Financial System of Bangladesh

Bank: Generally, bank is a financial institution that collects society’s surplus cash and gives a part of that as loan to investors for
earning profit. So, bank is an intermediary institution that makes relationship between the owner of surplus savings and the investor
of deficit capital.

Banking System of Bangladesh:

The financial system of Bangladesh is comprised of three broad fragmented sectors:

Formal
sector

Informal Semi formal

sector sector

▪ The formal sector includes all regulated institutions like Banks, Non-Bank Financial Institutions (FIs), Insurance
Companies, Capital Market Intermediaries like Brokerage Houses, Merchant Banks etc.; Micro Finance Institutions
(MFIs).

▪ The semi-formal sector is mainly represented by Specialized Financial Institutions like House Building Finance
Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank etc., Non-
Governmental Organizations (NGOs and discrete government programs.

▪ The informal sector includes private intermediaries which are completely unregulated.

Formal Sector
1. Financial Market
• Money Market:(Banks, NBFIs, Primary Dealers)
• Capital Market (Investment banks, Stock Exchanges, Credit Rating Co. etc.)

2. Regulators & Institutions

• Bangladesh Bank (Central Bank)
• Commercial Banks
There are total 48 private banks found in our database while 9 foreign banks are currently operating in Bangladesh
beside of 39 local private banks. Those foreign banks are now operating as the branches of the banks which are
incorporated in abroad. And there are 6 state owned commercial banks (SOCBs) which are fully or majorly owned by
the Government of Bangladesh.

3. NBFIs
There are 34 NBFIs operating in Bangladesh. Among these, 3 are government owned, 12 are joint ventures with foreign
participation, and the rest 19 are locally private owned companies.

4. Insurance Companies:
Currently there are 78 insurance companies including two previously mentioned government owned corporations. Among
these, 47 are non-life insurance companies and 31 are life insurance companies. 35 non-life and 12 life insurance companies
are listed in the capital market.

Insurance Development & Regulatory Authority (Insurance Authority)

5. BSEC:
(Regulatory of capital market Intermediaries)

Stock Ex, Dealers, Brokers, Merchants Banks etc.

6. Microfinance Institutions: The member-based Microfinance Institutions (MFIs) constitute a rapidly growing segment of the
Rural Financial Market (RFM) in Bangladesh. Microcredit programs (MCP) in Bangladesh are implemented by various formal
financial institutions (nationalized commercial banks and specialized banks), specialized government organizations and Non-
Government Organizations (NGOs). The growth in the MFI sector, in terms of the number of MFI as well as total membership,
was phenomenal during the 1990s and continues till today.
Despite the fact that more than a thousand of institutions are operating microcredit programs, but only 10 large Microcredit
Institutions (MFIs) and Grameen Bank represent 87% of total savings of the sector and 81% of total outstanding loan of the sector.
Through the financial services of microcredit, the poor people are engaging themselves in various income generating activities and
around 30 million poor people are directly benefited from microcredit programs.
Credit services of this sector can be categorized into six broad groups: i) general microcredit for small-scale self-employment based
activities, ii) microenterprise loans, iii) loans for ultra-poor, iv) agricultural loans, v) seasonal loans, and vi) loans for disaster
management.

Commercial bank:
Commercial bank is a financial institution that collects deposit from customer, provides individual with loan, issues cheque to its
depositors, and also provides many other financial services to its customers.

According to Prof. Roger

“The bank which deals with money and money’s worth with a view to earning profit is known as commercial bank.”

According to Prof. Gilbert

“A commercial bank is a dealer in capital or more properly a dealer in money. He is intermediate party between the borrower and
the lender. He borrows from one party and lends to another and the difference between the terms at which he borrows and those at
which he lends form the source of his profit.”

From the analysis of above definitions, we can say that the commercial bank has the following properties.

• Commercial banks are the financial intermediary or dealer in capital and money.

• They collect deposits on current account, savings account and fixed account from people.

• They lend money to different people and organizations.

• The honors the customer’s cheque.

• The main purpose of this bank is to earn profit.

Function of commercial bank

Functions of commercial bank can be classified into three categories. They are
(a) General function,
(b) Agency function and
(c) Other functions.

General function: The general functions of the commercial bank are described below.

1) Receiving deposit: The main function of commercial banks is to collect deposits through different deposit accounts. This deposit
plays important role in case of capital formation. They take various motivational activities to motivate people to save money.

2) Giving facilities of money withdrawals: Bank provides depositors with different types facilities for money withdrawal. Bank
issue cheque, ATM card etc. to withdraw money. Current account and saving account holder can withdraw their deposited money
almost anytime they want subject to some restrictions.

3) Lending of money: A major portion of the deposits received by a bank is lent by it. This is also the major source of a bank's
income. Bank gives lower interest rate on deposits and charge higher interest rate on loan. However, lending money is very risky
and, therefore, a banker must take proper precautions in this process.

4) Investment: Profit is the main purpose of commercial bank. Commercial banks invest their fund in different profitable business
or industrial sectors. They also invest their fund in bond, shares, and securities etc. that help to increase its profit.

5) Discounting bill: Commercial bank discount different bill of exchanges. Traders are benefited by getting the money before
maturity of the bill. On the other hand, this discount from the bill is the revenue of bank. Discounting bill of exchange is another
important source of revenue of commercial bank.

6) Helping central bank: Central bank controls credit to ensure the sustainable economic growth. As a schedule bank commercial
bank extend its overall cooperation to this activity of central bank. They also perform different activities according to the direction
of central bank.

B) Agency or representative functions: Commercial banks perform different activities as a representative of customers. These
are given below:

i) Collecting of drafts, bills cheques, dividend etc. on behalf of customers.

ii) Execution of standing orders of the customer for example payment of rent, bill, promissory notes, insurance premium etc.
iii) Conducting stock exchange transactions i.e., purchasing and selling of securities for the customers.
iv) Acting as a correspondent or representative of customer and other bank and financial institutions.
v) Acting as an executor, trustee or administrator of an estate of customer.
vi) Acting as an underwriter.

C) Ancillary functions:
In addition to the above function, commercial bank also performs the following function.

i) Issuance of letter of credit, traveler’s cheque, credit cards etc.

ii) Accepting valuables for safe custody
iii) Remittance of funds
iv) Providing specified advisory services to the customers

Distinguish between central banking and commercial banking:

Point of Differences Central Bank Commercial Bank

1. Formation 1. Establish under the ordinance issued by the 1. Establish under the Banking Act of the
president. country.
2. Ownership 2. Generally owned by the government. 2. Private, public or joint ownership
mostly private ownership.
3. Sole authority for issuing note. 3. No authority for issuing note.
3. Issue of Note 4. Controlled by the central bank.
4. Basically autonomous 5. No direct influenced of the government
4. Control in case of commercial bank.
5. Direct influence by the government 6. Accepts deposits from individual and
5. Government Influence institutions.
6. Accept deposits from the government and
commercial bank. 7. Main objective is to earn profit
6. Accepting Deposit 7. Control of banks and money market. 8. Accept clearing house facilities from the
8. Provide clearing house facility to scheduled central bank
bank 9. Submits accounts to the central bank
7. Objective 9. Submits accounts to the Government 10. Require mandatory reserve with central
10. No requirement of mandatory reserve bank.
8. Clearing House

9.Submissionof Accounts

10. Maintaining Reserve

Branch Banking:

Branch Banking is system where a bank with a network of branches throughout the country carries out its banking operations.
Sometimes branches are also opened outside the country.

Features:

The main features of Branch banking system are as follows:

1) The bank is owned by a group of shareholders and controlled by a single Board of Directors.
2) The bank has a central office properly termed as the head office of the bank which controls the operations of different
branches.
3) Each branch is managed by a branch manager who manages the affairs of the branch as per the directives and policies
of the Head Office.
4) For external report the assets and liabilities of the branches and the head office are aggregated.

Unit Banking:

Unit banking is a system where the operations of a bank are confined to single office located in a particular area. A unit bank has
virtually no branches.

Branch Banking versus Unit Banking:

There is a still controversy regarding which systems of banking, Branch banking or Unit Banking.

Advantages of Branch Banking:

1) Economies of Scale: In case of Branch banking the level of operations as quite large as compared to unit banking. Under the
branch banking system it is possible to hire more competent and qualified staff and have better division of work resulting in
increase in overall efficiency.
2) Lower cash reserves: A Large bank with a number-of branches can manage its business with lower cash reserves since each
of branch can withdraw upon the resources of another branch or branches, if an emergency crisis. How-ever a unit bank cannot
confidently depend upon the resources of another unit bank. Hence, it may require keeping higher cash reserves to run its
operations smoothly.

3) Diversification of risk: In Branch Banking industrial as well geographical diversification of loan risks is possible. As a result
the loss suffered by branches on account of fall in industrial activity in a particular area may be more than compensated on
account of profit made by branches in areas where there may be boom in business and industrial activity. This is not possible in
case of unit banking where a bank is having its operations only in a particular area.

4) Better customer service: Branch banking provides better service to customers in remittance and collection of funds.
Moreover, the objective of opening branches is to take banking service to the doors of the people who need them. Thus, Service
is cheap as well as convenient.

5) Greater mobility of capital: Branch banking permits better mobility of capital and thus more uniformity in interest rates.
Surplus funds can be transmitted from one area to another area with convenience and speed and thus being equilibrium in
demand and supply of funds resulting in better returns to the investors.

6) Safety of loans: While lending money, the branch banks follow the policies as laid down by their Head office. The chances of
favoritism are therefore reduced to the minimum. Moreover, loans beyond a particular limit are to be approved by the head office
as per the prescribed procedure

Disadvantages of Branch Banking

1) Individual needs ignored: In case of branch banking, the branches are guided by the policies laid down by the head official
which is quite unaware of the individual needs. The branch manager has not much role to play. While a unit bank operates
only in a limited area and hence it is possible for it to take personal care of the individual needs of each of its customer.
2) Red Tapism: In Branch banking, a branch manager is required to take the instructions of the Head office from time to time.
He cannot take several decisions at this level. In Unit banking all matters are decided at the unit bank. In unit banking all
matters are decided at the unit bank level itself. Thus, there is quicker and better service.
3) Lack of effective control: In Case of branch banking, the banks sometimes become unmanageable due to large increase in
the number of branches. As a result the control gets slackened and increases the chances of frauds and manipulations.
4) Local needs ignored: Branch banks do not have attachment with a particular place. Branch manager also not local people.
They are subject to frequent transfers. The funds collected from local sources may be used for meeting the requirement of
other places where the bank may find the investment more lucrative. Thus, the local needs are not given that much of
attention in case of branch banking as is done in case of unit banking
5) Failure of banks: In Branch banking inefficient branches continue to exit at the expense of remunerative and efficient
branches. In case this precise goes too far, it may cause failure of banks having repercussions throughout the country.

Chain Banking: Chain banking is a system where an individual or group of individuals or members of a family control the
operations of two or more banks. The control is exercised either through holding majority of shares in each bank or interbank-
locking directorships. However, each bank retains its individual entity.

Group banking: It is a system where two or more banks are controlled by a holding company. Thus, group banking is similar-to
chain banking except with the difference that instead of an individual or group of individuals or members of a family. An
incorporated company having a separate legal entity holds majority of voting power in the companies of group. Such holding
company may or may not be engaged in the banking business.

Chain banking or group banking brings the advantages of pooling of resources, economies of scale and reducing the idle cash
balances etc. to the member banks. However, it has the disadvantages of lack of effective control over the member units and
misutilization of resources of the member units particularly by the holding company.

Deposit banking and mixed banking

Deposit banking: It is a system of banking where the banks involve themselves only in acceptance of deposits repayable on
demand and lending money to trade and industry for short periods not exceeding a year or for meeting working capital
requirements. As a matter of fact the term commercial banks in the earlier stages were used only for such banks.

Mixed Banking: It is a system where banks combine both deposit banking and investment banking system. Thus, in this type of
banking, banks raise deposits from the public repayable on demand and lend it to meet both short-term as well as long term
requirements of trade and industry.

Investment banking & Merchant banking:

Investment banking: It is a system where bank arrange long term funds for business and industry. They work both as financiers
as well as underwriters. As a financier they themselves provide long term funds to business and industry. As an underwriter they
as middlemen between business corporation and industry. They undertake the responsibility of selling shares and debentures of
corporation to the general public for commission.

Merchant banking: Merchant banking is an emergent sector in the capital market. According to Securities and Exchange
Commission (Merchant Banker and Portfolio Manager) Rules, 1996, merchant bankers is defined as “those who manage portfolio
on behalf of its clients or performs the business of underwriting or are related to securities as underwriter or advisor or are providing
corporate advisory services on completion of all the activities relating to Issue Management.”
 As per Merchant Banking Regulations, a merchant bank can mainly perform three activities which are:

1. Issue Management: Issue Management function of merchant Banking helps capital market to increase the supply of
securities. Being a Issue Manager we provides assistance to the Private Limited Companies intended to be converted into
Public Limited Companies by way of obtaining necessary permission from the relevant authorities, preparing prospectus for
public issue of shares and debentures, involving itself in the collection of application money, scrutiny of applications,
arranging for lottery relating to allotment, if required, allotment of shares and debentures, refund of application money etc.

2. Underwriting: Underwriting Operation is one of the important functions of a Merchant Banker by which it can increase
the supply of stock/shares and debentures in the market. It is an arrangement whereby the underwriter undertakes to subscribe
the unsubscribed portion of shares/debentures offered by any Public Limited Company. This encourages the prospective
issuers to offer shares/debentures to the public for subscription and they can raise fund from the public for implementation of
their industrial undertakings.

3. Portfolio Investment Management Services: One of the most important functions of merchant banking is to provide
Portfolio Management service to the customer. Basically, Portfolio Management Services program has four different wings
to provide portfolio investment management services.

Agent banking:

Agent banking means providing limited scale banking and financial services to the underserved population through engaged
agents under a valid agency agreement, rather than a teller/cashier. It is the owner of an outlet who conducts banking transactions
on behalf of a bank. Globally these retailers are being increasingly utilized as important distribution channels for financial
inclusion. Bangladesh Bank has also decided to promote this complimentary channel to reach to the poor segment of the society
as well as existing bank customer with a range of financial services especially to geographically dispersed locations

Wholesale Banking:

Banks that Provide services to large corporation is called wholesale bank. The customers of these banks are small, medium and
large-scale enterprise, industry private and public sector firms and multinational companies.

Some important definitions of wholesale banks are as follows:

• “Wholesale Bank mean large metropolitan banks that office provides financial services to corporations and other large
institutions.”Peter. R. Rose

• “Wholesale banks indicate specialized banks that deal almost exclusively with medium and large size business.”
Benton E. Gap and James W. Kolar

Thus, in the process of modern technological development, wholesale banks provide services to all categories of commercial
customer, government institutions and multinational companies using the modern technology.

Retail Banking:

Generally banking firms that provide banking services to individual (households) and small business, is called retail bank.
Households are the most important sources of collecting deposit in any country. Retail banks collect deposit from households and
provide services of checking account, bill payment, opening new account, investment services, loan application and approval, credit
card issue, car loan etc.
Some important definitions of Retail banks are as follows:
• “Retail bank means consumer-oriented banks that sell the majority of their services to households and smaller
business.” Peter S. Rose

• “Retail banking means transaction with customers of smaller means, i.e. small checking account, consumer credit,
holding of saving deposits or sale of certificate of deposit in small holding L.M.Bhole

Retail banks provide the services of ATM, credit card, debit card, point of sale services, Home Banking and Telephone Banking
etc. In our country all the banks are considered as retail banks.

Primary Reserve and Secondary Reserve

Reserve of a commercial bank refers to that part of deposits which is kept in the central bank as a statutory requirement and in the
bank as liquidity.

Primary reserve and secondary reserve:

Primary reserve and secondary reserve are the banks funds. But they have some differences. Before discussing the differences, we
have to know the definition of primary reserve and secondary reserve.

Primary reserve: Most primary reserves are cash assets held to satisfy legal reserve requirements. Cash held in a bank’s vault and
on deposit at central bank for the purpose of meting reserve requirements and other cash needs of the bank.

Secondary reserve: Secondary reserves are near-money financial instruments that have no formal regulatory requirements and
provide an additional reserve of liquid assets to meet cash needs. While there are no formal liquidity requirements imposed by bank
regulators, it is considered in the on-site examination process. It provides an additional reserve of liquid assets as primary reserves
to meet cash needs.

SLR:

SLR stands for Statutory Liquidity Ratio and is prescribed by Bangladesh Bank as a ratio of cash deposits that banks have to
maintain in the form of gold, cash, and other securities approved by Bangladesh Bank. This is done by Bangladesh Bank to
regulate growth of credit. These are un-encumbered securities that a bank has to purchase with its cash reserves. The present SLR
is 13%,

CRR:
CRR stands for Cash Reserve Ratio, and specifies in percentage the money commercial banks need to keep with themselves
in the form of cash. In reality, banks deposit this amount with Bangladesh Bank instead of keeping this money with them. This
ratio is calculated by Bangladesh Bank, and it is in the jurisdiction of the BB to keep it high or low depending upon the cash flow
in the economy. Bangladesh Bank makes judicious use of this amazing tool to either drain excess liquidity from the economy
or pump in money if so required. When Bangladesh Bank lowers CRR, it allows banks to have surplus money that they can lend
to invest anywhere they want. On the other hand, a higher CRR means banks have lesser amount of money at their disposal to
distribute. This serves as a measure to control inflationary forces in economy. When Inflation is High (Money supply is
high), BB increases the CRR Rate, this will mean, Commercial Banks will have to keep more percentage of deposits with BB.
This in turn will reduce the commercial bank's Lending capacity. When lending capacity is reduced, money supply in the
economy will be less.SLR: Statutory Liquidity Ratio. It is a part of deposits that Commercial Banks are supposed to
Bangladesh Bank has re-fixed the CRR (Cash Reserve Ratio) at 4.00 percent on a bi-weekly average basis with a provision of
minimum 3.5 percent on a daily basi

Distinction between Primary reserve and Secondary reserve:

Although primary reserve and secondary reserve meets the deposit holders need. They have several differences. The differences
are given below:
 Subject Primary Reserve Secondary Reserve
1. Objective 1. Liquidity maintenance 1. Liquidity maintenance and profit
making.
2. Forms 2. Cash money 2. Bond and credit installment such as short
term loan to commercial bank.

3.Location 3. a) Bank’s vault 3.Credit installment and bond

b) Central bank issuing institutions
c) Demand deposits
with other bank

4. Rate of yield 4. Doesn’t have any profitability 4. Profitable but a lower rate
capacity
5. Types 5.Two types: 5. It needs not to be classified
a) Statutory Reserve
b) Working Reserve
6. Level of risk 6. No risk involved 6. Lower risk involved

Purposes of primary reserve:

Bank preserves a primary reserve for meeting current liquidity needs as well as they perform another functions with the primary
reserves. The other purposes for preserving a primary reserve are given below:
1. Protect from possible liquidity crisis.
2. Play the role of first line of defense/security.
3. Enable bank to satisfy the depositor’s claim/argue.
4. Enable to perform the expected function on the community.
5. Enable the bank to meet the establishment expense.
Purposes of secondary reserve:
After finishing the primary reserve, if the bank wants more liquid money these times they use secondary reserve fund. Secondary
reserve also performs loan function and recovers it as early as possible. The purposes of secondary functions are given below:
1. To avoid liquidity crisis.
2. To earn moderate income.
3. To tradeoff between liquidity and profitability.

Constituents of primary reserve:

Primary reserves can preserve in three forms. The forms are also called constituents of primary reserve. The constituents of primary
reserve are as follows:
1. Cash in hand: The amount of cash money kept in the bank is considered as primary reserve.
2. Balance with Central Bank: The bank has to maintain a certain level of statutory reserve with the Central Bank.
3. Demand deposits with other: For mutual strategic and operational benefits bank keeps demand deposits with other banks.

Different types of Standing Committee:

There are some committees which take decisions for their individual part of activities. The types of standing committee are given
below:
(i) Executive Committee.
(ii) Loan Committee.
(iii) Investment Committee.
(iv) Salary and employee relation Committee.
(v) Examining evaluation Committee.
(vi) Business development Committee.
(vii) Audit Committee

Explain the inflows and outflows of fund of commercial banks

Inflow and outflow of fund of a commercial bank:
There are some major factors which can create the inflows and outflows of commercial banks. In below the factors of fund inflows
and fund outflows are given:
Inflows of fund:
1. Increase in deposit: When a bank has increased the amount of its depositors than as usually the fund of bank increases.
2. Increase in borrowing: Bank borrows money from other banks or financial institutions. By borrowing from them the fund
of bank increases.
3. Undistributed profit: Banks earn profits and distribute it to the depositors and shareholders of the bank. Before distribution
the total profit amounts are reserved in banks fund.
4. Loan recovery: Banks give loans. So, when they recover the loans from the borrower their fund increases.
5. Return of invested fund: Banks invest depositors’ money in a profitable business. By this when they earned profit the
capital with profit amount added in their fund.
6. Sales proceeds of other assets: Banks have some assets and they also get assets in case of default loans collateral. They
can increase their fund by selling these assets.

Outflows of fund:
1. Increasing loans and advances: Banks give loans and advance payment to its customers. But by giving these facilities
bank need to cost money from their fund.
2. Withdrawal of deposits: Depositors of banks can take their money from their account any time. So when the depositors’
withdrawal their account money the total amount of bank’s capital decreases.
3. Increase in cash outflow: Banks give several types of services and to give this bank needs to spend cash. This increases
the cash outflow of banks.
4. Increase in investment: The more you invest the more you can earn profit. Sometimes bank work in this concept. So, by
investing more money bank’s cash outflow increases.
5. Repayment of borrowers: Banks borrow money from other banks and financial institutions. When they need to repayment
the borrowing loan these time the reserve of cash decreases.
6. Payment of dividend: Bank earns profit and distributes it as dividend to their shareholder. For this purpose, the outflow
of fund increases.
7. Increase in other assets: Bank needs assets for their business purposes. So, when they buy the needed assets the outflow
of cash increases.

Directors of the Banks

Constitution of the Board of Directors and fit and proper test for appointment of Bank director:
When a bank selects his Board of Director, these times there is some rules and regulation which have been maintained and for the
Board of Director a fit and proper test must be taken. The constitutions of the BOD and the rules of Fit and proper test are given
below:

Constitution of the Board of director:

(a) The board of directors of the bank companies shall be constituted of maximum 13 members.
(b) According to amendment of the provision 15 (10) Bank Company Act 2017, four family members of owner
family will be directors instead of existing two directors whatever written in the company law. The directors
of a private bank now hold the post two terms and each term is three years.
(c) According to Section 31 of the Banking Companies Act, 1991, no company shall
carry out banking business in Bangladesh without obtaining a license from
Bangladesh Bank. Bangladesh Bank will decide to grant licenses after
considering the need and overall strategy congenial to effective monetary and
financial sector policy for the country. Bangladesh Bank must be satisfied that
the following terms and conditions for the establishment of a new banking
company in Bangladesh have been met:
1. Status of the new commercial bank:
1.1 Must be a public limited company incorporated in Bangladesh.
2. Paid up capital requirement for a bank to be established: The paid-up capital of new commercial bank shall not be less
than Taka
400.00 Crore as required under Bank Company Act 1991. The share
capital will be formed with ordinary shares only.

Fit and proper test:

(a) The concerned person must have management/ business or professional experience for at least 10 years.
(b) He/she has not been convicted in any criminal offense or involved in any fraud/forgery financial crime or illegal
activities.
 (c) He/she has not been convicted in regard to contravention of rules, regulations or disciplines of the regulatory
authorities relating to financial sectors.
(d) He/she has not been involved with a company/firm whose registration/license has been revoked or cancelled or
which gone into liquidation.
(e) He/she has not been adjudicated a bankrupt by a court.
(f) Loans taken by him/her or allied concern from any bank or financial institutions have not been become defaulted.
Then, the declaration shall have to be signed by the concerned person (candidate) and it shall have to be forwarded to Bangladesh
Bank by the Chairman of the Board of Directors.

Management of the proposed bank:

6.1 A Director or Advisor to any banking company other than the proposed
bank shall not be a Director of the proposed bank.

6.2 The Member of Board of Directors shall be restricted to 13 (Thirteen).

6.3 Maximum number of directors from a family shall be restricted to four

in case of the total shareholding of that family exceeds 5% and one
director if the total shareholding is up to 5%.
6.4 The Chief Executive Officer (CEO) of the proposed bank shall have at
least 15 (fifteen) years of experience in the banking profession.

Declaration for Fit and proper test while selecting Board of Director:
I do thereby declare that I am eligible to become a director of a bank as per fit and proper test criteria issued by Bangladesh Bank.

(a) I have management/ business or professional experience for last 10 years.

(b) I have not been convicted in any criminal offense or involved in any fraud/forgery financial crime or illegal
activities.
(c) I have not been convicted in regard to contravention of rules, regulations or disciplines of the regulatory
authorities relating to financial sectors.
(d) I have not been involved with a company/firm whose registration/license has been revoked or cancelled or which
gone into liquidation.
(e) I have not been adjudicated a bankrupt by a court.
(f) There is no loans taken by me or allied concern from any bank or financial institutions have not been become
defaulted.

07-12-06
Dated Signature

Counter Signed

Chairman,
Board of Director
ABC Bank Ltd.
What are the functions of Board of Directors?

The need for setting up a Board of Director at individual bank level was an eventually of endorsing the idea of all country’s Central
Banks. The Board is formed for supervisory and advising activities. If the Board of Director does not able to solve any proble m,
then they take help from Central Bank. The Board of Director normally builds up with 13 members.

Functions of Board of Directors (BOD):

• Determine the bank’s goals and objectives: Generally, BOD determines a bank’s goals and objectives to earn the
targeted profit margin.
• Formulation of bank policies: BOD selects the bank rules and regulation and bank policies to run its operations.
• Selecting the bank management: BOD selects the management processes of a bank.
• Creating required committee: BOD creates the standing committee which the bank required.
• Supervision of bank’s bigger loans: BOD supervises the business organization while taking a bigger amount of loans.
• Supervision of bank’s major investments: BOD also supervises in the bigger and major investment projects.
• Management as well as customer counseling: Not only management process also customer counseling is done by BOD.
BOD surveys the customers need and want and fill up the lacks according to their need.
• Business development: BOD advises the business organization to their development purposes and gives loan to them.
• Review of bank operation: After a fixed period of time BOD overviews the activities of bank and the bank operations.
The responsibilities of Board of Director to depositors, to shareholders and to supervisory Agencies:

Responsibilities of the Board of Director:

Board of Director has some responsibilities to the individual part of bank. There are some responsibilities of BOD to their
depositors, shareholders and supervisory agencies. The responsibilities of BOD are given below:
→ To depositors:
Board of Director has some duties to the bank’s depositors.
1) BOD assures the depositors safety and gives them the facilities which are best to them.
2) Ensure adequate funds for withdrawal
3) Appoint capable and honest officer
4) Guarantee safety of the depositor.
5) Arrangement of adequate capital to guard against loan default
→ To shareholders:
The public bank’s BOD ensures their shareholders the adequate return against their shares and introduces attractive packages to
increase the number of Shareholder.
(1) Ensure reasonable return
(2) Develop innovative financing arrangement to attract the borrowers

→ To supervisory agencies:
BOD has to accept the advice of the Central Bank’s supervision team and they have to make the total audit report timely.
(1) Allow smooth supervision by the central bank
(2) Ensure timely statutory audit

Liabilities of the Board of Director:

BOD also has some liabilities to the outsider, shareholders and bank. The liabilities of Board of Directors are given below:
1. To outsider dealing with the bank:
Outside where the director enters into contract in the name on behalf of the banking company. They won’t be personally
liable for these customers.
2. To shareholder and creditor:
Directors are liable to shareholders for misstatement (wrong announcement) in the prospectus or report, which they
may issue.
3. To the bank:
Directors are liable if they breach the trust, which makes loss to the bank. This sort of liabilities arises from two
ways-----
i) Liability for secret profit
ii) Liability for negligence

Central Bank and Bank Supervision

Bank:
Generally, bank is a financial institution which involved with money and money related business.

Commercial Bank:
Bank means a commercial bank generally. Commercial bank is the mother of modern bank.
Generally, a bank which deals with money and money’s worth with a view of earn profit is called commercial bank.

According to Prof. Ashutos Nath, “Commercial Bank is an intermediary profit making institution.”
Commercial Bank is a financial institution that is owned by stockholders, operates for profit, and engages in lending activities.
Legal definitions of a commercial bank depend on whose laws or rules are being used.
Central Bank:
A bank that is engaged in control of money market and credit of a counting is called central bank. Because of that the central
bank is the guardian of all money market.

According to Prof. Hottray, “The Central bank is the leader of the last resort”.
According to Prof. R P Cent, “The Central bank is a financial institution which control money market and manage it practically
for human well-being.”

Objectives of Central Bank:

The main objective of central bank is to create a country’s economic stability. Central Bank have some objectives which are
different from all other banks is called objectives of central bank. The main objectives are given below:
1. Note issue: Central bank creates for issuing notes and money systematically for economic wellbeing.
2. Credit control: For Credit control, central bank is established. To stable the money supply, a central bank must control
its available credit.
3. Maintenance price stability: Maintenance price stability is also an objective of central bank because it can stable its
money market in internal country by supplying money and adjust the interest rate.
4. Acting as the banker to the government: Central bank is the bank of government. Central bank reserve money and
make monetary transaction on behalf of government.
5. Capital formation and development: Central bank forms the capital for another commercial bank. For the purpose of
industrialization and development process in inner country, central bank performs its activities.
6. Control of the banking system: Central bank controls the other commercial bank and advises them how to maintain
the banking activities.
7. Performing the duly of clearing house: Central bank performs the activity as “Clearing House”. With this activity
commercial banks solve their internal problems and inter-transaction in the presence of central bank in a fixed time.

From the above discussion, we can say that central bank is a bank of government and it performs some other activities like;
collecting money, give loan, consultant of government, control of foreign exchange, Economical research etc.

Functions of Central Bank:

General function:
There are some general functions of central bank which it performs normally. They are:
(i) Note issue: Note issue is the general activity of Central bank to supply money in the inner country.
(ii) Maintaining the value of currency: Central bank select the value of currency and rate of foreign exchange.
(iii) Control of money market: Central bank controls money market and supply money as much as they should
supply.
(iv) Control of credit: Credit control is another activity of central bank. To stable the money supply, a central bank
must control its available credit.

Functions as the banker to the government:

Central bank is the bank of government. Central bank performs some function on behalf of government. The functions are:
(v) Maintenance of government fund: Central bank controls the government fund means collect funds and
preserve it.
(vi) Receipt and transfer of government money: Central bank receive and transfer money on behalf of
government
(vii) Issue and supervision of loan: Central bank issues loan for commercial bank and supervise these activities as
the loan utilized perfectly.
(viii)Acting as advisor or agent of the government: There is a relation between government and the chief of the
central bank. The central bank acts as a agent of government to pay the money in foreign and domestic sectors
and give the payment and hand over it.

Functions as the banker of banks:

Central bank is the banker of all commercial banks. As a banker central bank performs several activities
(ix) Scheduling of banks: To open a new bank, it needs to take permission from the central bank.
(x) Acting as the clearing house: Clearing house is a system which contains a exact place where other banks’
transactional problems solved by the central bank at a exact time. Here central bank and its representative solve
internal banking transaction.
(xi) Sanctioning of loan to commercial bank: When commercial banks have the deficiency of liquidity they take
loan from the central bank.
(xii) Supervising loan activities of commercial banks: Not only sanction the loan, central bank also supervises
where the commercial banks use the loan.
(xiii)Assisting commercial banks to recover loans: The central bank make influence the commercial banks to
recover their loans.
 (xiv) Auditing the accounts of commercial banks: Central bank audits the transactions of commercial banks in a
regular period.

Non-Performing Loan or Default Loan:

Generally, a loan on which the interest payments are overdue is called Non-performing loan.
In broadly we can say when borrower cannot repay interest or installment on a loan with a due time then it is qualified as default
loan or non-performing loan.

Reasons of Default Loan:

There are some reasons for which default loan can be created. The reasons are given below:
• Government interference in sanctioning loan: Government does not take any step in sanctioning loan. They have no rules
and regulation when taking loan.
• Loan provided to the government institutions that subsequently became bad: Sometimes Government institutions take
loan and later they do not repay the loan.
• Negligence of concerned officials: Loan taker ignores the bank rules and do not want to fill the loan.
• Performance of duly without necessary skills: Any unskilled banker can give loan and for this time this loan can be
defaulted.
• Haste in credit analysis: A Loan can be defaulted for badly and rapidly credit analysis and investigation.
• Credit analysis based on incomplete data: If the loan given on the basis of incomplete data of loan taker then the loan can
be defaulted.
• Nepotism, partiality in the process of loan sanction: In the process of loan sanction, if the banker takes any false step or
if he gives the loan to any relative without knowing him then the loan can be defaulted.

Recommendation against the Default Loan:

There are some suggestions which can reduce the default loan usually. The steps for which a default loan can be decreased are
given below:
1. Concrete recovery policy should have followed by financial institution
2. Default loan recovery strategy should give emphasis on preventive measure; such as- Improvement of credit screening
3. Bank should more aware about collateral and security system. No loan should be provided without adequate collateral.
4. Political Influence is also necessary. As a democratic country, there are different parties come in power of governance.
Political assistance is needed to influence the banks performance.
5. Finally, defaulters of bank should not be allowed to any social and political platform. Their name should be circulated through
state broadcasting media even in rural area as many miscreants.
According to Prof. Wahiduddin Mahmud, “Habitual” defaulters should not get any loan rescheduling facilities.

Bank Supervision:
When a bank gives loan to the individual they direct them how to use the amount what he loaned is called bank supervision.
Every Bank has the supervision board.

Supervision is exercised by regulators to ensure that bankers are complying with banking regulations. Bank examinations are one
means of determining compliance with regulations. Bank supervisors have a variety of techniques at their disposal to deal with
problem banks- banks that are not in compliance with rules and regulations.

Objectives of Bank Supervision:

Bank super vision have some objectives that the loan which take an individual can use perfectly and bank can recover it as early as
possible. The objectives of bank supervision can run a bank successfully. The objectives of bank supervision are given below:
1. To protect depositor’s interest
2. To promote soundness of the banking system
3. To preserve confidence of the public
4. To ensure that banking sector remain healthy & promote economic growth

Supervisory departments: (Bangladesh Bank)

Bangladesh bank has six supervisory departments. They are:
1. Banking regulations and policy department
2. Department of banking operations
3. Department of bank inspection
4. Agriculture credit and special program department
5. Credit information bureau
6. Anti-money laundering department (newly formed)
CAMELS Ratings: (Measuring performance status)
CAMEL rating is a mnemonic for the five principal areas examined by such bank supervisory authorities. It is one of the methods
of bank supervising.

The inspector assesses the status of the bank computing the CAMELS rating. The elaboration of CAMELS is---- C=
Capital Adequacy
A = Asset Quality
M = Management Efficiency
E = Earning Capacity: and
L = Liquidity
S= Sensitivity of risky investment

Formulas for Assessing CAMELS:

Bank examinations are part of the supervisory process. CAMELS rating is also a part of examination which first objective is to
determine the safety and soundness of the bank. There are formulas for Assessing CAMELS. The individual rating points of capital,
asset, management, earnings and liquidity are added and divided by 5. Each letter of CAMELS refers-
C = Capital adequacy: the amount of regulatory capital that banks are required to maintain
A =Asset quality: the risk associated with managing assets including the quality of loans and investments.
M = Management efficiency: the capacities of the board of directors and management to measure, monitor, and control risk
E = Earning capacity: the profitability of the bank and sources of those earning taking risk into account.
L = Liquidity: the bank’s ability to meet its financial obligations and the needs of its customers (deposit withdrawals and loans).
S= Sensitivity of risky investment of the bank.

The bank’s performance is measured by the following status. These are:

Rating status:
1. Strong -------------------------------- 1 through 1.4
2. Satisfactory------------------------- 1.5 through 2.4
3. Fair ---------------------------------- 2.5 through 3.4
4. Marginal --------------------------- 3.5 through 4.4
5. Unsatisfactory --------------------- 4.5 through 5.

Problem of bank supervision: Bangladesh perspective:

There are some problems in the process of bank supervision. For these the performances of a bank cannot be measured perfectly
in Bangladesh. The problems for which bank supervision cannot be completed clearly are given below:
▪ Statements are not prepared by the branches/head office as per requirement inspection team.
▪ Abnormal delay occurs in case of supply information which are not readily available with the bank branches/ head office.
▪ In most cases co-operation is not cordially extended to the inspection team by the officials of the bank.
▪ Partial or inadequate information supplied by the branches/Head office to inspection team.

Suggestions:
There are some suggestions for solving the problems of bank supervision. If the banks follow the suggestion then they might solve
their problems quickly. The major suggestions that reduce the problems of bank supervision are given below:
1. Bank should be advised to prepare the statement required by the Bangladesh Bank inspection team/inspection on partial
basis.
2. In case of concealment of facts if detected the bank should be asked to take disciplinary measures against the concerned
officials.
3. Update necessary information should be supplied to inspection team.

Stages of deposit processing:

Stages of deposit processing are described as below:
1. New account section: The new depositor at first need to collect an application form regarding the new account section.
2. Acceptance of necessary application, photograph and documents: Than, he/she needs to fill-up the application and
attest photograph and necessary documents with the application form.
3. Checking department: The submitted documents are checked by the departmental officer of the bank.
 4. Permission of manager: If the submitted documents are right than the manger of the bank gives permission for opening
an account.
5. Deposit of primary money: Depositor needs to pay a certain amount of money in his account as primary money.
6. Data entry: Than the data regarding the new account get entry in banks account books.
7. Deliver check book, passbook and deposit receipt: After all of these steps bank deliver check book, passbook and
deposit receipt to the depositors.
8. Bookkeeping: All these processes include the receipt of money by the bank and deliver of the element to the depositors
are recorded in a book.
9. Review: From the first step to the previous one every steps are reviewed by the bank officer.
10. Influence the potential depositors: Banks says to the new depositor to advertise for the bank to collect more depositors.

Organization Chart:
Organization means a systematic process of collecting and allocating the resources of the organization to accomplish the objectives.
According to Prof. Haney says, “Organization is the harmonious adjustments of specialized parts for the accomplishment of some
common purposes.”