Modernising the banking system
Saturday, 10 November 2007
Dr Salehuddin Ahmed concluding his two-part write-up
The banking system in Bangladesh is continuously adopting modem and innovative products. and services, to make smooth payments and transactions. Foreign commercial banks (FCBs) in Bangladesh are playing a pioneer role in introducing modem financial products and services.
The existing innovative products and services consist of Debit and Credit Card, Automated Teller Machine (ATM), Point of Sales (POS), on-line banking (e-banking), Society for Worldwide Inter-bank Financial Telecommunication (SWIFT), and Reuter. These technologies would upgrade the banking services.
Modernisation: The Bangladesh Bank has been implementing the Central Bank Strengthening Project (CBSP) with a view to develop Bangladesh Bank into an effective and modem central bank through strengthening its capacity to play due role as the county's monetary authority as well as regulatory and supervisory authority of the banking sector. The project is working and is expected to be completed by June 2008.
Remittance retrieval modalities: Workers' remittances that played an important role in the economic development of. the country over the last few decade, is now more closely linked to financial sector development. The role of formal remittance service system is not limited to boosting foreign exchange reserves and matching current account deficit in the short term. Channelling remittances through banking help deepening the financial system and integrates rural people with the formal system. The BB is implementing a project -- 'Remittance and Payments Partnership (RPP)' -- with fund from the UK's Department for International Development (DFID), through which Automated Clearing House (ACH) will be installed and migrants' remittance fund will be speedily handed over to the recipients.
International standards in accounting: A fair representation of financial position of a bank is required by its stakeholders for making their economic decisions. This is significantly influenced by the accounting standard. In line with international norms, the Bangladesh Bank (BB) introduced international accounting standards (IAS-30) in the banking sector of Bangladesh in 2000. This requirement has brought transparency in the affairs of bank balance sheet by disclosing many sensitive issues such as volume of bad debts, amount of bad debt provisions, shortfall in provision, earning per share, cash flow position, banking risks including contingencies and future losses, maturity mismatch of asset and liabilities, credit facilities allowed to the bank directors etc. In order to bring more disclosure in the financial statements of banking companies, the BB is continuously updating this requirement from time to time in line with International Accounting and Reporting Standards.
International agreements financial vigilance: Bangladesh is a major compliant of international agreement on financial vigilance. Bangladesh enacted the Prevention of Money Laundering Act 2002, a major legislative development to combat financial terrorism. In order to closely monitor money laundering activities and update legal requirements as per international standard, the Bangladesh Bank has set up a separate department, namely, Anti-Money Laundering Department (AULD).
A Financial Intelligent Unit (FIU) has been established in the Anti-Money Laundering Department of the Bangladesh Bank. The unit is responsible for receiving, recording, maintaining and analysing Suspicious Transactions Reports (STR) and Cash Transactions Reports (CTR) received from banks and other financial institutions. FIU is mandated with responsibility of maintaining liaison with the concerned international bodies and FIUs of other countries. Bangladesh is a signatory of the UN Convention Against Corruption under which international collaboration is envisaged to combat corruption and money laundering activities.
Compliance of Basel II: As in many other developing countries, implementation of Basel II is a challenging issue for banking sector of Bangladesh. Compliance of Basel Core Principles (BCPs) requires providing a solid foundation for the eventual implementation of the New Accord. Recently, the BB has also carried out a self-assessment of the extent of compliance of BCPs. The findings show that it is now a largely compliant of Basel principles.
Since the New Accord requires substantial prior risk management practices in the banking sector, the BB issued 5(five) separate guidelines on 5(five) core risk areas in banking in 2003. It provides a basic foundation for smooth implementation of the New Accord. The risk areas include credit risk, asset and liability/balance sheet risk, foreign exchange risk, internal control and compliance risk and money laundering risk. Since the Accord is complex and may affect different banks in varying degrees, careful and compatible strategies need to be developed. This deserves inclusion of market participants in the decision-making process.
Corporate governance: In order to establish good corporate governance in banking, the Bangladesh Bank issued several prudential regulations specifying qualification of a Bank Director and a Chief Executive Officer. It also issued directives clarifying authorities and responsibilities of Chairman, Board of Directors, Chief Executive Officer (CEO) and adviser to the bank in respect of overall financial, operational, policy making, and administrative affairs.
As a part of good governance in banking, the BB requires each bank to form an Audit Committee of their Board. The Committee is responsible for review of the financial reporting process, the system of internal control and management of financial risks, the audit process, monitoring of compliance with banking laws and regulations.
Faster GDP growth consistent with the poverty reduction goals cannot be met unless the extent and quality of financial intermediation in Bangladesh advances significantly. In particular, this would require more competitive banking and non-bank financial sectors capable of reaching out to all sections of the community, rural and urban, catering to all types of marketable financial services. From the point view of a healthy and egalitarian pattern of economic development which is possible by bringing the poor and asset less (so-called unbanked) people within the financial system, the whole approach should be based on calibrated balancing of prudential norms and more genuinely inclusive financial services. The policy strategy that has been initiated and the reform programmes undertaken by Bangladesh would not only help the economy to grow at a faster rate but also pave the way for it to become a member of the "middle income group country" by the end of the next decade.
Investment in Bangladesh is highly dependent on bank credit. A major fallout of the excessive dependence on bank credit is the mismatch between the asset and liability sides of bank portfolios. The dependence of business on bank credit for investment increases the systematic risk faced by the banking system. There is also the informational asymmetry between the borrower and the lender, which adds to the risks faced by the lender. Indeed the latter asymmetry would be alleviated to an extent were the borrower to seek listing in the stock exchange, which could ordinarily require a greater extent of disclosure than otherwise and this may also allow better decision-making on the part of the banks in dealing with applications for credit.
Bond market: In Bangladesh, fixed-income securities are still limited in variety and bond market is dominated by short and long term government securities. Corporate bond market is in nascent stage having a shallow debenture market. In principle, efficient bond markets must encompass a mobile primary market, a fluid secondary market, transparent rules and regulations, a conducive tax system, market rules and awareness, well-functioning settlement and custody systems and a trustworthy rating system.
Fixed-income securities market in Bangladesh has experienced a number of changes in recent years. To activate secondary market, Bangladesh Bank started repo and reverse-repo auctions and issued licenses to primary dealers in government securities. On the other hand, preferential tax treatment for zero-coupon bonds has been introduced, Central Depository System (CDS) has been created, and stamp duty on transfer of assets has been eliminated for securitisation. The weekly revaluation based on marking to market for the portion of securities held for trading by the banks has been made compulsory.
However, further steps are needed such as developing benchmark yield curve in order to ensure the proper development of the bond market. A recent decision of the government to introduce pre-announced volume based auctions will definitely bring more transparency in the country's money market and avoid mismatch between cash and debt management.
(The writer is Governor of the Bangladesh Bank and the paper was
presented to a recent meeting held in Dhaka. The views expressed here are
the writer's own and do not reflect those of the central bank. Concluded)
The banking system in Bangladesh is continuously adopting modem and innovative products. and services, to make smooth payments and transactions. Foreign commercial banks (FCBs) in Bangladesh are playing a pioneer role in introducing modem financial products and services.
The existing innovative products and services consist of Debit and Credit Card, Automated Teller Machine (ATM), Point of Sales (POS), on-line banking (e-banking), Society for Worldwide Inter-bank Financial Telecommunication (SWIFT), and Reuter. These technologies would upgrade the banking services.
Modernisation: The Bangladesh Bank has been implementing the Central Bank Strengthening Project (CBSP) with a view to develop Bangladesh Bank into an effective and modem central bank through strengthening its capacity to play due role as the county's monetary authority as well as regulatory and supervisory authority of the banking sector. The project is working and is expected to be completed by June 2008.
Remittance retrieval modalities: Workers' remittances that played an important role in the economic development of. the country over the last few decade, is now more closely linked to financial sector development. The role of formal remittance service system is not limited to boosting foreign exchange reserves and matching current account deficit in the short term. Channelling remittances through banking help deepening the financial system and integrates rural people with the formal system. The BB is implementing a project -- 'Remittance and Payments Partnership (RPP)' -- with fund from the UK's Department for International Development (DFID), through which Automated Clearing House (ACH) will be installed and migrants' remittance fund will be speedily handed over to the recipients.
International standards in accounting: A fair representation of financial position of a bank is required by its stakeholders for making their economic decisions. This is significantly influenced by the accounting standard. In line with international norms, the Bangladesh Bank (BB) introduced international accounting standards (IAS-30) in the banking sector of Bangladesh in 2000. This requirement has brought transparency in the affairs of bank balance sheet by disclosing many sensitive issues such as volume of bad debts, amount of bad debt provisions, shortfall in provision, earning per share, cash flow position, banking risks including contingencies and future losses, maturity mismatch of asset and liabilities, credit facilities allowed to the bank directors etc. In order to bring more disclosure in the financial statements of banking companies, the BB is continuously updating this requirement from time to time in line with International Accounting and Reporting Standards.
International agreements financial vigilance: Bangladesh is a major compliant of international agreement on financial vigilance. Bangladesh enacted the Prevention of Money Laundering Act 2002, a major legislative development to combat financial terrorism. In order to closely monitor money laundering activities and update legal requirements as per international standard, the Bangladesh Bank has set up a separate department, namely, Anti-Money Laundering Department (AULD).
A Financial Intelligent Unit (FIU) has been established in the Anti-Money Laundering Department of the Bangladesh Bank. The unit is responsible for receiving, recording, maintaining and analysing Suspicious Transactions Reports (STR) and Cash Transactions Reports (CTR) received from banks and other financial institutions. FIU is mandated with responsibility of maintaining liaison with the concerned international bodies and FIUs of other countries. Bangladesh is a signatory of the UN Convention Against Corruption under which international collaboration is envisaged to combat corruption and money laundering activities.
Compliance of Basel II: As in many other developing countries, implementation of Basel II is a challenging issue for banking sector of Bangladesh. Compliance of Basel Core Principles (BCPs) requires providing a solid foundation for the eventual implementation of the New Accord. Recently, the BB has also carried out a self-assessment of the extent of compliance of BCPs. The findings show that it is now a largely compliant of Basel principles.
Since the New Accord requires substantial prior risk management practices in the banking sector, the BB issued 5(five) separate guidelines on 5(five) core risk areas in banking in 2003. It provides a basic foundation for smooth implementation of the New Accord. The risk areas include credit risk, asset and liability/balance sheet risk, foreign exchange risk, internal control and compliance risk and money laundering risk. Since the Accord is complex and may affect different banks in varying degrees, careful and compatible strategies need to be developed. This deserves inclusion of market participants in the decision-making process.
Corporate governance: In order to establish good corporate governance in banking, the Bangladesh Bank issued several prudential regulations specifying qualification of a Bank Director and a Chief Executive Officer. It also issued directives clarifying authorities and responsibilities of Chairman, Board of Directors, Chief Executive Officer (CEO) and adviser to the bank in respect of overall financial, operational, policy making, and administrative affairs.
As a part of good governance in banking, the BB requires each bank to form an Audit Committee of their Board. The Committee is responsible for review of the financial reporting process, the system of internal control and management of financial risks, the audit process, monitoring of compliance with banking laws and regulations.
Faster GDP growth consistent with the poverty reduction goals cannot be met unless the extent and quality of financial intermediation in Bangladesh advances significantly. In particular, this would require more competitive banking and non-bank financial sectors capable of reaching out to all sections of the community, rural and urban, catering to all types of marketable financial services. From the point view of a healthy and egalitarian pattern of economic development which is possible by bringing the poor and asset less (so-called unbanked) people within the financial system, the whole approach should be based on calibrated balancing of prudential norms and more genuinely inclusive financial services. The policy strategy that has been initiated and the reform programmes undertaken by Bangladesh would not only help the economy to grow at a faster rate but also pave the way for it to become a member of the "middle income group country" by the end of the next decade.
Investment in Bangladesh is highly dependent on bank credit. A major fallout of the excessive dependence on bank credit is the mismatch between the asset and liability sides of bank portfolios. The dependence of business on bank credit for investment increases the systematic risk faced by the banking system. There is also the informational asymmetry between the borrower and the lender, which adds to the risks faced by the lender. Indeed the latter asymmetry would be alleviated to an extent were the borrower to seek listing in the stock exchange, which could ordinarily require a greater extent of disclosure than otherwise and this may also allow better decision-making on the part of the banks in dealing with applications for credit.
Bond market: In Bangladesh, fixed-income securities are still limited in variety and bond market is dominated by short and long term government securities. Corporate bond market is in nascent stage having a shallow debenture market. In principle, efficient bond markets must encompass a mobile primary market, a fluid secondary market, transparent rules and regulations, a conducive tax system, market rules and awareness, well-functioning settlement and custody systems and a trustworthy rating system.
Fixed-income securities market in Bangladesh has experienced a number of changes in recent years. To activate secondary market, Bangladesh Bank started repo and reverse-repo auctions and issued licenses to primary dealers in government securities. On the other hand, preferential tax treatment for zero-coupon bonds has been introduced, Central Depository System (CDS) has been created, and stamp duty on transfer of assets has been eliminated for securitisation. The weekly revaluation based on marking to market for the portion of securities held for trading by the banks has been made compulsory.
However, further steps are needed such as developing benchmark yield curve in order to ensure the proper development of the bond market. A recent decision of the government to introduce pre-announced volume based auctions will definitely bring more transparency in the country's money market and avoid mismatch between cash and debt management.
(The writer is Governor of the Bangladesh Bank and the paper was
presented to a recent meeting held in Dhaka. The views expressed here are
the writer's own and do not reflect those of the central bank. Concluded)