Bangladesh Bank:

Bangladesh Bank is the Central bank of Bangladesh and is a member of the Asian Clearing Union. The bank is active in developing green banking [1] and financial inclusion policy and is an important member of the Alliance for Financial Inclusion.[2] Bangladesh Financial Intelligence Unit (BFIU), a department of Bangladesh Bank, has got the membership of Egmont Group. This is the first central bank in the world to introduce a dedicated hotline (16236) for the general people to complain any banking related problem. Moreover this organization is the first central bank in the world to issue a "Green Banking Policy". To acknowledge this contribution, current Governor of this organization, Dr. Atiur Rahman was given the ‘Green Governor’ title in the 2012 United Nations Climate Change Conference, held at the Qatar National Convention Centre in Doha . After the liberation war, and the eventual independence of Bangladesh, the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank. This reorganization was done pursuant to Bangladesh Bank Order, 1972, and the Bangladesh Bank came into existence with retrospective effect from 16 December 1971.

Role of Bangladesh Bank:

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The Role of Bangladesh Bank

General role Role as govt. bank Role as a bankers of others bank

Development Others

General Role:

Issue of BanknotesMoney is a key of economy. The central bank controls the issue of banknotes and coins. Most payment these days does not involve cash but cheque standing order, direct debit, credit cards and so on. Nevertheless, cash is important as bank’s cash. Holdings are a constraint on creation of credit, as we have seen.

Acting as Banker to Other BanksThe Central bank will act as banker to the other banks in the country. As well as holding accounts with international bodies like IMF World bank. It is a common habit for the central bank to insist that the other banks hold non-interest bearing reserves with in proportion to their deposit.

Acting As Banker to Government Normally a central bank acts as the government’s banker. It receives revenuesFor Taxes and other income and pay out money for the government’s expenditure.Usually, it will not lend to the government but will help the government to borrow money by the sales of its bill and bonds.

Raising Money for the GovernmentThe government Treasury bill and bond markets are covered by the central bank. While sometimes the treasury or ministry of finance handle.

Controlling the Nation’s Currency Reserves Another main function of Bangladesh Bank is to control the nation’s currency reserves. Again by controlling the exchanging rate, it protects the value of national currency in international market. So in a short, Bangladesh Bank always attempts to maintain the value of national currency steady.

Acting as “Lender of Last Resort” When all kinds of enlisted bank or govt. cannot collect loans in times of their economical crisis from anywhere, then Bangladesh Bank is only the bank which helps as the lender of last resort.

Credit ControlTo solve the problem of inflation and deflation, Bangladesh Bank takes the task of Credit control as the guardian of country’s money market and bank management.For controlling credit central bank uses the method of opening market policy, credit budgeting policy.

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Role as govt. bank

Received and Transfer Of MoneyAs the bank of Bangladesh government, Bangladesh Bank collects money from different sectors and deposit these is various accounts without interest not only deposit these money but also transfer these fund from one place to another and one sector to another according to the instruction of Bangladesh government

Money Market ControlBangladesh Bank acts as the guardian of country’s money market as the director and controller of money market. It also controls the money currency, controls credit, stability in money supply and exchange rate of foreign currency etc. It establishes a country’s well organized and develops money market. Foreign Exchange ControlThe country’s export and import as well as international trade success rate largely depend on the good conduct and control of foreign exchange. So foreign exchange system is also controlled by Bangladesh.Determination of Foreign Exchange RateBy purchasing commodities from other country one country paid its value through foreign currency. The value of all foreign currency is not same, so right determination of foreign exchange rate is needed by performing this task central bank made easy the foreign trade.Maintaining Foreign Exchange ReserveHigh level of crisis and abundance of foreign exchange are harmful for economy. So this reason Bangladesh Bank maintains sufficient foreign exchange, so that there is no problem in case of export and import trade.

Keeping the Gold StandardThe precondition of country’s economic stability is to control countries gold standard. If the money market is stranded on the basis of gold standard, the main task of central bank is to keep gold standard.

Maintain of Government’s Fund As Bangladesh Bank is the bank of Bangladesh government. So it protects all sorts of government’s fund as a bank of government, Bangladesh Bank keeps to itself the whole amount of government’s income and expenditures from this fund according to government needs.Keeping the Government AccountBesides receiving and transferring government fund, Bangladesh Bank maintains the account of various government’s division, ministry and organizations i.e. Bangladesh Bank keeps the account of all monetary and economical transactions.

Foreign Financial TransactionOn behalf of the Bangladesh government Bangladesh Bank accomplish all sorts of foreign financial transaction. It purchases and sells foreign currency and collects foreign currency on

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behalf of the Bangladesh government in a word Bangladesh Bank perform all sorts of financial transaction with abroad on behalf the Bangladesh government.

Loan Issue and SupervisionThis bank issue loan in case of crisis of government in different terms and also helps in case of collecting loan from different sectors.

Maintenance of Relationship with Foreign BankTo make and maintains a good relationship with other foreign country. This is also a function of Bangladesh Bank. Bangladesh Bank does this task on behalf of the Bangladesh government. Without this, Bangladesh Bank also maintain good relationship with others regional and international organization, such as World Bank, IMF, A.D.B, I.D.B etc.

Counsellor and Representative of GovernmentThis bank suggests and advices government in various behinds of economical issues such as-import and export polices, investment polices etc. Bangladesh Bank acts as the financial adviser of Bangladesh government. Not only as adviser but also Bangladesh Bank acts as the agent of Bangladesh government. It performs various kinds of contracts and transactions with foreign and abroad.

Implementation of Financial Policy of GovernmentIt doesn’t merely give advice to government. It also helps in implementing of different types of financial policy without the help of Bangladesh Bank it is much more complicated for the Bangladesh government to implement financial policies and economic developments.

Revenue CollectionAs the bank of govt. Bangladesh Bank helps to collect revenue by collecting different types of tax, duty.

Maintenance of InformationBangladesh Bank does the task of collecting and reserving all sorts of information’s which are much helpful in case of various governmental planning.

Co-coordinatorBangladesh Bank plays the role of co-coordinator by maintaining relationship with others foreign banks & international economical organizations.

Enlistment of Commercial BankThrough enlistment commercial banks take various privileges of Bangladesh Bank, There is need of permission of Bangladesh Bank for establishing conducting &enlisting any other kind of banks

Custodian of the Cash Reserve of the Commercial Banks

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Every enlisted bank deposit a certain amount of their cash reserve compulsorily according to low. In Bangladesh this rate is 8%. As a result, Bangladesh Bank supervises all kinds of commercial banks & helps by profiling loan & distributing billing times of economical crisis.

Formation & Expansion of BankBangladesh Bank plays a vital role in case of formatting & expanding any kinds of new & old bank in our country. Actually without the permission of Bangladesh Bank, no new bank can be formatted as well as no branch of old bank can be opened.

Role as a bankers of others Bank:

Clearing HouseAmong various functions of central bank, the most one is accomplishing the internal transactions of all enlisted bank. For this purpose Bangladesh Bank mange a clearinghouse by the coordination of all member banks. Bangladesh Bank meets up the all sorts of relative/reciprocal transactions with in the banks.

Audit of AccountsFor building fair banking environment in the country and for controlling all other banks Bangladesh Bank arranges the accounts of audit for several times for all kinds of enlisted and all other banks.

Maintenance of Deposit Bangladesh Bank deposits a certain amount of their reserve so that commercial banks cannot use this fund as their awards.

Act As an AdvisorBangladesh Bank delivers’ suggestions or an instruction to commercial banks by providing various kinds of financial information. Bangladesh Bank helps the commercial banks as well.

Assist To Collect CreditBangladesh Bank assists to collect credit through commercial bank. Regarding this, Bangladesh Bank suggests the government apply law at a time, it also take lawful schemes. It makes a list of countries bankrupts & assists government to collect credit.

Development:

Creating Job OpportunityBy permitting and adopting developing project for opening new bank and branch, Bangladesh Bank creates enormous opportunity for employment in Bangladesh.

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Role of Central Bank to regulate commercial banks in Bangladesh:

Why central banks is heavily regulated:

► To protect the safety of the public’s saving

► To regulatory agencies are charged with the responsibility of gathering and evaluating the

information needed to assess the true    financial condition of central bank to protect the

public against loss.

► Central bank also closely watched because of their power to create money in the form of

readily spend able deposit’s by making loans and investment.-

(Law Division)

President’s Order No. 127 of 1972

THE BANGLADESH BANK ORDER, 1972

Whereas, it is necessary to establish a central bank in Bangladesh to manage the

Monetary and credit system of Bangladesh with a view to stabilizing d domestic- monetary

value and maintaining a competitive external par value of the Bangladesh Taka towards

fostering growth and development of country’s productive resources in the best national

interest.

Now, therefore, in pursuance of the proclamation of independence of Bangladesh, read

with the Provisional Constitution of Bangladesh Order, 1972, and in exercise of all powers

 

■ Banks in one form or another have been subject to the following non exhaustive list of

regulatory provisions:

1) Restrictions on branching and new entry;

2) Restrictions on pricing (interest rate controls and other controls on prices or fees);

3) line-of-business restrictions and regulations on ownership linkages among financial

institutions;

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4) Restrictions on the portfolio of assets that banks can hold (such as requirements to hold

certain types of securities or requirements and/or not to hold other securities, including

requirements not to hold the control of non financial companies);

5) Compulsory deposit insurance (or informal deposit insurance, in the form of an expectation

that government will bail out depositors in the event of insolvency);

6) capital-adequacy requirements;

7) Reserve requirements (requirements to hold a certain quantity of the liabilities of the

central bank);

8) Requirements to direct credit to favored sectors or enterprises (in the form of either formal

rules, or informal government pressure);

9) Expectations that, in the event of difficulty, banks will receive assistance in the form of

“lender of last resort”;

10) Special rules concerning mergers (not always subject to a competition standard) or failing

banks (e.g., liquidation, winding up, insolvency, composition or analogous proceedings in the

banking sector);

11) Other rules affecting cooperation within the banking sector (e.g., with respect to payment

systems).

■ In recent years regulation in banking has become less pervasive and has shifted from

structural regulation to other more market oriented forms of regulation. As a consequence

competition has come to play a very important role in the allocation of credit and in the

improvement of financial services. The capital requirements framework created in the context

of the Basel committee paved the way to the development of stronger competition in banking.

It is unquestionable that all over the world banks now face greater competition both from new

entrants in the banking sector and from other financial companies.

■. Competition authorities have not been much involved in the process of liberalization of

banking. Moreover, in several countries the enforcement of antitrust rules until very recently

has not been applicable to banking because of sectored exceptions.

■. In this light, the purpose of this report is:

• to assist policy makers and enforcement authorities (in their competition advocacy function)

in their efforts to promote competition oriented regulatory reform in banking;

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• to assist policy-makers and enforcement authorities (in their competition advocacy function)

in promoting an environment where competition law is fully applicable to banking and where

there is an appropriate institutional setting to that end; and

• to assist competition enforcement authorities in the enforcement of competition law in this

sector, with a special emphasis on merger control.

PRELIMINARY

1. (1) This Order may be called the Bangladesh Bank Order, 1972

(2) It extends to the whole of Bangladesh.

(3) It shall come into force at once and shall be deemed to have taken effect on the16th  day

of December, 1971.

2. In this Order, unless there is anything repugnant in the subject or context, -

(a) “appointed day” means the 16th day of December, 1971;

(b) “approved foreign exchange” means currencies declared as such by any  notification

under Article 18;

(c) “Bank” means the Bangladesh Bank;

(d) “Bank Notes” means notes made and issued by the Bank in accordance withArticle23;

(dd) “bank rate” means the standard rate made public by the Bangladesh Bank under

Article21;

(e) “Board” means the Board of Directors of the Bank;

(f) “Co-operative Bank” means any co-operative society or co-operative bank

Including the apex co-operative bank registered under, or any other law for the time being in

force relating to cooperative societies, one of objectives of which is to provide financial

accommodation to its members;

(g) “Director” means a Director of the Bank;

(h) “Governor” and “Deputy Governor” means respectively the Governor and Deputy

Governor of the Bank;

(i) “Government” means the Government of the People’s Republic of Bangladesh;

(j) “Scheduled Bank” means a bank for the time being included in the list of banks

Maintained under sub-clause (a) of clause (2) of Article 37;

(k) “State Bank” means the State Bank of Pakistan constituted under the State Bank of

Pakistan Act, 1956; and

(l) “Taka coin” means one Taka coin and one Taka note and two Taka coin and two

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Taka note which are legal tender in Bangladesh  THE RECENT HISTORY OF REGULATORY REFORM IN BANKING

■ In the early 70s financial systems “were characterized by important restrictions on market

forces which included controls on the prices or quantities of business conducted by financial

institutions, restrictions on market access, and, in some cases, controls on the allocation of

finance amongst alternative borrowers. These regulatory restrictions served a number of

social and economic policy objectives of governments. Direct controls were used in many

countries to allocate finance to preferred industries during the post-war period; restrictions on

market access and competition were partly motivated by a concern for financial stability;

protection of small savers with limited financial knowledge was an important objective of

controls on banks; and controls on banks were frequently used as instruments of

macroeconomic management”.

■ since the mid 70s there has been a significant process of regulatory reform in the financial

systems of most countries. This process involved a shift towards more market-oriented forms

of regulation and involved partial or complete liberalization of the following:

• Interest rate controls

Until the early 1970s controls on borrowing and lending rates were pervasive in most

countries. These controls typically held both rates below their free-market levels. As a result,

banks rationed credit to privileged borrowers. By 1990 only a handful of countries retained

these controls.

• Quantitative investment restrictions on financial institutions

Investment restrictions on banks took a variety of forms, including requirements to hold

government securities, credit allocation rules, required lending to favored institutions and

controls on the total volume of credit expansion. Compulsory holdings of government

securities, as well as having a prudential justification, also acted as a disguised form of

taxation in that it allowed governments to keep security yields artificially low with some

exceptions these controls were largely eliminated by the early 1990s.

• Line-of-business restrictions and regulations on ownership linkages among financial

institutions:

Although important line-of-business restrictions still remain in place in many countries, the

role of these restrictions has been significantly eroded or, in some cases, entirely eliminated.

For example, the separation of savings-and-loans and commercial banks has been largely

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eliminated in many countries, as has the distinction between long-term and short-term credit

institutions in Italy and the legal separation of various types of credit suppliers in Japan. Bank

branching restrictions were phased out in a number of European countries by the early 1990s.

In the US “breaking down the barriers imposed by the (1933) Glass-Steagall Act the Gramm-

Leach-Bliley Financial Service Modernization Act of 1999 permits banks, securities firms,

and insurance companies to affiliate within a new structure – the financial holding company”

• Restrictions on the entry of foreign financial institutions

There has been significant liberalization of cross-border access to foreign banks. In particular,

there are now in place a number of international agreements on trade in banking services,

including GATS, NAFTA and the EC. In particular, in the European Union, the second

banking directive (89/646/EEC) forbade the obligation for banks established in one Member

State to seek authorization from other Member States when they intended to establish a

branch in their territory. In many countries however the entry of foreign banks is still made

more difficult than that of domestic ones.

• Controls on international capital movements and foreign exchange transactions

Liberalization of controls on capital movements is now virtually complete in OECD countries

and in many developing countries as well. Some controls remain on long-term capital

movements, particularly with respect to foreign ownership of real estate and foreign direct

investment. There also remain important restrictions on international portfolio diversification

by pension and insurance funds. The origins of regulatory reform

■ Regulatory reform was driven by a number of inter-related factors, including:

• The diminishing effectiveness of traditional controls due to financial innovation (including

the difficulty of isolating domestic markets) and rapid technological development;

• The development of various types of regulatory avoidance (such as the development of

offshore financial centers and off-balance-sheet methods of financing);

• Competition between international financial centers;

• Competition with non-banks for many services (consumer credit; small business loans;

mortgages; etc.);

•Competition between financial institutions under different regulatory environments; and,

finally,

• Multilateral agreements liberalizing cross-border banking activities.

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BANKING REGULATION: THE RISK OF BANK RUNS AND OF MORAL HAZARD IN BANKING AND THEIR EFFECTS ON THE ECONOMY

It is widely accepted that in the absence of market failures, open and competitive markets

yield strong incentives to efficiently meet the demands of consumers and to adapt to changing

demands and technology over time. With very few exceptions, in the absence of a market

failure there is no economic justification for regulation. 16. The most important rationale for

regulation in banking is to address concerns over the safety and stability of financial

institutions, the financial sector as a whole, or the payments system. The description and the

evaluation that follows necessarily reflect the views of competition authorities. With only one

exception, no bank regulator has reviewed this Report, which therefore, does not necessarily

reflect the positions and the opinions of bank regulators. · The risk of bank runs

All banks operate in conditions of fractional liquidity reserve. The great majority of banks

liabilities are very liquid deposits redeemable on demand. The great majority of their assets

are instead much more illiquid loans. This situation leads to the problem that if all depositors

demanded their deposits back at the same time, any bank (even if perfectly solvent) would

face serious problems in meeting its obligations vis à vis its depositors. A single bank might

obtain refinancing on the financial market but the problem would severely persist in cases of

low liquidity on the market or if the issue concerned a big portion of the banking sector. 18. It

is well known in the literature that whenever depositors start fearing the insolvency of their

bank, their first most common reaction is to go and withdraw their deposits creating serious

problems to the banks. Such behavior is normally referred to as a bank runI7. ·The risk of excessive risk taking (moral hazard) in banking

Banks grant loans normally financed by the deposits they received. This is by itself a

powerful incentive for banks to grant credit in a not sufficiently prudent way and to take in

too much risk. In fact it is well known in the literature that with debt financing, while the risk

of failure of the financed investment is mostly carried out by the bank depositors, in the case

of success profits accrue mostly to the banks good example of this deviating behavior is the

Asian financial crisis of 1997 that is mentioned further below. In general, however, this

incentive is somehow mitigated by the possibility that the market, both via depositors and

other banks, could monitor the risks assumed by the bank’s management.

The main purpose of regulation is to avoid the highly negative consequences for the economy

of widespread bank failures. There are two main strands of arguments for banking regulation.

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– The first focuses on the systemic dangers of bank failures, while the second on the need for

security and stability in the payments system. ·Systemic dangers of a bank failure

The main argument for bank regulation focuses on the possibility of systemic or system-wide

consequences of a bank failure. In exemplarity that the failure of one institution could lead to

the failure of others. This argument is summarized by Feldstein as follows: “The banking

system as a whole is a ‘public good’ that benefits the nation over and above the profits that is

earns for the banks’ shareholders. Systemic risks to the banking system are risks for the

nation as a whole. Although the management and shareholders of individual institutions are,

of course, eager to protect the solvency of their own institutions, they do not adequately take

into account the adverse effects to the nation of systemic failure. Banks left to them will

accept more risk than is optimal from a systemic point of view. That is the basic case for

government regulation of banking activity and the establishment of capital requirements-

It is possible to distinguish two mechanisms by which the failure of one bank could lead to

the failure of other banks or other non-bank firms:

(a) The failure of one bank leading to a decline in the value of the assets sufficient to induce

the failure of another bank (“consequent failure”) and

(b) The failure of one bank leading to the failure of another fully solvent bank, through some

contagion mechanism (“contagion failure”) REFORM OF BANK REGULATION AND MARKET POWER

On the credit side competition between banks has led to lower spreads and greater care in

financing sound projects. Classes and Leavens (2005) write: “More competitive banking

systems are better in providing financing to financially dependent firms. There is support for

the view that more competition may reduce hold up problems and lower the cost of financial

intermediation, making financially dependent firms more willing to seek (and more able to

obtain) external financing” Furthermore in most countries, including developing ones, recent

market developments have led to strong rivalry by non bank financial institutions for the

supply of some banking services, for example consumer credit or factoring services to small

and medium size firms. This implies that banks market power is somehow disciplined also by

non banks.

■Ensuring that banks are properly informed of the debt exposure of potential

borrowers:

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Especially in developing countries, however, competition among banks may be impaired

because information on the credit worthiness of potential borrowers is not readily available.

Without a proper supplier of information on borrowers credit worthiness, each single bank

has an informational advantage over any other bank on the credit worthiness of its customers.

New banks will be very reluctant to lend to customers of other banks, if they are not fully and

readily informed on the total debt exposure of each potential borrower. A competitive

financial market, where banks compete for customers and potential borrowers choose among

alternative banks as suppliers of funds, can only develop if banks are fully informed on the

total exposure of each customer. Otherwise, if information is privately held by each bank, the

market for credit will be segmented and banks will only lend to customers they personally

know.

■Relationship banking: Relationship banking is particularly efficient when firms are small

and accounting rules are not very effective. On the other hand a marked based system is

particularly effective when firms are relatively large and accounting statements transparent.

Moreover, “limitations on competition in a relationship-based system do not just give the

financier (market) power, but also strengthen his incentive to cooperate with the borrower”.

This implies that a relationship-based system tends to smooth firm specific shocks

internationally, while an arm’s length system is much less able to provide such contingent

insurance. On the other hand relationship-based systems, because of the liquidity of the

financed assets, have an incentive to increase financial risk more than arm’s length systems.

Market based financing “permits more flexibility in explicit contracts, which allows the

system to absorb adverse shocks. Moreover the healthy can be distinguished from the

terminally ill after a shock and can be dealt with differently – not everyone has to sink or

swim together as in the relationship system” Relationship banking does not imply that

potential borrowers do not have but one choice with respect to the bank that would assist

them. There can be strong competition among banks also with relationship banking. In fact, in

some countries, where the banking industry is sufficiently competitive and the industrial

sector is sufficiently developed, each local bank may be willing to invest in order to develop a

credit relationship with each local firm.

■ Arms-length and relationship banking: In many ways the two systems (arms-length and

relationship banking) coexist in the same economy. Regulators should therefore not impose or

favor one system over the other and should introduce regulatory provisions that are as much

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as possible neutral with respect to the type of relationship between banks and their creditors..

Regulators should therefore maintain a centralized system of monitoring the full exposure of

different firms with respect to the banking system, and more in general with respect to the

financial sector at large, requiring all financial institutions to communicate to the regulator all

loans granted to a given (consolidated) borrower and their degree of utilization. The increase

in transparency that such a system of centralized monitoring of debt exposure would provide,

may help the development of arm’s-length financing, and in any case reduce the market

power of each bank with respect to its customers. STANDARD INSTRUMENTS OF BANK REGULATION

■ This section of the paper provides a description of the most standard instruments of bank

regulation: deposit insurance, capital adequacy requirements and lender of last resort. These

three policies are linked one with the other. Deposit insurance protects the smallest depositors

from a bank bankruptcy and prevents bank runs. Capital adequacy requirements are necessary

in order to make sure that bank managers follow a responsible credit policy, in the absence of

an effective control on the part of depositors. Lender of last resort policies further reduce the

risk of banks bankruptcies providing banks with Emergency Liquidity Assistance facilities

that are designed to avoid that temporary situations of liquidity lead to the insolvency of the

bank.

Deposit insurance

■ Deposit insurance is a guarantee that all or part of a depositor’s debt with a bank will be

honored in the event of bankruptcy. The specific form of insurance schemes can vary in a

number of ways, including the fee structure (flat fee versus variable, risk-related fees); the

degree of coverage (full versus partial coverage, maximum limits); funding provisions

(funded versus unfunded systems); public versus private solutions; compulsory versus

voluntary participation.

■ Deposit insurance reduces (and in most cases eliminates entirely) the incentive to “run” on

the bank in the event of financial difficulty. Therefore it reduces the possibility that a

temporary situation of illiquidity and rumors on the insolvency of the bank actually lead to

the failure of the bank. Furthermore, deposit insurance prevents the “chain reaction” that can

also be started associated by the run on a single bank, so that it reduces the possibility of

contagion in the banking system.

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■ A drawback of its introduction is however the fact itself that from the point of view of the

depositor, deposit insurance makes all banks equally attractive. It almost completely removes

the incentive on the depositor to determine the risk of a bank and the need for the bank to

compensate the depositor for bearing bank-specific risk by including a bank-specific risk

premium in the interest paid to the depositor. Similarly, the depositor faces little incentive to

diversify her portfolio of assets held in banks.

■ The effect of deposit insurance on the incentives of the bank depends upon the nature of the

insurance contract (and also on any other complementary regulatory measures). In particular,

the effect of the deposit insurance on the bank will depend on whether or not the insurance

premium paid by the bank depends on the individual bank’s risk.

■ In the case where the premium is completely unrelated to the risk of a particular bank (i.e.,

the “fixed fee” system), there is clearly an incentive for the bank to attempt to increase its

profits by either increasing its revenues (by lending to higher return but riskier projects) or by

reducing its costs (by reducing its reserves). Both actions increase its risk. This is the well-

known “moral hazard” problem of deposit insurance. Fixed fee deposit insurance creates

incentives for banks to take on more risk in their operations than they would without deposit

insurance. “This effect was apparent almost as soon as deposit insurance was adopted in the

1930s, when bank capital ratios dropped from 15% to around 6%”

■ Deposit insurance, especially if extended to all deposits, by reducing the market incentives

for prudent management, may have the perverse incentive of making banks riskier.When this

moral hazard extends across all financial institutions, the macroeconomic consequences can

be very significant. .

■ The problem of moral hazard and the need for additional regulatory measures can be

reduced if the insurance premium is related to the risk of the insured bank. “An efficiently

organized insurer would graduate insurance premier according to the risk of the bank’s asset

portfolio and the adequacy of its capital holdings. Such a system would minimize the danger

of adverse incentive effects … Under such a system, the individual bank bears the

consequences of a higher risk portfolio or a lower capital-deposit ratio, in the form of a higher

insurance fee.

POLICY ON CAPITAL ADEQUACY OF BANKS

New arrangements for assessing the capital adequacy of banks on the basis of Risk -weighted

Assets replacing the capital-to-liabilities approach were introduced vide BRPD Circular No. 1

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dated 08.01.1996 .The revised policy on capital adequacy takes account of different degrees

of credit risk and covers both on-balance sheet and off-balance sheet transactions. The

following broad outlines containing certain amendments made thereto from time to time and a

few new instructions are issued for compliance by banks:

1. Definition of Capital

For the purpose of supervision, capital will be categorized into two tiers: Tier 1 i.e., Core

Capital comprises the highest quality capital elements and Tier 2 i.e., Supplementary Capital

represents other elements which fall short of some of the characteristics of the core capital but

contribute to the overall strength of a bank.

2. Minimum Capital Standards

Each bank will maintain a ratio of capital to risk weighted assets of not less than 9% with at

least 4.5% in core capital and this requirement will have to be achieved by 30 June 2003.

However, minimum capital requirements (paid up capital and reserve) for all banks will be

Tk.100 core as per Bank Company (Amendment) Act, 2003. Banks having capital shortfall

will have to meet at least 50% of the shortfall by 09 March 2004 and the rest by 09 March,

2005.

3. Risk-weighted Assets

Both balance sheet assets and off- balance sheet exposures are to be weighted according to

their relative risk. Presently, there are 4 (four) categories of risk weights ¾ 0,20,50 and 100

percent. Off -balance sheet transactions to be converted into balance sheet equivalents for the

purpose of assessing capital adequacy before assigning a risk weight as shown in section

10(a) of Annexure-II. Four categories of credit equivalents of 0,20,50 &100 percent will

apply.

4. Implementation

Banks are advised to assess their capital position on half-yearly basis i.e., on 30 June and 31

December each year and report the same to the Off-site Supervision Department of

Bangladesh Bank within one month from the end of respective half-year. Banks are also

advised to contact Banking Regulation and Policy Department (BRPD) of Bangladesh Bank

in case of any confusion or ambiguity.

Regulatory reform, competition and depositors’ switching costs

While, in many countries banks benefited from the new opportunities originating from

regulatory reform by offering new and improved financial services to customers, switching

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costs for consumers remained quite high, so that competition between banks did not increase

proportionately. There is now substantial evidence that the widening range of services offered

by banks was not associated with a significant increase in the elasticity of each bank residual

demand (as should have been expected because of greater competition). The effect of

liberalization on the market power of banks with respect to customers of banking services

was probably not too strong.

■In recent decades, besides the traditional deposit-taking banks have entered quite a number

of new related markets, such as (among others): 1.Credit cards services, paying bills for

depositors 2. Consumer owns 3.Mortgages 4. Life insurance 5.Financial consulting;

6.Management of investment funds;

Asset management By providing all these services under one roof, banks reduce the

transaction costs depositors would have faced had they been obliged to negotiate for receiving

these services with a number of different providers. At the same time, however, by offering

all these services, banks have made it more costly for depositors to switch bank. In fact

should depositors decide to move to a new bank they would need to:

1) Receive new credit cards (with a different number and expiry date) that would need to be

communicated to any service provider, for example the cable TV company, should its bills

being paid by credit card;

2) Inform the new bank about all utilities whose bills checking account debiting the depositor

checking account; was paying;

3) Transfer the depositor all purchased stocks or bonds to the new bank;

4) Maintain the checking account of the old bank just to service the mortgage;

5)Communicate to all correspondents the new banking coordinates. The increase in switching

costs tends to make steeper the residual demand curve each bank faces, so, even though

competition may be increased in each of the markets where the bank expanded, the overall

market power of each bank is increased, at least with respect to existing depositors. Or, to say

it differently, in order for a bank to convince depositors of another bank to switch, the

improvements in the quality of services it offers must be much larger than it would be the

case in the absence of switching costs.

■Depositors may also face switching costs because of strategic behavior on the part of banks.

For example while opening a checking account may be free, banks may require that a high fee

be paid when closing an account. There are good reasons why a policy of charging for closing

17

an account would be followed by all banks and would not be competed away: Each bank

benefits by market segmentation and no bank benefits by unilaterally reducing exit costs.

■This is why it is unlikely that banks would engage autonomously in switching costs

reducing activities, given that this would imply reducing profits for each bank and also for the

industry as a whole. Pro-competitive rules and regulations may contribute to make switching

easier, so as to ensure that all the benefits originating from greater competition actually reach

consumers.

■Regulation could impose on all banks disclosure rules with respect to all the costs involved

in switching, so that consumers are made aware of these costs and competition among banks

may indeed prove to be very useful.

■With the advent of the internet, banking is no longer necessarily a local industry, not even

for the smallest depositor, at least in countries with widespread internet literacy. Since

banking technology is the same across the world it is extremely important that regulation does

not limit the extent of the market with unjustified restrictions. This is particularly important in

jurisdictions that use the same currency. For example, the introduction of the Euro in 2002

could have made depositors indifferent as to the nationality of the bank where they would

deposit their savings, leading to a very significant enlargement of consumer choices and of

competition. Notwithstanding the regulatory interventions in such directions, such as with

regulation (EC) 2560/2001 on cross-border payments in the Euro area, the high costs

traditionally associated with dealing with foreign banks have remained. As a consequence,

the residual demand of a bank localized in one country remained substantially equal to what it

was before the Euro, while the removal of the higher costs associated with cross border

transactions would have probably led to a significant increase of the elasticity of its residual

demand.

BANKING AND THE FINANCING OF DEVELOPMENT:

Cross country comparisons show the importance of a well developed banking sector for

achieving both long term economic growth and the reduction of poverty. Countries with

better developed banking systems and capital markets have shown higher growth rates.

■Finance is always necessary for growth. In particular ongoing business needs finance for

operation and for expansion. The same is true for launching new business enterprises.

Households need to have safe deposits, access to the payment system, to mortgages and

consumer loans. In this respect the experience of many developing countries shows that the

18

banking sector is generally responding well to the needs of the wealthy households and of the

established firms. More in general, banking seems to develop well with firms and people that

are able to offer collateral or have formal employment so as to provide some guarantee with

respect to future income, less well with people and firms that are unable to offer guarantees.

However, while in developed countries this second group of customers is relatively small, in

developing countries it represents the majority, so that banks tend to provide services only to

the minority of the population. In banking, while the competitive solution with little

regulation is appropriate for these existing banks so as to eliminate distortions, favoritism and

high interest rate spreads. As an example, the Pakistani competition Authority in its

submission to the OECD Global Forum on Competition in February 2005 writes: “The

financial sector was deregulated and … with the economic liberalization, new banks,

financial institutions, leasing companies, housing finance, investment companies and foreign

banks have come up, which has created a competitive milieu”

■Regulatory reform and competition are able to expand the reach of banking to the

underprivileged. On the one hand, especially in countries where the majority of potential

borrowers do not have a collateral to offer, conventional banking may lead to a non optimal

equilibrium, where quite a number of low risk project are not financed and high-risk

borrowers end up having to pay higher interest payments. On the other hand technical

progress and flexible regulation have made it possible to provide banking services also to the

poor. For example Dymski (2003) writes: “Lemon Bank (a micro credit bank)… offers credit

and debit cards and savings accounts to the unbaked. Its minimum amount is tiny, and

checking services are available without annual fees. … Lemon Bank, which has 3600 access

points, many in favelas and in drugstores, is about to launch a media campaign aimed at

opening 100,000 new accounts by year’s end.”

■As for the lending side, in recent years in many developing countries specialized lending

institutions started to use unconventional methods to lend successfully to the poor, starting

what is now known as micro credit. Considerable evidence shows that such unconventional

lenders were able to lend to borrowers that no conventional borrower was willing to attract

and nonetheless performed much better, in terms of financial self sufficiency and repayment

rates, than would conventional banks in comparable loans. The reason of this success, that is

not limited to the Grameen Bank in Bangladesh, is the use of unconventional methods of risk

reduction: forming groups of borrowers that are jointly responsible for each other’s loans

19

(joint liability) and intense monitoring of clients, relying heavily on the promise of repeating

the loan.

Credit Rating

 In terms of the BRPD Circular Letter No. 05 dated May 29, 2004 it was made mandatory for

the banks to have themselves credit rated to raise capital from capital market through IPO.

The issue has been reviewed further and with a view to safeguard the interest of the

prospective investors, depositors and creditors and also the bank management as a whole for

their overall performances in each relevant areas including core risks of the bank, it has now

been decided to make it mandatory from January 2007 for all banks to have themselves credit

rated by a Credit Rating agency.

Banks are, therefore, advised to take necessary measures from now on so that they can have

their credit ratings in all relevant areas as well as the bank management.

Banks will be required to complete their credit rating by June 30, 2007. The credit rating will

be an ongoing process i.e. credit rating should be updated on a continuous basis from year to

year, within six months from the date of close of each financial year.

The rating report completed in all respects be submitted to Bangladesh Bank and made public

within a period of one month of the notification of rating by the credit rating agency.

Banks will disclose their credit rating prominently in their published annual & half yearly

financial statements.

Prudential Guidelines for Consumer finance and Small Enterprise Financing:

 Due to significant increase in credit disbursement in the arena of Consumer Financing and

encouraging credit flow in the Small Enterprise Financing sector in the recent time, two

separate guidelines have been issued to the banks for better management of credit in those

two sectors where-in loans will have to be classified into 8(eight) categories (in light of Credit

Risk Grading Manual). Banks have been advised to implement the guidelines by 31

December 2005. Bangladesh Bank will monitor the progress of implementation of these

Regulations/Guidelines through its on-site inspection teams through routine inspection.

Guideline on Information & Communication Technology for Scheduled Bank

Bangladesh Bank has forwarded guidelines to provide the industry with IT guideline of

‘minimum’ security standards for scheduled banks with a view to ensuring security in IT

setup as well as in IT operations by taking adequate measures to prevent the information from

unauthorized access, modification, disclosure and destruction so that customers’ interest is

20

fully protected. Banks are advised to follow the Guideline in their IT area and implement all

the security standards by May 15, 2006.

Implementation of Credit Risk Grading Manual

With the aim to fully implement a Risk Grading System, an Integrated Credit Risk Grading

Manual has been developed and forwarded to the banks. Banks are advised to implement

Credit Risk Grading (as described in the manual) by March 31, 2006 for all exposures

(irrespective of amount) other than those covered under Consumer and Small Enterprises

financing Prudential Guidelines and also under The Short-Term Agricultural and Micro-

Credit. Banks are also advised to submit a compliance report by April 15, 2006 to the effect

that the Credit Risk Grading has been put in place. Risk Grading Matrix provided in the

Manual will be the minimum standard of risk rating and banks may adopt and adapt more

sophisticated risk grades in line with the size and complexity of their business. Bangladesh

Bank will monitor the progress of implementation of the manual/guideline through its on-site

inspection teams during routine inspection.

1o years Inflation rate in Bangladesh:

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

4.2% 5.1% 5.2% 6.8% 8.8% 6.5% 6.5% 7.5% 8.5% 7.57%

21

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1

2

3

4

5

6

7

8

9

10

4.2

5.1 5.2

6.8

8.8

6.5 6.5

7.5

8.5

7.5

Inflation

Series 1

Analyzes:

In 2004 inflation rate is 4.1 % .the next year 2005 its increase 1% and getting 5.1% but the next year 2006 its only increase o.o1% and getting 5.2%.In 2007 inflation rate gets 6.8% and next year 2008 its increase 2% and getting 8.8% but 2009 its decrease 2.3% and getting 6.5%. No change in 2010, its 6.5 but the next year 2011 its increase 1%and getting 7.5%. 2012 increase by 8.5% and 2013 decrease 1% and same in 2011 7.5%.

22

Risk free interest Rate:

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

5% 5% 5% 5% 5% 5% 5% 5% 5% 5%

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1

2

3

4

5

6

5 5 5 5 5 5 5 5 5 5

Risk Free Rate

Series 1

Analyzes

There is no movement in risk free rate because last 10 years risk free rate is same.

23

Relationship between inflation rate and risk free rate:

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

2

4

6

8

10

12

14

16

4.2

5.1 5.2

6.8

8.8

6.5 6.5

7.5

8.5

7.5

5

5 5

5

5

5 5

5

5

5

Inflation & Risk Free rate

Risk free rateInflation

24

HISTORICAL BACKGROUND OF THE EXIM BANK

EXIM Bank- Export Import Bank of Bangladesh Ltd. was named at first as BEXIM Bank BEXIM stands for Bengal Export Import of Bangladesh. This new commercial Bank was opened in August 03, 1999 with some new innovative visions in customer services. The Bank received the certificate of incorporate no.C-37864 (2164)/99 under the commencement of the business on the same day by the section 150(2) under companies Act. A part from the head office in Dilkusha C/A, it stared its first local branch in Motijheel C/A simultaneously in order to provide all kinds of Banking support to the clients. On December 02, 1999 the second branches both in Dhaka City and other cities. Now it has twenty-five branches in the country.

OVERVIEW OF THE BANK:

Exim bank is only one export import bank in our country. It was established in 1999. The Bank starts functioning from 3rd August, 1999 with its name as Bengal Export Import Bank Limited. On 16th November 1999, it was renamed as Export Import Bank of Bangladesh Limited. EXIM Bank is using the T24 Islamic Banking Solution of Temenos which is already a recognized world leader in banking software technology with over 700 installations in over 125 countries, and more than 40 installations for Islamic Banking. EXIM Bank extended all Islamic banking services including wide range of saving and investment products, foreign exchange and ancillary services with the support of sophisticated IT and professional management. The investment portfolio of the bank comprises of diversified areas of business and industry sectors. The sectors include textiles, edible oil, ready-made garments, chemicals, cement, telecom, steel, real estate and other service industry including general trade finance. The bank has given utmost importance to acquire quality assets and is committed to retain good customers through customer relationship management and financial counselling. At the same time efforts have been made to explore/induct new clients having good potentiality to diversify and create a well-established structured investment portfolio and to minimize overall portfolio risk. International Award –“ International Diamond Prize for Excellence in Quality" award and "World Finance" award.

Implementation of the world renowned Core Banking Software (TEMENOS T24) and Conversion from Conventional Banking to Shariah Based Islamic Banking.

25

Exim Bank has provided. At least 2% of our annual profit of every year is put aside for the foundation to conduct Corporate Social Responsibilities (CSR) activities. The mainstream CSR activities that are carried out through this foundation are Female Employees' Interest Protection Policy" of EXIM Bank.As per the Service Rules for the Employees of EXIM Bank, 30th November 2006, Chapter IX, Section 9.1.1. Points (f) are covered disciplinary action against any offence involving moral turpitude. In addition to that, to encourage a healthy & cordial work environment, the following policy has been introduced and put in effect for well-being of the female employees of the bank.

MISSION:

The mission of the Exim bank is Provide quality financial services especially in Foreign Trade, Continue a contemporary technology based professional banking environment, Maintain corporate & business ethics and transparency at all levels, Sound Capital Base, Ensure sustainable growth and establish full value to the honourable stakeholders, Fulfil its social commitments and Above all, to add positive contribution to the national economy.

VISION:

The vision of Exim bank is ‘Together Towards Tomorrow’. Export Import Bank of Bangladesh Limited believes in togetherness with its customers, in its march on the road to growth and progress with service.

PRESENT SITUATION OF EXIM BANK LTD

Authorized Capital: The authorized capital of the bank at present remained at Tk. 20000 million .

26

Paid up capital: Tk. 10,515 million.

Reserve fund: Reserve fund Tk.3, 954.5million.

Face Value: Tk. 10

Profit/ (Loss) after tax: Tk. 2157,631,285.

Retained Earnings: Tk. 1,367,293,534.

Total Liabilities: Tk. 150,447,727,800.

NAV per share: Tk. 15.83( 2011 adjusted )

EPS (As per prospectus): Tk.2.05( 2011 adjusted )

Cash: 26,80,760,985Assets: 167,056,626,119

Investments : 118,219,992,997

Financial performance:

Sl. No.

Particulars 2008 2009 2010 2011 2012

1 Authorized Capital 3500.00 10000.00 10000.00 20000.00 20000.00

2 Paid-up Capital 2677.75 3373.96 6832.27 9223.56 10514.86

3 Shaerholder’s Equity 4989.20 6717.21 12474.85 14484.22 16641.86

4 Total Capital (Tier 1+ Tier 2) 5763.89 7718.89 13957.40 16109.56 18214.31

5 Statutory Reserve 1532.55 2092.97 3154.76 3849.78 4587.47

6 Total Assets 68446.46 86213.37 113070.98 129874.42 167056.63

7 Total liabilities 63457.26 79496.16 100596.13 115390.20 150414.77

8 Deposits 58833.06 73835.46 94949.40 107881.21 140369.66

9 Investment(General) 53637.68 68609.91 93296.65 99699.63 118219.99

10 Investment(Shares & Securities exld.subs)

2894.02 2189.54 4522.04 6734.03 10345.38

11 Total Contingent liabilities 26070.57 30109.11 55098.36 54929.92 63950.48

12 Total risk Weighted Assets 53428.99 69058.87 140251.40 148053.70 166531.66

27

13 Total Fixed Assets 293.53 381.98 463.74 467.98 433.0920357.48

14 Total income 8356.82 10383.62 13723.95 15801.88 15023.14

15 Total Expenditure 5838.43 7201.84 7830.16 11846.06 5334.35

16 Profit before provision and tax

2518.39 3181.78 5893.79 3955.82 3688.45

17 Profit before tax 1989.55 2802.12 5308.95 3475.06 2157.63

18 Net profit after provision and tax

1096.63 1694.10 3476.01 2009.37 270081.50

19 Foreign Exchange Business 156434.57 162604.61 227966.60 254407.47 143314.40

a) Import Business 78540.49 83911.51 129570.73 128445.77 120996.96

b) Export Business 76465.62 76240.77 95359.45 122217.34 5770.20

c) Remittance 1428.46 2452.33 3036.42 3744.36 398

20 No. of Foreign Correspondent

278 333 354 336 131147.17

21 Profit earning assets 56192.52 69006.56 97901.97 109707.50 35909.46

22 Non Profit earning assets 12253.94 17206.81 15169.01 20166.92 84.22%

23 Investment as a % of total Deposit

93.14% 92.92% 98.26 92.42% 10.94%

24 Capital adequacy Ratio 10.79% 11.18% 9.95 10.88% 10%

25 Dividend 26% 35% 35 14% 0

Cash 0 0 0 0 10%(proposed)

Bonus 26% 35% 35 14% 9.96%

Rights Share 1r:2 15.83

26 Cost of found 9.52% 9.09% 7.10 9.15% 2.05

27 Net Asset Value per share 186.32 199.09 18.26 15.70 10.14

28 Earning per share (EPS) 40.95 50.21 3.77 2.18 1.45%

29 Price earning ratio (times) 7.85 7.52 11.34 12.76 139482

30 Return on Assets (ROA) after tax

1.83% 2.19% 3.54 1.65% 1909

31 No. of shareholders 24387 29302 99882 126681 72

32 Number of Employees 1312 1440 1686 1724

33 Number of Branches 42 52 59 62

28

Balance sheet

Particular 2008 2009 2010 2011 2012

Property and Assets

Cash

In hand (include foreign

currency)

with bank and its agent banks

(including foreign currency)

470456231

6117457992

6587914223

502312143

8714624948

9216937091

738876217

9346699826

10085576043

948773916

13964278341

14913052257

1314251466

24866509519

26180760985

Balance with other banks

and financial institution

In Bangladesh

Outside Bangladesh

747546381

1445278570

2192824951

123249512

1406619922

1529869434

539356994

865104309

1406461306

3882017395

1414527197

5296544592

6186227238

2768122145

895434383

Money at call and short

notice

- - - - -

Investment (shares and

bonds)

Govt securities

Others

2250000000

644021207

2894021207

2000000000

169435240

216945240

2756000000

1766035569

4522036564

2763708330

3970320439

6734028769

3263708330

7081674745

10345383075

Investment

General investment

Bills discounted and

purchased

Fixed assets

50838709312

2798967791

53637677103

66898183938

1711723532

68609907470

90929921831

3744679959

94674610790

96855012694

1999007171

100854019865

115805715527

3554351738

119360067265

29

Others assets

Non-banking assets

293529040

2840497476

383332474

4294450230

467930909

1890860232

4739961675

-

439482675

1717886434

Total assets 68446464000 86203931339 113047466849 129709816841 166997929817

Liabilities

Borrowing from other

banks, financial institutions and agents

500000000 1298500 1658267943 3450000000 4300000000

Deposits and others

Accounts

Al wadiah current deposits

and other acc

Mudaraba savings bank

deposits

Call deposits

Foreign currency deposits

Bill payable

Other liabilities

6672698806

2440817852

47333793478

-

4454565455

57586991798

5370270246

4444334819

15466275929

8733452812

-

4458554545

73835461825

5661064700

4736853655

16974377239

12673205230

1154621462

8544555445

94951570297

3997774194

5461081193

21633784660

13717321688

-

9985544545

107515298597

4275035477

6038002361

90136641065

25180642319

170730899587

1597045903

140025422505

6122305295

Total liabilities 63457262044 79497825025 100601612424 115240334074 150447727800

Capital/shareholders’ equity

Paid up capital

Proposed issue of bonus shares

2677746000

-

3373959900

209294330

6832268790

3154763651

9223562860

3849775919

455445455

445522555

30

Share premium

Dividend equalization account

Statutory reserve

Total shareholders’ equity

Total liabilities and shareholders’ equity

-

62775000

1532550398

4989201956

68446464000

6552566

11763545654

-

68446201956

64446464000

62775000

2395946984

1295946984

12445854425

11304746684849

62775000

11716177

13215503384

14469482767

129709816841

782542554

55455545

8725554

40215012454

45622156564

Off balance sheet items

Contingent liabilities:

Acceptance and endorsements-

Letters of guarantee

Irrevocable letters of credit

Bills for collection

Other contingent liabilities

Total contingent liabilities

Others commitments

Total off balance sheet item

1926716986

8259107868

1207007428

14677737243

26070569525

-

26070569525

2051493156

11023568510

1915178096

15118871585

30109111347

-

30109111347

2843764312

24659729822

2101115742

35098364372

-

-

55098364372

3923644884

15239815112

2590679299

259175780264

34929919559

-

54929919559

3667283774

18331133277

2375795416

39576271160

-

-

63950483627

31

Loss and profit

Particular 2008 2009 2010 2011 2012

Investment income

Profit paid on deposits

borrowings, etc.

Net investment income

Income from investment in

shares/securities

6575384481

(4807489009)

1767895472

49290682

8147113948

(5942862461)

2204251487

45980606

9606185898

(6020054097)

3586131801

143927878

13266077269

(93398849)

3926192334

99745891

17283330742

(12228664694)

5054666048

138120503

Commission, exchange and

brokerage

Gain on sale of investment in

shares

Other operating income

Total operating income

1358584309

4958930

368602392

3549331785

1382364444

192447997

618702207

4443746741

1822977090

1292104250

872161614

7717302633

1914082722

-

675060237

6615081184

2070731029

51467200

802080203

1475414349

Operating expense

Salaries and allowances

Rent, taxes, insurance,

lighting etc.

Legal expenses

Postage, stamp, telegram, and

telephone audit fees

Stationery, printing,

advertisement, etc.

Managing directors

remuneration

Managing director fees

544058922

100138388

3439756

46319705

247500

46507927

5329800

648143840

134306353

4030585

48855397

1984110

70697703

7569300

1014492899

169548654

5552975

56864407

1932031

70168601

9885700

1338511684

214630630

9345446

67963092

3305582

103852471

8986135

2775414349

274271388

38277696

66565319

1916685

123360905

8088387

32

Directors fees

Depreciation on and repairs

to banks property

Other expenses

Total operating expense

Profit before provisions

Provision for investment

Provision for off balance

sheet exposure

Provision for diminution in

value of share

Profit before tax

Provision for tax

Deferred tax

Profit after tax

-

2585924

68248984

214065794

1030942700

2518389085

392862260

101460000

34514026

1989552753

-

1096627046

-

2508018

225292220

1273078086

3170676655

301625753

78036000

-

2791014902

1108024287

-

1682990615

-

2206353

226881

120096549

55897642

334633376

1841506068

-

5290953783

1832938651

-

3458015132

-

2382190

308611

148557159

83883260

547697143

2529423403

17 888196

31 18 60 666

3538005283

-

2017715667

-

2291071

256736

160452801

102409801

569412576

2822881452

554555442

3565445556

54542424

-

5456511356

Retained earnings brought

forward

Transfer from provision for

diminution in value of share

Adjustment for (under)/over

provision for tax made in

earlier years

608754548

-

-

608754548

716130558

33914343

750044901

-

117 6397684

-

4209449

11820607133

2390143482

-

-

2390143482

4549444571

-

-

5556525556

1705381594 2433035516 4638622265 4407859149 4522332212

Profit available for appropriation

33

Appropriation:

Statutory reserve

Cash dividend

Issue of bonds shares

397910560

149953560

441386700

560423932

-

696213900

1061789321

-

1180885960

695012268

-

2391294070

5545445454

-

44555455245

989251036 1256637832 224267281 13215527885 45254552456

Retained earnings carried

forward

Earnings per ordinary

share

716130558

40.95

1176397684

49.88

2395946984

5.33

1321552811

2.19

2545545555

15.87

Types of loans:

Types of loan sanctioned by the bank given below:

1. Agriculture loan 2. Term Loan to large & medium scale industry3. Term Loan to small Industry4. Large & Medium Scale Industry5. Small Industry6. Export7. Trade financing8. Housing loan9. Consumer credit10. Credit card 11. Credit to NBFIs

34

Loan category based description:

a. Continuous loan: loan continues year after year.b. Demand loan: loan to be paid on demand. Sanction of loan is made within short period of time.c. Term loan: generally loan is sanction for long time. Say 5 to 15 years and payment system is on installment basis. A. Continuous loan is two types :1. C.C pledged: where goods financed loan is kept under lock’s key of bank go down. Goods will be released by the bank authority of their getting the value. 2. C.C (Hypothecation) : bank sanction loan to client to purchase goods and service. Title of good’s remaining to client.

B. Demand loan:

1 .Lim (loan against imported merchandise) – This loan is provided for very short term say 10 to 15 days. This loan is related to foreign exchange business. When document is received and make payment to foreign buyer.

2. MIB (imported Bill) – when goods are received from foreign buyer; bank make payment against the goods. Goods are kept in safe custody to bank and subsequently released after getting the value.

3. T.R (trust receipt): here loan is provided against imported goods. Loan is generally provided go days. Basis difference between MIB and TR is that in MIB goods are kept and TR is that in MIB goods are kept at Bank’s custody’s in TR goods are lying under customer’s custody.

Interest rate Movement:

Here the 5 years interest rate movement of loanable funds:

35

2014

Agricu

lture

term lo

an la

rge &

med

ium scale

industr

y

term lo

an to

small

industr

y

large

& m

edium sc

ale in

dustry

small

industr

y

export

trade fi

nancin

g

housing

consu

mer cre

dit

credit c

ard

credit t

o NBF is

others0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

13 15.5 18 15.5 18 7 15.5 18 18 24 18 18

13 15.5 18 15.5 18 7 15.5 18 18 24 18 18

FebJan

2013

36

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

13 13 13 13 13 13 13 13 13 13 13 13

15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5

18 18 18 18 18 18 18 18 18 18 18 18

15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5

18 18 18 18 18 18 18 18 18 18 18 18

7 7 7 7 7 7 7 7 7 7 7 7

15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5 15.5

18 18 18 18 18 18 18 18 18 18 18 18

18 18 18 18 18 18 18 18 18 18 18 18

24 24 24 24 24 24 24 24 24 24 24 24

18 18 18 18 18 18 18 18 18 18 18 18

18 18 18 18 18 18 18 18 18 18 18 18

otherscredit to NBF iscredit cardconsumer credithousingtrade financingexportsmall industrylarge & medium scale industryterm loan to small industryterm loan large & medium scale industryAgriculture

2012

37

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

13 13 13 13 13 13 13 13 13 13 13 13

17 14 14 14 14 14 14 14 14 14 14 15.5

17 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 18

17 14 14 14 14 14 14 14 14 14 14 15.5

17 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 18

7 7 7 7 7 7 7 7 7 7 7 7

17 14 14 14 14 14 14 14 14 14 14 15.5

18 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 18

18 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 18

24 24 24 24 24 24 24 24 24 24 24 24

18 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 18

18 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 16.5 18

otherscredit to NBF iscredit cardconsumer credithousingtrade financingexportsmall industrylarge & medium scale industryterm loan to small industryterm loan large & medium scale industryAgriculture

2011

38

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

13 13 1313 13 13 13 13 13 13 13 13

13 13 13

1313 13 13 13 13 13 13 13

14.5 16 16

1313 13 13 13 13 13 13 13

13 13 13

16

16 15 15 17 17 17 17 17

14.5 16 16

17

17 15 15 17 17 17 17 17

7 7 7

7

7 7 7 7 7 7 7 7

13 13 13

17

17 17 17 17 17 17 17 17

13 13 13

17

17 17 17 17 17 17 17 17

0 0 017

17 17 17 17 17 17 17 17

1.67 1.67 1.671.67

24 24 24 24 24 24 24 24

13 13 1316 16 16 16 17 17 17 17 17

14.5 16 16 17 17 17

otherscredit to NBF iscredit cardconsumer credithousingtrade financingexportsmall industrylarge & medium scale industryterm loan to small industryterm loan large & medium scale industryAgriculture

2010

39

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

13 13 13 13 13 13 13 13 13 13 13 13

13 13 13 13 13 13 13 13 13 13 13 13

14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5

13 13 13 13 13 13 13 13 13 13 13 13

14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5

7 7 7 7 7 7 7 7 7 7 7 7

13 13 13 13 13 13 13 13 13 13 13 13

0 0 0 0 0 0 0 0 0 0 0 01.67 1.67 1.67 1.67 1.67 1.67 1.67 1.67 1.67 1.67 1.67 1.67

13 13 13 13 13 13 13 13 13 13 13 13

14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.5

otherscredit to NBF iscredit cardconsumer credithousingtrade financingexportsmall industrylarge & medium scale industryterm loan to small industryterm loan large & medium scale industryAgriculture

Yield Classification:

Agriculture:

40

Year Yield% = default premium%+

Risk free Rate%

2014 13 = 8 + 5

2013 13 = 8 + 5

2012 13 = 8 + 5

2011 13 = 8 + 5

2010 13 = 8 + 5

Term Loan to large & medium scale industry:

Year Yield %= default premium%+

Risk free Rate%

2014 15.50 = 10.50 + 5

2013 15.50 = 10.50 + 5

2012 14.37 = 9.37 + 5

2011 13 = 8 + 5

2010 13 = 8 + 5

Term Loan to small Industry:

41

Year Yield% = default premium%+

Risk free Rate%

2014 18 = 13 + 5

2013 18 = 13 + 5

2012 16.66 = 11.66+ 5

2011 13.63 = 8.63 + 5

2010 14.50 = 9.5 + 5

Large & Medium Scale Industry:

Year Yield %= default premium%+

Risk free Rate%

2014 15.5o = 10.50 + 5

2013 15.50= 10.50 + 5

2012 14.38 = 9.38+ 5

2011 15.50 = 10.50 + 5

2010 13 = 8 + 5

Small Industry:

Year Yield% = default premium%+

Risk free Rate%

42

2014 18 = 13 + 5

2013 18 = 13 + 5

2012 16.54 = 11.54+ 5

2011 16.29 = 11.29 + 5

2010 14.50 = 9.5 + 5

Export:

Year Yield% = default premium%+

Risk free Rate%

2014 7 = 2 + 5

2013 7 = 2 + 5

2012 7 = 2 + 5

2011 7 = 2 + 5

2010 7 = 2 + 5

Trade Financing:

Year Yield% = default premium%+

Risk free Rate%

2014 15.50 = 10.50 + 5

2013 15.50 = 10.50+ 5

2012 14.40 = 9.40 + 5

2011 13.90 = 8.90 + 5

2010 13 = 8 + 5

43

Housing Loan:

Year Yield %= default premium%+

Risk free Rate%

2014 15 = 10+ 5

2013 18 = 13+ 5

2012 18 = 13 + 5

2011 13.79 = 8.79+ 5

2010 13 = 8 + 5

Consumer Credit:

Year Yield = default premium+ Risk free Rate

2014 15= 10 + 5

2013 18 = 13+ 5

2012 18 = 13+ 5

2011 8.5 = 3.5 + 5

2010 00 = 00 + 5

Credit Card:

Year Yield = default premium+ Risk free Rate

2014 24= 19 + 5

44

2013 24= 19 + 5

2012 24= 19 + 5

2011 24= 19 + 5

2010 1.67= 1.67+

Credit to NBF IS:

Year Yield %= default premium%+

Risk free Rate%

2014 18= 13 + 5

2013 18= 13 + 5

2012 18= 13 + 5

2011 13= 8 + 5

2010 13= 8+ 5

Others:

Year Yield %= default premium%+

Risk free Rate%

2014 18= 13 + 5

2013 18= 13 + 5

2012 18= 13 + 5

2011 15.25= 10.25+ 5

2010 14.5= 9.5+ 5

45

Credit risk premium score:

The credit risk grading score sheet of EXIM bank given below:

CRG:

Number Grading Short Score

1 Superior SUP Fully cash secured, secured by government

2 Good GD 85+

3 acceptable ACCPT 75-84

4 Marginal/ watchlist MG/WL 65-74

5 Special mention SM 55-64

6 Substandard SS 45-54

7 doubtful DF 35-44

8 Bad / loss BL <35

Source: secondary (EXIM Bank)

Exim bank divided the credit risk grading score by superior, good, acceptable, marginal, special, substandard, doubtful and bad/ loss. Criteria of credit risk grading the Exim bank are financial

46

risk, business/ industry risk, management risk, security risk and relationship risk. . Under the financial risk are leverage (15%), liquidity (15%) ,profitability (15%) and coverage (5%).

Criteria weight

Parameter score Actual

Parameter

Score

obtained

A financial Risk 50%

1. Leverage: (15%)

Debt equity ratio (*)- times

Total liabilities to tangible net worth

All calculations should be based on

Annual financial statements of the

Borrower ( audited preferred)

Less than 0.25 x

0.26*to 0.35 x

0.36 * to 0.50x

0.51 * to 0.75x

0.76 *to 1.25 x

1.26 * to 2.00 x

2.01 *to 2.50 x

2.51 * to 2.75 x

More than 2.75 x

15

14

13

12

11

10

8

7

0

1.32 10

2. Liquidity (15%)

Current ratio (*) – times

Current assets to current liabilities

Greater than 2.74 x

2.50*to 2.74x

2.00*to 2.49x

15

14

13

1.03 10

47

1.50*to 1.99x

1.10*to 1.49x

0.99*to 1.09x

0.80* to 0.89x

0.74* to 0.79x

Less than 0.79x

12

11

10

8

7

0

3. Profitability: (15%)

Operating profit margin (%)

(operating profit/ sales * 100

Greater than 25%

20% to 24%

15% to 19%

10% to 14%

&% to ( %

4% to 6%

1% to 3%

less than 1%

15

14

13

12

10

9

7

0

20.00% 14

4. Coverage: (5%)

Interest coverage ratio (*) –times

Earnings before interest & tax ( EBIT)

Interest on debt

More than 2.oox

More than 1.51*less than 2.00x

More1.25 *less than 1.5 x

More than 1.00*less than1.24x

5

4

3

2

1.87 4

48

Less than 1.00x 0

Total score – financial risk 50 38

Source : secondary ( EXIM Bank)

B. Business /industry risk 18%

1.Size of business ( in BDT Crore)

The size of the borrower’s business

Measured by the most recent year’s

total sales. Preferably audited numbers.

>60.00

30.00 – 59.99

10.00 -29.99

5.00 – 9.99

2.50 -4.99

<2.50

5

4

3

2

1

0

3.33 1

2.Age of business

The number of the years the borrower

Engaged in the line of business

>10 years

>5 -10 years

<2 years

3

2

1

0

18 3

3.Business outlook

Critical assessment of medium term

Prospects of industry, market share

And economic factors

Favorable

Stable

Slightly uncertain

Cause for concern

3

2

1

0

Stable 2

4. Industry growth Strong (10% +)

Good (>5% -

3

2

Moderate (1% -5%)

1

49

10%)

Moderate (1%-5%)

No growth (<1%)

1

0

5. market competition Dominant player Moderately competitive

Highly competitive

2

1

0

Moderately competitive

1

6. entry /exit barriers Difficult

Average

Easy

2

1

0

Average 1

Total score –business / industry 18 8

Source: secondary (EXIM Bank )

c. Management risk 12%

50

Experience

Quality of management based on total

of years of experience of the senior

management in the industry

More than 10 years in the related

5-10 years in the related line of

1-5 years in the related line of

No experience

5

3

2

0

More than 10 years in the related line

5

2. second line / succession Ready succession

Succession within 1-2years

Succession within 2-3 years

Succession in question

4

3

2

0

Ready succession

5

3. Team work Very good

Moderate

Poor

Regular conflict

3

2

1

0

Moderate 2

Total score – management risk 12 11

Source: secondary (EXIM bank)

51

D. security risk 10%

1.security ( primary ) Fully pledged

Facilities/substantially cash covered/reg. mortg. for HBL

Registered hypothecation (1st

charge/1st pari passu charge)

2nd charge /inferior charge

Simply hypothecation/negative lien on assets

No security

4

3

2

1

0

Registered hypothecation(1st charge /1st pari passu charge

3

2.collateral coverage ( property location )

Registered mortgage on municipal

Corporation Prime area property

Registered mortgage on

Pourashava/ semi-urban area

Property

Equitable mortgage or no

Property but plant and machinery

As collateral

Negative lien on collateral

No collateral

4

3

2

1

0

Registered mortgage on municipal Corporation Prime area property

4

3. support (Guarantee)

Personal guarantee with high net worth or strong corporate

2 Personal guarantee with high net worth

2

52

Guarantee

Personal guarantees or corporate

Guarantees or corporate

Guarantee with average financial

Strength

No support / guarantee

1

0

or strong corporate

Guarantee

Total score – security Risk

10 9

Source: secondary (EXIM Bank)

E. relationship risk 10%

1. account conduct

More than 3 years accounts with faultless record

Less than 3 years accounts with faultless record

Accounting having satisfactory

Dealing with some late payments

Frequent past dues & irregular

Dealing in account

5

4

2

0

More than 3 years accounts with faultless record

5

53

2.Utilization of limit

(actual /projection0

More than 60%

40% -60%

Less than 40%

2

1

0

65.00% 5

2.Compliance of covenants/ condition

Full compliance

Some non-compliance

No compliance

2

1

0

Full compliance

2

3.Compliance of covenants/ conditions

Full compliance

Some non- compliance

No compliance

2

1

0

Full compliance

2

4.personal deposits Personal accounts of the key

Business sponsors / principals are

Maintained in the bank, with

Significant deposits

No depository relationship

1

0

Personal accounts of the key Business sponsors / principals are Maintained in the bank, with Significant deposits

1

Total score–relationship risk

10 10

Grand total – All Risk 100 76

Source: secondary (EXIM Bank)

Under the business /industry risk are size of business, age of business, business outlook, industry growth, market competition and entry / exit barriers. Under the management risk are experience, second line / succession and team work. Under the security risk are security coverage (primary), collateral coverage (property location) and support (guarantee).under the relationship risk are account conduct ,utilization , compliance of covenants / condition and personal deposits.

54

Pure Keynesian theory: make a research is it correct for Bangladesh:

Keynesian theory holds that the economy normally fails to employ all available resources and the

best technology and that government must regularly interfere with active fiscal and monetary

policies to move the economy toward full employment.

Lord John Maynard Keynes wrote “the General Theory of Employment, Interest and Money” as

a solution to the problem of periodic unemployment faced by developed industrial nations of the

West during the great depression of the thirties.

Many of his ideas were revolutionary, almost all were controversial. The central argument of The

General Theory is that the level of employment is determined, not by the price of labor as in

neoclassical economics, but by the spending of money. Keynes argues that it is wrong to assume

that competitive markets will, in the long run, deliver full employment or that full employment is

the natural, self-righting, equilibrium state of a monetary economy. On the contrary, under-

employment and under-investment are likely to be the natural state unless active measures are

taken. One implication of The General Theory is that an absence of competition is not the main

issue and measures to reduce unemployment by benefits or wage cuts have no major effect. Its

applicability in underdeveloped countries is very limited. To quote Joan Robinson: “ Keynes’s

theory has little to say directly, to the underdeveloped countries, for it was framed entirely in the

context of an advanced industrial economy, with highly developed financial institutions and a

sophisticated business class.

Bangladesh is a developing country. So, Keynesian theory is not applicable in Bangladesh. The

reason has described in below:

Keynesian theory is fundamentally a capitalistic theory. It basically examines the

determinants of employment in a free enterprise economy. But Bangladesh is a mixed

economy system country.

55

Keynes’s theory deals with short-run phenomena only. It pays little attention to the long-

run problems of a dynamic economy. But Bangladesh needs paying much attention to the

long run problems. If Bangladesh cannot able to solve long run problems, it will not be

developed.

Keynesian theory is not strictly applicable to underdeveloped countries. Keynes deals

with the problem of cyclical unemployment. Underdeveloped countries have the problem

of chronic unemployment and disguised unemployment. That’s why it is not capable for

Bangladesh.

He showed that full employment could be maintained only with the help of government

spending. He advocated in the General Theory that wages be kept stable. A general cut in

wages, he argued, would decrease income, consumption, and aggregate demand. This

would offset any benefits to output that the lower price of labor might have contributed.

But it is not possible for Bangladesh.

Although the policy measures suggested by the Keynesian theory may not be suitable to the

problems of underdeveloped countries, it does not mean that Keynesian economics has no

significance. Indeed, Keynesian methodology of thinking in macro-economic terms is very

essential and appropriate in understanding the major problems of any economy, whether

developed or developing. However, in view of the changing institutional set-up of the developing

economies during the process of planning and socio-economic reforms, Keynesian tools have to

be adopted with suitable modifications.

Reference:

Inflation rate http://search.worldbank.org/quickview?name=%3Cem%3EInflation%3C%2Fem%3E

56

2004-2012 %2C+GDP+deflator+%28annual+%25%29&id=NY.GDP.DEFL.KD.ZG&type=Indicators&cube_no=2&qterm=inflation+rate+in+bd

Inflation rate 2013

http://www.bangladesh-bank.org/econdata/inflation.php

Annual report http://www.eximbankbd.com/report/Annual_Reports

Risk free rate http://www.bangladesh-bank.org/econdata/intrate.php

About Exim bank http://www.eximbankbd.com/

Central Bank how to regulate commercial bank

http://www.bangladesh-bank.org/

Role of Bangladesh Bank

Intermediate 1st paper books “principles Business

Risk premium and interest movement

Attach appendix

57