Bangladesh Bank, the central bank and apex regulatory body for the country’s monetary and financial system, was established in Dhaka as a body corporate vide the Bangladesh Bank Order, 1972 with effect from 16th December, 1971. At present it has nine offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra, Rajshahi, Sylhet, Barisal and Rangpur in Bangladesh; total manpower stood at 5071 as of end FY 2010.

Bangladesh Bank performs all the core functions of a typical monetary and financial sector regulator, and a number of other non core functions. The major functional areas include :

• Formulation and implementation of monetary and credit policies.
• Regulation and supervision of banks and non-bank financial institutions, promotion and development of domestic financial markets.
• Management of the country’s international reserves.
• Issuance of currency notes.
• Regulation and supervision of the payment system.
• Acting as banker to the government.
• Money Laundering Prevention.
• Collection and furnishing of credit information.
• Implementation of the Foreign exchange regulation Act.
• Managing a Deposit Insurance Scheme.

The financial system of Bangladesh consists of Bangladesh Bank as the central bank, 4 State Owned Commercial Banks, 5 government owned specialized banks, 30 domestic private banks, 9 foreign banks and 29 non-bank financial institutions. Moreover, MRA has given license to 298 Micro-credit Organizations. The financial system also embraces insurance companies, stock exchanges and co-operative banks.

Bangladesh Bank, as the central bank, has legal authority to supervise and regulate all banks and non-bank financial institutions. It performs the traditional central banking roles of note issuance and of being the banker to the government and banks. Given some broad policy goals and objectives, it formulates and implements monetary policy, manages foreign exchange reserves and lays down prudential regulations and conduct monitoring thereof as they apply to the entire banking system. Its prudential regulations include, among others: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. The Bangladesh Bank has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problem arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime.

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:

• Price stability both internal and external
• Sustainable growth and development
• High employment
• Economic and efficient use of resources
• Stability of financial and payment system

Bangladesh Bank is empowered by section 7A of Bangladesh Bank Order, 1972 to hold and manage the official foreign exchange reserve of Bangladesh. It maintains its foreign exchange reserve in different currencies to minimize the risk emerging from widespread fluctuation in exchange rate of major currencies and very irregular movement in interest rates in the global money market. Bangladesh Bank has established Nostro account arrangements with different Central Banks. Funds accumulated in these accounts are invested in Treasury bills, repos and other government papers in the respective currencies. It also makes investment in the form of short term deposits with different high rated and reputed commercial banks and purchase of high rated sovereign/supranational/corporate bonds. Forex Reserve & Treasury Management Department of Bangladesh Bank performs the operational functions regarding investment which is guided by investment policy set by the Bangladesh Bank’s Investment Committee headed by a Deputy Governor. The underlying principle of the investment policy is to ensure the optimum return on investment with minimum market risk.

Towards liberalization of foreign exchange transactions, a number of measures were adopted since 1990s. Bangladeshi currency, the taka, was declared convertible on current account transactions, in terms of Article VIII of IMF Article of Agreement. As Taka is not convertible in capital account, resident owned capital is not freely transferable abroad. Bangladesh adopted Floating Exchange Rate regime since 31 May 2003. Under the regime, Bangladesh Bank does not interfere in the determination of exchange rate, but operates the monetary policy prudently for minimizing extreme swings in exchange rate to avoid adverse repercussion on the domestic economy. In the forex market banks are free to buy and sale foreign currency in the spot and also in the forward markets.

The deposit insurance scheme was introduced in Bangladesh in August 1984 to act as a safety net for the depositors aiming at minimizing the risks of loss of depositors’ fund with banks in which all the commercial banks including foreign banks and the specialized banks operating in Bangladesh are the member of this scheme by compulsion as provided under Article of Bank Deposit Insurance Act 2000. The deposit insurance scheme is designed to minimize the risks that the depositors suffer a loss out of placing funds with a bank. The purpose of deposit insurance scheme is to help to increase market discipline, reduce moral hazard in the financial sector and provide safety nets at the minimum cost to the public in the event of bank failure. The direct rationale for the deposit insurance is customer protection. The indirect rationale for deposit insurance is that it reduces the risks of systemic crisis, involving, for example, panic withdrawals of deposits from sound banks and breakdown of payments system.

A Deposit Insurance Trust Fund has also been created for providing limited protection to a small depositor in case of winding up of any bank. The Board of Directors of Bangladesh Bank is the Trustee Board for the Deposit Insurance Trust Fund. Bangladesh bank has adopted a system of risk based deposit insurance premium rates applicable for all scheduled banks effective from the half year January — June 2007. According to new instruction regarding premium rates, problem banks are required to pay 0.09 percent and private banks other than the problem banks and state owned commercial banks are required to pay 0.07 percent where the percent coverage of the deposits is taka one hundred thousand per depositor per bank. With this end in view, BB has already advised the banks for bringing deposit insurance scheme into the notice of the public through displaying the same in their display board.

On March 24, 1994 Bangladesh Taka was declared convertible for current transactions in terms of Article VIII of the IMF Articles of Agreement. Consequent to this, current external settlements for trade in goods and fnansys and for amortization payments on foreign borrowings can be made through banks authorized to deal in foreign exchange, without prior central bank authorization. However, because resident owned capital is not freely transferable abroad, some current settlements beyond certain indicative limits are subject to bonafides checks.

Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are repatriable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly.

Useful links

Currency of the Bangladesh:

Bangladesh Taka

List of Central Banks:

Central Banks

Official website of Bangladesh Bank:

www.bangladesh-bank.org

Chittagong Stock Exchange:

www.csebd.com

Dhaka Stock Exchange:

www.dsebd.org

Bangladesh Bank on Wikipedia:

Bangladesh Bank