Overview on Financial System

Of
Bangladesh
Prepared By:
Kazi Mashfiq Uddin Ahmed
Id: 100306003
Department of Business Administration
Green University Of Bangladesh
 Overview of Financial system of Bangladesh

The financial system of Bangladesh is comprised of three broad fragmented

sectors:

1) Formal Sector,

2) Semi-Formal Sector,

3 ) Informal Sector.

The sectors have been categorized in accordance with their degree of regulation.
The formal sector includes all regulated institutions like Banks, Non-Bank Financial Institutions (FIs),
Insurance Companies, Capital Market Intermediaries like Brokerage Houses, Merchant Banks etc.; Micro
Finance Institutions (MFIs).

The semi formal sector includes those institutions which are regulated otherwise but do not fall under the
jurisdiction of Central Bank, Insurance Authority, Securities and Exchange Commission or any other
enacted financial regulator. This sector is mainly represented by Specialized Financial Institutions like House
Building Finance Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen
Bank etc., Non Governmental Organizations (NGOs and discrete government programs.

The informal sector includes private intermediaries which are completely unregulated.
 Financial System Of
Bangladesh

Formal Sector Semi Formal Sector Informal Sector

Specialized Financial
Financial Market Regulators & Institutions
Institutions

Money Market Bangladesh Bank House Building Financial

(Banks, NBFIs,Primary Dealers) (Central Bank) Corporation(HBFC)

Capital Market Banks

Palli Karma Sahayak
Investment banks, Stock Exchanges, 47 scheduled &
Credit Rating Companies etc.) 4 non-scheduled banks Foundation(PKSF)

Foreign Exchange Market NBFIs

Samabay Bank
(Authorized Dealers) 31 NBFIs

Insurance Development &

Grameen Bank
Regulatory Authority

Insurance Companies
18 Life and 44 Non-Life
Insurance Companies

Securities & Exchange Commission

(Regulatory of capital market
Intermediaries )

Stock Exchanges, Stock Dealers

Brokers, Merchants Banks, AMC s,
Credit Rating Agencies etc.

Microcredit Regulatory
Authority
(MFI Authority)

Micro Finance Institutions

599 MFIs
 Financial market in Bangladesh
• Money Market: The primary money market is comprised of banks, FIs and primary dealers as
intermediaries and savings & lending instruments, treasury bills as instruments. There are currently 15
primary dealers (12 banks and 3 FIs) in Bangladesh. The only active secondary market is overnight call
money market which is participated by the scheduled banks and FIs. The money market in Bangladesh is
regulated by Bangladesh Bank (BB), the Central Bank of Bangladesh.

• Capital market: The primary segment of capital market is operated through private and public offering of
equity and bond instruments. The secondary segment of capital market is institutionalized by two (02)
stock exchanges-Dhaka Stock Exchange and Chittagong Stock Exchange. The instruments in these
exchanges are equity securities (shares), debentures, corporate bonds and treasury bonds. The capital
market in Bangladesh is governed by Securities and Commission (SEC).

• Foreign Exchange Market: Towards liberalization of foreign exchange transactions, a number of

measures were adopted since 1990s. Bangladeshi currency, the taka, was declared convertible on
current account transactions (as on 24 March 1994), in terms of Article VIII of IMF Article of Agreement
(1994). As Taka is not convertible in capital account, resident owned capital is not freely transferable
abroad. Repatriation of profits or disinvestment proceeds on non-resident FDI and portfolio investment
inflows are permitted freely. Direct investments of non-residents in the industrial sector and portfolio
investments of non-residents through stock exchanges are repatriable abroad, as also are capital gains
and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh
Bank approval, which is allowed only sparingly. Bangladesh adopted Floating Exchange Rate regime
since 31 May 2003. Under the regime, BB does not interfere in the determination of exchange rate, but
operates the monetary policy prudently for minimizing extreme swings in exchange rate to avoid adverse
repercussion on the domestic economy. The exchange rate is being determined in the market on the
basis of market demand and supply forces of the respective currencies. In the forex market banks are
free to buy and sale foreign currency in the spot and also in the forward markets. However, to avoid any
unusual volatility in the exchange rate, Bangladesh Bank, the regulator of foreign exchange market
remains vigilant over the developments in the foreign exchange market and intervenes by buying and
selling foreign currencies whenever it deems necessary to maintain stability in the foreign exchange
market.
 Regulators of the Financial System
Central Bank:
Bangladesh Bank acts as the Central Bank of Bangladesh which was established on December 16, 1972
through the enactment of Bangladesh Bank Order 1972- President’s Order No. 127 of 1972 (Amended in
2003).
The general superintendence and direction of the affairs and business of BB have been entrusted to a 9
members' Board of Directors which is headed by the Governor who is the Chief Executive Officer of this
institution as well. BB has 40 departments and 9 branch offices.
In Strategic Plan (2010-2014), the vision of BB has been stated as, “To develop continually as a forward
looking central bank with competent and committed professionals of high ethical standards, conducting
monetary management and financial sector supervision to maintain price stability and financial system
robustness, supporting rapid broad based inclusive economic growth, employment generation and poverty
eradication in Bangladesh”.
The main functions of BB are (Section 7A of BB Order, 1972) -

1. to formulate and implement monetary policy;

2. to formulate and implement intervention policies in the foreign exchange market;
3. to give advice to the Government on the interaction of monetary policy with fiscal and exchange
rate policy, on the impact of various policy measures on the economy and to propose legislative
measures it considers necessary or appropriate to attain its objectives and perform its functions;
4. to hold and manage the official foreign reserves of Bangladesh;
5. to promote, regulate and ensure a secure and efficient payment system, including the issue of
bank notes;
6. to regulate and supervise banking companies and financial institutions.
 Core Policies of Central Bank
Monetary policy

• The main objectives of monetary policy of Bangladesh Bank are:

• Price stability both internal & external

• Sustainable growth & development
• High employment
• Economic and efficient use of resources
• Stability of financial & payment system

Bangladesh Bank declares the monetary policy by issuing Monetary Policy Statement (MPS) twice
(January and July) in a year. The tools and instruments for implementation of monetary policy in
Bangladesh are Bank Rate, Open Market Operations (OMO), Repurchase agreements (Repo) &

Reverse Repo, Statutory Reserve Requirements (SLR & CRR).

Reserve Management Strategy:
Bangladesh Bank maintains the foreign exchange reserve of the country in different currencies to minimize the
risk emerging from widespread fluctuation in exchange rate of major currencies and very irregular movement in
interest rates in the global money market. BB has established Nostro account arrangements with different Central
Banks. Funds accumulated in these accounts are invested in Treasury bills, repos and other government papers
in the respective currencies. It also makes investment in the form of short term deposits with different high rated
and reputed commercial banks and purchase of high rated sovereign/supranational/corporate bonds. A separate
department of BB performs the operational functions regarding investment which is guided by investment policy
set by the BB's Investment Committee headed by a Deputy Governor. The underlying principle of the investment
policy is to ensure the optimum return on investment with minimum market risk.

Interest Rate Policy:

Under the Financial sector reform program, a flexible interest policy was formulated. According to that, banks
are free to charge/fix their deposit (Bank /Financial Institutes) and Lending (Bank /Financial Institutes) rates other
than Export Credit. At present, except Pre-shipment export credit and agricultural lending, there is no interest
rate cap on lending for banks. Yet, banks can differentiate interest rate up to 3% considering comparative risk
elements involved among borrowers in same lending category. With progressive deregulation of interest rates,
banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may
change interest 1.5% more or less than the announced mid-rate on the basis of the comparative credit risk.
Banks upload their deposit and lending interest rate in their respective website.

Capital Adequacy for Banks and FIs:

With a view to strengthening the capital base of banks & FIs, Basel-II Accord has been introduced in both of
these sectors. For banks, full implementation of Basel-II was started in January 01, 2010 (Guidelines on Risk
Based Capital Adequacy for banks). Now, scheduled banks in Bangladesh are required to maintain Tk. 4 billion
or 10% of Total Risk Weighted Assets as capital, whichever is higher. For FIs, full implementation of Basel-II has
been started in January 01, 2012 (Prudential Guidelines on Capital Adequacy and Market Discipline (CAMD) for
Financial Institutions). Now, FIs in Bangladesh are required to maintain Tk. 1 billion or 10% of Total Risk
Weighted Assets as capital, whichever is higher.
Deposit Insurance:
The deposit insurance scheme (DIS) was introduced in Bangladesh in August 1984 to act as a safety net for the
depositors. All the scheduled banks Bangladesh are the member of this scheme Bank Deposit Insurance Act
2000. The purpose of DIS is to help to increase market discipline, reduce moral hazard in the financial sector and
provide safety nets at the minimum cost to the public in the event of bank failure. A Deposit Insurance Trust Fund
(DITF) has also been created for providing limited protection (not exceeding Taka 0.01 million) to a small
depositor in case of winding up of any bank. The Board of Directors of BB is the Trustee Board for the DITF. BB
has adopted a system of risk based deposit insurance premium rates applicable for all scheduled banks effective
from January - June 2007. According to new instruction regarding premium rates, problem banks are required to
pay 0.09 percent and private banks other than the problem banks and state owned commercial banks are
required to pay 0.07 percent where the percent coverage of the deposits is taka one hundred thousand per
depositor per bank. With this end in view, BB has already advised the banks for bringing DIS into the notice of the
public through displaying the same in their display board .

Insurance Authority:
Insurance Development and Regulatory Authority (IDRA) was instituted on January 26, 2011 as the
regulator of insurance industry being empowered by Insurance Development and Regulatory Act,
2010 by replacing its predecessor, Chief Controller of Insurance. This institution is operated under
Ministry of Finance and a 4 member executive body headed by Chairman is responsible for its
general supervision and direction of business.
IDRA has been established to make the insurance industry as the premier financial service provider
in the country by structuring on an efficient corporate environment, by securing embryonic
aspiration of society and by penetrating deep into all segments for high economic growth. The
mission of IDRA is to protect the interest of the policy holders and other stakeholders under
insurance policy, supervise and regulate the insurance industry effectively, ensure orderly and
systematic growth of the insurance industry and for matters connected therewith or incidental
thereto.
 Regulator of Capital Market Intermediaries
Securities and Exchange Commission (SEC) performs the functions to regulate the capital
market intermediaries and issuance of capital and financial instruments by public limited
companies. It was established on June 8, 1993 under the Securities and Exchange Commission
Act, 1993. A 5 member commission headed by a Chairman has the overall responsibility to
administer securities legislation and the Commission is attached to the Ministry of Finance.
The mission of SEC is to protect the interests of securities investors, to develop and maintain
fair, transparent and efficient securities markets and to ensure proper issuance of securities and
compliance with securities laws. The main functions of SEC are:

• Regulating the business of the Stock Exchanges or any other securities market.
• Registering and regulating the business of stock-brokers, sub-brokers, share transfer
agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of
an issue, underwriters, portfolio managers, investment advisers and other intermediaries
in the securities market.
• Registering, monitoring and regulating of collective investment scheme including all
forms of mutual funds.
• Monitoring and regulating all authorized self regulatory organizations in the securities
market.
• Prohibiting fraudulent and unfair trade practices in any securities market.
• Promoting investors’ education and providing training for intermediaries of the securities
market.
• Prohibiting insider trading in securities.
• Regulating the substantial acquisition of shares and take-over of companies.
• Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of
securities, the Stock Exchanges and intermediaries and any self regulatory organization
in the securities market.
• Conducting research and publishing information.
 Regulator of Micro Finance Institutions
To bring Non-government Microfinance Institutions (NGO-MFIs) under a regulatory framework, the
Government of Bangladesh enacted "Microcredit Regulatory Authority Act, 2006’" (Act no. 32 of 2006) which
came into effect from August 27, 2006. Under this Act, the Government established Microcredit Regulatory
Authority (MRA) with a view to ensuring transparency and accountability of microcredit activities of the NGO-
MFIs in the country. The Authority is empowered and responsible to implement the said act and to bring the
microcredit sector of the country under a full-fledged regulatory framework.
MRA’s mission is to ensure transparency and accountability of microfinance operations of NGO-MFIs as well
as foster sustainable growth of this sector. In order to achieve its mission, MRA has set itself the task to
attain the following goals:
• To formulate as well as implement the policies to ensure good governance and transparent financial
systems of MFIs.
• To conduct in-depth research on critical microfinance issues and provide policy inputs to the
government consistent with the national strategy for poverty eradication.
• To provide training of NGO-MFIs and linking them with the broader financial market to facilitate
sustainable resources and efficient management.
• To assist the government to build up an inclusive financial market for economic development of the
country.
• To identify the priorities in the microfinance sector for policy guidance and dissemination of
information to attain the MRA’s social responsibility.

According to the Act, the MRA will be responsible for the three primary functions that will need to be carried out, namely:

Licensing of MFIs with explicit legal powers

Supervision of MFIs to ensure that they continue to comply with the licensing requirements; and
Enforcement of sanctions in the event of any MFI failing to meet the licensing and ongoing
supervisory requirements.
 Banks:
• After the independence, banking industry in Bangladesh started its journey with 6 Nationalized commercialized banks, 2 State
owned Specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant expansion with the entrance
of private banks. Now, banks in Bangladesh are primarily of two types:

• Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as
Scheduled Banks.
• Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are
enacted for meeting up those objectives, are termed as Non-Scheduled Banks. These banks cannot perform all functions of
scheduled banks.

• There are 47 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank which is
empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled Banks are classified
into following types:
• State Owned Commercial Banks (SOCBs): There are 4 SOCBs which are fully or majorly owned by the Government of
Bangladesh.

• Specialized Banks (SDBs): 4 specialized banks are now operating which were established for specific objectives like
agricultural or industrial development. These banks are also fully or majorly owned by the Government of Bangladesh.

• Private Commercial Banks (PCBs): There are 30 private commercial banks which are majorly owned by the private entities.
PCBs can be categorized into two groups:

• Conventional PCBs: 23 conventional PCBs are now operating in the industry. They perform the banking functions in
conventional fashion i.e interest based operations.

• Islami Shariah based PCBs: There are 7 Islami Shariah based PCBs in Bangladesh and they execute banking activities
according to Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode. .

• Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks which are incorporated
in abroad.

• There are now 4 non-scheduled banks in Bangladesh which are:

• Ansar VDP Unnayan Bank,
• Karmashangosthan Bank,
• Probashi Kollyan Bank,
• Jubilee Bank
 FIs
• Non Bank Financial Institutions (FIs) are those types of financial institutions which are
regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank.
Now, 31 FIs are operating in Bangladesh while the maiden one was established in
1981. Out of the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 13
were initiated by private domestic initiative and 15 were initiated by joint venture
initiative. Major sources of funds of FIs are Term Deposit (at least six months tenure),
Credit Facility from Banks and other FIs, Call Money as well as Bond and
Securitization.
The major difference between banks and FIs are as follows:

• FIs cannot issue cheques, pay-orders or demand

drafts.
• FIs cannot receive demand deposits,
• FIs cannot be involved in foreign exchange financing,
• FIs can conduct their business operations with
diversified financing modes like syndicated financing,
bridge financing, lease financing, securitization
instruments, private placement of equity etc.
 Capital Market
After the independence, establishment of Dhaka Stock Exchange (formerly East Pakistan Stock Exchange) initiated the pathway of capital market
intermediaries in Bangladesh. In 1976, formation of Investment Corporation of Bangladesh opened the door of professional portfolio management in
institutional form. In last two decades, capital market witnessed number of institutional and regulatory advancements which has resulted diversified capital
market intermediaries. At present, capital market intermediaries are of following types:

1. Stock Exchanges: Apart from Dhaka Stock Exchange, there is another stock exchange in Bangladesh that is
Chittagong Stock Exchange established in 1995.

2. Central Depository: The only depository system for the transaction and settlement of financial securities, Central
Depository Bangladesh Ltd (CDBL) was formed in 2000 which conducts its operations under Depositories Act 1999,
Depositories Regulations 2000, Depository (User) Regulations 2003, and the CDBL by-laws.

3. Stock Dealer/Sock Broker: Under SEC (Stock Dealer, Stock Broker & Authorized Representative) Rules 2000, these
entities are licensed and they are bound to be a member of any of the two stock exchanges. At present, DSE and CSE
have 238 and 136 members respectively.

4. Merchant Banker & Portfolio Manager: These institutions are licensed to operate under SEC (Merchant Banker &
Portfolio Manager Rules) 1996 and 45 institutions have been licensed by SEC under this rules so far.

5. Asset Management Companies (AMCs): AMCs are authorized to act as issue and portfolio manager of the mutual
funds which are issued under SEC (Mutual Fund) Rules 2001. There are 15 AMCs in Bangladesh at present.

6. Credit Rating Companies (CRCs): CRCs in Bangladesh are licensed under Credit Rating Companies Rules, 1996 and
now, 5 CRCs have been accredited by SEC.

7. Trustees/Custodians: According to rules, all asset backed securitizations and mutual funds must have an accredited
trusty and security custodian. For that purpose, SEC has licensed 9 institutions as Trustees and 9 institutions as
custodians.

8. Investment Corporation of Bangladesh (ICB): ICB is a specialized capital market intermediary which was established
in 1976 through the ordainment of The Investment Corporation of Bangladesh Ordinance 1976. This ordinance has
empowered ICB to perform all types of capital market intermediation that fall under jurisdiction of SEC. ICB has three
subsidiaries:

8.1. ICB Capital Management Ltd.,

 Insurance
Insurance sector in Bangladesh emerged after independence with 2 nationalized insurance
companies- 1 Life & 1 General; and 1 foreign insurance company. In mid 80s, private
sector insurance companies started to enter in the industry and it got expanded. Now days,
62 companies are operating under Insurance Act 2010. Out of them-

• 18 are Life Insurance Companies including 1 foreign

company and 1 is state-owned company,
• 44 General Insurance Companies including 1 state-owned
company.

Insurance companies in Bangladesh provide following services:

• Life insurance,
• General Insurance,
• Reinsurance,
• Micro-insurance,
• Takaful or Islami insurance.
 Micro Finance Institutions (MFIs)
The member-based Microfinance Institutions (MFIs) constitute a rapidly growing segment of the Rural
Financial Market (RFM) in Bangladesh. Microcredit programs (MCP) in Bangladesh are implemented by
various formal financial institutions (nationalized commercial banks and specialized banks), specialized
government organizations and Non-Government Organizations (NGOs). The growth in the MFI sector, in
terms of the number of MFI as well as total membership, was phenomenal during the 1990s and continues
till today.
Despite the fact that more than a thousand of institutions are operating microcredit programs, but only 10
large Microcredit Institutions (MFIs) and Grameen Bank represent 87% of total savings of the sector and
81% of total outstanding loan of the sector.

Credit services of this sector can be categorized into six broad groups:
i) general microcredit for small-scale self employment based activities,
ii) microenterprise loans,
iii) loans for ultra poor,
iv) agricultural loans,
v) seasonal loans, and
vi) loans for disaster management.

Currently, 599 institutions (as of October 10 2011) have been licensed by

MRA to operate Micro Credit Programs. But, Grameen Bank is out of the
jurisdiction of MRA as it is operated under a distinct legislation- Grameen
Bank Ordinance, 1983.
 Key Financial Indicator
Banks As on June 2011
Deposits Advances Total Capital* No. of Branches
4115855.50 Million 3212848.70 Million 461697.00 Million 7772

FIs As on December 2010

Deposits Loans and Assets Share Capital & No. of Branches
leases Reserve

94374.80 Million 321284.87 251527.34 44689.29 Million 115

Million Million

Insurance As on December 2009

Asset Share Capital Reserve

Life Insurance 118020.15 Million 1245.54 Million 106098.88 Million

Non-Life Insurance 42622.90 Million 6653.83 Million 12133.30 Million

 Capital Market
Market Capitalization of Dhaka Stock Exchange As on September 2011

All Listed Securities 2,782,901Million

All Listed Companies Shares 2,202,274 Million
All Listed Mutual Funds 35,733 Million
All Debentures 576 Million
All Listed Govt. T-Bonds 537,381 Million
All Listed Corporate Bonds 6,937 Million

MFIs As on June 2009

Total Number of Number of No. of Branches

Outstanding Clients Borrowers

1,21,881.85 24.77 Million 19.50Million 18,022

Million