Role of Central Bank in Bangladesh

Dr. Md. Azam KhanProfessorFaculty of BusinessBangladesh University of Professionals

Presented To

Presented ByName: Hosneara SwarnalyId no:1407017 Name: Munni ChakmaId no:1407035 Name: Afroza Parvin ChowdhuryId no:1407031 Name: Tasnim Ali ShammaId no:1407069 Name: Namrata KhisaId no:1404050 Name: Ishrat JahanTanjila Id no:1404017

Definition of Bank: • The term ‘Bank’ seems to

originated and/or derived from different sources like the Germanic word ‘banck’, the French word ‘banque’ and the Italian word ‘banco’.

• The Germanic word ‘banck’ which means a joint stock fund or heap. The Italian word ‘banco’ refers to a bench at which the money changers used to change one kind of money into another and transact their banking business.

• Thus, in olden days, banking was associated with the business of money changing/lending.

Banking process diagram:

Objectives of Bank• 1. Maximizing profits• 2. Saving and Lending money .• 3. Creating propensity of savings amongst the people.• 4. Create money against money as an alternative for enhancing supply of money.• 6. Build up capital through savings.• 7. Expedite investments.• 8. Controlling money market.• 10. Extend co-operation and advices to the Govt. on economic issues.• 11. Assist the Govt. for trade& business and socio-economic development.• 12. Issue and control notes and currency as a central bank.• 13. Maintain and control exchange rates as a central bank. 

Types of Banks: Different types of Banks & their functions

Central bank of Bangladesh : Bangladesh Bank• “A central bank is a bank whose essential duty is to

maintain stability of the monetary standard.”• Bangladesh Bank is the Central bank of Bangladesh

and is a member of the Asian Clearing Union.• Bangladesh Bank is the first central bank in the world

to introduce a dedicated hotline (16236) for the general populace to complain any banking related problem.

• Bangladesh Bank is the first central bank in the world to issue a "Green Banking Policy".

• Dr. Atiur Rahman was given the title ‘Green Governor’ at the 2012 United Nations Climate Change Conference, held at the Qatar National Convention Centre in Doha

History of Bangladesh Bank• Bangladesh Bank came into existence on 16

December 1971. order 1972 (Presidential Order No. 127 of 1972) .• In 1982, the first reform program was initiated,

wherein the government denationalized two of the six nationalized commercial banks and permitted private local banks to compete in the banking sector.

• In 1986, a National Commission on Money, Banking and Credit was appointed to deal with the problems of the banking sector.

• The Financial Sector Adjustment Credit (FSAC) and Financial Sector Reform Programme (FSRP) were formed in 1990, upon contracts with the World Bank.

Monetary policy• A set of rules that aims at regulating the supply of

money in accordance with predetermined goals or objectives. Monetary policy plays a very dominant role in altering the economic activity and the price level in a country. So, it should be very carefully formulated and implemented in achieving the goals and objectives as outlined in the Bangladesh Bank Order, 1972 below:

(1) Price stability both internal and external; (2) Sustainable growth and development; (3) High employment; (4) Economic and efficient use of resources; (5) Stability of financial and payment system.

Core functions(i) Open market operation (treasury bills/bonds, repo, reverse repo auctions), (ii) Reserve ratios- cash reserve requirements (CRR) and statutory liquidity ratio (SLR), (iii) Secondary trading, (iv) Discounting rate/ bank rate, and (v) Acts as a banker to the government.(vi) Acts as an advisor to the government.(vii) As the central bank of Bangladesh reserves sole responsibility to issue bank note.(viii) Directs the growth expediting programs for the national interest.

Economic growth• Bangladesh banks one of the key objective is to

promote and maintain a high level of production, employment and real income of Bangladesh; and to foster growth and development of the country's productive resources for national interests.

• Therefore, Bangladesh bank as the regulator of country's financial system performs its responsibilities with the view to achieve its objectives that impacts directly and indirectly on country's financial growth, in particular, monetary, fiscal, and economic growth.

The Role of Central Bank in a Developing Economy in a country (Bangladesh)1. Role of Central Bank in Economic DevelopmentThe central bank in a developing country aims at the promotion and maintenance of a rising level of production, employment and real income in the country.

2. Creation and Expansion of Financial InstitutionsOne of the aims of a central bank in an underdeveloped and developing country is to improve its currency and credit system.

3.Proper Adjustment between Demand for and Supply of MoneyThe central bank plays an important role in bringing about a proper adjustment between demand for and supply of money. An imbalance between the two is reflected in the price level. A shortage of money supply will inhibit growth while an excess of it will lead to inflation. As the economy develops, the demand for money is likely to go up due to gradual monetization of the non-monetized sector and the increase in agricultural and industrial production and prices.

4. A Suitable Interest Rate PolicyIn an underdeveloped country the interest rate structure stands at a very high level. There are also vast disparities between long-term and short-term interest rates and between interest rates in different sectors of the economy.

5. Debt ManagementDebt management is one of the important functions of the central bank in an underdeveloped and developing country. It aims at proper timing and issuing of government bonds, stabilizing their prices and minimizing the cost of servicing public debt.

6. Credit ControlCentral Bank should also aim at controlling credit in order to influence the patterns of investment and production in a developing economy. Its main objective is to control inflationary pressures arising in the process of development. This requires the use of both quantitative and qualitative methods of credit control.

7. Solving the Balance of Payments ProblemThe central bank should also aim at preventing and solving the balance of payments problem in a developing economy. Such economies face serious balance of payments difficulties to fulfil the targets of development plans. An imbalance is created between imports and exports which continue to widen with development.

Functions of Central Bank

The arguments in its favor are as follows:(a) To maintain equilibrium in quality between notes and currency issue(b) To maintain equilibrium in size, types and values of  notes and currency(c) To maintain stability in rates of exchange both inland and foreign(d) To create confidence on the people(e) To control money market.

Commercial Bank and Central Bank: Their functions and mutual relationships• In common parlance, Bank means Commercial Bank and its

functions. Central Bank is a separate entity and plays distinctive roles. The function of a Bank is to collect deposits from the public and lend those deposits for the development of Agriculture, Industry, Trade and Commerce.

• Bank pays interest at lower rates to the depositors and receives interests on loans and advances from them at higher rates. In modern banking, Bank carries out many other activities, e.g. creation of debts and money, transmission of money from one country to another country, increase of foreign trade, preservation of valuables in safe custody etc.

• Thus, Bank earns profits through executing various types of activities.

Distinguish between Central Bank and Commercial Bank:Sl. Points of

distinction Central Bank Commercial Bank

01. Formation Central Bank is the sole banking Institution which is established through ordinance or special law of the Government.

Commercial Bank is formed on the basis of Banking Company Laws.

02. Ownership Central Bank is established under Government ownership.

Commercial Bank is established under both govt. and private Ownership.

03. Purpose To earn profit is not the main purpose of central bank. Its main purpose is to control credit system and money market.

The main purpose of commercial bank is to earn profit. Recovery of loan is the main stay for generation of profit.

04. Number In a country there is only one Central Bank.

In a country there may be more number of commercial banks.

05. Control Central bank is conducted exclusively under Government control.

Commercial Bank is conducted under central bank’s control.

06. Government Influence

Government has direct influence on Central Bank.

Government has indirect influence On Commercial Bank through Central Bank.

Conclusion• Thus the central bank plays an important role in achieving economic

growth of a developing country like Bangladesh through the various measures discussed above. It should promote economic growth with stability, help in attaining full employment of resources, in overcoming balance of payments disequilibrium, and in stabilizing exchange rates.

• Over the past decade, many central banks in developing and emerging economies have begun to place renewed emphasis on the promotion of economic development. A central bank with a wider, developmental mandate can make important contributions to a country’s economic and social development and may play an important role in improving the framework conditions for financing the post-2015 development.

• Bangladesh bank is following a vigilantly accommodative monetary policy to sustain strong public , especially private sector credit demand and its mechanism of control.