 1339.53
2006-07 325 10 16427.93 47585.54 16467.16 2149.32
2007-08 378 13 28437.97 93102.52 54328.60 3000.50
2008-09 443 17 45794.40 124133.90 89378.92 3010.26

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Bangladesh Economic Review 2018
End of No. of Listed No. of Issued Market Securities DSE DSE
Period Securities IPOs Capital Capitalization Traded in General Board
(Including (Tk. in (Tk. in crore) Value (Tk. in index Index
Mutual Funds crore) crore) (DSEX)**
& Debentures
2009-10 450 23 60726.29 270074.46 256349.86 6153.68
2010-11 490 19 80683.91 285389.22 325915.26 6117.23
2011-12 511 15 93362.96 249161.29 117145.14 4572.88
2012-13 525 15 98358.97 253024.60 85708.97 4104.65
2013-14 536 13 103,207.64 294320.23 112539.84 4480.52
2014-15 555 16 109195.35 324730.63 112351.95 4583.11
2015-16 559 11 112741.00 318574.93 107246.07 4507.58
2016-17 563 9 116551.08 380100.10 180522.21 5656.05
2017-18 572 11 121966.51 384734.78 159085.19 5405.46
Source: Dhaka Stock Exchange
Note: * Stop displaying DSE General Index (DGEN) in DSE website from 01 August 2013.
** DSE introduced new index benchmark DSE broad index (DSEx) on 28 January 2013 as per ‘DSE Bangladesh Index Methodology’
designed and developed by S&P Dow Jones Indices.

Figure 5.5: DSE Market Capitalisation and Indices

450,000 6,000
400,000
5,500
350,000
M. Cap Tk in crore

300,000 5,000
250,000
4,500

Index
200,000
150,000 4,000
100,000
3,500
50,000
- 3,000
2002-03

2011-12
2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

Market Capitalization (Tk in crore) DSE Board Index (DSEX)**

Chattogram Stock Exchange (CSE) Tk.60,657.21 crore to Tk.65,405.91 crore


Limited during the same period. Market capitalisation
of CSE at the end of FY2017-18 stood at
The number of listed securities (including
Tk.3,12,352 crore, up by 0.33 percent
mutual funds and bonds) of Chattogram Stock
compared to the market capitalisation of
Exchange (CSE) increased from 303 in
Tk.3,11,324.29 crore at the end of FY2016-
FY2016-17 to 312 in FY2017-18.The issued
17. CSE All Share Price Index reached
capital increased by 7.82 percent from

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Bangladesh Economic Review 2018

16,558.50 points at the end of June 2018 Table 5.8 and Figure 5.6 show the trend of
which was 15,580.37 at the same period. CSE market capitalisation, CSE general index
and securities turnover.

Table 5.8: Securities Trading Information of Chattogram Stock Exchange

End of No. of Listed IPO Issued Market Turnover CSE All


Period Securities Capital Capitalisation Value Share Price
(with MF& (Tk. in (Tk. in crore) (Tk. in Index
Bonds) crore) crore)
2005-06 213 19 6375.02 19555.17 1143.91 2879.19
2006-07 219 10 8225.17 39926.82 3437.74 5194.76
2007-08 231 14 10314.08 77774.28 8016.21 9050.56
2008-09 246 18 14246.55 97494.82 12518.25 10477.67
2009-10 232 23 20677.39 224176.78 21711.23 18116.05
2010-11 220 19 30155.33 225977.78 32168.23 17059.53
2011-12 251 15 37527.49 187817.14 13485.49 13736.42
2012-13 266 15 42338.09 191907.03 10198.52 12738.23
2013-14 276 13 47083.97 229772.82 10218.27 13766.23
2014-15 292 20 50130.63 257146.40 9648.00 14097.17
2015-16 298 11 56607.60 249684.89 7747.16 13623.07
2016-17 303 09 60657.21 311324.29 11807.52 15580.37
2017-18 312 12 65405.91 312352.17 10985.06 16558.50
Source: Chattogram Stock Exchange

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