Budget of An Emerging Economy Bangladesh of the economy starting from Tk. 786 crores in 1972- 1973....

January - March 2016

BUD

GET O

F AN

EMERG

ING

ECO

NO

MY: BA

NG

LAD

ESH

January - March 2016

6.51 %6.06 %6.01 %6.52 %6.46 %5.57 %5.05 %6.01 %7.06 %6.67 %

1,314 $1,184 $

1,054 $955 $928 $843 $759 $686 $598 $543 $

B u d g e t o f A nEmerging EconomyBangladesh

From the Editorial Board 2President’s Desk 4

ARTICLESAspired Budget 6Interview of FBCCI President Abdul Matlub Ahmad

Budget for Encountering the Challenges of 10Emerging Economies- M Jalal Hussain FCA

Aspired Budget of Bangladesh 15An Emerging Economy- M. Idris Ali FCA

Investment in Emerging Market Economy 19The Bigger the Risk, the Bigger the Reward- Md Anisuzzaman FCA

Budget for an Emerging Economy 24- Raihan M Chowdhury

Roadmap of an Emerging Economy in Growth of Revenue 28- Nabila Ishrat Jahan ACA

Budget Planning Intended for Economic Dynamics 30- Thauhidul Alam

Better Government Series 38A Modern Finance Ministry- 1Ross Campbell- 2Graham Dale

ADP Implementation Meets Target Quality? 46- Mohammad Zahid Hossain FCA

Determinants of Audit Committee Independence 49In Financial Sector of Bangladesh- 1Rumana Ahmed- 2Mahdi Hasan

International Audit Regulator Pushes 59Audit Firms to Improve Quality- Iftekhar Hossain FCA

Negative Interest Rate on Deposit 64- M. S. Siddiqui

Effective and Transparent Financial 67Reporting is Good for Business- Ashish Kumar Paul FCA

Importance of Business Risk Management (BRM) to 72Strategic Planning and Control- Md. Mustaq Ahmed ACA

Sharing Transaction Statement by Banks 80No more enough for Companies- K. M. Tarek FCA

Environmental and Economic Implications 82for Adopting Carbon Tax PolicySome Experiences from the GlobalContext and Lesson for Bangladesh- 1Shamsun Arefin- 2Zoinul Abedin Sakil ACA

Role of Internal Auditor to Improve 91Internal Control System in Listed Companies- Chandra Shekhar Das FCA

Accounting Requirements of Takaful Operators 94- Kazi Md. Mortuza Ali

CONTENTS ISSN 1993-3649

"The opinions expressed in this publication are those of the respective authors themselves and do not necessarily reflect the views of the Editorial Board of the Institute of Chartered Accountants of Bangladesh (ICAB) or ICAB itself."

DISCLAIMER

EDITORIAL BOARDChairmanMasih Malik Chowdhury FCA

Co-ChairmanDr. Jamshed Sanyiath Ahmed Choudhury FCA

EditorHarun Mahmud FCA

MembersAkhtar Sohel Kasem FCAA F Nesaruddin FCA Nasir Uddin Ahmed FCA Parveen Mahmud FCAMd. Shahadat Hossain FCAGopal Chandra Ghosh FCAModdassar Ahmed Siddique FCAMd. Mahamud Hosain FCA Amanullah Khan FCA (56)M Idris Ali FCA (95)Dr. Md. Abu Sayed Khan FCA (401)Md Abdus Salam FCA (570)Mohammad Zahid Hossain FCA (808)Mohammed Jashim Uddin FCA (863)S. M. Rafiqul Islam FCA (867)Md. Saiful Islam FCA (952)Mohammad Redwanur Rahman FCA (999)Md. Abu Khair Hasanul Hasif Sowdagar FCA (1054)Muhammad Aminul Hoque FCA (1129)Abdullah-Al-Mamun FCA (1142)Zareen Mahmud Hosein FCA (1152)SK. Md. Tarikul Islam ACA (1238)Mohammad Golam Sarwar ACA (1300)Dhali Tanvir Ahmad Siddiqui ACA (1391)Mohammad Main Uddin ACA (1454)Anika Sultana ACA (1484)Bidhan Chandra Mandal ACA (1579)Ismat Jahan ACA (1600)Md. Tarique Abdullah ACA (1701)Mustaq Ahmed ACA (1715)Chairman DRC-ICABChairman CRC-ICAB

Member SecretaryMohammed Emdadul Haque FCATechnical Adviser, ICAB

Published by the Editorial Board of the CouncilThe Institute of Chartered Accountants of Bangladesh (ICAB)CA Bhaban, 100 Kazi Nazrul Islam Avenue, Dhaka 1215Tel : 9117521, 9112672, 9115340, 9137847Email : [email protected] : www.icab.org.bd

EDITORIAL BOARDFROM THE

The upcoming Budget for 2016/17 FY will be the 45th one after the 1972-73 FY. The total size of Budget has been gradually broadening in a sustainable manner reflecting the need base of the economy starting from Tk. 786 crores in 1972- 1973. Last 3 years’ Budget manifest enormous expansion in resource mobilization, volumes being Tk 2,22,491 crores, Tk 250,506 crores and Taka 295,100 crores for consecutive FYs 2013-14, 2014-15 and 2015-2016 respectively.

A SWOT analysis of Bangladesh Economy can be explored in the snapshot below. The country has achieved an average growth rate of above 6% per annum since 2004. Amid all the doom and gloom of economic recession and stagnation in South Asian and South East Asian countries, Bangladesh and Vietnam are the only two bright spots with an expected growth rate of 6 % or slightly above in 2016. The current phase of economic growth appears to be largely driven by strongly growing domestic demand, a sustainable one.

Bangladesh has been more impressive between 1990 and 2011 on account of life expectancy at birth, infant immunisation and female literacy, being ahead of India and Pakistan. On other indicators also, its performance can be described as satisfactory relative

January - March 2016 The Bangladesh Accountant02

to those two countries. As a consequence, people now live longer reaching a life expectancy of 71 years at birth rising from 59 years in 1990. In terms of GDP (gross domestic product), it moved up to the 44th position (US$205 billion) in 2015 from the 58th position in (US$149.99 billion) in 2013. On a per capita basis, the country was ranked at the 58th position in 2015 (US$ 1,314).

As for the services sector, it by and large appears to be domestic market-focused. Like any other country in the world, a substantial part of this sector is composed of non-tradable (i.e. their prices are not determined by the international market forces). Commercial services only accounted for 4% of total exports and 14% of total imports in 2014. During the same year Bangladesh had 0.16% share of world exports and 0.22% share of world imports. The principal export markets are the USA, Germany, the UK, France, Spain, Italy & EU.

As an emerging economy all the development indicators of Bangladesh have been performing quite well in recent years. According to the price water house coopers, Bangladesh will become the world’s 23rd largest economy by 2050 from its current 38th rank. Bangladesh is set to win out of the 6% trap in economic growth in 2015-16 with a 7.05% estimated growth rate in third quarter to March 2016. It will be driven by industrial and service sectors which grew impressively @

10.10% and 6.70% respectively. According to BBS, the share of industrial sector to the GDP has increased to 28.56% in the 2015-16 FY from 28.15% in the last FY. The service sector’s role rose to 56.69% in the current fiscal from 56.35% in FY 2015. Share of exports in relation to GDP is expected to be 25% of GDP by 2021 depicting lead role of export sector in the economy.

The economy with features of emerging market economy is progressing towards becoming a sustainable model with per capita income rising from USD 543 in 2006 to USD 1314 in 2015. For achieving the growth rate of 7% to 8%, the country needs 32% of GDP from 10 years’ indigenous investment coupled with voluminous quantum of FDI . Investment in the power sector is the number one priority of the government to meet the growing infrastructure needs.

Our economy is more integrated with the global market largely due to rapid growth in trade, massive overseas employment of labor and consequent remittance inflows, liberalization of foreign exchange regime, financial sector reforms, and a favorable FDI regime.

The features of recurrent global economy like lower commodity price, crude oil price, strong US dollar, etc are likely to augment Bangladesh’s capability to depict economic performance for transformation into a Middle

Bangladesh and Vietnam are the only two bright spotswith an expected growth rateof 6 % or slightly above in 2016

The Bangladesh Accountant January - March 2016 03

Masih Malik Chowdhury FCAChairman, Editorial BoardPast President-ICAB

Harun Mahmud FCAEditor

Income Country (MIC). The 3 indicators for graduating of a country from LDC status to MIC are; per capita national income, economic vulnerability index and human asset index. Bangladesh is in the proximity of fulfilling these 3 necessary conditions. During the last 6FYP (2011-2015) and the 7FYP (2016-2020) it retains to be on right track of development path. MIC will be our status expectedly by 2021. Under the Perspective Plan, the road map for accelerated growth spells down broad approaches for eradication of poverty, inequality and human deprivation. The country will meet the middle income threshold needs when the basic needs of the population would be ensured. Then fundamental rights like food, cloths, education, shelter and healthcare will be accessed by all. The euphoria of economic development of Bangladesh will then be no less than an accomplished success.

The debate of fiscal policy playing an important role in bringing stronger economic growth and expanding the economy’s long term growth potential has reached closed to a consensus. The Government has been sustaining its endeavours for facilitating the strengthening of the economy by

extracting country’s potentialities. The global policy on finance and international trade has been undergoing consistent reforms in terms of capacity building for sustainable economic development. Taking cognizance of the reform policy of G-7 and China, Bangladesh is envisaging entry into partnership with stakeholders to generate more revenues through changes in its revenue collection policy. It would be mobilizing local resources at a larger pace to promote trade and development catered to zero tolerance policy on corruption. The government is contemplating economic reforms policies from resources by more expeditious revenue measures deviating further from exogenous sources.

Dear fellow members and the readers, considering recurrent phenomenal reforms of Bangladesh economy in practice, the Bangladesh Accountant January-March 2016 issue has endeavored to gather views & opinions of thinkers of economic development prospects. This issue mainly stressed on emerging market economy (EME) characteristics and the related fiscal policy in the budget 2016-17. The scholarly thoughts & pertinent suggestions evolving from the articles may augment thoughts of policy makers

in framing policies of government for graduating into an MIC & in the aftermath attaining a higher per capita income. We solicit interest of policy makers.

Bangladesh economy now is progressing its pace of growth in progressive manner. Indeed the poem of D H Lawrence may be pertinent because our development is not a dream but a reality!

“All people dream, but not equally.Those who dream by night in the dusty recesses of their mind,Wake in the morning to find that it was vanity.But the dreamers of the day are dangerous people,For the dream their dreams with open eyes,And make them come true.”

--- ‘Dreams’ by D. H. Lawrence

As always, fellow members & honourable readers Editorial Board looks forward to your spontaneous augmentation to its relentless efforts for- The Bangladesh Accountant- upcoming issues. We want to continue to unveil treasures of wisdom in you for furtherance of ICAB in its journey onward. Reforms are a continuous phenomenon & we will go for it as the readers would suggest us to.


ambassador. With this importance, we have introduced a committee named 'Media and Branding'. I am sure this will be the right step towards reaching our goal. We have to give value and respect others in order to get valued for our works and earn respect that we deserve. With time the world changes; people changes and the profession

progresses. We must be adaptable with the time and change for better prospects.

Before I wrap up, I want to stress upon that we have challenges ahead. However, I can assure you that we are adequately equipped to meet the eventualities from those challenges. We would strive for

the professional excellence as always and in the long run time will be on the side of true professionals.

ChangeforbetterProspects...

PRESIDENT’S DESK

As I took over the leadership of this Institute, I felt extremely delighted to see that 'Bangladesh Accountant' has held a high esteem in our intellectual pursuit of knowledge and experience sharing. People of diverse background are contributing their thoughts & ideas through this Journal. We take more pride to say that the contributions are increasing, so as more people are reading and showing interest in the write-ups published in this Journal.

Now that I have already communicated all the activities undertaken during the 1st Quarter of this year through President's Communication Letters with ICAB's News Bulletin; without repeating the same, I may add that the progress and development of CA

profession, like any other profession, is a continuous process. We can't be complacent by being at a certain standard or quality. Our understanding and aspiration to gain higher standard also shifts as we have one. The Institute is mindful to ensure required training and courses for professionals through our own and outsourced resource persons. I am happy to note that there was tremendous response by our members to participate in 'Leadership and Communications Skill', 'Project Management using MS Project' or courses like this.

As the Institute grows, I feel there is increased demand of time that we extend our network by interacting with diverse group of people and exchange our professional value and

knowledge; at the same time attend various professional organisations and institutions whenever invited. This to my understanding would create an environment of collaboration and cohesiveness. This is also expected by our society and the nation from professionals like us.

I believe we need to reach out to people and convey the right information about our profession and CAs. We need to let others know how to join the CA profession. This may sound simple but needs our persistent efforts to make chartered accountancy a better career.

Surely, I am talking about branding and I think in this journey, every member, employee, well wisher of 'CA profession' should act as an


ambassador. With this importance, we have introduced a committee named 'Media and Branding'. I am sure this will be the right step towards reaching our goal. We have to give value and respect others in order to get valued for our works and earn respect that we deserve. With time the world changes; people changes and the profession

progresses. We must be adaptable with the time and change for better prospects.

Before I wrap up, I want to stress upon that we have challenges ahead. However, I can assure you that we are adequately equipped to meet the eventualities from those challenges. We would strive for

the professional excellence as always and in the long run time will be on the side of true professionals.

As I took over the leadership of this Institute, I felt extremely delighted to see that 'Bangladesh Accountant' has held a high esteem in our intellectual pursuit of knowledge and experience sharing. People of diverse background are contributing their thoughts & ideas through this Journal. We take more pride to say that the contributions are increasing, so as more people are reading and showing interest in the write-ups published in this Journal.

Now that I have already communicated all the activities undertaken during the 1st Quarter of this year through President's Communication Letters with ICAB's News Bulletin; without repeating the same, I may add that the progress and development of CA

profession, like any other profession, is a continuous process. We can't be complacent by being at a certain standard or quality. Our understanding and aspiration to gain higher standard also shifts as we have one. The Institute is mindful to ensure required training and courses for professionals through our own and outsourced resource persons. I am happy to note that there was tremendous response by our members to participate in 'Leadership and Communications Skill', 'Project Management using MS Project' or courses like this.

As the Institute grows, I feel there is increased demand of time that we extend our network by interacting with diverse group of people and exchange our professional value and

knowledge; at the same time attend various professional organisations and institutions whenever invited. This to my understanding would create an environment of collaboration and cohesiveness. This is also expected by our society and the nation from professionals like us.

I believe we need to reach out to people and convey the right information about our profession and CAs. We need to let others know how to join the CA profession. This may sound simple but needs our persistent efforts to make chartered accountancy a better career.

Surely, I am talking about branding and I think in this journey, every member, employee, well wisher of 'CA profession' should act as an

Kamrul Abedin FCAPresident-ICAB


A firm believer of national development and economic growth through industrial revolution and creating jobs for all, Abdul Matlub Ahmad (AMA) is a versatile and smart entrepreneur turned industrialist. "Work hard but smartly, invest boldly but wisely and discard mistakes ruthlessly but tactfully." This great quotation goes very well with the dynamic nature and pleasant personality of FBCCI President.

Abdul Matlub Ahmad, Chairman of Nitol Niloy Group, is now heading the country's apex trade body - The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI). The FBCCI President has talked to the Institute of Chartered Accountants of Bangladesh (ICAB) on a wide range of issues, including trade, investment, capital market and banking sector. We briefly in the following pages describe the issues he touched upon and the ideas he shared for the economic & social development of the country through joint efforts.

ICAB: From the outset of the regime of 1/11 government, the business community has been saying business is not going well, many of them are also saying the same thing till today. According to them, they are into the business because they don’t have any other choice. As a leader of this community, what’s your general feeling? What’s the current state of

Aspired BudgetInterview of FBCCI President Abdul Matlub Ahmad

business? Are we having good days now or moving towards a better time?

AMA: The confidence and desire for investment in the country had gone down to zero level during the army-controlled caretaker government. The country’s economic growth was impeded because the then army-backed government had also targeted to let the business people suffer and tortured them in many ways. It took over two years to get back to the track and the business community made a turnaround, subsequently started concentrating on investment afresh. Of course, now, the whole economy is very vibrant and the country is moving towards future in the right direction.

ICAB: Do you think the initiatives and implementation process of the government in developing infrastructure are adequate to improve the current growth trend and achieve 7%+ GDP growth? How would you describe the foreign investors' sentiment for Bangladesh?

AMA: If you talk about foreign investors’ sentiment, I would say superb in a word. Many global companies, including companies from neighbouring country India, are showing their keen interest and coming to Bangladesh for investment. But we are yet to make sure that every


industrial unit will have access to required energy supply. Entrepreneurs still do not know whether they will get required gas and electricity connections when a new industrial unit is established. Amidst such uncertainties, foreign direct investment (FDI) would never inflow to Bangladesh. The existing investment scenario in the country is certainly not satisfactory. We are yet to ensure quality power supply outside Dhaka. The investment, both domestic and foreign, will not reach the satisfactory level unless and until we ensure adequate energy supply for the industrial units. However, there is good news. The government has started realising the urgent necessity of smooth supply of energy to run industrial units effectively.

ICAB: How do you see the initiatives of some entrepreneurs of investing outside Bangladesh?

AMA: Cross-border investment is a common phenomenon. Many of us, over approximately the last 45 years, have developed the capacity to make investment abroad. Many have the capacity to invest in any destination of the world. The government, in the past, did not support the idea of making

investment in foreign lands. These days, the government is allowing investment abroad on case-to-case basis. Now we are looking for setting up plastic industries and an oil refinery in Iran. We are planning to go for mega investment projects abroad to earn foreign currency for the country banking on our talents. The time has come to encourage young and energetic entrepreneurs to invest abroad. Two pharmaceutical industries have already been given permission to run business in the USA and a garment industry in Egypt. I am very hopeful that the highly educated energetic young entrepreneurs will be able to bring in huge foreign currency through investing abroad. If our Bangladeshi expatriates can contribute around US$ 16 billion as remittances we can multiply the earnings figure in not far future.

ICAB: Do you think the infrastructure development initiatives are designed in line with the government’s targeted development goals?

AMA: After many years, the government has come up with mega projects in the public sector though the private sector is also getting involved through sub-contracting. There are examples that development efforts get accelerated once mega projects are taken and implemented through the public sector. We see such examples in Malaysia and China. The government has also established Bangladesh Economic Zone Authority (BEZA) and the Public Private Partnership (PPP) Authority. Now we will see Dhaka-Chittagong Expressway, 100-storey icon building and other big projects in the coming years. We are now seeing with interest how the global investors are giving a serious look at the big projects in Bangladesh. Proper and planned investment for the country’s infrastructure development will

NOW WE ARE LOOKING FOR SETTING UP PLASTIC INDUSTRIES AND AN OIL REFINERY IN IRAN. WE ARE PLANNING TO GO FOR MEGA INVESTMENT PROJECTS ABROAD TO EARN FOREIGN CURRENCY FOR THE COUNTRY BANKING ON OUR TALENTS. THE TIME HAS COME TO ENCOURAGE YOUNG AND ENERGETIC ENTREPRENEURS TO INVEST ABROAD.

help take Bangladesh to the next level of development amidst coveted 8-9 percent GDP growth.

ICAB: The success of PPP (Public Private Partnership) has been questioned. Do you think the business community & private sector were expected to be more proactive to harness the benefits offered by the government? What’s the reason of the failure?

AMA: It took much time to develop the PPP system. There are some projects under the PPP. As the days go by, the number of projects under the PPP will continue to increase. I think the PPP base is done and now building needs to be constructed on the base. I am so happy to see a right person is heading the PPP authority who has been working in favour of the country’s interest.

ICAB: Despite the demand of the business community, the bank interest rate is still in double digit. Do you think the high cost of fund is also a barrier to new investments?

AMA: We have been urging for bringing down the bank interest rate to a single digit. We are lagging behind in competition with other competitors in other countries as the cost of doing business is high here due to high bank interest rate. Now the bank interest rate is coming down and I hope it will come down to a single digit soon through another push. Some 80 percent banks are in the private sector. But there are reasons behind the non-reduction of bank interest rate. The non-performing loan (NPL) now amounts at around Tk 52-60 thousand crore. (A non-performing loan (NPL) is either in default or close to being in default.) This is like a cancer. We need to come out from this cancer.

ICAB: It was revealed that a group of business people is responsible

for the recent scams (Hallmark, BASIC Bank, Bismillah Group etc.) in the banking sector. Are the initiatives taken by the government enough to stop the repetition thereof? What are your recommendations?

AMA: It is a sad part. These types of incidents will continue to take place if the banks and clients do not behave responsibly. Now worst things are also happening. We have a fear that the next generation entrepreneurs will be affected again due to such irresponsible behaviours. Each bank should act carefully. Bank owners must not get engaged in banks’ management process. I am really worried over the country’s banking sector. It seems to me that the role of the Bangladesh Bank was very weak in dealing with issues with the private and public banks’ activities. The country will be at big financial risk if the banks and the central bank do not fix up their problems quickly. Banking management system has to be a system having in-built safeguards. You will sink only when you will violate your own rules. If clients also join hands with banks in violating rules then the consequences appear dreadful.

ICAB: Due to the ambitious revenue target, tax officials are allegedly harassing business houses to pay excessive taxes. Do

you think that the people at the tax department are properly accountable for their job and they are not doing anything unjust with the taxpayers?

AMA: Tax officials have been asked to refrain from harassing business people in the name of revenue collection. However, it is true that it takes two hands to clap. Tax collectors create scope and the business people avail of the opportunity. The business person who fails to avail of the opportunity says he is being harassed. The key thing is that we need to bring about transparency in the entire process through collecting VAT and tax online. In the future we would come out from this culture. The problem is that there is an intention to mount pressure on existing taxpayers instead of expanding tax net. However, there is nothing to be worried about. I think NBR is making a mistake and its revenue target will not be achieved if the tax administration does not come out from the existing practice.

ICAB: After the Stock Market crash in 2010, it could not regain the confidence of the investors despite many incentives given by the government. Companies having strong financial bases are not listing their shares with the stock market. On the other hand, the stock market is not getting back


reality. If we can do it we will be able to achieve all the development goals.

ICAB: How do you see the current scenario in the country’s housing sector and role of REHAB?

AMA: The Real Estate and Housing Association of Bangladesh (REHAB) had invited troubles by itself. They had created a balloon by inflating the land prices. They used it to divert money for making investment in other areas. They used to take up so many projects together with very slow implementation rate. We have found such a person who invested his entire retirement fund for an apartment. The person died but the apartment remained undelivered. So, the developers were irresponsible in many cases. The balloon once bursts. There were so many manipulations in the housing sector. Some are doing business ethically and adhering to the set rules and regulations. But the tendency of making high profits still persists: No sector can run in such an indisciplined way. They must come out from such practice and must offer realistic prices to buyers for their apartments. Once they turn realistic, then we will ask the banking sector to finance the actual buyers, not the intermediaries. REHAB itself has invited the miseries. It is now demanding that black money be allowed into the housing sector. But REHAB’s appeal is not reaching the government’s ear. It needs to change it self to revive its reputation. It has to recover its own image. I think REHAB needs to rethink and redesign its plan and strategy keeping the interests of clients in mind.

Interviewed by:Mohammad Zahid Hossain FCAAssisted by: Abu Taher andUNB Journalist AKM Moinuddin


vibrancy for lack of good companies’ shares. How this dilemma can be addressed? How the confidence of the investors can be recovered/restored?

AMA: The single-dose medicine will not work in fixing the capital market problems. The capital market will not grow until and unless transparency is put in place. There are a few people who play with the capital market. Many companies having strong financial bases are not coming to the capital market simply because of the absence of transparency. Apparently, there is no one to look into the matter. Even there is no one who sees the facts. As a country, we are losing a very big opportunity to have non-bank capital source for expediting industrialisation. It is a sad story for us. We need to come out from this circle as soon as possible. It needs complete overhauling. We need to drive out the bad companies while inviting good companies to get registered with the stock market. There should be instant punishment if there is any incident of violation of rules. I have not yet seen the reports of the stock market scam inquiry bodies. Even, I do not know whether the investigation was done properly. I only know thousands of people have lost their investments. They still do not know the answer why they had to suffer. As a result, the investors‘ confidence in the market is yet to be restored fully. And their confidence may not be restored unless proper steps are taken and new rules and regulations are introduced. It is a big task. We can do it. First of all we need a political will and a political decision because business follows politics.

ICAB: The national budget for the fiscal year 2016-17 is going to be placed in June. The FBCCI, as always, is going to place some recommendations to the

government. Do you think the next budget for 2016-17 will be more important than previous year’s? If yes, why? Which are the areas, the government should give more focus upon?

AMA: I am in discussion with various stakeholders every day on budget issues. There is an ongoing debate on VAT and Tax online issues. But there should be no such step in the coming budget that might create unnecessary fear among all. We need to cross the transition period smoothly. The consequences will not be good if there is an attempt to give a big tweak through budgetary measures. Transparency and governance issues should be given priority in the coming budget. The budget implementation success rate will go up automatically once transparency is ensured in NBR operations. We need to make sure that the Annual Development Programme (ADP) is implemented effectively. We are yet to develop the capacity to efficiently spend the ADP allocation. Transparency needs to be ensured there, too.

ICAB: The FBCCI is the apex trade body of the country to protect the interest of the business community. Do you think it’s playing the right role for the business community? What other areas FBCCI can work in future?

AMA: The FBCCI’s key role is to help promote the private sector and its growth. When we, the private sector, grow the country also grows together. The FBCCI and the government want to work jointly keeping hands in hands for the country’s development. We unnecessarily do not want to fight with the government. We, both, have the same goal. That is the country’s development. We hope to see government considers us as guide towards development. We are working to help all realise this


The world economy had to face lots of ups and downs in the year 2015. None of the countries in developed and emerging economies was exonerated from the economic, financial, political and social back-lashes during the year 2015. The drastic fall of oil price, the political mayhems in some Middle-Eastern and African countries, the political and economic uncertainties, slow-moving capital markets in some Asian countries including China and Bangladesh, are some of the major events that made the policy-makers of various economies especially the state-policy-makers of emerging economies terribly worried about the future economy. Budget, economically known as fiscal budget, is an important blue-print that guides, assists and drives an economy to right direction in the up-coming years. It’s the fiscal budget of an economy that can drive the nation to uplift, development and headway or on the contrary, to economic mayhems, slow-down and sluggishness.

A reticent and potholed recovery is betrothed in economically advanced countries to brook, with an ongoing further narrowing of output gaps. The picture for Emerging Economies (EEs) and developing economies is variegated but in many cases challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in

Budget for Encountering theChallenges of Emerging Economies

M Jalal Hussain FCA

some hefty emerging market economies will continue to balance on growth prospects in the Year 2016–17. The projected pickup in growth in the next two years, notwithstanding the ongoing slowdown in China, predominantly echoes forecasts of a gradual upgrading of growth rates in countries currently in economic wretchedness, predominantly Brazil, Russia, Bangladesh and some countries in the Middle East, though even this projected partial recovery could be unfulfilled by political shock-waves or new economic shudders. The Emerging Economies are encountered with series of shrouded crises-the domestic crises over the external crises, the political crises, social and economic crises as well as public confidence crises. All these crises bring up the extreme necessity to use fiscal policy to adjust macroeconomic imbalances.

The goals, aims and objectives of a budget for a developed economy, are of course, different from that of an Emerging Economy. The Emerging Economies are at the threshold of development and are fraught to reach the status of developed economies in terms of GDP growth, per capita income, job creation and health care. The future progress and development of an Emerging Economy largely depend on what the leaders and state-policy-makers plan to do today. As


we know that prosperity and progress are neither matters of luck nor fortune nor gifts. These need to be earned, to be accomplished by utilizing the limited and scarce resources, by proper planning and implementation through rational and pragmatic national budget.

Definition of an Emerging Economy

Emerging Economies is not a new concept. The economists, international organization like the World Bank, had categorized the world economies into developed, least developed, underdeveloped and poor, based on the economic performance and status, such as GDP growth rate, per capita income, unemployment ratio and standard of living index. In 1970s the developing countries were reclassified as emerging economies that were less developed than the developed economies like US, UK, Canada, Japan and Germany. The term Emerging Economy had been started widely using by the World Bank and other international

economists. BBA Research has categorized the growing economies of the present world as Emerging and Growth-Leading Economies (EAGLES) that are expected to have lead growth at least in the next 10 years and that would provide excellent opportunities for the investors. Bangladesh is listed in the EAGLES group.

Many definitions of Emerging Economies are there. According to INVESTIPEDIA an Emerging Economy is defined as an economy with low to middle per capita income. Such countries constitute approximately 80% of the global population, and represent about 20% of the world's economies. The term was coined in 1981 by Antoine W. Van Agtmael of the International Finance Corporation of the World Bank. Some of the Emerging Economies were regrouped by different names to accelerate economic benefits, BRICS countries (Brazil, Russia, India, China and South Africa) are one of the important groups in EEs.

OVER A THIRD OF EMERGING ECONOMY BUSINESSES (35%) EXPECT A SHORTAGE OF WORKING CAPITAL TO RESTRAIN THEIR GROWTH PLANS OVER THE NEXT YEARS, COMPARED TO JUST 16% IN ADVANCED ECONOMIES. SIMILARLY, 30% AND 29% REFER TO THE COST AND AVAILABILITY OF LONG TERM FINANCE RESPECTIVELY, COMPARED WITH 13% AND 15% IN ADVANCED ECONOMIES.


Major Challenges Faced by Emerging Economies

Emerging Economies, in the past decade, established themselves on a strong footing and were the world’s best entrants while the advanced economies were shriveled up due to series of crises. But of late, the situation is changed and the sprinters have started to seethe. With the change of the world economy, the EEs are facing tough challenges that are required to be met by intransigent fiscal budget and its proper implementation.

In the 21st century globalized world, manufacturing is a substratum of any economy. Generally manufacturing industries accouter more employment opportunities than service industries. The sectorial GDP occupation in economically advanced countries is much higher than that of Emerging Economies. To improve productivity and to increase the GDP occupation in manufacturing is the great challenge for an emerging economy. Adequate and developed infrastructure is a precondition for industrial development. Most of the EEs don’t have developed infrastructure suitable for industrial development. The EEs are much behindhand in terms of education and ICT with the economically avant-garde countries. Increase the literacy rate and also to increase the competence of workers to compete with the arthritic competitive world are the major challenges for EEs.

Some countries in the EEs are directly dependent on natural resources like natural gas and oil. The recent sharp decline of oil price in the international market, drastically affected their economies. It’s a big challenge and finding alternative source of

revenue, diversification of investments to other arenas, are prerequisite for the natural-resources-based economies. The major affected countries from the whammies of oil price downfall in EEs, are Russia, Brazil, Saudi Arabia and Nigeria. Other challenges faced by EEs are continued slow-moving capital market, real estate and housing sector economies.

Budget Objects for Emerging Economies

The Emerging Economies include many countries with different sizes, in different continents, different economic strengths and the budget objectives, programs and parameters differ from each other. But some common objectives, viz., enhancement of GDP growth, increase of employment opportunities, improve capital markets, education and IT sector, tackle climate change, develop infrastructure, private sectors to boost up productivity and FDI, may be the included in the EEs fiscal budget and implemented.

GDP Growth

Every economy, either developed or EE, wants to keep the GDP growth positive and at least static. In 2015, global economic activity remained unresponsive. Economic alarm bells are ringing loudly in all continents of the world. Financial markets and the economies of Emerging Economies are wilted. Forecasters got no choice than to slice the projection for future growth. Growth in emerging countries, while accounting for over 70 percent of global growth putrefied for the fifth consecutive year, while a diffident recovery continued in advanced countries. Global growth, was at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6percent in 2017. It’s the common challenge for all the economies to make achievable GDP target in the budget and implement the target in the upcoming budget by giving priorities to those sectors that contribute direct to GDP growth. The main objective of the budget for EEs should be to maintain a sustainable growth at any cost.

Budget for Innovation for Scintillating Future

The Emerging Economies must move forward with modernized and advanced science and technologies and for obvious reasons they must make adequate provisos in the budget for investment in innovation. Innovation will help create job opportunities and build strong economy. Prioritizing research and development in the budget is very essential.

Budget for Weaving a 21st Century Transport and Communication System

Transport and communication system is the most important part of infrastructure of an economy. It’s a sine qua non for industrial development, productivity and sustainable economic growth for the EEs. The transport and communication systems of some EEs like Bangladesh, Brazil, Nigeria and many countries in Africa and Latin America are impaired and primordial that act as a deterrent to economic uplift. Emerging Economies are always found to be calling on global investors to build roads, bridges, power plants and other large infrastructure to offshoot growth in their countries, but the response so far received is not pleasing. The great challenge is lying with the policy-makers of EEs and they have to undertake long-term planning for transport and communication systems and implementation through the budget.

Budget for Surviving from Spleens of Climate Change

Climate change will disproportionately disrupt economic growth in developed, emerging, poorer, tropical

countries especially the currently busy economies of South Asia and Southeast Asia. Greenhouse gas emissions are expected to double between 2010 and 2060, the OECD said. That could cut global GDP by 1.5 percent compared to base projections and amount to a 5 percent GDP loss in the worst-hit regions, it projected. Greenhouse gas emissions need to decrease substantially to hold global average temperature increase below 2°C warming above the preindustrial level. This requires emission reductions by all major emitting countries with developed countries taking the lead, but emerging economies are of increasing importance in this global effort. Some of the countries of EEs will be devastatingly affected by climate changes unless timely planning and actions are taken through Fiscal Budget.

Budget for Infrastructure Development

From story of fruition and ontogeny, infrastructure pushes social and economic uplift and development simultaneously. It enables us to renew and renovate our private, public services and physical surroundings. It allows societies, economies, corporates and individuals the prospect to live to their full latent. At the same time, the way the world approaches infrastructure itself is also evolving and some of the swings in the sector are unexpected and unsettling. Others evolve gradually, receding and flowing in and out of political perception as governments and business persons react to changing circumstances. Another area where Emerging Economy businesses believe their respective economies are lacking in key transport and information communications technology (ICT) infrastructure. More than one in five businesses in

Emerging Economies (22%) expect the poor quality of local transport infrastructure to be a drag on growth over the next 12 months or more, compared to just 9% in advanced economies. A further 20% of emerging economy businesses refer to ICT infrastructure as a restraint on growth, compared to just 11% of peers in advanced economies. Adequate budget provision and implementation is the crying need of the time for EEs.

Stimulating Emerging Economies Manufacturing

The budget of EEs needs to invest in coordinated, cutting-edge manufacturing Research and Development (R&D, while expanding training for industry-driven workforce and providing additional resources through the manufacturing extension programmes to help EE’s small manufacturers access the advanced technology and expertise they need to enlarge. It includes investments to grow the national network of manufacturing innovation, a national network of innovative R&D centers to help keep EEs manufacturing sector in the lead on technology. Well-educated, dynamic, good-value and productive work-force are extremely required for manufacturing sector. Investment in Research & Development can help establish the industries and create jobs of the future, such as supercomputing, big data, robotics, advanced materials, nanotechnology, and synthetic biology. In addition, the Budget makes new investments to sustain EEs leading edge in the development of self-governing vehicle technologies and self-driving cars.



Stimulating the Slow-Moving Capital Markets in EEs

The present capital markets of some EEs notably Bangladesh, China, Pakistan, India and Brazil are very stroppy position. The political uncertainties, economic instability, reduction of GDP growth and decline in private sector economies have been identified as the major causes for continuous crashing of stock market in Emerging Economies. The Fiscal Budget and the monetary policy of the EEs may bring some improvements in the declining stock market. Implementing investment-friendly policy, stimulus packages to uplift public confidence, reducing interest rates on savings instruments and on lendings, relaxing tax laws on investment in capital market are the important measures the policy makers of EEs may undertake immediately to make the capital market strong and resilient.

Confidence in Emerging Economies is annealed slightly by an understanding of the growth constrictions in businesses in these markets expect to face over the upcoming years. The recent Grant Thornton Global Dynamism Index (GDI) ranked the financing environments of most Emerging Economies as far less dynamic than those of advanced economies, so it is perhaps unsurprising to see that access to finance is an area of particular concern to businesses in these economies. Over a third of emerging economy businesses (35%) expect a shortage of working capital to restrain their growth plans over the next years, compared to just 16% in advanced economies. Similarly, 30% and 29% refer to the cost and

availability of long term finance respectively, compared with 13% and 15% in advanced economies.

Abridge Unproductive Expenditure in the Fiscal Budget

The major challenge of the EEs is to upgrade the per capita income from mid-level to high-level with the aim to reach the status of a developed economy. The resources of most of the EEs are sporadic and limited. To get the maximum benefits from limited resources it’s highly essential that revenue earned needs to be allocated to the productive sectors that creates jobs, increase investment, production and keep GPD growth stabile. Allocating more in non-productive sectors like social welfare, public administration, pension scheme and many more, would put the country in economic and financial glitches like Greece, that fails to pay its debts, to finance the budget and to run the country smoothly.

Conclusion

Improving per capita income is an important issue for emerging economies to discourse if they are to avoid being caught in the so-called middle income trap. Emerging Economies can make huge productivity gains by adopting the new technologies of more advanced economies, but as the focus moves from imitation to innovation, these EEs often see rising earnings and costs outstrip productivity increases. EEs can find themselves unable to compete with lower cost exporters in lower income economies, but still unable to compete with richer economies in higher value-added-products. A

recent World Bank report, written in partnership with China mentions avoiding this trap as a key challenge over the next two decades. The world of today is advanced in all-embracing arenas especially in the fields of science, technology and strategic planning. EEs are much behind the advanced economies. The policy makers need to cope vulnerabilities and restructure resilience against potential tremors while uplifting GDP growth and ensuring continued merging towards progressive economy income levels.

The traditional budget, the political, economic and monetary systems of EEs need to be reformed and emended to reach the status of advanced economies. Policy-makers need to press on structural reforms to alleviate infrastructural tailbacks, expedite a dynamic and innovation-friendly business environment and reinforce human capital. Ease of doing business, good governance, political and economic stability, corruption-free-society are increasingly important for EEs and the fiscal budget should cover these areas for improving efficiencies and productivity. Finally, actions speak louder than words and the state-policy-makers and politicians need to be realistic, honest and forthright about the real problems face by the EEs, rather than taking cheap shots. Striking poses is easy task; figuring out what can be done is lot harder; thats would be the fast-track job of the leaders of the EEs.

The Author is a Fellow Member ofICAB and the CFO of a PrivateGroup of Industries


Bangladesh’s economy with sustainable growth in exports of industrial products, agricultural production, man power export and average yearly GDP growth of 6.5% etc continuously for several years is considered as an emerging economy. Compiling its budget is, therefore, an astoundingly challenging and well-thought task. National budget of an emerging economy should not be a mere estimate or forecast, it is rather a skillfully and expertly compiled and targets set achievement of which focuses economic development the country and well being of its people.

Internal Revenue Target

In a pre-budget discussion with the economic research personnel in the NEC Hall of the Ministry of Planning the Finance Minister has forecast a Revenue

Aspired Budget of BangladeshAn Emerging Economy

M. Idris Ali FCA

target of Tk. 3,40,000 crore during the fiscal year 2016-2017. Revenue earnings targets of Bangladesh has been going up every year as indicated in the preceding graph.

Growth of budgeted revenue by Tk. 44,900 crore or 15.21% seems to be ambitious in the backdrop of actual collection of revenue. Ambitious fiscal targets, both from income and expenditure sides, set for FY 2013-14, did not materialize at the end of the fiscal year, although the government has been struggling to boost up its revenue earning. In July-November period of FY 2014-15, National Board of Revenue (NBR) has collected Tk. 47,725.70 crore whereas target was set to collect Tk. 1,49,720 crore. During the 8 months of current Financial year (Jul.15-Feb 16) shortfall in collection of revenue was Tk. 90,654 crore against set target of Tk. 1,04,165 crore resulting in a shortfall of Tk. 13,511 crore. This declining trends in volume and growth of revenue warrants that the task of setting revenue target should be an expert and skillful job in an emerging economy. Let us examine below the macro economic trends of revenue income, expenditure and resultant deficit in the FY 2015 (source CPD).


During FY 2016 CPD had estimated an overall shortfall in collection of revenue at 60.3%, but actual shortfall has amounted to 50.3%. This shortfall has been met by borrowing from banking system and other sources. Let us examine more macro economic trends taken place during the FY 2015.

Macro Economic Trends in FY2015

• GDP fell short of target (7.3%) but increased by only 0.4 percentage points to 6.5% in FY15 compared to FY14

• Private investment continued to remain sluggish (around 22%)

• Ambitious fiscal targets did not come true for both income and expenditure e.g. revenue shortfall Tk. 36,997 crore

• A better year for crop production, but much reduced growth as compared to FY14

• Inflation experienced a consistent decline except the months of political turmoil

• Growth rates of the monetary aggregates remained rather subdued except for net foreign assets

• Despite the decline in classified loan at the end of FY15, the SCBs faced capital deficit which in turn created additional fiscal pressure for the government

• Export target was missed by a significant margin

• Net foreign aid had seen certain amount of volatility throughout FY2015

• Remittances inflow returned to its positive growth trend in FY2015 after experiencing a major setback in FY2014

• BoP remained comfortable despite widening trade deficit

• Exchange rate was stable

• Foreign exchange reserve accumulated

FY 2016

Deficit in collection of Revenue during 8 months up to Feb., 2016

During the last 8 months NBR’s deficit in revenue has amounted to Tk. 13,511 crore. Target was 1,04,000 crore but actual collection amounted to Tk. 90,654 crore. Growth is 13.55%, but during the same period last year collection was

DURING THE LAST 8 MONTHS NBR’S DEFICIT IN REVENUE HAS AMOUNTED TO TK. 13,511 CRORE. TARGET WAS 1,04,000 CRORE BUT ACTUAL COLLECTION AMOUNTED TO TK. 90,654 CRORE. GROWTH IS 13.55%, BUT DURING THE SAME PERIOD LAST YEAR COLLECTION WAS 79,978 CRORE AND GROWTH WAS 16.42%.

Macro Economic Trends in FY2015Revenue Growth (%)

Revenue Collection 16.4 9.0 -4.0NBR Tax Revenue 21.2 15.5 - 11.3Non-NBR Tax -2.1 -16.3 -24.0Total Expenditure 27.3 10.0 8.2Annual Development 35.6 22.9 - 7.7Programme (ADP Non-ADP 23.9 4.6 - 8.4Overall Deficit (Excluding Grant) 59.5 13.0 - 20.5Net Foreign Borrowing and Grants 122.4 23.6 -32.4Domestic Borrowing 43.4 10.3 33.9

Sources: Revised Budget FY15 Actual FY15 Sur/def. over FY14

79,978 crore and growth was 16.42%.

It is agreed that an emerging economy needs more and more revenue to fulfill its budget goals. But trends of revenue shortfalls in the past years warrants to be more cautious than to be over ambitious in forecasting revenue targets. Because if target cannot be achieved it will have a negative repercussion in the development expenditure of the Government. Deficit of revenue will compel the Government either to curtail some expenditure or borrow from Banking system or sale of Government securities such as sanchaypatras. Treasury bills, bonds etc which are interest-bearing. Payment of interest on these securities will add to Government expenditure curtailing development or revenue expenses. Reduction of Government expenditure, on the other hand, hampers creation of jobs, reduction of poverty and discourages investment by private sector etc. Achievement of revenue target will, however, depend upon some measures of reforms, reorganization, simplification of collection methods and enforcement procedures undertaken in the financial sector, especially in the NBR.

Revenue (Non Development) and Development Budget

Revenue (Non development) expenses

Revenue expenses size of a national budget is predetermined according to state policies, commitments or promises to the people, not according to size of collectible revenue. In an emerging economy it is more relevant that the size of public expenditure must show growth in existing sectors and new segments or outlets are

opened for additional commitments and developments. Agriculture, Education and Health, sectors should get increased allocations of funds in order to improve human efficiency which in turn, will boost productivity and GDP. Agriculture has still a significant contribution to economy of Bangladesh. Agriculture contributes immensely towards GDP. Self-sufficiency in food grains, protein items, fruits, spices, vegetables etc saves a remarkable portion of foreign exchange which would have been exhausted in importing the items had these not been produced at home by the farmers. Agricultural items are being exported as well. Agriculture, therefore, deserves increased allocation of funds every year. India, our giant neighbour, has allocated 35,984 crore Rupees for agriculture and welfare of the farmers in its 2016-17 national budget. 20,000 crore Rupees has been allocated for Prime Minister’s Irrigation project alone which will bring 28.5 lacs hectares of land afresh under cultivation. Bangladesh has to expand cultivable land by facilitating cheap or fully subsidized irrigation. Subsidy paid by the Government for irrigation by way of reduction in diesel cost, in fact, does not benefit the poor farmers ,because the owner of the irrigation pumps dictate their charge which the poor farmers are compelled to pay. Irrigation should be free of cost, Bangladesh Agricultural Development Corporation (BADC) should control and operate all irrigation projects and pumps all over the country. This measure may reduce cost of production and boost earning of the farmers resulting in reduction of poverty and increase of GDP.

Readymade garments industry (RMG) sector alone has been earning 82% of foreign exchange of the country. This sector has

forecast a target of exporting products worth 5,000 crore US Dollars yearly by the year 2021. This is a sky high target but not impossible. Substantial investments in infra structure developments, modernization, creating riskless working environment are badly needed in this respect. The owners of RMG factories have so much surplus funds that they want to build factories in India. If they do so the country will lose the badly needed investment, earning of foreign exchange, opportunity of employment of lakhs of workers and suffer capital flight. The Government should do everything possible including building multistoried industrial parks for RMG in and around Dhaka city and allocate funds in the budget. In the desert of investment we cannot afford losing huge investment of the owners of RMG sector.

Having even limited resources, an educated nation is more productive and happier than an illiterate rich nation. Many countries like Nigeria, Zambia have huge natural resources, but want of good governance in the state, tribal and ethnic clashes have spoiled their capability to exploit and reap benefit of these resources. Literacy builds up competence and teaches giving value to humanity. An illiterate nation is deprived of many facilities and developments in the world. An emerging economy must prioritize education sector and allocate more funds and expertise in its budget every year. But unfortunately allocation of funds in the budget to education, health and welfare, social welfare, women and child welfare and disaster Ministries has been declining for several years. Following table shows allocation of funds in the budget as percentage of total expenditure from FY 2013 to FY 2016:



With the aim of achieving Millennium development goal(MDG) of the UN, literacy rate must be accelerated by providing more facilities like stipends, free meals etc to students of primary and secondary educational Institutions. This might reduce drop-outs after primary school certificate. Inadequate trained teachers in primary and secondary levels which is a regular phenomenon should be solved soonest. Emerging economy requires skilled manpower. More vocational and ICT education facilities after secondary level should be created in order to build up a big number of skilled man power force for deployment inside and out side the country .All these activities need adequate funds which should be allocated to Ministry of education in the budget and measure should be taken to utilize the funds without corruption. It is said that ICT sector will earn a trillion dollar income in the next decade. With a view to materializing this dream ,ICT should be declared a thrust sector and proper infra structures should be built to educate the mass unemployed youth and deploy them.

Allocation for the Poor

Although per capita income has gone up to over US$ 1300, disparity of wealth between the rich and the poor and poverty is still predominant in an emerging

economy like Bangladesh. In order to reduce poverty equal distribution of national wealth is essential. Direct monetary assistance in the sector of social safety network, like allowances to old age persons, widows, disabled freedom fighters , beggars , one home- one farm , food for work etc will enhance the income of the poor which will reduce poverty. Allocation of funds to Ministry of Social welfare ,therefore, should go up every year in the national budget. Measures should be taken to ensure that monetary assistance reaches the actual poor beneficiaries.

Health sector is still under-developed in the country. Majority of the marginal poor in the rural areas are still deprived of medical facilities. Community clinics are inefficient, most of the time having no physicians , unable to provide medicines. Hence severely sick poor are compelled to take treatment of private clinics at unaffordable high cost, losing their last coin of saving or borrowing money from money lenders at exorbitant interest rates repayment of which makes them more poor. An emerging economy needs healthy skilled or unskilled manpower for boosting production in all sectors contributing adequately to GDP. Allocation of funds to Ministry of health ,therefore, should go up every year for providing basic medical facilities to the poor. On the other

hand in order to stop flight of foreign exchange for medical treatment of the statesmen, rich and ultra rich businessmen , more specialized and modern hospitals should be established in Dhaka and other urban cities.

Development (ADP) Budget

The state of implementation of ADP budget may be considered very poor. Capability of completing projects in time with funds allocated is questionable. Rate of implementation of ADP projects by Top ten ministries in percentage of ADP allocation is given below:

Development works under ADP is the lifeblood of Government investment. If ADP projects are delayed or become overrun or abandoned then private investment is seriously discouraged. The Government of an emerging economy has ,therefore, to ensure capability of implementation of all ADP projects in time by deploying task forces amongst the civil administration.

The Author is a Fellow Member,ICAB and Consultant, Hospitalityand Financial Consultants

FY2013 FY 2014 FY 2015 FY 2016Ministry of education 6.0 5.9 6.2 5.8Min. Primary and Mass edu 5.1 5.4 5.5 4.9Min. of Health and welfare 4.9 4.3 4.5 4.3Min. of social welfare 1.1 1.0 1.2 1.1Min.of women and child welfare 0.7 0.7 0.6 0.5 Min. of Disaster and relief 3.0 2.9 2.5 2.3Total for 6 ministries 20.8 20.1 20.8 19.2

Ministry/ Divn FY2014 FY2015 (Jul-Nov) (Jul-Nov)LGRD 27.6 26.6Power Divn 18.3 18.8Bridges Divn 10.2 12.5 R& H Divn 17.4 14.2M/O Railway 9.7 13.1M/O Health 18.2 15.9M/O Primary & mass edu 29.2 21.4M/O Edu 23.5 17.5M/O of Water resource 4.4 10.0M/O energy 34.8 15.0


An Emerging Market Economy (EME) may be defined as an economy with moderate per capita income. Examples of emerging market countries include China, India, and Mexico. Generally, these countries are described by a growing population experiencing a substantial increase in living standards and income, rapid economic growth, and a relatively stable currency. Such countries constitute majority of the global population, and represent lesser of the world's economies (may be 80:20 concept). There are few characteristics to consider EMEs:

fast-growing economies.

transitional in the process of moving from a closed economy to an open market economy

an economic reform program

stronger and more responsible economic performance levels

transparency and efficiency in the capital market.

building confidence in the local economy with a stable local currency

reduction of the desire for local investors to send their capital abroad and foreigners are investing.

Investment in Emerging Market EconomyThe Bigger the Risk, the Bigger the Reward

Md Anisuzzaman FCA

receiving aid and guidance from large donor countries and/or world organizations

an increase in both local and foreign investment

an increase in GDP

lessening the gap between the emerged and emerging worlds.

exposure to new work standards and also to new cultures (say, fast food and music etc.)

The four largest emerging and developing economies by either nominal or PPP-adjusted GDP are the BRIC countries (Brazil, Russia, India and China). The next five largest markets are South Korea, Mexico, Indonesia, Turkey, and Saudi Arabia. Iran is also considered an emerging market. Bangladesh is behaving like emerging markets or considered as the next to BRIC.

On the other hand, a developed market is a country that is most developed in terms of its economy and capital markets. The country must be of high income, but this also includes openness to foreign ownership, ease of capital movement, and efficiency of market institutions. Needless to say who the developed markets are.


In the emerging transition, foreign investment is a signal that the world has begun to take notice of the emerging market, and when international capital flows are directed toward an EME, the injection of foreign currency into the local economy adds volume to the country's stock market and long-term investment to the infrastructure.

For foreign investors or developed-economy businesses, an EME provides an outlet for expansion by serving, for example, as a new place for a new factory or for new sources of revenue. For the recipient country, employment levels rise, labor and managerial skills become more refined, and a sharing and transfer of technology occurs.

As the markets are in transition and hence not stable, emerging markets offer an opportunity to investors who are looking to add some risk to their portfolios. The risk of an EME investment is higher than an investment in a developed market, during which international portfolio flowing into these countries actually began to reverse themselves, is a good example of how EMEs can be high-risk investment opportunities.

However, the bigger the risk , the bigger the reward , so emerging

market investments have become a regular practice among investors to optimize the diversification while adding risk.

Scenario of Stock Market in Developed Countries

In the recent past, most international stock exchanges were affected by continuing monetary stimuli and by the lack of investment alternatives in the low interest environment. Despite political unrest, such as that in Ukraine, share prices benefited from these factors. It was not until the end of 2014 that growing economic concerns and the significant fall in the oil price led to a drop in share prices.

Most of the major European stock market indices performed similarly. The MSCI (stock market index of 'world' stocks) Euro Index gained in value by 2.0 percent and the DJ EURO STOXX (Eurozone stocks) by 1.7 percent. The FTS Eurofirst 300 Index in London increased by 4.0 percent. Only the CAC 40 Index in Paris fell, dropping by 0.5 percent.

The German share index DAX (German stock index), in June 2014, it broke through the 10,000 points mark for the first time. As a result of worsening economic data from the

THE STOCK MARKET SIZE RELATIVE TO THE SIZE OF THE ECONOMY IN BANGLADESH IN COMPARISON TO OTHER COUNTRIES IS REALLY FRUSTRATING. MOREOVER, POLITICAL TURMOIL IS A COMMON PHENOMENON RESULTING IN DISTURBING MARKET ENVIRONMENT. HOWEVER, THERE ARE FEW POSITIVES LIKE SYSTEM BASED INFORMATION, MARKET REGULAR MONITORING, TAX REBATE OF CAPITAL MARKET INVESTORS, CORPORATE TAX RATE BENEFITS ETC.

United States, share prices went down, with the DAX falling to its lowest level for the year of 8,572 points on 16 October 2014. For the remaining part of the year, the trend was back up. On 5 December 2014, the DAX reached its highest level for the year of 10,093 points, ending the year at 9,806 points. This was 2.7 percent higher than at the end of the 2013 financial year.

The US stock markets again saw more dynamic trends than in Europe. The S & P 500 Index was up 11.6 percent, while the NASDAQ (American stock exchange) technology index (NASDAQ composite) rose by 13.4 percent. In the emerging economies, however, the picture was different. The MSCI Emerging Markets Index lost 4.6 percent in the course of 2014.

Important differences in the characteristics of stock market

crises between the developed and emerging stock markets could be found. While each developed market crisis has been less severe than the previous one, both in terms of the extent of price decline and the duration of the crises, this is not so for the emerging stock markets. For emerging markets stock crises, prices tend to fall rapidly and steeply, but take longer to recover, in about three years on average. For both developed and emerging markets, prices fall for at least three years subsequent to recovery from a crisis.

Source: 2015 Annual Report of Linde Group.

Emerging Market Economy

Comprehensive emerging markets index was first launched by MSCI in 1988 and since then, a progressive opening up of more countries to foreign investors has been accompanied by major

structural transformations in many parts of the world.

Strong economic growth combined with the development of monetary markets has led to the expansion of investment opportunities in emerging markets. Emerging markets continue to attract the attention of investors the world over. Economic reforms, the expansion of the European Union, and changing political climates worldwide may create more investment opportunities as well as pose additional challenges and uncertainty in the years to come. For a long-term investor with a high tolerance for risk and the need for added diversification, it might be a good opportunity to explore the potential benefits of making emerging markets a part of your portfolio.

The dancing tendency between potential rewards and risks of emerging market investing can be



readily seen from the experiences of investors in Asia from late 1997 to 1999. A major collapse in emerging markets began with Asia in July 1997, when the Thai government was forced to dramatically devalue its currency, the baht, after failing to defend it in the face of a very large currency-account deficit, foreign debt, and a government budget shortfall. It is especially important to note that the fortunes of one nation can increasingly affect those of another, as trading ties become tighter between most nations. As one nation devalues its currency, others may be forced to do so in order to keep their exports competitive, as some nations did when Thailand devalued the baht. When Asia's troubled economies cut their oil purchases, energy-producing nations such as Russia and Ecuador also suffered from falling petroleum revenue.

In 2009, the average real growth in the GDP of developing economies was 4.12% versus a -2.72% growth rate for developed economies. Emerging stock markets alone currently represent only 12.5% of the capitalization of the world's equity markets as of December 31, 2010.* (*Sources: IMF 2010; Standard & Poor's Global Broad Market Index).

Investment Feasibility in Emerging Markets

Along with high potential returns, emerging markets also offer diversification benefits. Because these markets tend to be rising, while other markets are falling. Hence, they can help reduce the overall risk of a stock portfolio to emerging markets, depending on their investment goals and tolerance for risk.

Generally, the emerging markets tend to be volatile and investors in

emerging markets are therefore advised to potentially reduce risk through diversification among many different markets, and to maintain a long-term view. Emerging market funds concentrate on investments in these markets around the world or in a specific country or region. Some funds that invest in stocks of emerging market companies may also invest in bonds issued in that country. In general, these funds may contain a better mix of different types of securities than a home-land fund.

Key Considerations for Investing in Emerging Markets

Higher potential returns to long-term investors but also carry higher potential risk, if the market is considered volatile; trade-off between investment goals and tolerance for risk.

Depending on stock portfolio to emerging markets may help optimize diversification.

Emerging market investments entail higher political and liquidity risks than domestic investments

Currency risks also affect emerging market investments. If the value of the dollar declines against the currency of the emerging market country, your return will be lower. The currencies of some emerging market countries are pegged to the dollar and usually do not fluctuate wildly.

Managing risk by holding emerging market investments among different countries and regions of the world.

Although emerging economies may be able to look forward to

brighter opportunities and offer new areas of investment for foreign and developed economies, local officials in EMEs need to consider the effects of an open economy on citizens. Furthermore, investors need to determine the risks when considering investing in an EME.

Scenerio of Bangladesh Stock Markets

Over the last few years, banking sectors in Bangladesh has improved with a healthy financial performance. On the other hand Bangladesh's capital market has not been performing well for the last few years. There are some co-relating factors in existence. Like high interest rates. Another co-relation is between higher interest rate vs liquidity crisis in banking sector. Liquidity crisis leads to unattractiveness of the investors to borrow and invest in stock market.

Finance in monetary market is a bit reliable, but bank finance is only for short term, while stock markets can provide funds to risky and productive long-term investment projects. This leads to an increase in the rate of economic growth. Stock market contributes to the mobilization of domestic savings by enhancing a set of financial instruments available to savers to diversify their portfolios. The Bangladesh economy needs investments in productive sectors. A strong and stable stock market can help increase investment flow to such sectors.

The Bangladesh stock market crash in 2011 is known to all and since then it has been falling continuously. The share index of the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) was 9500 in 2011 and it stands at 4500 in 2015. This gives a depressed picture of stock

market. During 2011, many potential investors lost their investments. Investors are still unfriendly for the sudden abnormal behavior of the market environment. The confidence level of investors in stocks has not yet been reestablished. Still, the regular transactions of the both DSE and CSE do not meet the investors’ expectation.

The stock market size relative to the size of the economy in Bangladesh in comparison to other countries is really frustrating. Moreover, political turmoil is a common phenomenon resulting in disturbing market environment. However, there are few positives like system based information, market regular monitoring, tax rebate of capital market investors, Corporate tax rate benefits etc. However, for more healthy capital market, more initiatives by Govt. as well as private partnership are

expected like influencing banks to generate more investment in the capital market, integrated Govt. policy and regulatory structure, synergy of fiscal and monetary policy, removal the corruption and so on.

Every stock market may be different and its stock determinants always vary from market to market. However, the most vital factors even in Bangladesh stock market that determine the Share market price, are EPS, DPS, NAV and Net Operating Cash Flow Per Share (NOCFPS) and these information are also required to be published as per Bangladesh Securities and Exchange Commission. A good practice is noticed in Bangladesh stock market is the flow of information by the good rated companies where they believe that the management of a successful and productive relationship with its Shareholders must be strengthened

by the importance of maintaining transparency and accountability to its Shareholders. In order to achieve good governance, the Company continues to have regular communication with Shareholders through General Meeting, Annual Report, periodical updates on financial performance, web sites, media publications etc. and at any other time in the best interests of Shareholders. In this respect, the best practices are followed by the Companies which help investors to rebuild and to keep their trust and confidence in the Company and to attract other investors.

Without an effective and strong stock market, it is quite impossible to have an economic development of a country. Stock market plays a vital role for capital formation geared towards economic development by accumulating savings for investment in productive and profitable sectors of the economy. Investment in Bangladesh stock markets may be attractive to investors for several reasons; the rapid economic growth, higher rate of consumption level, investment potentials. The allure of Bangladesh economy can be strong, as faster economic growth is typically associated with stronger earnings growth, which many investors associate with higher stock returns.


The Author is aFellow Member, ICAB andCFO and Company Secretary,Linde Bangladesh Limited


Emerging economies mean rapidly growing and volatile economies of certain Asian and Latin American countries. They promise huge potential for growth but also pose significant political, monetary, and social risks.

In sync with the dream of becoming a middle-income economy from an emerging economy, Finance Minister AMA Muhith has kicked off the annual budget dialogue series with think-tanks, trade bodies, lawmakers and media on the forthcoming budget, tipped to be about Tk 340,000 crore -- about 15 percent higher than the current year's.

The first meeting was held recently with the representatives of the Policy Research Institute, Economic Research Group, Bangladesh Institute of Development Studies and Bangladesh Economic Association at the NEC. Mr Muhith will hold nine meetings until May on the budget.

The Finance Division has already started work on this year's revised budget and the budget for fiscal 2016-17.

The National Board of Revenue and the planning ministry have also started their work on the budget formulation.

Budget for an Emerging EconomyRaihan M Chowdhury

In the next budget, a big chunk will be required for paying the salaries and allowances of public servants.

In the current fiscal year, the public servants' basic salaries were paid as per the new pay scale, but from next year their allowances will also have to be according to that system.

An additional Tk 15,904 crore will be required in the current fiscal year for payment of their basic salaries, according to finance ministry data.

In fiscal 2016-17, if the allowances are paid as per the new pay scale, the government will need Tk 23,828 crore more.

However, an official of the finance ministry said the actual cost may be much higher, which means a big portion of the next budget's non-development expenditure will go towards salaries and allowances.

Another big budgetary expenditure is on development: the size of the Annual Development Programme is likely to be about Tk 113,000 crore in the next fiscal year, up from Tk 97,000 crore now.

A planning ministry official said the various ministries and divisions have


already started sending in their demands and they are much higher than the primary estimate.

To finance the budget, the government will set its revenue earning target most likely at Tk 248,000 crore, with the NBR shouldering the biggest burden.

In the current fiscal year, the target for revenue earning has been fixed at Tk 208,443 crore.

The budget deficit will be fixed at 5 percent of the gross domestic product, like this year.

Since the ministries and divisions fail to use their allocations, the deficit tends to be around 4 percent.

The GDP growth target may be set at 7.2 percent and the inflation target at 6 percent.

A series of pre-budget meetings will begin on March 27 at the National Board of Revenue (NBR) and economists and professionals come first with inputs for the budget for fiscal year 2016-17.

The NBR has planned a total of 18 meetings with the major chambers and associations and others relevant to framing budget with opinions and recommendations from all sectors and stakeholders.

Among the participants are also hotels, restaurants, paper and printing industry, cinema and advertising, clinic and diagnostic center, construction sector, small, medium and large industry and businesses, media, economic reporters forum, agriculture, poultry, oil, gas, food, chemical, telecom operators, Bangladesh Reconditioned Vehicles Importers & Dealers Association (BARVIDA), Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), Bangladesh Textile Mills Associations (BTMEA), cigarette manufacturers’ association, ceramic wares, banks, insurance, leasing, merchant banks, clearing and forwarding agents, tax lawyers, and local government.

The pre-budget talks will end on May 12, 2016, giving the finance

IN THE CURRENT FISCAL YEAR, THE PUBLIC SERVANTS' BASIC SALARIES WERE PAID AS PER THE NEW PAY SCALE, BUT FROM NEXT YEAR THEIR ALLOWANCES WILL ALSO HAVE TO BE ACCORDING TO THAT SYSTEM.AN ADDITIONAL TK 15,904 CRORE WILL BE REQUIRED IN THE CURRENT FISCAL YEAR FOR PAYMENT OF THEIR BASIC SALARIES, ACCORDING TO FINANCE MINISTRY DATA.IN FISCAL 2016-17, IF THE ALLOWANCES ARE PAID AS PER THE NEW PAY SCALE, THE GOVERNMENT WILL NEED TK 23,828 CRORE MORE.


authorities necessary inputs and time to cobble the ingredients together and place the next budget in the first week of June, as usual.

Reports say the finance ministry has already got down to collating various factors as preparatory work on the budget, which the finance minister has forecast may be Tk 3.40 trillion in size.

Meanwhile, chartered accountants have recommended the government allow taxpayers six months to prepare themselves for adapting to the new VAT law.

The VAT and Supplementary Duty Act will be enforced from July 1, 2016.

They said there is a basic difference between the existing VAT law and new VAT and Supplementary Duty Act that calls for adequate preparation, planning and training of the taxpayers.

The Institute of Chartered Accountants of Bangladesh (ICAB) made the recommendation in its budget proposal for fiscal year 2016-17.

“Taxpayers need at least six months to get prepared for the new law after the VAT and SD rules are finalised and enforced,” the institute said in its budget proposal to the National Board of Revenue (NBR).

The auditors’ grouping, however, submitted the budget proposal to the NBR on both existing VAT law, framed in 1991, and the new VAT law to be enforced in a few months.

The institute has proposed introducing a single-digit VAT rate instead of 15 per cent uniform rate in the new law, considering the global trade situation.

It also proposed de-linking the VAT law with the income tax ordinance and rules 1984, while withdrawing repeated imposition of VAT.

Supporting the rebate claim, the association leaders said the bill of entry should be enough as document in support of import for offering the rebate to the importers.

The new VAT law has kept provision for obtaining a clearance certificate from the customs

authority showing that the goods have been imported for local consumption.

The ICAB also said the integrated tax invoice in the new law is a complex procedure. It cannot be used properly in the present context. Also, it cannot leave any impact in revenue collection.

The integrated tax invoice will create problem for both suppliers and receivers.

The chartered accountants have proposed introducing one tax deduction at source certificate against each supplier at the end of the every tax-term.

Since resources are limited, priorities have to compete with each other. As a result, many issues which did not receive adequate importance in the previous budgets should get proper focus in the coming budget. The initiative of the government to launch a National Social Security Strategy (NSSS) in FY2015-16 that intends to tackle poverty and inequality is a noteworthy step. It aims to bring 3.57 crores of the poorest and most vulnerable of the

population under a social safety net.

However, resources for social safety net programmes (SSNP) have always been far below the requirement. During FY2014-15 allocation for SSNPs, that includes social protection and social empowerment programmes, was 2.3% of GDP. Therefore, the ambition of the Sixth Five Year Plan that intended to increase public expenditures on SSNPs to 3% of GDP in FY2014-15 remained unfulfilled. Allocation for SSNPs in Bangladesh is much lower than the South Asian average of 4% of GDP. East Asia and Pacific countries spend about 8% of GDP on SSNPs while the European countries make an expenditure equivalent to 20% of their GDP on social protection. Though the allocation for SSNPs has almost been doubled since FY2009-10, the share of this allocation in total budget has declined from 15.1% in FY2009-10 to 12.3% in FY2014-15.

The other aspect of SSNPs is the distribution and utilisation of resources. Access to SSNPs by the extreme poor is limited. Apart from the targeting problem, leakage of resources in these programmes

reduces the efficiency of SSNPs. Considering the requirement of the poor, the upcoming budget should increase allocation for various programmes.

The efficiency of resources allocated for SSNPs could be improved through harmonising programmes. At present there is more than one programme in each category of SSNPs that deal with the same types of projects, target areas and groups. Similar programmes can be consolidated and merged to reduce administrative leakages, duplication, pilferage and spill over transfers to the beneficiaries. The selection processes of the target group could also be improved through a participatory process where the local community can be involved in selecting poor participants in the SSNPs since the number of potential participants is large in a country like Bangladesh.

According to Dr Fahmida Khatun, Research Director at Centre for Policy Dialogue (CPD) the most important objective of SSNPs should be to empower the poor by creating employment opportunities for them. The Employment Generation Programme for the Poorest (EGPP) that aims to

enhance income of the poorest section through short-term employment generation during lean periods and develop small scale rural infrastructure has been very useful for the poorest section such as the unemployed, seasonally unemployed and marginal farmers. Programmes such as EGPP should be expanded through higher budgetary allocation. EGPP should also have a legal basis similar to that of the National Rural Employment Guarantee Act of India so that the poorest have a guarantee for employment.

The underlying philosophy of SSNPs should be meeting the right of the poor. These are not 'relief' programmes for the poor, but their 'right'. A modern democratic government will have the moral obligation to fulfill this right in order to make development long-lasting. As we are in the process of finalising another budget for a new fiscal year, both allocations and programmes for SSNPs should be guided by the broader objective of making development sustainable through empowering the poorest of the poor.


The Author is a Senior Journaliston Business and Economic Issues


Bangladesh has recently entered the club of lower middle income along with other countries having Gross National Income per capita (GNI) from a range of USD 1,046 to 4,125, according to a recent World Bank Report. Though the per capital income of this country is USD 1,314, nearly 40 million people are still living under the poverty line. Of them, nearly 25 million people are sufferers of high poverty. In order to eradicate poverty and reduce the significant gap between the incomes of top and marginal earning groups, Revenue Strategies are to be revised. Increasing the direct tax net is one of the much practiced techniques to reduce the gap of different earning groups of the society.

Roadmap of an EmergingEconomy in Growth of Revenue

Nabila Ishrat Jahan ACA

In Bangladesh, the growth trend of revenue collection has been strongly positive for many years. The main source of government revenue is taxation- both in direct and indirect forms. However the appropriation thereof is something that needs to be revisited. Looking into the data on revenue collection over past five years between 2010-11 and 2015-16, it can be seen that the collection from indirect tax is consistently around two thirds whereas direct tax forms one third of the yearly revenue collection for the government. Though Indirect Tax is helping to collect internal resources significantly to finance our own budget, it cannot ensure sustainable development of the country in the long run.

0

50

100

2010-11 2011-12 2012-13 2013-14 2014-15* 2015-16*

71 69 65 64 64 63

29 31 35 36 36 37

Yearwise Revenue Proportion (BD)

Direct Tax % Indirect Tax %

*Due to data unavailability, revised budgeted and budgeted figures have been used for 2014-15 and 2015-16 respectively


From the above data, it can be observed that the weight is slowly being shifted towards direct tax from indirect tax. Let us now take a look at the scenario of two Asian countries- India and Singapore.

From here, it is quite evident that the structure of India is similar to ours whereas in Singapore, the appropriation is more balanced with the load being added on the direct tax. The strategies of Singapore has been to bring parity among different group of people of the society which is leading to the sustainable socio-economic development of this country.

With a view to moving to the next level of the economy, we should move more towards the principle of ‘ability-to-pay’, shifting the tax burden slowly towards direct tax. On top of the tax net being extremely narrow, only about 1.4 percent of the total population is under direct tax net, less than one percent of whom actually pay the tax. The high rates of tax evasion and avoidances just add more to this issue. It is important to first ensure that we overcome the inefficiency of direct tax administration. It’s undoubted that collection of indirect tax is easier than direct. Hence, Government is not very keen to shift their focus from indirect to direct tax. But this strategy is merely short-term

and economy cannot stand strongly on indirect taxes only. Coupled with advanced technological setup, authorities have to clear the direct tax system which is riddled with corruption and collusion. It is also important to make the taxation simpler due to the higher level of tax illiteracy and unawareness among individual income tax payers and tax collectors alike.

The success of Malaysia was greatly contributed by the shift from indirect to direct taxes over a span of twenty five years. Another fellow developing country showed that less oppressive revenue collection was found to have contributed to the increased people’s positivity towards taxation.

Learning from such examples from around the world, along with dedicated efforts in bringing parity and fairness in the tax burden, allocating it justly across direct, indirect sources should take us to high growth structure in the near future. Releasing the dependence on indirect tax by targeting more direct taxpayers can ensure the flow of wealth from the top earning group to marginal people. And this should be the ultimate roadmap for an emerging economy!

LOOKING INTO THE DATA ON REVENUE COLLECTION OVER PAST FIVE YEARS BETWEEN 2010-11 AND 2015-16, IT CAN BE SEEN THAT THE COLLECTION FROM INDIRECT TAX IS CONSISTENTLY AROUND TWO THIRDS WHEREAS DIRECT TAX FORMS ONE THIRD OF THE YEARLY REVENUE COLLECTION FOR THE GOVERNMENT. THOUGH INDIRECT TAX IS HELPING TO COLLECT INTERNAL RESOURCES SIGNIFICANTLY TO FINANCE OUR OWN BUDGET, IT CANNOT ENSURE SUSTAINABLE DEVELOPMENT OF THE COUNTRY IN THE LONG RUN.

The Author is anAssociate Member, ICAB

0

50

100

64 62 65 66 67

36 38 35 34 33

Yearwise Revenue (India)

Indirect Tax % Direct Tax %

0

50

100

48 47 47 48 46

52 53 53 52 54

Yearwise Revenue (SG)

Indirect Tax Direct Tax


Abstract

After much development activities over a prolonged period by the governments in power, Bangladesh has been able to diminish its disgrace as a third world country and has been recognized in the world as a lower middle income country. Every year we are offered an ascending budget. The Finance Minister is confident that the country is now well capable of managing this uphill in the budget figure, although critics are doubtful how long this can be maintained.

The issue is economic sustainability: is the economic growth maintainable in the long-term or is merely a short-term demonstration at the expense of long-term decomposition? Nowadays the term ‘sustainable economy’ has been widespread. The main feature of a sustainable economy is dynamism. A sustainable economy grows steadily in terms of the macroeconomic determinants (i.e. GDP, GNP, Per Capital Income etc.) while gathering strength for facing difficulties at the point of downturns. And in the way of achieving steady growth, it does not produce any side effects (such as: income inequality, hyperinflation, environmental pollution, origin of black money which is subsequently whitened etc.). So the growth of the economy can

Budget Planning Intendedfor Economic Dynamics

Thauhidul Alam

be maintained in the long run. This is possible only when the economy has achieved flexibility and stability. And this is called economic dynamics. Hence a sustainable economy cannot be built up as long as economic dynamics cannot be ensured.

The following paragraphs embed some thoughts in relation to ensuring economic dynamics. Of course economic dynamics requires extensive preplanned efforts and is not achievable overnight. The recommendations have also been made in that long-term context.

Defining Economic Dynamics

Economic dynamics refers to the vitalization of transactions in an economy in terms of both quantity and quality. In other words, an economic system is dynamic when value adding transactions occur frequently there. And to add value, transactions must involve more and more people instead of involving the same people again and again. As many different people get involved, as newer facets of transactions open up.

We see that transaction frequency and quality determine the economic dynamics. We all know that money is the centre of all economic transactions. Therefore frequent transactions mean frequent


exchanges of money or money’s worth. Again, quality transaction means value additive transactions. Value itself is measured in terms of money or money’s worth. So we have identified what the key factor for economic dynamics is. Yes, this is Money Circulation.

An economic system is as much dynamic as much strong the money circulation therein is. Money is the centre of all economic activities, so money circulation is the heartbeat of all economic dynamics. Money circulation is not merely printing new coins or notes by the Bangladesh Bank and injecting the same into the economy, it refers to how many times a certain coin or note changes hands. As many times a coin or note changes hands, as higher value is added to the economy by that coin or note. And as many different hands ‘touch and pass’ the coin or note, as many people are benefited from the transactions. So a dynamic economic system merely means a dynamic money circulation.

Pillars of a Dynamic Economic System

Now we may proceed to explore how to keep up the economy dynamic or how to keep money circulation effective. There are several ways for doing so. But we shall not focus on all those ways today. We shall confine our discussion to the following two most potential factors:

1. Income equality: This is the very first and foremost pillar of a dynamic economic system. In simple words a society where national income is unequally distributed is often called to be capitalistic. Here most of the wealth centers to only a few people. The larger portion of the population is not affluent enough to spend spontaneously. Hence economic activity slows down, although national income in the total sense looks very handsome.

2. Minimize the leakage of money from the circulation mechanism:

A MAJOR CRITICISM OF THE TRADITIONAL MACROECONOMIC VARIABLES LIKE GDP, GNP, PER CAPITAL INCOME, GROWTH, ECONOMIC OUTPUT AND STANDARD OF LIVING ETC. IS THAT THESE ALL MERELY REPRESENT THE AVERAGE OF THE POPULATION: THEY DO NOT ADDRESS THE INDIVIDUAL ITEMS IN THE POPULATION. SO A COUNTRY WITH EXTREMELY GOOD ECONOMIC STANDARDS IS NO SURPRISE TO SUFFER FROM EXTREME INCOME INEQUALITY (IN FACT THIS IS HAPPENING ALL AROUND) AND CONSEQUENTLY EXTREME ECONOMIC DISORDER. SUCH AN ECONOMY CANNOT BE SAID TO BE ‘DEEP’ SINCE IT HAS LITTLE STRENGTH TO FACE DIFFICULTIES IN THE LONG RUN.


An economic system remains dynamic as long as money circulation remains active. Money circulation itself depends on how much money is injected into, transacted in and leaked from the economic system. There are certain leakages through which money emits out of the circulation mechanism. Until and unless those leakages can be blocked, money circulation cannot be expedited.

Equal Wealth Distribution and Income Equality

Wealth distribution and income distribution may be taken as synonymous for the purpose of this article. But in real sense they have significant differences. Wealth refers to personal accretions and is of capital nature. This is the long-term possession of an individual. Wealth can be defined as assets less liabilities. In contrast, income is the return or earnings generated from using assets and is of revenue nature. The simple link between income and wealth is that income net off expenditure accumulates to the wealth of an individual. (Again, wealth is apart

from savings: savings are cash or cash equivalents whereas wealth may take the form of either cash or tangible asset investments. In fact savings are just a form of wealth.) Another important difference between income and wealth is that wealth is usually used for meeting capital expenditures or making long-term capital investments whereas income is usually used for meeting consumptions and other day-to-day revenue expenditures or for making short-term investments.

An important question is: can absolute equality of wealth or income be ensured? This is only theoretically possible and practically not. And even if the government attempts for ensuring absolute equality, this will create another problem: individuals will no more be willing to earn more i.e. their potential productive capabilities will remain unutilized (as the case is in the socialist economic systems). Hence we are talking about some sort of equality where every person has sufficient

fund to spend

comfortably. Beyond this, if someone

can earn and accumulate some additional wealth by dint of personal capability, that should not be called into question. For example, say there are total 100 persons and total Taka 1.5 lakh in an economy. And for meeting all expenditures, each person needs Taka 1,000. Now if each person gets Taka 1,000 and the excess Taka 50,000 belongs to a particular person among them, that is not objectionable because everyone can maintain his standard of living. We should concern only when a few persons have mostly grasped the said Taka 1.5 lakh and resultantly the other persons cannot cope up with their expenditures properly.

At this stage of discussion arises another important question: what is vital for economic dynamics: income equality or equal wealth distribution? The answer is: both. Wealth is important for gearing up capital investments (such as: industrialization) in the economy, which will create sources of income for some other persons.

And income equality is important for ensuring equal wealth distribution, since income eventually adds to wealth. Moreover, at higher level of income, luxuries are felt like necessities. So income equality will also gear up luxury expenditures. Thus when both income equality and equal wealth distribution can be ensured, money will change hands frequently and valuably and the entire economy will become vibrant.

Income Equality and Economic Activity

Now let us see how equal income distribution affects the economic system. Although human want or need is said to be endless, in reality it has a declining marginal utility: as many forms of want or need are satisfied, as less important the next forms become. In other words, luxury needs have lower utility than necessities. This simply means the Marginal Propensity to Consume (increase in consumption expenditure in response to increase in income) by a single person decreases gradually when his consumption expenditure crosses a certain limit. For example: an average person is very keen to purchase a car. When he has been able to manage a medium grade car, he is not that much keen to purchase a luxury car. This signifies the crucial relationship between income equality and economic activity. When only a few people have much money to spend, economic activity will slow down. When each of many people has some money to spend, economic activity will be vitalized. Such as: it is better for the economy that many persons purchase medium grade cars than a few persons purchase luxury cars. This is why income equality can be taken as the core of economic dynamics.

Income Equality and the Velocity of Money Circulation

Although earlier we said that money circulation or economic dynamics is tremendously affected by income equality, it is also true that income equality itself is dependent on money circulation. That means income equality and money circulation react to each other. When money circulates too frequently, that causes money to change hands repeatedly. Thus both income and expenditure of people increase sharply. People begin to earn by one hand and they spend it by the other hand. And this is the real appearance of a dynamic economy.

Income Equality and Traditional Macroeconomic Variables

A major criticism of the traditional macroeconomic variables like GDP, GNP, Per Capital Income, Growth, Economic Output and Standard of Living etc. is that these all merely represent the average of the population: they do not address the individual items in the population. So a country with extremely good economic standards is no surprise to suffer from extreme income inequality (in fact this is happening all around) and consequently extreme economic disorder. Such an economy cannot be said to be ‘deep’ since it has little strength to face difficulties in the long run.

Leakage of Money from the Circulation Mechanism

After much discussion about income equality, now let us glance at the other pillar (as introduced earlier) of economic dynamics.

As the name suggests, leakage of money from the circulation mechanism means this money is no more used in economic transactions. In other words, this money is no more in circulation, so this money has lost productivity. Money generates value when is in circulation. Although idle money cannot be treated as an accounting liability, but is certainly felt like a burden.

Here may arise a question: does this money exist in the economic system or not? May or may not be. There are several leakages for money. On account of some leakages (such as: cancellation of coins), money totally exits the economic system (i.e. dead money). On account of some other leakages (such as: savings), money remains in the economic system but loses productivity (i.e. idle money). And on account of rest of the leakages (such as: import), money is transferred / transmitted / relocated from one macroeconomic unit (i.e. country) to another (i.e. remitted money). This sounds a bit obscure at this stage; but when we explore each of the leakages separately, this will become clear.

Now, what are the leakages? some instances are mentioned below:

- Withdrawal or cancellation of certain coins or notes by Central Bank

- Individual savings or wealth accretion

- Import

- Non-market transactions

- Illegal activities

Now let us scrutinize each of the leakages closely.



Withdrawal or Cancellation of Certain Coins or Notes by Central Bank

Why or how the leakage of money happens? The simplest answer that peeps into mind is that the Bangladesh Bank has withdrawn or cancelled some coins or notes from market. But this is an extremely rare practice. The following points are to be cited in this regard:

- The Bangladesh Bank usually does not cancel any money abruptly; rather it is seen to replace some of the existing coins or notes with newer ones. Such as: a few years back the Bangladesh Bank withdrew all one taka paper notes from market and introduced one taka coins instead. Such an action of the Bangladesh Bank hardly affects the total money supply in the economy and so does not cause any leakage of money.

- Sometimes some scarcity of money in the market may be felt. This is usually temporary and is due to the contractionary monetary policy of the Bangladesh Bank. The Bangladesh Bank may think fit that money supply in the economy should be narrowed for the time being. But this does not mean that the money

has been cancelled; in fact the money has been retained in the reserve of the Bangladesh Bank for a certain period and will be released in the economy again when appropriate. So this is not also a leakage of money.

- If the Bangladesh Bank cancels any money right away, that would result into deflation. But as to any normal economy, inflation is a genuine feature. Like any living body grows with time, economy grows through inflation. Of course we are talking apart from hyperinflation.

Individual Savings or Wealth Accretion

It sounds a bit surprising that savings is not good for economic activities. When investment is highly appreciated by all economists, most of them discourage savings. They refer to the Paradox of Thrift, a concept introduced by John Maynard Keynes. The underlying fact is that money in savings is idle money. Although the money exists in the economy, it has lost fertility. Hence high rate of savings causes economic infirmity.

Some may argue that savings in the form of bank deposits are not bad, since banks can lend this money to businesses, resulting in expansion

of business activities. But that is also arguable. It is often heard that banks have huge amount of idle fund in their reserves. This happens because people choose to keep the money deposited with banks instead of spending for consumption or making investments. Idle reserves are a great headache for banks nowadays.

So the government may prefer to minimize savings by people and keep the money running. How can that be done? For answering this, we have to discuss first why people tend to save money.

1. Launch social security systems in government initiative

The primary reason for people saving money is future contingencies. People think that they will need money for meeting various emergencies. Even apart from emergencies, they will need money for arranging comforts. They know that money is the security for them.

Such tendency of people can be mitigated only when the government introduces social security system in its own initiative, in the shape of the developed countries. When people will see that they can get medical aid from the government for treatment purpose or poor but meritorious students can obtain educational aid from the government for carrying on higher studies or aged people may obtain seniority allowance or likewise benefits will be there, then people will not feel the urge of saving much. This will enable them to increase consumption spending or productive investments, which will ultimately boost up economic activities.

2. Progressive taxation

Currently the government follows the progressive principle of taxation. The rate of taxation climbs up along higher income slabs. Also, surcharge at progressive rate is imposed when net worth exceeds certain limit as set and revised by the government during each budget. Moreover, bank deposits by individuals are also taxed at least at truncated rates. In contrary, various types of investment allowance for individuals are in effect. Such progressive taxation is a good stick against individual savings or wealth accretion.

3. Induce investment friendly environment

Investment is no doubt the lifeblood of economic dynamics. Investment is the core of money circulation. When investment is stalled, the entire economy becomes stagnant. One vital reason for high savings by people is that they do not feel enough security or guarantee for making investments. So when the government can ensure investment security to the entrepreneurs, savings will automatically fall.

How to ensure an investment friendly environment? This is such a big question that a separate article should be written on that. There are too many factors connected with investment security to discuss in this article. So let us just mention the most paramount three factors:

- Political stability: This is involved not only with investment environment but also with the overall image of the country. So the government should give the highest priority to it.

- Investment incentive: The government is honest to offer

various types of trade and non-trade incentives to the investors. We just request the government to keep those up.

- Lower bank interest rate: Bank interest is a burden on the investors. So as lower it can be kept, as good for investment.

Individual Savings Versus Group Savings

While individual savings should be discouraged by the government, group savings should be highly encouraged. Mutual funds, cooperative societies and micro-credits are good examples of group savings. Group savers are quite likely to keep their saved fund invested in some productive sources, unlike as making idle deposits by individual savers. Such as: they are seen to make investment in the share market, they are seen to lend to their members or other poor people in the society at zero or cheaper interest rate, they are seen to start some partnership business with the collective fund and so on. Thus the economy gets much return from their savings. Hence the government should offer tax and other incentives for the group savers on their innovative activities.

Import and the Economy

Nowadays every country has an open economy. It exports goods or services as to which it has surplus, and it imports goods or services as to which it has deficit. These are very general talks. The implication hereby is that export causes injection of money in the economy and import causes leakage of money from the economy. Of course we are talking about the countries individually and not collectively. If we think about the world economy as a whole,

imports and exports cause no change in the net money supply: money is just transferred from one geographical area to another. But if we consider each country as an independent macroeconomic unit, then import is a leakage of money. By means of importing we get some non-monetary items in exchange for money and by means of exporting we get money in exchange for some non-monetary items.

So can we go for only exporting and stop importing? Definitely not. It is not possible for us to produce all the necessary goods for ourselves. Moreover, in this age of globalization, the rest of the world will not permit us to stay as a closed economy, unless we are imposed with severe international embargoes by the global community. So we know that we cannot stop importing.

The option open to us is selective importing. The government should encourage domestic production of the things that we are importing currently. By utilizing our entire production capacity, we should produce as much as possible. Even if entire production accomplishment is not feasible for us, then we may choose to in-house one or more parts of the production process (such as: materials supply, quality checking, assembling, after-sales service etc.). Finally we should go for importing the rest of the goods or the rest of the quantities. And when setting production priorities, necessary goods must be given preference to luxury goods. This is because luxury goods pose larger scope of taxation than necessary goods. Such as: it is irrational to impose supplementary duty on imported necessary goods, but imported luxury goods are already subject to high supplementary duty in our country.



Such an initiative by the government will not only improve our internal money circulation, but also will provide many other folds of benefits to the economy; such as: improve balance of payment, the highest utilization or employment of internal resources, enhance foreign currency reserve, strengthen domestic currency in the international transactions, more effective control on the inflation rate etc.

Non-market Transactions and the Economy

Non-market transactions refer to those economic activities which are done by people for themselves. Household chores done by ourselves are the most common examples of non-market transactions. Similarly, an artist may sketch a painting work for his own satisfaction and not for selling. In the annual picnic, we may decide to perform cultural events ourselves instead of hiring any outside professional performer. During a fair or exhibition, we may get free ticket or gate pass. These are called non-market transactions

because, for these works, we neither earn anything from others nor pay anything to others. So non-market transactions are simply free of cost activities and not exchanges.

The concern for the economy on account of non-market transactions is that no monetary issue is involved. Non-market transactions cause leakage of money in the way that the money does not come into circulation at all. So as much is the volume of non-market transactions, as much is money circulation hampered. Therefore we must way out how to minimize those transactions.

An important reason for non-market transactions is the increase in the cost of living. When people find it tough to balance between their income and expenditure, they choose to carry on non-market transactions as a means of saving costs. This behavior is too rational to interrupt. Rather what would be wise for the government to do is to control inflation. The government should hold inflationary price hikes so that people feel easy with

spending. Then the volume of non-market transactions will fall automatically.

Another good remedy in this regard may be taxation on the market value of non-market transactions. Here is the rough idea: the government should determine and declare an appropriate market value for each non-market transaction. Then the gross value of all non-market transactions carried out by an individual during any income year should be added either to his income or to his net worth for taxation purpose. On the other hand, any payment or receipt of money in connection with any non-market transactions should be exempted from taxation. Such a decision by government will encourage people to monetize or make marketed all their activities and thus contribute to money circulation.

Illegal Activities and the Economy

Economics is a social science. Unsocial works are beyond the

scope of economics. Whenever we are talking about money circulation or any other macroeconomic factors, we are confined to the legitimate activities by the members of the economy. But can we ignore the existence of illegal activities in the society? No. Truly speaking, if we ignore illegal activities, our discussion will be incomplete and forecasts will be imperfect. Again if we consider illegal activities, it will be kind of acknowledging those activities. So what to do?

Yes, the government has to prevent those activities strictly. Although illegal activities (such as: black marketing, money laundering, corruption, hijacking etc.) involve monetary issues, but the money is black money and cannot be taken into account until and unless whitened. Thus illegal activities cause great leakage of money from the circulation mechanism.

Keeping this in mind, almost in every budget the government offers opportunities for whitening black moneys. Once again this is kind of acknowledging illegal activities and so is not agreeable. Instead the government should be much stricter on enforcing the existing laws and should ensure condign punishment of the offenders, with a view to suppressing the criminal tendency in people.

Inflation and the Economy

The famous economist William Philips opined in his renowned

Philips Curve theory that inflation is good for the economy. He showed that inflation and employment of resources grow together. Unfortunately we cannot agree to him absolutely. Earlier in this article we also told that inflation is the sign of a normal economy and in fact it denotes the growth of economic activities. So inflation is obviously important, but up to what extent? Philips did not show the demarcation.

Earlier in this article we described that high rate of inflation instigates non-market transactions. Also, the critics of Philips Curve theory mention about stagflation, a situation where inflation induces spiral of factor cost of production (such as: increased wage rate) and subsequent unemployment. But besides these, inflation has other downside effects as well.

Inflation is good for the economy as long as it can be backed by the available resources. When the rate of inflation exceeds the growth rate of resources, there will be a scarcity and discrimination in the allocation of resources. This will create an overall economic disorder. Such as: poor people will be deprived of their fundamental needs since hoarders and importers start taking an upper hand over them. Eventually income equality will be fully damaged. If the situation is left uncontrolled, it would be no surprise that there breaks out a famine. In such a circumstance, goods from black market will be traded in large

volumes because only those goods will be available at comparatively cheaper prices and efforts. Other criminal activities will also grow beyond control since poverty has been intensified. Therefore the government must be careful about inflation for the sake of economic stability.

Ending Words

It is the dream of every Bangladeshi to see Bangladesh in the row of the developed countries. But actualization of this dream requires superior level of planning and implementation efficiency. In a developing country like Bangladesh budget planning is more a matter of prudence than mere forecasting and target setting. When targets are based on forecasts, budget becomes customary and feedback oriented. But this is not the mark of an exemplary economy. Rather targets should be set first and then should be matched with forecasts through determining and doing the needful. That is, forecasts should not lead the targets, but targets should lead the forecasts. Of course there will be deviations from targets, but the end result will be handy.


The Author is a Deputy ManagerAccounts & Finance,R. M. Group of Industries


“A modern finance ministry should go much further than just ensuring accurate and timely financial information. It should also play an active role in optimising management of the nation’s resources and be at the core of strategic decision-making. We believe the discussions in this paper can help shape the Government’s vision for long-term sustainable finances. The discussion mainly focused on the UK government initiatives for ensuring sustainable financial management. However, we encourage policymakers from all political parties to consider these ideas closely so that together we can spend tax-payers money wisely.”

Characteristics of a Modern Finance Ministry

An effective and accountable modern finance ministry should have a clear mandate setting out roles, responsibilities and capabilities to ensure government financial plans are well founded and sustainable. This mandate should include:

• A clear distinction between setting macroeconomic policy and the management of government tax-raising and spending (fiscal) plans.

• A strong focus on managing the public

Better Government SeriesA Modern Finance Ministry

1Ross Campbell | 2Graham Dale

finances and the associated risks to the delivery of fiscal plans as set out in government policy.

• A greater emphasis on managing the medium- to long-term sustainability of the public finances, rather than on short-term and in-year management of expenditure.

Structure – with Clear Functional Accountability

• Clear lines of accountability with appropriate governance and oversight including independent review and forecasting.

• Transparent to the legislature and the taxpayer with clear, understandable and regular reporting of key decisions and outcomes.

• Delegates appropriate responsibility for local decision making and management of tax raising and expenditure to devolved and subsidiary bodies within a clear policy and governance framework.

People – the Right Expertise at the Right Levels

• A high proportion of professionally trained staff, including economists,


statisticians and chartered accountants to ensure that a finance ministry has the analytical and reporting capability to discharge its role.

• Appropriate remuneration and career development structures to attract, motivate and retain experienced senior professionals from the required disciplines.

• A skilled, experienced and stable wider workforce with a well-developed understanding of key accounting and budgeting policies and frameworks.

Processes and Systems

• Systems to show the financial position of government in a comprehensive way on at least a monthly basis, including income, expenditure, assets, liabilities and risk.

• Skills to commission the development of and to maintain pan-government frameworks and systems and to drive

improvements to the completeness, consistency and quality of information across government.

• Skills and processes to conduct comprehensive interpretative analysis on revenue, spending and financial position in order to investigate variances, identify cost drivers, establish trends and analyse cause and effect relationships.

• Processes and systems to support accurate modelling, forecasting and understanding of a realistic range of financial outcomes likely to arise from policy proposals and fiscal plans.

How other Organisations would Act Differently

In comparison, finance departments in other organisations such as businesses, local government and charities would place a far stronger focus on the accountability of management and on understanding

IT IS CLEAR THAT THERE ARE CONSIDERABLE DIFFERENCES IN APPROACH BETWEEN THE WAY IN WHICH HM TREASURY MANAGES CONTROL OF PUBLIC SPENDING AND COMMERCIAL BEST PRACTICE. CONSEQUENTLY, IN THE FACE OF THE EVER-PRESENT PRESSURES ON THE PUBLIC FINANCES AND THE NEED TO DO THE SAME, OR MORE WITH LESS, WE ARE ASKING IF THERE ARE ELEMENTS OF BEST PRACTICE THAT WILL BE OF BENEFIT IN IMPROVING FINANCIAL MANAGEMENT IN GOVERNMENT.


whether outcomes have been achieved and how effectively money has been spent. The management information provided by the component parts of the organisation is rigorously reviewed and the reasons for variances from what was expected are investigated. This permits a far better understanding of the cause and effect relationships between decisions and results than is generally available to government departments or HM Treasury. At the strategic level, this also permits a better informed and higher-quality discussion about the future needs and allocation of resources in the business.

Another critical role of a finance department is aligning resources with the strategic priorities for the organisation and managing the tensions between conflicting objectives in different business areas. It is usually the responsibility of the finance department to ‘hold the ring’ and force out difficult decisions about strategic priorities. It also has an important role in ensuring that decision makers properly understand the second order effect of their decisions on other parts of the business. This role is not always evident within central government, which implies that it is perhaps not as joined up as it could be. While to some extent this is due to the nature of government, HM Treasury could play a far more active role in reconciling competing demands and ensuring the wider consequences of policy decisions on other departments are understood and managed at cabinet level.

It is clear that there are considerable differences in approach between the way in which HM Treasury manages control of public spending and commercial best practice.

Consequently, in the face of the ever-present pressures on the public finances and the need to do the same, or more with less, we are asking if there are elements of best practice that will be of benefit in improving financial management in government. In particular, we ask whether the overall structure is set up in a way that supports effective accountability, without which there will never be sufficient incentives for officials to make improvements in professional skills, processes and systems.

The Need for Change is Widely Recognised

The need to improve financial management in government is a long-standing theme. Since 2010, the Coalition continued a programme of reform which built on political thinking in the 2009 Conservative publication It‘s your money, and the development of the Whole of Government Accounts. The financial crisis meant that improvements to financial leadership was central to government thinking and non-executive directors (NEDs) were placed in Whitehall departments, a chief executive officer was appointed and further progress was made in professionalising the civil service.

ICAEW made its own contribution to this journey in A CFO at the Cabinet Table? Strengthening UK government finances for the future which helped inform the Financial Management Review (FMR) carried out by HM Treasury in 2013. A number of the recommendations in A CFO at the Cabinet Table? Strengthening UK government finances for the future were subsequently adopted. In particular, ICAEW welcomed the post of Director General for Public Spending and Finance, with a dotted line management

responsibility for departmental finance directors across Whitehall.

We continue to welcome initiatives to improve financial management, information systems and strategic decision making at the centre of government. HM Treasury clearly understands there is a need for change and together these developments are a step in the right direction. Progress also continues to be made in the creation of a cross-government internal audit service.

While these are all positive developments, none of these steps will tackle the core issue of whether continuous improvement can be delivered without clear functional accountability. The FMR has not yet proposed significant changes to the structure of HM Treasury and following the 2015 Autumn Statement and Comprehensive Spending Review, resources will continue to reduce. This will place even more pressure on staff to stick to what they see as their core business and is likely to diminish scope for investment in improvements.

The 2013 FMR was a good initiative, but should have also considered structure and accountability in its scope. In 2016 under a new Government, we think it is time to include questions of structure and accountability.

There is a Need to Maintain the Momentum for Financial Change

While the UK enjoys international recognition for its management of the public finances, an ever changing context means it cannot afford to rest on its laurels. The need for continuing deficit reduction, volatility in the global economy and demographic and

infrastructure challenges, mean the public finances will remain under constant pressure for many years to come.

In its progress report on the FMR, the National Audit Office (NAO) said in March 2015 that ‘The delivery plans are works in progress, and there has already been some movement in planned delivery dates’ and that ‘The delivery plans have expanded to go beyond the initially stated aims of the Financial Management Review’ and that, because delivery plans were still in development, it was difficult to conclude whether this was ‘a reasonable adjustment of expectations or early indications of the challenges in implementation’.

Two years on from its publication, much of the substance of the 2013 FMR appears from outside the HM Treasury to remain work in progress. According to the NAO, HM Treasury does not appear to have moved quickly to widespread FMR implementation or did not devote sufficient resources or control to bring about the required scale of change in a faster timeframe. Reliance on a number of wider groupings across government for delivery may have helped build consensus, but as the NAO observes, this has also led to an expansion of the scope of the exercise. We are concerned that the consequence has been a loss of momentum and a risk that the status quo will be perpetuated.

It is important to critically review what the FMR has achieved, what more needs to be done, and to allocate the resources necessary to achieve it.

Future Policy Goals will Challenge the Status Quo

Not only do current challenges

demand a more effective financial architecture but future policy goals will also add to the need for it. The devolution of tax powers and spending to devolved administrations will also require structural change away from the currently highly centralised model. As the chair of the Public Accounts Committee has said, ‘Devolving power and responsibilities carries the risk of weakened accountability’. In all of this change there is both opportunity and risk.

The risk is that by responding to events and making changes on a reactive basis, the ability of the government to manage the public finances becomes sub-optimal or worse, results in incoherence and a breaking down of devolution settlements. The opportunity is that by acknowledging the need for change and taking the initiative, government can move to a more modern system of financial management that accommodates the necessary change and provides a sound and flexible basis for the future. More than this, with better information and accountability structures, HM Treasury would be able to both manage future policy goals more effectively and be able to highlight when those policy goals have the potential to be in conflict and can reconcile them accordingly.

Perpetuating the status quo is unlikely to result in effective accountability for public money in a UK with greater devolved powers.

Real time information for real time policy making

A modern finance ministry should have ‘near’ real time information in a way that will hold policy makers to account. Not only can HM Treasury then fund the policy

direction, it can also source a greater level of insight into policy effectiveness. Information on what policy implementation costs will be captured at a more granular level and analysed more effectively. Currently, the primary measure of success is whether departments stay within various budget ‘control’ totals, with less focus on what they have delivered for the money. While this supports HM Treasury’s goal of controlling overall spending, it makes it very hard to manage or assess the effectiveness of what is done with the money. There also remain concerns about the ability of departments to forecast their expenditure accurately which makes the process of managing to a budget total challenging.

The current approach can also create a silo mentality. Because each department is measured against its own budget and policy delivery, there is little incentive in the system for collaborative behaviour or holistic delivery of policies across government. This can lead to departments pursuing policies that cut across each other, for example the Department for Energy and Climate Change seeking greener energy sources, while the Department for Business Innovations and Skills is seeking to address security of energy supply for business. A modern finance department and effective chief financial officer (CFO) working to commercial best practice would make a significant contribution to ensuring policy objectives were prioritised, coherent and matched by resources.

Despite some encouraging progress in recent years, there remains a danger that HM Treasury still places too much emphasis on assessing whether policies fit its mandate to control and drive down overall spending. Understanding



the linkages between money spent and policies achieved is a significant architectural and cultural issue that still needs to be addressed.

It is Time for a Public Debate about the Role of HM Treasury

Given this context of progress made, momentum lost, future challenges and a greater need for policy effectiveness, a Modern Finance Ministry now asks some searching questions. From our perspective, reflecting the knowledge of many professionals involved in financial management of large undertakings, it seems unlikely that without significant structural change, government will be able to respond to the policy challenges of delivering stable and sustained growth, public services and investment within a balanced budget. Without further examination, there appears to be a risk of perpetuating a system that may not be optimal for the challenges of the future. At the very least, the importance of this subject to the well-being of the state makes a debate about the existing structure worthwhile.

The debate about what a modern finance ministry would look like should be a minister-led initiative.

We believe it should review and challenge cultural and architectural assumptions in a way that enables proper consideration of what is needed now for HM Treasury to become the future finance function for government. We believe this would ultimately result in HM Treasury looking less like a policy department for the rest of Whitehall and more like a group finance function.

We believe this means examining three aspects of HM Treasury:

• Structure, whether there is sufficient clarity about the purpose, mandate and functional boundaries of HM Treasury. This should include asking what things HM Treasury is responsible for and what it is not responsible for and what functional structure is needed to support strong financial management and provide clear accountability to Parliament and the taxpayer.

• People, whether HM Treasury has the right professional skills and experience in order to be able to discharge its responsibilities within the increasingly complex environment in which government operates.

• Processes and systems, whether it has the right tools for the job in terms of robust and effective business processes and systems to deliver on its actual responsibilities.

The ability to deliver real and continuous improvements to financial management performance will only be brought about when it is clear what individuals and organisations are responsible and accountable for. That is the place to start.

Some Key Questions and Practical Proposals

For the Government to grasp the challenge of improving financial management and put in place a modern set of institutions we recommend that the following issues are considered by ministers.

Structure: A Clear Accountability Framework

1 How best to improve transparency and accountability for the policy, spending control and financial management activities of HM Treasury? We propose the functional separation of the economic policy making, planning and operational finance elements.

2 What terms of reference will ensure that the finance ministry element is held accountable? We propose clear responsibilities and performance measures for senior management within an overall governance and accountability framework that is transparent to the public and Parliament.

3 How to ensure overall coherence of HM Treasury’s activities? We propose an over-arching framework that sets out the relationship between the functional elements within government, where they are inter-dependent and how they operate together to deliver government policy.

People: Ensure the Right Mix of Expertise and Improved Performance

1 How to change the culture to one of continuous improvement? We propose performance mechanisms that hold individuals accountable for what they are responsible for and ensure appropriate feedback for both successes and failures.

2 How to improve professional skills? Establish a default presumption that individuals involved with the management of public money will have some form of financial training and, in senior roles, recognised qualifications.

3 How to embed best commercial practice? Create employment policies that encourage more movement into and out of the civil service as part of a normal financial management career. This will help promulgate best practice and both government and industry would benefit enormously from the exchange of skills and experience.

Processes and Systems: A Comprehensive Financial Management System

1 How to improve financial management? Implement information systems and

business processes that make the financial position clear across government. Ensure the right expertise is available and adequate resources are devoted to this activity.

2 How to improve performance? Develop an effective performance framework focused on the effectiveness of expenditure and achievement of outcomes. Spending departments should be free to focus on delivering their policy areas within the parameters set by HM Treasury acting as a ‘group finance function’ to set overall priorities and actively managing conflict between individual departments.

3 How to improve understanding of the financial position of government? Establish a comprehensive approach that focuses on all of income and expenditure, assets and liabilities and cash management in a holistic way, so that the overall financial position of government can be understood in near real time.

To further stimulate debate, we have set out below our assessment of the current issues relating to people, process and systems that we believe are acting as constraints on the ability of HM Treasury specifically and Government more generally to improve its financial management performance.

People: How to Secure the Right Skills to Run the Public FinancesGoverning a large, developed modern state is a complex enterprise. In 2015–16 alone Government expects to spend approximately £756bn of public money across a range of activities greater than any individual

company. This includes setting policy frameworks and regulations, but also ranges from purchasing technologically advanced assets to distributing grants and services on a national (and international) basis, to delivering public services such as healthcare and education.

Management of the public finances is a complex business. To do it well requires the right blend of commercial acumen and technical knowledge and the ability to grow individuals with the confidence, stature and strategic grasp to add value to board-level discussions.

It is not necessary to ask whether HM Treasury and the Government has the skills it needs as various parties including the NAO, PAC, the Cabinet Office and HM Treasury itself have all acknowledged there are not enough staff with these characteristics in government. The recent decision to pay certain civil servants up to £300,000 per annum, over twice what the Prime Minister earns, is an acknowledgment of this.

The related question is what can be done to change the attractiveness of a career in government finance to skilled professionals? We believe there are two components to achieving this: recognition and reward.

With respect to recognition, we think that HM Treasury needs to move beyond its policy focus to have the full range of skills to be able to discharge its functional responsibilities. The full range of skills that would be expected to reside in a group finance function are set out below.

• Accounting policy and technical accounting

• Planning, budgeting and forecasting

• Business analysis and evaluation



• Taxation

• Financial systems design and development

• Project management capability.

In order to ensure these skills are valued we recommend that having professional skills and qualifications in the above categories should form part of a list of essential criteria to be eligible for promotion to senior roles.

At the present time we believe some government policies militate against the development and retention of these skills. In particular, there is insufficient recognition at a political level and within the civil service that financial management needs to be undertaken and managed by people with the right skills and experience. Indeed it has been reported that the current lack of both reward and recognition for professional finance staff is leading to an exodus of business critical skills and experience from government as something the country can ill afford.

While there is no shortage of policy staff to ‘backfill’ financial roles, they often lack the professional training and instincts to discharge senior financial roles effectively. We believe there are strengths in maintaining a cadre of generalists as they are versatile and can be deployed flexibly in a wide range of roles. However when it comes to areas requiring specialist professional expertise they have to spend a lot of time ‘learning on the job’ and all too often run up against the limits of their knowledge. When it comes to expert subject matter, insufficient expert experience can lead to over-simplification of complex issues and policies being formulated that are not effective in practice.

A career in government finances needs to be made more rewarding to attract the brightest and the best. This does not necessarily mean keeping pace with the largest businesses on pay. What it does mean is that people with professional finance skills receive the training, career development opportunities and sufficient incentives to want to stay within government. Failing that, we run the risk of not having the skills needed to run the public finances effectively which would result in a far higher cost than the cost of reasonable rewards for skilled processionals.

One example of this is that HM Treasury does not have the right technical skills to take an authoritative position on the development of management information and standardised financial systems. A modern finance ministry should lead the development of such systems across government and have the in-house capability to formulate its requirements and manage their acquisition and implementation. Only a finance ministry has the necessary level of interest in these systems or sufficient control of the financial frameworks and policies to direct their development.

Building a finance function fit for a modern finance ministry will also require other parts of HM Treasury to play their part, in particular, those areas concerned with wider policy around recruitment, remuneration and retention. While not necessarily residing within the finance function, there needs to be a strong link with the strategic human resources function to ensure that the right skills and experience are supplied and a talent pipeline established for senior roles.

We propose thinking about this in more radical terms. We think it

should become more normal for finance professionals to spend at least a part of their career in public service. A greater level of interchange would help spread experience, promote wider adoption of best practice and strengthen skills. At present, there are many barriers to easy movement from private to public sector service and vice versa. This should change. The civil service should revisit its terms to move to a more level playing field and ensure greater flow of people into and out of government. This should include more parity in remuneration, more portable pension entitlements and more work experience with industry to create recognition of the insight and value that public service brings.

Systems: Understanding the Financial Position of Government

Government financial management systems tend to lag behind best practice in industry and we believe that the effectiveness of HM Treasury spending teams is being constrained by under-investment in systems and insufficiently comprehensive and timely financial information. There is the potential for a step change in the effectiveness of financial management to be achieved through improved information combined with modern financial management techniques and the training to be able to utilise it effectively.

Despite the shortcomings of its systems government manages to produce some very valuable financial information. For example, the Whole of Government Accounts (WGA) is a remarkable undertaking providing a genuine improvement in the transparency

of the public finances and most government departments produce relatively high-quality financial accounts. The reporting systems that support and enable this are, however, largely geared towards annual external reporting and compliance and to produce the WGA requires a manpower intensive effort taking several months. It is unusual for a balance sheet to be prepared more than once a year, several months after year end. As a consequence the financial position is only really understood once a year and there is little emphasis on the balance sheet for management purposes.

In lieu of monthly financial accounts, HM Treasury places considerable reliance on monthly National Accounts data for in-year management purposes. These are a set of statistically derived numbers that seek to capture economic flows in the economy. Unlike financial accounts used in business, they are not based on a complete record of underlying transactions or are capable of being audited. We remain concerned that they are too focused on economic flows and are not sufficiently robust to support effective financial management of government as an entity. Chapter 2 of the interim findings of the Bean review into UK economic statistics for example draws attention to a number of short-comings that call their robustness into question.

Some of the barriers to making improvements in financial systems

stem from the nature of the current fiscal mandate and control framework which has become part of the embedded management culture. Because HM Treasury is required to discharge a fiscal mandate set out in terms of National Account aggregates, it focuses on these measures rather than the more comprehensive accounting measures used by business. HM Treasury’s spending control framework is accordingly set on the basis of this fiscal mandate. Consequently, managers in central government are focused on spending control framework measures such as expenditure against budget line totals, rather than what has been achieved for the money as their main measure of performance. This approach is focused on spending rather than management of assets and liabilities. It also diverts focus away from some areas that are not captured by the National Accounts but which need active financial management such as the future obligations of government. As the WGA shows, and is the subject of our analysis as part of the Institute for Fiscal Studies’ Green Budget, there has been an alarming growth in the liabilities of government in recent years.

A further feature is that financial systems are not interoperable or based on common technical standards other than at a very high level. Recent attempts by the Cabinet Office to harmonise these systems in a number of service centres have missed the opportunity to standardise on a

single approach. From what is publicly available, progress in migrating departments into these service centres also appears to be running behind schedule, with several departments making other plans. In the absence of clear leadership from HM Treasury or incentives in the system to have a more joined up approach, this looks like another missed opportunity.

We believe it is time for HM Treasury specifically and government more generally to recognise that it will only make meaningful improvements to its financial management performance when it has more comprehensive and timely information derived from transactional data about financial performance. To make this happen the information requirements of the finance ministry element of HM Treasury need to be clearly articulated in a framework that can be extended to the rest of government. There also needs to be a clear commitment to allocate the resources in terms of technical skills and funding for the necessary systems. It is our contention that this will only be addressed if HM Treasury starts to act more like a modern finance ministry with its primary focus on financial management.


The Authors are:

1Director, Public Sector, ICAEW2Head of Public Affairs, ICAEW

*The article is the extract from ICAEW Publication “Better Government Series: A Modern Finance Ministry”


Annual Development Programme (ADP) is an organized list of projects in various sectors and allocations for them for a year to implement government’s development policies, programmes and investment plans. The ADP is prepared on the basis of the year's development budget approved by the parliament.

The role of ADP for the socio-economic development of Bangladesh is extremely critical. It directly influences to create employment, reduction of poverty, development of infrastructures etc. It also fosters environment for Investments and industrialization.

Despite taking various steps, during the last couple of decades, the average GDP growth rate hovered around 6 percent. Lack of infrastructures is considered as the major reason of the current sorry state of investments and stagnant GDP rate. Efficient ADP implementation could vibrate the economy to improve the GDP growth rate consistently.

Though, the size of ADP has become double during last 5 years (Implemented ADP of FY 2010-11: BDT 329.49 Billion and 2014-15 BDT 685.32 Billion) time, it

ADP ImplementationMeets Target Quality?

Mohammad Zahid Hossain FCA

has become a phenomenon that the actual expenditure is lower than the target.

In the last budget speech, Finance Minister acknowledged the sluggish implementation of ADP and highlighted some initiatives to ensure satisfactory qualitative and quantitative implementation of ADP. A taskforce was formed to monitor ADP implementation of ten big ministries. Side by side, Govt. took steps to accelerate the pace of implementation of 50 slow-moving projects, identifying projects facing slow foreign aid disbursement problem and scale up disbursement through quarterly tripartite meetings. Finance Minister claimed that these initiatives increased the rate of ADP implementation. Yet implementation rate during July-January of last 5 FYs is something between 30 to 40%. There is a rush tendency is noticed during 3rd and 4th Quarters of FY to meet the target ADP expenditure. It is a concern of all quarters that the expected quality of implementation is not met for this unusual hurry of meeting target.

Implementation of ADP during the period of July-January of various FYs:

Potential reasons of unsatisfactory implementation of ADP:

- Lack of Efficiency of people directly involved in the implementation

- Difficulties in procurement

- Lack of Coordination among Departments

- Delay in Land Acquisition and hand over

- Faulty work / Design (for Construction)

- Lack of monitoring by the Ministry

- Timely Allocation and disbursement of inadequate amount of fund

These issues are very much common from year to year while no effective initiatives were taken to deal with them. Budget for specific programme is allocated considering the importance thereof upon depriving others. If the spending of budgeted amount is not possible by the relevant Ministry, Planning Ministry could be informed upfront so that the unspent fund could be diverted in another project. This would impact on the satisfactory implementation of ADP.


SO, IT’S CLEARLY EVIDENT THAT SIZE OF ADP IS CONSIDERED INSTEAD OF CAPACITY OF IMPLEMENTATION IN DEVELOPING ADP. THIS TENDENCY IS MOTIVATING RELEVANT MINISTRY TO IMPLEMENT ADP SOMETIMES COMPROMISING THE QUALITY. IN ORDER TO IMPLEMENT ADP UPON MEETING EXPECTED QUALITY, SIZE OF ADP SHOULD BE DETERMINED BASED ON THE CAPACITY AND EXISTENCE OF IMPEDIMENTS ON IMPLEMENTATION.

FYImp.Rate: July-Jan Expenditure

Growth over Last yr.

2015-16 *28% 287.50 11.18%

2014-15 32% 258.58 18.31%

2013-14 33% 218.56 3.89%

2012-13 38% 210.37 33.28%

2011-12 34% 157.84 24.86%

Fiscal Yr ADPGrowth in ADP RADP

Implementation

% of RADP on ADP

% Implemetation on ADP

% Implemetation on RADP

2015-16 970.00 21% - - - -

2014-15 803.00 22% 750.00 685.32 93.40% 85.34% 91.38%

2013-14 658.00 20% 600.00 567.47 91.19% 86.24% 94.58%

2012-13 550.00 20% 523.66 500.26 95.21% 90.96% 95.53%

2011-12 460.00 19% 410.80 378.72 89.30% 82.33% 92.19%

* Including self �nance


The growth rate of ADP size is more or less 20% year on year. ADP is revised immediate before the end of each FY. In FY 2014-15, ADP was scaled down to 93.4% to get RADP while 85.34% of ADP was eventually implemented. The scenario for other FYs is almost similar. So, it’s clearly evident that

size of ADP is considered instead of capacity of implementation in developing ADP. This tendency is motivating relevant Ministry to implement ADP sometimes compromising the quality. In order to implement ADP upon meeting expected quality, size of ADP should be determined based on the

capacity and existence of impediments on implementation. For every economy, reckless spending of public money cannot ensure sustainable growth.

The Author is aFellow Member, ICAB

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Abstract

Audit committee plays very important roles in case of audit services. This paper investigates the determinants of audit committee independence in the financial sector of Bangladesh. The study employs cross-sectional data analysis for 72 financial firms that provide the required information for the year of 2012. Our findings show that audit committees are more independent when firms have large boards and more non-executive directors in the board. In addition, the study finds that large firms with potential growth opportunity place less demand on audit committee independence and highly levered firms require more monitoring mechanism leading to more audit committee independence. Finally, the study reports a negative association between audit committee independence and the size of audit committee. However, no evidence is found of the association of the audit committee independence with the presence of expert in the audit committee, percentage of insider ownership, free cash flow and profitability.

Key words: Audit committee, audit committee independence.

Determinants of Audit Committee IndependenceIn Financial Sector of Bangladesh

1Rumana Ahmed | 2Mahdi Hasan

Introduction

In the past decades, highly successful leading firms such as Enron, WorldCom, Tyco International and other firms have been victims of accounting fraud which contributed to their financial downfall significantly. Accounting fraud caused investors to lose their confidence they once had in financial market in both the United States and the rest of the world (Carson, 2003:389). In order to overcome this situation, regulators, professional entities and national government has issued a wide range of laws and codes with the goal of strengthening the corporate governance mechanisms of a company. The regulators concentrated on the activities, independence and financial expertise of the audit committees with a view to improving the quality of financial statements (Willekens, Bauwhede & Gaeremynck, 2004).

Audit Committee has become one of the main pillars of an organization’s corporate governance systems. It plays a very vital role in improving the stakeholders’ confidence on financial reporting and corporate governance by bringing out better internal control mechanism, better monitoring, oversight and quality of internal and external reporting. As an oversight body, the audit committee can


alleviate agency problems by reducing the information asymmetry between insiders and outsiders through identifying and removing structural obstacles to corporate governance, corporate reporting and voluntary disclosures. Several literatures, such as DeFond and Jimbalvo (1991), Dechow, Sloan and Sweeney (1996), McMullen (1996) and Beasley et al.(2000), have demonstrated that the existence of an audit committee has been found to mitigate fraudulent financial reporting, earnings management, SEC enforcement actions, restatement and litigations.

All these evidences provide a strong ground to raise the questions of the independence of the Audit Committee. The determinants of Audit Committee in the financial sectors are an important avenue to conduct a research especially for the countries like Bangladesh where financial sectors are severely influenced and controlled by the political attributes. But no extensive research has been made in this area. The limited work concerning audit committee independence and activity in Bangladesh motivates this study and reinforces the empirical importance of determinants of audit committee independence. This study tries to shed light on the underlying

factors affecting the independence of audit committee in Bangladesh.

The main objective of this study is to find out the relevant factors that influence the independence of audit committee in the financial sector of Bangladesh.

Literature Review

In this part of the study, a discussion of related literature is provided to explain the rationale behind developing the econometrics model used by this study. There is a lack of empirical studies investigating the independence of audit committees. Prior studies support a positive relationship between the presence of an audit committee and credible & reliable financial reporting of a firm. Firms with audit committees are less likely to manipulate earnings (Lin & Wang, 2010), (Dechow, 1996), more likely to voluntarily disclose information and have more reliable financial reporting (McMullen, 1996). There has been pressure on UK firms to form audit committee according to the recommendation of (Cadbury Committee, 1992). Collier (1997) in his empirical study found that around 84% of UK listed firms formed an audit committee. An investigation of 32 banks in Bangladesh conducted by Kamal &

AS AN OVERSIGHT BODY, THE AUDIT COMMITTEE CAN ALLEVIATE AGENCY PROBLEMS BY REDUCING THE INFORMATION ASYMMETRY BETWEEN INSIDERS AND OUTSIDERS THROUGH IDENTIFYING AND REMOVING STRUCTURAL OBSTACLES TO CORPORATE GOVERNANCE, CORPORATE REPORTING AND VOLUNTARY DISCLOSURES.

Ferdousi (2006) shows that only 17 banks out of 32 have audit committee in their firm.

The existence of an independent audit committee is a sign of the firm’s commitment to good corporate governance practice (Sommer, 1991). Many prior studies (for example, Bedard & Gendron, 2010; Abbott, 2007) have suggested that audit committee composition is a vital factor and the committee’s independence has been described as a pre-requisite of its effectiveness. It is argued that if the members of an audit committee are independent from the management and owner of the firms, they could mitigate the possibility of manipulating the financial results (Mohiuddin, 2012).

Audit Committee of the Board of a bank can play an effective role in providing a bridge between the board and management, shareholders, depositors and stake-holders and help in ensuring efficient, safe and sound banking practices. (Bangladesh BRPD Corcular No 12)

Collier (1993) examined 142 UK listed firms and reported that there is a positive relationship between non-executive director and voluntary information of audit committees.

Carcello (2002) identified factors that are associated with voluntary disclosure of audit committee charters and found that firms with more independent audit committees are more likely to disclose the activities of their audit committee.

Bedard (2004) argues that more objective oversight of financial reporting process can be ensured if the audit committee includes more independent members. Cohen (2000) highlighted the importance of committee’s independence for evaluating management actions in respect of risk assessment. Studies by Klein (2002) and Dechow (1996) clearly mentioned that inclusion of more independent members in audit committee minimizes the likelihood of financial fraudulent activities.

Chan (2008) noted that inclusion of expert independent directors in

board and audit committee enhances firm’s value significantly. Roles of audit committee lead to positive impact in terms of firm’s earning, value creation and goodwill.

Dechow et al., (1996) and Klein (2002) have noted that the inclusion of more independent members in audit committee minimizes the likelihood of financial fraudulent activities. Carcello (2000) and Klein (2002) argue that audit committees may perform insufficiently if there is no audit independence, due to the fact that such committees will not effectively question the outcome of the audit. Most recently Najjar (2011) finds that audit committees are more independent when firms have large boards and insider ownership. A negative relationship is found between audit committee independence and firm’s size, suggesting that large firms are more advanced in monitoring and place less demand on audit independence.

Deli (2000) found that audit committee independence and activity were negatively related to firm growth opportunities and managerial ownership and positively related to firm size and leverage. Mendez (2007) found evidence of negative relationship between audit committee activity and leverage. Maria (2012) found that the presence of large auditing firms and board’s characteristics are the determining factors for activity level, independence and specialization of audit committee.

In some firms, the Chief Executive Officers (CEOs) hold the chairman positions of the ACs. This not only hampers the independence of the committee but also may keep the committee away from serving its assigned duties. Beasley, (2001) reported that an independent AC is



more likely to be associated with a larger proportion of non-employee directors on the board, and is less likely to be associated with CEO duality.

The person appointed as internal auditor will not be able to engage in any Bank company’s contract or transaction and or be a representative of the bank. (Bank Company Act-1991 (amended up to 2013) Section-15GA-3)

These literatures reveal that the independence of audit committees has received much attention from researchers Klein (2002), Deli (2000), Beasley (2001), Collier (1993), Chan (2008) and Najjar (2011) to investigate the determinants of audit committee independence. But none of these studies investigated audit committee independence using evidence from Bangladesh.

Though there are a lot of studies on corporate governance in Bangladesh, little research is found regarding the audit committee. (Kamal & Ferdousi, 2006) conducted one study regarding the presence of audit committee in the banking sector of Bangladesh. Bhuiyan (2007) conducted an empirical analysis of the current regulatory framework of audit committee in public limited banks in Bangladesh. Das & Das (2007) also conducted an empirical research on audit committee disclosure of listed companies of Bangladesh. Hossain (2007) attempted to provide a summary of findings of a fast growing theoretical and empirical literature on audit committee mainly based on several available articles. The current study offers an empirical analysis that tries to shed light on the underlying factors affecting the independence of audit committee in financial sector of Bangladesh.

Hypothesis Development and Their Relevance

Several variables are tested to find their association with indicators of audit committee independence. This report investigates four broad categories of variables that affect audit committee independence

The four broad factors affecting audit committee independence

1. Firm Specific Factors

Empirical studies provide evidence that financial factors are important determinants of audit committee independence. There are five elements explained under firm specific factors. They are: firm size, financial leverage, growth opportunities, free cash flow and profitability.

Firm Size

If the firm’s internal control acts as in-housing monitoring mechanisms, then larger firms require less alternative monitoring of their overall reporting systems and therefore need lower level of audit committee independence (Klein, 2002).

This report emphasizes this argument and suggests that the large firms need fewer or less alternative control mechanisms which lead to less importance on audit committee independence.

Our first hypothesis regarding firm size is:

H1: Audit committee independence is negatively related to firm size.

Financial Leverage

It is argued that creditors require more audit independence as the demand for monitoring the

financial reporting system increases. This report does not provide any expected sign for the relationship between financial leverage and audit committee independence. Both the directions are expected in this case. Therefore, our second hypothesis is:

H2: Audit committee independence is related to financial leverage

Growth Opportunities

Firms with rapid growth may outgrow their infrastructure, including internal control system (Stice, 1991). Klein (2002) argues that growing firms are associated with great uncertainties and complexities. It suggests that such firms rely more on insider directors, not non-executive or independent directors. Consequently, our third hypothesis regarding growth opportunities is:

H3: Audit committee independence is negatively related to firm’s growth opportunities.

Free Cash Flow

This study investigates the importance of free cash flow as an index for managers’ private benefit Boone (2007). Free cash flow can increase agency problems requiring more internal control within the firm (Najjar, 2011). Our subsequent hypothesis is:

H4: Audit Committee independence in positively related to free cash flow.

Profitability

It is argued that fraud and error are more likely at poorly performed firms (DeFond, 1991). As profitability can increase agency problem, it requires management

to put more internal control. And an effective internal control suggests to put more emphasis on audit independence. Therefore, our hypothesis regarding firm’s profitability is:

H5: Audit committee independence is positively related to profitability of a firm.

2. Audit Committee

Audit Committee Size

Raghunandan’s (2007) argument implies that large audit committee provides better resources to improve the quality of financial reporting. As large audit committee also requires more discussion, more demand is placed on the presence of non-executive directors on the audit committee. Therefore, our subsequent hypothesis regarding audit size is:

H6: Audit committee independence is positively related to audit committee size.

Audit Committee Expertise

In reference, Abbott (2007) finds a significant negative relationship between the presence of a member of a board with financial expertise and the incidence of financial statement restatement.

We have included this term to check whether there is any impact of expert in audit committee independence. Thus, our subsequent hypothesis is:

H7: Audit committee independence is positively related to audit committee expertise.

3. Board Structure

In this report two board structures have been considered: board size and board independence.

Board Size

Collier (1999) and Beasley (2001) proved that as board size increases, a firm’s ability to appoint more non-executive directors also increases. Consequently our eighth hypothesis is:

H8: Audit committee independence is positively related to board size.

Board Independence

Non-executive directors are considered as a key monitoring tool and these directors improve the monitoring resources for financial reporting (Beasley, 1996); (Dechow, 1996). Klein (2002) and Najjar (2011) hypothesized a positive relationship between non-executive directors on board and audit committee independence. Subsequently, our hypothesis regarding non-executive director is:

H9: Audit committee independence is positively related to non-executive directors on board.

4. Insider Ownership

Najjar (2011) argues that the existence of insider ownership, as a monitoring tool, can alleviate agency conflicts. Hence, my final hypothesis regarding insider ownership is:

H10: Audit committee independence is positively related to insider ownership.

Research Design

Sample Description and Data Collection

There are, in total, 99 (ninety nine) firms listed on DSE under financial sector (Year-2012). Out of these public listed companies, a sample of 72 (72.73 percent) has been selected under simple random basis. I have collected the annual reports of the sampled companies for the year end 2012 and surveyed these reports extensively in order to get information for the audit committee and other financial information required. The population and sample have been shown in Table I:



Table I: Population and sample description of this study

Financial Sector Population Sample Percentage

Banks 30 30 100%

Insurance Companies 46 32 69.57%

Financial Institutions 23 10 43.48%

Total 99 72 72.73%

Defining variables The dependent and independent variables are summarized in Table II, including their definition and expected nature of their relationship with audit committee independence:

Table II: Description of the Research variables

Variables Acronym Definition Expected Sign

Dependent Variable Audit Committee Independence

INDAUD Percentage of non-executive Directors on audit committee.

Independent Variables Audit Committee Size AUDSIZE Number of members of the audit

committee. +

Board Size BOD Number of members of the board of directors.

+

Board Independence INDEP Percentage of non-executive directors on the board.

+

Insider Ownership INS Insider ownership is the number of share held by insider over the number of share outstanding

+

Financial Leverage LEV Total liabilities to total assets ratio ? Earnings Per Share (proxy for profitability)

EPS Net profit after tax per share +

Market to Book Ratio (proxy for growth opportunity)

MB Ratio used to find the value of a company by comparing the book value of a firm to its market value

-

Free Cash Flow FCF Free cash flow per share + Market Capitalization (proxy for firm size)

SIZE Natural log of market capitalization

-

Expert EXPERT Dummy variable takes 1 if at least one member of audit committee is expert, otherwise 0

+

Analysis Techniques

Both bivariate and multivariate analysis are conducted in this report in order to get the relationship between the audit committee independence and other independent variables. Multivariate analysis is used to develop a model of audit committee independence. Before entering into the development of multi-regression model, this report will test the multicolinearity effect by using Pearson’s correlation matrix. This report also considers the normality of the dependent variable using graph.

Regression Model

In modeling the determinants of audit committee independence, the analysis employs pooled regression model. The regression model is as follow:

INDAUD=α+β1AUDSIZE+β2BOD+β3INDEP+β4INS+β5LEV+β6EPS+β7MB+β8FCF+β910EXPERT+ε

Where;

INDAUD = Percentage of non-executive directors on the audit committee;

AUDSIZE = Number of members on the audit committee;

BOD = Number of members on the board of directors;

INDEP = Percentage of non-executive directors on the board of directors;

INS = Insider ownership measured by number of share held by insider over the Number of share outstanding;

LEV = Total liabilities to total assets ratio.

EPS = Earnings per share measured by dividing the net profit after tax by the number of share outstanding.

MB = Market to book value ratio;

FCF = Free cash flow per share;

SIZE = Firm size measured by natural log of market capitalization

EXPERT = Firm size measured by natural log of market capitalization. Dummy variable takes 1 if at least one member of audit committee is expert6, otherwise 0

Discussion of Empirical Result

Correlation Analysis

The Pearson’s correlation matrix is used for correlation analysis. The result demonstrates in table III. At significance level of 1%, the correlation coefficients for INDAUD show positive significant relationship with INDEP (+0.5725) and negative significant relationship with AUDSIZE (-0.4117). On the other hand, considering 10% significance level, the correlation coefficients for INDAUD show negative significant relationship with MB (-0.1982) and EXPERT (-0.2082). Other insignificant correlation coefficients are LEV (+0.14), FCF (+0.107), INS (+0.064), SIZE (+0.015), BOD (-0.122) and EPS (-0.07).



Table III: Bivariate correlation: Pearson’s Coefficient

1 2 3 4 5 6 7 8 9 10 111 1 2 0.57*** 1 3 -0.12 -0.36*** 1 4 -0.41*** -0.13 0.11 1 5 0.14 0.10 -0.33*** -0.04 1 6 0.01 0.11 -0.10 -0.03 0.74*** 1 7 0.11 0.16 -0.21* -0.16 0.37*** 0.43*** 1 8 0.06 0.14 -0.06 0.01 0.00 -0.04 0.06 1 9 -0.20* -0.04 0.12 -0.01 -0.32*** -0.16 -0.11 0.12 1 10 -0.07 -0.11 0.02 -0.09 -0.03 0.21* 0.59*** 0.14 -0.05 1 11 -0.21* -0.21* 0.00 0.09 -0.07 -0.07 -0.16 0.08 -0.12 0.05 1

1. INDAUD 2. INDEP 3. BOD 4. AUDITSIZE 5. LEV 6.SIZE 7. FCF 8. INS 9. MB 10. EPS 11. EXPERT

***, ** and * indicate significance at the level of 1, 5 and 10 percent, respectively

Normality Test of Dependent Variable

We test the normality of dependent variable graphically. Figure-2 demonstrates the distribution of dependent variable.

Figure-2: Density distribution of dependent variable-INDAU

From the following figure, we can say that the data presented under the dependent variable is roughly normally distributed. So the required assumptions before doing multivariate analysis are fulfilled.

The results indicate a significant negative relationship between firm size and audit committee independence hence I support H1. The positive significant coefficient of financial leverage (LEV) suggests that creditors’ require more audit committee independence. The argument is consistent with my hypothesis and hence H2 is supported. The result concerning firm’s growth opportunities (MB) is consistent with the view that firms with great growth opportunities tend to have less audit independence as they generally rely on insider directors rather on non-executive directors (Klein,

2002). Hence my evidence supports H3.

Concerning the effect of audit committee size which is suggesting that the audit committee independence decreases as the size of audit committee increases. Thus, H6 is not accepted. Najjar (2011) also finds a negative but insignificant relation between audit size and audit independence in his empirical study

The results suggest that large boards provide more monitoring resources and in turn, higher demand for audit committee

independence. This result is consistent with Beasley (2001), Klein (2002) and Najjar (2011). Thus my evidence supports H8. In considering the effect of non-executive director, this finding suggests that the greater number of non-executive directors on board increases the chance of having more audit committee independence (Klein, 2002) and thus I support H9.

The coefficient on FCF, INS, EPS and EXPERT are insignificantly different from 0. Thus I fail to reject null hypothesis. This study could not find any supportive evidence


Result of Multivariate Regression Analysis

Table IV: Results of Multivariate Regression

Variable Expected sign Coefficient t-statistic P-valueIntercept 0.911** 2.574 0.013

(0.354)INDEP + 1.004*** 5.732 0.000

(0.175)BOD + 0.008* 1.988 0.051

(0.004)AUDSIZE + -0.045*** -3.964 0.000

(0.011)LEV ? 0.156* 1.794 0.078

(0.087)FCF + 0.000 -0.343 0.733

(0.001)INS + 0.010 0.111 0.912

(0.094)MB - -0.015* -1.755 0.084

(0.009)SIZE - -0.034* -1.863 0.067

(0.018)EPS + 0.004 0.326 0.745

(0.011)EXPERT + -0.025 -0.871 0.387

(0.029)N 72F-statistic 7.061Prob. > F 0.000R-square 0.54Adj. R-square 0.46

***, ** and * indicate significance at the level of 1, 5 and 10 percent, respectively


The Authors are:1Assistant Professor, Department of Accounting & Information Systems, Faculty of Business Studies, University of Dhaka2MBA Student, Department of Accounting & Information Systems, Faculty of Business Studies, University of Dhaka

for the relationship between audit independence and free cash flow, insider ownership, EPS and Expert.

Conclusion

This paper has made an attempt to trace out the determinants of audit committee independence in the financial sector of Bangladesh. The study has employed cross-sectional data analysis for 72 financial firms that provide the required information for the year of 2012.The findings of this paper has successfully fulfilled its objectives showing that audit committees are more independent when firms have large boards and more non-executive directors in the board. The study also reports a negative association between audit committee independence and the size of audit committee. However, no evidence is found of the association of the audit committee independence with the presence of expert in the audit committee, percentage of insider ownership, free cash flow and profitability. All the results of this paper found considerable avenue to go for further research on the Determinants of Audit Committee independence in the financial sectors of Bangladesh.

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The International Forum of Independent Audit Regulators (IFIAR) was established in 2006 by independent audit regulators from 17 jurisdictions. Since its creation, IFIAR’s membership has grown in light of the establishment of new independent audit regulators in different jurisdictions around the globe, bringing together independent audit regulators from a total of 50 jurisdictions in Africa, the Americas, Asia-Pacific, Europe, and the Middle East. Of the SAFA members only Sri Lanka is a Member.

IFIAR’s mission is to serve the public interest and to enhance investor protection by improving audit quality globally. In order to achieve this mission, IFIAR provides a platform to its Members to share knowledge and experience about the audit market and audit oversight, to initiate and lead dialogues with stakeholders on audit quality matters and to formulate common views and positions on matters relevant to IFIAR’s members.

IFIAR became a Member of the Monitoring Group during 2011; the Group oversees audit and accounting related standard setting activities of the International Federation of Accountants (IFAC), monitors the activities of the Public Interest Oversight Board (PIOB) of

International Audit Regulator PushesAudit Firms to Improve Quality

Iftekhar Hossain FCA

USA, and convenes to discuss issues and share views relating to international audit quality and regulatory and market developments having an impact on auditing.

IFIAR is currently chaired by Janine van Diggelen, Head of Audit & Reporting Quality Division, Netherlands Authority for the Financial Markets (AFM). IFIAR’s Vice Chair is Brian Hunt, CEO of the Canadian Public Accountability Board (CPAB). The Chair and Vice-Chair have two-year terms which expire in April 2017 when new Officers will be elected. The Chair and Vice-Chair are assisted and advised by an Advisory Council in pursuing their responsibilities as set out in the Charter. The current Advisory Council Members are Australia, France, Germany, Japan, Singapore, the United Kingdom and the United States.

IFIAR, through its Global Audit Quality (GAQ) Working Group, engages in an ongoing dialogue with its networks at the global network level, with the objective of improving audit quality on a global basis. The nine GAQ Working Group members are the IFIAR Members from Australia, Canada, France, Germany, Japan, the Netherlands, Singapore, the United Kingdom, and the United States of America. The GAQ Working Group aims


to inform IFIAR Members of global initiatives in the firms’ audit practices that should be relevant to regulation of the firms’ local network affiliates. The Chair of the GAQ Working Group is Lewis Ferguson, PCAOB, USA and the Vice Chair is Paul George, FRC, UK.

In 2015, the IFIAR conducted its fourth annual Survey of findings identified by its 35 Members in jurisdictions around the world in their individual inspections of audit firms affiliated with following six largest global network audit firms:

• BDO International Limited,

• Deloitte Touche Tohmatsu Limited,

• Ernst & Young Global Limited,

• Grant Thornton International Limited,

• KPMG International Cooperative, and

• PricewaterhouseCoopers International Limited.

An audit firm “network” is composed of individual audit firms that are members of a global organization. Many audits today involve practitioners from network member

firms in a number of countries. The audit of a multinational company may involve significant work performed by many, legally separate audit firms that operate as a network, often with a common name and common auditing, quality control, and ethical policies and requirements. The multinational aspects of audit, and the involvement of many local audit firms that are members of a global firm network, call for collaboration by regulators globally.

Twenty-nine IFIAR Members provided information in the 2015 Survey on findings from inspections of audits of 872 listed PIEs (Public Interest Entity) by 98 audit firms in the 6 networks.

IFIAR Members reported that 43% (376) of the listed PIE audits inspected had at least one finding; the rate of inspected PIE audits with findings reported in the 2014 Survey was 47%. Consistent with the results of IFIAR’s prior Surveys, the current Survey reveals high frequency and number of findings in key aspects of the audit and in the inspected audit firms’ systems of quality control.

The Survey relates to two types of “findings” communicated in writing to an inspected firm in a formal

CERTAIN RECURRING ROOT CAUSES IDENTIFIED BY IFIAR MEMBERS INCLUDE: • INSUFFICIENT UNDERSTANDING AND REVIEW OF WORK DONE BY SPECIALISTS AND OTHER AUDITORS;• LACK OF TIMELY INVOLVEMENT AND INSUFFICIENT SUPERVISION AND DIRECTION OF THE ENGAGEMENT LEADER; • LACK OF PROFESSIONAL ATTITUDE AND INSUFFICIENT EXERCISE OF PROFESSIONAL SKEPTICISM;• LACK OF ACCOUNTABILITY;• INSUFFICIENT CHALLENGE OF KEY ASSUMPTIONS AND INPUTS (RELATED TO PROVISIONS); • INADEQUATE CORROBORATION OF MANAGEMENT’S EXPLANATIONS;• EXCESSIVE WORKLOAD AND DEADLINE PRESSURES; AND • PRESSURES FROM FEES AND RESOURCES, INCLUDING HIGH STAFF ATTRITION RATES.

inspection report at the conclusion of an inspection:

• those related to audit engagements and

• those related to the systems of quality control of the audit firms.

With respect to audit engagement findings related to a financial statement balance or disclosure, a deficiency is either a matter with respect to which the firm did not obtain sufficient audit evidence to support its opinion or a failure to identify or address a material, or likely potential material, error in the application of an accounting principle. With respect to all other themes, a deficiency is a departure from auditing standards or requirements, including standards on quality control and ethics and independence requirements, that may or did have an effect on audit quality, either due to the significance or systemic nature of the departure. Quality control findings relate to processes and procedures employed on a firm-wide basis by the firm subject to inspection, rather than to work

performed on specific audit engagements.

An inspection addresses the procedures performed by the auditor. A finding from an inspection of the audit does not necessarily indicate that the financial statements are misstated; therefore, it is important to recognize that the frequency of findings addressed in this report is not indicative of the frequency of financial statement misstatements.

Audit regulators do not measure the sufficiency of audit performance based on whether or not the financial statements were misstated. The reporting company’s management has primary responsibility for the accuracy and presentation in the financial statements, making benchmarks about misstatements more appropriate to evaluations of management’s performance. Audit regulators, rather, evaluate whether the auditor fulfilled the requirements of the auditing standards designed to position the auditor to detect a material misstatement, in the event one exists.

As in prior surveys, this year’s survey reveals a high frequency and number of findings in key areas of the audit and in the inspected audit firms’ quality control systems. While some improvements have been noted, the frequency and total findings continue to concern IFIAR and its members. Inspection themes with the highest numbers of findings were similar to 2014. Inspections of firm-wide systems for quality control also reveal high frequencies of findings, including in the areas of (1) engagement quality control review and firms’ audit methodologies and (2) independence and ethical requirements.

Root Cause Analysis

IFIAR’s dialogue among Members and with the 6 networks has expanded awareness of the need for deeper understanding of the causal factors that lead to ongoing audit quality challenges. Many IFIAR Members, dissatisfied with the nature, extent, and persistence of audit deficiencies, evaluate the assessments by audit firms’ in their jurisdiction of the root causes behind audit shortcomings, and follow up with consideration of whether responsive action is taken.

Gains in audit quality require improved consistency in how an audit firm performs across teams, offices, industries, and countries. Consistent performance benefits from understanding not only what can go wrong in an audit, but also the attributes of a high-quality audit engagement or systems for quality control across the audit firm.

In the 2015 Survey, IFIAR sought to gain more information about root cause analysis practices observed in firms in Members’ jurisdictions. Twenty-four



Members participated in this aspect of the Survey. Several Members reported in the 2015 Survey that they perform their own root cause analyses. While root causes generally should be considered in more specific contexts, certain recurring root causes identified by IFIAR Members include:

• insufficient understanding and review of work done by specialists and other auditors;

• lack of timely involvement and insufficient supervision and direction of the engagement leader;

• lack of professional attitude and insufficient exercise of professional skepticism;

• lack of accountability;

• insufficient challenge of key assumptions and inputs (related to provisions);

• inadequate corroboration of management’s explanations;

• excessive workload and deadline pressures; and

• pressures from fees and resources, including high staff attrition rates.

IFIAR believes that enhancing professional skepticism of practitioners contributes significantly to quality financial statement audits and should be a high priority for audit firms, given the recurrence of audit deficiencies.

IFIAR also intends to intensify its outreach to and interactions with audit committees to create further awareness regarding audit quality issues and what audit committee members can do to contribute to the improvement of audit quality globally.

New Initiative to Improve Audit Quality Globally

IFIAR and the six largest network firms have agreed on the goal to reduce the number of deficient audits reported by its members in the survey. To provide a means to measure progress, for the first time IFIAR’s working group that engages regularly with the largest global audit firms has set a measurable target for the reduction of audits with findings: a reduction of at least 25 percent in the next four years in audits with at least one finding as reported by the members of this working group.

IFIAR will support this objective by encouraging root cause analysis along with intensive quality monitoring, and increased dialogue with the networks’ international leadership.

While this initiative focuses on the combined inspection results from the GAQ Working Group members’ jurisdictions, the aim of the initiative is for audit quality to improve globally, not just in these nine countries. IFIAR will continue to disclose findings reported by all IFIAR Members in its Survey reports, with the expectation that the Global networks’ efforts to improve audit quality are global in reach.

IFIAR also plans to continue to discuss with the International Auditing and Assurance Standards Board (IAASB) and other standard setters how standards in the areas of most frequent inspection findings can contribute to more consistency and compliance in auditor behavior, along with other regulators and policy makers on issues raised through member inspections.

IFIAR's Members are the Independent Audit Oversight Authorities listed below

1. ABU DHABI - Abu Dhabi Accountability Authority

2. ALBANIA - Public Oversight Board of Albania

3. AUSTRALIA - Australian Securities & Investments Commission (ASIC)

4. AUSTRIA - Austrian Auditors Supervisory Authority

5. BELGIUM -CRME/KVI (Chambre de renvoi et de mise en état/Kamer van verwijzing en instaatstelling)

6. BOTSWANA-Botswana Accountancy Oversight Authority (BAOA)

7. BRAZIL-Comissao de Valores Mobiliarios Securities (CVM)

8. BULGARIA-Commission for Public Oversight of Statutory Auditors

9. CANADA-Canadian Public Accountability Board (CPAB)

10. CAYMAN ISLANDS-Auditors Oversight Authority (AOA)

11. CHINESE TAIPEI-Financial Supervisory Commission

12. CROATIA-Croatian Audit Public Oversight Committee (APOC)

13. CZECH REPUBLIC-Public Audit Oversight Board (RVDA)

14. DENMARK-Danish Business Authority (DBA)

15. DUBAI -Dubai Financial Services Authority

16. EGYPT-Auditors Oversight Board,Egyptian Financial Supervisory Authority

17. FINLAND-Finnish Patent and Registration Office,Auditor Oversight Unit (PRH)

18. FRANCE-Haut Conseil du commissariat aux comptes (H3C)

19. GERMANY-Abschlussprueferaufsichtskommission (APAK)/Auditor Oversight Commission (AOC)

20. GIBRALTAR-Financial Services Commission

21. GREECE-Accounting and Auditing Standards Oversight Board

22. HUNGARY-Auditors' Public Oversight Authority (Ministry for National Economy)

23. INDONESIA-The Accountant and Appraiser Supervisory Center (PPAJP),Ministry of Finance in Indonesia

24. IRELAND-Irish Auditing & Accounting Supervisory Authority (IAASA)

25. ITALY-Commissione Nazionale per le Società e la Borsa (CONSOB)

26. JAPAN-Certified Public Accountants & Auditing Oversight Board (CPAAOB);Financial Services Agency (FSA)

27. JERSEY-Jersey Financial Services Commission

28. KOREA-Financial Services Commission (FSC) ; Financial Supervisory Service (FSS)

29. LIECHTENSTEIN-Financial Market Authority Liechtenstein (FMA)

30. LITHUANIA-The Authority of Audit and Accounting

31. LUXEMBOURG- Commission de Surveillance du Secteur Financier (CSSF)

32. MALAYSIA-Audit Oversight Board,Securities Commission Malaysia

33. MAURITIUS-Financial Reporting Council

34. NETHERLANDS-Autoriteit Financiele Markten (AFM)

35. NEW ZEALAND-Financial Markets Authority (FMA)

36. NORWAY-Finanstilsynet / The Financial Supervisory Authority of Norway

37. POLAND- Komisja Nadzoru Audytowego/Audit Oversight Commission

38. PORTUGAL-Conselho Nacional de Supervisão de Auditoria (CNSA)/National Council of Auditing Supervision

39. SINGAPORE-Accounting and Corporate Regulatory Authority (ACRA)

40. SLOVAK REPUBLIC-Úrad pre dohľad nad výkonom auditu (UDVA)/Auditing Oversight Authority

41. SLOVENIA-Agencija za javni nadzor nad revidiranjem (ANR)/Agency for Public Oversight of Auditing (APOA)

42. SOUTH AFRICA-Independent Regulatory Board for Auditors (IRBA)

43. SPAIN-Accounting and Auditing Institute (ICAC)

44. SRI LANKA-Accounting and Auditing Standards Monitoring Board

45. SWEDEN-Revisorsnämnden/ Supervisory Board of Public Accountants (RN)

46. SWITZERLAND-Federal Audit Oversight Authority FAOA

47. THAILAND-Securities and Exchange Commission

48. TURKEY -Capital Markets Board of Turkey (CMB);-Public Oversight, Accounting and Auditing Standards Authority (POA)

49. United Kingdom-Financial Reporting Council (FRC)

50. United States - Public Company Accounting Oversight Board (PCAOB)

Observers

i. Basel Committee of Banking Supervisors (BCBS)

ii. European Commission

iii. Financial Stability Board (FSB)

iv. International Association of Insurance Supervisors (IAIS)

v. International Organization of Securities Commission (IOSCO)

vi. Public Interest Oversight Board (PIOB)

vii. World Bank


The Author is a Partner, ACNABINChartered Accountants(An independent member ofBaker Tilly International)


When an economy is struggling, it is a standard practice for a central bank to cut interest rates. That makes saving less attractive and borrowing more so, boosting the amount of money being spent and kick-starting an economic recovery. Europe’s central banks and the US Federal Reserve have kept interest rates near zero for years now in the hope of making money cheap to borrow. Bangladesh Bank talks loudly about reduction of bank interest rate for loan and not much about deposits.

At present, interest rates in USA and Europe are so close to zero while our interest rate for saving certificate is 18%;their economic activity is so sluggish that some central bankers are seriously discussing whether they should drive interest rates into negative territory in the future, as a sort of economic punishment for not spending money. The theory that is: if common people are deterred from keeping cash in the bank they will withdraw it and spend some of it, thus creating economic growth. Some economists consider this dangerous. Some reckon it shouldn't be possible at all. Since cash carries an implicit rate of interest of 0%, consumers might well respond to negative rates by withdrawing money from banks and stuffing it in their mattresses. The resulting shortage of

Negative Interest Rate on DepositM. S. Siddiqui

loanable funds would push interest rates up.

Europe’s central banks and the US Federal Reserve have kept interest rates near zero for years now in the hopes of making money cheap to borrow. The intent is that because it costs next to nothing to borrow money, the depositors will take advantage of that and invest it in anything that pays more than a 0% return. That usually creates inflation too, as the influx of cheap, new cash devalues the existing stock. But inflation is nowhere to be seen.

The Wall Street Journal reported on February 10, 2015 that, after the Danish central bank recently slashed its benchmark interest rate to well below zero, several of the country’s lenders have followed with highly unusual moves of their own. On Friday, FIH Erhvervs bank announced plans to charge retail customers to hold money in their deposit accounts, the first Danish bank to do so. The Daily Mail of UK on 18th September 2015 reported that Bank of England is actively considering the negative interest on deposits. Such a move would mean that rather than earning on money left in the bank savers would be charged – as the rate acts as a tax on savings. The Chief Economist of the bank saidthat Britain could require 'radical' action in order to keep the recovery on track, including


further cuts in interest rates and even, in theory, the abolition of cash. Sweden is shaping up to be the first country to plunge its citizens into a fascinating and terrifying economic experiment: negative interest rates in a cashless society.

The Swedish central bank, The Sveriges Riksbank, imposed benchmark interest rate of -0.35 percent since July this year. Negative interest is normally approached from the depositor's perspective and a saver who leaves money at the bank would pay money to do so rather than earning money through interest. The idea behind negative interest rates is to get banks to lend and businesses and people to borrow and spend – therefore boosting economic growth. When interest rates are cut below zero, they go into negative territory.

Banks extend loan from the deposits and earned profits. There are many methods of calculation of interest rates.

Fixed Interest Rate

In fixed interest rate the interest to be paid is fixed in advance when

extending loan. The borrower knows the exact amount he needs to pay in the future or at least he knows the exact interest rate to pay for the outstanding loan at that time.

Floating Interest Rate

In case of floating interest rate, the interest rate is not determined while lending. LIBOR is the London Inter Bank Offer Rate, i.e. the interest rate at which the banks are ready to borrow money. The London Interbank Offered Rate (LIBOR) is the average interest rate estimated by leading banks in London that the average leading bank would be charged if borrowing from other banks. LIBOR or ICE LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. This rate keeps on changing on a per day basis and thus the interest rate at which the person borrowed would keep on changing. However, the change is not made on a daily basis but is done once a year/six months and the interest rate is thus fixed till the next update.

EUROPE’S CENTRAL BANKS AND THE US FEDERAL RESERVE HAVE KEPT INTEREST RATES NEAR ZERO FOR YEARS NOW IN THE HOPES OF MAKING MONEY CHEAP TO BORROW. THE INTENT IS THAT BECAUSE IT COSTS NEXT TO NOTHING TO BORROW MONEY, THE DEPOSITORS WILL TAKE ADVANTAGE OF THAT AND INVEST IT IN ANYTHING THAT PAYS MORE THAN A 0% RETURN. THAT USUALLY CREATES INFLATION TOO, AS THE INFLUX OF CHEAP, NEW CASH DEVALUES THE EXISTING STOCK. BUT INFLATION IS NOWHERE TO BE SEEN.


Other Methods (Inflation)

Any interest rate that changes on a periodic basis. The change is usually tied to movement of an outside indicator, such as the prime interest rate. Movement above or below certain levels is often prevented by a predetermined floor and ceiling for a given rate. For example, you might see a rate set at "prime plus 2%". This means that the rate on the loan will always be 2% higher than the prime rate, which changes regularly to take into account changes in the inflation rate.

In many countries, floating rate loans and mortgages predominate. They may be referred to by different names, such as an adjustable rate mortgage in the USA. In some countries, there may be no special name for this type of loan or mortgage, as floating rate lending may be the norm. For example, in Canada substantially all mortgages are floating rate mortgages; borrowers may choose to "fix" the interest rate for any period between six months and ten years, although the actual term of the loan may be 25 years or more.

The Commercial Banks in Bangladesh are not ‘listening’ to BB to lower interest rate on certain saving instruments issued for retired government official @18% and on other deposits. Banks are

overloaded with huge deposits which may affect the profit of Banks as business houses are not willing to take loan at such high interest rate. The interest rates on credit and deposit in Bangladesh slowly declined to a small percentage since the banks were free to fix the level and structure of the rates under the market-based interest rate policy.

BB has intervened in certain sectors and implemented loan interest rates. Though the interest rate policy is market-based, the BB often sets the maximum cap for loans in different priority sectors considering the national interest and overall macroeconomic situation. For example, the current ceiling on interest rates for pre-shipment export loans is 7% and for agricultural loans it is 11%. The effective rate of interest for the Export Development Fund (EDF) is less than 3%. According to the central bank, no more than 10% (9% in most cases) interest rate can be charged under the BB refinancing scheme for SMEs and women entrepreneurs, while 4% rebate rate is applicable for the agriculture sector for cultivation of pulses, oilseeds, and spices. Businesses now can avail loan facilities from foreign sources at a lower rate (London Interbank Offer Rate or LIBOR plus 3 to 4%, which is less than 5%).

Banks in Bangladesh have one fixed rate policy and there is no other option like floating or inflation based rates like some other countries. The BB has a special policy of interest rate on loans from its Export Development Fund (EDF) by 1 percentage point to help exporters get low-cost funds especially due to recent political unrest. With the move, commercial banks will now charge exporters LIBOR (London Interbank Offer Rate) plus 1.5 percent interest, meaning the cost of loans will remain within 2 percent as the six-month LIBOR rate is 0.35 percent now. Additionally banks will charge about 6% identical to Bank rate (interest rate of bank to bank loan).

The effective interest rate on loan is about 15-20%, which makes the businesses unviable and business enterprises are going debt ridden. BB can intervene and change the policy to determine interest on loan and reduce the interest rate on deposit close to zero and may even try to maintain negative interest rate. The action will increase consumption and investment in products and services.

The Author is a Legal Economistand Pursuing PhD in OpenUniversity, Malaysia


Financial Reporting and Its Purpose

Financial reporting is a vital part of corporate governance. In this paper, we'll discuss basics of financial reporting and its purpose.

Definition

Financial reporting involves disclosure of financial information to management and the public (if the company is publicly traded) about how the company is performing over a specific period of time. Financial reports are usually issued on a quarterly and annual basis. This is different from management reporting, which is financial information that is disclosed to those inside the company to be used to make decisions within the company. Financial reports are included in a public company's annual report.

Purpose

Financial reporting serves two primary purposes. First, it helps management to engage in effective decision-making concerning the company's objectives and overall strategies by its analysis. The data disclosed in the reports can help

Effective and Transparent FinancialReporting is Good for Business

Ashish Kumar Paul FCA

management discern the strengths and weaknesses of the company as well as its overall financial health. Second, financial reporting provides vital information about the financial health and activities of the company to its stakeholders including its shareholders, potential investors, consumers, and government regulators. It's a means of ensuring that the company is being run appropriately. If a company is publicly traded, it is subject to some very strict reporting regulations enforced by the Securities and Exchange Commission (SEC).

Financial Statement Analysis

Transparent and effective Financial Report facilitates Financial Statement analysis and Financial Statement analysis is a method of reviewing and analyzing a company’s accounting reports (financial statements) in order to gauge its past, present or projected future performance. This process of reviewing the financial statements allows for better economic decision making.

Globally, publicly traded (listed) companies are required by law to file their financial statements with the relevant authorities. For example, listed firms in America are required to submit their financial statements to the Securities and


Exchange Commission (SEC). Firms are also obligated to provide their financial statements in the annual report that they share with their stakeholders. As financial statements are prepared in order to meet requirements, the second step in the process is to analyze them effectively so that future profitability and cash flows can be forecasted.

Therefore, the main purpose of financial statement analysis is to utilize information about the past performance of the company in order to predict how it will fare in the future. Another important purpose of the analysis of financial statements is to identify potential problem areas and troubleshoot those.

Users of Financial Statement Analysis

There are different users of financial statement analysis. These can be classified into internal and external users. Internal users refer to the management of the company who analyzes financial statements in order to make decisions related to the operations of the company. On

the other hand, external users do not necessarily belong to the company but still hold some sort of financial interest. These include owners, investors, creditors, government, employees, customers, and the general public. These users are elaborated on below:

1. Management

The managers of the company use their financial statement analysis to make intelligent decisions about their performance. For instance, they may gauge cost per distribution channel, or how much cash they have left, from their accounting reports and make decisions from these analysis results.

2. Owners

Small business owners need financial information from their operations to determine whether the business is profitable. It helps in making decisions like whether to continue operating the business, whether to improve business strategies or whether to give up on the business altogether.

INVESTORS SHOULD SEEK DISCLOSURE AND SIMPLICITY. THE MORE COMPANIES SAY ABOUT WHERE THEY ARE MAKING MONEY AND HOW THEY ARE SPENDING THEIR RESOURCES, THE MORE CONFIDENT INVESTORS CAN BE ABOUT THEIR FUNDAMENTALS.

3. Investors

People who have purchased stock or shares in a company need financial information to analyze the way the company is performing. They use financial statement analysis to determine what to do with their investments in the company. So depending on how the company is doing, they will either hold onto their stock, sell it or buy more.

4. Creditors

Creditors are interested in knowing if a company will be able to honor its payments as they become due. They use cash flow analysis of the company’s accounting records to measure the company’s liquidity, or its ability to make short-term payments.

5. Government

Governing and regulating bodies of the state look at financial statement analysis to determine how the

economy is performing in general so they can plan their financial and industrial policies. Tax authorities also analyze a company’s statements to calculate the tax burden that the company has to pay.

6. Employees

Employees need to know if their employment is secure and if there is a possibility of a pay raise. They want to be abreast of their company’s profitability and stability. Employees may also be interested in knowing the company’s financial position to see whether there may be plans for expansion and hence, career prospects for them.

7. Customers

Customers need to know about the ability of the company to service its clients into the future. The need to know about the company’s stability of operations is heightened if the customer (i.e. a distributor or

procurer of specialized products) is dependent wholly on the company for its supplies.

8. General Public

Anyone in the general public, like students, analysts and researchers, may be interested in using a company’s financial statement analysis. They may wish to evaluate the effects of the firm on the environment, or the economy or even the local community. For instance, if the company is running corporate social responsibility programs for improving the community, the public may want to be aware of the future operations of the company.

Financial Reporting: Making it more Effective for Investors

Corporate financial statements and their related disclosures are fundamental to sound investment decision making. The well-being of



global financial markets, and of the investors who entrust their financial present and future to those markets, depends directly on the information financial statements and disclosures provide. The following framework is intended to enhance effectiveness in financial reporting.

Guiding Principles

1. The primary financial statements must provide the information needed by equity investors, creditors, and other suppliers of risk capital.

2. In financial reporting, standard-setting as well as statement preparation, the entity must be viewed from the perspective of an investor in the common equity issued by the company.

3. Fair value information is the most relevant information for financial decision making.

4. Recognition and disclosure must be determined by the relevance of the information to investment decision making and not based upon measurement reliability alone.

5. All transactions and events must be recognized as they occur in the financial statements.

6. Investors’ information requirements must determine the materiality threshold.

7. Financial reporting must be neutral.

8. All changes in net assets, including changes in fair values, must be recorded in a single financial statement, the Statement of Changes in Net Assets Available to Common Shareowners.

9. The cash flow statement provides information essential to the analysis of a company and should be prepared using the direct method only.

10. Changes affecting each of the financial statements should be reported and explained on a disaggregated basis.

11. Individual line items should be reported based upon the nature of the items rather than by the function for which they are used.

12. Disclosures must provide the additional information investors require to understand the items recognized in the financial statements, their measurement properties, and their risk exposures.

Criteria for Development of Effective Disclosures

1. Disclosure is not a substitute for recognition and

measurement, and recognition and measurement do not eliminate the need for disclosure.

2. Standards for recognition and measurement of financial statement items and their related disclosures must be developed concurrently.

3. Policy choices, assumptions, judgments, and methods must be fully and clearly disclosed.

4. Disclosures should provide sufficient disaggregated information for investors to be able to fully understand and interpret the summary information in the financial statements.

5. Investors require clear and complete disclosure of a company’s risk exposures, its strategies for managing risks, and the effectiveness of those strategies.

6. Investors must have clear and complete disclosure of all off-balance sheet assets, liabilities, and other financial arrangements and commitments.

7. Investors require clear and complete information about intangible assets held by a company.

8. Investors require clear and complete information about a company’s contingencies and commitments.

A Better Model

1. Comparative Balance Sheets — Minimum of two years (two balance sheets and two income and cash flow statements provide two full years of data), with accounts listed in order of decreasing liquidity within each category.

2. Comparative Cash Flow Statements — Minimum of two years, prepared using the direct method, with a supplemental schedule of significant noncash financing and investing activities.

3. (New) Comparative Statements of Changes in Net Assets Available to Common Shareowners — Minimum of two years, that:

a. Identify and distinguish among:

i. Current-period cash and accrual transactions;

ii. Estimates; and

iii. Changes in the fair values of balance sheet accounts.

b. Provide information by nature of each resource consumed rather than the function for which it is consumed; and

c. Display transactions with owners that affect net assets, such as dividends and new share issuances.

4. Reconciliation of Financial Position — Reconciles the comparative balance sheets by further disaggregating the amounts in the statements mentioned previously and by

clearly showing how the statements articulate.

Making Financial Reports more Effective and Useful

The following explores several financial reporting challenges and trends that have emerged over the past few years. In particular, the focus is on three key qualitative characteristics of useful financial reporting that may contribute to more solid support for financial, investment and other economic decisions, including:

1. Relevance: Reported information must be relevant to investors and other users as an aid in making decisions based on an entity’s financial position, performance, risks and business prospects.

2. Understandability: Financial reports must be clear and avoid unnecessary complexity or inconsistency that may limit the ability of users to comprehend the information.

3. Timeliness: In today’s fast-moving markets, information must be communicated quickly if it is to be useful in supporting investors’ decisions.

The Bottom Line

Investors should seek disclosure and simplicity. The more companies say about where they are making money and how they are spending their resources, the more confident investors can be about their fundamentals.

It's even better when financial reports provide a line-of-sight view into the company's growth drivers. Transparency makes analysis easier and thus lowers an investor's risk when investing in stocks. That way you, the investor, are less likely to face unpleasant surprises.

References

1. http://accounting-simplified.com/ financial/statements/types.html

2. http://study.com/academy/lesson/ what-is-financial-reporting-purpose-statement-examples-analysis.html

3. http://www.entrepreneurial- insights.com/financial-statement-analysis-introduction/

4. https://blogs.cfainstitute.org/ marketintegrity/2014/06/18/financial-reporting-making-it-more-effective-for-investors/


The Author is Head of Internal AuditApex Holdings Limited


Introduction

Today’s business world is persistently changing. It is unpredictable, volatile, and seems to become more complex every day. By its very nature, it is fraught with risk. In business, risks lurk at every turn, competitor innovations that threaten the viability of your products or services, new players in the market place, adverse trends in commodity prices, currencies, interest rates or the economy. Throw in potential disruptions to supply chains that have been stretched across thousands of miles and country borders by globalization. Organizations face a wide range of uncertain internal and external factors that may affect achievement of their objectives whether they are strategic, operational, or financial. The effect of this uncertainty on their objectives can be a positive risk (opportunities) or a negative risk (threats).

Proper risk management assists organizations in making informed decisions about the level of risk that they want to take and implementing the necessary controls to effectively pursue their objectives. To do this you need to think about what, in your business, might cause hinder to achieve your objectives and decide whether you are taking reasonable steps to prevent those barriers.

Importance of Business RiskManagement (BRM) to Strategic

Planning and ControlMd. Mustaq Ahmed ACA

Definition of Risk

The word risk is used to describe a situation that involves a possibility of something undesired to happen.

Risk means the potential variation in outcomes. The variation can be either positive (upside risk) or negative (downside risk). This definition is mainly used in finance, where both positive and negative positions in securities are possible.

In business risk management, risk is defined as a possible event or circumstance that can have negative influences on the enterprise in question. Its impact can be on the very existence, the resources (human and capital), the products and services, or the customers of the enterprise, as well as external impacts on society, markets, or the environment.

The usual measure of risk for a class of events is as follows:

Risk = Probability (of the Event) times Consequence.

The use of the curves is often convenient, because many risky situations might result in variably severe consequences and usually the less critical ones are more probable.


Types of Risk

There are several ways in which risks can be classified according to their source and characteristics. For this study, risk has been classified into business and non-business risk.

Business Risk

Business risk arises from the nature of the businesses, its operations and the conditions it operates in. Business risk arises due to carrying out business transaction such as selling goods or services. It includes:

• Strategy risk: the risk of choosing the wrong corporate business of functional strategies.

• Product risk: the chance that

customers will not buy the company’s product or services in the expected quantities.

• Enterprise risk: the success or failure of a business operation and whether it should have been undertaken in first place.

• Economic risk: the effect of unexplained changing economic condition. For example, global financial events, interest rate increases, cash flow shortages, customers not paying, rapid growth and rising costs.

• Technology risk: the risk that the market or industry is affected by some change in production or delivery technology. Such as computer network failures and problems associated with using outdated equipment.

• Property risk: the risk of loss of property or loss arising from accident. Such as damage from natural disasters, burst water pipes, robbery and vandalism.

There are also some indirect risk to business. We often make the mistake

FOR COMPANIES IN RISKY BUSINESSES, BRM IS NOT JUST A NECESSITY, IT IS A COMPETITIVE ADVANTAGE. THERE ARE LIVING EXAMPLES OF COMPANIES THAT HAVE STARTED USING GOOD-QUALITY BRM AS A STRATEGIC ADVANTAGE TO INCREASE VALUE. BY QUANTIFYING RISK, COMPANIES HAVE A MORE RELIABLE WAY TO MEASURE HOW EACH FUNCTION OR PROJECT CONTRIBUTES TO THE MANAGEMENT OF EACH RISK THAT AFFECTS PERFORMANCE.

Risk

Non-businessRisk

Business Risk

Figure 1: Risk Matrix


of overlooking things that don't directly impact their business and are therefore unprepared to deal with change. For example, while your business might not be directly affected by a natural disaster, you may still suffer if it affects your suppliers, customers or general location.

Non-business RiskNon-business risk is any other type of risk, usually classified as financial risk and operational risk (or event risk).Non-business risk arises due to factors other than carrying out business transactions.

Risk ManagementRisk management is the process of identifying, quantifying, and managing the risks that an organization faces. Risk management involves identifying the types of risk exposure within the company, measuring those potential risks, proposing means to hedge, insure or mitigate some of the risks and estimating the impact of various risks on the future earnings of the company.

The International Organization for Standardization (ISO) identifies the following principles of risk management:

Risk Management Should

• create value – resources expended to mitigate risk should be less than the consequence of inaction, or (as in value engineering), the gain should exceed the pain;

• be an integral part of organizational processes and decision making process;

• explicitly address uncertainty and assumptions;

• be a systematic and structured process;

• be based on the best available information;

• take human factors into account;

• be transparent and inclusive;

• be dynamic, iterative and responsive to change;

• be capable of continual improvement and enhancement; and

• be continually or periodically re-assessed.

Business Risk Management

Business Risk Management (BRM) is a strategic process which helps and supports decision making at both strategic and operational levels in an organization.

Business risk management is a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.

BRM may therefore be defined as the eradication or minimization of the adverse effects of pure and speculative risks to which an organization is exposed.

Hence, BRM is used in organizations to:

• consider the possible impacts of foreseeable significant risks on the organization’s performance

• respond appropriately to internal and external changes in risk perception

• devise strategic options for eliminating or controlling all significant risks and their impacts

• link these options to the general decision and control framework used by the organization.

The requirement for a BRM approach is highlighted in the Turnbull Committee’s guidance, which requires organizations listed on the UK stock market to identify, record and manage their significant risks in a suitable manner. Systems for regular review of risks and review or amendment of internal controls must be in place, together with statements in company annual reports confirming the effectiveness of these systems.

Business Risk Management Process

The business risk management process typically includes six steps. The steps are:

Determining the objectives

of the organization

Identification of risk to business

Risk analysis: assessment

and measurement

Selecting alternatives

Implementation

Monitoring the results

A. Determining the Objectives of the Organization

The first step in preparing a risk management plan is to determine the objectives for which an organization established. Organizations and project teams have objectives. Any event that may endanger achieving an objective partly or completely is identified as risk.

B. Identification of Risk to Business

The next step in preparing a risk management plan is to identify potential risks to your business. Understanding the scope of possible risks will help you develop realistic, cost-effective strategies for dealing with them.

Ways of Identifying Risk

Once you have a clear picture of your business, you can begin to identify the risks. Review your business plan and think about what you couldn't do without, and what type of incidents could impact on these areas. Ask yourself:

• when, where, why and how are risks likely to happen in your business?

• are the risks internal or external?

• who might be involved or affected if an incident happens?

The following are some useful techniques for identifying risks:

a. Brainstorm

Brainstorming with different people, such as your accountant, financial adviser, staff, suppliers and other interested parties, will help you get many different perspectives on risks to your business.

b. Analyze other events

Think about other events that have, or could have, affected your business. What were the outcomes of those events? Could they happen again? Think about what possible future events could affect your business. Analyze the scenarios that might lead to an event and what the outcome could be. This will help you identify risks that might be external to your business.

c. Assess your processes

Use flow charts, checklists and inspections to assess your work processes. Identify each step in your processes and think about the associated risks. Ask yourself what could prevent each step from happening and how that would affect the rest of the process.

C. Risk Analysis: Assessment and Measurement

Risk Assessment

Once risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring. Therefore, in the assessment process it is critical to make the best educated decisions in order to properly prioritize the implementation of the risk management plan. Risk assessment can therefore be conducted at various levels of the organization.

Way to Assess the Risks in an Organization’s Workplace

A good starting point is to walk around your workplace and look for any hazards, (things that may cause harm).Then think about the risk, which is the chance, high or

low, of somebody being harmed by the hazard, and how serious the harm could be. Think about how accidents could happen and who might be harmed. Ask your employees what they think the hazards are, as they may notice things that are not obvious to you and may have some good ideas on how to control the risks. Concentrate on the real risks those that are most likely to cause harm. Consider the measures you are already taking to control the risks and ask if you have covered all you need to do.

Once you have identified the risks and what you need to do to control them, you should put the appropriate measures in place. Then record your significant findings. Any paperwork you produce should help you to manage the risks in your business and tell people what they need to know. For most people this does not need to be a big exercise – just note the main points down about the significant risks and what you concluded.

Evaluating Risks (Risk Measurement)

Risk evaluation (or measurement) can be based on economic, social and legal considerations, together with the probability and frequency of each occurrence and the severity of the outcome of the event being assessed. Once you have established the level of risk, you then need to create a rating table for evaluating the risk. Evaluating a risk means making a decision about its severity and ways to manage it.

For example, you may decide the likelihood of a fire is 'unlikely' (a score of 2) but the consequences are 'severe' (a score of 4). Using the tables and formula above, a fire therefore has a risk rating of 8 (i.e. 2 x 4 = 8).



Your risk evaluation should consider:

• the importance of the activity to your business;

• the amount of control you have over the risk;

• potential losses to your business; and

• any benefits or opportunities presented by the risk.

D. Selecting Alternatives

Once you have identified, analyzed and evaluated your risks, you need to rank them in order of priority. You can then identify different alternatives to treat unacceptable risks. The following are different options for treating risks (see figures):

i. Avoid the Risk

If it's possible, you may decide not to proceed with an activity that is likely to generate risk. Alternatively, you may think of another way to reach the same outcome that doesn't involve the same risks. This could involve changing your processes, equipment or materials.

ii. Reduce the Risk

You can reduce a risk by:

• reducing the likelihood of the risk happening - for example, through quality control processes, auditing, compliance with legislation, staff training, regular maintenance or a change in procedures;

• reducing the impact if the risk occurs - for example, through emergency procedures, off site data backup, minimizing exposure to sources of risk, or using public relations.

iii. Transfer the Risk

You may be able to shift some or all of the responsibility for the risk to another party through insurance, outsourcing, joint ventures or partnerships. You may also be able to transfer risk by:

• cross-training staff so that more than one person knows how to do a certain task and you don't risk losing essential skills or knowledge if something happens to one of your staff members;

• identifying alternative suppliers in case your usual supplier is unable to deliver; and

• keeping old equipment (after it is replaced) and practicing doing things manually in case your computer networks or other equipment can't be used.

iv. Risk Retention

Risk retention involves managing the risk within the organization, with any loss arising from poor risk management being totally financed from within. This option may be followed consciously or unconsciously – it’s what happens if risks aren’t fully identified.

E. Implementation

Implementation follows all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for the risks that have been decided to be transferred to an insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce others, and retain the rest.

Risk rating Description Action

12-16 Severe Needs immediate corrective action

8-12 High Needs corrective action within 1 month

4-8 Moderate Needs corrective action within 3 months

1-4 Low Does not currently require corrective action

Risk rating table example

Figure 2. Risk response strategies

F. Monitoring the results

You will need to test, evaluate and update your risk management plan regularly as risks can change as your business, your industry and the environment you operate in change. Regularly reviewing your risk management plan is essential for identifying new risks and monitoring the effectiveness of your risk treatment strategies.

During the monitoring and review processes:

- the risk controls should be monitored for their effectiveness;

- the identification and evaluation processes should be reviewed regularly and whenever significant change occurs; and

- the BRM process should be reviewed periodically to make sure weaknesses are identified and addressed and to enable continual improvement.

Importance of Business Risk Management to Strategic Planning and Control

For companies in risky businesses, BRM is not just a necessity, it is a competitive advantage. There are living examples of companies that have started using good-quality BRM as a strategic advantage to increase value. By quantifying risk, companies have a more reliable way to measure how each function or project contributes to the management of each risk that affects performance.

While the BRM program focuses on risk identification and mitigation, risk is not viewed as a one-sided thing, there is an upside and a downside. From a management decision-making

standpoint, this means we may decide we are not taking enough strategic risk, or managing it too closely. If so, there is an opportunity with change to be pursuing those operations or take a more entrepreneurial approach to the business. An organization try to look at how it can manage this risk to an acceptable level.

There has been a change in the organizational mindset and risk management has become intertwined with strategic planning. People start thinking about risk differently. Initially, risk was viewed as a way to say ‘no’. Now it has evolved into people considering risk as we start new initiatives. You don’t always want to be the one in the room saying it is too risky when someone comes in with new business case. This has made it okay to think about what our risks are within the strategy and how to mitigate and manage those risks, so we can make sure the strategy is successful. People are not afraid to talk about risk. It is encouraged. So rather than being the ‘naysayers,’ it is more about ‘have you thought through this?’ ‘What if this assumption is incorrect?’ What’s our action plan if it does not work?

Ensuring that targets are met in terms of customers, people and processes does not necessarily mean, however, that risk is being managed. Consequently, there is a need to also ensure that risk management controls complement rather than conflict with the performance targets set within the steering wheel. The first way in which this is achieved is via a strategy: risk management control loop. The risk management standard produced by the Institute of Risk Management (2002) identifies three key elements in the risk management process, namely risk assessment, risk reporting and risk response (measures to reduce or modify risks), and all three elements form part of the control loop. Risk assessment comprises both the establishment of risk appetite and the identification of risks; risk reporting takes place following the risk monitoring by both line management and internal audit. Risk responses and control mechanisms are the responsibility of line management and internal audit then independently monitors the risk systems established by management. Internal audit may also offer advice to line managers regarding deficiencies or potential improvements to risk controls.



Minimizing and controlling the effects of risks can improve and maintain business cash flow. The continuation of cash flow creates stability for your organization and helps sustain credit relationships, while helping to build additional credit. Creditors will see this stability and good cash flow reflected in your company’s financial reports. Greater stability will mean your company will last into the future. The rewards of risk management are all linked together: good cash flow leads to stability, which leads to good credit, which leads to longevity.

Key Success Factors of Business Risk Management Program

The success factors of business risk management program are:

Sell it to the top. It has got to be something the CEO wants and drives, or you will not get the management involvement you need.

They are inclusive. The best programs draw on the input and cooperation of every part of the organization.

Get to the right people. Involve the people who are involved in the strategy and understand the business.

Make it transparent.

Condense the information. Think about your audience, and what the result is going to be so there is not too much detail.

Make it holistic. The best risk management programs not only address all the risks to which modern corporations are susceptible, they also consider how these various risks can affect the company’s stakeholders and operations.

Proactive systems.

Global Perspectives on Risk Management

The recent financial crises demonstrated quite clearly that, with increasingly globalized economies and markets, a crisis in one nation or region can affect far more than those living and working in the immediate area. National economic, social, and environmental issues need to be considered in a global context, especially issues related to risk. In addition, risk management need to encompass a wider perspective, since organizations are affected by many variables, often outside their direct control.

• According to IFAC’s interviews with 25 key business leaders, summarized in Integrating the Business Reporting Supply Chain, recent financial crises have exposed flawed or ineffective risk management and internal control practices—especially in some financial institutions. Many organizations were overly focused on financial reporting controls, and did not fully comprehend the risks to which they were exposed. In fact, many, if not most, of the risks derived from other areas, including operations and external circumstances.

• Respondents to IFAC’s Global Survey on Risk Management and Internal Control—Results, Analysis, and Proposed Next Steps felt that risk management and internal control guidelines should be combined into one set of integrated guidelines, to increase the understanding that they are both integral parts of an effective governance system.

IFAC facilitates a collaborative global dialogue with the issuers of standards, guidance, and frameworks in the area of governance, risk management, and internal control culminating in greater international alignment.

The Role of Accountants and the Accountancy Profession on Business Risk Management

Evaluating and improving risk management is among the core competencies of many professional accountants and, within organizations. Many are partnering with other functions to design, plan, implement, execute, and monitor. In addition, professional accountants are often responsible for providing objective, accurate, and timely information and analyses to support all of these activities. They can also organize risk management and internal control training sessions and establishing an understandable, common risk and control language that meets professional and technical standards.

Professional accountants play a leading role in ensuring that risk management form an integral part of an organization’s governance system. With an integrated, organization-wide approach, professional accountants can also encourage treating risks in a more holistic, comprehensive way,

ensuring that all business decisions are based on proper risk assessment and management that defines the overall effect of uncertainties on the organization’s objectives.

Conducting business online exposes a company to a wide range of potential risks, including liability due to infringement on copyrights, patents, or trademarks, charges of defamation due to statements made on a Web site or via e mail, charges of invasion of privacy due to unauthorized use of personal information or excessive monitoring of employee communications, liability for harassment due to employee behavior online, and legal issues due to accidental noncompliance with foreign laws.So, the accountants shall be very careful and consider appropriate procedures to minimize the risk of business

Conclusion

The importance of risk management in business can hardly be overstated. Awareness of risk shall be increased as we

currently live in a less stable economic and political environment. However it is generally agreed that the consequences of risk management failure can be dire. There is a clear imperative for many companies to develop a strong, consistent, enterprise wide risk management program, as most prevalent business risks will either remain at current levels or increase.

By implementing an effective risk management program, companies protect their ability to compete and try to look at how it can manage this risk to an acceptable level.So, financial executives, who have not done so already, should begin to develop a holistic risk management program or one that allows them to mitigate and manage risk incorporating with strategic planning and control.


The Author is an Assistant ManagerRahman Rahman Huq(KPMG in Bangladesh)


Volume of banking transactions is increasing day by day worldwide. This is true for personal as well as corporate transactions. The transactions are no more limited to only deposit and withdrawal instead widened to electronic transfer, internet banking and very recently to mobile banking. Export /Import bill endorsement, purchase, sell and realization are part of International Trading since long. In this era of highly inclusive and intensive banking transaction this is a big question whether companies of private sector in Bangladesh are well aware of the risks of frauds and they have means and strategies to address the risks. Is Central Bank along with its scheduled commercial banks are willing to be cooperative with private sector to mitigate the risks.

According to present practice the banks share Statement of Transaction of Savings/Current/OD Accounts at the end of every month with their Account Holders. Only a few foreign banks send the statement by post pro-actively. In other cases the companies need to collect it in-person by a representative staff. A few banks also started to give access to the Transaction Details on-line. Statement of Transaction is the only document Banks communicate with its account holders regularly. But mere this statement is no

Sharing Transaction Statement by BanksNo more enough for Companies

K. M. Tarek FCA

longer sufficient for business world especially in an environment of growing international trade transactions.

A numerous number of Export Bills are purchased or discounted by Banks every day for Garments Manufacturing Companies in Bangladesh. Amount paid by bank in advance ahead of final realization of the same bills from Buyers staying in Europe or America remains as liability for the Garments Company. This is important for the Company to collect month-end list of unsettled liabilities against the export bills and reconcile with its accounts with a purpose to identify, if any, intentional lingering of liability pending final settlement of bill with foreign buyer and therby prevent probable fraud. So the commercial banks can take a further step to prepare and share a month closing list of Discounted Bills and send it to the company to reconcile and confirm with its own books of accounts.

Companies are also opening L/C with Banks to purchase raw materials from foreign countries. Banks pay the supplier in favor of its client against a credit arrangement of 120-180 days. There is no practice of sharing transaction statement of these liability accounts with the Company by Banks. If a corrupt bank official with collaboration of a company staff import goods and sends off it to other destination


with an evil purpose the fact will remain undetected for a period until the company reconciles Monthly Bank Statements, they receive for CD/OD accounts, with its own accounting record to detect mismatched transaction(s) .

Cheque is the instrument which is used most for banking transactions worldwide. This is wide practice in Bangladesh that authorized representative staffs of a company receive cheque books from Banks’ Branch office. Then cheques are signed off and issued by authorized signatories to pay creditors and to withdraw cash. The Statement which is shared by Bank with company covers only the cheque leaves which are already issued and presented to the Bank. A corrupt company official with or without help of a Bank Official can easily breach his custodial role using a cheque leaf which is kept under his custody. This is not rare case in Bangladesh that is detected the froud a few months later after an occurrence like that Bank issued cheque book to an

un-authorized person and honored later un-authorized cheque because the banker could not detect that fake signature had been put on the cheque requisition slip and later on the instrument. But the fraud could be detected early and its prevention could be also possible if Bank confirms issuance of cheque book by SMS alert and sends a list of unused Cheque leaves to company’s registered address at the end of every month to reconcile with its record.

In view of the above context, this is to say that sharing statement of transactions by banks with its clients is no more enough now-a-days. Banks have to also share statement of all commercial liabilities and a list of un-used cheque leaves at the end of every month. We hope the central bank will pay heed to address the issue to mitigate risks underlying with banking transactions of private sector companies in growing economy of Bangladesh.

A CORRUPT COMPANY OFFICIAL WITH OR WITHOUT HELP OF A BANK OFFICIAL CAN EASILY BREACH HIS CUSTODIAL ROLE USING A CHEQUE LEAF WHICH IS KEPT UNDER HIS CUSTODY. THIS IS NOT RARE CASE IN BANGLADESH THAT IS DETECTED THE FROUD A FEW MONTHS LATER AFTER AN OCCURRENCE LIKE THAT BANK ISSUED CHEQUE BOOK TO AN UN-AUTHORIZED PERSON AND HONORED LATER UN-AUTHORIZED CHEQUE BECAUSE THE BANKER COULD NOT DETECT THAT FAKE SIGNATURE HAD BEEN PUT ON THE CHEQUE REQUISITION SLIP AND LATER ON THE INSTRUMENT. BUT THE FRAUD COULD BE DETECTED EARLY AND ITS PREVENTION COULD BE ALSO POSSIBLE IF BANK CONFIRMS ISSUANCE OF CHEQUE BOOK BY SMS ALERT AND SENDS A LIST OF UNUSED CHEQUE LEAVES TO COMPANY’S REGISTERED ADDRESS AT THE END OF EVERY MONTH TO RECONCILE WITH ITS RECORD.

The Author is aFellow Member, ICAB


Abstract

The paper deals with the carbon tax as an instrument of environmental pollution control and prevention of Carbon dioxide (CO2) emissions that cause global warming. The research begins by outlining the theoretical background of carbontax as part of market based incentive to reduce the pollution. In this study, the impact of imposing carbon tax on economy and environment of an individual country is analyzed on the basis of cost benefit trade-off in global context. This study is made to explore the impact of carbon taxes scheme on households and the overall economy in Bangladesh.

Key-Words: Carbon Tax, CO2, Global Warming, Market based Incentive and Trade-off.

Introduction

Atmosphere is a global public good and all nations around the globe dump pollution in the atmosphere at zero cost. As a result the Greenhouse Gas (GHG) has been increasing in the atmosphere. In targeting GHG emission, main focus is given to CO2 since it constitutes a large share (other three are methane, nitrous oxide and fluorinated gases) of the GHG.

Environmental and Economic Implicationsfor Adopting Carbon Tax Policy

Some Experiences from the GlobalContext and Lesson for Bangladesh

1Shamsun Arefin | 2Zoinul Abedin Sakil ACA

In the last decade Bangladesh has made significant progress in terms of reducing population growth, increasing economic growth and significantly reduced the number of people living in extreme poverty. Despite this, the country faces huge challenges which poses serious question in growth, environment sustainability. Studies have revealed that annually about 4% of GDP is lost and 22% of diseases are due to environmental degradation most of the case because of human alterations and pollution (BCPEIR, 2014).

Climate change is predicted to raise average sea levels by around 30 cm by 2050, and could make an additional 14% of the country extremely vulnerable to floods by 2030. Therefore, timely and effective response to climate change is crucial to maintain the development progresses that facilitate adaptation to climate change. Although Bangladesh has low GHG emission, the vulnerability of Bangladesh for climate change demands interventions to reduce GHG emission from her own end. There may be different policy intervention instruments for reducing GHG emission like market based incentives emission tax and trading scheme, different forms of regulation, subsidies etc.


Definition of Carbon Tax

Carbon tax is an environmental fee levied by governments on the production, distribution or use of fossil fuels such as oil, coal and natural gas. The amount of the tax depends on how much CO2 each type of fuel emits when it is used to run factories or power plants, provide heat and electricity to homes and businesses, drive vehicles and so on. The tax creates a cost foremitting GHG into the atmosphere and in doing so provides a financial incentive (tax credit) for reducing GHG emissions from the atmosphere. It is a form of explicit carbon pricing. It refers to a tax directly linked to the level of CO2 emissions.

Carbon Tax Versus Cap and Trade Policy

Though both policy approaches are market-based and create a carbon price that provides the financial incentive to reduce GHG emissions, the fundamental difference between the two approaches is as carbon tax imposes a direct fee on fuels based on the amount of GHG they emit, but does not set a limit on GHG emissions. On the other hand, cap-and-trade establishes a limit on GHG emissions, but the price for emission allowances is determined by the supply and demand in the emission trading market. There are also a number of additional trade-offs advantage over one another as such:

IN BANGLADESH UNDER THE BASE CASE, TOTAL GREENHOUSE GAS (GHG) EMISSIONS ARE ESTIMATED TOINCREASE AT 5.8% CUMULATIVE ANNUAL GROWTH RATE (CAGR) TO REACH 168.3 MILLION TONSOF CARBON DIOXIDE EQUIVALENT (T CO2E) BY 2030, WITH THE POWER SECTOR CONTRIBUTING ABOUT 50%(FIGURE-4). WITH CARBON TAX, CUMULATIVE GHG EMISSIONS DURING 2005–2030 WOULD BE REDUCED BY 9.4% FROM THE BASE CASE LEVEL, WITH ADDITIONAL NUCLEAR, WIND, ANDMUNICIPAL SOLID WASTE-BASED POWER GENERATION PLANTWOULD DECREASE BY 18.4% DURING 2005–2030. CUMULATIVE GHG EMISSIONSFROM THE RESIDENTIAL AND COMMERCIAL SECTORS WOULD ALSO DECLINE. THERE WOULD BE NO SIGNIFICANT REDUCTION FROM TRANSPORT AND INDUSTRY SECTORS.

Policy Price Certainty

Emission Certainty

Simplicity Transparency Security International Linkage

Carbon Trade X X

Carbon Tax X X X X

Note: X denotes a relative advantage


Global Context Review

One of the key problems of today´s world is global warming caused by GHG which include specially CO2. As Fu and Kelly (2012) state global warming brings negative results for the mankindand is a threat for the entire world. CO2 emissions increase is caused by the consumption of fossil fuels. From the global perspective it is therefore essential to reduce CO2 emissions. Figure 1 shows the CO2 emitters in 2015:

According to Chancel and Piketty (2015) the results for emitting CO2 are moderately sensitive to elasticity choices. Higher country elasticity implies higher global CO2 concentrations, assuming an elasticity of 0.7 within countries; the top 10% of global emitters are responsible for 40% of total emissions. Middle and upper classes of emerging countries increased their CO2e emissions more than any other group within the past 15 years, with cumulated per capita growth rates over 30%,

about twice the world average (17%) and much higher than growth rates for the majority of the population in industrialized countries.

Carbon taxes can be introduced as an independent instrument or alongside other carbon pricing instrument, such as an energy tax. Such instruments are being introduced at a fast pace to achieve a cost-effective reduction in emissions. By making dirty fuels more expensive and encouraging businesses and individuals to reduce energy consumption and increase energy efficiency. A carbon tax also makes clean, renewable energy from sources such as wind and solar more cost-competitive with fossil fuels. Accordingto Nordhaus, W. (2013) raising the market price of carbon provides strong incentives to reduce carbon emissions through three mechanisms-i) provides signals to consumers about what goods and services produce high carbon emissions ii)provides signals to producers about which inputs use more carbon, and which

inputs use less or none that induces producers to move to low carbon technologies and iii) provide market signals and financial incentives to inventors and innovators to develop and introduce low carbon products and processes for replacing carbon-intensive technologies.

According to the World Bank (2014), about 40 national and over 20 sub-national jurisdictions have already implemented orscheduled emissions trading schemes or carbon taxes which in altogether account for morethan 22 percent of global emissions. Many more countries and jurisdictions are advancing preparation to be in a state of “carbon pricing readiness” by 2016-2020 that represent almost half of global Greenhouse Gas (GHG) emissions.35 countries (28 in the EU) and 20 sub nationaljurisdictions (6 in the USA) have adoptedemissions trading Scheme (ETS) programs.On the other hand three out of the ten of the largest economies (USA, Russia and China) in the world do not have a carbon price in state level.

As countries begin to construct their 2030, 2040, and 2050 green house gas mitigation scenarios, they have increasingly identified cost-efficient policies, including carbon pricing instruments, asessential elements of proposed climate action. Countries’ activities in this regard differ based on their unique circumstances, and range from improving carbon pricing readiness schemes.

Environmental and Economic Effects for Adopting Carbon Tax Policy

The relationship between economic growth and the environment has attracted considerable attention in the literature. Numerous studies have been conducted to analyze the impact of market based instruments on the environment as well as the economy in general. Orlov (2013), Timilsina (2011) found that carbon taxes which form one of the environmental

taxes pillars are an effective tool to reduce CO2 and also other GHGs in Russia. Their results revealed introducing carbon taxes in Russia can provide large economic and environmental benefits by stemming from the use of energy commodities, optimizing the use of existing plant, substituting lower emission energy source for higher emission sources and adopting passive energy saving technologies. The authors found that after initial declines GDP and consumption exceeded baseline levels and the revenue neutral carbon tax serves to transfer income from consumers to producers and then into increased investment.

How Does a Carbon Tax Impact other Businesses, Individuals, Low Income Consumers?

Companies and individuals pay higher prices for GHG-intensive energy as the costs of carbon tax

are passed down to consumers. The extent to which these higher energy prices impact the overall income of companies and individuals depends on how the tax revenues are used. The overall impact on a company also depends on how much fossil fuel-based energy it uses, how higher energy prices affect their business, and a company’s ability to either minimize or avoid increasing costs and/or pass along costs to its customers.

In Australia, according to the Australian Competition and Consumer Commission (ACCC), 2014 approximately 75,000 businesses directly paid the carbon tax or paid an equivalent carbon tax through changes to duties and rebates. The introduction of the carbon tax from 2012 (at $23 per tonne in 2012-13) was estimated to have increased the cost of living of households by around $9.90 per week on average, and increased the Consumer Price Index by 0.7


Figure 2: Tax program initiatives taken by different countries.


per cent (at $25.40 per tonne in2014-15).For many businesses the carbon tax accounts for a larger proportion of their final electricity bills.

In Canada, (Charis, M. (2014) carbon tax totally works in the British Colombia (BC). It has also helped change the culture of energy use declining seven times as much as might be expected from an equivalent rise in the market price of gas. It made climate action plan to save lot of money of the people. That's because the tax is designed to be revenue neutral—the money it raises goes right back to citizens in the form of tax breaks.

In USA, the poor tend to spend a higher proportion of their earnings on energy, particularly utilities and transportation they use more fossil-fuel energy than others because of driv¬ing distances; geographically less temperate weather. A carbon tax would disproportionately hit these families, whose behavior is difficult to change in the short run said by Oak, R. (2011).

In China, studied by Zhixin, Z. and Ya,L. (2011) taking two parts in China(poor and rich region)found that the energy consumption and CO2 emissions are various in Chinese regions because of different economic structures and the effect of imposing carbon tax on region is different. Carbon tax will directly increase the production costs of local firms, not conducive to economic development. However, provinces in eastern region are engaged in deep processing and high tech industries with less CO2 emission, it has just little impact on economy to impose carbon tax.

How High does a Carbon Tax have to be to Effectively Reduce GHG Emissions?

It is difficult to determine the exact impact of carbon tax is expected to have on GHG emissions. Achieving the necessary GHG emission reductions depends on whether a carbon tax raises prices to a point that significantly curbs consumer demand for fuels and products that emit GHG and spurs development to deploy low-GHG technologies. Market responses to higher prices and can vary for different goods and services.

In India, a research run by Pradhan and Ghosh (2015) seven simulations were taken for the purpose of their paper. They found that there is approximately a 29 percent fall in CO2 emission intensity of GDP between 2005 and 2020 in the baseline scenario, and a 77 percent decline between 2005 and 2050. In the climate policy regimes the fall in emission intensity was found to be 32 and 88 percent for 2005-20 and 2005-50, respectively. The fall in emission intensity of GDP is due to the growth in energy efficiency over time and the gradual replacement of fossils fuels by renewable energy that can play a significant role in bringing down the climate change and other initiatives to stabilize / reduce the level of emissions.

In USA, a carbon tax is also a cheaper and often more efficient way to reduce carbon emissions than subsidies for alternative fuels. Other subsidies, like the production tax credit, have been even more effective in combination with a carbon tax that would make fossil fuels less price-competitive and would stimulate research on renewable and energy-saving technologies found by Laura, et al. (2013).

How does Carbon Tax Affect International Competitiveness of Country’s Industries?

Impacts to an industry largely depend on the level of the tax, how tax revenues are recycled, how much energy the industry uses, and the industry’s competitive position in domestic and international markets. The overall affect on competitiveness will differ by sector, and by firm, as the tax could adversely affect some individual industries and have limited impacts on other sectors.

In USA, according to Laura, et al. (2013) policies that impose a price on GHG emissions would affect the competitiveness of some producers of services and goods. Their research focused on goods, which are generally more emission-intensive than services. The switch to foreign emission-intensive products by U.S. and foreign consumers would cause foreign production and, foreign GHG emissions to increase.

In UK, Martin, et al.(2014) found that the Climate Change Agreement (CCA) plants has been justified as a means of preventing energy intensive firms from losing competitiveness in international product markets due to the unilateral implementation of the tax and to the lack of international harmonization.

How can Carbon Tax Mitigate the Global Climate Change Issue?

Climate change is a global issue and therefore requires a high level of international cooperation to tackle it. International negotiations have been launched to address the issue of climate change. The

United Nation (UN) Framework Convention on Climate Change (also known as the Kyoto Protocol) came into effect in 1997, with the purpose of limiting the release of GHG into the atmosphere. Under this Protocol the industrialized countries agreed to cut their emissions by 5.2 percent of 1990 levels, by 2008-12. However, this

target has not been met by a significant margin due to inability of many countries to implement carbon tax policy immediately (like Russia, US and China).

UN (Framework Contentions on Climate Change, subsidiary body) has implemented inventory reporting guidelines to monitor the

countries to implement GHG level, Parties should report on national GHG inventory data annually to improve the quality of their emission estimates and ensure the consistency. Figure 3shows the changes in total aggregate GHG emissions over the period 1990–2013 for the 30 reporting countries.


Figure 3: Changes in Total Aggregate GHG Emissions (1990–2013)

Abbreviations: LULUCF = land use, land-use change and forestry.

Source: United Nations, FCCC/SBI/2015/21


Greenhouse gas emissions from developing countries will likely surpass those from developed countries within the first half of this century, highlighting the need for developing country efforts to reduce the risk of climate change. While developing nations have been reluctant to accept binding emissions targets, asking that richer nations take action first, many are undertaking efforts that have significantly reduced the growth of their own greenhouse gas emissions. In most cases, climate mitigation is not the goal, but rather an outgrowth of efforts driven by economic, security, or local environmental concerns.

Bangladesh Context Review

The effects of climate change are likely to be severe for developing countries because of geographic disadvantage than developed countries, heavily dependent on agriculture, the most

climate-sensitive of all economic sectors, low incomes and vulnerabilities to make adaptation to climate change founded by Tol (2013). Bangladeshis highly vulnerable to climate change impacts. Therefore, timely and effective response to climate change is crucial to maintain the development progress so far, facilitate adaptation to climate change as well as transition to low-carbon development as such.

The Environment Policy (1992) of Bangladesh recognized the need for a comprehensive approach to address climate change and the environment. The Bangladesh Environment Conservation Act (ECA) of 1995 was passed later was amended in 2010 and 2011 to protect and improve the environment and to preserve the natural resources, biodiversity, wetlands, forests and wildlife for the present and future citizens. A National Action Plan for Short

Lived Climate Pollutants was published in January 2014. This plan, focusing on black carbon, methane, ozone and some hydro fluorocarbons, identifies the Climate Change Trust Fund as a potential funding source for initiatives to reduce these pollutants and to ensure that the funds are effective, sustainable and transparent in the long-term. The Climate Public Expenditure and Institutional Review(CPEIR) and the Climate Fiscal Framework (CFF) of Bangladesh measure two figures of climate expenditures: i) climate dimension expenditures: the total sum of expenditures of climate elements programmme and ii) climate-relevant expenditures: weighted average climate dimension expenditures, adjusted based on the level of relevance to climate change of each programme. These climate expenditure data from 2009-2014 are summarized in the table below.

Table 1: Climate Expenditures in Bangladesh (FY2009-2014)

Million USD) 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014Climate Dimension Expenditures 3,875 4,508 3,915 5,938 6,170Split by SourceGovernment 76.56% 81.16% 84.07% 82.23% 80.49%Donor 23.44% 18.84% 15.93% 17.77% 19.51%% of Total Government Budget 23.61% 24.15% 18.01% 25.67% 21.66%% of GDP 4.35% 3.99% 3.17% 4.68% 4.05%Climate-Relevant Expenditures 1,082 1,272 1,154 1,734 1,813% of Total Government Budget 6.59% 6.81% 5.31% 7.50% 6.36%

% of GDP 1.22% 1.12% 0.94% 1.37% 1.19%

Source: Bangladesh CPEIR (2012), Bangladesh Climate Fiscal Framework (2014)

Climate dimension expenditures and climate-relevant expenditures in Bangladesh amount up to USD24.4bn and USD7bn respectively over 5 years (2009-2014), averaging USD4.88bn per year. Notably, Bangladesh climate expenditures have increased over the years. As shown in Table 1, the government

is the main funder of the climate expenditures in the Bangladesh budget system, financing 80% of the total climate expenditures on average, with the rest coming from foreign sources. As a small emitter of GHG, Bangladesh spends the majority of its expenditures on adaptation to climate change.

Energy consumption and use of fossil fuels in South Asian Developing countries are growing rapidly. In 2030, the total primary energy use in Bangladesh, Bhutan, the Maldives, Nepal, and Sri Lanka could be 2.4 times that in 2005. Although there are large variations in estimates of future energy growth across studies, the

countries need a new look at their resource and energy options in order to develop a low-carbon path that can provide sustained high economic growth and simultaneously abate GHG emissions.Bangladesh is examining the possibility of a carbon tax since 2010 in conjunction with more traditional pollution charges. While the green tax (carbon tax) for pollution was enacted as part of the 2014-15 budgets, carbon pricing is not yet come in a reality.

In Bangladesh under the base case, total greenhouse gas (GHG) emissions are estimated toincrease at 5.8% cumulative annual growth rate (CAGR) to reach 168.3 million tonsof carbon dioxide equivalent (t CO2e) by 2030, with the power sector contributing about 50%(figure-4). With carbon tax, cumulative GHG emissions during 2005–2030 would be reduced by 9.4% from the base case level, with additional nuclear, wind, andmunicipal solid waste-based power generation plantwould decrease by 18.4% during 2005–2030. Cumulative GHG emissionsfrom the residential and commercial sectors would also decline. There would be no significant reduction from transport and industry sectors.

In a carbon tax regime it is necessary to stabilize GHG concentration at 550 parts per million by volume of CO2e, (which is the setting target to reduce the emission level in the country) the primary energy mix would move toward aggressive use of cleaner resources, i.e., natural gas, hydropower, biomass, municipal solid waste, wind, and nuclear energy. Thus the carbon tax would reduce cumulative GHG emissions by 9.4% in Bangladesh

due to low consumption of petroleum and coal.Approximately 10.5 million t CO2e of GHG emissions, or about 10.7% of the base case, could be avoided in 2020 at no additional cost (negative incremental abatement cost)by developing nine “No regret” and energy efficient options in residential sectors which has the highest annual GHG abatement potential of about 4.7 million t CO2e in 2020, and at noadditional cost (Table2).


Figure 4: Sectoral GHG emission under the Base case and Carbon Tax Scenario in Bangladesh

Table 2: Total GHG emission at selected incremental abatement cost, Bangladesh, 2020

The Authors are:1Assistant Professor, Department ofInternational Business, University of Dhaka2Associate Member of ICAB


The Five Year Plan (2011- 2015) focusing on accelerating growth and reducing poverty contains numerous policy initiatives that relate to climate changes targeting to increase energy efficiency by 10%,improving railways and waterways as energy efficient multi-modal transport system to reducing carbon emissions and optimizing domestic production of primary energy resources including renewable energy and a target of 500 meter-wide permanent green belt established and protected along the coast, to increase productive forest coverage by 2% points and integrated project design, budgetary allocations and implementation process of environment, climate change and disaster risk reduction for environment sustainability.

In Renewable Energy Policy (REP -2008), the objectives to promote renewable energy and includes the target of developing renewable energy resources to meet 5% of the total power demand by 2015 and 10% by 2020.

Such targets and policies can be implemented by considering the particular circumstances of a firm or industry. It is possible to set a renewable energy target for a firm consuming more energy after a limit. The connection between regulations and GHG emission outcome is more direct. The outcome of regulation on GHG emission can be predicted by evaluating the policy under certain standards like environmental effectiveness, cost effectiveness, distributional impacts and institutional feasibilities before imposing such policies.

Conclusion

Developing economies, have established ambitious targets to cap and reduce GHG emissions. However, these targets will not be achieved unless the full range of policies are considered and

implemented by the large emitting developed countries. In case for Bangladesh, it is needed to be complemented by broader reforms to liberalise financial and energy markets and strengthening technological advantage and new sources of energy growth opportunity. A key way to transform into low carbon economy is imposing regulations on renewable energy target which can create two-fold benefits for Bangladesh- environmental and energy sufficiency. Elasticity of the products should be considered in setting the carbon tax because tax imposed on carbon passes to buyers and the share that will pass on depends on relative elasticity.

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Bangladesh Climate Public Expenditure and Institutional Review (BCPEIR, 2012, 2014) available: http://www.unpei.org/sites/default/files/e_library_documents/Bangladesh limated Public_Expenditure_and_ Institutional_Review_2012_0.pdf

Charis, M. 2014. Canada Tax Policy, Available:http://www.motherjones.com/ environment/2014/03/british-columbia-carbon-tax sanity)

Chancel,L. and Piketty, T 2015,How should we tax the world’s biggest carbon emitters? Published in Paris School of Economics, Paris. Available at:https://www.weforum.org/ agenda/2015/12/how-should-we-tax-the-worlds-biggest- carbon-emitters/

Fu, M., and Kelly, J. A. Carbon related taxation policies for road transport. Efficacy of ownership and usage taxes, and the role of public transport and motorist cost perception on policy outcomes. Transport Policy, Vol. 22, 2012, pp. 57-69.

Laura, D. and Tyson, A: The Myriad Benefits of a Carbon Tax, New York Times 2013, June 18. And Effects of a Carbon Tax on the Economy and the Environment New York Times, May13, www.cbo.gov/publication/44223

Martin, R.; Preuex, L.B. D and Wagner,U.J.,2014 . The impact of a carbon tax on manufacturing: Evidence from microdata, Journal of Public Economices,vol.117, pg1- 14.

Nordhaus,W. 2013, Economist, Yale Universityhttp://www.marketplace.org/topics/your- money/my-two-cents/ economics-global-climate-change.

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Orlov, A., Grethe,H., andMcdoland ,S. Carbon taxation in Russia: Prospects for a double dividend and improved energy efficiency. Energy Economics, Vol. 37, 2013, pp. 128-140.

Pradhan,B.K. and Ghosh,J. .2015, Are the costs of climate change mitigation policies higher than the costs of climate change induced agricultural productivity shocks? A CGE analysis of India, the Institute of Economic Growth) held at the India International Center (IIC), New Delhi, on Sep.6, 2012.

Timilsina, R.,Govinda, C., Stefan and Simon M. When does a carbon taxon fossil fuels stimulate biofuels?. Ecological Economics, Vol. 70, Iss. 12, 2011, pp. 2400-2415.

Tol, S. J. Richard. 2013, Targets for global climatepolicy: An overview. Journal of Economic Dynamic & Control, Vol. 37, Iss. 5, 2013, pp.911-928.

World Bank Background Note “Carbon Pricing Readiness: Looking Ahead”. The World Bank. June 3, 2014 download:http://www.worldbank.org/content/dam/Worldbank/document/SDN/backgroundnote_ carbon-pricing- readiness.pdf. Main article: http://www.worldbank.org/en/programs/pricing-carbon#1

Zhixin, Z. and Ya, L.,(2011)The Impact of Carbon Tax on Economic Growth in China, Energy Procedia, Vol.5 (2011) Pg .1757–1761, Available online at www.sciencedirect.com


Internal auditors deal with issues that are fundamentally important to the survival and prosperity of any organization. It is concerned with evaluating and improving the effectiveness of risk management, control and governance processes in an organization. Internal auditors work with management to systematically review systems and operations. These reviews (audits) are aimed at identifying how well risks are managed including whether the right processes are in place, and whether agreed procedures are being adhered to. Audits can also identify areas where efficiencies or innovations might be made. Internal audits are organized under an ongoing program of review and advisory activity this is based on the strategic needs of an organization.

The definition of internal auditing is ‘an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes’. (Source: The International Standards for the Professional Practice of

Role of Internal Auditor to ImproveInternal Control System in Listed Companies

Chandra Shekhar Das FCA

Internal Auditing issued by the Institute of Internal Auditors)

Internal audit work is risk–based and encompasses both financial and non–financial operations of the organization. Internal auditors work within businesses and organizations to monitor and evaluate how well risks are being managed, the business is being governed and internal processes are working.

The scope and nature of audits can vary significantly but the main priority of the work is to make sure any issues that affect the survival and prosperity of the business are dealt with. The work of an internal auditor differs with that of external auditors as they look at more than financial and accounting risks. Their work helps senior management to provide evidence that they are managing the business effectively. In broad sense, we may allocate the total work time of an internal auditor into the following four categories -(a) fact finding, (b) prepare departmental work flowchart (for each department), (c) timely review the work flowchart and (d) ensure that work flowchart were followed in day to day activities.


Fact-finding is defined as gathering information and identifying important details. An example of fact-finding is when an internal auditor examines related documents and interviews witnesses to try to put together what happened. Auditor finds the fact through interviews, visual observation, and documentation review. During fact finding process, auditor should document matters which are important in providing evidence to support the audit opinion and evidence that the audit was carried out in applicable guideline. In audit

report, auditor should disclose the facts, consequences and recommendation for improvement of internal system.

A flowchart is a picture of the separate steps of a process in sequential order. Flow chart is used to develop understanding of how a process is done, to study a process for improvement, to communicate with others how a process is done, when better communication is needed between people involved with the same process and to document a process.

THE SCOPE AND NATURE OF AUDITS CAN VARY SIGNIFICANTLY BUT THE MAIN PRIORITY OF THE WORK IS TO MAKE SURE ANY ISSUES THAT AFFECT THE SURVIVAL AND PROSPERITY OF THE BUSINESS ARE DEALT WITH. THE WORK OF AN INTERNAL AUDITOR DIFFERS WITH THAT OF EXTERNAL AUDITORS AS THEY LOOK AT MORE THAN FINANCIAL AND ACCOUNTING RISKS. THEIR WORK HELPS SENIOR MANAGEMENT TO PROVIDE EVIDENCE THAT THEY ARE MANAGING THE BUSINESS EFFECTIVELY.

Internal audit team prepare flowchart for every activity. One department may perform more than one activity; in that case, that department must follow more than one flowchart. Flow chart should be approved by Audit Committee or Board of Directors.

A System Review includes determining whether the departmental work flowchart is designed and complied with to provide the firm with reasonable assurance of performing in conformity with applicable rules in all material respects. In a System

Review, the internal auditor will study and evaluate departmental policies and procedures. This includes interviewing firm personnel and examining relevant documents. To evaluate the effectiveness of the system and the degree of compliance with the system, the reviewer will test the departmental functions.

In a sound system, employee in each department must follow approved guideline. Internal auditor will ensure that approved policy/guidelines are follow in day to day operation. If there is any

deviation, internal auditor will inform to the higher authority. Hard work by the management team will be required to establish a sound operational system within the organization. Many organizations are committed to the philosophy of continuous improvement. This involves continually assessing and reassessing not only the outcomes of business processes but also the processes and systems themselves to see what improvements can be made to streamline and improve methods.


Competing Demands on Internal Audit Function

All organizational governance models recognize the central role of management as one of the drivers of organizational governance. Management’s influence on the quality of governance is significant. Management is responsible for monitoring organizational risks and implementing controls to mitigate such risks. The potential tensions that the internal audit function might have to simultaneouslyserve two Masters; management and audit committee,is shown in the side table.

Recommendations: (1) BSEC, ICAB, ICMAB, Institute of Internal Auditors Bangladesh (IIAB) may arrange training program for Internal Audit officers of various listed companies. (2)Sector wise Internal Audit guideline may be issued by respective Regulators (3) Full qualified or Part qualified accountants may be recruited in Internal Audit department (4) Internal Audit performance may be evaluated on the basis of their overall activities instead of fact findings (5) Internal Audit team will focus on internal system development.

Management Requests of Internal Audit Function> Independent evaluation of controls.> Assistance in preparing report on controls. > Evaluation of efficiency of processes.> Assistance in designing controls. > Risk analysis. > Risk assurance.

INTERNAL AUDIT FUNCTION

Audit Committee Requests of Internal Audit Function:> Assurances regarding controls, including an

independent assessment of the tone at the top.> Independent evaluation of accounting

practices and processes, including financial reporting.

> Risk analysis primarily focused on internal accounting control and financial reporting.

> Fraud analysis and special investigations.

Internal audit role now extends beyond financial control matters. It is playing a more prominent and proactive role in non-financial reporting—for example, in sustainability reporting—and it has focused its energies on the company’s operational risk factors. It has taken on a much broader role vis-à-vis emerging risks in the areas of information technology (IT), and compliance and corruption. Finally, internal audit’s role has increased further as internal auditors are now advising companies on governance processes.

The Author is aDeputy Managing DirectorPragati Life Insurance Limited


Introduction

Takaful is an alternative form of conventional insurance based on the concept of trusteeship and cooperation inspired by the beliefs of the followers of Islamic teaching. Muslim societies in different parts of the world are now practising Takaul scheme as their own way of sharing financial responsibilities to assist each other. They have invented an Islamic way of mutual assistance to deal with uncertainties of life.

Takaful is a social scheme based on the principles of brotherhood, solidarity and mutual assistance. It provides mutual financial aids and assistance to those who are members of the takaful scheme and voluntarily agree to contribute a certain amount of money for that purpose. It is a mutual agreement among the participants of the scheme. This has its origin from the concept of collective sharing of individual’s loss. Takaful, is being practised now as an alternate of conventional insurance system and is bounded by Islamic principles, rules and the laws of Islam (Shariah).

Takaful is an Arabic word stemming from the verb “kafal” which means to take care of one’s needs. Under this scheme, the members or the participants in a group

Accounting Requirementsof Takaful Operators

Kazi Md. Mortuza Ali

agree to jointly guarantee themselves against loss or damage caused by specified perils. The entire group would assist the incumbent person from the fund they have created to alleviate (indemnify) his/her loss and or to provide him/her with financial help. Takaful is a legally binding agreement between all the participants of the scheme to pay any of the members who suffer a loss as specified in the takaful certificate (policy). Takaful scheme has been evolved from the teachings of Islam i.e. on the basis of the Quaran and the Sunnah (Traditions of Prophet Muhammad P.B.U.H). The Quran says:

“Help ye one another in righteousness and piety, but help ye not one another in sin and rancour”. (The Quran 5:2) The Prophet Muhammad (P.B.U.H) said: “The believers, in their affection, mercy and sympathy to each other, are like the body, if one of its organs suffers and complains, the entire body responds with insomnia and fever” (Muslim)

Takaful, generally means joint guarantee. It is an understanding among a group of people (called the participants) who agree to reciprocally guarantee each other financially should any event (as defined in the contract) occur. The basic objective of a Takaful contract is to pay from a common fund, which is set up by the participants of the scheme. The fund thus


created may be managed by the participants themselves or through professionals or by a registered Takaful Operator. The fund is created by the equitable contributions of the participants. The Takaful operators can be registered under the relevant Companies Act or Cooperative Societies Act, Societies Registration Act or by Takaful Act. In order to ensure that a Takaful scheme operates within the principles of Islamic teachings, the transactional aspects of the system is subjected to Islamic contractual laws. Hence, Takaful contracts are based on the principles of Mudarabah (limited partnerships), which means profit and loss sharing.

The fundamental basis of Takaful scheme is that its operations do not involve any element which is not approved by the Shariah (Laws of Islam). Therefore, it is necessary that the Takaful operators should establish and maintain Takaful fund for the class or each of the Takaful schemes carried on by the operators. The assets comprised in the fund shall be applicable only to meet such part of the operator’s liabilities and expenses as is properly so attributable. The assets of the Takaful fund shall be kept separate from all other assets of the operator. This means that the fund of the

entrepreneurs of a Takaful company should not be amalgamated with the Takaful fund created by the participants of a Takaful scheme.

When a Takaful scheme is operated on the basis of mutual or cooperative principles, any surplus or deficit of the Takaful operation has to be shared by the participants, or the members themselves. But when a Takaful scheme is being operated on commercial basis, the surplus of Takaful operation has to be shared between the operator and the participants in accordance with the principles of Mudarabah. The sharing of such surplus may be in a ratio as agreed between the contracting parties. The participants are entitled to a share of surplus as the providers of the fund and the operators are supposed to have a share of the surplus as the entrepreneur and managers of the fund.

When a contract is made between the operator of a Takaful life scheme and the participants of that scheme, the concept of Tabarru (donation) is incorporated in it. This means a participant will agree to relinquish a certain amount of Takaful contributions to fulfil his obligation of mutual help and joint guarantee should any of the fellow participants

HELP YE ONE ANOTHER IN RIGHTEOUSNESS AND PIETY, BUT HELP YE NOT ONE ANOTHER IN SIN AND RANCOUR”. (THE QURAN 5:2) THE PROPHET MUHAMMAD (P.B.U.H) SAID: “THE BELIEVERS, IN THEIR AFFECTION, MERCY AND SYMPATHY TO EACH OTHER, ARE LIKE THE BODY, IF ONE OF ITS ORGANS SUFFERS AND COMPLAINS, THE ENTIRE BODY RESPONDS WITH INSOMNIA AND FEVER


under the scheme suffer a loss caused by specified perils and or hazards of life.

The sharing of surplus between the operator and the participants has to be made as per ratio fixed in the agreement. The operators are to strive prudently in order to ensure that the funds which are being managed by them are protected against undue overexposure and creates some surplus for distribution, since the operators are entitled to a share of surplus out of Takaful operations.

The operation of Takaful practices is supervised by an independent body called the Shariah Supervisory Board or Council. The Board advises the Takaful operators on the day to day operational matters in order to ensure that the Operator does not involve in its operation any element, which is not approved by the Shariah principles. The establishment of a Shariah Supervisory Board is a prerequisite before the commencement of the Takaful operation. The Board prescribes the necessary requirements for acceptability of different modes of transactions of the Takaful operators from the Shariah point of view and provide the operators a clear perception of the relevant rules and principles of Shariah.

How Takaful Suits in Islamic Economic System?

In majority of the Muslim countries, Takaful has emerged as a profit sharing business venture between the Operator and the individual members of a group of participants who desire to reciprocally guarantee each other against certain loss or damage that may be inflicted upon any one of them. However the aims and operations of a Takaful business

venture should not involve any element which is contrary to Islamic principles and law of financial transactions.

Takaful has grown not only as an innovative financial instrument, but also on religious principles. The purpose of religion is the well being of mankind. Islam as a religion seeks to order human life so as to make it actualise the pattern intended for it by its Creator. Islam is not only a religion but an ideology in the sense that the Shariah, its law, has given the Muslims a pattern of life with which to order their lives.

The Shariah is comprehensive, embracing all human activities, defining man’s relations with God and with his fellow men. The Shariah grew out of the attempts made by early Muslims as they confronted immediate social and political problems to devise a legal system in keeping with the code of behaviour called for by the Quran and the Hadith. The purpose of Islam is always to inject morality into the fabric of human relations. How the Muslims earn its livelihood, how he spends his wealth and how his wealth is to be disposed of after his death all these are the stuff of Islam. In Islam, the human aspect is more important than the material one. It relies more on moral, ethical and human aspects than on the material aspects. This is something unique in the Islamic Economic system.

Prophet Mohammad (P.B.U.H) said,

“One who eats to his hearts contents, while his neighbour starves, is not a Mumin (faithful)”

Helping neighbours, poor relations and the distressed contribute to an exploitation free society based on the principle of brotherhood.

Understanding fundamental principles of Islamic Economic System is necessary in order to have a better understanding of the role of Takaful and its suitability in the Islamic Economy. For example, right of private ownership accorded by Islam is not absolute and unconditional. The ownership is a kind of trust only. An individual may privately own and manage any kind of wealth, but he can not do with them whatever he likes. He is to regulate the uses of wealth as per the Shariah Law. An individual can make joint investment to earn profit from his investment. Takaful is a means whereby investments of surplus funds are made by the Operators and profits are distributed to the Participants i.e. to the owners of the capital.

Another fundamental principle of the economic system of Islam is that it stands for equitable distribution of wealth. Islam encourages people to be selfless helpers for one another by arousing in them feelings of sympathy. Takaful is a system where people are encouraged to contribute money for mutual help in times of need. Thus Takaful comes in for help of distressed fellow by means of mutual cooperation and joint guarantee.

The Islamic Economic system combats the accumulation of wealth and its concentration in the hands of a small minority. The Islamic Law of inheritance provides for the shifting and distribution of wealth in a manner unknown in other legal and economic systems. It divides the estate of the deceased over a wide range of beneficiaries and not on a single heir to the exclusion of others. The nominee in a family takaful scheme is only a trustee and the policy money needs to be distributed to all the heirs.

Why Shariah Based Accounting?

The emrgence of Islamic banks and Islamic financial institutions (IFIs) as relatively new organizations and the great challenge they face to successfully serve the societies in which they operate, have led them, together with specialists in Shariah and in accounting, to seek the most appropriate means through which accounting standards could be developed and implemented in order to present adequate, reliable, and relevant information to users of the financial statements of such organizations. The presentation of such information is critical to the economic decision making process by parties who deal with Islamic financial institutions and who also have a significant effect on the distribution of economic resources for the benefit of society.

The principles of Shariah strike a balance between the interests of the individual and society. It is known that investment is the foundation of economic activities in any society. However, not every individual is capable of directly investing his own savings. Accordingly, Islamic banks and family takaful operators (Islamic life insurance companies) play an important role by acting as a vehicle to attract the savings of individuals and investing those savings for the benefit of the

individuals and society.

However, to induce individuals to invest through savings with their Islamic banks and insurers it is essential that such individuals develop a trust in the ability of Islamic financial institues to realize their investment objectives. In the absence of trust in the ability of Islamic banks and insurers to invest efficiently and in full compliance with Shariah, many individuals may refrain from investing through Islamic financial institutions.

The interest in developing financial accounting standards for Islamic banks started in 1987. In this respect, several studies have been prepared. These studies have been compiled in five volumes and deposited in the Library of the Research and Training Institute of the Islamic Development Bank.

The outcome of these studies has been the formation of the Financial Accounting Organization for Islamic Banks and Financial Institutions, which was registered as a not-for-profit organization in the Kingdom of Bahrain on 27/03/1991. Since its inception this Organization has continued the efforts to develop accounting standards. Periodic meetings of the Executive Committee for Planning and follow Ups have been held with the aim to implement the plan approved by both the Supervisory

Committee ( the supreme authority of the Organization) and by the Financial Accounting Standards Board for Islamic Banks and Financial Institutions. In this respect, the Committee has retained the service of several consultants on Shariah and experts and practitioners of accounting, and bankers.

This standard defines the financial statements that should be periodically published by Islamic financial institutions including takaful oerators. This standard also establishes the general principles for the presentation of information and defines certain information that should be disclosed in the financial statements of Islamic financial institutes in order to achieve the objectives of accounting and financial reports within the limitations of financial accounting.

The objectives of financial accounting and reporting determine the type and nature of information which should be included in financial reports, in order to assist users of these reports in making decisions. Therefore, the objectives of separate financial accounting is to focus on the common information needs of users of financial reports. To do so the takaful operators must identify the users of the information in the first place.


Points Insurance TakafulPrinciples Not necessarily Shariah based Shariah Compliance is must.Contract Buying/Selling Contract Tabarru & Mudharabah Contract

(Donation & Partnership).Company Guarantor to meet liability Fund Manger/Trustee of Funds.Guarantee Given By Company Participants mutually guarantee for

each other by creating tabarru fund.Indemnity/financial Aid Company’s Fund is debited Relevant Takaful Fund is debitedInvestment Interest based mainly Interest based investment is not

allowedShariah Supervision Not required Required

Some of the key differences between conventional insurance and takaful are shown in the following table:


It is necessary to determine the rights and obligations of all interested parties in accordance with the principles of Shariah and its concepts of fairness, clarity and compliance with ethical values. This will contribute to the enhancement of the managerial and productive capabilities of the takaful operators and encourage compliance with its established goals and policies and, above all, compliance with Shariah in all transactions and events. Further, through financial reports, useful information to users of such reports will enable them to make decisions in their dealings with takaful operators.

This information should be provided principally for assisting the user in evaluating the adequacy of the Takaful Operator’s capital to absorb losses and business risks; assessing the risk inherent in its investments; and evaluating the liquidity position and the liquidity requirements for meeting its obligations and its operational requirements.

Three important reasons underpin the development of the Conceptual Framework and separate financial accounting standards for IFIs:

a) To establish a common framework for accounting and financial reporting and to help demonstrate to the common users of that the entities they are associated with comply, in form and in substance, with the principles and rules of the Shari’s in their financial and other dealings.

b) The relationship between IFIs and the parties that deal with them differs from the relationship of those who deal with conventional entities, insurance firms, mutual funds, and other organizations. Unlike

conventional entities IFIs are prohibited from the use of interest in their investment and finacing transactions and from entering into highly speculative transactions and also prohibited from entering into transactions that are not permissible by the Shariah. For instance, whereas conventional entities borrow and lend money on the basis of interest, IFI mobilizes funds through investment accounts on the basis of Mudaraba (i.e., sharing of profit between the investor who provides the funds and the IFI which provides the effort) and invests these funds in Shariah-compliant assets or instruments.

c) The information needs of the common users of finance reports of IFI are unique and specific, and, accordingly, the financial reports of such entities must reflect the nature of the relationships established with such entities and the transactions, events or conditions involving such entities.

Purposes of Financial Accounting in Takaful Operation

The main objective of financial accounting of a takaful company is to provide information through periodic reports about the financial performance, its financial position, the results of operations and cash flows, assets etc. This is necessary, because the takaful operator is responsible for fund management in a fiduciary capacity.

The financial statements are the main type of reports provided by financial accounting. However, depending on the type of entity (family, general, health, micro,

group, liability takaful) and the country in which it operates, the elements could be different and additional statements would be needed to meet the requirements of the regulatory authority and objectives of reporting.

While preparing financial statements, the common information needs of users should always be taken into consideration with respect to the qualitative and quantitative importance of the information contained in those financial statements. Information that is qualitatively or quantitatively important and or relevantly material should be presented.

Conversely the information that is not important and material may not be presented. Materiality and adequate disclosure are inter–related and relate also to the concepts of relevance and reliability. If the information is material, it should be disclosed and at the same time, information that is not disclosed is presumed to be immaterial.

Financial accounting as a process of measurement and communication frequently involves judgments. In making these judgments consideration of materiality, plays an essential role. In general, an item is regarded material if its omission, nondisclosure or misstatement would result in distortion of the information being presented in the financial statements. In deciding whether an item is material or not, its nature and its amounts both should be taken into consideration.

Objectives of financial accounting and financial reports may be summarized as follows:

a) Determining the rights and obligations of all interested

parties (stakeholders) of a takaful company.

b) Contributing to safeguard the assets and rights of all stakeholders.

c) Contributing to the enhancement of the managerial and productive capabilities of the takaful operator.

d) Providing financial reports with useful information to make decisions by the stakeholders.

e) Complying with the Shariah guidelines in all transactions and events and recording of prohibited earnings/ expenditures, if any.

Determining the Time Frame of Reports

Generally, for every commercial and noncommercial organization, financial accounting and auditing principles should aim to provide an accurate and credible information to help the present and potential users of the financial reports. The financial accounting principles need to identify the procedures to be followed to ensure accuracy and credibility. To achieve the purpose, the following processes should be followed:

a) Determining the time frame of revenue, expense, profit & loss in the income statement and timing of recognition of assets and liabilities. The basic principle for revenue recognition is that revenue should be recognized when earned. The earning process should be complete or virtually complete within the recognized time frame. This means the amount of revenue should be known and should be collectable with reasonable degree of certainty, if not already collected.

b) Assets and liabilities or financial rights and obligations should be recognized or de-recognized when they satisfy certain criteria. De- recognition is the removal of an asset or liability that no longer meets the recognition criteria.

c) The basic principle of expense recognition is occurrence either because the expense relates directly to the earning of revenues that have been realized and recognized or because it relates to a certain period covered by the income statement. Expenses that have no direct relationship to revenues but do have a direct relationship to the periods during which revenues are recognized fall in two categories:

i) Expenses representing costs that provide a benefit in the current period but are not expected to provide reasonably measurable benefits in the future. Such expenses, for example, management compensation and administrative expenses should be recognized when incurred.

ii) Expenses that represent a cost incurred by the takaful company is expected to benefit multiple periods (Furnitures & fixtures) should be allocated in a rational and systematic manner to the expected period of benefit (depreciation)

There are measurement attributes of assets and liabilities that should be measured for financial accounting purposes. For example, assets’ attributes that may be selected for measurement in financial accounting include the acquisition cost of the asset, the net realizable value/cash of the asset as of a given date, the assets’

replacement cost as of a given date or any other relevant attribute. The choice of the attributes that should be measured for financial accounting purposes should be guided by the relevant qualitative characteristics of the resulting information provided to users of financial statements.

The historical cost of an asset refers to cash or its cash equivalent paid or received or the fair value of the consideration given to acquire the asset. The historical cost of a liability refers to the amount received by the takaful company when the liability was incurred or cash equivalent expected to be paid.

Fair value is the value representing estimate of the amount of cash or cash equivalent that would be received for an asset sold or amount of cash or cash equivalent paid for a liability extinguished or transferred in an orderly transaction between a willing buyer and a willing seller at the measurement date. Fair value at the date of acquisition refers to the price paid by the takaful company to purchase the asset. When all the conditions required for the measurement of fair value (relevance, reliability etc.) are present, measurement or this attribute would be suitable as a basis for accounting measurement of a takaful company.

Measurement of the realizable value or fair value expected to be realized or paid require the periodic revaluation of outstanding assets, liabilities or other elements of financial statements. The measurement attribute is not relevant in all circumstances and, should therefore be adopted only when it enhances the credibility and usefulness of the element, as well as it is practicable and verifiable with a reasonable degree



of accuracy. To ensure reliability, the takaful operators need to (a) consider all relevant available information (b) apply logical and appropriate valuation methods and (c) relate to objectivity and neutrality in the choice of values.

Standards for Quality Accounting

Financial statements of a takaful company should be prepared on the basis of high quality accounting standards and financial accounting process which in turn lead to high quality financial reporting information that is useful for making decisions. The usefulness of information must be evaluated in relation to the objectives of presenting financial statements. The decision making objectives of presenting financial statements lead to the overriding criterion by which the alternative accounting methods or disclosure choices can be evaluated.

The specific characteristics that would make the information useful for decision making need to be defined. Also, transparency is deemed to exist when there is adequate and appropriate disclosues. Adequate disclosures means that the financial statements should contain all material information necessary to make them useful to their users. There are two main aspects to appropriate disclosure (a) proper aggregation of accounting data and (b) appropriate description and clarification.

Accounting information in the financial statements ought to be relevant and fulfill the following qualitative requirements:

a) The information should enable the user to predict the potential outcome of a current or new relationship with takaful company.

b) The information should enable the user to verify the accuracy of the prior prediction and make adjustments.

c) The information should be made available before it loses its capacity to influence decisions. Optimal frequency of financial reporting and minimal lag are important criteria of useful accounting information.

d) The information provided should be understandable, clear and concise so that it transpires meaningful to users of financial statements and not just to accountants.

Accounting methods of a takaful company should be consistent with Shariah principles which permit the persuasive evidence in the absence of conclusive evidence. Reliable accounting information should have the following qualities:

a) The information should reflect a faithful representation of what it purports to represent.

b) The information should have the common information needs of its users without bias or unfair information advantage given to any one group.

c) The information should be presented in accordance with its substance or an economic phenomenon as well as the legal form.

d) The information in the financial reports must be complete within the bounds of materiality and cost.

e) The information should be consistent from one period to another period and similar measurement/ disclosure methods should be used to similar events.

Takaful company has to follow an overall strategy and business model encompassing funds belonging to the shareholders as well as funds mobilized from the policyholders (participants). In general takaful, the operator does not accept funds in the form of investment, yet they deal in

substantial funds belonging to participants in a fiduciary capacity. The takaful operator has the authority by the contractual arrangement business model being followed to develop the strategy or investment policy in relation to the investment of policyholders’ funds (which should not be amalgamated with shareholders’ fund). Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI), Bahrain has developed several standards to be followed by the IFIs. These standards provide the detail analysis of accounting & auditing guidelines for Islamic financial institutions in the following relevant areas:

a) General presentation and disclosure in the financial statements

b) Mudarabah and Musharaka Financing

c) Provisions and reserves.

d) Investment of funds

e) Investments guidelines along with investment in sukuk, shares and similar instruments etc.

A takaful company needs to establish principles, standards or guidelines for the auditors. The auditor’s report should contain a clear written expression of opinion on the financial statements taken as a whole. Standard measure of uniformity in the form and content of the auditor’s report is desirable because it helps to promote the readers’ understanding and to identify unusual circumstances when they occur.

Auditor’s Responsibilities

The auditor’s responsibility is to audit the financial statements in order to express an opinion as to whether the statements have been prepared by national/ international standards, statutory requirements and the Shariah standards. The report should include a statement that the audit was planned and performed to obtain reasonable assurance about whether there are any financial misstatements.

The auditor’s report should clearly state as to whether the financial statements give a true and fair view in accordance with Islamic Shariah Rules and principles as determined by the Shariah supervisory council/Board and also whether the statements comply with statutory requirements.

An auditor may not be able to express an unqualified opinion when there is a limitation on the scope of the auditor’s work or there is disagreement with management regarding the implementation of Islamic Shariah Rules and principles as determined by the Shariah council. In such a situation it will lead to a qualified opinion or a disclaimer of opinion. An adverse opinion may be expressed when the effect of a disagreement is so material and pervasive to the financial statement that the auditor concludes that a



simple qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

Whenever, the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons for such opinion should be included in the report along with, unless impractible, a quantification of the possible effects on the financial statements. The auditor may disagree with management about matters such as the acceptability of accounting policies selected, the method of their application or the adequacy of disclosures in the financial statements. If such disagreements are material to the financial statements, the auditor should express an opinion which may be adverse or qualified.

While testing for Shariah compliance, the auditor shall obtain sufficient appropriate evidence that provides the auditor with reasonable assurance that the takaful company has complied with Islamic Shariah rules. The auditor shall be knowledgeable about Islamic Shariah rules and principles. However, the auditor shall not be expected to provide interpretation of these rules and principles.

The responsibility of the auditor is to form an opinion on whether the transactions of the takaful operator are in compliance with the rulings and guidance issued by the Shariah council/Board. As part of his own scope of work, the auditor shall review available documents to ensure that all types of products offered by the takaful operator have been subject to a review by the Shariah Board and shall satisfy him/herself that the Shariah supervisory board (S.S.B) has found these products to be in compliance with Shariah Rules and principles.

The primary responsibility for the prevention and detection of fraud and error lies with those responsible for the corporate governance and management of the takaful company. However, the auditor when planning and performing the audit procedures and evaluating and results thereof shall consider the risk of material misstatements resulting from fraud and error. The fact that an audit is carried out may act as a deterrent but the auditor is not and cannot be held responsible for the prevention of fraud and error. The auditor should be held responsible for negligence and misconduct if reasonable efforts are not seen to have been made in designing and planning the audit in order to detect fraud and error.

An auditor may also be responsible if he does not take any necessary action to report it to the appropriate authority. The auditor needs to assess that management has developed an appropriate system of internal control that shall also include compliance with Shariah rules and principles.

The auditor shall obtain written statements from management that it has complied with all the Shariah rulings and guidelines and it has disclosed and raised all known matters of concern relating to the fraud and error. The auditor shall also obtain all fatwas, ruling and guidelines given by the S.S.B

There are two principles which are used for the management of funds a) Management on a Mudaraba basis b) Management on the agency (Wakala) basis. Both the methods are allowed in Shariah. There is another form that combines the two methods. In the Mudaraba method the management fee of the Mudarib (takaful operator) is specified as a share of profit made by the Fund.

In case of agency method, the management fee is specified for the agent (takaful operator) as a fixed lump sum amount or as percentage of the amount underwritten. Under the third method, the takaful operator receives a basic fee plus a specified performance fee based on certain fixed rates of return being achieved. Like other forms of investments, Takaful Funds are managed in accordance with the Islamic rules and principles. The guidelines provided by Accounting & Auding Organisation of Islamic Financial Institutions (AAOIFI) in this respect are as follows:

a) Regulation of relationship between shareholder, policyholder, operator and other counteracting parties.

b) Selection of the assets represented by the shares/units.

c) The Fund cannot be invested in interest bearing deposits, or raising interest bearing loans, conventional, insurance transactions, intoxicants, gambling, pornography, unlawfull foods and drinks.

It is the responsibility of the respective Shariah Councils to examine all the documents relating to Fund investment to ensure Shariah compliance. The following financial statements should be maintained for the fund and need to be verified by the auditor:

a) Statement of Net Asset

b) Statement of portfolio investments

c) Statement of operations

d) Statement of Cash flows

e) Statement of Financial Highlights

f) Statement of Receivables

Applicable International Accounting Standards

Islamic Financial Services Board (IFSB) is an international standard setting organization which was inaugurated in November, 2002 at Kuala Lumpur Malaysia, and became operational in March, 2003. As on 2015, it has total strength of 188 members out of which 61 are supervisory and regulatory authorities, eight, inter-governmental and international organizations and more than one hundred (119) are market & professional players in over 45 jurisdictions. The organization promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the sectors providing Islamic financial services which includes banking, insurance (takaful), capital markets, sukuks, (Islamic bonds) etc. The IFSB conducts research and coordinates initiatives on industry related issues. It also organizes roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end the IFSB works closely with relevant international, regional and national organizations.

Objectives of IFSB are as Under:

• To promote the development of a prudent and transparent Islamic financial service industry through introducing new, or adapting existing, international standards consistent with Shariah principles, and recommending these for adoption.

• To provide guidance on the effective supervision and regulation of institutions

offering Islamic financial products and to develop for the Islamic financial service industry the criteria of identifying, measuring, managing and disclosing risks, taking into account international standards for valuation, income and expense calculation, and disclosure.

• To liaise and cooperate with relevant organizations currently setting standards for the stability and the soundness of the international monetary and financial systems and those of the member countries.

• To enhance and coordinate initiatives to develop instruments and procedures for efficient operations and risk management.

• To encourage cooperation amongst member countries in developing the Islamic financial services industry.

• To facilitate training and personnel development in skills in areas relevant to effective regulation of the Islamic financial services industry and related markets.

• To undertake research into, and publish studies and surveys on, the Islamic financial services industry.

• To establish a database of Islamic banks, financial institutions and industry experts.

• Any other objectives which the General Assembly of the IFSB may agree from time to time.

As on 2015 the IFSB has issued 24 Standards, Guiding principles, Guidance and technical Notes for the Islamic financial services

industry. The standards and guidelines proposed by the IFSB follow a lengthy due process which involve, among others the issuance of exposure draft and where necessary, the holding of a public hearing. The IFSB is actively involved in the promotion of awareness of issues that are relevant or have an impact on the regulation and supervision of Islamic financial organizations by conducting seminars, workshops, conferences training and dialogue in different countries.

The IFSB in an effort to guide the takaful industry towards a stable and sound financial environment published its first two standards in December 2010. The first standard IFSB -8 provides the industry with guiding principles on the appropriate governance framework for a takaful operator. The second standard IFSB 11 Standard on Solvency Requirements for Takāful (Islamic Insurance) Undertakings provides a framework for Solvency supervision of a takaful operation. Other related documents published by the IFSB - IFSB-10 (Shariah governance system) and IFSB -9 (Principles on conduct of business for Islamic financial service) also provide guidance in the areas of Shariah governance systems of takaful operators. Another important standard is IFSB – 14 which provides the standards on risk management for takaful (Islamic insurance) undertaking. The principles and recommendation set forth in IFSB – 14 are intended to help understand the risks to which a takaful operator is exposed and to provide minimum standard for the development of a risk management framework.

Objectives of AAOFI

AAOIFI (Accounting and Auditing Organization for Islamic Financial



Institutions) formerly known as Financial Accounting Organization for Islamic Banks and IFIs was established in Feb, 1990 in Algiers and registered in March, 1991 at Bahrain as a corporate non- profit organization. A very good number of institutional members and practitioners support AAOIFI. There are around 200 members from forty countries over the globe. It comprises of a General Assembly, a Board of trustee, an Accounting & Auditing Standards Board Governance and Ethics Board and a Shariah committee. The core objectives for the formulation of this corporate body are as follows:

• To develop auditing and accounting thoughts and principles for IFIs (Islamic Financial Institutions) and to craft and construe auditing and accounting standards.

• To prepare, promulgate and interpret accounting standards for IFIs and to apply them in these institutions through various means like trainings,

publications, seminars and various other relevant means.

• To evaluate review and amend any changes in the accounting and auditing standards if and when needed.

• To Approach the regulators of the IFIs or instituions offering financial service to the customers to apply the Auditing and Accounting standards published by AAOIFI.

The objectives of the AAOIFI are carried out in consonance with the Shariah rulings and the main purpose of these objectives is to enhance the trust of the users of the financial reports of the IFIs as well as to encourage them to invest in IFIs and get facilitated with their services. Accountig and Auditing organization for Islamic Finance Institutions (AAOIFI) has so far issued a total of 94 Standards-consisting of 54 Shariah Standards, 26 Accounting Standards, 5 Auditing Standards, 2 Codes fo Ethics and 7 Governance

Standards. The vision of the organization is to guide Islamic financial markets operation and financial reporting on shariah principles and rules and to provide with a standard that can support growth of the industry. The mission of AAOIFI is standardization and harmonization of international Islamic financial practices and financial reporting in accordance to shariah.

These standards give guidance on, amongst others, presentation of financial statements for Islamic financial Institutions (IFIs), accounting treatment for specific Islamic finance products and mechanisms, external auditing of IFIs, and Shariah compliance and supervision processes and framework for IFIs.

Challenges of AAOIFI & IFSB

As a primary objective (as evident from name itself), AAOIFI developed auditing standards for the industry. AAOIFI’s auditing standards have been reemphasizing the requirements of

International Standards on Auditing, except for the difference that these standards require (and somehow guide, though not comprehensively) the external auditor to provide an opinion on the entity’s compliance with Shariah rules and principles. However, later it was realized that the prime objective that AAOIFI wants to achieve is through governance standards rather than auditing standards.

AAOIFI, with regard to its governance standards, among others, is facing a precarious situation. The level of adoption of its standards is not quite good, as yet. A few countries do not adopt these standards altogether, whereas a few have made their own regulations in line with AAOIFI’s standards. These standards have not been incorporated into proper regulatory framework by any central bank or regulatory authority.

Adoption of governance standards has only been mainly on voluntary basis by Islamic financial institutions and their regulatory authorities. IFSB though an Islamic finance infrastructure body, issues global prudential and governance standards and guiding principles for the industry, broadly including banking, capital markets and insurance sectors. IFSB is a body of regulators itself, hence, it is the standard-setter of the first choice for them. AAOIFI’s standard development work has been slow.

It is important to note that in case of Shariah standards the level of acceptability and voluntary adoption is very high even if these are part of regulatory framework in a handful of countries only. In case of governance standards it is not at that level, yet it can be said that in addition to the countries that have adopted the AAOIFI governance

standards, they are also used as principle based guidance for a few countries and standard setters in addition to those who have adopted it.

After 25 years of AAOIFI’s commencement of operations, it is now a very crucial stage for AAOIFI, particularly with regard to its technical standards development role. As far as Shariah standards development role is concerned, it has strong enough presence and enjoys market leadership in the industry. This includes both situations i.e. the regulatory support in various jurisdictions and voluntary adoption / use as a guidelines in a vast majority of IFIs. However, the status and original role of technical standard setting, including that of governance standards, AAOIFI has lagged way behind its previously supplementary role of Shari’ah standard setting.

Both AAOIFI and IFSB should focus on the key areas where guidance is needed and should avoid unnecessary contradictions with other standards setters. Accordingly, AAOIFI should consider to :

Review / revise the existing governance standards; Develop guidelines and standards for internal and external Shariah audits / reviews. These will be by far more useful for the IFIs and their auditors / Shariah auditors. Develop ethical standards for IFIs. Set in motion the development of new Shari’ah governance and control standards.

For different standards, there might be a different number of workshops required. In certain cases, however, a workshop may be avoided if the respective committee and the executive team conclude that additional market insights or expert views are not required during the process.

This however, does not apply in case of public hearings, which shall take place in all situations.

The workshops will involve regulators, accountancy bodies, standard development institutions, research institutions, academicians, professional firms other relevant professionals and key stakeholders within the industry. Wherever possible, and to the maximum extent possible, workshops will



include participation across the globe.

Why we Need Standards?

There must be honesty, integrity, trust and reliability involved in all sorts of financial transactions. The role of IFSB & AAOIFI is to provide an unswerving podium to converse the problems and concern faced by IFIs and focus on the development of Islamic accounting, governance and other relevant standards. Their role is also to cater the needs and requirements of multiple countries with respect to their infrastructure and policy environment.

IFSB provides a comprehensive framework to the IFIs and all the other institutions dealing in Islamic financial services to promote and inculcate the importance of Islamic finance. It provides the significant inputs from the experts of the industry who are usually member of these standard setting bodies.. It provides regulations which are usually referred as mandatory or advisory services for meeting a specific requirements. The standards provided by IFSB are with the intent to frame regulations through different regulatory bodies, modify and amend them with respect to the countries’ requirement, update and issue new standards on various products from time to time to ensure that the Islamic financial services across the globe are regularized and standardized.

Although the involvement of regulators is very critical in the development of the standards to justify the role of these standard setting bodies but their goal is comprehensive and as the demand for Islamic finance is increasing, which bring more practicable reasoning of their valuable role in the industry. The functions of the standard setting bodies especially

the AAOIFI and IFSB are to harmonize and converge all the standards under one roof. These bodies (IFSB & AAOIFI) significantly add values to the Islamic money market, capital markets, banks, takaful operators and other relevant areas of Islamic finance like corporate governance, capital adequacy and supervisory review process.

The regulators role for applying the standard setting bodies does not look very dominant and still there is an extensive room for improvement. Since these bodies are playing their part in harmonizing the Islamic finance, other institutions must also perform in consonance with them to promulgate the idea of standardization among the Islamic finance industry. The global growth of Islamic banking and insurance is taking advantage of the diversity and flexibility in the fiqh opinions (often referred to as Shariah) to meet the challenges of growth.

While the flexibility in fiqh opinion is presently contributing to global growth, it may soon become a constraining factor in the global growth of the industry if the challenges arising out of the use of diversity and flexibility in fiqh are not properly recognized and taken care of. This is the area where Shariah standard setting bodies must perform their role in indulging and diversifying the Islamic financial services industry and should come up with the diversity in the Fiqh ruling and make their impression in the arena of market players. The AAOIFI and IFSB need to be more efficient globally as well as their significance must be incumbent with the idea that the standardized procedures and guidelines must be in consonance with the Shariah and business requirements.

The takaful industry is currently not transparent enough on details of Shariah application. AAOIFI and IFSB are performing their roles and they kept emphasizing on the transparency in the financial reporting of the financial institution to gain more trust and social capital from the investors. Shariah scholars who understand and disagree with some declared applications chose to remain silent as an expression of respect for other Shariah opinions but it is not the Shariah scholars who needs to enforce compliance of these standards rather, the Regulators must govern and set conditions to the takaful operators for the implementation of the standards.

Responsibilities of Takaful Operators Under Regulatory Framwork

The regulatory authorities in different countries have identified takaful as one of the avenues which can be used to increase insurance penetration to the Gross Domestic Product (GDP) of respective countries. Therefore, several countries have already introduced separate Takaful Act, Takaful Rules/ Regulations and or Takaful guidelines. The regulatory framework is essential for takaful operator for enhancing financial inclusion and to ensure that takaful operators do not face any problem and they can operate in a level playing field. The required legal and regulatory framework need to provide guidance on elements that are specific to the operations of takaful. The regulatory framework should be operative in conjunction with other related laws/ rules/ regulations or guidelines and circulars. It is also necessary to ensure that Shariah principles are being followed by the takaful operators.

The objective of regulatory

framework is to clearly set the duties and responsibilities of takaful operators and to provide a framework for the establishment and growth of takaful business. Takaful regulatory framework should also set the basic requirements and standards for operation and disclosure to protect the interest of participants and other stakeholders. Ultimate aim of the regulatory framework is to promote prudent management of the takaful funds in order to enhance financial resilience. The framework should promote fairness and transparency to protect the interest of participants and it should ensure the appropriateness of fees and charges imposed on the participants’ own fund tabarru/ takaful fund. The regulatory framework should also provide guidelines to impart good governance and risk management practices.

The regulators ought to provide regulatory framework which specifies the duties and responsibilities of the company Board, the Shariah Board, and operators senior management including Chief operating officer, Chief of internal audit & compliance, Chief financial officer, Chief of risk management and Chief executive officer. It is the responsibility of the Board to ensure overall effectiveness of takaful operators’ management. It will put in place an effective

oversight framework that continuously assesses the effectiveness of policies and produces of the management of takaful funds. The BOD shall have to ensure strong corporate governance processes in order to enable the takaful operators to effectively discharge their fiduciary duties towards participants and all other stakeholders.

Concluding Remarks

Compliance of Shariah rules is the essence of takaful. Structurally, takaful company is a combination of stock company and mutual organization. However, there are significant variations in takaful operation in comparison to stock companies and mutuals/cooperatives engaged in insurance business. Mutuals, cooperatives and the conventional companies are not supposed to comply with Shariah guidance, which a takaful operator must abide by. On the surface, takaful appears to be similar to mutual insurance, however, the vast majority of takaful companies operate as stock companies. The key difference is that takaful operators must have a Shariah Board to supervise and monitor the operations of takaful regarding Shariah compliance.

Takaful is guided by the Shairah law of “Muamalat” (Commercial law). Therefore, belief in religion

of Islam is not a precondition for participants, executives, shareholders and so on. But this does not mean that the stakeholders can remain ignorant or indifferent about the applicable Shariah laws and their implications in the takaful operations. One cannot be Shariah compliant, unless he/she is conversant with Shariah knowledge. Furthermore, all the stakeholders must be willing to be Shariah compliant.

Operation of takaful business purely on business motive cannot fulfill the desires of vast majority of Muslims throughout the world. A Shariah compliant takaful operator cannot charge or earn interest and they must not invest in non Shariah compliant assets. To avoid confusion among the Muslim population, there should be a consensus among Shariah scholars as to how ta`kaful is to be structured and implemented under Shariah guidelines. In this respect, local Shariah scholars must try to agree among themselves and then to come to consensus regarding structure and operational guidelines.


The Author is Director General,Bangladesh Institute forProfessional Development (BIPD) &Chief Consultant of Prime IslamiLife Insurance Limited


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