Overview of Financial system of Bangladesh

The Financial system is a set of institutional arrangement through which financial

surpluses in the economy are mobilized from surplus units and transferred to deficit
spenders.

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

1. Formal Sector,
2. Semi-Formal Sector,
3. Informal Sector.

The sectors have been categorized in accordance with their degree of regulation.

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 includes those institutions which are regulated otherwise but do
not fall under the jurisdiction of Central Bank, Insurance Development & Regulatory
Authority (IDRA), Securities and Exchange Commission or any other enacted financial
regulator. This 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.
 Financial System of
Bangladesh

Formal Sector Semi Formal Sector Informal Sector

Specialized Financial Institutions:

1. House Building Financial

Corporation(HBFC)
2. Palli Karma Sahayak Foundation(PKSF)
3. Samabay Bank
4. Grameen Bank

Financial Market Regulators and Institutions

Money Market (Banks, Capital Market (Investment Banks, Stock Foreign Exchange
Exchanges, CDBL, Stock Broker, Merchant
NBFIs, Primary Dealers) Banker & Portfolio Manager, AMCs, ICB Market (Authorized
Credit Rating Companies etc.) Dealer )

Bangladesh Bank- Insurance Development & Security & Exchange Micro Credit Regulatory
Banks (59 schedule Regulatory Authority Commission (SEC)- Authority (MRA)-
Banks & 5 non schedule Stock Exchange, Stock
(IDRA)- 18 Life Insurance Brokers & Dealers, 693 Micro Finance
Banks) & Institutions
Merchant Banks, Credit
34 Non Banking Companies and 44 Non Rating Agencies.
Financial Institutions Life Insurance Companies
(NBFI)
Banks
After the independence, banking industry in Bangladesh started its journey with 6
Nationalized commercialized banks, 2 State owned Specialized banks and 3 Foreign
Banks. In the 1980's banking industry achieved significant expansion with the entrance of
private banks. Now, banks in Bangladesh are primarily of two types:

 Scheduled Banks: The banks which get license to operate under Bank Company
Act, 1991 (Amended in 2013) are termed as Scheduled Banks.

 Non-Scheduled Banks: The banks which are established for special and definite
objective and operate under the acts that are enacted for meeting up those
objectives, are termed as Non-Scheduled Banks. These banks cannot perform all
functions of scheduled banks.

There are 59 scheduled banks in Bangladesh who operate under full control and
supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank
Order, 1972 and Bank Company Act, 1991. Scheduled Banks are classified into
following types:

 State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or
majorly owned by the Government of Bangladesh. Sonali Bank Ltd, Janata Bank
Ltd, Agrani Bank Ltd, Rupali Bank Ltd, BASIC Bank Ltd, BDBL

 Specialized Banks (SDBs): 3 specialized banks are now operating which were
established for specific objectives like agricultural or industrial development.
These banks are also fully or majorly owned by the Government of Bangladesh.
Bangladesh Krishi Bank, RAKUB, Probashi Kallayan Bank.

 Private Commercial Banks (PCBs): There are 41 private commercial banks

which are majorly owned by the private entities. PCBs can be categorized into
two groups:

 Conventional PCBs: 33 conventional PCBs are now operating in the industry.

They perform the banking functions in conventional fashion i.e interest based
operations.
  Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in
Bangladesh and they execute banking activities according to Islami Shariah based
principles i.e. Profit-Loss Sharing (PLS) mode. .
 Foreign Commercial Banks (FCBs) : 9 FCBs are operating in Bangladesh as the
branches of the banks which are incorporated in abroad.

There are now 5 non-scheduled banks in Bangladesh which are:

 Ansar VDP Unnayan Bank,

 Karmashangosthan Bank,
 Grameen Bank,
 Jubilee Bank,
 Palli Sanchay Bank

FINANCIAL INSTITUTIONS

Non Bank Financial Institutions (FIs) are those types of financial institutions which are
regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now,
34 FIs are operating in Bangladesh while the maiden one was established in 1981. Out of
the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 16 were initiated
by private domestic initiative and 15 were initiated by joint venture initiative. Major
sources of funds of FIs are Term Deposit (at least three months tenure), Credit Facility
from Banks and other FIs, Call Money as well as Bond and Securitization.
The major difference between banks and FIs are as follows:

 FIs cannot issue cheques, pay-orders or demand drafts.

 FIs cannot receive demand deposits,
 FIs cannot be involved in foreign exchange financing,
 FIs can conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitization instruments,
private placement of equity etc.

Insurance Companies

Insurance sector in Bangladesh emerged after independence with 2 nationalized insurance

companies- 1 Life & 1 General; and 1 foreign insurance company. In mid 80s, private
sector insurance companies started to enter in the industry and it got expanded. Now
days, 62 companies are operating under Insurance Act 2010. Out of them-

 18 are Life Insurance Companies including 1 foreign company and 1 is state-

owned company,
  44 General Insurance Companies including 1 state-owned company.

Insurance companies in Bangladesh provide following services:

1. Life insurance,
2. General Insurance,
3. Reinsurance,
4. Micro-insurance,
5. Takaful or Islami insurance.

Micro Credit Regulatory Authority:

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. Currently, 693 institutions (as of July 2015) have been licensed by MRA to
operate Micro Credit Programs. But, Grameen Bank is out of the jurisdiction of MRA as
it is operated under a distinct legislation- Grameen Bank Ordinance, 1983.
Dhaka Stock Exchange:

Dhaka Stock Exchange (DSE) is a public limited company which was incorporated in
1954. It is formed and managed under the Companies Act 1994, Security and Exchange
Commission Act 1993, Security and Exchange Commission Regulation 1994, Security
Exchange (inside trading) regulation 1994, The Exchange demutualization Act 2013 .
According to stock market rule, only members can participate in the floor and can buy
shares for himself or his clients. At present it has 238 members.

The major functions are:

 Listing of Companies (As per Listing Regulations).

 Providing the screen based automated trading of listed Securities.
 Settlement of trading (As per Settlement of Transaction Regulations).
 Gifting of share / granting approval to the transaction/transfer of share outside the
trading system of the exchange (As per Listing Regulations 42).
 Market Administration & Control.
 Market Surveillance.
 Publication of Monthly Review.
 Monitoring the activities of listed companies (As per Listing Regulations).
 Investors grievance Cell (Disposal of complaint bye laws 1997).
 Investors Protection Fund (As per investor protection fund Regulations 1999).
 Announcement of Price sensitive or other information about listed companies
through online

Chittagong Stock Exchange (CSE):

Chittagong Stock Exchange (generally known as CSE)-the Second Stock Exchange in

the country. The Chittagong Stock Exchange began its journey in 10th October of 1995
from Chittagong city through the cry-out trading system with the promise to create a
state-of-the art bourse in the country.

Securities and Exchange Commission (SEC):

Securities and Exchange Commission (SEC) was established on 8th June 1993 under
Securities and Exchange Commission Act, 1993. SEC is composed of a Chairman and 4
full time members who are appointed by the Government. The main objective of SEC is:
a) To protect the interest of Investors in Securities.
b) To develop securities Market
c) To ensure proper issuance of Securities and compliance of the Laws
relating to the securities.
Central Depository Bangladesh Limited (CDBL):
The only depository system for the transaction and settlement of financial scurrilities,
Central Depository Bangladesh Limited (CDBL) was formed in 2000 which conducts its
operations under Depositories Act 1999, Depositories regulations 2000, Depository (user)
regulation 2003 and the CDBL by-laws.

Investment Corporation of Bangladesh (ICB):

ICB is a specialized capital market intermediary which was established in 1976 through
the ordainment of the investment corporation of Bangladesh ordinance 1976. This
ordinance empowered ICB to perform all types of capital market intermediaries that fall
under jurisdiction of SEC. ICB has three subsidiaries:
1. ICB Capital Management Ltd
2. ICB Asset Management Ltd
3. ICB Securities Trading Co. Ltd

Foreign Exchange Market

The rate at which one currency is exchanged for another currency in the foreign exchange
market is called exchange rate.

Until recent past, fixed exchange rate system was prevailing in Bangladesh in which case
the central bank of the country could devalue the local currency. To better protect the
external competitiveness of Taka and to enhance the resilience of the economy in
responding to shocks, Bangladesh formally stepped over to market based exchange rate
for the Taka from 31st May 2003 (Annual Report, BB, 2002-03). In this new system,
the nominal exchange rate is set by the market forces but keeps discretion for the central
bank to intervene in the foreign exchange market to keep the rate within certain limit of
appreciation or depreciation. This is known as ‘managed float’ system. In this system,
demand and supply primarily determine the exchange rate on a particular day. But
Bangladesh Bank comes forward to keep the exchange rate within a certain limit of
appreciation or depreciation by selling or buying the foreign currencies or by adopting
some other measures. The historical development of Exchange rate system in Bangladesh
if given bellow:
 Stages Exchange Rate Particulars
System
Stage one Fixed Wholesale and Retail rates between Bangladesh
Bank and Authorized Dealers were determined
by Bangladesh Bank. As such, in what rates the
Authorized Dealers would transact with the
clients were determined by Bangladesh Bank. In
this stage Exchange rate was fully controlled by
Bangladesh Bank. So , any devaluation and
revaluation of currency was done by Bangladesh
Stage Two Hybrid Wholesale rate was determined by Bangladesh
Bank and Retail rate was determined by
Authorized Dealers. In this stage Exchange rate
was not fully controlled by Bangladesh Bank.
Stage Three Hybrid Wholesale rate was determined by Bangladesh
Bank only for USD and Retail rate was
determined by Authorized Dealers. In this stage
Exchange rate was not fully controlled by
Bangladesh Bank.
Stage Four Floating Wholesale and Retail rates were determined by
(managed float) Authorized Dealers. Bangladesh formally
stepped over to market based exchange rate for
the Taka from 31st May 2003 (Annual Report,
BB, 2002-03). In this new system, the nominal
exchange rate is set by the market forces but
keeps discretion for the central bank to intervene
in the foreign exchange market to keep the rate
within certain limit of appreciation or
depreciation. This is known as ‘managed float’
system. If it is floating, the Bangladesh Bank
would have no power to intervention.