banking research series 2011ssadmin.bibm.org.bd/notice/29-06-19/banking research series 2011.pdf ·...

Banking Research Series 2011

A Compilation of Research

Workshop Keynote Papers

BANGLADESH INSTITUTE OF BANK MANAGEMENT Mirpur, Dhaka

Banking Research Series 2011

Published: February 2012 Editorial Team : Dr. Toufic Ahmad Choudhury : Dr. Shah Md. Ahsan Habib : Abed Ali Support Team : Sharmina Nargish : Papon Tabassum : Sarder Aktaruzzaman : Md. Awalad Hossain Published by Bangladesh Institute of Bank Management (BIBM) Plot No. 4, Main Road No. 1 (South), Section No. 2 Mirpur, Dhaka-1216, Bangladesh PABX : 9003031-5, 9003051-2 Fax : 88-02-9006756 E-mail : [email protected] [email protected] Web : www.bibm.org.bd

Printed by Nahida Art Press, Gopibag, Dhaka, Bangladesh

The views in this publication are those of authors only and do not necessarily reflect the views of the institution involved in this publication.

Forewords

Bangladesh Institute of Bank Management (BIBM) has introduced a number of research-based roundtable discussions/workshops on contemporary financial and banking issues in its annual training calendar from 2010. In these discussions and workshops, a keynote paper is usually prepared by the faculty members of the BIBM, highlighting issues which called for wider dissemination to and discussion with a mature audience of banking professionals. After thorough deliberations on the relevant issues, a number of recommendations are usually derived on different aspects of the topic which are incorporated into the final version. We have published the first issue “Banking Research Series 2010” in 2011. The present compendium, the second of the Banking Research Series would, we hope, attract attention of not only bankers, but of other professionals like credit analysts, economic consultants, economists, development practitioners as well as the academic community. BIBM would also welcome comments, critiques and suggestions on the themes contained in these research-based discussions/workshops. Dr. Toufic Ahmad Choudhury Director General

Contents

Paper One

An Impact Evaluation of Green Initiatives of Bangladesh Bank Dr. Shah Md. Ahsan Habib, Md. Shahid Ullah, Tahmina Rahman

01-38

Paper Two

Implementation Status of Basel-II: Bangladesh Perspective Md. Nehal Ahmed, Atul Chandra Pandit

41-68

Paper Three

Disclosure Requirements of Banks: Bangladesh Perspective Atul Chandra Pandit, Md. Mahabbat Hossain, Maksuda Khatun

71-116

Paper Four

Financing PPP Projects in Bangladesh: Bank’s Initiatives Md. Ruhul Amin

119-168

Paper Five

An Assessment of the Operations of Trade Payment Methods in Bangladesh Mahmood-ur-Rahman, Antara Zareen

171-209

Paper Six

Mobile Banking in Bangladesh Md. Mahbubur Rahman Alam, Md. Shihab Uddin Khan, Kaniz Rabbi

213-265

Paper Seven

Risk Assessment of Banks’ Involvement in the Capital Market: Bangladesh Perspective Md. Alamgir, Md. Zakir Hossain

269-286

Paper Eight

Implication of the Legal Framework Guiding Loan Recovery Syed Ahmed Khan, Quazi Golam Morshed Farooqi

289-303

Paper One

An Impact Evaluation of Green Initiatives of Bangladesh Bank

Dr. Shah Md. Ahsan Habib Professor and

Director (Training), BIBM

Md. Shahid Ullah Lecturer, BIBM

Tahmina Rahman Lecturer, BIBM

An Impact Evaluation of Green Initiatives of

Bangladesh Bank

I. Introduction

Policy makers in many economies have been undertaking initiatives and

formulating rules to support green banking activities by the financial sectors

throughout the world. Central banks have been addressing environmental and social

needs and responding positively to the demands and suggestions of stakeholders1.

Alongside issuing guidelines for ensuring environmental compliance, central banks

have been formulating green policies and offering incentives for developing Green

Banking (GB) practices among commercial banks and Environmentally Responsible

(ER) practices among businesses. Today, it is recognized that banks can play

important roles in economic development and environmental protection through

performing and promoting green practices in banking and businesses.

Environmental concern is at the centre of GB policies and strategies. The public

concern of the state of environment has been growing rapidly in the last few years,

mostly due to unusual weather patterns, rising greenhouse gases, declining air

quality, etc. (Zeitlberger 2007). Banks hold a unique position in an economic system

that can affect production, business, and other economic activities through their

financing. Today, an increasing number of banks are going green by providing

innovative products that cover financial services to support the activities that are not

hazardous to environment and help conserve environment. Such activities are known

as ‘Green Banking Activities’ and the banks that are performing green banking

activities are popularly called ‘Green Bank.’ Green Banking is conducted in such

areas and in such manners that help overall reduction of carbon footprint2 and other

pollutions; and help preserving scarce resources for future generation.

In response to various legislative and regulatory bindings and incentives to

promote good corporate citizenship, a good number of banks in developed countries

have been demonstrating their commitment to the earth through incorporating

environmental risk in financing; using recycling programs; focusing on energy

efficiency, purchase of carbon offsets; and sponsoring environmental events.

In contrast, the status of environmental management has not been satisfactory in

many developing countries, largely due to poor enforcement of existing laws and

policies, lack of incentives and inadequate pressure from civil society and interest

groups (Habib 2010). Bangladesh Bank (BB) has been helping government in

implementing provisions of key environmental regulations in the financial sector and

1 In the endeavour of green banking, different stakeholders- government, IFIs and IGOs, environmental NGOs,

business firms, and commercial banks ( in addition to central banks) have been contributing in different ways. 2 It is the total set of greenhouse gas emissions caused by an organization, event, product or person.

Research Workshop Keynote Paper 01

http://en.wikipedia.org/wiki/Greenhouse_gas

from time to time it (BB) has issued a few environmental circulars and introduced

refinance facilities to encourage banks for environmental financing. The recent

circular on ‘Policy Guidelines for GB’ is a remarkable step on the way to developing

green banking practices in the financial sector of Bangladesh. Commercial banks’

responses are crucial for positive outcomes of these initiatives. Now the questions

are: Are the commercial banks responding to the initiatives of BB? Are the

commercial banks using refinance facilities of BB? Is there any change in the green

banking activities of the commercial banks after BB’s initiatives? What difficulties

are banks and the end users facing in this connection? How can these challenges and

issues be handled? There is no doubt that favourable legal framework; supportive

policy framework; conducive market environment are crucial for achieving the

desired goals. In finding the answers of the research questions, the study identified

the following specific objectives of the paper: one, discussing conceptual issues and

reviewing literature on domestic policy initiatives on green practices in global

perspective; two, discussing the green initiatives of BB to develop GB in Bangladesh

; three, identifying supportive legal, policy and market environment for developing

GB in Bangladesh ; four, examining the implications of the BB initiatives for the

commercial banks; and five, identifying measurers to handle challenges and issues

relevant for developing green practices in the banking sector of Bangladesh.

The research workshop paper is based on both primary and secondary

information. Secondary and published literature, research papers, and sustainability

reports of different banks and environmental organizations have been reviewed to

understand conceptual issues and domestic policy initiatives in global perspective.

Websites, published documents of BB and other commercial banks; and primary data

from BB and commercial banks have been used to attain the basic objectives of the

paper. The research team interviewed bank officials of relevant desks of the BB and

twenty-five selected commercial banks (covering 4 state-owned3, 17 local private

commercial banks,4 2 foreign commercial banks5 and 2 specialized banks6).

Unstructured questionnaires/schedules have been used to gather primary information.

A few cases have been gathered and added to the report to understand the

perspectives of commercial banks and end-users of green products. On the way to

finding measures for effective implementation of green banking practices in

Bangladesh, the relevant issues and challenges were placed in a workshop

(participated by a good number of experienced practitioners) where the participants

came up with some specific recommendations.

3 Sonali Bank Ltd., Agrani Bank Ltd, Janata Bank Ltd. . and Rupali Bank Ltd.,

4 Mutual Trust Bank Ltd., Mercantile Bank Ltd., Trust Bank Ltd., National Bank Ltd., Prime Bank Ltd.,

Uttara Bank Ltd., Southeast Bank Ltd., Dhaka Bank Ltd., Islami Bank Bangladesh Ltd., Al Arafa Islami Bank

Ltd., NCC Bank Ltd., EXIM Bank Ltd., BRAC Bank Ltd., Shahjalal Islami Bank Ltd., Eastern Bank Ltd., Dutch-

Bangla Bank Ltd. and Pubali Bank Ltd. 5 HSBC and Standard Chartered Bank

6 BASIC Bank Ltd. and Bangladesh Krishi Bank

02 Research Workshop Keynote Paper

The paper is organized into six sections. After stating the background, objectives

and methodological aspects in section I, section II attempts to discuss some

conceptual issues of GB and stakeholders’ role. Domestic policy and regulatory

initiatives both in global and Bangladesh contexts are discussed in section III. Section

IV identifies BB’s initiatives for the development of GB practices and the market

readiness. The implications of the BB’s initiatives are assessed in section V. Finally,

section VI comes up with some recommendations for effective implementation of

green banking practices in line with BB initiatives.

II. Green Banking Initiatives: Conceptual Aspects and Stakeholders’ Role

Green Banking Practices are Global Public Goods with Positive Externalities

The green banking initiatives have been linked with the concepts of market

failure-public goods and externalities. The concepts of externalities and public goods7

are closely associated. In today’s world, focus on Global Public Goods (GPGs)8 and

innovative financing mechanisms are closely related to the sustainable development

(Binger 2003). The GPGs having negative impacts is known as Global Public Bads

(GPBs). The results of the global pollutions and emissions like global warming,

contamination, disruption of eco-systems etc are GPBs. The negative externalities

and GPBs are the burdens of the entire society. In economic theory, the green

initiatives to handle these negative externalities and GPBs are GPGs (Habib 2010).

It is well known that green banking is a component of the environment

conservation effort by a group of stakeholders. International Financial Institutions

(IFIs) and Inter Governmental Organizations (IGOs) have been engaged in designing

principles and undertaking initiatives for framing international policy architecture;

governments have been formulating policies and enacting relevant rules and

regulations and enforcing emission standards; central banks have been formulating

rules and policies and implementing green banking practices in the financial sector;

environmental NGOs are engaged in the role of formulating guidelines and

monitoring business firms and banks; a section of consumers are paying premium in

the form of higher prices; some business firms are contributing by adopting voluntary

environmental protection programs; and a section of banks and Financial Institutions

(FIs) have been undertaking internal environment management and offering green

products. These efforts are expected to bring positive changes in the environment,

which are mostly non-excludable and non-rival in nature. Thus, as a whole,

the ongoing green initiatives by different stakeholders are GPGs where the society as

a whole is the target beneficiary. The green financing products that help create

favorable impact on environment have positive externalities.

7 A public good, as defined in economic theory, is a good that, once produced, can be consumed by an additional

consumer at no additional cost. 8 GPGs are public goods with benefits or costs that extend across countries and regions and across rich and poor

population groups, and even across generations (Inge et al. 2003).


Table 1: A Framework of Environmental Degradation and Green Initiatives

Source: Habib (2010)

Green Banking is a Multi-stakeholders’ Endeavour

Stakeholders’ roles are crucial for the development of green banking practices in

any country. Governments of a good number of developed countries and some

developing countries (like USA, EU, China etc.) and their central banks have been

remarkably active in offering regulatory and policy supports for the development of

green banking in their respective banking sectors. In the international arena, IGOs

and IFIs have been contributing a lot in developing international policy architecture

that enables countries and stakeholders to better anticipate and respond to

environmental initiatives. In this connection, Kyoto Protocol9 is a remarkable

9The Kyoto Protocol is a protocol of the United Nations Framework Convention on Climate Change, aimed at

fighting global warming. The UNFCCC is an international environmental treaty with the goal of achieving

stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous

anthropogenic interference with the climate system.

Society as a whole

are affected by GPBs and

Negative

Externalities

Producers Banks/Financial

Institutions Finance

Production

Air Pollution, Water Pollution, GHG

Emission etc

Global Warming, Contamination from

Pollution, Disruption of Eco-system etc

Negative

Externality

Global

Public

Bads

Green Initiatives by IFIs, IGOs,

Governments, Central Banks, Businesses,

NGOs and Banks

Global

Public

Goods

Output

Consumers

Consumption

Society as a whole

are benefitted by

Green Initiatives


http://en.wikipedia.org/wiki/Protocol_(diplomacy)

http://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change

http://en.wikipedia.org/wiki/Global_warming

http://en.wikipedia.org/wiki/Environmental_policy

http://en.wikipedia.org/wiki/Treaty

http://en.wikipedia.org/wiki/Greenhouse_gas

http://en.wikipedia.org/wiki/Atmosphere



initiative, which was adopted in 1997. As of October 2010, 19110 states have signed

and ratified the protocol under which 37 industrialized countries committed

themselves to a reduction of four greenhouse gases and all member countries gave

general commitments. A good number of environment related principles, guidelines

and standards have been developed over time by the international organizations for

the improvement of the green practices. Some notable examples include Equator

Principles (EPs), UN Principles for Responsible Investment (UNPRI), UNEP Finance

Initiative Statements, etc. The UNPRI was developed by institutional investors that

recognize the increasing relevance of environmental, social and corporate governance

issues that apply to asset management. The EPs are a set of voluntary standards that

commit signatory banks to take social and environmental risks into account when

providing project finance11. UNEP FI12 Statements recognize the role of financial

service sector in making global economies sustainable and commit to the integration

of environmental considerations into all aspects of their operations. Banks and

financial institutions13 have also been involved in designing and framing guidelines

and standards to be followed by the banking and financial communities. There are

important international standards and principles14 relevant for different

environmentally sensitive sectors prepared by international organizations and NGOs.

Banks can use these guidelines in formulating their sector specific policies and

strategies.

As a reporting standard, Global Reporting Initiative (GRI) is a remarkable

development. Developed by UN, GRI15 aims at standardizing sustainability reporting

procedure. It was conceived in 1997 by the Coalition for Environmentally

Responsible Economies (Ceres) which is a useful framework for producing annual

sustainability reports, promoting banks to not only describe policies but also to

measure their implementation. A number of global banks have been using this

framework for assessment and reporting purposes (Bank Track 2010).

10

http://en.wikipedia.org/wiki/List_of_Kyoto_Protocol_signatories 11

During last five years, project finance is applied more frequently in the environmentally sensitive sectors like

electricity generation (45%), oil and gas (34%), and mining (8%). It means that the EP applies to a considerable

share of a bank’s activities in the financing of these specific sectors (Ceres 2009). 12

The UNEPFI promotes investment in clean and renewable energy by financial institutions and other investors.

The UNEP Statement by Financial Institutions on the Environment & Sustainable Development applies to all

financial services. 13

For example, UNEP Finance is a collaborative effort of UN and over 190 financial institutions. The EPs are

designed by a group of banks based on the environmental and social policies and guidelines of IFC. 14

For example, the Guidelines for Investment in Operations that Impact Forests, published by WWF (World

Wildlife Fund) in September 2003, help banks identify critical issues in the sector and develop a forest policy (Bank

Track 2010). 15

The framework contains principles to define report content (materiality, stakeholder inclusiveness, sustainability

context, and completeness) principles to define report quality (balance, comparability, accuracy, timeliness,

reliability, and clarity) and guidance on how to structure the report.


http://en.wikipedia.org/wiki/List_of_Kyoto_Protocol_signatories


Environmental NGOs have been engaged to play a role of watchdog for the banks

against financing dirty companies. For example, Green America16 and its allies

protested the plans of financing to build 11 new coal-fired plants17 in Texas by some

USA mega-banks in 2007, which helped stopping 8 of the 11 plants (Habib 2010).

NGOs have also been helpful to the banking community in formulating guidelines

and correcting paths. For example, Bank TracK (2010) published essential elements

that should be part of banks’ sector18 specific lending policies. Recently,

Pricewaterhouse Coopers LLP (2010) independently reviewed how ‘Climate

Principles Adopting Banks’19 are fulfilling their commitments.

The voluntary initiatives of business firms (the main clients of banks) have been

working as a complement to strictly regulatory approaches and are crucial incentives

to the green banks. In USA, recent developments in technology have made it easier to

undertake environment protection measures by a good number of corporate

businesses (Bhat 2008). Large Japanese companies such as OKI, Asahi, Fuji, Fujitsu

and Sumitomo have led the way to establishing zero-emissions plants. Voluntary

cleaner production initiatives have also existed for some time in developing countries

like Taiwan, Thailand and China (Welford 2004). In recent years, a good number of

global businesses have adopted ISO 1400020 as a part of their commitment to

environment and the society.

The business firms and banks had not always been very receptive to the pressures

being put on them by NGOs and environmental organizations. However, the growing

environmental concern has brought about a new era of communication and

cooperation between the business/banks and the NGOs worldwide (Kennedy 2008).

Some NGOs have also been supporting banks through educating consumers and

businesses21.

Consumer awareness and responses improved over the years, though a lot more is

expected for the betterment of environment and society. A study by Javelin Research

(2009) observes that consumers have more interest in ‘thinking’ green than actually

‘acting’ green. The study finds that while environmental issues have grown in

16

Green America is a not-for-profit membership organization founded in 1982 with a mission to create a socially

just and environmentally sustainable society. 17

There’s no doubt that climate change presents a serious threat—so it makes no sense to continue building carbon-

spewing coal-fired power plants. 18

Covers agriculture, fisheries, forestry, mining, oil & gas and power generation. 19

In December 2008, a group of global financial institutions including Credit Agricole, HSBC, Munich Re,

Standard Chartered and Swiss Re– announced their adoption of the Climate Principles, a set of commitments on

climate business strategies developed by the Climate Group, a UK-based climate advocacy group. 20

The ISO 14000 family addresses various aspects of environmental management. The very first two standards, ISO

14001:2004 and ISO 14004:2004 deal with environmental management systems (EMS). ISO 14001:2004 provides

the requirements for an EMS and ISO 14004:2004 gives general EMS guidelines. 21

For example, in USA PayItGreen and NACHA have been engaged in educating consumers and businesses about

the positive environmental impact of choosing electronic bills, statements and payments over paper.


http://www.iso.org/iso/iso_catalogue/catalogue_ics/catalogue_detail_ics.htm?csnumber=31807

http://www.iso.org/iso/iso_catalogue/catalogue_ics/catalogue_detail_ics.htm?csnumber=31807

http://www.iso.org/iso/iso_catalogue/catalogue_ics/catalogue_detail_ics.htm?csnumber=31808&ICS1=13&ICS2=20&ICS3=10

importance with consumers, green banking habits have yet to take hold. The report

notes that most consumers want to do the right thing, but if the process appears

confusing or inconvenient, they simply are not going to bother changing their

banking habits (Javelin Research 2009). The following table shows systematically the

whole picture.

Table 2: Role of Stakeholders in the Development of Green Banking

Source: Habib (2010)

Market Based Economic Incentives are Crucial for Green Banking

Refusing to lend to ‘dirty’ industries is one thing but making a commitment to

clean up one’s own act is even harder (Goth 2008). Sometimes it is difficult for the

banks to balance environmental concerns and business demands. Banks need market

incentives for that. Policy and regulatory supports exist in most industrialized

economies in favour of developing a congenial atmosphere for providing green

products by banks22. In the past, environmental regulations were either absent or there

22

For example, banks’ engagements in environmental and community development activities are entitled to receive

incentives from US Department of the Treasury. The Treasury offers certification to banks as a Community

Development Financial Institution (CDFI) and access to CDFI Fund to provide commercial loans to the renewable

energy, green building, fishing, foods and agriculture industries. Banks are also receiving funding from the USA

Small Business Administration (SBA) for ER financing (Fed Atlanta 2009).

Banks/Financial Institution

-Green Financing

- Environmental Risk

Assessment in Financing

-Environmental Programs

-Internal Environment

Management

-Environmental Reporting

NGOs developing

guidelines &

monitoring

banks’

activities

IFIs/ IGOs are

developing

international

policy

architecture

Govt. formulating

regulations

and providing

incentives

Central Bank

formulating

guidelines, promoting

green

initiatives by

banks Business Firms

voluntarily accepting

environmental principles

and pay premium

Consumers becoming

aware and increasingly ready to

pay premium


was lack of enforcement in developing countries. Nowadays, environmental liabilities

are starting to represent real economic risks and environmental legislation in many

developing countries is rapidly converging to the path followed by the path of

industrialized countries. There is no doubt that mandatory or legal imposition may

not work for long and will not bring optimum result. Thus, it is important to convert

regulation-driven approach of corporate to market based approach for long run

effective environmental protection.

‘Environmental liability’ is one reason why lenders are exposed to credit risk,

should the borrower have difficulties repaying. In fact, many different types of costs

can arise as a result of pollution or compliance with environmental laws. Growing

market risks may work in favor of developing responsible practices. There are

instances in Argentina, Chile, Mexico and the Philippines where stock markets

reacted negatively to citizens' protests reported by the economic press (World Bank

1998). In many instances, stock prices reward the announcement of superior

environmental performance such as greater pollution control or the adoption of

cleaner technologies.

Besides credit and market risks, damage to an institution’s reputation often acts as

an important driver for international banks. A study by Mercier and Oliver (2002)

notes, for many financial institutions, credit and market risks have not been the

primary motivation for adopting an environmental program. A Senior Executive

Vice-President for group risk management at ABN AMRO states ‘I believe that

environmental damage is primarily a risk to our reputation rather than a credit risk’

(ABN AMRO 2006).

Consumers or business firms are more likely to accept environmentally sound

financial products if it does not have an associated economic cost, or is, in fact, more

affordable than the environmentally degrading alternative. Over the years, greater

consumer awareness and voluntary environmental activities of an increasing number

of business firms have been contributing towards creating an environment of better

economic and market based incentives for green banks. Best practice analyses and

awards are some forms of incentives to the banks that may also work as marketing

tools and recognition23.

III. A Review of Effective Domestic Policy Initiatives and Regulatory

Environment for Green Banking

Effective Policy and Regulatory Environment in Global Economies

US banks are the early starters that drastically began changing their policies after

enforcement of the Comprehensive Environmental Responses, Compensation, and

Liability Act (CERCLA) by the US government in 1980. CERCLA holds US banks

23

For example, Financial Times and IFC recognize the Best Sustainable Bank for every year.


directly responsible for contamination caused by their clients (Weber et al. 2008).

Due to strict environmental disciplines imposed by the competent authorities across

many countries, the industries would have to follow certain standards to run their

business. In the case of failure, it would lead to closure of the industries leading to a

likelihood of default to the bank. For example, the enactment of CERCLA in the US

in the late 1980s resulted in huge loss to the banks in the US as banks were held

directly responsible for the environmental pollution of their clients and made to pay

the remedial cost. This is the reason the banks in the US are ahead of other countries

in integrating environmental concerns into their business operations (Bhat 2008).

Of the different early initiatives under these regulations, Superfund24 is the first

program in the world to tackle USA’s 150-year industrial legacy and to make those

responsible for the clean up. In recent years several other countries (more in Europe)

are seen adopting policies that have made banks responsible for the misdeeds of their

clients. For example, in the United Kingdom, the breach of terms of the license given

by integrated pollution prevention control would lead to prohibition, financial

penalties and enforcement notice. All such notices can have significant financial

implications for the business as well as the financial institutions that have put money

into it (Stavros 2005).

Using government support, small and local FIs and banks in USA and some other

European countries have led the way in embracing green development and creating

targeted green lending programs. These programs use public subsidies to reduce

interest rates on loans issued by participating lenders that homeowners use to finance

energy-efficient improvements. In USA, The Department of Natural Resources

subsidizes one-half of the financing for the energy-efficient improvements, making

the loan more affordable. Banks engagements in environmental and community

development activities are entitled to receive incentives from US Department of the

Treasury. The Treasury offers certification to banks as a Community Development

Financial Institution (CDFI) and access to CDFI Fund. CDFI funding increases a

bank’s capacity to provide commercial loans to the renewable energy, green building,

fishing, foods and agriculture industries (Fed Atlanta 2009).

The UK Government is committed to achieving the transition to a green

economy and delivering long-term sustainable growth. This will require more

sustainable use of natural assets, less environmental damage, improved resource

efficiency and greater energy security and resilience, while also maximizing growth

and creating high value employment. Policy makers of developed countries are

also responding positively to the suggestions of stakeholders. In 2009, Green

24

In 1980, USA Congress enacted CERCLA, which authorized the ‘Superfund’, the Federal government’s program

to clean up the nation’s uncontrolled hazardous waste sites. To do this, EPA works closely with communities ,

potentially responsible parties (polluters), scientists, researchers, contractors, and state, local, tribal, and other

federal authorities. Working with these groups, EPA identifies hazardous waste sites, tests the conditions of the

sites, formulates cleanup plans, and begins cleaning up identified sites. (Source: www.america.gov/st/energy and

www.epa.gov/superfund/index.htm)


http://www.america.gov/st/energy

Alliance proposed to set up a Green Investment Bank in order to deliver a low

carbon economy in the UK, and the government responded positively (Reuters

2010). Australia is the worst contributors in terms of per capita green-house gas

production. Recently the Australian government proposed to impose carbon tax on

500 companies at the rate of USD 25 per ton from the coming year which would

rise by 2.5 percent every year. This scheme aims to cut Australian carbon emissions

by 5 percent of 2000 levels by 202025.

In regard to supportive policy environment, the approaches of governments and

central banks have changed dramatically over time even in developing countries.

In view of the financial globalization and ever increasing environmental regulations,

many financial institutions operating in developing and emerging countries are

pressed to better manage risks arising from environmental liabilities. In the past,

it was sometimes argued that environmental regulations in developing countries are

either non-existing or lack enforcement. Today, environmental legislation in many

developing countries is rapidly converging to the path followed by the industrialized

countries, while the prospects for enforcement seem to loom larger. In 2007, a Green

Credit Policy was jointly developed by the State Environmental Protection Agency,

the People's Bank of China, and the China Banking Regulatory Commission with the

objective to guide loan financing away from highly polluting and/or energy

consuming enterprises and projects. According to the policy, firms that fail to pass an

environmental assessment or implement state environmental protection regulations

will be disqualified from receiving loans from any financial institution. The policy

sends a strong message to banks concerning new responsibilities towards

environmental protection (Business Issues Bulletin 2009). The environmental

regulations in India can be broadly classified into two broad categories i.e. command

and control regulations and liability law. The command and control regulations are

designed to dissuade environmentally damaging projects and are implemented by

setting industry specific pollution standards, scrutinizing the projects and

granting/denying permissions by the concerned authorities like Ministry of

Environment and Forest. The liability laws are ex post in nature and are implemented

by enforcing authorities through imposing fines, closing down the defaulting

industries etc. However, there is no law and rule in India that can hold banks

responsible for scrutinizing investment projects before financing and for the

environmental damage created by its client (Sahoo and Nayak 2008). In fact, many

different types of costs can arise as a result of pollution or compliance with

environmental laws. For example, in Columbia, Banco de Colombia was held

responsible for cleaning up a site received from the National Federation of Cotton

Growers in payment of a loan.

25

The Daily Star, July 11, 2011.


Supportive Policy and Regulatory Environment of Green Banking in Bangladesh

Key environmental legislations/rules in Bangladesh include Water Pollution

Control Ordinance, 197026; The Environment Pollution Control Ordinance, 197727;

The Bangladesh Environment Conservation Act, 199528; The Environmental

Conservation Rules, 199729; and The Environment Court Act, 2000; and the

recently amended Environment Court (Amendment) Act, 201030. Recently the

Bangladesh Environment Preservation (Amendment) Act, 2010 has been enacted to

impose restrictions on pollution generating stockpiling and transportation of

hazardous waste as well as provisions for the aggrieved persons to sue directly in

the environment court.

The issue of climate change, waste management and wildlife protection received

attention of the policy makers of Bangladesh in recent years. In order to utilize the

resources of Climate Change Trust Fund in an effective and suitable manner, the

Climate Change Trust Act, 2010 has been enacted. According to the recent budget

speech of the Finance Minister, National Action Plan 2020 has been formulated and

the Wildlife Protection Act, 2010 would be finalized soon for preservation of

environment. Further, in order to manage different waste in an environmentally and

hygienically acceptable manner the Solid Waste Management Rules, 2011 and the

Hazardous Waste and Ship Breaking Waste Management Rules, 2011 would be

enacted soon.

To protect the environment, government formulated Environmental Policy in

1992 and made commitments as a signatory of a number of Multilateral

Environmental Agreements31. In fact, the awareness build up and conservation effort

started in Bangladesh in the 1980s when several developments took place, and during

that period a separate Ministry called Ministry of Environment and Forest (MoEF)

and The Department of Environment (DoE) were established (Islam 2002). The

Department of Environment (of the MOEF) developed a sector-specific industrial

guidelines and standards as per the requirements of the country’s environmental acts.

Government has also undertaken some initiatives to encourage environment

friendly industries and for saving scarce energy resources. In Bangladesh,

a Renewable Energy Policy has been prepared in order to generate environment-

26

An ordinance to provide for the control, preservation and abatement of pollution of water of Bangladesh. 27

An ordinance to provide for control prevention and abatement of pollution of the environment of Bangladesh. 28

An act to provide for conservation of the environment, improvement of environmental standards and control and

mitigation of environmental pollution. 29

To exercise the powers conferred by section 20 of the Bangladesh Environmental Conservation Act, 1995, the

Government of Bangladesh passed this rule. 30

An act to provide for the establishment of environment courts and special magistrate courts in all districts. 31

Bangladesh is a signatory of the Rio Conventions (RCs), i.e. United Nations Framework Convention on Climate

Change (UNFCCC), Convention on Biological Diversity (CBD) and United Nations Convention to Combat

Desertification (UNCCD).


friendly power from renewable energy sources. Various action plans have already

been undertaken with the target to generate 5 percent and 10 percent of total power

production by 2015 and 2020 respectively32. The government has also initiated to set

up a Sustainable Energy Development Authority (SEDA) and is working to finalize

Sustainable Energy Development Act, 2011.

Mandatory Jute Packaging Act, 2010 passed with the intention to boost the

classic environment friendly sonali ansh (golden fibre). It has made the use of jute

bags for packaging all agricultural produce, food stuffs and even cement legally

binding. This golden fiber’s potential is immense: paper pulp from green jute and

yarn for household linen, upholstery and clothing, not to forget existing items like

carpets, rugs, twine and sacking (www.worldjute.com).

Industrial waste has been a problem for Bangladesh. Polluting water, land and

air by throwing industrial wastes have been growing concerns. In order to manage

the solid waste, ship breaking waste and hazardous waste in an environmentally and

hygienically acceptable manner, two rules, namely, the Solid Waste Management

Rules, 2011 and the Hazardous Waste and Ship Breaking Waste Management

Rules, 2011 will be enacted soon, as declared in the budget speech. E-waste is

another growing environmental concern of developing world including Bangladesh.

The country has no regulation specifically dealing with e- waste till date. As

Bangladesh is a signatory to Basel convention, import of any kind of waste requires

government’s permission. In the adopted National ICT Policy, 2009, environment,

climate and disaster management is identified as one of the ten objectives, which

aims to ensure safe disposal of toxic wastes. Government has already prepared a

draft National 3R (Reduce, Reuse & Recycle) Strategy where e-waste issues have

been addressed.

Bangladesh Environmental Conservation Act (ECA), 1995 is the umbrella Act.

ECA 1995 and ECR 1997 together provide the framework of environmental

regulations relevant to industries of the country. According to the framework,

‘no industrial unit or project shall be established or undertaken without obtaining

environmental clearance from the Director General, DOE in the manner prescribed by

the rules’. EIA is an instrument of environmental planning of new projects that is

expected to carry out the process of clearance33 that rests on DOE. It is to be noted

32 Two wind powered power plants with 1 MW capacity each have been built to supply electricity to coastal belts of Kutubdia and Feni. Solar panels have already been installed in various public and private organizations including the Prime Minister’s office. Government has decided to install a 100 MW (offshore) windmill power plant at Anwara, Chittagong. 40 solar-based irrigation pumps are also going to be set up by

the government gradually. Government planned to install solar bulbs in some of the streets of Dhaka City Corporation area. This program will be rolled out to all the City Corporation subsequently.

33 Application for environmental clearance requires documents like NOC from local authorities for Green and

Amber-A categories, and in addition require Environment examination report, Pollution Minimisation Plan etc. for

Amber-B and Red categories of Industries.


that the clearance from the DOE is one of the requirements for obtaining finance from

commercial banks for the industrial units grouped under different categories of EIA.

For the purpose of issuing the Environmental Clearance Certificate, the industrial unit

and projects shall in consideration of their location and impact on the environment be

classified into the following 4 categories34: (i) Green, (ii) Orange-A, (iii) Orange-B

and (iv) Red. ECR 1997 prescribes various performance standards35 requirements

that are both general and industry specific.

IV. Green Initiatives by Bangladesh Bank and the Market Environment for

their Implementation

Green Initiatives by Bangladesh Bank

Bangladesh Bank has undertaken certain initiatives to help implement the

relevant provisions of environment related acts enacted by the government of the

country. In 1997, commercial banks of the country were asked36 by the central

bank to undertake necessary steps for implementation of certain decisions in

regard to environmental conservation and protection by the National Environment

Committee. Banks of the country were asked to ensure that steps have been

undertaken to control environmental pollution before financing a new project or

providing working capital financing to the existing enterprises37. According to the

BB requirements, the industrial units (that may cause environmental pollution) to

be established under bank credit would get permission for opening LC to import

machineries only after ensuring that the list of machines includes equipments to

set up waste treatment plant38. A comprehensive guideline on Corporate Social

Responsibility (CSR) has been issued by BB where banks have been asked to

concentrate hard on linking CSR at their highest corporate level for ingraining

environmentally and socially responsible practices and engaging with borrowers

in scrutiny of the environmental and social impacts39.

34

This categorization indicate that green is least polluting and red is most polluting, with the two orange

categories regarded as having medium-scale impacts. In its Schedule I, ECR 1997 includes a list of 22

industrial units or projects under Green, 26 types under Orange A, 69 types under Orange B and 69 types

under Red. For the each category of industries, there are different levels of documents to be provided at the

time of seeking the Environmental Clearance Certificate (Ministry of Environment and Forest, BEI

Guidelines for Industries, June 1997). 35

The following are the prescribed standards: Water (Schedule 3), Sound (Schedule 4), Sewage discharge

(Schedule 9), Waste from industries (Schedule 10), gaseous emissions from industries (Schedule 11) and sector -

wise industrial effluent or emissions (Schedule 12). When operating the industries, these performance standards

have to be met in order to ensure that there is no legal non-compliance. 36

BB BRPD Circular No-12 dated August 10, 1997. 37

BB BRPD Circular No-12 dated October 08, 1997; BRPD Circular No-21, November 10, 1999; and BRPD

Circular No-17, December 29, 2010. 38

BB BRPD Circular No-12 dated October 08, 1997. 39

BB DOS Circular No-1, June 1, 2008.


Online banking has been the starting point of GB in many instances. Bangladesh

Bank has been encouraging commercial banks to undertake online banking activities.

Banks have been brought under the purview of E-commerce with a view to providing

the customers with online-banking facilities covering payments of utility bills, money

transfer and transactions in local currency through internet as well40.

Considering the adverse effects of climate change, banks have been advised by

BB to be cautious about the adverse impact of natural calamities and encourage the

farmers to cultivate salinity resistant crops in the salty areas, water resistant crops in

the water logged and flood prone areas, drought resistant crops in the drought prone

areas, using surface water instead of underground water for irrigation and also using

organic fertilizer, insecticides by natural means instead of using chemical fertilizer

and pesticides41. Bangladesh Bank has also been taking initiatives for the

rehabilitation of cyclone and other natural disaster affected people of the country time

to time. For example, Bangladesh Bank issued a circular on Agri-loan Facilities for

rehabilitation of agriculture sector in cyclone Aila affected areas in July, 200942.

Moreover, banks were asked to undertake CSR activities in the areas of the affected

people for their rehabilitation43.

There is no doubt that environmental protection had not been on the priority list

of the policy makers in Bangladesh. However, some recent initiatives by the BB are

really encouraging. Banks have been advised to finance in solar energy, bio-gas plant,

Effluent Treatment Plant (ETP) and Hybrid Hoffman Kiln (HHK) in brick field under

refinance program of BB44. BB introduced Taka 2.0 billion refinance line in FY 10

against bank loans for investments in solar energy, biogas plants and ETPs. A year

back, BB switched over to solar-powered lighting by setting up a 20 kilowatt solar

panel, as a move towards encouraging green energy in Bangladesh. A new refinance

facility of Taka 5.0 billion has also been introduced to capacitate jute sector, the age-

old green pillar of Bangladesh economy (Rahman 2010).

The recent comprehensive circular45 of BB on ‘Policy Guidelines for Green

Banking’ is a remarkable step on the way to develop GB practices in the banking

sector of the country. As per the circular, commercial banks will have to adopt a

comprehensive GB policy by December 2013 as a part of the central bank's efforts to

make banking practices more responsible to social and environmental causes. Besides

introducing internal environment management, the banks are expected to introduce

environment friendly green financing to address the environmental challenges of the

country. The policy is segregated into three phases. In phase-I, the banks are to

40

BB Circular No-2, dated February 27, 2011. 41

BB ACSPD Circular No-04, dated July 14, 2009. 42

BB ACSPD Circular No-05, July 14, 2009. 43

BB DOS Circular No-2, June 2, 2009. 44

BB ACSPD Circular No-9, July 08, 2010. 45

BB BRPD Circular No-2, February 27, 2011.


develop green banking policies and show general commitment on environment

through in-house performances by December 31, 2011. Banks are required to

formulate environmental policy and create a GB cell or unit under this phase. A high-

powered committee should be responsible for reviewing the banks' environmental

policies, strategies and programs. The banks are to allocate sufficient fund in their

annual budget for GB; and are to introduce a green office guide for practicing internal

environment management. The banks should take measures to save electricity, water

and paper consumption as per the requirement. Instead of relying on printed

documents, online communication should be extensively used for office management.

Energy saving bulbs should replace the regular ones in branches/offices of the banks

and employees should be encouraged to purchase energy efficient cars. Banks are

also to create a climate risk fund to finance the economic activities of the flood,

cyclone and drought prone areas at the regular interest rate without charging

additional risk premium.

In phase-II of the Green Policy Guidelines that would not exceed December 31,

2012, banks have to formulate specific policies for different environmentally

sensitive sectors46 and will have to determine a set of achievable targets and

strategies, and disclose these in their annual reports and websites. They are

expected to set up green branches and should increasingly rely on virtual meeting

through video conferencing. Banks are to develop and follow environmental risk

management manual in their assessment and monitoring of project and working

capital loans under phase-II. The Phase-III, which is to be attained by December

31, 2013, requires banks to publish independent Green Annual Report following

internationally accepted format like GRI (details in appendix-2) with the

arrangement of external verification.

The circular on policy guidelines for GB requires reporting to BB on quarterly

basis first of which was due on July 15, 2011. The circular points out some incentives

in the form of preferential treatments for the compliant banks: BB will give points to

compliant banks on management component while deciding on its CAMELS rating;

BB will name top ten banks for their overall performances in green banking; and BB

will take into account green banking in giving permission to open new branches.

BB prepared and circulated a Guideline on Environmental Risk Management

(ERM)47 on January 30, 2011 to streamline solutions for managing the environmental

risks in the financial sector. The guidelines cover different conceptual aspects,

approaches, applicability, stages and benefits of ERM by banks. The ERM guideline

prescribes a set of sector specific ‘Environmental Due-diligence Checklist’ for

46

Agriculture, agri-business, agro farming, leather, fisheries, textile, renewable energy, pulp and paper, sugar and

distilleries, construction, engineering and basic metal, chemicals, rubber and plastics, hospitals, brick

manufacturing, and ship-breaking. 47

BB BRPD Circular No-1, January 30, 2011.


financing environmentally sensitive sectors48 by banks. As per the guideline, banks

should establish and maintain a database of NPLs that are due to environmental

reasons to ensure that the banks/FIs streamline their own institutional knowledge for

better decision-making in their future financing. Banks/FIs are required to have a

reporting system on an annual basis and should form a part of their Annual Report.

The Policy Guidelines for GB (circulated in February 2011 and discussed earlier)

requires complying with the instructions stipulated in this detailed guidelines on

ERM.

Supportive Environment for Development of Green Banking: Is Bangladesh Ready for a

Change?

Other than policy and guiding supports from BB, a congenial market environment

with active support from government, businesses, NGOs and consumers are crucial

for the development of GB practices in the country. Government of Bangladesh has

taken some notable measures for improving environmental governance in recent

years. Alongside enactment of a pool of environmental regulations (discussed in

section III), the government has undertaken the National Capacity Self-Assessment

(NCSA) initiative to assess the capacity needs and prepare a capacity development

action plan in sustainable environmental governance in the year 2007. Recently, a

Monitoring and Enforcement Section has been set up in the DOE to monitor the

compliance of conditions set out in the environmental clearance certificate. Creation

of ‘Climate Change Trust Fund’ is a very positive step on the part of the government.

The fund has been created in order to mitigate the effects of disasters and natural

calamities through capacity building with a total of Tk. 1,400 crore. Another fund

titled ‘Bangladesh Climate Change Resilience Fund (BCCRF)’ with an amount of

USD 113.5 million has also been created with the financial support from different

development partners. Two projects resourced from this fund has been undertaken to

establish cyclone centers and carry out afforestation. In the budget of FY2011-12, a

target has been set to create block gardens in 16000 hectares of land, strip forests

covering 3500 kilometers of land and to distribute around 35 lakh plants. Moreover, a

special project named ‘Clean Air and Sustainable Environment’ has undertaken to

identify the sources of air pollution and work out necessary action plans to reduce the

pollution level in the capital city Dhaka. Recently, government initiated steps to

replace 28 million incandescent bulbs with Compact Fluorescent Lamp (CFL) bulbs

to ensure savings and proper use of power49. Government is also encouraging the

factories producing incandescent bulbs to switch over to CFL bulbs production

gradually. In addition, government has declared to start special programs (Energy

Star Labeling Program) to encourage people to save energy (Budget Speech 2011).

48

Agri-business, cement, chemicals, housing, engineering and basic metals, pulp and paper, tannery, Sugar and

distilleries, textile and apparels, and ship-breaking. 49

In FY 2010-11, Bangladesh saved almost 250 MW by distributing 10.5 million of Compact Fluorescent Lamp

(CFL) bulbs free of cost (Budget Speech 2011).


However, if there is no arrangement for disposal or recycling of energy saving bulbs/

CFL bulbs50 then, these could prove to be even more dangerous for the environment

and health in the long run. Practically, developed countries can afford such

arrangements51 which may not be so easy for a low-income country like Bangladesh.

Environmental responsibility comes as a part of CSR practices among businesses

in Bangladesh. Capturing a set of CSR issues52 based on primary and secondary

survey of three stakeholders53 group, a CPD (2003) study observes that 64 percent of

the business firms54 have a ‘sustainable development policy’. The data of the CPD

study indicate about two-thirds of the civil society representatives are dissatisfied

with the state of corporate responsibility as practiced by companies in Bangladesh.

In regard to environmental responsibility, CPD (2003) analysis shows that only 49

percent of the corporations recognize their responsibility in protecting the

environment and very insignificant proportion of companies have policies or

strategies related to environment. The study revealed quite an outstanding difference

between company policy to manage the waste generated and existing system for their

implementation. Practically, environmental pollution and violation of related

regulations are widespread in the country. However, the number of companies in the

survey which were found violating environmental legislation, and for that reason

experienced penalty, is very limited (only 9 percent). The situation indicates weak

enforcement of regulations and poor performance of the law-enforcing agencies that

are responsible for penalizing environment polluters. However, it is encouraging that

the DOE is increasingly becoming active and has taken punitive measures55 against

the polluting industrial units during recent period.

Industrial wastes have reached to the dangerous level and have been one of the

major sources of pollution and environmental degradation in the country.

A commonly known fact is that a good number of industrial units of the country have

50

There are potential hazards associated with certain types of CFLs. Emissions from open CFLs have demonstrated

significant environmental (land contamination, air and water pollution etc) and health risks (like radiation exposure, skin cancer, mercury contamination, etc.) associated with their use and disposal (www.ehow.com). 51

US EPA asserts that no mercury is released into the environment when CFL bulbs (regardless of type) are intact

or in use. However, all CFLs must be disposed of properly during replacement or due to breakage because of the

risk of mercury contamination via skin or airborne transmission. For safely handling, broken CFLs, the EPA advises

wearing protective gloves, carefully scooping up glass fragments and powder using stiff paper or cardboard and

placing the remnants in a glass jar with a metal lid or in a sealed plastic bag (www.ehow.com). 52

Sustainable Development, Business Ethics, Human Rights, Legal Compliance, Corporate Governance,

Stakeholders Dialogue, Fair Employment, Health & Safety, Labour Standards, Community Relations,

Environmental Responsibilities. 53

Companies/Employers, Civil Society Groups, Employees 54

A total number of 151 business enterprises that include RMG, Energy, Leather, Pharmaceuticals, Constructions,

Textiles, Jute, Ceramics, Plastic, Software, Engineering, Food and Agro-based industry. 55

For example, in June 2011, DoE penalized Tk. 3 million to a textile dyeing unit for polluting water resources

and farming land; on April 20, 2011 DOE fined a brick field Tk. 1.5 million for expanding its kiln filling up the

Dhaleshwari River bank; on January 24, 2011, DOE ordered a real estate company in Chittagong to pay Tk . 7

lakh in fines for cutting down a hill; on December 30, 2010, DOE sealed Experience Textiles Ltd, a Pakistani

venture for fabric dyeing at Bhaluka in Mymensingh, and fined it Tk . 2.24 crore for polluting over 232 acres of

agricultural land.


ETPs (as per regulatory requirement) that are kept shut. Very recently six factories

were slapped hefty fines for not using their ETPs56. It is encouraging that recently the

High Court of Dhaka, Bangladesh has prohibited scrap ships from entering the

country. Moreover, some recent philanthropic and voluntary green activities57 of

businesses could be very helpful in creating awareness among common people.

Government agencies are also extending hands to them58.

One relevant vulnerable area in Bangladesh is inadequate responses and

awareness among consumers on the issue. Consumer awareness is still very low with

limited market surveillance by consumer organizations and there is no consumer

representation in any standardization activity (Consumer International,

www.consumersinternational.org). The Consumers Association of Bangladesh

(CAB), a consumer organization in the country, is not that much active for building

consumer consciousness concerning green products (Shamsudoha 2005). In 2008,

Consumer International and UNIDO undertook initiatives to raise public awareness

on quality (in terms of safety, health, performance, reliability, environment, and

consistency) standards and to encourage informed choice (as part of Bangladesh

Quality Support Program of UNIDO) in the country. Shamsudhoha and Alamgir

(2009) observes, though green marketing seems to be getting popular, it has not been

very successful in practice in Bangladesh either in attracting customers or in helping

the environment. The study also notes, neither customers know nor producing

organizations clearly state environmental benefits of any products. Generally,

consumers are not found to be committed to improve their environment and may be

looking to lay too much responsibility on industry and government. Considering

income levels of the greater proportion of the country’s people, it is also not easy to

impose external cost of pollution directly on their shoulders.

There are probably more and bigger NGOs in Bangladesh than in any other

country of a similar size of population in the world. A few NGOs are actively

involved in the environmental sectors of Bangladesh by doing research and

advocacy59, and as pressure group. These are implementing several projects with

government and international donor agencies and international environmental

NGOs60. A good number of NGOs have collaborated with the government in

56

DOE fined six factories BDT 1 crore on July 13, 2011 for keeping ETPs idle in their factories. DOE also ordered

closure of an unit for not installing ETP (The Daily Star, July 14, 2011). 57

For example, Holcim (Banagldesh) Ltd, a cement company, has inaugurated ‘Holcim Green Heart Society’ by

welcoming Bengali New Year to increase the awareness of presenting a green environment to our future generation

(Bangladesh Brand Forum, A monthly magazine, Issue-2, Vol-3, April, 2011). . 58

Grameenphone Ltd and Dhaka City Corporation have taken a joint initiative to clean up some areas of Dhaka

city on the Pahela Baishakh eve on April 14, 2011 with the pledge ‘Shobuje Thakun, Kachey Thakun’ to build a

greener and cleaner world (Bangladesh Brand Forum, April, 2011). 59

Bangladesh Centre for Advanced studies (BCAS) and Centre for Natural Resources Studies (CNRS) are basically

involved in relevant research activities. 60

International NGOs like Greenpeace, IIED, ACOPS, IUCN, Actionaid, Winrock International are working in

Bangladesh with collaboration of the governmental agencies and national and local environmental NGOs.


formulating National Environmental Management Action Plan in 2007 (NEMAP).

Some of these are now engaged in implementation of NEMAP related and other

environmental projects. Considering the insignificant roles of government in

environmental protection in the country, some environmental NGOs61 are trying to

put pressure on the government to undertake protective measures to save critical

sectors like wetland conservation, pollution control and biodiversity protection.

They are also trying to motivate people, and in some cases the government is

accepting their ideas (Ahsan et al. 2009).

Research, advocacy and campaign on environmentally responsible practices of

banks or GB are extremely limited. The issue is not on the priority list of the

environmental NGOs of the country till date. CSR or green practices of businesses

also found priority in an insignificant number of research activities. CPD conducted

an informative and comprehensive study on corporate responsibility practices by

businesses in Bangladesh in 2003 in association with TERI-UK62. Manusher Jonno

Foundation63 sponsored some research activities on social accountability of

businesses64 and banks65 in recent years. Bangladesh Enterprise Institute (BEI)66

conducted some research and published some guidelines on Corporate Governance,

CSR and ER practices of Bangladesh covering business sector including banks.

Sponsored by Katalyst 67, BEI conducted a survey to develop guidelines for financial

institutions in promoting environmentally and socially responsible business practices

in 2005. The study came up with a proposed framework for socially and

environmentally responsible practices by banks in Bangladesh. BIBM has undertaken

a few research activities and training programs to create awareness and improve

understanding of the GB in Bangladesh among bankers.

V. Examinations of the Implications of Bangladesh Bank’s Initiatives for Banks

and End-users

Green or ER practices are generally seen as a part of CSR practices in the

banking sector of Bangladesh. Most financial institutions in Bangladesh have not

integrated CSR in their routine operation; rather they are in the form of occasional

charity or promotional activities (Rahman 2009). The CSR that includes mainly

61

Bangladesh Poribesh Andolan (BAPA), Bangladesh Environmental Lawyers Association (BELA), Ongikar

Bangladesh are examples of such types of NGOs. 62

The Energy and Resources Institute (TERI) works for solutions to global problems in the fields of energy,

environment and current patterns of development, which are largely unsustainable. 63

Manusher Jonno Foundation is a Bangladeshi based group of NGOs to promote human rights and good

governance in Bangladesh. 64

For example, Raihan, Ananya conducted a study on Social Accountability: Prospects and Challenges for the

conference organized by Manusher Jonno in 2005. 65

For example, a case study by Shah Md. Ahsan Habib was prepared on Social Accountability of Bank: Role and

Challenges for a Conference organized by Manusher Jonno in 2005. 66

Bangladesh Enterprise Institute is a non-profit centre for research and advocacy work focusing on the growth of

private enterprise in Bangladesh. 67

Katalyst is a market development project funded by some donor agencies in Bangladesh.


philanthropic activities of banks generally cover education, health, disaster relief,

sports, art and culture, environment etc. According to BB (2010), only 1 PCB and 1

FCB have direct environmental intervention in 2009 as a part of their CSR activities.

Moreover, during 2008 and 2009, 5 PCBs and 1 FCB have taken direct steps to

provide aid and rehabilitation program they considered necessary to the group of

people affected in different natural disaster (BB 2010). In recent years, some banks of

the country have undertaken remarkable steps covering plantation, resource saving,

financing green initiatives etc. (some examples are in appendix -1). It is encouraging

that overall CSR expenditures (that includes expenditure on environmental

initiatives) of banks have increased significantly from BDT 226 million in 2007 to

BDT 3896 million in 2010.

Table 3: CSR Expenditure of Banks over 2007-2010

Source: BB Data, 2011

As mentioned earlier, banks allocate funds for environmental reasons as a part of

their CSR expenditure. According to a BIBM survey (Habib et al. 2010), only 11

percent banks have separate funds to support environmental activities. The situation

has not changed following the issuance of the circular on ‘Policy Guidelines for

Green Banking’ in February 2011. The policy guidelines require banks to create a

‘Climate Risk Fund’ to be used in case of emergency in the flood, cyclone and

draught prone areas. The fund should be used to ensure smooth credit flows in these

areas even at the time of emergency. It could be a separate fund or a component of

CSR fund. The study did not observe any initiative in this connection.

Green Governance

Bangladesh Bank’s initiatives have made no significant change in regard to the

creation of green governance frameworks in commercial banks till date. The survey

data of the study reveal that as of June 2011, 16 percent banks have environmental

polices. About 26 percent commercial banks claimed to had CSR/environment related

policies and 11 percent had related cell or posts in mid 2010 (Habib et al. 2010).


According to the survey information, only 12 percent banks have posts or cells

related to GB. In response to the circular of ‘Policy Guideline for GB’, only 4 percent

banks have formulated high level committee (comprising board members and

employees) to oversee the green activities of banks. However, there is no doubt that

the BB’s initiatives have brought remarkable change in the awareness and approach

of banking communities, as observed by the survey team.

Table 4: Green Governance in Banks (% of banks)

Done Planned

Green Policy Formulation 16 84

Separate Green Banking Cell 12 88

Creation of New position as the Head of Cell 12 88

Formulation of a Separate Committee 4 96

Source: Survey observation

Internal Environment Management

Banks have very limited initiatives in regard to resource inventory preparation

and management, paper, water and power saving etc. It is good to observe that now a

good number of banks are thinking or planning of introducing internal environment

management initiatives (table-5). Almost three-fourths banks have online banking

services and can offer online bank statement. Banks are generally aware of the

necessity of adopting online banking to serve their customers. However, using online

application as a tool to protect environment is not part of the banking strategy in

Bangladesh till date. Other than some scattered initiatives68, banks generally do not

have specific strategies to popularize online statement to save papers.

Table 5: Initiatives on Internal Environment Management (% of banks)

Done Planned To be decided

Green Office Guide 16 76 8

Preparation of Inventory 4 72 24

Using Duplex Printer 84 12 4

Using Eco-font (ink saving) 44 36 20

Saving Daylight 469

12 84

Automatic Computer Shutdown system 470

00 96

On-line banking 68 32 00

Internet banking 56 24 20

Mobile banking 8 32 60

Source: Survey Findings

68

Standard Chartered Bank initiated tree-plantation for using e-statements by its clients (one tree for one account

holder); it discourages printing of e-mail by the receiver to save papers. 69

Only Head Office has the arrangement. 70

Only head Office has the arrangement.


Banks generally do not have estimations on their level of environmental

pollutions or related activities, and do not maintain inventory of the consumption of

energy, water, electricity etc. Following the issuance of the circular on ‘Policy

Guidelines for GB’ some banks started making plans. However, banks having large

branch network found the task impossible within the given timeframe for

implementation. No local bank has any set environmental goal in connection with

internal environment management to attain in near future. In the guideline, such

type of target setting will be required in phase-II after preparing inventories by

banks in phase-I.

Environmental Risk Mitigation

Clearance from the DOE is one of the requirements for obtaining finance from

commercial banks for the industrial units. Banks have been complying with the

requirements. However, it is obvious that the arrangement is hardly playing any role

in environmental protection. According to the survey observations, 35 percent banks

have some internal environmental risk management requirements or arrangement71;

and 30 percent have made plan to introduce some requirements in near future. The

ERM guideline requires banks to establish and maintain a database of NPLs that are

due to environmental reasons and to have a reporting system on an annual basis.

However, the ‘Policy Guidelines for GB’ that incorporated ERM Guideline in CRM,

requires reporting on quarterly basis. The survey did not come across any preparation

of banks for creating and maintaining database or complying with the upcoming

reporting requirements as per BB circulars.

Green Products or Financing

Though on a limited scale, 68 percent banks of the country have some initiatives

related to financing environment friendly projects, according to survey information.

Some banks have financed reasonably good amount in solar, bio-gas, ETP and HHK

projects in recent years. A few banks have submitted targets72 (as required by BB at

the request of the Ministry of Energy in 2010) to BB in regard to financing renewable

energy projects. The survey data reveal that though three-fourths of the country’s

banks have got one or more green lending scheme/schemes, some of these have not

financed even a single project. A few banks73 have specially designed project for the

vulnerable areas affected by climate change.

71

For example, engaging technicians to visit the site and report to the management. 72

The target submitted by banks are Sonali Bank- BDT 10 million; Agrani Bank-BDT 500 million; Rupali Bank-

BDT 120 million; RAKUB- BDT 60 million; AB Bank-BDT 66 million; Islami Bank- BDT 300 million; UCBL-

BDT 20 million; Al-Arafa- BDT 30 million; Social-Islamic Bank- BDT 20 million; Mercantile- BDT 62 million;

Standard Bank- BDT 10 million; Mutual trust- BDT 350 million; Uttara-BDT 100 million; Bank Asia-BDT 30

million; First Security-BDT 50 million; and Trust bank –BDT 10 million (ACD, BB,2011). 73

For example NBL financed over BDT 100 crore in drought prone areas for irrigation purposes; Mutual Trust,

Agrani and NCCBL have also some programs in the vulnerable areas.


Table 6: Lending under Green Financing Scheme by Banks (% of banks)

Product Done Planned Yet to be decided

Solar 24 56 20

Biogas 20 64 16

ETP 45 55 00

HHK 8 32 60

Source: Survey observation

Availing Refinance Facilities of BB

Till date, a few banks have used very insignificant portion of refinance facilities

offered by BB. The survey information reveals that only five banks (table-7) of the

country availed refinance facilities as of June 30, 2011, and the current outstanding

amount is less than BDT 14 crore which is less than 7 percent of the total available

amount. However, it is encouraging that another 15 banks have entered into

agreements with the BB to avail the facilities. According to the survey observation,

a number of banks are found to have no interest to avail refinancing facilities

of BB. The reasons as identified by the banks include: complexity in disbursement

process; uncertainty in getting BB refinance facilities; and availability of own funds

to finance.

In some instances, bank managers find it a thank-less effort as the acclaim of the

success of these projects goes to the head office people. So, bank managers are

reluctant to offer extra-effort for these schemes.

Table 7: Availing Financing from BB by Commercial Banks

(as upto June 30, 2011)

Name of Banks Total Amount under (BDT million) Trust Bank Ltd. (Biogas) 50.15 Mutual Trust Bank Ltd. (Solar and Biogas) 76.14 Prime Bank Ltd(ETP) 8.98 Mercantile Bank Ltd. (ETP) 1.80 National bank Ltd(Biogas) 0.74 Total 137.81

Source: BB (2011)


About the refinance facility of jute sector, an amount of BDT 500 crore has

already been disbursed to the four SCBs in June 2010 with the guarantee of the MoF

for on-lending. In this connection, government’s recent steps74 are encouraging.

These are expected to boost jute production75 and processing market. It may help

getting fair price by the farmers and also may help reducing reliance on plastic

products which is environmentally harmful.

Awareness, Promotional Activities, and NGO Linkages

Green marketing or promotional activities are yet to get popularity in the banking

community. According to the survey information, 32 percent banks have some kinds

of promotional activities76 for their green initiatives. Though apparently the

percentage is high, practically it covers very limited activities. There are very limited

instances of NGO-linkages of banks for green causes. According to the survey

observation, 52 percent banks have NGO-linkages. However, only 4 percent banks77

are found to have linkages with NGOs to promote green initiatives.

Table 8: Awareness, Promotional Activities and NGO Linkages

Done Planned Yet to be decided

Training program 52 48 00

Promotional activities 32 56 12

Environmental NGO Linkage 4 16 80

Customer Awareness program 32 48 20

Source: Survey Information

A few banks have initiatives for awareness development of consumers and

employees. According to a BIBM survey in 2010 (Habib et al, 2010), 47 percent

banks facilitate environment related training to their employees which actually meant

that the banks from where at least one participant participated in environment related

74

In March 2011, the government has lifted ban on export of raw in a bid to help local jute traders sell their unsold

stocks and earn more foreign currency. The Ministry of Textiles and Jute issued a circular to this effect on March 09

amid a growing demand of the natural fibre in global market. The government's decision will help farmers sell their

products at fair prices, as the item has global demand. 75

Jute cultivation rose 20 percent to 13.8 lakh acres in the current season from 11.5 lakh in the previous season,

according to the estimate of Department fo Jute (The Daily Star, July 15, 2011). 76

For example, Mutual Trust and HSBC have calendars to promote green; Standard Chartered Bank discourages

printing; BRAC Bank promotes green banking through its web; Southeast use a slogan ‘Go green with Green

Financing’ in their publications; HSBC promotes e-statements; HSBC introduced HSBC-The Daily Star Climate

Award to promote individual and institutions. 77

For example HSBC has arrangements with Green World and IPac to perform tree-plantation and rain water

conservation activities respectively.


training programs arranged by the BB, BIBM or other NGOs. Sponsoring of green

events78 by a few banks could prove to be very effective for green awareness in the

country.

Waste Management

Generally banks do not have any concrete waste management policy till date.

However, a few banks have some inspiring initiatives for in-house waste management

and financing. For example, HSBC recycles used papers to make envelope for re-use.

DBBL has financed a project79 that produces quality organic fertilizer from fruits and

vegetables wastes. Growing e-waste has been another related problem for banks. Few

corporate offices in Bangladesh have taken initiatives regarding their re-use of

e-waste. Some are distributing computers to different schools and organizations for

reuse. Among the banks surveyed, Standard Chartered Bank has an arrangement with

D Net80 to distribute their used PCs to schools. HSBC also provides computers to

different schools for re-use.

Disclosure and Reporting of Green Activities

Generally, banks do not publish separate reports of their green activities or CSR

programs and do not use comprehensive standard formats such as the GRI (BB

2010). One notable exception is HSBC in Bangladesh, which has published

Corporate Sustainability Report 2009 and 2010 covering some environmental

issues81. However, 75 percent government controlled commercial banks and 97

percent private commercial banks have reported about their CSR initiatives in their

annual financial reports in accordance to the directive of BB. A survey in 2010 by

BIBM (Habib et al. 2010) shows that only 11 percent banks have some kind of

arrangement (as a part of Annual Report or website) to disseminate environment

related information. According to the ‘Policy Guideline for GB’ banks were to

furnish their first quarterly reports within July 15, 2011. According to the survey

observation, only one bank reported to the concerned department as of July 17, 2011.

78

Programs like Earth Day celebration and Green Day by HSBC could prove to be crucial for customer and

employee awareness of banks. 79

DBBL has disbursed loan for about BDT 4 Crore to WWR Bio Fertilizer Bangladesh Ltd. which has formally

released its first high quality organic fertilizer, produced from fruits and vegetables waste from the markets of

Dhaka on 21st March, 2009. ACI ensure the marketing of this fertilizer. The new born bio fertilizer, named Waste

Concern Jaiba Sar (WCJS), is being produced on the organic waste composting plant at Bhulta (Narayanganj) in the

outside areas of Dhaka.The current project aims at setting up two more plants by 2010 to have a total capacity of

handling 700 tons of waste from the Dhaka City Cooperation (DCC) markets on a daily basis. The project has the

objective of reducing 89,000 tons of green house gas (GHG) in the coming years and has a positive impact on the

environment. 80

A development NGO working with ICT. 81

HSBC in Bangladesh initiated a carbon footprint management study at the Bank’s Dhanmondi branch managed

by Waste Concern Consultants Ltd. in 2009; HSBC has undertaken 5 environmental initiatives in 2010 that include

HSBC-Daily Star Award; Rainwater Harvesting Program; HSBC Climate Championship; and Carbon Footprint

Management Initiative (HSBC Corporate Sustainability Report, 2010).


Time Frame of the Green Banking Policy Guideline of BB

According to the survey observation, 52 percent banks think that it is possible to

implement phase-I by the stipulated one year and another 24 percent believe that it

can only be partly implemented. Of the respondents, 24 percent found it difficult to

comply with the phase-I guideline within the time line.

Responses from End-Users: Mostly Unaware and Hesitant

Mostly, end users or borrowers have been availing environmental financing as

per the regulatory requirement in certain sectors82. However, there are a few success

cases (table-9, 10, 11). According to the survey observation, as a whole, the end-users

are unaware about the benefits and processes and are hesitant to obtain the facilities.

Table 9: Environmental Financing to Women getting Good Responses

Source: Agrani Bank, 2011; the name of the loan recipient is changed.

Table 10: A Biogas Plant under BB Refinancing

Source: BRAC Bank, 2011; the name of the loan recipient is changed

82

For example, ETP is to be installed by the factories in certain sectors as per the country’s ECA.

Mrs. Jahan Ara, residing at Shibpur in Norshingdi, took a ‘Composite loan’ (for

purchasing cow and produce organic fertilizer through Vermi-compost method) of BDT

1,00,000 under ‘Agrani Prani Shampad’ scheme. The bank set her installment on weekly

basis. As it takes at least 45 days to generate organic fertilizer under vermin-compost

method, the borrower repays her installment by selling milk that she gets regularly and she

is comfortable with it. These loans are mainly given to women who are widow or beggars

as part of the bank’s CSR activities. In Norshingdi district, the bank has financed a good

number of woman under the scheme and ensured successful repayment

Five members of Mr. Akbar’s family of Aliar village in Comilla started a small poultry

farm in 2007 which became a big project having an area of over five bigha land and

about 15,000 adult poultry birds and 5,000 chicks over time. Being successful in poultry

and fisheries, they felt responsible to people, society and environment and took

initiative to set a biogas plant using litter of poultry birds. BRAC Bank Ltd. financed

Tk. 1.5 million to the project under refinancing scheme of BB. Two domes of the biogas

plant burns 14,000 kg of litter a day to produce 150 cubic meter of gas. The gas

generates 8 KV power which meets total electricity requirement of the plant. And the

rest of gas is used to fire 40 burners in surrounding households. According to the

opinion of the entrepreneurs, ‘although the plant does not bring much financial benefits

due to high installation cost, still we are happy to be able to do something for the people

and environment’. According to them, ‘the biogas has huge demand from nearby

households. We may meet the demand by expanding the plant in future.’ A large

number of people of the village work in foreign countries and sent remittances. Success

of BRAC Bank-financed Pall Layer Farm cum biogas plant may encourage the

expatriates to invest in different productive sectors in the area.


Table 11: A Composite considers Bio-gas a Viable Business

Mr. Sabbir, resides at Gazipur, has established an ideal composite set up. The firm

use recyclable plastic poultry cases; poultry wastes are used for bio gas generation

for fuel and electricity; and other wastes are used for compost fertilizer. His

produced feed is used by his own poultry firm and is also sold. He uses manure of

the poultry firm to produce biogas which is used for electricity generation and

cooking for farm laborers. To build this eco-friendly poultry composite, he was

awarded the best Trophy in the year of 1998 from the Directorate of Youth

Development. Mutual Trust Bank financed him a composite credit facility of BDT

106.00 lac in different forms. Total cost of the project is BDT 1200 lac in an area

of 12 bigha land at Gazipur and the estimated cost of the Bio gas plant is BDT

9.00 lac where MTB financed BDT 6.00 lac under refinance scheme of BB. The

plant size is 8000 cubic feet (20 x 20x 20) having a capacity of generating 3000 cft

biogas. The gas is currently used for household cooking and generating electricity

for the poultry firm and household purposes. According to the entrepreneur, this

type of project is quite viable as it helps to generate gas, electricity and organic

fertilizer which can be used both for personal as well as business purposes in a

profitable manner. The owner is thinking about commercial production and sale of

the gas and electricity. He suggests that the government should make the bio-gas

plant establishment mandatory for all entrepreneurs engaged in poultry business to

ensure a clean environment besides a profitable business concern.

Source: Mutual Trust Bank Limited, 2011; the name of the loan recipient is changed

VI. Issues, Challenges, and Recommended Measures

The workshop paper comes up with the following issues, challenges, and

recommended measures:

One, the survey team does not come across remarkable responses to BB’s

environmental initiatives from banking community as of July 2011. There is no doubt

that it is a very short time-span to assess impacts of BB’s initiatives, most of which

have been mainly undertaken a few months back. However, considering the

timeframe of the ‘Policy Guidelines for GB’ by BB, the preparedness of most of the

banks were not found to be adequate. Moreover, the implementation statuses of

earlier circulars of BB have not been upto the mark. Understanding and readiness of

banks are crucial for getting optimum response to BB’s initiatives. There is no doubt

that the initiatives taken by BB seem to be adequate at this stage. However, it is too

early to say whether BB’s steps are sufficient for the effective implementation of its

initiatives by the banks; once the implementation process starts new requirements

might arise. Effective implementation of GB practices requires commitment of board

members, employees, and BB; it also requires effective training and awareness

development programs, continuous monitoring from BB and dissemination of success

stories among the stakeholders.


Two, supportive regulatory, policy, and incentive structure are crucial for the

development of GB practices in any country. Bangladesh has a pool of recently

enacted regulations and some relevant policy initiatives. Though enforcing agencies

like DOE has shown improvement in actions, enforcement of government’s

regulations and policies remain weak till date. Initiatives of environmental NGOs and

businesses remain inadequate. In such a situation, it may not be easy to encourage all

banks to offer enthusiastic response to BB’s initiatives. Bankers opined that more

incentives are required to inspire commercial banks for undertaking green initiatives.

Incentives may be provided in different forms like allowing tax rebate, allowing

higher credit-deposit ratio for GB practicing banks and awarding bank employees as

well as green practitioners in the real sector.

Three, ‘Policy Guidelines for GB’ incorporates some specific actions to be

performed by commercial banks by December 2013 covering policy formulation,

creation of GB cell, in-house environment management, preparing inventory of

resource use, promotional activities, environmental risk management, green financing

and green reporting. According to the participating bankers, the activities of different

phases are logically placed but the stipulated timeline may not be logical for all;

opinions of different banks should have been considered before setting the time line;

and timeline should be set considering size of the banks and other existing situations.

Four, an internal mechanism approved by the Board is crucial for future smooth

running of any activities. The BB policy guidelines require intervention of board

members in the green activities of banks. Understanding and awareness of board

members, management and employees are crucial for effective functioning of GB

practices. All broad groups should be convinced about the necessity and accruable

benefits of GB. General observation is that the board members are not aware as well

as not convinced to undertake GB and all bank management and employees do not

have required understanding of GB. To improve the understanding of board members

and bank management different training, seminars, symposiums, workshops, etc. can

be arranged by the joint collaboration of BB, BIBM, BAB, ABB and other

institutions; BB and BIBM can arrange discussion meeting for the board members

under the direct supervision of BB Governor.

Five, a few commercial banks have used refinance facilities of BB for

environmental financing. The outstanding volume of the loans under refinance

schemes remains insignificant. Some banks also identified some problems that

include the complexity in terms and conditions of the scheme; end users are not

coming forward with viable projects; Islamic banks can not participate in the present

mode of refinance, etc. For better participation of banks and end-users in the

refinancing facilities, BB needs to undertake necessary steps like building awareness

about refinance scheme; making the terms and conditions of refinancing easier to

implement; issuing a separate guideline for Islamic banks.


Six, consumers remain the most vulnerable stakeholder of GB. Development of

consumer awareness is among the most crucial tasks of policy makers and banks for

development of GB practices. Green marketing could be a great tool in this

connection. Linkages with NGOs could also play a useful role. Till date, a few banks

have insignificant initiatives of green marketing. Some green initiatives like

sponsoring different programs of environmental NGOs; tagging CSR with

environmental NGOs; financing environmental NGOs at a concessional rate;

motivating NGOs for promoting more green practices; conducting road show for

awareness building; observing GB week, etc. would help developing awareness

among consumers and other stakeholders.

Seven, ‘waste disposal and management’ is a growing problem of corporate

entities including banks. Especially e-waste disposal and management has become

one of the major concerns. Banks in the country have very limited initiatives. Banks

have been using CFL bulbs to save energy and to reduce carbon emission.

However, absence of disposal arrangement of these bulbs could even be more

dangerous. A concrete strategy from the procurement to the disposal is the need of

the time. At the time of procurement of electric equipment, banks may identify and

adapt a disposal strategy. For the formulation and successful implementation of

waste disposal and management strategy in Bangladesh, banks may provide special

incentives for establishment of e-waste plant; and banks may participate in the establishment of e-waste treatment plant under PPP.

Eight, most of the commercial banks of Bangladesh have failed to attain the

first milestone of the ‘Policy Guidelines for GB’ that requires reporting to BB by

July 15, 2011. As per ERM guidelines, reports are to be furnished by banks on

annual basis. The different time lines for two guidelines may confuse banks when

ERM has been incorporated as environmental risk management tool in the ‘Policy

Guidelines for GB.’ Moreover, banks should publish independent Green Annual

Report following GRI by December 2013 with the arrangement of external

verification. To comply with the reporting requirements, banks need adequate

preparation. Specific reporting format might help the banks to report in time. To

report to BB following GRI by 2013, banks need more support like training about

GB, detail reporting format by BB, etc.


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Appendix 1

Some Environmental Initiatives of Banks in Bangladesh

Box 1: Al-Arafah has Remarkable Initiatives on Solar Panel Financing

Al-Arafah Islami Bank Limited has been financing some green products

successfully. Its green products include Al-Arafah Renewable Energy Program

(solar panel), Unnata Chula (Fuel saving stove), Biogas plant, Effluent

Treatment Plant (ETP), Wind power plant, etc. They have established a

separate unit named Power and Technology Unit under SME to offer green

financing. They also appointed twenty five technicians to take care of financing

green projects. Till 23 may, 2011 they have provided financing facilities

amounting to Tk. 2,57,19,000 for solar panel to 873 families generating about

44145 watt electricity. They provide three years after-sale services. The bank

has 100% recovery of investment from solar project financing. They have

distributed some solar panels free of cost to the local community in Madabpur

and Habigonj Chor areas under CSR. The bank financed in solar panel in

different areas of the country like Hobiganj, Khulna, Gazipur, Rangpur,

Noakhali, Comilla, Modbari, Naogaon, Akhaura etc. The Jatrabari Branch of

the bank is fully powered by solar energy.

Source: Al-Arafah Bank 2011

Box 2: Mutual Trust Bank is Well-ahead in Internal Green Management

Mutual Trust Bank Limited practices green banking activities with utmost care.

It is one of the participants of BB’s refinancing scheme for green products.

The corporate Head office of the bank, located at 26, Gulshan is a modern building

using technologies for efficient utilization of resources. The building has been built

in such a manner so that day-light can be utilized. The bank uses energy saving

bulbs. The bulbs and computers have sensor and they are automatically switched

on/off with the presence and absence of people respectively. All water taps also

have sensor. As a result water falls only when one’s hand is placed below the tap.

All sorts of correspondence of the bank are made through e-mail and i-mail (only

between head office and branch) to save paper. The bank’s Sirajgonj and Ishwardi

SME branches are running with own solar panel system. The online banking

facilities of the bank allows customers do online transactions via internet such as

withdrawals, transfer payment, checking account status etc. lead to saving paper

and reducing carbon emissions. The bank has already prepared green credit policy

and an inventory of its utilities as per the policy guidelines for green banking.

The bank conducts different training programs for its employees’ awareness

development.

Source: Mutual Trust Bank 2011


Box 3: HSBC has Remarkable Initiatives in line with its Global Activities

HSBC is a globally ‘Carbon Neutral bank’. Some initiatives of the bank are

praiseworthy. It introduced fully Solar Powered ATM at Dhanmondi Branch. Tree

plantation is a remarkable step of the bank. A total number of 300 trees have been

planted at Lauachora in Sylhet with the help of green World, an environmental

NGO funded by the USAID and will be transferred to the local community after 3

years. The bank ensures shut down of computer during lunch time. The bank has

initiated ‘Go green’ campaign for business customers. It celebrates the ‘World

Environment Day’ (5th June related to Earth Day) by wearing green costumes by all

employees of the bank and on the same day they arranged plantation programs and

a ‘Quiz Contest’ on environmental issues. The bank also introduces HSBC- The

Daily Star Climate Awards to the eminent personalities of the country for their

contribution towards protection and preservation of environment. The award is

given for four categories of works: Climate change adaptation, Climate change

mitigation, Climate change research and knowledge management and Green

Business Entrepreneurship. As a part of its commitment, HSBC has set up rain

water harvesting devices in two major schools of Dhaka city - Residential Model

School and Rajuk Uttara Model College. Now, over 2200 students benefit from

these projects. The program has been implemented at HSBC’s Dhaka main office

building too. As a part of this program, in 2010, one of the Bangladeshi climate

champions implemented a project where HSBC volunteers planted over 300

varieties of saplings over a one-km stretch in Srimongal, Moulvibazar.

Source: HSBC 2011

Box 4: Agrani Bank Promoting Women Entrepreneurship through Green

Initiatives

Agrani Bank has been providing loan for plantation at 2 percent interest rate in

different districts. The bank financed in environment friendly ‘Easy Bike’ which

was run by battery but recently Govt. has stopped this initiatives. The Bank offered

composite loans for purchasing cow and produce organic fertilizer through Vermi-

compost, of BDT 100,000 under ‘Agrani Prani Shampad’ scheme. A good number

of women have received financing facilities under the scheme. In Norshingdi

district, the bank financed 647 women entrepreneurs till mid June, 2011. The bank

recently undertook a pilot project to expand green banking initiatives.

Source: Agrani Bank 2011


Appendix 2

Global Reporting Initiative: G3 Guidelines

Application Levels were introduced with the release of GRI’s G3 Guidelines in

October 2006. The Application Level system provides organizations with a pathway

towards continuous improvement of their sustainability reporting. The Levels are

intended to motivate reporters to enhance the quality of their reporting over time.

Application Levels also meet the needs of reporting organizations in terms

of objectively displaying their use of the GRI Guidelines. There are three different

Application Levels: A, B & C. Reporters are required to assess their Application

Level. GRI offers a service for organizations to have their Application Level

checked. Some reporters choose to have their Application Level checked by a third

party. In such cases, the third party executing the check is selected by the reporter.

None of these third parties are affiliated with GRI, nor are their methodologies known

to or formally endorsed by GRI. In addition, to support reporting organizations in

correctly applying the Guidelines and making valid assessments of their Application

Levels, GRI has assembled the G3 Checklist . These Checklists details which data

points are contained within each of the G3 Profile Disclosures and Performance

Indicators (covering 1.1-4.17; and Performance Indicators). GRI advises reporting

organizations to include the Application Level table in the reporting. This provides

context for report readers to understand the requirements for the different Application

Levels.

Standard

Disclosure

Report Application Level

C C+ B B+ A A+

G3 Profile

Disclosure

Report on:

1.12.1-2.10;

3.1-3.8;

3.10-3.12;

4.1-4.4;

4.14-4.15

Report

Externally

Assured

Report on all

listed for C+:

1.2; 3.9; 3.13;

4.5-4.13;4.13-

4.17

Report

Externally

Assured

Same as

Requirement

of Level B

Report

Externally

Assured

G3

Management

Approach

Disclosure

Not

Required

Management

Approach

Disclosures

for each

Indicator

Category

Management

Approach

Disclosures

for each

Indicator

Category

(Continued)


http://www.globalreporting.org/ReportServices/ApplicationLevelChecks/

http://www.globalreporting.org/ReportServices/ApplicationLevelChecks/

http://www.globalreporting.org/ReportServices/ApplicationLevelChecks/FAQs/FAQsALCheck.htm#nine

http://www.globalreporting.org/ReportServices/GRIContentIndex/

Appendix 2: (Continued)

G3

Performance

Indicators and

Sector

Supplement

Performance

Indicators

Report on a

minimum of

10

performanc

e indicators

including at

least one

from each:

Economic,

Social and

Environmen

tal

Report on a

minimum of

20

performance

indicators

including at

least one from

each:

Economic,

Human right,

labour,

society,

product

responsibility

and

Environmental

Report on

each core G3

and sector

supplement

indicator

with due

regard to the

materiality

principle by

either: a)

Reporting on

the indicator;

b)

Explaining

the reason

for omission

Source: http://www.globalreporting.org/reportingframework/g3guidelines/


List of Abbreviation

ACD Agricultural Credit Department ACOPS Advisory Committee on Protection of the Sea BAPA Bangladesh Poribesh Andolan BB Bangladesh Bank BCAS Bangladesh Centre for Advanced studies BCCTF Bangladesh Climate Change Trust Fund BCCRF Bangladesh Climate Change Resilience Fund BEI Bangladesh Enterprise Institute BELA Bangladesh Environmental Lawyers Association BIBM Bangladesh Institute of Bank Management BRPD Banking Regulation and Policy Department CAB Consumers Association of Bangladesh CAMELS Capital adequacy, Asset quality, Management quality, Earnings,

Liquidity, Sensitivity to Market Risk CBD Convention on Biological Diversity CDFI Community Development Financial Institution CERCLA Comprehensive Environmental Responses, Compensation, and

Liability Act CERES Coalition for Environmentally Responsible Economies CFL Compact Fluorescent Lamp CNRS Centre for Natural Resources Studies CPD Centre for Policy Dialogue CRM Credit Risk Management CSR Corporate Social Responsibility DBBL Dutch Bangla Bank Limited DCC Dhaka City Cooperation DoE Department of Environment ECA Environmental Conservation Act E Commerce Electronic Commerce ECR Environment Conservation Rules EIA Environment Impact Assessment E-mail Electronic Mail EMS Environmental management systems EP Equator Principle EPA Environmental Protection Agency ER Environmentally Responsible ERM Environmental Risk Management ETP Effluent Treatment Plant E-waste Electronic waste FAO Food and Agricultural Organization FCB Foreign Commercial Bank FIs Financial Institutions FY Financial Year GB Green Banking GHG Green House Gas GPB Global Public Bad


http://www.acops.org.uk/

GPG Global Public Good GRI Global Reporting Initiative HHK Hybrid Hoffman Kiln HSBC Hong Kong and Shanghai Banking Corporation ICT Information and communication technology IFC International Finance Corporation IGOs Intergovernmental organizations IFIs International Financial Institutions IIED International Institute for Environment and Development I-mail Intra Mail ISO International Standard Organization IUCN International Union for Conservation of Nature LC Letter of Credit MoEF Ministry of Environment and Forest MoF Ministry of Finance NBFI Non Bank Financial Institution NCSA National Capacity Self-Assessment NEMAP National Environmental Management Action Plan NGO Non Government Organization NPL Non-Performing Loan PCs Personal Computers PCB Private Commercial Bank PPP Public Private Partnership RCs Rio Conventions RMG Ready Made Garments SBA Small Business Administration SCB State Owned Commercial Bank SEDA Sustainable Energy Development Authority TERI The Energy and Resources Institute UN United Nation UNCCD United Nations Convention to Combat Desertification UNEP United Nations Environmental Program UNEP FI United Nations Environmental Program Financial Institution UNFCCC United Nations Framework Convention on Climate Change UNIDO United Nations Industrial Development Organizations UNPRI United Nations Principles for Responsible Investment USAID United States Agency for International Development WCJS Waste Concern Jaiba Sar WTO World Trade Organization WWF World Wildlife Fund


Paper Two

Implementation Status of Basel-II: Bangladesh Perspective

Md. Nehal Ahmed Associate Professor, BIBM

Atul Chandra Pandit Assistant Professor, BIBM

Implementation Status of Basel-II: Bangladesh

Perspective

I. Introduction

Globalization and financial innovation have over the last two decades or more

multiplied and diversified the risks carried by the banking system. In response, the

regulation of banking in the developed industrial countries has increasingly focused

on ensuring financial stability. The appropriateness of this move is being debated

even in the developed countries, which in any case are at a completely different level

of development of their economies and of the extent of financial deepening and

intermediation as compared to the developing world. Despite this, many developing

countries including Bangladesh have already implemented or in the process of

implementing capital adequacy guideline popularly known as Basel guideline.

The regulators and supervisors of the banking system are increasingly challenged

worldwide by the development of the risk-sensitive financial markets. Financial

institutions, especially the banks, are in the business of risk management and

reallocation, and they have developed sophisticated risk management models to

encounter it. Their efforts cover many components of risk namely, identification and

definition of risk the firm is exposed to, assessment and measurement of their

magnitude, development and implementation of effective risk mitigation techniques,

and setting aside sufficient capital for potential losses.

Capital adequacy is defined as the level of capital which is required to protect a

bank from portfolio losses. However, debate on the quantum of minimum level of

capital seems to be never-ending. Though different methods and approaches were

adopted at different points in time, they were insufficient to capture new dimensions

and magnitudes of risk emanating from the continuous innovations in the domestic

and international business. Consequently, banking business in last few decades

experienced many uncertainties and volatilities that caused serious problems.

The Basel Committee, based on this idea, designed Capital Regulation, which is

known as the Basel Accord. Two fundamental objectives of the Accord were: (a) to

strengthen the soundness and stability of the international banking system and (b) to

obtain a high degree of consistency in its application to banks in different countries

with a view to diminishing an existing source of competitive inequality among

international banks.

Banks are highly-leveraged financial institutions that borrow fund mainly from

the depositors which are mostly repayable on demand. On the other hand, it lends

money to the borrowers. That way, banks always run a risk of insufficient liquidity as

the future is uncertain and borrower might be in default. Besides, globalization of


banking business, introduction of complex banking products, increased complexity in

operation, increased adoption of information technology, increased awareness of the

stakeholders about risk etc. are some factors that impels banks to focus on risk

management. Since risk is inherent in the banking business, nobody can ignore the

importance of risk management. Maintaining adequate amount of capital is an

integral part of the process of risk management in banks as capital is regarded as the

shock absorber. Accordingly, the international community adopted risk based capital

adequacy standard for banks, popularly known as Basel-II.

Banks of the country are working to comply with the risk based capital adequacy

(RBCA) guideline, which has been formulated by Bangladesh Bank in line with

global Basel-II framework. They have already started reporting as per the guidelines.

In this background, it is important to identify the level of compliance so far achieved

by the banks, the challenges they are facing, issues to be dealt with, and experiences

of the international community regarding its implementation. Accordingly, the

current project has been undertaken to focus on the above mentioned issues.

The paper aims to highlight the issues relating to implementation status of

Basel-II in the context of Bangladesh. Specific objectives of the paper are: One, to

assess the current implementation status of Basel-II in the banking sector of the

Bangladesh; Two, to review Basel-II implementation status in different Asian

countries and compare the outcome with that of the Bangladesh scenario; Three, to

identify challenges and issues which need to be addressed for smooth implementation

of Basel-II framework.

The paper is based on both primary and secondary information. A detailed

questionnaire has been designed to collect the information from the different banks

for collecting primary data. The questionnaire was sent to a number of sample banks.

The study used purposive sampling in order to ensure the availability of the data and

quality of the response. A total of 14 banks (1 state-owned commercial bank,

11 private commercial banks and 2 foreign commercial banks) were selected in the

sample. The response from the sample banks were accumulated, compiled and

analyzed to identify the current implementation status of Basel-II along with the

challenges related to the implementation of Basel-II. Secondary data on all the banks

has been considered and used in the study. Secondary data has been collected from

Annual Reports, different departments of Bangladesh Bank and literature survey.

Different statistical techniques have been used to analyze the data.

In order to fulfil the objectives of the study, a keynote paper was prepared and

presented in a day-long workshop which was attended by a number of senior level

bankers. After the presentation of the keynote paper, a group discussion was arranged

for the participants. Several issues were raised in the discussion and the final report

has been prepared after incorporating the valuable and appropriate suggestions of the

participants.


The paper is organized into six sections. The first section describes the

background, objectives, methodology. The introductory section is followed by the

theoretical framework of Basel-II. Third section depicts the different country

experiences regarding the Basel-II implementation with special focus on South Asian

countries. Section four portrays the current implementation status of Basel-II in

Bangladesh including a comparison with selected SAARC countries. Section five

presents the key challenges regarding the implementation of Basel-II. Finally issues

and suggestions related to Basel-II implementation have been placed in section six.

II. Theoretical Framework of Basel-II

The implementation of New Capital Adequacy Framework (Basel II) has gained a

lot of interest all over the world. The effective adoption of this new international

supervisory regulation is confronted by many challenges and issues. With

globalization, expansion of the financial sectors and introduction of new financial

products, the financial institutions have become more exposed to diversified structure

of risk. The complexity of this risk structure is aggravating as the changes are rapidly

taking place on the financial landscape of different countries.

Until the late 1970s, banks were highly regulated and protected entities with

hardly any competition among them. Collapse of the Bretton Woods agreement put

them in a new environment of increased competition, leading to gradual erosion of

capital that started to alarm the regulators. Hence, a special committee was set up

under the auspices of the Bank for International Settlements (BIS) in Basel.

The Committee1, initially known as the Cooke Committee and later renamed as the

Basel Committee on Banking Supervision (BCBS) formulated a proposal in which,

it suggested that a common framework for calculating the capital adequacy of banks

should be adopted. This document, known as the 1988 Basel Capital Accord, became

a huge success after its adoption – it not only managed to ensure a level playing field,

but it also brought national practices on capital adequacy of banks in line.

The Basel I, the earlier version of regulation, had a number of drawbacks.

For instance it was relatively risk insensitive, as it did not properly differentiate

between credit risk and other types of risk. Because of the “capital economizing

efforts”, the banks were motivated to hold the lower quality assets on their balance

sheet and off-loading their high quality (less risky) assets (Chami, Khan, Sharma,

2003). On the other hand, financial innovations in the form of derivatives and

securitization played an important role in the decline of traditional banking. Banks

are now focusing more on innovative banking rather than traditional banking. This

changing scenario has posed important implications for the future of banking

1 Committee on Banking Regulations and Supervisory Practices or in short the Basel Committee was established in

1974 by the governors of central banks of the Group of Ten (G10) countries (Belgium, Canada, France, Germany,

Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom and USA) and Luxembourg.


industry and created new challenges for regulators. It was recognized that Basel I

has lost its usefulness for the complex financial innovations driven by new

technologies (Fakhar, 2005).

To address these limitations, the Basel Committee on Banking Supervision

(BCBS) formalized Basel II in June 1999. The final version of New Capital

Adequacy Framework (Basel II) was released in June 2004. The new capital

framework consists of three pillars: minimum capital requirements, which seek to

refine the standardized rules set forth in the 1988 Accord; supervisory review of an

institution's internal assessment process and capital adequacy; and effective use of

disclosure to strengthen market discipline as a complement to supervisory efforts.

Pillar-I - minimum capital requirement - develops the capital allocation

methodology by covering three major components of risk that bank faces; credit risk;

market risk and operational risk. As such the first pillar is similar to the existing

Basel I capital adequacy requirement with the changes made in the calculation

method for risk weighted assets. There are two approaches to measuring credit risk -

a Standardized Approach and Internal Rating Based Approach (IRB). The first

approach is more likely to be used by the banks who are engaged in less complex

form of credit operations and deals with less sophisticated financial transactions. This

option is more suitable to small banks that cannot develop their own technical models

to evaluate credit risk. External Rating Agency provides the necessary credit ratings

based on predefined risk model. On the other hand, under the IRB approach, the

amount of capital that a bank will have to hold against a given exposure will be a

function of the estimated credit risk of that exposure.

Four parameters are used to predetermine the estimated credit risk. They are

probability of default (PD), loss given default, (LGD); exposure at default (EAD),

and maturity (M). With the application of this approach, the banks would be able to

absorb the unexpected credit loss at 99.90% confidence level statistically. Banks

operating under the “Advanced” variant of the IRB approach will be responsible for

providing all four of this parameter themselves based on their own internal models.

Banks operating under “Foundation” variant of the IRB Approach will be responsible

only for providing the PD parameter, with the other three parameters to be set

externally by the Basel committee (Kashyap and Stein, 2004).

Pillar-II – Supervision – addresses the need of “effective supervisory review” by

allowing the supervisors to evaluate a bank‟s assessment of its own risk and

determine whether that assessment seems reasonable (Caruana, 2006). The risk which

are not captured in Pillar I, are covered in Pillar II. Pillar II provide implicit

incentives to the banks to develop their own internal models for risk evaluation. The

role of supervisors in this complex Basel II regulatory framework is to verify that

Banks hold enough capital to cover their actual risk profiles.


Pillar- III – Market Discipline – ensure that effective market discipline provides

an extra set of eyes besides the supervisor. The aim of this pillar is to enhance market

discipline through greater disclosure by banks. The market also requires instruments

(e.g. equity or subordinated debt) which serve as a means of disseminating the

market‟s evaluation of financial institutions, and as a vehicle for rewarding well- run

entities (Chami, Khan, Sharma, 2003).

III. Basel-II Implementation Status: Country Experience

Different countries around the world have different implementation plans, which

depend on a number of factors. These include the size, structure and the state of

development of financial sector, existing level of economic development, depth and

efficiency of financial intermediation, sustainability of banking sector reforms, other

economic reforms, existing regulatory and supervisory framework, state of

technology, political stability, etc.

There are differences regarding the pace and sequencing of smooth migration to

Basel II in different countries. As far as Asia Pacific is concerned, there are varying

implementation plans. Australia, Korea, Singapore, New Zealand are among those

countries where both the simplest and the most advanced approaches are available

initially. In Hong Kong, Japan, Indonesia, Thailand the simplest approaches are

available at the beginning of the implementation plan and at least one of the most

advanced approaches is available within a year or two thereafter. Malaysia and

Philippines are broadly implementing the simple approaches initially. They will take

two or three years to implement the most advanced approaches.

Table 1: Capital Adequacy Ratio of Different Countries

(In percent)

Economy 2007 2008 2009 2010*

China 8.4 12.0 11.4 12.2 Hong Kong 13.4 14.7 16.8 15.9 Indonesia 19.3 16.8 17.4 17.2 Korea 12.0 12.7 14.6 14.7 Malaysia 12.8 12.2 14.9 14.4 Philippines 15.9 15.7 16.0 16.5 Singapore 13.5 14.7 17.3 18.6 Taipei, China 10.6 10.8 11.6 12.0 Thailand 15.4 14.1 16.1 16.2

* Data for Philippines is as of Jun 2010

Source: National Sources and Global Financial Stability Report April 2011, International Monetary Fund


China, India and Pakistan are taking a slow but steady approach for transition

towards Basel II, initially implementing the simple approaches. Implementation

status in India and Pakistan would provide better understanding of implementation

challenges for Bangladesh.

Across the EU, the Basel II agreement is given legal “life” by the capital

requirement directives covering 27 EU member states. In contrast to the rest of the

world, United States has adopted only one option under Basel II - the advanced

approach. All U.S. home country banks and U.S. subsidiaries of foreign banks, after

meeting certain size or foreign exposure criteria, will be expected to adopt the

advanced approach, whereas the other domiciled banks would have the option to

adopt the other versions of Basel II.

Implementation Status in India

India implemented Basel I guidelines in 1999. Later, India's central bank, the

Reserve Bank of India (RBI), issued the guidelines for implementation of Basel II

from March 31, 2007 by adopting the standardized approach for credit risk and basic

indicator approach for operational risk. The India‟s central bank extended the

implementation period in two phases. The foreign banks operating in India and the

Indian banks operating abroad were asked to implement it by March 31, 2008.

The other banks were asked to do it by March 31, 2009.

Table 2: Capital to Risk Weighted Assets Ratio

(In percent)

Bank Group Basel-I Basel-II

2009 2010 2009 2010 Public Sector Banks 12.3 12.1 13.5 13.3 Nationalized Banks 12.1 12.1 13.2 13.2 SBI Group 12.7 12.1 14.0 13.5 Private Sector Banks 15.0 16.7 15.2 17.4 Old Private Sector Banks 14.3 13.8 14.8 14.9 New Private Sector Banks 15.1 17.3 15.3 18.0 Foreign Banks 15.0 18.1 14.3 17.3 Schedule Commercial Banks 13.2 13.6 14.0 14.5

Source: Report on Trend and Progress of Banking in India 2009-10

Now, the Indian central bank has set a phase by phase timeline for transition to

the next phase - the advanced approach. It set March 31, 2011 for implementing

internal models approach for market risk. For implementing the standardized

approach for operational risk was September 30, 2010. For implementing internal

ratings-based approaches for credit risk and the advanced approach for operational

risk is March 31, 2014.


Implementation Status in Sri Lanka

The Central Bank of Sri Lanka joined the global trend by implementing the Basel

II, in January 2008. Accordingly, banks were required to apply the standardized

approach for credit risk, the standardized measurement method for market risk and

the basic indicator approach for operational risk, in computing the capital

requirements.

Figure 1: Capital to Risk Weighted Assets Ratio

Source: Annual Report, Central Bank of Sri Lanka, 2010

The Central Bank has decided to move to more advanced approaches (IRB

approaches) beginning 2013. Once the Central Bank is satisfied that the banks have

the appropriate models and risk management systems, the permission will be granted

for them to proceed with the IRB advanced approaches.

Implementation Status in Pakistan

The State Bank of Pakistan has chalked out a roadmap for the transition of the

banking system towards Basel II. The central bank of Pakistan adopted the

standardized approach for credit risk and basic indicator approach for operational risk

from January 1, 2008. Banks adopted Internal Ratings Based Approach from January

2010. To ensure smooth transition to Basel-II there was a parallel run of one and half

year for Standardized Approach and two years for IRB Approach.


Table 3: Capital to Risk Weighted Assets Ratio

(In percent)

2008 2009 Jun-2010 Dec-2010

Public Sector Commercial

Banks 13.4 15.1 13.9 12.8

Local Private Banks 11.9 13.9 14.0 14.2 Foreign Banks 21.8 23.0 22.7 26.4 Commercial Banks 12.6 14.5 14.3 14.2 Specialized Banks (4.9) (1.5) (1.5) 4.7 All Banks 12.2 14.0 13.9 14.0

Source: Quarterly Performance Review, State Bank of Pakistan, December 2010

Healthy growth in banking profits in 2010, coupled with accumulation of the

reserves, improved the solvency profile of the banking sector. The baseline Capital

Adequacy Ratio (CAR) strengthened and reached to 14.0 percent in December 2010.

This improvement was on account of enhanced MCR requirements of Rs.7 billion set

by SBP as well as banks‟ lower risk appetite.

IV. Implementation Status of Basel-II in Bangladesh

Being the supervisory authority, Bangladesh Bank (BB) has decided to adopt the

Risk Based Capital Adequacy standard for banks in line with capital adequacy

framework devised by the Basel Committee on Banking Supervision. Accordingly,

banks operating in Bangladesh are maintaining capital since 1996 on the basis of risk-

weighted assets in line with BCBS capital framework (Basel I guideline) published in

1988. Considering present complexity and diversity in the banking industry and to

make the banks‟ capital requirement more risk-sensitive, BB has prepared a guideline

in line with Basel-II framework devised by BCBS to be followed by all scheduled

banks from January 2009. According to Bangladesh Bank roadmap, the year 2009

has been considered as the year for parallel run with the preceding Basel I regime,

with full transition to Basel II from 2010. Subsequently, a revised guideline was

suggested by the central bank in December 20102. Besides, guidelines have also been

issued on Internal Capital Adequacy Assessment Process (ICAAP) and stress testing.

Bangladesh Bank asked the banks to strengthen their capital base and maintain a

minimum of 10 per cent of its risk weighted asset as capital in three different phases.

As per the directive, under Pillar-1, banks have to maintain minimum capital @ 8%

of its RWA by June 2010 in the first phase, 9% of its RWA by June 2011 in the

second phase and afterwards it should be 10% of its RWA.

2 Guidelines on Risk Based Capital Adequacy, Bangladesh Bank, December 2010


As per RBCA guideline, banks are following standardized approach for credit

and market risk, and basic indicator approach for operational risk under Pillar-1 of

Basel-II. In Pillar-2, banks should not only hold adequate capital cushion against all

risks associated with their businesses but also ensure that proper risk management

system is in place. Wherever banks would be found deficient in their risk

management practices, there is provision for supervisors to ask for the injection of

additional capital as part of Pillar-II of Basel-II. As per the BB roadmap, the banks

are required to take necessary initiatives for migration to IRB approach by 2012.

This study has identified the implementation status of Basel-II framework in

Bangladesh, which is presented same in the following section.

Minimum Capital Requirement

Basel II Accord, first of all, aims to align banks‟ capital with their basic risk

profiles. It is very elaborate and far superior in terms of its coverage and details.

It exploits effectively the new frontiers of risk management. It seeks to give impetus

to the development of a sound risk management system which, hopefully, will

promote a more efficient, equitable and prudent allocation of resources. It is

perceived to be the indication of the future outlook of bank supervision and an

evolutionary path for the banking industry.

As per RBCA guideline, banks are required to maintain Capital Adequacy Ratio

(CAR) of not less than 10.0 percent. But the central bank has reduced the ratio and set

a new timeframe for the banks to maintain their capital against 8 percent of the risk-

weighted assets by June 2010 and 9 percent by June 2011. Table-4 below shows that

as of June 2011, the SCBs, DFIs, PCBs and FCBs maintained CAR of 9.49, -7.05,

10.41 and 17.08 percent respectively, which has been increased from 8.92, -7.25,

10.08 and 15.63 percent, respectively in December 2010.

Table 4: Capital Adequacy Ratio (CAR) by Type of Banks3

(In percent)

Types of Bank 2007 2008 2009 2010 June, 2011 SCBs 7.9 6.9 9.0 8.92 9.49% DFIs -5.5 -5.3 0.4 -7.25 -7.05% PCBs 10.6 11.4 12.1 10.08 10.41% FCBs 22.7 24.0 28.1 15.63 17.08% Total 9.6 10.1 11.6 9.31 9.75%

Source: Department of Off-Site Supervision, BB

3 Up to 2009, CAR was calculated on the basis of Basel-I framework, afterwards the calculation was based on new

risk based capital adequacy guideline i.e. Basel-II.


Looking at the group-wise CAR position, it is evident that both Private

Commercial Banks (PCB) and Foreign Commercial Banks (FCB) are successful in

maintaining required CAR. Only one PCB failed to maintain the required CAR,

which arose because of the huge amount of accumulated loss and it is categorized as

a problem bank. Although SCB group improved their performance from December

2010 and crossed the target CAR of 9% in June 2011 but the problem lies with the

DFI group. Of the four DFIs, two banks fall short of target. One of the banks in DFI

group suffers so badly that the entire group went into the red. Both the banks give

most of their loans to agricultural sector as per government directive. As a result,

these banks cannot maintain their financial health up to the standard.

The compliance status of the commercial banks in terms of their achievement

regarding the capital adequacy ratio is shown in Table-5. The table shows that 4

banks fall short of the target and yet to attain the required CAR of 9 percent by June

2011. The remaining picture is quite optimistic as many of the banks are well above

the target. Out of the total 47 banks, 30 of them have already crossed 10 percent

marks. Even some of the banks (14 banks) are doing so well that they have exceeded

12 percent benchmark.

Table 5: Distribution of Banks by CAR

Number of Banks

CAR Less than 9 % 9% to 12% 12% to 15% Over 15% Total Dec 2010 8 26 5 8 47 June 2011 4 29 5 9 47

Source: Department of Off-Site Supervision, BB and Author‟s own calculation

Individual performance of banks (figure-2) shows that within the SCB group,

Sonali Bank is in the leading position in terms of achieving CAR, which is 10.23%

but Agrani Bank fails to achieve the required CAR. Although Rupali Bank achieved

the overall CAR but its Tier-1 capital is well below the target. Janata Bank

marginally crossed the limit. Of the 30 PCB, except ICB Islamic Bank, all the PCBs

successfully reached the target CAR of 9%. Among them 19 banks have already

crossed the 10% mark which is a very good sign as all the banks need to maintain

CAR of 10% from the July 2011. ICB Islami Bank posted a CAR of minus 37.20%.


Figure 2: Bank-wise Capital Adequacy Ratio as on June 30, 2011


Within the PCB group, Social Islami Bank (13.59%) is at the top of the table in

attaining CAR followed by Prime Bank (12.52%) and Al-Arafah Islami Bank

(12.36%). All the banks in the FCB group are well above the target rate and their

group CAR already reached 17.08%. But the situation of the DFI group is severe

especially for BKB and RAKUB. The condition of BKB is really alarming as it

observed a CAR of -25.91%. Although RAKUB posted a positive CAR but still it is

far from the target.

According to central bank statistics, till June 2011, the total Minimum Capital

Requirements (MCR) by the banks were Tk. 43,226 crore against which the banks

maintained a capital of Tk. 46,169 crore and the overall surplus was Tk. 2,943 crore

(table-6). This surplus is the outcome of good performance of both PCBs and FCBs

which observed a capital surplus of Tk. 4,284 crore and Tk. 2,403 crore, respectively.

Although SCB‟s achieved capital surplus of Tk. 494 crore but DFIs posted a huge

capital deficit of Tk. 4,238 crore.

Table 6: Bank-group wise Capital Composition

(Tk. in Crore)

Types of

Bank Required

Minimum

Capital

Tier-1

Capital Tier-2

Capital Tier-3

Capital Total

Eligible

Capital

Capital

Surplus/

Shortfall SCBs 9148.40 6670.74 2971.43 0.00 9642.17 493.77 DFIs 2376.37 -2609.17 747.35 0.00 -1861.82 -4238.19 PCBs 27938.88 25256.90 6966.73 0.00 32223.63 4284.75 FCBs 3762.41 5573.26 592.46 0.00 6165.73 2403.32 Total 43226.06 34891.73 11277.97 0.00 46169.71 2943.65



From the table, it is evident that out of total regulatory capital for all banks, 75.6

percent was maintained as core capital in June 2011 which was 71.7 percent in

December 2010. Disaggregated figures show that except for the DFIs, actual core

capital was 19.2 percent, 28.4 percent and 40.39 percent higher than the requirement

for SCBs, PCBs and FCBs, respectively. If we look at the capital composition of the

different group of banks, we can conclude that there is no Tier-3 capital in the

banking sector of Bangladesh. Only 25 percent of the total regulatory capital is in the

form of Tier-2 capital, of which only 7 banks raised a portion (14 percent) of their

Tier-2 capital through subordinated debt. Although subordinated debt both long-term

(Tier-2) and short-term (Tier-3) was used as a capital component in the existing

regulatory capital framework but it will not be treated as a capital component in the

upcoming framework. The contribution of subordinated debt in the capital formation

will definitely be helpful in the transition to the future framework.

Figure 3: Capital Mix of Schedule Banks


The above figure represents the capital mix, both Tier-1 and Tier-2, of all

scheduled banks operating in Bangladesh. From the figure, we find that except

retained earnings, all the components of Tier-1 capital have increased from December

2010 to June 2011. Retained earnings show slightly declining trend because of the

accumulated loss by the DFI group. The biggest increase was observed in paid up

capital as banks are continuously offering bonus share, right share in the form of

dividend to the shareholders in an effort to enhance their core capital base. Also in

recent years, many banks are found to increase their authorized capital from its

current level to Tk.1,000 crore, which is an indication of the further increase of the

paid up capital by the banks in future. Although Tier-2 capital is slightly increased in

absolute term but eventually it showed a little reduction in percentage term. The

biggest component in this category is the „general provision‟, which is about

Tk.6,000 crore (13% of the total regulatory capital), is an outcome of the continuous

increase of the loans & advance by the banking sector.


From figure-4, it is observed that as opposed to required 4.5 percent of the

minimum core capital, SCB, PCB and FCB maintained 6.56 percent, 8.16 percent and

15.44 percent respectively in the form of core (Tier-1) capital. Even after the worse

condition of the DFI group, the average core capital reached 7.37 percent, which is an

indication of high concentration on Tier-1 capital by the banking sector of

Bangladesh. This outcome is a very good indication, as we know that Basel-III sets

extreme importance on core capital, which might have an added advantage for the

banking sector of Bangladesh while implementing Basel-III in future.

Figure 4: Percentage of Core Capital by Different Group of Banks


The Credit Risk Weighted Assets (CRWA), with 83.58 percent share, was the

leading component of aggregate RWA (table-7). The banks‟ concern in equity and

interest exposures marginally enhanced their overall market risk exposure which

witnessed a growth in its share to 7.81 percent during first half of the year. Further,

share of Operational Risk Weighted Assets (ORWA) slightly increased on account of

rise in banking profits4.

4 The operational risk weighted assets are calculated under the Basic Indicator Approach of Basel II Framework that

requires the banks to set ORWA equal to an average of three years of annual gross income. So rising gross income

would result in higher capital charge for operational risk

6.56

-9.88

8.16

15.44

7.37

-12

-8

-4

0

4

8

12

16

SCB DFI PCB FCB ALL Bank

Perc

en

t

Minimum Core Capital Actual Core Capital


Table 7: Composition of Risk Weighted Assets

December 2010 June 2011 Amount

(in crore taka) Share (%) Amount

(in crore taka) Share (%)

Credit RWA 374,139.02 84.53 395,941.83 83.58 Market RWA 32,347.57 7.31 36,983.92 7.81 Operational RWA 36,136.65 8.16 40,814.22 8.62 Total RWA 442,623.24 100 473,739.97 100

Source: Department of Off-site Supervision, BB

Although central bank has a framework in place to curtail operational risk

through Customer Due Diligence / Know Your Customer (KYC) measures,

it continuously monitors the progress of banks and amends these guidelines for

stricter compliance.

Figure 5: Ratio of Risk Weighted Assets to Total Assets5


Figure-5 represents the ratio of risk weighted assets to total assets, which is

increasing over the years. In the initial years the ratio was moving around 50 percent

mark. But in 2010, the ratio reached almost 92 percent, which is very high for a

country like Bangladesh. This is because of the implementation of Basel-II

regulation. Basel-II regulation was put into operation in Bangladesh from 2010 where

calculation Of Risk Weighted Assets (RWA) were more rationalized than that of

Basel-I regime. This caused increase in the ratio, which indicates the banks

involvement in high risk sensitive assets. Another important reason of such increase

5 Total Assets is net of specific provision, interest suspense, cash collateral

45.71

53.28 54.84

91.3887.22

0

10

20

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 (June)

RW

A to

Tot

al A

sset

(%)


was the risk weight of unrated corporate clients. The ratio has slightly declined in the

first half of 2011 because of the little improvement of the rating scenario by the

unrated corporate clients. The ratio could have decreased further if it was possible to

increase the rating coverage. Although banks are compliant in terms of maintaining

required CAR, but the risk weighted exposure is very high as compared to the

neighboring countries. In Pakistan, the ratio is only 64 percent in December 2010. So

banks should concentrate for reducing its exposure to high risky assets in order to

ensure better risk management and increased financial stability.

Supervisory Review Process

The second Pillar of Basel II capital regime requires banks and the supervisors

not just to ensure that banks hold adequate capital cushion against all risks

associated with their businesses, but also to ensure that banks have policies and

processes in place for assessing, monitoring and prudent management of the risks.

For the banks this second pillar requires active board and senior management

oversight, forward looking capital adequacy assessment; adequate processes for

monitoring and reporting of risk exposures; and periodically reviewed strong and

effective internal control processes. For supervisors the second pillar demands

regular review of adequacy and effectiveness of capital assessment, risk

management and internal control practices in banks; seeing to it that banks operate

above their minimum regulatory capital ratios; intervening early for preventing

slippages of capital ratio below the regulatory minimum; and rapid remedial actions

in the event of any such slippage.

The key principle of the Supervisory Review Process (SRP) is that “banks have a

process for assessing overall capital adequacy in relation to their risk profile and a

strategy for maintaining their capital at an adequate level”. Banks should have an

exclusive body (called SRP team) where risk management unit is an integral part, and

a process document (called Internal Capital Adequacy Assessment Process-ICAAP)

for assessing their overall risk profile, and a strategy for maintaining adequate capital.

Adequate capital means enough capital to compensate all the risks in their business,

and to develop and practice better risk management techniques in monitoring and

managing their risks. ICAAP includes regulations of a bank‟s own supervisory

review of capital positions aiming to reveal whether it has prudent risk management

and sufficient capital to cover its risk profile. Supervisory Review Evaluation Process

(SREP) of BB includes dialogue between BB and the bank‟s SRP team followed by

findings/evaluation of the bank‟s ICAAP. During SRP-SREP dialogue BB will

review and determine additional capital of banks.

Recently central bank has developed a guideline to evaluate the individual bank‟s

process document for determining the adequacy of the capital. In the guideline, BB

has identified 10 different risk components and provides capital calculation

methodology against those risk components. Bangladesh Bank circulated their


guideline through website and almost all the commercial banks have decided to adopt

this guideline as basis of their process document. Sample survey showed that 40

percent of the respondents have already developed their own ICAAP, another 40

percent is in the process of development and the remaining 20 percent is yet to

develop any process document. All the respondents under the survey have exclusive

team for SRP, approved capital plan and submitted the capital calculation report

under Pillar-II to the Bangladesh Bank. Bangladesh Bank is yet to start SRP-SREP

dialogue. While assessing the capital requirement for the following risk components

the respondents have identified some practical difficulties which are summarized and

given in the appendix.

The following table is the summary output of the survey conducted in the sample

banks. First four columns represent respectively Banks Identity (which is not

disclosed), Eligible Regulatory Capital, Minimum Capital Requirement (MCR) and

Adequate Capital Requirement as per Pillar-2 of Basel-II. Fifth column represents the

percentage of MCR within total eligible regulatory capital. Sixth column is the

capital in excess of MCR already maintained by the respective banks, which may be

used to cover additional capital. The average amount of extra capital over the

minimum is approximately 20 percent. Final column of the table shows the

percentage of additional capital to eligible regulatory capital of the sample banks.

The survey data shows that the percentage varied from 4 to 27 percent with an

average of 16 percent.

Table 8: Eligible Capital, Minimum Capital and Additional Capital of Sample Banks

(Tk. in Crore)

Name of the

Bank

Eligible

Regulatory

Capital MCR

Additional

Capital

Requireme

nt

MCR to

Eligible

Capital (%)

Surplus

Capital

Over MCR

(%)

Additional

Capital to

Eligible

Capital (%) Sample-1 953.64 694.28 69.00 72.80 27.20 7.24 Sample-2 358.55 200.00 12.73 55.78 44.22 3.55 Sample-3 1001.88 849.01 170.00 84.74 15.26 16.97 Sample-4 1298.85 761.92 131.00 58.66 41.34 10.09 Sample-5 668.53 623.63 138.56 93.28 6.72 20.73 Sample-6 669.49 513.61 109.87 76.72 23.28 16.41 Sample-7 2207.64 1586.73 270.46 71.87 28.13 12.25 Sample-8 3699.52 3254.96 970.72 87.98 12.02 26.24 Sample-9 1254.88 971.19 129.41 77.39 22.61 10.31

Sample-10 1320.01 1430.81 200.31 92.26 7.74 14.00 Total 10775.34 13543.79 2202.06 79.56 20.44 16.26

Source: Department of Off-Site Supervision BB, Survey Result and Author‟s own Calculation


The result indicates that, on an average, banks are already in a position to

maintain the additional amount of capital (in excess of MCR), which leads to increase

soundness and higher financial stability by the banking sector of Bangladesh.

Currently, central bank is giving high emphasis on implementing the supervisory

review process, for which banks are required to maintain some additional capital

under Pillar-2 for different forms of risk other than credit, market and operational risk

of Pillar-1. Although banks were very much concerned about this extra capital

requirement and this was considered as one of the biggest challenge, the result shows

an optimistic view in this regard.

Stress Testing

Stress testing, as defined by BIS, is a risk management technique used to evaluate

the potential effects on an institution‟s financial condition of a specific event and / or

movement in a set of financial variables. It refers to the process to cover multiple risk

measures across categories and complements traditional risk models. It is also an

integral part of the BIS capital adequacy framework. Considering the importance and

complexity of the methodology of stress testing, BB issued a guideline on stress

testing in 2010 and made it mandatory for banks.

The following table shows the survey result conducted to find the capital

condition under different stressed situation. It is evident that none of the sample

banks falls short of the capital in case of minor level shock whereas 100 percent will

face the capital shortage if it has to face the major level shock.

Table 9: Shortage of Capital at Different Level of Shocks

Level of Shock Yes No Minor level - 100% Moderate level 20% 80% Major level 100% -

When the respondents were asked whether the shock level used in different areas

of stress testing are justified or not, majority of the respondents considers that the

shock levels are not justified. They have already mentioned some comments

regarding the shock level of stress testing which are summarized below:

Downgrading the top ten customers directly to B/L category is not justified

The level of shock should be determined through a scientific process and can be a

blending of the historical trend, probable level of disaster considering the

economic strength/condition of the country.


Market Discipline

Market discipline, the third Pillar of Basel II complements the regulatory capital

and supervisory review pillars, with requirement of sufficient transparency to enable

stakeholders to make their own assessments about the risk profiles of the asset

holdings of a bank and the adequacy of its capital in meeting probable losses. This

pillar requires banks to develop formal disclosure frameworks providing sufficient

qualitative and quantitative disclosure of validated (i.e., audited) material information

at regular periodicity.

A bank should decide which disclosures are relevant for it based on the

materiality concept. Banks should provide 8 categories of information (Scope of

application, Capital structure, Capital adequacy, Credit risk, Equities, Disclosures for

banking book positions, Interest Rate Risk in the Banking Book (IRRBB), Market

risk, Operational risk) required to disclose in both qualitative and quantitative form as

at the end of March of each year along with annual financial statements. So a bank

has to disclose 16 different categories of items in order to comply with Pillar-III of

Basel-II guideline.

Some of the banks disclose sufficient information under Pillar III of Basel II.

At the same time, some of the banks do not disclose at all and some of the banks do

not follow the prescribed format. The following table illustrates the survey result

where 27 banks were taken as sample. Of the sampled survey, only 5 banks (18.52

percent) were found fully compliant as per the guideline in terms of disclosure. Out

of required 16 items, 8 banks were found to report maximum of 13 to 15 items and

also 8 banks were found to disclose less than 7 items. The quantity of disclosure for

the remaining 6 banks varies from 7 to 12 items (disclosure percentage varies from

40 percent to 80 percent), which represents only 22 percent of the respondents.

Since disclosure is a mandatory requirement for all banks, the percentage reflects

weak compliance of Pillar-III under Basel-II by the banking sector of Bangladesh.

All the banks should come forward to disclose required information under Pillar III

of Basel II.

Table 10: Distribution of Banks in Terms of their Disclosure Percentage

Actual disclosed

items out of 16 items Percentage of

Disclosure No. of

Banks Percentage of

Banks 16 100% 5 18.52

13-15 >=80% to <100% 8 29.63 10-12 >=60% to <80% 3 11.11

7-9 >=40% to <60% 3 11.11 1-7 >0% to <40% 8 29.63 0 0% 0 0.0

Source: Annual Reports of Different Banks


Comparative Scenario of Basel-II Implementation

Comparative statement of selected indicators of Basel-II implementation in

selected SAARC countries are presented in Table-11 below. The table shows that the

Capital Adequacy Ratio (CAR) of Bangladesh is only 9.31 percent where as the same

of Sri Lanka, the best performer, is 14.90 percent. Bangladesh is also lagging behind

other countries in terms of two other ratios namely core capital ratio and risk

weighted assets to total assets. Sri Lanka is the top performer in the group.

Table 11: Basel-II Implementation Scenario in Selected SAARC Countries

(As on December, 2010)

Bangladesh India Pakistan Sri Lanka

Capital Adequacy Ratio (%) 9.31 14.50 14.00 14.90 Core Capital Ratio (%) 7.37 10.10 11.80 13.00 RWA to Total Assets (%) 91.38 N/A 64.10 N/A

N/A = Not Available

Source: Department of Off-Site Supervision BB, Report on Trend and Progress of Banking in India 2009-10,

Quarterly Performance Review, State Bank of Pakistan, December 2010, Annual Report, Central Bank of Sri

Lanka, 2010

SAARC countries are implementing Basel-II in different phases. At present,

banks in Bangladesh are following standardized approach for credit and market risk,

and basic indicator approach for operational risk. As per Bangladesh Bank roadmap,

Banks are expected to migrate to the advanced approaches by 2012. In Pakistan,

Banks adopted Internal Ratings Based approach from January 2010 with provision

for two years parallel run of Standardized and IRB approach. Sri Lanka is following

the simpler approaches at the moment and the Central Bank of the country has

decided to move to advanced approaches (IRB approaches) beginning 2013. Indian

central bank has set a phase by phase timeline for transition to the next phase - the

advanced approach. It set March 31, 2011 for implementing internal models approach

for market risk. For implementing the standardized approach for operational risk was

September 30, 2010. For implementing internal ratings-based approaches for credit

risk and the advanced approach for operational risk is March 31, 2014.


V. Challenges Faced by the Banks while Implementing RBCA Guideline

The current study has identified the challenges faced by the banking community

in the process of implementing the Basel-II guidelines in Bangladesh by a

questionnaire survey and literature review. Identified challenges are presented in the

section below:

Non-compliance of MCR requirements by DFIs

DFI group is suffering from severe capital shortage as per the new guideline.

Especially, BKB and RAKUB are showing acute shortages. The condition of BKB is

really alarming as it observed a CAR of -25.91%. Although RAKUB posted a

positive CAR but still it is far from the target. This condition is a big challenge for

the banking sector of the country as it significantly reduces the overall CAR position

of the banking sector.

Poor Compliance of Pillar-II and Pillar-III

For being Basel-II compliant, implementation of all three pillars is equally

important. From this study, it has been observed that banks were somewhat

successful in attaining required CAR but the compliance of other pillars (Pillar-II and

Pillar-III) are still far from the target. This is big a challenge on the way to become

Basel-II compliant. In this context, all the concerned parties need to play proactive

role so that all Pillars of the capital adequacy framework is implemented at its full

length.

Low Credit Rating Coverage

One of the two approaches prescribed for Credit Risk in Basel II is the

standardized approach. The standardized approach of determining capital for credit

risk depends heavily on the credit rating by ECAI. While the BB has accredited a

number of rating agencies operating in Bangladesh (CRISL, CRAB, NCRL, ECRL),

the rating penetration is rather low. Based on our sample, approximately 16% of the

corporate borrowers are rated in Bangladesh. This is because of the unwillingness of

borrowers to be rated, high cost of rating, short validity of rating, poor quality of

rating, lack of independence, lack of trust on the rating agency etc. Besides, the risk

weighting scheme under standardized approach also creates some incentive for some

of the bank clients to remain unrated since such entities receive a lower risk weight of

125 per cent vis-à-vis 150 per cent risk weight for a lowest rated client. This might

especially be the case if the unrated client expects a poor rating. Because of poor

rating coverage, banks are facing challenge in this regard as they are applying high

risk weight in the absence of rating and are maintaining higher capital accordingly.


Development of ICAAP

The key principle of the Supervisory Review Process (SRP) is that the banks

should have their own process (ICAAP) document for assessing overall capital

adequacy in relation to their risk profile and a strategy for maintaining their capital at

an adequate level. Development of Internal Capital Adequacy Assessment Process

(ICAAP) under the Pillar-2 of the framework would perhaps be the biggest challenge

for the banks in Bangladesh as it requires a comprehensive risk modeling

infrastructure to capture all the risks that are not covered under the other two Pillars

of the framework. From our questionnaire survey, it has been found that only a few

banks have developed their own ICAAP while many others have none. A few other

banks are in the process of developing their ICAAP. So, ICAAP development and

capital maintenance as per ICAAP is a challenge for the implementation of Pillar-II.

Availability of Reliable Data

Strong MIS and reliable database on the borrowers, security, documentation and

on similar other issues is indispensable for the successful implementation of the

Basel-II. For capturing these data in a timely and less costly way, bank should

redesign their information system, need to expand the IT infrastructure, need to

develop new software. These are yet to be done in many banks. Even some banks are

doing manual banking in the rural level branches. So availability of reliable data on a

timely basis is still a major challenge for the implementation of Basel-II in the

banking sector of Bangladesh.

Availability of Skilled Human Resources

The banks have to interpret the new regulations and have proper understanding of

its effects on banking business. So, skilled human resources are the “tools” for the

gradual implementation of Basel II. Proper interpretation of data is crucial for

accurate decision-making. Those who are skilled at decision-making will give better

results than those whose judgments are poor. Moreover, Basel-II is mainly focused

on risk management at all level of banks. So human resources capable of

understanding risk management issues at all levels are essential. But there is a dearth

of skilled and trained manpower for risk management, which is also a challenge for

Basel-II implementation.

IT Infrastructural Requirements of the Banks

Some of the banks are still running under decentralized and less sophisticated IT

platform. So, data management, storage and processing remains a major challenge.

The single largest cost of implementing Basel II is the IT costs. A high-end IT

infrastructure with risk management software is needed. This preparedness is not

present in all the banks. The required expenditure would be far higher than small

banks could bear, which posses a big challenge for implementation of Basel-II.


Assessing Capital Requirement for Residual Risk

Assessing capital requirement for residual risk is a big challenge for many banks

because of the unavailability of data on error in documentation, cases of physical

non- existence of collateral, error in valuation etc. Besides, determining the capital

requirement by considering delay in process of legal action and execution of court

verdict (time value of money + legal processing cost) is complex.

Absence of Comprehensive Checklist for Assessing Compliance of Core Risk

A comprehensive checklist is needed for evaluation of the degree of compliance

of core risk management guidelines by banks. But acceptable and comprehensive

checklist is yet to be prepared by the banks. As a result, banks are facing problem at

the time of determining the capital requirement for the compliance of core risk

management guidelines.

Non-cooperation in Assessing Environmental & Climate Change Risk

For assessing capital requirement for Environmental & Climate Change Risk,

cooperation from customer is a must. But respondents of questionnaire survey opined

that customers do not cooperate in many instances particularly where there is

possibility of gross environmental pollution. Offering appropriate incentives for the

customers is a big challenge as it may be costly for the banks.

Absence of Guidelines/ Job description for the Risk Management Unit

Banks have already formed SRP team and established risk management unit as an

integral part of SRP. But the process of determining risk profile is yet to be

completed. Even in some cases they are not provided with guidelines or sufficient job

descriptions. For successful implementation of the Pillar-II, this challenge needs to be

addressed in the coming days.

Appropriate Risk Evaluation Techniques

Application of appropriate techniques for risk evaluation is an implementation

issue. This is where the modeling comes into play. Modeling is used as a popular

technique for identifying, quantifying and analyzing risks to enable the

management to decide on the allocation of capital. But one need not entirely

depend on modeling and be out of reality as modeling will produce a statistical

outcome depending on the data you feed into a set of equations or a simulation

model. Modeling also involves issues such as focus on loss data, validation,

calibration and issues on floors and ceilings.

Stress Test and Capital Shortfall

The idea of stress test is new in Bangladesh. The BB started carrying out stress

tests of banks to determine whether they are able to withstand various shocks, which

is very important to assess the financial stability. The recent global financial crisis has


brought the issue of stress test of financial institutions, particularly banks, in the

limelight. Bangladesh Bank has already given the stress test guideline. As per the

guideline banks are submitting their reports to central bank. The BB already carried

out the stress test on the data given by the banks as of end-March 2011. Majority of

the banks will face a capital shortage in moderate and major level of shocks in

different risk category, which is a challenge for the banking sector.

Challenges in the Implementation of Disclosure Requirements

The purpose of market discipline (Pillar-3) is to complement Pillar I and II by

encouraging public disclosure of key information on risk exposures and capital

adequacy. Disclosures are applicable at the bank level as well as supervisory level.

While checking the implementation status, it has been observed that the disclosure

practices are still at a nascent stage in the banking sector so far as it is concerned with

Pillar-3 disclosure. Challenges of Pillar-3 implementation are basically coming from

two different areas : (i) Approved disclosure framework – a large portion of the

respondents said that they are yet to have their own disclosure framework approved

by the Broad of Directors; and (ii) Poor qualitative disclosure – it has been observed

that the banks are really very reluctant to make qualitative disclosure. So, achieving

sufficient appropriate qualitative disclosure is a big challenge.

Operational Cost of Basel-II

One of the most serious and widespread challenges is the operational cost of

Basel II. There is a heavy compliance burden of Basel II and the growing burden of

domestic and internal regulation is the biggest risk facing the banks as

implementation of new rules entails a very high cost for the banks. A right balance in

this risk – return trade-off is very essential. Moreover, it can be argued that Basel II,

unfairly gives advantage to the larger banks that are able to bear the high compliance

cost but the smaller banks will be discouraged.

Adverse Selection and Moral Hazard Problem

The existence of imperfect markets is a major challenge for the implementation

of Basel II. Banks engage in information – intensive activities and their profitability

depends on keeping that information private (Chami, Mohsin and Sharma, 2003).

Adverse Selection, Moral Hazards and Agency problems stem from the informational

asymmetry between banks and other economic agents such as borrowers, lenders, and

regulators. Asymmetry of information creates price distortions. Market surveillance

by regulator could minimize the distortions.

Cross-border Challenges

One of the most difficult aspects of implementation is the cross-border

challenges. With the openness of the economies, capital flows freely among the world

economies. The conclusion derived from empirical evidence is that there will be a


decline in credit flows from banks of developed countries to the developing countries

because of the higher risk perception of their financial system, and lack of appropriate

rating and risk-management systems (Akhtar 2006). There is a dire need to find a

robust and a workable solution to this potential threat to the world economies.

Migration to Advanced Approaches

As per the roadmap of BB, banks are supposed to migrate from the current

approaches to advanced approaches (Internal Rating Based (IRB) approach, Internal

Model Approach Standardized/advanced measurement approach) for calculating

RWA against credit, market and operational risk by 2012. Initiatives so far taken

include organizing training, designing borrower database, use of different

sophisticated techniques to calculate various risks etc. These initiatives are

insufficient to migrate to the advanced approaches by 2012. Most of the

respondents thought that shifting to advanced approaches by 2012 will be a great

challenge for the banking sector. The advanced approaches would put a difficult

responsibility on the supervisors of not only guiding the banking system through

the implementation phase but also of validating the internal models, system and

processes adopted by the regulated banks. This, needless to say, would require

considerable capacity-building and augmentation of the domain knowledge and

expertise of the supervisors themselves to ensure a non-disruptive migration to the

advanced approaches under Basel II.

VI. Issues for Discussion and Suggestions

One, as per RBCA guideline, banks total risk weighted assets are categorized into

credit, market and operational risk. From Table-7, it is apparent that credit risk

weighted assets constitute almost 84 percent of the total RWA of the banking sector

of Bangladesh. Efforts to minimize capital requirements will not be successful unless

credit risk weighted assets are reduced. So reducing the credit risk weighted assets is

major issue for the banking sector for better capital management. The scenario may

be improved by encouraging good clients to be rated and also by accepting good rated

new corporate exposure. Increasing the number of rated clients may not always be

possible unless internal or external interferences are removed or reduced to a

minimum level.

Two, under the Standardized Approach, the banks have to rely heavily on

External Credit Assessment Institutions (ECAI) in order to get their client rated.

One of the key implementation challenges is to get the credit rating of the clients.

To overcome this, rating coverage needs to be increased. In order to increase the

rating coverage, benefits/rewards may be offered to the good rated clients in the form

of reduced interest rate, sharing of the rating cost by the bank etc. Regulatory

enforcement like incorporating the rating issue in the credit assessment process,

inclusion of rating in the listing requirements of stock markets may also be helpful in

increasing the rating coverage.


Three, basel-II is a highly technical and data-sensitive regulation. Particularly,

the advanced approaches are more complex, which requires highly skilled staff.

This would need innovative strategies and concerted efforts on the part of the banks

to be able to attract and retain the right mix of talent in the organization. To ensure

sufficient supply of skilled and competent workforce, employees should be developed

through focused training program both home and abroad.

Four, most of the banks are following the BB‟s evaluation guideline as their

process document in order to determine the adequate capital requirement under

Pillar-2. But banks are supposed to prepare their own ICAAP for this purpose.

For doing this, banks are even taking the service from the foreign expert, which is a

costly exercise. Banks should concentrate on development of their own ICAAP with

help of local talented workforce.

Five, assessing capital requirement for various risks under Pillar-2 is subject to

different challenges starting from understanding methodology to development of

ICAAP. For obtaining branch level data related with the calculation of capital

requirement for various risk under SRP, banks may expand their IT infrastructure and

strengthen the capacity and coverage of internal audit.

Six, stress test is a technique by which banks can assess their position under

different stress scenario – minor, moderate and major. Although central bank has

started the stress testing but it is yet to assess the impact of such test and take the

necessary action accordingly. Banks can themselves learn some lessons from the

test and be benefited by taking necessary policy decision in advance. In this

regard banks may be encouraged to use stress test information for their policy

formulation in respective areas and stress test result should be reflected in the

capital plan of the banks.

Seven, the level and content of Pillar III disclosures will vary according to the

measurement and calculation approaches adopted by a relevant bank. In terms of

Basel II, the disclosures would have to be made on an annual and semi-annual basis.

In the context of Bangladeshi banking system, non-compliance of disclosure

requirements as per Basel-II guideline is observed. Even if there are some

disclosures, the quality is questionable. For improving disclosure practices, banks

having good disclosures may be rewarded, supervisory efforts to ensure quantity and

quality may be intensified, scope of the auditors may be enhanced and finally

awareness programs may be undertaken to increase the awareness of the stakeholders.

Eight, implementation of Basel-II entails a very high cost for the banks. The

major sources of cost is designing risk management system, developing ICAAP,

adoption of new standards, training cost for the human resources and cost of

developing infrastructure. In some cases, small banks suffer greatly because of the

cost involvement. In order to reduce the cost a number of steps can be undertaken.

For example, common software may be developed jointly by banks‟ common fund

for risk management, local expertise may be shared by banks.


Nine, basel II requires the involvement of the senior management in the process

of identification, evaluation and mitigation risks. The bank management should

address this issue early. Top management should be educated in terms of risk

management and Basel accord. The senior management and the board members

should use some supervisory and monitoring powers to ensure that the technical and

other officers continue to engage in risk mitigation activities and that the board is

satisfied with action taken by them. To attain this objective, Board risk committee

may be formed and board may be appraised of the risk management, stress testing

and Basel-II implementation outcome.

Ten, when financial market innovation takes place globally, new products such as

derivatives, securitization will be introduced and they are likely to bring in new risks

including operational risks. It is evident that Basel II enables banking to be based on

more market-driven systems which are conducive to financial innovation and it

requires setting aside risk mitigation processes to deal with ever increasing financial

innovation.

Eleven, the advanced approaches would require considerable capacity-building

for both the supervisory authority as well as the banks. These approaches are very

data intensive and require high-quality, consistent, time-series data for various

borrower- and facility-categories for a period of five to seven years to enable

computation of the required risk parameters (such as default probability and loss

given default, etc.). Although majority of the banks are not ready to conduct a

thorough review of their internal processes with a view to redesign and upgrade them

to be able to capture the information needed for creating the requisite databases but

most banks understand the need and they are preparing themselves in order to ensure

the process of adoption.

REFERENCES

Ahmed, Muzaffar (2008), “Challenges for BASEL-II Implementation in Bangladesh”, The Financial Express, 9 August.

Akhtar, Shamshad, Governor of the SBP (2006), “Basel-II Implementation: Issues, Challenges and Implications”, 56th Annual General Meeting, Institute of Bankers, Pakistan.

Akhtaruzzaman, Md. (2009), “Potential Impact of Basel-II in Developing Economies:

Experiment on Bangladesh”, International Research Journal of Finance and Economics, Issue 23 (2009), pp. 46-61.

Bangladesh Bank (2007), Basel II Road Map, December.

Bangladesh Bank (2011), Process Document for SRP-SREP Dialogue on ICAAP, February.

Bangladesh Bank (2010), Annual Report.

Bangladesh Bank (2010), Risk Based Capital Adequacy Guideline, December.

Bangladesh Bank (2011), Stress Testing Guideline, February.


http://www.thefinancialexpress-bd.com/2008/08/21/5.html


Basel Committee on Banking Supervision (2006), “International Convergence of

Capital Measurement and Capital Standards‟, A Revised Framework Comprehensive Version”, Bank for International Settlements, June.

Caruana, Jemie (2006), “The Implementation of Basel II, Central Banks and the

Challenges for Development; Bank for International Settlements, ISBN 92-9197-713-6 (online).

Central Bank of Sri Lanka (2010), Annual Report.

Chami, Mohsin S. Khan and Sunil Sharma (2003), “Emerging Issues in Banking Regulation”, IMF Working Paper 03/101.

Different Banks of Bangladesh (2010), Annual Report, Various Issues.

Fakhar, Fozia (2005), “Basel II: A Step Forward in Risk Management”, Journal of IBP, April-June, pp. 15-19.

Griffith-Jones, Stephany and Avinash Persaud (2006), “The Pro-Cyclical Impact of Basle II on Emerging Markets and Its Political Economy”, December.

Harlalka Sarans (2007), “An analysis of Impact of Basel-II in India: A Qualitative Approach”, The University of Nottingham.

ICRA (2005), “Basel II and India”, ICRA Rating Feature, March.

IMF (2011), National Sources and Global Financial Stability Report.

Kashyap and Jeremy C. Stein (2004), “Cyclical Implications of Basel-II Capital

Standards”, Journal of Economic Perspectives, 1Q/2004, pp. 18-31.

Leeladhar V., Deputy Governor of the Reserve Bank of India (2007), “India‟s

Preparedness for Basel-II Implementation”, at the panel discussion during the FICCI-

IBA Conference on Global Banking: Paradigm Shift, Mumbai, September.

Mathew, Maria (2009), “How will Basel-II change Banking in India?” Chennai: Loyla Institute of Business Administration.

Rashid, Mamun (2008), “Challenges for BASEL-II Implementation in Bangladesh”, The Financial Express, 21st August.

Report on Trend and Progress of Banking in India 2009-10.

Vlaar, P. J. (2000), “Capital Requirements and Competition in the Banking Industry,” Federal Reserve Bank of Chicago, Working Paper 18.

Reserve Bank of India (2010), Annual Report.

State Bank of Pakistan (2010), Annual Report.

Walter, Stefan, Secretary General, BCBS (2010), “Basel III and Financial Stability”

5th Biennial Conference on Risk Management and Supervision, Financial Stability Institute, Bank for International Settlements, Basel, 3-4, November.

Ward, J. (2002), “The New Basel Accord and Developing Countries: Problems and Alternatives”, Cambridge Endowment of Research Finance, Working Paper No. 4, p. 14.



Appendix

Table: Summary Issues of SRP

Risk Components Mention the Difficulties (a) Residual Risk Identification of error in documentation

Calculating time value of money in case of

delayed and/or partial recovery.

Identification of security overvaluation

Difficulties in identifying basis point due to lack of sufficient information

(b) Evaluation of Core Risk Management

Determining the degree of compliance of

core risk management guidelines

Absence of core risk management checklist

for assessing CRM (c) Credit Concentration Risk Superior MIS support required which is

costly (d) IRRBB Lack of customer historical information

MVE calculation does not include any

changes from 1% increase in interest rate scenario thus have no impacts on capital

charge. (e) Liquidity Risk Total Adjusted Cash Inflow has been taken as

a percentage of Total Cash Outflow instead

of Total Cash Inflow (logical confusion) (f) Reputation Risk Dual effect on capital charge with regard to

settlement risk. (g) Strategic Risk Difficulty in defining intervention of Board

(h) Settlement Risk Dual effect on capital charge with regard to reputation risk

(i) Environmental Risk Non-cooperation from customers


Paper Three

Disclosure Requirements of Banks: Bangladesh Perspective

Atul Chandra Pandit Assistant Professor, BIBM

Md. Mahabbat Hossain

Lecturer, BIBM

Maksuda Khatun Lecturer, BIBM

Disclosure Requirements of Banks: Bangladesh

Perspective

I. Introduction

Business organizations interact with many interest groups in the process of doing

business. Such interest groups or stakeholders include but are not limited to the

shareholders, suppliers, customers, government, tax authority, regulatory authority,

employees, prospective investor, etc. Stakeholders need a lot of information for

making their business decisions effectively. This is relatively more important in those

businesses where management is separated from ownership i.e. in case of corporate

form of business. The information need of the stakeholders may be satisfied through

public disclosure of information by business organizations. Such disclosure also plays

vital role in the process of doing business by influencing the decisions of the

stakeholders. So, business organizations willfully disclose information to the public.

But such willful disclosure is limited by the cost-benefit consideration and

confidentiality. Problem also lies in the diversity of information requirements from

different interest groups. Besides, the possibility of adverse selection, moral hazard,

poor governance, corruption and insider trading increases in the absence of

appropriate and timely disclosure by companies. Minimum common public

disclosure is, sometimes, made mandatory by enacting laws, issuing regulations and

by adopting disclosure standards in the absence of appropriate willful disclosure by

business organizations. So, the identification of the disclosure requirement is always

important. Such identification of disclosure requirements helps companies to make

appropriate and cost effective disclosure and thereby helps to avoid many problems.

Like other businesses, banks need to make public disclosure of information for

keeping their stakeholders informed about different aspects of banking operation,

operating performance, financial position and many other issues of interest. A bank in

Bangladesh is required to comply with a lot of laws and regulations because of its

nature and systemic importance in the national economy. Such laws and regulations

require a lot of disclosures in different forms. Besides, disclosure is the only

instrument of Market Discipline under Basel-II as adopted in Bangladesh. Huang

(2006) said that enhanced accounting disclosure leads to better transparency and

stronger market discipline in the banking sector and it is an important ingredient of

banking sector stability. In the above context, the current study is a timely initiative

to identify the disclosure requirements of banks and to determine the degree of

compliance. Improvement in the disclosure practices of banks is expected to bring

multiple benefits in different forms, such as, informed decision making, improved

governance, less corruption, pro-active management, etc. It may also be used as a

marketing tool for the concerned bank conveying their image to the stakeholders.


The current study aims to achieve some specific objectives which are: one, to

identify the disclosure requirements of banks keeping the global practices and local

regulatory requirements in view; two, to understand the present status of banks in

terms of disclosure requirements; three, to identify the association between corporate

attributes and the extent of disclosure by banks; and four, to identify the issues and

problems relating to disclosure of banks and to propose courses of action in order to

enhance disclosure practices by banks.

There are forty seven (4 State Owned, 4 Specialized, 9 Foreign Bank, 23 Private

and 7 Islamic Banks) banks operating in Bangladesh (BB 2011c). Purposive sampling

technique has been followed. The study covers 25 banks that include 3 State Owned

Banks, 2 Foreign Banks and 20 Private Banks incorporated in Bangladesh including 6

Islamic Banks (Appendix-A).

A disclosure checklist has been prepared with 140 items of disclosure

(Appendix-B). The constructed disclosure checklist has seven broad groups of

disclosure and these are (i) Statements and Reports, (ii) Board‟s Reports Information,

(iii) Corporate Governance & IAS Compliance Checklist, (iv) Disclosure under Pillar

III of Basel II, (v) Information Regarding Subsidiary, (vi) Information on Financial

Statements and Notes and (vii) Others. For preparing the disclosure checklist,

researchers considered relevant laws, regulations and circulars (Table-1) particularly

the Companies Act, 1994; the Banking Companies Act, 1991; Securities and

Exchange Rules, 1987; Listing Regulations of the Dhaka Stock Exchange Limited;

Listing Regulations of the Chittagong Stock Exchange Limited; Circular issued by

Bangladesh Bank (BRPD Circular No. 14/2003, BRPD Circular No. 16/2003; BRPD

Circular No. 10/2010, BRPD Circular No. 06/2010 BRPD Circular No. 14/2009);

Guidelines on Risk Based Capital Adequacy (Revised Regulatory Capital Framework

for banks in line with Basel II) issued by Bangladesh Bank in December 2010;

Environmental Risk Management Guidelines for Banks and Financial Institutions in

Bangladesh issued by Bangladesh Bank in January 2011; Prudential Regulations for

Banks (Credit Rating) issued by Bangladesh Bank; The Securities and Exchange

Commission Notifications (No. SEC/CMRRCD/2008-181/53/Admin/03/28, dated

June 4, 2008 and No. SEC/CMRRCD/2006-158/Admin/02-08, dated February 20,

2006). BB circular on Green banking and BFRS -7 have not been included in the

constructed checklist as their compliance is expected in 2011 or later.


Table 1: List of Laws, Regulations and Circulars that Require Disclosure

Sl. Laws, Regulations and Circulars

1. BRPD Circular No. 14/2003 (Amendments to the forms of the First Schedule of

the Bank Companies Act, 1991), issued by Bangladesh Bank, dated June, 25,

2003.

2. Guidelines on Risk Based Capital Adequacy (Revised Regulatory Capital

Framework for banks in line with Basel II), issued by Bangladesh Bank,

December 2010.

3. BRPD Circular No. 10/2010 (Revised regulatory capital framework in line with Basel II), issued by Bangladesh Bank, dated March 10, 2010.

4. BRPD Circular No. 06 (Restrictions in respect of responsibilities and

accountabilities of the board of directors and the CEO), issued by Bangladesh

Bank, dated February 04, 2010.

5. BRPD Circular No. 2/2011 (Policy Guidelines for Green Banking), issued by

Bangladesh Bank, dated February 27, 2011.

6. Environmental Risk Management Guidelines for Banks and Financial

Institutions in Bangladesh issued by Bangladesh Bank, January 2011.

7. BRPD Circular No. 14/2009 (Guidelines on Subordinated debt), issued by

Bangladesh Bank, dated October 14, 2009.

8. BRPD Circular No. 16/2003 (Restrictions in respect of responsibilities and

accountabilities of the board of directors and the CEO of private bank), issued by Bangladesh Bank, dated July 24, 2003.

9. Prudential Regulations for Banks (Bank Charge), issued by Bangladesh Bank.

10. Prudential Regulations for Banks (Credit Rating), issued by Bangladesh Bank.

11. Guidelines for Conducting Islamic Banking (Guidelines on the Specimen Reports and Financial Statements for Banks under Islamic Shariah), issued by

Bangladesh Bank, November 2009,

12. The Companies Act, 1994, Act No. 18 of 1994.

13. The Banking Companies Act, 1991, Act No. 14 of 1991.

14. Securities and Exchange Rules, 1987, The Bangladesh Gazette No. S.R.O 237-

L/87, Dhaka, the 28th September, 1987.

15. The Securities and Exchange Commission (SEC) Notification No.

SEC/CMRRCD/2008-181/53/Admin/03/28, dated June 4, 2008.

16. The Securities and Exchange Commission (SEC) Notification No.

SEC/CMRRCD/2006-158/Admin/02-08, dated February 20, 2006.

17. The Securities and Exchange Ordinance, 1969, Gazette of Pakistan,

Extraordinary, June 28, 1969.

18. The Securities and Exchange Commission (SEC) Notification No. SEC/Section-

7/SER/03/132 dated October 22, 1997, published in official gazette On December 29, 1997.

19. Listing Regulations of the Dhaka Stock Exchange Limited, Notification No.

SEC/Member-II, dated April 8, 1996. (Continued)


Table 1: (Continued)

20. Listing Regulations of the Chittagong Stock Exchange Limited-CSE, dated May

29, 1997.

21. The Securities and Exchange Commission (Capital Issue of Public Limited

Company) Rules, 2001, dated March 28, 2001.

22. The Securities and Exchange Commission (Over-the-Counter) Rules, 2001,

dated December 12, 2001.

23. Bangladesh Accounting Standards (BASs) issued by Institute of Chartered

Accountants of Bangladesh (ICAB).

24. Bangladesh Financial Reporting Standards (BFRSs) issued by Institute of

Chartered Accountants of Bangladesh (ICAB).

Source: Researchers‟ Analysis

Both primary and secondary data sources have been utilized in the study. Primary

data have been collected through observation, interview and opinion survey to

determine the degree of compliance and identify the issues related to disclosure.

Particularly, the branch-related disclosure requirements have been confirmed by

visiting and observing notice boards of the bank branches. 10 branches of different

banks were visited for the purpose. Besides, the depositors, borrowers, shareholders,

banks, regulators have been interviewed to collect and document their opinion.

Secondary data have been collected by checking the annual reports of the sample

banks for the year ended December 31, 2010 against the constructed checklist.

Scoring of Disclosure

In this study un-weighted approach has been followed to determine the disclosure

score of a bank although there are two methods for determining the extent of

disclosure: weighted and un-weighted. Here the underlying assumption is that all the

disclosure items are equally important. Wallace (1988); Rahman (1999); Akhtaruddin

(2005); believe that all disclosure items are equally important to the average users.

Score 1 is assigned if a company discloses an item otherwise 0. The total disclosure

score (TDS) is arrived for a particular bank by adding together the disclosed items as

follows:

n

i

diTDS1

;

Where TDS = Total disclosure score of a particular bank, d = 1, if the di is disclosed,

d = 0, if di is not disclosed and n = number of items on disclosure.

Hypothesis of the Study

As mentioned in the objective, for identifying the degree of association between

different corporate attributes and extent of disclosure, the following hypothesis is

tested:


Ho: There is no significant association between a number of corporate attributes

(viz. solvency, liquidity, size, profitability and assets quality) and the extent of

disclosure made by banks.

The multiple linear regression technique is used to test the hypothesis.

The operational definition of variables, expected sign and relationship in the

regression are presented in Table 2.

Table 2: Operational Definition of Variables, Expected Sign and Relationship

Variable Operational definition Source of

information Expected sign and

relationship TDS Total disclosure index Annual report Index CAR Solvency measured by

capital adequacy ratio Annual report (+) CAR has a significant

positive relationship with

the level of disclosure LAtoSTL Liquidity measured by

liquid assets to short-

term liabilities

Annual report (+) LAtoSTL has a significant positive

relationship with the level

of disclosure TREV Size measured by total

revenue Annual report (+) TREV has a significant


the level of disclosure ROA Profitability measure by

return on assets Annual report (+) ROA has a significant


the level of disclosure CLtoTLA Assets quality measured

by classified loan to total loans and advances

Annual report (-) CLtoTLA has a

significant negative relationship with the level

of disclosure

Dependent Variable

Total disclosure score, as defined earlier, is used as the dependent variable in the

regression.

Explanatory Variables

Five corporate attributes are used as explanatory variables. These are:

(i) solvency of bank measured by Capital Adequacy Ratio (CAR); (ii) liquidity of

bank measured by liquid assets to short-term liabilities; (iii) bank size measured by

total revenue ; (iv) profitability of bank measured by return on assets; and (v) assets

quality measured by classified loan to total loans and advances.


Solvency: Solvency is an important measure of strength and soundness a bank.

Solvency can be measured in different ways. This study used Capital Adequacy Ratio

(CAR) for measuring solvency. It is expected that banks with higher CAR will

disclosure more items than other banks in their annual reports to obtain competitive

advantage.

Liquidity: Prior studies have used liquidity as an explanatory variable for

examining association with the level of disclosure (e.g. Nurunnabi, et. al 2011).

Among different measures Liquid Assets to Short-Term Liabilities (LAtoSTL) is

used as a measurement of liquidity in this study. It is expected that the banks with

better liquidity will provide more disclosure in their annual reports.

Size: Most of the studies found that size of firm does affect the level of disclosure

(Rouf and Hossain 2011). The size was measured in the prior studies by sales, total

assets, number of employees, number of shareholders etc. (Akhtaruddin 2005). In the

present study, the size of the bank is determined by taking into account the total

revenue (TREV). It is expected that there is a significant association between bank

size and the extent of disclosure.

Profitability: Banks are likely to feel comfortable in disclosing favorable rather

than unfavorable information (Karim, et. al 2011). Prior researchers (Akhtaruddin

2005, Hossain 2000, Karim 1996) used profitability as a determinant of corporate

disclosure. In this study, the researchers used Return on Assets (ROA) to measure

profitability of banks. It is expected that banks with higher Return on Assets (ROA)

disclose more information than that of the banks with Return on Assets (ROA).

Assets quality: Banks mainly earn from their financial assets. But more

important is the quality of those assets. Quality of assets significantly affects the

earnings and economic value of the bank. Therefore, the researchers used this

variable as a determinant of disclosure. For this purpose, Classified Loan to Total

Loans and Advances (CLtoTLA) is used as a measure of assets quality. It is expected

that banks with lower CLtoTLA will disclosure more items in their annual reports

than other banks.

The paper is organized into five different sections. After an introduction, section

two, presents literature review; section three, discusses the disclosure requirements of

banks in Bangladesh; section four, presents a summary of the disclosure compliance

status, stakeholders‟ responses and result of hypothesis test and finally, section five,

summarizes the issues, difficulties related to disclosure and probable solution.


II. Literature Review

According to Weygandt, Kieso and Kimmel (2005) users of accounting

information are classified into two groups: internal users and external users. Internal

users of information are managers of the company. External users include customer,

supplier, investors, creditors, tax authority, regulatory agencies, labor union,

economic planners etc. Businesses are required to make disclosure considering the

need of the users. Banks are not an exception. Banks are also required to disclose

information considering needs of different stakeholders like depositors and

borrowers, shareholders, regulators etc. Regulators require banks to publicly disclose

financial and other information which help shareholders, depositors, and other

stakeholders to assess the level of risk and make investment decisions. In a study

Huang (2006) presented the importance of bank disclosure as (i) enhanced accounting

disclosure leading to better transparency and stronger market discipline in the

banking sector, (ii) accounting disclosure is raised to a particularly high level of

importance for banking organizations compared to not-financial firms, for banks are

inherently more opaque, (iii) transparency and disclosure is an important ingredient

of banking sector stability. Although state-owned banks do not issue share but they

are also required to disclose information publicly. In this context Huang (2006) stated

that enhanced accounting disclosures should be required for not only publicly-traded

banks, but also for privately-held and state-owned banks, because of the systemic

importance of banks in national economy, their deposit-taking from the general

public, and the safety net extended to them financed by taxpayers.

The financial reporting and disclosure of banking companies in India are

regulated by the Companies Act, 1956, the Banking Regulation Act, 1947, the rules

of the Securities And Exchange Board of India and the guidelines of the Reserve

Bank of India, as well as the recommendations of the Institute of Chartered

Accountants of India (Hossain, 2008). Corporate disclosure and reporting by listed

firms in Malaysia are largely influenced by the Companies Act, 1956 and accounting

standards approved by the Malaysian Accounting Standard Board (MASB)

(Akhtaruddin, et al, 2009). The main disclosure requirements for Singapore banks are

those stipulated under the Companies Act, the Statements of Accounting Standard

issued by the Institute of Certified Public Accountants of Singapore (ICPAS) and, for

banks listed on the Stock Exchange of Singapore (SES), the SES‟s listing rules

(Committee on Banking Disclosure, 1998). In Bangladesh, corporate disclosure is

governed by a number of statutes like, the Companies Act, 1994, Securities and

Exchange Rules 1987, International Accounting Standards adopted by ICAB,

Nationalized Order 1972, Banking Companies Act, 1991, Income Tax Ordinance

1984 (Akhtaruddin, 2005).

There are a number of studies in the area of financial reporting in the context of

emerging economies and there are a number of studies in the area of compliance of

International Accounting Standards (IASs) in developing and/or emerging economies


(Nurunnabi, 2009; Ahmed, 2009). Abd-Elsalam and Weetman (2003) stated that

there is a shortage of existing literature which has investigated compliance disclosure

(mandatory or voluntary) in Corporate Annual Reports of the banking sector in the

context of an emerging economy in general and Bangladesh in particular. The extent

of information disclosure, its adequacy, relevance and reliability are important

characteristics of financial reporting practices prevalent in a country (Hossain, 1999).

In case of Singapore, it is said that banks have been subject to lower standards of

disclosure than other corporations for two reasons; first, the high regulatory and

supervisory standards practiced by the Monetary Authority of Singapore compensate

somewhat for a more limited disclosure and second, disclosure is constrained by

concern that fuller disclosure of banking information may have an adverse impact on

the stability of the banking system since, relative to other corporations, banks are

especially vulnerable to a loss of confidence (Committee on Banking Disclosure,

1998). Though the committee suggested that in the move from banking regulation to

supervision in Singapore, greater transparency in financial reporting is now desirable

(Committee on Banking Disclosure, 1998).

Kahl and Belkaoui (1981) investigate the extent of disclosure by banks located in

18 countries. The results of their study showed that the degree of disclosure was

relatively different among the countries covered, with US banks leading the list.

The financial statements of banks in the United States, the United Kingdom and

Australia are fully in compliance with or exceed the requirements of IAS 30, but

accounting practices in some countries, notably Japan and Switzerland, still deviate

considerably from IAS 30 guidelines (Committee on Banking Disclosure, 1998).

Singapore banks have improved their standard of disclosure but this is still below that

of the United States, the United Kingdom and Australia (Committee on Banking

Disclosure, 1998). Hossain (2008) categorizes the mandatory items as (i) Balance

sheet items, (ii) Profit and loss account, (iii) Director‟s report, (iv) Corporate

governance report, (v) The management discussion and analysis and (vi) Circular

issued. Jayadev, Monga and Tiwari conducted a study on the annual reports of nine

banks from India, Australia, Russia, Brazil, China, USA etc. The results of their study

proved that, in terms of disclosures, Indian banks are lagging behind their

counterparts in other developing countries on various fronts such as assets and

liabilities related disclosures, investments and NPA (non-performing asset) related

disclosures, etc. Banks in China, Russia, and Brazil are subject to much more

stringent disclosure norms (Jayadev, Monga and Tiwari). Unlike the United States,

the United Kingdom and Australia, Singapore banks do not separately disclose the

amount of specific and general provisions for loan losses and movements in

provisions (Committee on Banking Disclosure, 1998).

Shakoor (1989) has focused on the financial reporting practices of the 6

nationalized commercial banks by evaluating the performance of nationalized

commercial banks in Bangladesh during 1972 to 1984. Shakoor (1989) commented

that financial reporting system of banks needs to disclose more information to be


disclosed and be more methodical. Islam (1996) attempted to evaluate the practices

relating to disclosure of accounting policies in the financial statements of the banks

working in Bangladesh on Islamic principles and commented that the banks should

disclose confidently promulgation as to compliance with the professional

requirements that are followed. Based on 10 years published annual reports of the

commercial banks working in Bangladesh, Islam (1997) observed that selected banks

mainly comply with the legal requirements. Islam (1997) also commented that the

existing forms including contents of bank balance sheet and profit & loss account do

not provide adequate data to calculate important ratios and items of information

evaluating the performance and risk, solvency, liquidity and profitability of the

banks. Hossain (2008) investigate empirically the extent of both mandatory

(101 items) and voluntary (81 items) disclosure by listed banking companies in India.

The study revealed that in disclosing mandatory items, the average score is 88, whilst

the average score for voluntary disclosure is 25 only. According to the findings of

Hossain (2008), size, profitability, board composition, and market discipline variables

are significant in explaining the level of disclosure. Hossain (2008) opined that his

study can be a good example for other developing countries, who are trying to have a

high level of compliance in mandatory disclosure. Ahmed (2009) empirically

examined the relationship between the disclosure score and selected corporate

attributes (like, size, profitability, credit deposit ratio, capital adequacy ratio,

debt-equity ratio, shareholder‟s risk ratio) in a developing country like Bangladesh.

Observing 12 banks over 5 years period (from 2002 to 2006), the extent of disclosure

has been measured in his study and the results showed that disclosure levels are

associated with some company characteristics (e.g., return on assets and capital

adequacy ratio). Ahmed and Dey (2009) showed that Arab Bangladesh Bank

(AB Bank) appeared to have the highest levels of disclosure and Standard Bank

appeared to have the lowest levels of disclosure. Akhtaruddin (2005) opined that

companies in general have not responded adequately to the mandatory disclosure

requirements of the regulatory bodies. Improved disclosure reduces the gap between

management and the outside world (Karim, 1996; Hossain, 2000). As per Lang and

Lundholm (1993) disclosures are higher for larger firms. Rouf & Hossain (2011) state

that size of the firm does not affect the level of corporate social responsibility

disclosure. Nazli, et al. (2003) suggested that the disclosure have a public relations

bias, with very general, „good news‟ type of disclosures being the norm and „bad

news‟ disclosure are minimal. Lobo and Zhou (2001) demonstrated that companies

that are performing well are likely to provide more information than poorly

performing companies. Hossain (2000) showed that size of company and profitability

is positively related to the disclosure of the company. Bhuiyan and Biswas (2007)

opined that disclosure index is significantly influenced by the SEC notification.

Rahman (1999) showed that no company disclosed all mandatory information items

in its annual reports. The present study concentrates on mandatory disclosure by the

banks operating in Bangladesh under different laws, regulations, circular and

notifications of the regulators and medium of disclosure to the stakeholders.


Huang (2006) prepare a composite Bank Disclosure Index of each of the around

180 countries surveyed yearly since 1994. Using a checkbox approach to analyze

financial statements of individual banks, the index seeks to quantitatively measure the

actual disclosure practices of commercial banks around the world, in relation to their

assets, liabilities, funding, incomes, and risk profiles. The Disclosure Indices are first

created for individual banks and then national Indices are created by taking the asset-

weighted average of the bank-level Disclosure Indices. He identified seventeen

disclosure items under six categories like, (i) Loans, (ii) Other earning assets,

(iii) Deposits, (iv) Other funding, (v) Memo lines and (vi) Incomes. He also

emphasized that a simplified, relevant, and standardized checklist of core disclosure

items needs to be developed for low and mid-income countries. Table 3 and Table 4

below are prepared on the basis of the Hung (2006) study.

Table 3: Regional Status of Banking Disclosure

Country/

Region Major findings

OECD

Countries High income OECD (Organisation for Economic Co-operation and

Development) countries in general adopt better disclosure practices

that other countries and especially the disclosure index value of US

has remained rather stable over time. In the past several years, the most salient improvement on the

national Disclosure Index was seen in Spain. During late 1990s, starting from the worst, Germany had rapidly

converged to the average disclosure standard. France experienced stagnation. UK‟s Disclosure Index is not impressive. UK regulator traditionally

dislikes hands-on approach on standardization of banks‟ financial

reporting. BRIC (for Brazil,

Russia,

India and China)

Improving banking sector transparency is likely to be the highest for

policy-makers in these BRIC countries. China seems to be heading for bigger improvement after three of the

four Big Fours have enlisted international reputable banks on board

as minority shareholders and will all finish IPOs in Hong Kong by

2006/2007. Compared to China and Russia, Brazil has had fewer problems from

the beginning (of this Report‟s survey period) and accounting

information on Brazilian banks has been quite detailed and abundant (at least in terms of quantity)

Over the past decade India‟s Disclosure Index value has been rising

consistently, and today has reached the level of Brazil, although

there has been less improvement in the disclosures of loan compositions (in which Brazil is particularly strong).

(Continued)



Asia In the region, Hong Kong clearly stands out as the consistent leader

in transparency and disclosures of banks. The Disclosure Index for Singapore in 1996 confirms industry‟s

perception that disclosure by Singapore banks was poor until a few

years ago. Banks in Thailand, India, Philippines, Singapore, and Indonesia were

much more secretive in presenting their balance sheets, compared to

those located in Malaysia, Korea and Hong Kong. The main challenge in the region remains China, which has the

largest (and also currently most problematic) banking system in Asia

(excluding Japan). The sheer size of the Chinese banking system makes the problems

not only domestic, but also regional and international, and attracts keen attention from international investors and policy-makers.

India has been making consistent and significant progress over the

past decade, while Pakistan, starting from not much worse than its

neighbor, has not made many strides in improving bank accounting disclosure practices.

Bangladesh is lagging behind both India and Pakistan. Latin

America In the region, banking systems in Brazil and Mexico are always

ahead of their neighbors on standards of information disclosures. Back in 1996, Chile scored much lower in the Disclosure Index than

her regional peers and subsequently situations improved

significantly after enacting of the General Banking Act in 1997. Chile‟s Disclosure Index was already at par with Peru, which was

previously one of the regional leaders in public disclosures. The gap between Brazil and Chile could reflect the different

philosophies of the two countries‟ policy makers. Turkey In the wake of 2000/2001 financial crisis, a “Banking Sector

Restructuring Program” was initiated in Turkey in May 2001 to

strengthen privately owned commercial banks. The impact of the reforms is clearly seen in Turkey‟s Disclosure

Index, which received one large upgrade after another over the past

few years. Today, in bank disclosure practices, Turkey has already clearly

distinguished herself from all of her major regional peers including

Russia, Egypt, and her richer neighbor Greece, which several years

ago still had a ten point lead over Turkey on the Bank Disclosure Index.

Source: Based on Huang, R. (2006)


Table 4: Top Transparent and Opaque Countries in the World

Rank Most Transparent Country Most Opaque Country 1 Hong Kong Argentina 2 Sweden France 3 Italy Czech Republic 4 Netherlands Morocco 5 Finland Russian 6 Norway Chile 7 Switzerland Luxembourg 8 Spain China 9 Japan Egypt

10 Turkey Syria

Sources: Huang, R. (2006), which is based on Bank Disclosure Index 2004 and only the top fifty largest banking

systems in the world

III. Disclosure Requirements of Banks in Bangladesh

Banks in Bangladesh are required to make disclosures in different media

(Appendix 3) under different laws, regulations, standards and circulars of different

organizations. The disclosure requirements under different laws, regulations, circulars

or guidelines are presented in the following paragraphs:

The Bank Companies Act, 1991 (BCA, 1991)

BCA, 1991 requires banking companies in Bangladesh to disclose their profit and

loss account, balance sheet, financial reports and the auditor‟s report of each financial

year within three months from the close of the concerned year. Banks must also

furnish the same to the Bangladesh Bank within the aforementioned time. It requires

banks to prepare the financial statements in accordance with the forms set out in the

First Schedule of the Act (Section 38 and 40). The amended first schedule of BCA,

1991 requires banks to preserve copies of financial statements including the Balance

Sheet in each of the bank branches so that the customers of the bank may readily use

those on request. Besides, the Financial Highlights and Balance Sheet should be

affixed in a visible place of each bank branch. The schedule also calls for publishing

financial statements in widely circulated one Bangla and one English daily newspaper

within one week of submission of the statements to Bangladesh Bank so that the

stakeholders of the bank including its depositors, shareholders and regulatory bodies

can get information about the bank easily. These should also be disclosed in the

bank‟s website (First Schedule after amendment through BRPD circular 14/2003).

Every banking company incorporated outside Bangladesh shall not later than the 1st

Monday in February of the year when it runs the business, display a copy of the last

balance sheet and profit and loss account in a conspicuous place in its principal office

and every branch office (Section 42).


The Companies Act, 1994 (CA, 1994)

BCA, 1991 states that the provisions of this Act will be in addition to and not in

derogation of the Companies Act,1994 (Section-2). So it is clear that a bank

company must also comply with the requirements of the Companies Act, 1994.

Directors‟ report must provide the state of affairs, the amount proposed by the board

of directors to carry to the reserve fund, the amount of dividend recommend by the

board of directors, material changes and commitments, change in the nature of

business, change in subsidiaries‟ business, change in the business in which company

has interest, statement and response to qualified auditors‟ report (Section 184 and

185). A holding company with its financial statements must also disclose the

financial statements, director‟s report, and the auditor‟s report of the subsidiaries

(Section 186). The Act also requires a banking company to make a statement every

year in a format given in Schedule XII. Audited balance sheet and the aforementioned

statement shall be displayed, until the display of the next year‟s statements, in a

conspicuous place in the registered office and in every branch office (Section-192).

Bangladesh Accounting Standard (BAS) and Bangladesh Financial Reporting Standard

(BFRS)

BASs are derived from the International Accounting Standards in Bangladesh.

BAS-30 is on the “Disclosures in the Financial Statements of Banks and Similar

Financial Institutions”. BRPD circular 14/2003 has given a comprehensive guideline

regarding disclosure requirement of banks keeping the requirements of BAS-30 in

view. The Institute of Chartered Accountants of Bangladesh superseded BAS 30 and

adopted BFRS 7. BFRSs are the adopted International Financial Reporting Standards

in Bangladesh. BFRS-7 is on “Financial Instruments: Disclosures”. BFRS-7 requires

banks to make a lot of disclosures regarding financial instruments it deals with. It has

greatly emphasized on the disclosure regarding risk management activities in banks.

For different types of risks it requires qualitative and quantitative disclosures. It has

already been adopted by ICAB and effective date of application is January1, 2010. A

disclosure checklist has been prepared on the basis of BFRS 7 (Appendix 6). As BB

did not make any circular incorporating BFRS 7 we excluded from the data collection

checklist of this paper.

Basel II

Basel II as adopted in Bangladesh requires disclosure under its Third Pillar called

“Market Discipline”. It requires banks to make both qualitative and quantitative

disclosures regarding scope of application, capital structure, capital adequacy, credit

risk, equities, interest rate risk in the banking book, market risk, and operational risk.

Such disclosures should be made annually with the annual report and also through the

bank‟s website having link in the front page (BRPD Circular 35, Dec 29, 2010).


The Securities and Exchange Ordinance, 1969 (SEO, 1969) and the Securities and

Exchange Rules, 1987 (SER, 1987)

An issuer of a listed security shall furnish to the Stock Exchange, to the security

holders and to the Commission an annual report of its affairs and such statements and

other reports as may be prescribed (Section 11, SEO-1969). It implies that the banks

listed in the stock exchanges must prepare an annual report and distribute it to the

stakeholders. Such annual report must include audited balance sheet, profit and loss

account, cash flow statement and notes to the accounts and it should be submitted to

the stock exchanges within 134 days of the end of the concerned year. Financial

statements for this purpose must be prepared in a format laid down in the schedule

(Rule 12, SER, 1987). In addition, banks being an issuer shall submit half yearly

financial statements to the Stock Exchange, to the security holders and to the

Commission within one month of the close of the half year.

Securities and Exchange Commission (Merchant Banker and Portfolio Manager) Rules,

1996

Merchant banks are bound to submit their Balance Sheet, Profit and Loss

Account, Cash Flow Statement, Auditor‟s Report and other reports for each financial

year to the Commission as per the demand of the commission (Rule 11). Besides,

unaudited quarterly financial statements must also be submitted to the commission

(Rule 13). In addition to the above, a portfolio manager must also provide statement

to his client at least after every six months containing information relating to portfolio

structure, value, number of securities, cash balance, date of transactions, interest,

dividend, bonus share, portfolio expense, possible risks of the portfolio etc (Rule 31).

Listing Regulations of DSE and CSE

A listed company is required to release material information immediately to the

public in a manner designed to obtain its fullest possible public dissemination. In case

of any rumor or report, the company is required to publicly clarify the rumor or

reports as promptly as possible. Regarding unusual market action, the company is

required to announce that there has been no material development in its business and

affairs and there is no reason to account for the unusual market action. A listed

company should refrain from promotional disclosure activity which exceeds what is

necessary to enable the public to make informed investment decisions. Buy/Sell of

Shares by Sponsors should be reported to DSE in a specified format at least four

working days before the scheduled date for disposal/ acquisition of the shares with

copy to the Securities and Exchange Commission (Regulation 43). Bank being an

issuer shall have website where latest financial statements including Balance Sheet,

Income Statement and Cash Flow Statement (annual and interim) should be

displayed. This website should be linked with DSE website. Issuer shall update its

website relating to annual and interim financial statements and all other price

sensitive information within stipulated time (DSE Notification on February 2010).


Environmental Risk Management Guidelines (January 2011)

Banks are required to have a reporting system, with a view to intimating

management, shareholders, and other stakeholders on the use of Environmental Risk

Management Guidelines. This reporting should be done on an annual basis and

should form a part of their Annual Report.

Policy Guidelines for Green Banking (BRPD Circular No.02, February 27, 2011)

Policy guidelines on green banking require banks in the first phase to report on

the green banking initiatives to BB and disclose in their respective websites. In the

second phase, banks should start publishing independent Green Banking and

Sustainability reports showing past performances, current activities, and future

initiatives. Updated and detailed information about banks environmental activities

and performances of major clients should be disclosed. In the second phase banks

shall report their initiatives/activities under the said program to the Department of

Off-site Supervision of Bangladesh Bank on quarterly basis. Banks shall submit their

first quarterly report on June 30, 2011 basis within July 15, 2011 and similarly they

will be required to continue to submit reports on the subsequent quarters within the

next 15 days of the respective quarter end. Banks shall keep their annual report and

websites updated with the disclosures on green banking initiatives/activities.

BB Guidelines on Subordinated Debt (BRPD Circular No. 14/2009, October 14, 2009)

This guideline requires that the total amount of subordinated debt shall be

disclosed in the balance sheet under the head „subordinated debt‟ in the nature of long

term borrowings.

Bangladesh Payment and Settlement Systems Regulations, 2009

A Payment System Operator (PSO) or Payment Service Provider (PSP) licensed

by the Bangladesh Bank shall be required to publish annual reports with its audited

financial statements, information on its operations, its risk management and IT

practices including opinion of external audit on effectiveness of the risk management

practices; the annual report to be publicly available (e.g., by uploading to its website)

within three months from the close of its accounting year‟. In addition to annual

reports, a Payment System Operator or Payment Service Provider may be directed to

disclose such other information or data as deemed necessary in the public interest.

Prudential Regulations for Banks (Bank Charges)

Each bank will prepare its schedule of charges and commissions etc. and ensure

that these are publicly accessible at each branch.


Prudential Regulations for Banks (Credit Rating)

Banks will disclose their credit rating prominently in their published annual &

half yearly financial statements.

IV. State of Disclosure of Banks in Bangladesh

As part of the study, an assessment of the state of compliance of the disclosure

requirements by banks has been done and the findings are presented in the following

paragraphs-

Compliance of Disclosure Requirements by Banks in the Annual Report

This section presents the status of banks in terms of the compliance of disclosure

requirements in their annual report. Compliance has been assessed on the basis of the

disclosure checklist prepared under this research. Table-5 represents the summary of

disclosure index of the sample banks. Out of 140 items, maximum disclosure is 118

items, which is 84.29%. Whereas, minimum disclosure score is 68 which represents

48.57% and average score is 94.28 i.e. 67.34%. It is noted that average disclosure of

Indian banks is about 87% (Hossain, 2008).

In the case of sub-group “Statements and Reports”, most of the sample banks

disclosed required statements in their annual reports. In this case maximum

presentation is 9 out of 10 whereas minimum is 7. It is also noted that there is an item

of disclosure in this group which will be made mandatory from the year 2011 (Report

on the implementation of environmental risk management guidelines). The Foreign

Bank does not present Board‟s Report and Audit Committee Report. For this reason

average score stands at 87.60%.

In case of the contents of Board‟s Report, there are 17 items of disclosure.

Although some of the items under this head are the requirement of SEC (for

protecting the interest of the shareholders), these are equally important for the

depositors and borrowers. Maximum score obtained under this sub-category is 13

(76.47%), minimum score is 5 (29.41%) and average score is 50.59%. It is important

to note that the level of disclosure under this category is much lower than expected. It

seems that banks are either unaware of or reluctant to disclose this type of

information in the director‟s report.

In the disclosure checklist there are 3 items under “Corporate Governance (CG)

and IAS Compliance Checklist”. One of these is required by Bangladesh Bank and

the rest are required by Securities and Exchange Commission. But these are also vital

for other users of information. In this category the maximum, minimum and average

score are 100%, 0% and 58.67% respectively.

Some of the banks disclose sufficient information under Pillar III of Basel II. At

the same time some of the banks do not disclose at all and some of the banks do not


follow the prescribed way. Out of 16 items maximum score is 16 whereas minimum

score is 0. The average score under this head is equivalent to 48.75%. Since it is

mandatory disclosure requirement for all banks, poor score is unexpected. They

should come forward to disclose required information under Pillar III of Basel II.

Maximum score under sub-group “Information Regarding Subsidiary” is 6 out of

7 whereas minimum score is 0 with average score 19.43%. Disclosure regarding

subsidiary is absent in some annual reports which may due to non-availability of

subsidiary. But it will remove confusion of the users if they mention that they have

no subsidiary.

Information on Financial Statements (FS) and Notes are mandatory for all types

of bank, e.g. listed and non-listed, state-owned and private commercial bank,

conventional and Islamic bank, local and foreign bank. There are 83 disclosure items

in the disclosure checklist. In this category maximum score obtained is 77, which is

92.77% whereas minimum obtained score is only 39, which represents 46.99%. So,

the average score is 74.80%. Disclosure of information under the head “Others” is

quite satisfactory. Most of the banks comply with the disclosure requirements (98%).

Table 6 presents the least disclosed items. Some of these items are report on the

implementation of environmental risk management guidelines, change in the nature

of business, change in the business in which company has interest, statement and

response to qualified auditors‟ report, restriction on the title to assets, change in

accounting policy, statement of the premises not used by the bank for its own etc.

These are the requirements of Bangladesh Bank or Companies Act, 1994. As per

section 38 of the Banking Companies Act, 1991, the provisions of Companies Act,

1994 shall be applicable to the extent they are consistent with the provisions of

Banking Companies Act 1991. Banks should provide clear statements regarding these

types of information.


Table 5: Summary of Disclosure by Banks

Statements

and Reports

Board's

Reports

CG and IAS

Checklist

Pillar III

Disclosure

Subsidiary

Information FS and Notes Other TDS

No.

(10) %

No.

(17) %

No.

(3) %

No.

(16) %

No.

(7) %

No.

(83) %

No.

(4) %

No.

(140) %

B 01 9 90.00 7 41.18 3 100.00 14 87.50 4 57.14 77 92.77 4 100.00 118 84.29

B 02 9 90.00 12 70.59 3 100.00 14 87.50 4 57.14 70 84.34 4 100.00 116 82.86

B 03 9 90.00 10 58.82 2 66.67 15 93.75 1 14.29 73 87.95 4 100.00 114 81.43

B 04 9 90.00 8 47.06 1 33.33 15 93.75 6 85.71 68 81.93 4 100.00 111 79.29

B 05 9 90.00 13 76.47 3 100.00 6 37.50 4 57.14 72 86.75 4 100.00 111 79.29

B 06 9 90.00 13 76.47 2 66.67 14 87.50 4 57.14 65 78.31 4 100.00 111 79.29

B 07 9 90.00 9 52.94 2 66.67 10 62.50 0 0.00 73 87.95 4 100.00 107 76.43

B 08 9 90.00 10 58.82 2 66.67 4 25.00 5 71.43 66 79.52 4 100.00 100 71.43

B 09 9 90.00 8 47.06 2 66.67 4 25.00 0 0.00 72 86.75 4 100.00 99 70.71

B 10 8 80.00 5 29.41 2 66.67 16 100.00 0 0.00 64 77.11 4 100.00 99 70.71

B 11 9 90.00 8 47.06 1 33.33 12 75.00 0 0.00 64 77.11 4 100.00 98 70.00

B 12 9 90.00 7 41.18 2 66.67 13 81.25 0 0.00 62 74.70 4 100.00 97 69.29

B 13 9 90.00 9 52.94 2 66.67 14 87.50 3 42.86 54 65.06 4 100.00 95 67.86

B 14 9 90.00 11 64.71 1 33.33 0 0.00 0 0.00 68 81.93 4 100.00 93 66.43

(Continued)

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Statements

and Reports

Board's

Reports

CG and IAS

Checklist

Pillar III

Disclosure

Subsidiary

Information FS and Notes Other TDS

No.

(10) %

No.

(17) %

No.

(3) %

No.

(16) %

No.

(7) %

No.

(83) %

No.

(4) %

No.

(140) %

B 15 9 90.00 7 41.18 3 100.00 0 0.00 0 0.00 70 84.34 4 100.00 93 66.43

B 16 7 70.00 8 47.06 1 33.33 10 62.50 0 0.00 58 69.88 3 75.00 87 62.14

B 17 9 90.00 9 52.94 3 100.00 10 62.50 0 0.00 52 62.65 4 100.00 87 62.14

B 18 9 90.00 8 47.06 1 33.33 15 93.75 0 0.00 51 61.45 3 75.00 87 62.14

B 19 8 80.00 8 47.06 2 66.67 0 0.00 3 42.86 60 72.29 4 100.00 85 60.71

B 20 9 90.00 7 41.18 1 33.33 0 0.00 0 0.00 59 71.08 4 100.00 80 57.14

B 21 9 90.00 9 52.94 2 66.67 0 0.00 0 0.00 54 65.06 4 100.00 78 55.71

B 22 9 90.00 9 52.94 1 33.33 0 0.00 0 0.00 55 66.27 4 100.00 78 55.71

B 23 8 80.00 5 29.41 1 33.33 0 0.00 0 0.00 56 67.47 4 100.00 74 52.86

B 24 9 90.00 7 41.18 1 33.33 0 0.00 0 0.00 50 60.24 4 100.00 71 50.71

B 25 8 80.00 8 47.06 0 0.00 9 56.25 0 0.00 39 46.99 4 100.00 68 48.57

Average 8.76 87.60 8.60 50.59 1.76 58.67 7.80 48.75 1.36 19.43 62.08 74.80 3.92 98.00 94.28 67.34

Source: Researchers‟ Analysis


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Table 6: Least Disclosure Items by less than or equal to 1 (≤1)

Item

No. Disclosure Item Nature of Items

*Requirement

of A 4 Report on the implementation of

environmental risk management

guidelines Statements and Reports

BB (2011b)

B 5 Change in the nature of business Board's Reports Information

CA, 1994 (Sec. 184)

B 6 Change in the business in which

company has interest Board's Reports

Information CA, 1994 (Sec. 184)

B 7 Statement and Response to qualified auditors‟ report

Board's Reports Information

CA, 1994 (Sec. 184)

E 4 Details of any material change of

the Subsidiary Information Regarding

Subsidiary CA, 1994

(Sec.186) E 5 Change in subsidiaries‟ business Information Regarding

Subsidiary CA, 1994 (Sec.184)

F 3 An explanation of where the

accounting standards that

underpin the policies can be found

Information on Financial

Statements and Notes SEC, 2008

F 5 A statement that explains in what

regard the standards and the reporting framework used differs

from IFRS


Statements and Notes SEC, 2008; SEC, 2006

F 7 Any restriction on the title to

assets Information on Financial

Statements and Notes CA, 1994 (GI)

F 8 A change in accounting policy Information on Financial


F 49 A statement of the premises not

used by the bank for its own Information on Financial

Statements and Notes BRPD#14/2003

F 83 Non-recurring transactions or

transaction of an exceptional

nature



*BB = Bangladesh Bank, CA = Companies Act, GI = General Instruction under Section 185 of Companies Act,

BRPD = Banking Regulation and Policy Department of Bangladesh Bank, SEC = Securities and Exchange

Commission

Compliance with Branch Level Disclosure Requirements

As per the laws of the country every bank branch, where banking business is

carried on, should display some information in a conspicuous place so that they are

visible to the stakeholders. These information include, the last audited balance sheet,

financial highlights, and schedule of charges. Table 7 presents the summary of


compliance with branch level disclosure requirements. About 40% of the sample

branches hanged latest audited balance sheet. Outdated balance sheet was found in

10% cases. Balance sheet was not found in the notice board in 50% cases. Financial

highlight was not found in 60% cases. Schedule of charges are disclosed on the notice

board by 60% of sample branches. Non compliance regarding schedule of charges

was found in 20% cases.

Table 7: Compliance with Branch Level Disclosure Requirements

Information required to display

in the branch notice board

Findings

Disclosed as

Required Not disclosed Outdated

Audited Balance Sheet 40% 50% 10%

Financial Highlights 40% 60% 0%

Schedule of Charges 60% 20% 20%

Source: Observation of bank branch notice board

Summary of Opinion Survey

As a part of the study, responses of the different stakeholders (Depositors,

Borrowers, Shareholders, Bank officials and Regulators) were collected through

opinion survey and series of interviews. Appendix 4 presents a summary of the

responses.

Response of Depositors

Depositors are the single largest group of stakeholders of a bank. About 80% of

the depositors opined that they want to be sure about the service quality of the bank

before starting depository relationship (Appendix 5). About 67% reported that they

want to make deposit in well reputed banks. Respondents also said that they consider

information (in-order of priority)like interest rate, branch location, products available,

bank rating, soundness, availability of online & ATM service, liquidity, relationship

etc. before making depository relationship. Regarding the sources of information

highest number of respondents (about 93%) said that they collect information directly

from the bank officials through branch visit. They also get information (in order of

their priority) from the word of mouth of the people, newspaper report, bank website,

bank marketing team, TV commercials, branch notice board, and bank annual report.

It is surprising to note that only 7% (lowest) of the respondents collect information

from branch notice board and annual report. Regarding the awareness of the

depositors about certain sources of information, about 80% reported that they are


aware about the bank website and they use it for collecting information. Again, it is

surprising to note that the depositors are less aware about the branch notice board

(27%) and annual report (33%) although these are emphasized by the laws of the

country. But the awareness about the news paper as a source of information is 67%.

Regarding how they want to get information in future, about 93% opined that they

want a common website containing comparable information on all banks. Besides,

they also want to get information from bank website, annual report, electronic display

board, and leaflet.

Response of Borrowers

Borrowers are the main customers of a bank. They need a lot of information from

a bank before making borrowing decision. About 87% of the borrowers opined that

they want to be sure about the service quality of the bank before starting borrower

relationship (Appendix 5). About 80% reported that they need interest rate

information of the loan products. Respondents also said that they consider

information (in order of priority) like products available, liquidity, availability of

online & ATM service, reputation, collateral, branch location, soundness, etc. before

choosing bank for borrowing. Regarding the sources of information highest number

of respondents (about 87%) said that they collect information directly from the bank

officials through branch visit. They also get information (in order of their priority)

from the word of mouth of the people, bank website, bank marketing team, phone call

to branch, bank annual report, TV commercials and news paper report. It is

interesting to note that sample borrowers do not use the branch notice board at all.

Regarding the awareness of the borrowers about certain sources of information, about

67% reported that they are aware about the bank website. It is surprising to note that

the borrowers, for some reason or other, rarely use the branch notice board (0%) and

annual report (7%) although it is required by the laws of the country. But the

awareness about the news paper as a source of information is 33%. Regarding how

they want to get information in future, about 87% opined that they want a common

website containing comparable information on all banks. Besides, they also want to

get information from bank website, Mobile SMS, electronic display board, and

newspaper report.

Response of Shareholders

Shareholders, being the owner of the banks, need a lot of information from a bank

before making investment decision. This is particularly true in case of publicly traded

banking companies. About 93% of the shareholders opined that they want to be sure

about the EPS, P/E and NAV of the bank before taking investment decision

(Appendix 5). About 73% reported that they need information regarding management

bank. Respondents also said that they consider information (in order of priority) like

reputation, rating, capital adequacy, service quality, asset quality, liquidity,

availability of online banking and ATM Network, number of branch, future prospect


etc. before choosing bank for investment. Regarding the sources of information

highest number of respondents (about 87%) said that they collect information from

the annual report of the bank. They also get information (in order of their priority)

from bank website, news paper report, DSE and CSE websites, and other

publications. Regarding the awareness of the shareholders about certain sources of

information, about 93% reported that they are aware about the bank website.

Shareholders are also aware about other sources of information. Regarding how they

want to get information in future, about 87% opined that they want a common

website containing comparable information on all banks. Besides, they also want to

get information from bank website, Mobile SMS, electronic display board, and

newspaper report.

Response of Bank Officials

In the interview conducted for this purpose, relevant bank officials opined that

they used all four media (Newspaper, Website, Annual Report and Branch Notice

Board) for disclosing information. About 70% of the officials believe that the website

is the cost effective and convenient media for disclosing information whereas notice

board is less effective and inconvenient media for disclosing information

(Appendix 5). This finding is also supported by the response of the depositors and

borrowers. Although website is claimed to be effective and convenient, banks are yet

to introduce a counting system of the website users. Only 20% of the respondents

claimed that they have a counting system or in the process of introducing a counting

system in the website. About 30% of the bank officials reported that they faced

problems in the process of complying with disclosure requirements. About 90% of

the bank officials appreciated the concept of harmonization of disclosure

requirements and common disclosure point. In response to the question, why do you

disclose information, bank officials said that it works in both ways: ensures

compliance with regulatory requirements in one hand and facilitates marketing on the

other hand.

Response of Regulators

At present disclosures are required by different departments (BRPD, DOS and

DBI) of Bangladesh Bank, SEC, DSE, CSE, and RJSCF. They require banks to

disclose different types of information to the public in different media (Widely

circulated daily newspaper: One Bengali and one English, Websites, Annual Report,

Display board at the head office and in branches). Harmonization is still absent in

terms of the disclosure requirements. Compliance is also monitored by the respective

departments and organizations. An integrated monitoring system for ensuring

compliance is still under process. Inspection data regarding disclosure is solely used

for the supervisory purpose and these are not published. In the background of

adopting IFRS by ICAB, BB is planning to issue a fresh circular like BRPD 14/2003

after consultation with different stakeholders and experts.


Test of Hypothesis

The descriptive statistics for the dependent and explanatory variables are

presented in Table 8. The descriptive statistics shows that the mean disclosure level

of the banks is 94.28 items with minimum disclosure 68 and maximum 118 items.

Minimum and maximum CAR are 6.30% and 16.18% respectively. Average

LAtoSTL is 68.60% with minimum 24.77% and maximum 130.96%. Average total

revenue of bans is Tk. 12568287572.22. Average ROA is 2.02 percent while average

CLtoTLA is 4.35%.

Table 8: Descriptive Statistics

Variable Minimum Maximum Mean Std. Deviation TDS 68 118 94.28 14.166

CAR 6.30 16.18 10.5217 2.12013 LAtoSTL 24.77 130.96 68.6017 26.24334 TREV 1981345757 39720147625 12568287572.22 8548909536.86 ROA .42 3.22 2.0183 .80808

CLtoTLA .07 23.88 4.3504 5.31471

Source: Researchers‟ own Analysis

Note: The descriptions of the variables are given in Table 2

The Multivariate Model

The model developed in this paper is as follows:

TDS = α + β1 Solvency + β2 Liquidity + β3 Size + β4 Profitability + β5 Assets quality + Ɛ

Where,

TDS = the total disclosure index

α = constant

βj = coefficient o the concern variables (j = 1 to 5)

Ɛ = the error term

A summary of the regression output is provided in Table 9. On OLS regression

model there are five explanatory variables. The regression results show R, R2 and

adjusted R2 are .639, .408 and .234 respectively where F value is 2.343 which is

significant at .086 level. Our results depict that LAtoSTL, TREV and CLtoTLA have

significant influence on disclosure levels whereas CAR and ROA do not have

significant influence on disclosure levels. Besides, CAR and ROA have unexpected

negative signs of their beta co-efficient (Table 10). Moreover, beta co-efficient of

TREV is insignificant. Thus, it can be stated that liquidity has a significant positive

relationship with the level of disclosure whereas and assets quality has a significant

negative relationship with the level of disclosure. On the other hand, solvency and

profitability have adverse relationship with the level of disclosure, but not statistically

significant. Size of banks is not found to be a good predictor of compliance with

mandatory disclosure as expected.


Table 9: Regression Results

Variable Unstandardized

Coefficients Standardized

Coefficients t Sig.

B Beta (Constant) 90.787 4.616 .000

CAR -1.021 -.153 -.711 .487

LAtoSTL .223 .413 1.835 .084

TREV 1.31E-009 .792 2.957 .009

ROA -3.706 -.211 -.766 .454

CLtoTLA -1.954 -.733 -2.420 .027

Model Summary R = .639 R

2 = .408

Adjusted R2 = .234

F = 2.343 Sig. = .086 N = 25


Note: The descriptions of the variables are given in Table 2.

Table 10: Summary of Regression Results

Variable Expected sign Results

TDS Index Index

CAR (+) Not Supported

LAtoSTL (+) Supported

TREV (+) Supported

ROA (+) Not Supported

CLtoTLA (-) Supported


Note: The descriptions of the variables are given in Table 2

V. Issues, Difficulties and Probable Solution

Based on the research, the following issues and difficulties have been identified

and discussed in the workshop and proposed the following –

One, from the examination of the annual reports of the sample banks, it has been

found that certain items (Table 6), although required by law, are either not disclosed

or rarely disclosed by the banks. For improving disclosure in the above mentioned

items, regulatory monitoring may be increased. Besides, the recognition of the best disclosure practices may encourage banks to make more disclosure.

Two, it has been observed from the opinion survey that stakeholders are less

aware of the disclosed information. It may act as a disincentive for the banks with

good disclosure. In this connection, it is really important to increase the awareness of


the depositors, shareholders and borrowers about the sources and nature of

information publicly disclosed by banks. Banks with good disclosure may encourage

depositors, shareholders and borrowers to use different public sources of information

and to make informed decision. In this way, other banks will also be motivated to make better disclosure.

Three, wide range of diversity is clear in terms of the nature of information,

timing, and media of disclosures required under different laws, regulations and

guidelines. This creates confusion among the reporting entities. In some cases, the

reporting entities are not even aware about specific requirement of laws, regulations

and circulars regarding disclosure. Besides, attempt to capture changes in the laws,

regulations and circulars regarding disclosure by individual banks are not always

effective to identify all requirements. If the responsibility of identifying disclosure

requirements and capturing changes in the laws, regulations and circulars regarding

disclosure can be assigned to a common organization that will compile the disclosure

requirements, update and disseminate the same to the banks for compliance, it would

be easy and cost effective for the entire banking sector. Such initiatives may be effectively undertaken by the different associations of banks.

Four, disclosure is a costly exercise in terms of time, money, and impact. So, it is

important to determine effectiveness and efficiency of disclosure. In the opinion

survey bank officials raised their concern on the increasing cost of hard copy

disclosures. Depositors and borrowers have also highlighted the importance of web-

based disclosure. In this regard, banks may be encouraged to disclose more and more

information in their respective websites. Similarly, banks may encourage their clients

to use web-based information. But only encouraging the clients will not be sufficient,

banks must also maintain and update their websites regularly and instantly. This way

the clients will get all the information from the web instantly and in a less costly way

which will ultimately reduce the cost of making hardcopy disclosure. Besides, if

permitted by regulatory authority, softcopy annual reports may be prepared and sent

via email. This will substantially reduce the cost of printing annual reports and it would be a national saving.

Five, in the opinion survey, most of the respondents highlighted the importance

of a common disclosure point containing comparable information of all banks. Such

common disclosure point will immensely benefit the users of disclosed information.

It will help the users to quickly absorb the information and to take informed decision

quickly. This type of initiatives may be effectively undertaken by the different associations of banks.

Six, from the examination of the annual reports of the banks it has been observed

that disclosures are not made in common format and in common sequence. It causes

inconvenience for the users to locate information in the annual report.

A comprehensive common disclosure checklist may help banks to disclose


information in a similar format which will ultimately help the users. Amended First

Schedule of BCA, 1991 (BRPD circular 14/2003) is an attempt in this regard. But it

needs to be updated in the background of IFRS being adopted by ICAB. Besides, it is

not comprehensive enough to include the requirements of SEC, DSE, CSE and

others. Any initiative in this connection will benefit the banks and the users of disclosed information.

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www.bangladesh-bank.org, website of BB

www.bix.org, website of Bank for International Settlement

www.cse.com.bd, website of CSE

www.dsebd.org, website of DSE

www.grobalreporting.org, website of Global Reporting Initiative (GRI)

www.icab.org.bd, website of ICAB

www.icmab.org.be, website of ICMAB

www.secbe.org, website of SEC


http://www.bangladesh-bank.org/

http://www.bix.org/

http://www.cse.com.bd/

http://www.dsebd.org/

http://www.grobalreporting.org/

http://www.icab.org.bd/

http://www.icmab.org.be/

http://www.secbe.org/

Appendix 1

List of Sample Banks

Name of the Banks Nature of the Bank

1. Agrani Bank Limited Non-listed State Owned Commercial Bank

2. United Commercial Bank Ltd. Listed Private Commercial Bank

3. Pubali Bank Limited Listed Private Commercial Bank

4. Prime Bank Limited Listed Private Commercial Bank

5. Dutch-Bangla Bank Limited Listed Private Commercial Bank

6. Standard Bank Limited Listed Private Commercial Bank

7. ONE Bank Limited Listed Private Commercial Bank

8. Bank Asia Limited Listed Private Commercial Bank

9. BRAC Bank Limited Listed Private Commercial Bank

10. Dhaka Bank Limited Listed Private Commercial Bank

11. The Premier Bank Limited Listed Private Commercial Bank

12. Islami Bank Bangladesh Limited Listed Private Commercial Islamic Bank

13. Shahjalal Islami Bank Limited Listed Private Commercial Islamic Bank

14. Commercial Bank of Ceylon PLC Foreign Commercial Bank

15. Eastern Bank Limited Listed Private Commercial Bank

16. Rupali Bank Limited Listed State Owned Commercial Bank

17. Sonali Bank Limited Non-listed State Owned Commercial Bank

18. Bangladesh Commerce Bank Limited

Non-listed Private Commercial Bank

19. IFIC Bank Limited Listed Private Commercial Bank

20. First Security Islami Bank Limited Listed Private Commercial Islamic Bank

21. ICB Islamic Bank Limited Listed Private Commercial Islamic Bank

22. National Credit and Commerce

Bank Limited

Listed Private Commercial Bank

23. Social Islami Bank Limited Listed Private Commercial Islamic Bank

24. Al-Arafah Islami Bank Limited Listed Private Commercial Islamic Bank

25. The Hongkong and Shanghai Banking Corporation Limited

Foreign Commercial Bank


Appendix 2

Disclosure Checklist

Item

No. Disclosure Items

A Statements and Reports

1 Directors‟ Report 2 Auditors‟ Report 3 Report of Audit Committee 4 Report on the Implementation of Environmental Risk Management Guidelines 5 Components of FS: Balance Sheet

6 Components of FS: Profit and Loss Account 7 Components of FS: Cash Flow Statement 8 Components of FS: Statement of Change in Equity 9 Components of FS: Liquidity Statement

10 Components of FS: Notes to the Financial Statement B Board's Reports Information

1 The state of the companies affairs 2 Amount carry to reserve 3 Amount of dividend or reason for not declaration of dividend 4 Material changes and commitments 5 Change in the nature of business 6 Change in the business in which company has interest 7 Statement and Response to qualified auditors‟ report 8 Board's analytical review regarding the success/failure in achieving the business 9 Directors‟ Statement on FS that they present fairly its state of affairs, the result

of its operations, cash flows and changes in equity. 10 Directors‟ Statement as proper books of accounts have been maintained 11 Directors‟ Statement as accounting policies are followed consistently 12 Directors‟ Statement as Internal control system is sound & implemented

13 Directors‟ Statement as there is no doubt of going concern 14 Directors‟ Statement on deviation from last year operating result 15 Key operating and Financial data of at least preceding 3 years 16 No. of board meeting with attendance

17 Pattern of Shareholding: Parent/Subsidiary, Directors/Others, Shareholding 10% or more

C Corporate Governance and IAS Compliance Checklist 1 Corporate Guidelines Checklist of SEC

2 Corporate Guidelines Checklist of Bangladesh Bank 3 IAS/IFRS/BAS/BFRS Checklist

(Continued)


Appendix 2 : (Continued)

D Disclosure under Pillar III of Basel II

1 Qualitative disclosure of Scope of Application 2 Quantitative disclosure of Scope of Application 3 Qualitative disclosure of Capital Structure 4 Quantitative disclosure of Capital Structure 5 Qualitative disclosure of Capital Adequacy 6 Quantitative disclosure of Capital Adequacy 7 Qualitative disclosure of Credit Risk

8 Quantitative disclosure of Credit Risk

9 Qualitative disclosure of Equities

10 Quantitative disclosure of Equities

11 Qualitative disclosure of IRRBB

12 Quantitative disclosure of IRRBB

13 Qualitative disclosure of Market Risk

14 Quantitative disclosure of Market Risk

15 Qualitative disclosure of Operational Risk 16 Quantitative disclosure of Operational Risk E Information Regarding Subsidiary

1 The extent of holding company‟s interest 2 A copy of Boards‟ Report of subsidiary 3 A copy of Auditors‟ Report of subsidiary 4 Details of any material change of the Subsidiary 5 Change in subsidiaries‟ business

6 A copy of B/S of subsidiary

7 A copy of P/L of subsidiary

F Information on Financial Statements and Notes 1 Significant aspects of accounting principles and procedures, which have been

followed 2 A clear statement of the company‟s accounting policies on all material

accounting areas 3 An explanation of where the accounting standards that underpin the policies can

be found 4 A statement that explains that the financial statements are in compliance with

IFRS 5 A statement that explains in what regard the standards and the reporting

framework used differs from IFRS 6 All Material information to make Balance Sheet clear & understandable 7 Any restriction on the title to assets

(Continued)



8 A change in accounting policy

9 Nature of Activities

10 Event after Balance Sheet date

11 The market prices of dealing securities and marketable investment securities 12 Concentration of assets, liabilities or off-balance sheet items 13 The aggregate amount of secured liabilities and the nature and carried amount

of the assets pledged as security

14 Calculation of EPS

15 The relationship and transactions between the bank and its related parties

16 Names of the Directors together with a list of entities in which they have

Interests 17 All contracts of significance to which the bank, its subsidiary or any fellow

subsidiary company was a party and wherein a director has interests subsisted at any time during the year or at the end of the year

18 Share options given to directors and executives 19 The nature of the related party relationship, the types of transactions and the

elements of transactions 20 The lending policy to related parties 21 Balances resulting from transactions with directors and their related concerns

together with an analysis as to the classified and unclassified advances. 22 Detailed information of any business other than the banking business with any

related concerns of the directors 23 Detailed information of the amount invested along with a list, in the securities

of the directors and their related concerns. 24 Names of the members of the audit committee 25 Educational Qualification of the members of Audit Committee 26 The number of meetings of the audit committee held 27 The nature and scope of audit reviews

28 The effectiveness of internal control system and compliance 29 Explanation regarding tax determination, provision 30 The procedure of conversion into local currency 31 Reconciliation of books of accounts_ inter-bank and inter-branch transactions

with explanations 32 Detailed information regarding financing and management of the fund raised

for staff pension 33 Information regarding credit rating in annual report 34 Assets in details

35 Details of Cash

36 Details of Balance with other banks and financial institutions

(Continued)



37 Money at call on short notice: Bank/financial institution-wise 38 Investments in Details

39 Maturity grouping of Loan and Advances

40 Loan and Advances: within Bangladesh and outside Bangladesh 41 Significant concentration of Loans and Advances 42 The loans and advances - Industry-wise 43 The loans and advances - Geographical location-wise 44 The loans and advances as unclassified and classified 45 Loans and Advances should also be categorized as Fully Secured, No Security,

No provision, to firms in which directors have interest, amount written off. etc.

(total 11 items) 46 Bills purchased and discounted payable in Bangladesh & outside Bangladesh 47 The bills discounted and purchased as per remaining maturity grouping 48 Fixed assets including premises (less accumulated depreciation 49 A statement of the premises not used by the bank for its own 50 Details of Other assets 51 Details of Non-banking assets 52 Borrowings from other banks, financial institutions and agents: In Bangladesh,

and Outside Bangladesh 53 Borrowings from other banks, financial institutions and agents: Secured (stating

the nature of securities) and unsecured borrowing 54 Borrowings from other banks, financial institutions and agents: Repayable on

demand or others 55 Deposits and other accounts - Inter-bank deposit & other deposits

56 Deposits and other accounts maturity grouping 57 Unclaimed deposits for 10 years or more held by the bank 58 Other liabilities in details 59 Paid up Capital with other Capital in details 60 Liabilities in Details

61 Capital surplus/deficit 62 The core capital and supplementary 63 Movement of Statutory Reserve 64 Other Reserve: Details movement 65 Capital reserve and revaluation reserve 66 Surplus in Profit and Loss A/C: Increase/decrease in details 67 Contingent liabilities in details 68 Total amount of subordinated debt 69 Gross Income derived from services rendered 70 Depreciation policy 71 Amount of Income tax or provision

(Continued)



72 Amount paid to Auditors 73 Remuneration of Managing Director

74 Interest Income in details 75 Interest Paid on Deposits & Borrowings in details 76 Commission, Exchange & Brokerage in details 77 Other operating income in details 78 Directors' fees in details 79 Provision for loan: For adversely classified loans and advances

80 Provision for unclassified loans and advances

81 Provision for diminution in value of investments in details

82 Other provisions: Provision kept against classified other asset

83 Non-recurring transactions or transaction of an exceptional nature

G Others 1 Boards‟ report must be signed

2 Authentication of Financial Statement 3 Financial Statements (FS) in Prescribed Format 4 Highlights of prescribed 22 items of the bank

Source: Based on Banking Companies Act, 1991; Companies Act, 1994; Banking Regulation and Policy

Department of Bangladesh Bank Circular; Securities and Exchange Commission Circular; Securities and Exchange

Ordinance, 1969; Securities and Exchange Rules, 1987; DSE, 1996; CSE, 1997.


Appendix 3

Media of Disclosure

Sl. Issues Reference*

1. Corporate Annual Report or Annual Financial

Statements BCA, 1991 (Sec.38, 40)

CA, 1994 (Sec. 183, 184, 185,

190, 191 & 192) SEO, 1969 (Sec. 11) SER, 1987 (Rule 12)

2. FS with Highlight should be preserved in each of the bank branches at a visible place.

BRPD # 14/2003 CA, 1994 (Sec. 192)

3. Schedule of charges and Commission etc

should be publicly accessible at each branch BB, Prudential Regulations for

Banks (Bank Charge)

4. Published of FS in widely circulated one Bangla and one English daily newspapers

BRPD # 14/2003

5. Publication of FS in the bank's website BRPD #14/2003 DSE notification Feb,2010

6. Updated annual F/Ss, interim F/Ss and Price Sensitive Information in the Website

DSE notification Feb,2010

7. Information regarding Green banking

initiatives in the bank‟s website BRPD #2/2011

* CA = Companies Act, BRPD = Banking Regulation and Policy Department of Bangladesh Bank Circular, BCA =

Banking Companies Act, SEC = Securities and Exchange Commission, SEO = Securities and Exchange Ordinance,

SER = Securities and Exchange Rules.


Appendix 4

Unstructured Questionnaire for Stakeholders

Set 1: Unstructured Questionnaire for Depositors

1. What information is required by the depositors before making deposit?

2. How the required information is obtained by the depositors?

3. Are the depositors aware of certain sources of information?

4. How the depositors want to get required information in future?

Set 2: Unstructured Questionnaire for Borrowers

1. What information is required by the borrowers?

2. How the required information is obtained by the borrowers?

3. Are the borrowers aware of certain sources of information?

4. How the borrowers want to get required information in future?

Set 3: Unstructured Questionnaire for Shareholders

1. What information is required by the shareholders before making

investment decision?

2. How the required information is obtained by the shareholders?

3. Are the shareholders aware of certain sources of information?

4. How the shareholders want to get required information in future?

Set 4: Unstructured Questionnaire for Bankers

1. What media do you use to make public disclosure?

2. Which is the most convenient medium for you?

3. Do you have any system in your website to count the user?

4. Do you face any problem to meet the disclosure requirement?

5. Do you think that harmonization is required?

6. Do you think that common disclosure point may have?

7. Why you disclose information?

Set 5: Unstructured Questionnaire for Bangladesh Bank and SEC

1. Do you satisfy with the present compliance with disclosure requirements?

2. What techniques you used to check disclosure compliance?




Appendix 5

Response of the Stakeholders

Response Set 1: Response of the Depositors

1. What information is required by the depositors before making deposit?

Information Needed Response (%)

Service Quality 80

Reputation 67

Interest Rate 60

Deposit Products available 47

No. of Branch and Branch Location 47

Availability of Online Banking, ATM Network 40

Rating of Bank 40

Strength and Soundness of Bank 40

Liquidity 27

Profitability 27

Relationship 7

2. How the required information is obtained by the depositors?

Sources Response (%)

Branch Visit and Conversation with officials 93

Word of Mouth 73

News Paper Report 60

Bank Website 40

Over Telephone 33

Bank Marketing team 20

TV commercials 13

Bank Annual Report 7

Branch Notice Board 7

3. Are the depositors aware of certain sources of information?


Bank Website 80

News Paper 67



(Continued)



4. How the depositors want to get required information in future?

Sources Response (%) Through a common website containing comparable information of all banks 93

Bank Website 53


Electronic Display Board 13

Leaflet 7

Response Set 2: Response of the Borrowers

1. What information is required by the borrowers?


Service Quality 87

Interest Rate 80

Loan Products available 73

Liquidity 47


Reputation 40

Collateral 33

No. of Branch and Branch Location 27

Strength and Soundness of Bank 13

Profitability 7

Rating of Bank 0

2. How the required information is obtained by the borrowers?


Branch Visit and Conversation with officials 87

Word of Mouth 60

Bank Marketing team 47

Bank Website 47

Over Telephone 20


News Paper Report 7

TV commercials 7


(Continued)



3. Are the borrowers aware of certain sources of information?


Bank Website 67

News Paper 33



4. How the borrowers want to get required information in future?

Sources Response (%) Through a common website containing

comparable information of all banks 87

Bank Website 47

SMS 27


News paper 7


Response Set 3: Response of the Shareholders

1. What information is required by the shareholders before making investment

decision?


EPS, P/E and NAV 93

Management 73

Reputation 67

Rating 53

Capital Adequacy 47

Service Quality 47

Asset Quality 40

Liquidity 33


No. of Branch 13

Future Prospect 7

(Continued)



2. How the required information is obtained by the shareholders?



Bank Website 73


DSE, CSE website 67

Other Monthly Publication 47

3. Are the shareholders aware of certain sources of information?


Bank Website 93



Other Monthly Publication 53


4. How the shareholders want to get required information in future?

Sources Response (%) Through a common website containing

comparable information of all banks 87


Bank Website 53


Quarterly publication for all banks 7

Response Set 4: Response of the bank officials

1. What media do you use to make public disclosure?

Media Response Total Response (%) Newspaper 10 100 Website 10 100 Annual Report 10 100 Branch Notice Board 10 100

2. Which is the most effective and convenient media for you?

Media Response Total Response (%) Newspaper 2 20 Website 7 70 Annual Report 1 10 Branch Notice Board 0 0

(Continued)



3. Do you have any system in your website to count the user?

Response Response Total Response (%) Have a counting system 2 20 Have not counting system 8 80

4. Do you face any problem to meet the disclosure requirement?

Response Response Total Response (%) Face problem 3 30 Do not face problem 7 70


Response Response Total Response (%) Required 9 90 Not Required 1 10


Response Response Total Response (%) May have 9 90 May not have 1 10

7. Why you disclose information?

Response Response Total Response (%) Comply with Regulatory Requirements 10 100 As a Marketing Tool 10 100


Appendix 6

Disclosure Requirement as per BFRS 7

Sl. Issues Reference*

1. Financial instrument disclosure in group BFRS 7 (Para 6)

2. Information Regarding Financial Position BFRS 7 (Para 7)

3. Information Regarding Financial Performance BFRS 7 (Para 7)

Disclosure on the face of BS or in Notes

4. Financial Assets at fair value BFRS 7 (Para 8)

5. Held-to-maturity investment BFRS 7 (Para 8)

6. Loans and Receivables BFRS 7 (Para 8)

7. Available for sale financial assets BFRS 7 (Para 8)

8. Financial liabilities at fair value BFRS 7 (Para 8)

9. Financial liabilities measured at amortized cost BFRS 7 (Para 8)

10. The maximum exposure to credit risk without security BFRS 7 (Para 9)

11. Instruments mitigate that maximum exposure to credit risk BFRS 7 (Para 9)

12. Amount of change in its fair value of financial asset that

rise market risk (not for change in market condition) BFRS 7 (Para 9)

13. Amount of change in its fair value of financial asset for

using alternative method BFRS 7 (Para 9)

14. Amount change in fair value of derivatives BFRS 7 (Para 9)

15. Amount change in fair value of financial liability that rise market risk (not for change in market condition)

BFRS 7 (Para 10)

16. Amount of change in its fair value of financial liability for

using alternative method BFRS 7 (Para 10)

17. Difference between financial liability‟s carrying amount and amount to be paid

BFRS 7 (Para 10)

18. Method used to calculate amount of change fair value of

financial assets and liabilities BFRS 7 (Para 11)

19. If the disclosure change in fair value is not faithful then

reasons for that believe BFRS 7 (Para 11)

20. Amount of reclassification, if any BFRS 7 (Para 12)

21. In case of de-recognition_ the nature of the assets BFRS 7 (Para 13)

22. In case of de-recognition_the nature of the risk BFRS 7 (Para 13)

23. In case of de-recognition_the carrying amount of assets and associated liabilities

BFRS 7 (Para 13)

24. The carrying amount of financial assets it has pledged as

collateral for liabilities BFRS 7 (Para 14)

25. The terms and condition of financial assets that has pledged as collateral for liabilities

BFRS 7 (Para 14)

26. Fair value of collateral held BFRS 7 (Para 15)

(Continued)



27. Fair value of any collateral sold BFRS 7 (Para 15)

28. Terms and conditions of collateral BFRS 7 (Para 15)

29. Allowance account for credit losses separately BFRS 7 (Para 16)

30. Financial instruments with multiple embedded derivatives

(e.g., callable convertible debt instrument) BFRS 7 (Para 17)

31. Details of any defaults during the period BFRS 7 (Para 18)

32. Details of breaches of loan agreement BFRS 7 (Para 18)

Disclosure on the face of IS or in Notes

33. Net gains or losses on financial assets and liabilities BFRS 7 (Para 20)

34. Net gains or losses on available for sale assets BFRS 7 (Para 20)

35. Net gains or losses on held-to-maturity investment BFRS 7 (Para 20)

36. Net gains or losses on loans or receivables BFRS 7 (Para 20)

37. Net gains or losses on financial liability measured at amortized cost

BFRS 3 (Para 20)

38. Total interest income BFRS 7 (Para 20)

39. Total interest expense BFRS 7 (Para 20)

40. Fee income and expense BFRS 7 (Para 20)

41. Interest income on impaired financial assets BFRS 7 (Para 20)

42. Amount of impairment loss BFRS 7 (Para 20)

Other Disclosure

43. Disclosure of accounting policies BFRS 7 (Para 21)

44. A description of each type of hedge BFRS 7 (Para 22)

45. A description of hedging instrument BFRS 7 (Para 22)

46. The nature of the risks being hedged BFRS 7 (Para 22)

47. Details regarding cash flow hedge BFRS 7 (Para 23)

48. Details regarding fair value hedge BFRS 7 (Para 24)

49. Fair value of financial instrument compare with carrying value BFRS 7 (Para 25)

50. In disclosing fair value financial assets and liabilities in group BFRS 7 (Para 26)

51. Methods and assumptions in determining fair value with details BFRS 7 (Para 27)

52. If market of financial instrument is not active then policy for determining fair value

BFRS 7 (Para 28)

53. Reasons and description of instrument whose fair value is

not disclosed BFRS 7 (Para 30)

54. Information to evaluate the nature and extent of risks BFRS 7 (Para 31)

55. Information regarding management of credit risk, liquidity

risk and market risk BFRS 7 (Para 32)

56. The exposure to risk and how they arise BFRS 7 (Para 33)

57. Objectives, policies and processes for managing risk and

methods used to measure risk BFRS 7 (Para 33)

(Continued)



58. Any change of risk or methods to measure the risk BFRS 7 (Para 33)

59. Summary quantitative data about its exposure to that risk at

the of the reporting period BFRS 7 (Para 34)

60. Concentration of risk BFRS 7 (Para 34)

61. The amount that best represents it maximum exposure to

credit risk BFRS 7 (Para 36)

62. Description of collateral held as security for credit risk BFRS 7 (Para 36)

63. Information about credit quality that are neither past due

nor impaired BFRS 7 (Para 36)

64. Carrying amount asset whose terms have been renegotiated BFRS 7 (Para 36)

65. Analysis of assets that are past due but not impaired BFRS 7 (Para 37)

66. Analysis of assets that are to be impaired BFRS 7 (Para 37)

67. Description of collateral held for past due or impaired

assets BFRS 7 (Para 37)

68. The nature and carrying amount of the obtained as collateral

BFRS 7 (Para 38)

69. Policies for disposing of assets obtained as collateral BFRS 7 (Para 38)

70. Maturity analysis of financial liabilities and how it manages

BFRS 7 (Para 39)

71. A sensitivity analysis for each type of market risk BFRS 7 (Para 40)

72. Method and assumptions in sensitivity analysis BFRS 7 (Para 40)

73. Reasons for change of methods and assumption in

sensitivity analysis BFRS 7 (Para 40)

74. An explanation of methods used in sensitivity analysis BFRS 7 (Para 41)

75. Objectives and limitations of methods used in sensitivity

analysis BFRS 7 (Para 41)

76. Reasons and fact if sensitivity analyses are unrepresentative BFRS 7 (Para 42)

* BFRS=Bangladesh Financial Reporting Standard


Paper Four

Financing PPP Projects in Bangladesh: Bank’s Initiatives

Md. Ruhul Amin Lecturer, BIBM

Financing PPP Projects in Bangladesh: Bank’s Initiatives

I. Introduction

Physical infrastructures like power, telecom, ports, roads, railways, etc.

development is critical to accelerate economic growth as well as to achieve reduction

of poverty. Infrastructure plays a pivotal role in facilitating new investment (both

domestic and foreign), expanding production base, product diversification, increasing

productivity and reducing costs and most importantly enhancing quality of life. But in

the context of emerging market economies including Bangladesh, governments are

increasingly constrained in mobilizing the required financial and technical resources

and the executive capacity needed to cope with the rising demand for infrastructure

and other utilities. Developing countries are experiencing increasing pressure from

their citizens, civil society organizations, and the media to provide accessible and

affordable infrastructure and basic services. Not only for Bangladesh, but also for

countries in South Asia, bridging gaps in infrastructure is the key to achieving goals

for growth and poverty reduction. Over the years, the successive governments have

not invested adequately in infrastructure assets and especially in maintaining them.

While the infrastructure gap is rising, government budgetary resources are

increasingly found inadequate in financing this deficit. Since neither the public sector

nor the private sector can meet the financial requirements for infrastructure in

isolation, the Public-Private-Partnership (PPP) model can represent a logical, viable,

and necessary option for them to work together (Islam 2009).

The economic growth of Bangladesh is inhibited by inadequate provision of

roads, railways, telecom and most importantly power and ports. In order to achieve

the target of becoming a middle income country by 2021, it is needed to ensure a

more rapid, inclusive growth trajectory. According to the budget document for FY

2009-10, the country‟s target is to achieve 6%-8% GDP growth in the next five years

starting from FY 2010.1 For achieving the targeted GDP growth during the stipulated

period, the cumulative amount of required investment would be US$ 185.91 billion2

and the cumulative shortfall for the required investment will stand at US$28.06

billion3. It will be impossible for the government to generate the required amount of

funds from available domestic and foreign sources.

1 The target GDP growth rates are 6% in FY2010, 6.8% in FY2011, 7.5% in FY2012, and 8% in both FY2013 and

FY2014, respectively. 2 The country will need investments amounting to US$24.59 billion, US$30.63 billion, US$37.18 billion, US$43.82

billion, and US$49.69 billion in the respective fiscal years. 3 The investment shortfalls will be US$1.04 billion in FY2009-10, US$3.53 billion in FY2010-11, US$5.82 billion

in FY2011-12, US$8.27 billion in FY2012-13, and US$9.40 billion in FY2013-14


Obviously, the Government alone cannot meet the huge investment deficits

without taking help from external sources. But it may not be possible to get required

financing from external sources at affordable terms and conditions. One might easily

guess that the prospect of getting large foreign investments appears uncertain at the

moment and, moreover, huge involvement of foreign investors in long term projects

may create pressure on balance of payments because of repatriation of foreign

currency, as happened during the East Asian financial crisis in the past decade. It was

estimated that the country‟s stock market would supply BDT 200 billion in the next

five years, but past experiences in raising funds for Greenfield projects from the stock

market has not been much encouraging (Bhuyan 2009). The recent debacle in the

country‟s stock market has darkened the residual hope of raising fund for

infrastructure projects. Moreover, a lot of formalities are required to be completed,

particularly for new companies, before funds can be raised from the stock market.

In such a situation, Government may seek participation of multilateral and regional

development banks (viz., World Bank, Asian Development Bank etc.). Although

these banks offer concessional loans for longer maturities, but their involvement may

put pressures on government from multiple sources. Hence, it might be an ideal

strategy to attract investment from the private sector and utilize their expertise and

experience through PPP. As mentioned earlier, Bangladesh needs huge amount of

investments, especially for the development of power, energy and communication

infrastructures, Government has embarked on the PPP initiatives in the consecutive

last three years‟ budget to encourage the private sector in infrastructure development

alongside the Government. According to the budget document for FY2009-10, the

ratio of private and public sector investments in PPP projects is assumed to be 70:30,

i.e., 70% of the project‟s funding will be arranged by private parties and remaining

30% will be arranged by the public party (Bhuyan 2009). And, major portion of the

private sector funds is provided by different financial institutions of which

commercial banks assemble the lion share of funds. For example, as of December

2008, the banking sector of Bangladesh accounted for over 80% of the country's

financial assets (Ahmed 2010). So, financial institutions especially commercial banks

have ample opportunities to enlarge their business by allocating funds in

infrastructure projects through PPP and thus ensure some additional profits and

diversifying credit portfolio risks as well.

Financial institutions especially banks facilitate funds mobilization from surplus

economic units and deploy the same to deficit economic units through various deposit

and loan products. Besides offering various types of traditional deposit and loan

products, commercial banks are gradually expanding their businesses by offering

more customized financial solutions through diverse products/services such as

consumer and retail credits, SME credit, term lending i.e., project and infrastructure

lending, corporate lending, investment banking, offshore banking, modern

technology based services, structured and syndicated financing, and many more. By

doing so, they have gained enough expertise and experiences which would help them


to move towards new areas of businesses. Expansion of business in new areas

particularly in the infrastructure sector may help them (banks) to ensure long

sustainability by providing adequate profit and diversifying risks. It is noticeable that

commercial banks are increasingly getting involved in large projects financing

including infrastructure projects through syndicated lending. The syndicated lending

by banks started more than a decade ago and it (syndicate loan) is growing fast as

more banks are coming forward to lend different sectors through such mechanism.

The data from major market playing banks shows that whereas the total syndicated

lending of the banks was BDT3844.53 million in 2001, it grew to BDT33219.05

million in 2005, BDT49258.38 million in 2007 and BDT37432.58 million in 2010.

The average growth of the syndicated loan was about 55% during 2001-2010. Banks

provide syndicated loan to diverse sectors including infrastructure sectors. Some

examples of banks‟ syndicated lending include spinning sector4, health care sector5,

aviation (such as Bangladesh Biman6) sector, SME sector7, ICT sector8, ceramic

industry9, steel industry10, pharmaceutical sector11, power sector12 and so on.

4 Six commercial banks (Mercantile Bank as Lead Arranger, Uttara Bank, Exim Bank, EBL, BRAC Bank, and

Trust Bank) provided Tk 48 crore to Spinning Mills Ltd., a sister concern of Rising Group. (Source: The Daily

Independent, Nov 26, 2009, Dhaka).

5 Five commercial banks led by Agrani Bank disbursed Tk. 420 million to Green Life Hospital Ltd. Dhaka, under

syndicated loan facility. Other participating banks are Janata Bank , Pubali Bank , DBBL and NCCBL .

6 (i) EBL along with other 9 banks arranges US$114.49 million syndicated loan for Bangladesh Biman to purchase

two B777-300ERs in 2010. (Other banks are AB Bank, BRAC, Dhaka Bank, IFIC, Mutual Trust, NBL, Prime

Bank, The City Bank and Premier Bank). Report: The Daily Star, May 6, 2010. (ii) EBL has also arranged a

syndicated Term Loan facility of BDT 980 million for HG Aviation Limited to purchase two 50 seater DASH 8

Q300 Aircrafts in 2011. Other nine banks and NBFIs participated in the deal. (Source: The Daily Financial Express,

February 2, 2011, Dhaka).

7 Citibank, NA, arranges Tk 100 crore under syndicated loan facility for BURO Bangladesh, an NGO to facilitate

financing in SMEs especially in agriculture sector in 2009. (Other financing banks are Sonali Bank, Agrani Bank,

Pubali Bank, MTBL, Southeast Bank, UCBL, National Bank, Dhaka Bank and EBL). Source: The Daily Star, April

5, 2009, Dhaka.

8AB Bank arranges Tk. 191crore syndicated loan for BanglaLion Wimax in 2010. (Other co-financiers are Agrani

Bank, Bangladesh Commerce Bank, Janata Bank, Mercantile Bank, Sonali Bank, Standard Bank and UCBL). Report: The Daily Star, January 20, 2010.

9 Together with five commercial bnks (Namely IBBL, Exim Bank of Bangladesh Limited, SIBL, Southeast Bank

and Trust Bank Limited), Prime Bank Ltd. fianced Tk. 350 mil through syndicated Hire Purchase under Shirkatul Melk (HPSM) investment facility to X-Ceramics Limited, a ceramic wall tiles manufacturing plant in 2009. Report: The Daily Financial Express, June 10, 2009. 10

EBL has arranged a syndicated facility of Tk 300 million medium term loans for Magnum Steel Industries Limited (MSIL). (Other participating banks are Bangladesh Commerce Bank, Bank Al-Falah , People‟s Leasing and Financial Services Limited, SIBL and The City Bank Limited). Source:http://bangladesheconomy.wordpress.com /2008/07/20/ebl-arranges-tk-300m-syndicated-loan-facility-for-magnum-steel/) 11

EBL also arranged Tk. 650 mil syndicated term loan to General Pharmaceuticals Limited (GPL) Other participating banks are AB Bank, Bangladesh Commerce Bank, DBBL, NBL, One Bank, Pubali Bank, Standard Bank and Trust Bank Ltd. (Source: http://www.generalpharma.com/EBL%20Bank/ebl.php) 12

IIDFC raised Tk. Tk 395.5 crore through syndication of 18 banks and NBFIs to finance two power companies of Summit Group, to produce 110 megawatt (MW) of electricity in 2008. Report: The Daily Star, July 28, 2008.


http://www.generalpharma.com/EBL%20Bank/ebl.php

Obviously, by dealing with syndicated loan and other structured finance products

banks have got enough maturity and adequate expertise to deal with large

infrastructure projects. Now, banks can easily use their gained experiences and

expertise of various structured finance deals in larger projects especially

infrastructure sectors i.e., roads, power, port etc. which are usually done through PPP

mechanism in different parts of the world and to contribute much to the economic

development of the country. For their likely move towards large scale financing in

infrastructure projects, the ideal strategy may be going through PPP mechanism.

If the banks can fix up their appropriate strategy and devote their expertise to

implement PPP projects, this will open up new windows for widening their

investment portfolio, reduce intense competitions among banks for investing in few

traditional businesses, provide sustainability, and minimize risks as well. But the

preconditions for successful PPP initiatives, appropriate policy and regulatory

environment, institutional framework, stimulatory incentives etc. are necessary. The

Government of Bangladesh (GoB) is keen to implement the PPP initiatives for

infrastructure development of the country. And, as part of its (GoB) initiatives,

government has already issued a complete PPP policy and strategy for ensuring legal

framework for PPP projects, allocated some funds for PPP through budgetary

provisions, declared some fiscal and special incentives for private sectors in the

policy and strategy paper. The Government has allocated BDT 2500 crore in FY

2009-10, BDT 3000 crore for both FY2010-11 and FY2011-12. The Government has

also established a number of organizations viz., Bangladesh Infrastructure Finance

Fund (BIFF), Infrastructure Development Company Ltd. (IDCOL), Infrastructure

Investment Facilitation Centre (IIFC) etc. to encourage private sector to implement

infrastructure projects under PPPs. Bangladesh Bank has also taken initiatives to

encourage private sector especially banks/financial institutions to participate in PPP

projects. For this purpose, it (BB) has created a separate cell (called IPFF cell) for

providing refinance facilities to banks/NBFIs for on-lending to PPP projects. Some

banks and NBFIs have already lent to seven power projects (list of these projects are

attached in Appendix, Table-3) through PPP mechanism by taking refinancing

facility from IPFF cell of BB. These projects are contributing 178MW electricity to

the national grid. Some new PPP projects are in pipeline to get finance from different

banks and NBFIs under IPFF cell. But this fund is not sufficient to meet the current

demand of infrastructure developments in the country. For ensuring widespread

infrastructure development in the country large scale investments are required at this

moment. In this regard, commercial banks‟ responses are crucial for positive

outcomes of these initiatives.

The issues discussed above raise some research questions: Is the policy and

regulatory framework good enough to promote PPP projects in Bangladesh? What is

the status of financing PPP projects by banks? Are the commercial banks using

refinance facilities of IPFF Project (BB)? What should be the appropriate role of

banks in PPP projects? What would be the PPP financing structure under banks

initiatives? Is/are there any problem(s) from financier‟s side to involve in PPP


projects? How can the potential challenges and issues related to PPP financing be

handled? It is needless to say that favourable legal framework, commensurate

incentives, effective coordination among stakeholders, adopting appropriate

techniques and strategies to manage projects and project parties are crucial for

achieving the desired goals in such a new area. In finding the answers of the research

questions, the study identified the following specific objectives: one, to discuss the

conceptual issues and reviewing literature on banks initiatives in PPP projects; two, to

examine the policy initiatives and regulatory environment for PPP financing by banks

in Bangladesh; three, to identify the status and techniques of financing PPP projects

in Bangladesh as well as global perspectives; four, to examine the initiatives taken by

banks in financing PPP projects in Bangladesh; and five, to find out the challenges

and issues relevant for financing PPP projects by commercial banks in Bangladesh.

The research workshop paper is prepared based on both primary and secondary

information. Secondary and published literature, research papers, published

documents of GoB/BB, newspaper reports, websites etc. have been reviewed to

understand conceptual issues and policy initiatives. Primary data, which have been

utilized to accomplish the basic objectives of the paper, are collected from

commercial banks. The research team interviewed bank officials of relevant desks of

20 selected commercial banks (covering 2 state-owned banks13, 14 local private

commercial banks,14 2 foreign commercial banks15 and 2 Islami banks16).

For collecting primary data, banks have been chosen on the basis of „purposive

sampling method‟. In selecting banks for the survey, primary emphasis has been

given to select those banks that have experiences of syndicated lending, as large

projects financing are usually done through syndication mechanism. For the selection

of local commercial banks, the norm so followed was to select all the banks which are

already enlisted with IPFF17 to avail refinancing facility for subsequently lending in

PPP projects and the remaining local commercial banks have been chosen on the

basis of their experiences and magnitude of syndicated lending over the years. Other

samples are selected based on their experiences and volume of large projects

financing which represent their respective category of banks. A questionnaire has

been used to gather primary information from the selected banks.

In order to accomplish the stated objectives, a key-note paper was prepared and

presented in a day-long workshop participated by a number of senior level bankers

from different banks which was followed by a group discussion by the participants.

Several issues were raised in the discussion and the final report has been prepared

after incorporating the valuable suggestions where it was thought appropriate.

13

Agrani Bank Ltd. and Janata Bank Ltd. 14

Mutual Trust Bank Ltd., Mercantile Bank Ltd., Trust Bank Ltd., Prime Bank Ltd., Dhaka Bank Ltd., NCC Bank

Ltd., BRAC Bank Ltd., Eastern Bank Ltd., Dutch-Bangla Bank Ltd., IFIC Bank Ltd., Bank Asia Ltd., United

Commercial Bank Ltd., AB Bank Ltd. and The City Bank Ltd. 15

Citi Bank N.A. and Standard Chartered Bank 16

Islami Bank Bangladesh Ltd. and Exim Bank Ltd. 17

Currently eleven (11) local commercial banks are listed with IPFF Cell of Bangladesh Bank.


The paper is organized into six sections. After stating the background, objectives

and methodological aspects in section I, section II attempts to discuss some

conceptual issues of PPP financing especially under bank‟s initiatives. Policy

initiatives and regulatory environment for PPP financing by banks in the context of

Bangladesh are discussed in section III. Section IV identifies the status and

techniques of financing PPP projects in Bangladesh along with cross country

experiences. The initiatives taken by banks in financing PPP projects in Bangladesh

are assessed in section V. Finally, a set of critical issues along with some

recommendations related to successful implementation of PPP initiatives in the

country are presented in section VI.

II. PPP Financing: Brief Literature Review and Bank’s Initiatives

Concepts and Issues

PPP has become widely accepted and popular term in public sector involvement

management. Now, PPP is considered as a favorite tool for providing public services

and developing society in both developed and developing countries. At the most

general level, PPP describes a government service or private business venture which

is funded and operated through a partnership of government and one or more private

sector companies. PPP involves a contract between a public-sector authority and a

private party, in which the private party provides a public service or project and

assumes substantial financial, technical and operational risks in the project. In most

PPP projects, capital investment is made by the private sector on the strength of a

contract with government to provide agreed services and the cost of providing the

service is borne wholly or in part by the government. Government‟s contribution to a

PPP may also be in kind. In projects that are aimed at creating public goods like in

the infrastructure sector, the government may provide a capital subsidy in the form of

a one-time grant, so as to make it more attractive to the private investors. In some

other cases, the government may support the project by providing revenue subsidies,

including tax breaks or by providing guaranteed annual revenues for a fixed period.

There is a wide range of PPPs with diverse features and involved in different

activities. However, very few people agree on what exactly a PPP mean and perhaps,

there is no precise and widely accepted definition of PPP and hence the concept of

PPP is still contested. According to Asian Development Bank Institute (ADBI 2000),

“Public Private Partnerships are collaborative activities among interested groups,

based on a mutual recognition of respective strengths and weaknesses, working

towards common agreed objectives developed through effective and timely

communication”. The World Bank‟s definition of PPPs is closely aligned to that of

the ADBI. The World Bank (1999) defined Public Private Partnerships as “joint

initiatives of the public sector in conjunction with the private, for profit and not-for-

profit sectors”, also referred to “as the government, business and civic sector”. In

these partnerships, each of the actors contributes resources (financial, human,


technical and intangibles viz., information or political support) and participates in the

decision making process. World Bank (2007) has also defined PPP as “a win-win

relationship between the government and various private sector players for the

purpose of delivering a project or service by sharing the risks and rewards of the

venture”. According to the Organization for Economic Cooperation and Development

(OECD), PPPs refer to any form of agreement or partnership between public and

private parties (OECD 2000). They should not be confused with privatization, where

the management and the ownership of infrastructure are transferred to the private

sector. In most cases, PPP allows private sector to venture into areas of business that

have been historically controlled by the government with respect to either

infrastructure or service delivery process or both.

In the Policy & Strategy for PPP (2010) of the GoB, the concept of PPP is

explained as follows: “Public-Private Partnership (PPP) projects normally cover

public good provisions characterized by indivisibility and non-excludability, natural

monopoly characterized by declining marginal cost (and associated average cost), and

lumpy investment characterized by long gestation period”. In most of the cases, PPP

allows private sector into areas of business, where the government holds control over

infrastructure or service before such partnership. The public sector retains a

significant role in the partnership, either as the sole purchaser of the services provided

or as the main enabler of the project. The private party commonly provides the

detailed design, construct, operation and financing for the PPP project, and is paid

according to the performance.

A PPP ideally integrates the public sector, the private sectors and all community

stakeholders and by pooling their resources and sharing responsibilities it (PPP)

accrues benefits to all stakeholders. This is done in order to develop and implement a

project that is technically sound, financially viable, environmentally acceptable and

affordable to all users. However, risk allocation is ceded to the party, either

government or private sector, which is best able to manage it. According to Thomson

(2005) and Savas (2000) PPPs can take many forms, depending upon the exact

allocation of risks and responsibilities. The most common PPP model includes Build-

Operate-Transfer (BOT) (Box-1 highlights some other PPP models). In general, the

financial arrangements of BOT are that the project is designed and financed by the

private sector, and run and maintained by the private sector for the concession period.

The private sector partner receives income from running the infrastructure (e.g. toll

road, electricity generation). After the expiry of the concession period, the legal

ownership of the project is transferred to the government. Campbell (2001) also

emphasizes on financial arrangements of PPP and concluded that „a PPP project

generally involves the design, construction, financing and maintenance and in some

cases operation of public infrastructure or a public facility by the private sector under

a long term contract‟. Collin (1998), after surveying 117 different public private

partnerships in Sweden, referred PPP as an arrangement between a municipality and

one or more private firms where all parties were involved in sharing risks, profit,


utilities and investments through joint ownership. The financial participation, based

on the particular PPP model, may be zero for the government or for the private sector,

or any combination of financial sharing. Financial participations by private parties in

PPP reduces pressure on government budgets and because of private sectors‟ finance

and efficiency the projects provide better value for money to the stakeholders.

Box 1: PPP Financing Models

Lease-Build-Operate (LBO): In this model, a private firm is given a long-term lease

to develop and operate an expanded facility using its own funds. It recovers its

investment, plus a reasonable return over the term of lease and pays a rental fee. The

facility remains publicly owned. Example includes Stewart Airport of USA which was

leased by the state to a British Company for a period of ninety-nine years.

Design-Build-Operate (DBO): Here the public authority entrusts the private sector

with the design, construction and operation of new facilities, for a fixed period of time,

however, they remain the property of the public authority. The private operator takes

responsibility for the risks linked to the design and management of the facility. It is

paid a fee by the public authority and commits to an overall cost for the facility‟s

construction and operation.

Build-Transfer-Operate (BTO): A private developer designs, finances, and builds

the infrastructure. Once completed, legal ownership is transferred to the sponsoring

government agency. The agency then leases the facility back to the developer under a

long-term lease. During this time the developer operates the facility and recovers his

investment, and earns a reasonable return from user charges and commercial activities.

Build-Operate-Transfer (BOT): A private developer is awarded the concession to

finance, build, own, and operate a facility. The developer collects the user fees for a

specified period, after which ownership of the facility reverts back to the public sector.

This is perhaps the most common form of PPP for building new infrastructure.

Build-Own-Operate-Transfer (BOOT): Same as BOT except that asset ownership is

with the operator and sold to the Government for either a nominal/ pre-agreed fixed

sum/ market value with a cap.

Built-Own-Operate (BOO): A private developer finances, builds, owns, and operates

a facility in perpetuity under a franchise, but is subject to regulatory constraints on

pricing and operations. The long-term property rights provide a significant financial

incentive for capital investment in the facility. Some examples of this model are the

private toll roads in Virginia and California; the toll road in China connecting Hong

Kong and Macao with Guangzhou; and the „Chunnel‟ under the English Channel.

Numerous power projects and ports in the Philippines and Indonesia are also made

though this model.

Buy-Build-Operate (BBO): An existing public facility is sold to a private partner who

renovates or expands it and operates it in perpetuity under a franchise. This is

equivalent to divesting a company, which then operates under a franchise.

(Continued)


Box 1: (Continued)

Source: Based on Nyagwachi (2008)

Private sector involvement in the public services is not a new phenomenon now-

a-days. PPPs have been using for over four decades, predating the contracting out

initiatives of 1970s in the USA. Initially focusing on economic infrastructure, PPPs

have evolved to include the procurement of social infrastructure assets and associated

non-core sendees. Gradually, PPPs have extended to housing, health, corrective

facilities, energy, water, and waste treatment etc. PPP policy has also evolved

globally as public sectors develop the necessary skill base to procure infrastructure by

way of PPP, including the capacity to create and maintain a regulatory framework.

The private sector has also become increasingly innovative in several experienced

countries, thereby adding significant value to public procurement. The UK has been a

modern instigator of this wave of private sector involvement. Almost all developed

and developing countries are using PPPs for producing public services now-a-days.

Among other countries India, Canada, Malaysia, Thailand, Cameroon and Chad are

also practicing PPP concept for their development. In Bangladesh, PPP initiative

started in the year 2004, after approving Private Sector Infrastructure Guidelines

(PSIG) and till date several projects have been completed through PPP mechanism.

Financing Techniques/Structure of PPP Projects

As PPP is a contract-driven relationship among the stakeholders, financial

arrangements/structures vary depending on the PPP model. Usually, the sponsor of a

project decides what proportion of equity (owned funds) and debt (borrowed funds)

would be used to finance the entire cost of the project. Sometimes, it may be

governed by the state policy or policy of the financier. Inevitably, the financing

structure depends on the nature & size of the project, capital intensity, promoters‟

capacity, importance of the project to the national economy. There is no prescribed

standard for financing pattern or debt / equity ratios under PPP. But one of the

important factors considered for fixing D/E ratio is the debt servicing ability of the

project. In the case of infrastructure projects, equity holders are primarily sponsors

and minority investors. Investment is done in the form of equity or preference shares.

In the case of availability of state subsidies, it is taken as capital. In some cases

Government injects some funds to promote investment in particular sector(s) in order

Wraparound Addition (WA): A private developer finances and constructs an

addition to an existing public facility and then operates the combined facility either

for a fixed period, or until costs are recovered and a reasonable return on the invested

capital is realized. The developer may own the addition. The objective of this

arrangement is to expand the facility, despite the government‟s lack of resources or

expertise.

Rehabilitate Operate Transfer (ROT): A private sector developer finances,

rehabilitates, maintains and operates a facility for a given period of time, before

transferring the facility back to the public entity at no cost.


to ensure financial viability of the projects. State subsidies are usually taken as capital

grants. Historically, it is observed that equity contribution in infrastructure projects is

15-30% and the remaining portion is supplied by lenders. The debt funds are

generally term loans which are usually termed as senior debt. Debt for major PPP

projects may be provided either by commercial banks (typically in the form of

syndication/consortium), international financial institutions or directly from the

capital markets18. Debt financing for PPP infrastructure projects is provided either

before or after a project's construction is completed. Construction phase financing

usually comes from local and international commercial banks. Except in Malaysia,

the role of local commercial banks in developing countries in financing Greenfield

private infrastructure projects has been very limited due to weaknesses in credit

appraisal and financing techniques. In addition to institutional weaknesses,

commercial banks in developing countries are usually unable to make long-term

loans because the profile of their liabilities is mostly short-term. This short-term

profile of bank liabilities (deposits) is largely the result of macroeconomic instability

in many countries, especially during the 1980s (Ferreira & Khatami 1996). Table-1

shows sources of financing for PPP projects.

Table 1: Financing Sources for PPP Projects

Sources of Finance Maturity

1. Domestic

Sources

a) Debt

Financing

Domestic Commercial banks

Domestic term lending institutions

Domestic bond markets

Specialized infrastructure financing institutions

3-5 years

7-10 years

7-10 years

b) Equity

Financing

Sponsors Fund

2. External

Sources

a) Debt

Financing

International commercial banks

Export credit agencies

International bond markets

7-10 years

7-10 years

10-30 years

b) Other

External

Financing

International developers (independently or

in collaboration with domestic developers)

Equipment suppliers (in collaboration with

domestic or international developers)

Dedicated infrastructure funds Other

international equity investors

Multilateral agencies (International finance

Corporation, Asian Development Bank)

Usually these

are long-term Financing

Source: Ahluwalia (2006)

18

For raising debt capital directly from the capital markets, project companies issue bonds which are taken up by

financial institutions such as pension or insurance companies which are looking for long term investments.


The debt form of financing requires interest & principal servicing at monthly /

quarterly intervals, subject to restrictive covenants / prudential norms. The financial

structure may also include other forms of junior debt (such as mezzanine debt which

ranks between senior debt and pure equity). Before financing an infrastructure

project, the lender must assess whether the proposed PPP contract is bankable19 and

whether the proposed financing is desirable. Box-2 focuses on some financing tools

in PPP/private infrastructure projects in some selected countries.

Box 2: Preliminary Financing Tools for Private Infrastructure/ PPP Projects in

Pakistan, Sri Lanka, and Jamaica

Pakistan: Pakistan's Private Sector Energy Development Fund was created in 1988

to support institution building and to provide subordinated debt financing for

limited recourse private power projects. The fund was initially capitalized with a

World Bank loan of $150 million co-financed with $150 million from the Export-

Import Bank of Japan (Jexim), as well as $99 million in loans provided by France,

Italy, and the United States for equipment to be sourced from these countries. The

fund, administered by the National Development Financing Corporation, was

replenished in January 1995 with a $250 million loan from the World Bank and a

$110 million Jexim loan (raised to $250 million in May 1996). France also

provided an additional $10 million loan toward purchases of French equipment.

The fund provides subordinated debt financing (with up to twenty-three years'

maturity with eight years of grace period) for up to 30 percent of the financing of

private energy projects. Project sponsors are expected to mobilize 20-30 percent of

project funds investments in infrastructure in equity and to raise the remaining

funding as senior debt. Although private power projects were the fund‟s initial

focus, it is now financing other private infrastructure, and was recently designated

as Pakistan's Long-Term Infrastructure Credit Facility. In 1997 a newly created

financial institution with a majority shareholding by the private sector will be

assigned to administer this facility. By 1998 the private sector will control about a

third of power generation capacity and supply nearly half of Pakistan's power.

Sri Lanka: The World Bank is helping the Sri Lankan government to promote

limited recourse project financing through a Private Sector Infrastructure

Development Company. This company, modeled after Pakistan's Private Sector

Energy Development Fund, has an all-debt capital structure that includes $70

million from the International Development Association (IDA) and $14 million

from Germany's KfW. Operations began after the IDA credit was approved in June

1996. A pipeline

(Continued)

19

A PPP project is considered bankable if lenders are willing to finance it (generally on a project finance basis).


Box 2: (Continued)

Source: Based on Ferreira & Khatami (1996)

Project Finance versus Corporate Finance

Usually, PPP projects are financed through project finance arrangements all over

the world. Project financing is generally used to refer to a non-recourse or limited

recourse financing stature in which debt, equity, and credit enhancement are

combined for construction and operation, or the refinancing of a particular facility in

a capital-intensive industry, in which lenders base credit appraisals on the projected

revenues from the operation of the facility rather than the general assets or the credit

of the sponsors of the facility, and rely on the assets of the facility, including any

revenue-producing contracts and other cash flow generated by the facility, as

collateral for the debt (Hoffman 2001).

The concept of project finance is very simple, as it involves a capital investment

on the merits of the asset‟s return. According to Finnerty (1996), project finance is

“the raising of funds to finance an economically separable capital investment project

in which the providers of the funds look primarily to the cash flow from the project as

of projects recommended for funding includes the 150 megawatt Kelanitissa

power plant, a container terminal, a wharf, and a 30-kilometer expressway. Loans

made in U.S. dollars to private sponsors will be at variable and fixed rates and

will have maturities of up to twenty-two years, including up to eight years' grace.

The company should give momentum to private financing of infrastructure in Sri

Lanka. The country's strong export potential in textiles is held back by

infrastructure bottlenecks, and 75 percent of industries and hotels produce their

own power. Independent power producers could easily satisfy this demand at

lower cost.

Jamaica: Jamaica's Private Sector Energy Fund was also designed to promote

limited recourse private investments in infrastructure. The World Bank and the

Inter-American Development Bank each provided $40.5 million loans to help set

up the fund. This money was used to provide a commitment to refinance the

commercial construction debt of the Rockfort private power project. The project

is slated to begin operations in August 1996. In 1998 the project can call a takeout

loan from the fund that will have a twelve-year maturity with no grace period and

a fixed rate equal to a thirty-year U.S. Treasury bond plus 300 basis points. This

arrangement does not prevent the project from testing the market for more

favorable takeout financing, however. The development of the Rockfort power

project and the accompanying changes in the policy and regulatory environment

for the private provision of power have had an important demonstration effect,

thereby improving the prospects for future private power projects in Jamaica.


the source of funds to service their loans and provide the return on their equity

invested in the project.” According to Nevitt & Fabozzi (2000), “A financing of a

particular economic unit in which a lender is satisfied to look initially to the cash

flow and earnings of that economic unit as the source of funds from which a loan will

be repaid and to the assets of the economic unit as collateral for the loan.” According

to Esty & Sesia (2005), “It involves the creation of a legally independent project

company financed with equity and non-recourse debt for the purpose of financing a

single purpose capital asset, usually with a limited life.” According to Standard &

Poor‟s Risk Solutions (2002), “A project company is a group of agreements and

contracts between lenders, projects sponsors, and other interested parties that create a

form of business organization that will issue a finite amount of debt on inception; will

operate in a focused line of business; and will ask that lenders look only to a specific

asset to generate cash flow as the sole source of principal and interest payments and

collateral.”

There are some basic characteristics of project finance technique which are

highlighted below:

(a) Creation of Separate Entity – Project financing involves a creation of a separate

entity popularly known as Special Purpose Vehicle (SPV). The SPV has a defined

objective and definite life.

(b) Equity Holding Pattern – The project financing structure or SPV is a highly

concentrated ownership structure. It is normally an outcome of partnership or

joint venture between three or four equity sponsors. This format is similar to the

venture-backed companies with the only exception that equity sponsors are not

the managers.

(c) Non-recourse Debt – The debt component provided by lenders is on non-

recourse nature and the lenders have no claim on the equity sponsors for the

repayment of debt service but fully rely on the project cash flows for the debt

service.

(d) Leverage – The project financing deals are highly leveraged deals typically

involving a leverage of 70% and at times going up to 80% or more.


A typical project finance structure applicable for PPPs is shown in figure-1:

Figure 1: Project Finance Structure

Source: Srivastava and Kumar (2010)

The project finance structure is opposite to corporate lending where lenders rely

on the strength of the borrower‟s balance sheet for their loans. Under traditional

corporate financing, the lenders provide the funds to the parent company (the

investing firm) and then the parent company is investing the funds in the project

assets. Figure-2 shows a traditional corporate finance structure:

Figure 2: Traditional Corporate Financing Structure

Source: Srivastava & Kumar (2010)

In the form of corporate financing, although the financing is done for the project,

but the lender looks at the cash flows and assets of the whole company in order to

service the debt and provide security (Pandey 2005). In case of default, the lenders

Project Investment

Debt Providers Parent Company

Returns Investment

Debt service

Full Recourse Loan

Project

Company/SPV

Contractor Operator &

Maintenance Purchasers

Escrow A/C Suppliers (raw

materials, fuel)

Lenders [ECAs; IFIs; Banks]

(Inter-credit Agreements)

Engineer 3rd party

guarantee Investors

Construction

Contract

O & M Contract

Sales

Contract

Revenues

Debt Service

Payments (2)

O & M

Payments (1)

Surplus (3) Loan

Agreements

Share Subscription Agreement

Dividends

Supply

Contract


have full claim on the total assets of the parent company including the new project

assets for which the new debt is being issued. In this way the lenders are having full

recourse on the parent company for the payment of debt service. This kind of lending

largely depends on the parent company and not on the project in which the amount

will be invested and the financial credibility and standing of the parent company

plays a major role in deciding the amount disbursed and the conditions and the

characteristics of the loan. The parent company is exposed to risk of the full amount

required for the investment. In other words, the existing shareholders are exposed to a

new additional risk by this act and the claim of the shareholders is further reduced

due to the additional financial risk.

The use of project finance is not a new phenomenon as considered by many.

It has been using since long ago for funding the capital expenditure projects. One of

the earliest recorded applications of project finance is in 1299, when the English

Crown enlisted a leading Florentine merchant bank to aid in the development of the

Devon silver mines. In the seventeenth and eighteenth centuries, the trading

expenditures were also financed by the project finance structures. In the 1970s,

project finance began to develop into its modern form. Now-a-days, project financing

has become a well established financing technique. Chen et al (1989) documented

more than US$23 billion worth of project financing between 1987 and 1989 and

identified 168 projects financed on this format including 102 projects for power

generation. In the early 1990s, privatization, deregulation and globalization have

spurred the use of project finance in both developed and developing countries. In

developing countries, because of limited public funds, the governments decided to

privatize the state-owned companies of infrastructure development. According to

World Bank (2004) study on Public Policy for Private Sector, Private infrastructure,

from 1990 to 2003, investment in infrastructure projects with private participation in

developing countries was US$890 billion. Project Finance loans are also practiced in

the Asia Pacific region. For example, in 2005 project finance loans was US$6.7

billion in this region (Vikas & Kumar 2010). The motivations for using project

financing structure in large scale projects are appropriate risk sharing among project

parties, reduced underinvestment problems, reduced costly agency conflicts,

structured risk mitigation, reduced overall project costs, availability of free cash flow

etc. which are absent in traditional corporate financing method.

As most of the PPP project structures (such as BOT, BOOST, BOLT etc.) are

complex in nature and have limited duration, a PPP company (called SPV) is usually

set up by the sponsors solely for the purpose of the implementation and operation of

the project. The reasons for creating an SPV by the sponsors are to derisk own

balance sheet from high project leverage, create an exit option for equity investors

and perhaps tax structuring. For lenders, it provides a legal and structural separation

(bankruptcy remoteness) of the project from the sponsors and the sponsor's cash

flows are ring fenced from the cash flows of the project as the SPV is a focused entity


with a limited purpose (cash flow protection). It also restricts additional debt

issuances. The SPV is formed under the Companies Act and is therefore, legally

independent from the parent company. The SPV is different from a subsidiary as

there may be two or three equity sponsors in the SPV and none of them will have

more than 51% stake in the SPV. Project sponsors take an equity stake in the SPV,

depending on project cost and sponsors‟ ability. Normally bankers insist on an equity

contribution of 15-30% of the project cost and is caged "Sponsors Contribution".

As some banks find it difficult to finance at such a high debt equity ratio, to increase

the bankability of projects, the Government is sought to come out with a "Viability

Gap Funding Mechanism". In the form of Viability Gap Funding, Government/

Government Agency gives the SPV an upfront equity support in the form of grant.

This grant can be either positive or negative depending on the importance and

magnitude of the projects. In the form of positive grant, Government contributes

some funds as equity to ensure economic viability of the project whereas SPV may

require to pay upfront money to the Government before bidding for a highly lucrative

project which is called negative grant.

Traditionally, project finance has been undertaken by the bankers using the

corporate finance structure wherein bankers lend to the sponsors and the sponsors put

money in the projects. Bankers are able to get the repayment from the sponsors who

capture the cash flows of the project. Bankers are connected to the project through the

sponsors and therefore, they have recourse on to the balance sheet of the sponsors,

which implies that if anything goes wrong then the sponsors will ultimately bear a

major chunk of the risk associated with the project. Now-a-days, this trend is

changing as the importance and magnitude of infrastructure project finance by

commercial banks are increasing. Banks are increasingly involving in infrastructure

PPP projects through syndicated/consortium form all over the world.

However, in Bangladesh financial institutions/banks still follow corporate finance

structure to finance large/infrastructure projects. Due to lack of commensurate

collateral and uncertainty of futures benefit, commercial banks do not show much

interest to extend fund in infrastructure projects. Moreover, banks carry short-term

liabilities but the infrastructure loans are long-term in nature, usually 10-12 years.

To avoid asset-liability mismatch, banks usually prefer short term finance e.g.,

working capital and trade finance rather than long-term loans which are preconditions

of project finance. However, few banks/ non-banking financial institutions are

financing PPP projects with the help of refinancing facility of IPFF. The financing

structure of IPFF is very distinctive (figure-3). The private sector promoter needs at

least 25% equity contribution to access IPFF loan, whereas PFIs need to finance at

least 15% of the project cost and the rest 60% may be financed by IPFF.

The maximum term of the loan repayment is 20 years with 3-10 years grace period.

The interest rate for PFI is weighted average yield of 1 year Treasury bill plus 30

basis points (if floating loan). Facility loan can also be made in dollar or other

currency with 30 basis points above the relevant interbank rate.


Figure 3: Financing structure/Fund Flow pattern of IPFF in PPP Projects

Source: IPFF Project Cell, BB

III. Review of Policy Initiatives and Regulatory Environment for PPP Financing

by Banks in Bangladesh

Early Legislations and Policy Issues

The Government of Bangladesh (GoB) has taken a series of measures to

promote PPP to develop infrastructure. In 1996, the government adopted a private

sector power generation policy to shore up private sector participation. In 1997,

under the administrative control of the Economic Relations Division, Infrastructure

Development Company Ltd. (IDCOL) was established in order to facilitate private

sector investments in infrastructure development. In early 2000, the government

established Infrastructure Investment Facilitation Center (IIFC) as an advisory body

of the government under the Economic Relations Division (ERD) of the Ministry of

Finance to promote and facilitate infrastructure projects in the country through PPP.

The objective of creating IIFC is to assist relevant ministries, divisions or agencies

in formulating and screening project proposals as well as providing technical

assistance. Later in 2004, “Bangladesh Private Sector Infrastructure Guidelines”

(PSIG) were issued by the government for rapidly developing country‟s

infrastructure with private sector financing, management and operation. To oversee

the implementation of PSIG, the Private Infrastructure Committee (PICOM) was

formed under the Board of Investment (BOI). PICOM is entrusted with several

responsibilities as promoting private sector participation in infrastructure projects.

In fact, PSIG forms the basis of the current PPP in Bangladesh. After the

introduction of PSIG, there have been some successes in private investments

IPFF, BB

Participating Financial

Institutions (PFI)

Private

Infrastructure Project

Other Financial Institutions

or Private Investors

Project Promoter

60% of project cost

(interest rate 364

days T-bill +30 bp)

60% Debt at Market rate

15% Debt or

Other funding

25%

Equity

Fund Ownership: Ministry of Finance

Implementing Agency: Bangladesh Bank


through PPP route in the power, gas and telecom sectors. The Government seeks

more investment in these and other sectors such as ports, roads, railway, water

supply, waste management, tourism, e-service delivery etc.

Introduction of PPP within the Budgetary Framework

Allocation of funds by the government in the national budget has encouraged

private sectors in many countries to participate in PPP projects. Over 30 countries

around the world have such initiatives in place, including a number of emerging

economies e.g., China, India, Brazil, South Africa, Chile etc. (Palmer, 2009). For the

first time in Bangladesh, the Government through its national budget for FY 2009-10,

introduced the concept of PPP budget. This is considered as a very strong statement

and commitment for the development of PPP in the country. In the budget for

FY2009-10, BDT2,500 crore (2.2% of the total budget) has been allocated for PPPs20.

In the next two budgets i.e., FY 2010-11 and FY 2011-12, GoB allocated BDT3000

crore for each year for the same purposes. The PPP budget aims to provide support

for upfront development of PPP projects, create a mechanism for targeted subsidies

and set long term financing of PPP projects. In addition, the Government issued a

position paper on PPP, titled; “Invigorating Investment Initiative through Public-

Private Partnership” in June 2009.

Formulation of Complete PPP Policy and Institutional Framework

As a part of the government‟s commitment to flourish PPPs in a large scale, the

Government has formulated the most essential ingredient to the PPP Endeavour, „The

Policy and Strategy for Public-Private Partnership, 2010‟ (on August 2, 2010). The

objectives of this Policy and Strategy are to spell out the principles of partnership

with private sector for undertaking various projects related to infrastructure as well as

public service delivery; to define an institutional framework, which is conductive and

efficient in handling the PPP projects as well as effective to protect public interest;

and to ensure balance between risk and reward for both the government and private

partners while aiming to keep the undertaking attractive for the private sector.

The Government has taken a two-pronged strategy for building PPPs: one is to

attract investment for projects, where building new infrastructure and expanding

existing infrastructure is the major component; the second is to attract innovation and

sustainability of public service delivery to the citizens. While the government is

committed to launch PPPs in a big scale, the essential ingredient to that Endeavour is

to set up a forward looking strategy and a framework for operationalisation of PPPs

as well as clear-cut procedural guidelines for the sake of ensuring transparency and

building confidence among the private sector players.

20

Of the total amount of BDT 2,500 allocated in the budget, BDT100 crore was allocated for Technical Assistance

(TA), BDT300 for Viability Gap Funding (VGF) as subsidy or speed money and the rest of the fund was allocated

for an infrastructure investment fund as loan and equity participation.


PPP policy of GoB includes a clear cut definition of PPP, applicability of PPP,

sectoral coverage of PPP21, eligibility criteria of private sector, classification

of projects by investment size22, type of financial participations23 of the government

in PPP projects, incentive structure for private investors and institutional framework

for PPP. And, for accelerating identification, formulation, appraisal, approval,

monitoring and financing of PPP projects, a simplified and dedicated institutional

framework has been created as per the provision of PPP policy. This institutional

framework is designed to streamline the approval process, to ensure a smooth and

linear process of approval of proposed projects.

Government has also created „a new window for infrastructure financing‟ called

Investment Promotion and Financing Facility (IPFF) as a separate cell of Bangladesh

Bank (BB) in 2006 as part of its (GoB) policy initiatives to funding and capacity

building facility for PPP projects. IPFF project is co-financed by GoB and the World

Bank (WB). Bangladesh Bank (BB) is implementing IPFF project on behalf of

Finance Division, Ministry of Finance with the objectives of supplementing the

resources of the Bangladesh financial markets to provide term finance for

infrastructure and other investment projects beyond the capacity of local financial

institutions; and promoting the role of private sector entrepreneurs in the

development of capital projects, especially infrastructure. Through IPFF, Bangladesh

Bank is responding to supplement the effort of Government of Bangladesh (GoB) by

encouraging the participation of the private sector through PPP to reduce the

investment deficit especially in power and energy, roads and highways, water supply

and port development. For implementing PPP initiatives, IPFF is mandated to work

with two main components (i) Credit or on-lending component and (ii) Technical

Assistance component. The IPFF project is also being implementing in two phases.

The duration of the first phase is January 2006-December 2011 (5 years) and the

duration of the second phase is January 2012-December 2014 (3 years). Under the

first phase of operation, World Bank has provided US$50 million and GoB provided

US$10 million.24

21

Priority sectors included in the PPP policy are (i) exploration of oil, gas and other mineral resources; (ii) power,

(iii) ports & terminal (airports, sea, river & land ports including deep sea ports), (iv) water supply & waste

management, (v) Highways & expressways, (vi) telecommunications and ICT, (vii) tourism industry, (viii)

economic zone, industrial estates & parts development, (ix) social infrastructure e.g., health, education

development, (x) e-service delivery, (xi) poverty reduction projects, etc. 22

In the „Policy and Strategy for PPP 2010‟, PPP projects are classified into three groups according to investment

size viz., Large Project [having total investment above BDT 2.5 billion (as identified in the pre-feasibility report)

excluding on-going capital for expansion]; Medium Project [having total investment between BDT 500 million and

2.5 billion (as identified in the pre-feasibility report), excluding on-going capital for expansion] and Small Project

[having total investment below BDT 500 million (as identified in the feasibility report), excluding on -going capital

for expansion]. 23

Depending on the nature and model of PPP projects, financial participations of the government may be in at least

3 forms, viz., Technical Assistance Financing, Viability Gap Financing and Infrastructure Financing.

24

Of the total US$60 million of IPFF fund, US$57.5 was sanctioned as Credit/On-lending Component and

remaining US$2.5 million was allocated as Technical Assistance Component in the first phase.


IV. Status of Financing PPP Projects in Bangladesh and Global Experiences

PPP initiatives started more than a decade ago in the country. Three government

organizations25 are involved in the project implementation by the private sector under

the PPP initiatives. Among the three government sponsored organizations, two

(IDCOL and IPFF) provide direct financial support to PPP projects and the rest one

(IIFC) is responsible for providing expert assistance to relevant ministries, divisions

or agencies regarding project development, project formulation, project design,

technical, engineering, implementation and monitoring related issues for projects

sanctioned by PPP initiative. So far, the direct assistance of these organizations has

enabled implementation of 27 projects (Position Paper on PPP 2009). Currently one

third of the country's power requirements are fulfilled by private sector.

Telecommunication sector has achieved a significant progress by PPP route. Private

mobile telecom operators have made more than billion dollar investment in the

country. There are also some PPP projects under Bangladesh Land Port Authority

(BLPA). Among thirteen land ports, twelve are considered to be operated by private

operators on BOT basis. Some (Sona Masjid and Teknaf) are under operation on

BOT basis and some are still waiting. Through the Government sponsored company

IDCOL, PPP project finance and financial intermediation are conducted. Till date,

BDT13 billion has been financed by IDCOL to 22 projects implemented under PPP

(details of the projects are shown in Appendix, Table-1). Under the auspices of the

IPFF project, 7 small power plants are now contributing 178MW to the national grid

(details in Appendix, Table-3). The total expenditure in the 7 aforementioned projects

is BDT 8.67 billion of which IPFF financed BDT 4.41billion (51% of total

expenditure), private investors financed BDT 2.51 billion (32% of total expenditure)

and participating banks financed BDT 1.46 billion (17% of total expenditure). Till

now, IIFC has been under contract to design 30 projects, provide technical support to

8 projects and consultancy support to 16 projects under PPP. Apart from these

initiatives, some commercial banks have financed BDT 47,094.61 million in PPP

projects (Survey findings, table-2, and page-31).

In the FY2009-10 and onward, the Government already placed six projects for

implementation under PPP, which, in total, would cost some US$13.85 billion or

BDT 951 billion. The projects are Dhaka-Chittagong Access Control Highway at an

estimated cost of US$3.02 billion on BOOT basis, Sky-Train encompassing the

Dhaka Metropolis (estimated cost: US$2.80 billion on BOOT basis), Dhaka City

Subway (estimated cost: US$3.1 billion on BOOT/BOT basis), Dhaka City Elevated

Expressway (estimated cost: US$1.23 billion on BOOT/BOT basis), Dhaka-

Narayanganj-Gazipur-Dhaka Elevated Expressway (estimated cost: US$1.90 billion

on BOOT/BOT basis), and four 450 megawatt gas- or coal-fired power stations at an

25

The government sponsored three organizations are: Infrastructure Development Company Limited (IDCOL)

established in 1997, Infrastructure Investment Facilitation Centre (IIFC) in 2000, and Investment Promotion and

Financing Facility (IPFF) in 2006.


estimated cost of US$1.80 billion on BOOT/BOT basis. Besides, the Government has

planned to construct smaller link and approach roads, bridges, flyovers, underpasses

and tunnels, university residential halls and hospitals under the PPP. Moreover,

government had earlier decided to construct the Sonadia Deep Sea Port (DSP) under

PPP outside the budget. The DSP project would cost approximately US$3 billion.

In addition, government has decided to build three small scale transportation projects

viz., Bus Rapid Transit (BRT) at an estimated cost of BDT 150 million, Articulated

Bus Service at the cost of BDT 50 million and Bus Route Franchise (BRF) at the cost

of BDT 50 million on BOO model. As the government is committed to accelerate

infrastructure development of the country, it (government) has enlisted some

infrastructure projects to be implemented under PPP. At present, 36 infrastructure

projects (28 power projects and 8 cross section projects) are either in implementation

stage or under consideration for implementations through PPP approach (details of

the projects are in Appendix, Table-2).

As stated earlier, to attract private investments through PPP, government has

introduced “PPP Budget” since FY2009-10 and allocated a lump sum of BDT.25

billion in the national budget. The purpose of allocating fund in the budget is to

ensure some form of financial participations in PPP projects along with the private

sectors. The financial participation of the government in the PPP projects may be in

at least 3 forms (viz., Technical Assistance Financing26, Viability Gap Financing27

and Infrastructure Financing28) depending on the nature of the projects and models of

PPP adopted for a particular type of project. Of the total amount of BDT 25 billion,

BDT.1 billion was earmarked for technical assistance, BDT 3 billion for Viability

Gap Funding (VGF) and BDT 21 billion for setting up an Infrastructure Development

Fund. Considering the importance of PPP, Government has created Bangladesh

Infrastructure Finance Fund (BIFF) which will commence its investment functions in

FY2011-12. Meantime, BDT 1600 crore from the budget allocation of the previous

years has been transferred to this fund and in FY2011-12 proposed allocation is BDT

2500 crore (Budget Speech for FY 2011-12, June 09, 2011).

26

Technical Assistance Financing is designed for the purposes of Pre-feasibility and Feasibility study for projects;

Preparation of RFQ and REP documents; Preparation of concession contracts ; PPP related capacity building in the

line Ministries/implementing agencies and other relevant agencies; PPP related awareness building such as road

show, exhibition etc. 27

Through Viability Gap Financing govt. provides funds to projects where financial viability is not ensured but

their economic and social viability is high. VGF could be in the form of capital grant or annuity payment or in both

forms. VGF in the form of capital grant shall be disbursed only after the private sector company has subscribed and

expended the equity contribution required for the project. The VGF is to be managed by the Finance Division and is

for disbursement to the PPP Project Company, upon request by the line Ministry/implementing agency, as per the

terms of the concession contract. 28

Infrastructure Financing is an arrangement for extending financing facilities for the PPP projects in the form of

debt or equity through specialized financial institutions such as Bangladesh Infrastructure Finance Fund (BIFF) and

Infrastructure Development Company Limited (IDCOL). The government may participate in such financing

arrangements through necessary budget provision.


Apart from coming forward with financing facilities from own funds (from

budgetary allocation), Government is trying to facilitate financing as well as technical

support to PPP projects in collaboration with multilateral financial institutions such as

World Bank, IFC, ADB etc. As part of the joint effort, Government has created the

IPFF project in collaboration with World Bank to make available partial debt

financing through private sector financial intermediaries for eligible, government-

endorsed infrastructure projects, to be developed by private sector. The IPFF project

seeks to assist the GoB in facilitating new infrastructure projects with potential for

private sector participation and in developing the capacity of the financial sector for

the ongoing provisions of infrastructure finance. So far, IPFF has successfully

completed first phase of its operation by disbursing 100% of its credit line (on-

lending) component amounting US$ 57.5 million (US$47.5 m IDA+US$10 m GoB

fund) equivalent to BDT 422.33 crore to seven small power plants through different

banks and financial institutions (details of the implemented projects are in Appendix,

Table-3). Around 30% of the TA budget of the first phase of IPFF project has been

utilized for capacity building of the PPP stakeholders by arranging a series of PPP

trainings and workshops both at home and abroad29. After being satisfied at the first

phase operation, IDA has sanctioned another US$257 million (US$7 for TA) and

GoB has sanctioned US$ 50 million for the implementation of PPP projects under the

second phase. Under second phase of IPFF, a total of BDT 2100 crore (US$ 300

million) is available for financing eligible PPP projects. Under second phase of the

IPFF project, several projects in different sectors i.e., water treatment plant, inland

container terminal, express ways etc., have already approached to IPFF for funding in

PPP projects. Funding to some of these projects are under process and others are

under evaluation (Appendix, Table-4 details some of the proposed projects).

Although GoB adopted wholehearted initiatives for ensuring sufficient

infrastructure facilities to mass people, the implementation status of PPP projects are

not that much satisfactory compared to those in the developed and developing

countries of the world. Many developed countries have adopted the PPP framework

to facilitate and manage large infrastructure investments. PPP financing technique is

being widely used in the UK, Australia, Canada, and countries across Continental

Europe. For example, the Australian government has successfully used PPPs to

deliver several social infrastructure projects (box-3 shows an example of PPP finance

project in Australia); Ireland has used them for transport and education infrastructure

(box-4 highlights the financing of a bank in school PPP projects); Netherlands have

experienced considerable success in social housing and urban regeneration programs

delivered through PPP; India is investing heavily in highways through PPPs; Japan

29

Till January 2011, 7 local workshops were arranged for awareness creation about PPP where 232 participants

from different FIs, ministries and executing agencies attended; 9 intensive training courses were arranged to train

264 officials of both public and private sectors and 12 foreign training programs were arranged in different

renowned PPP training institutions of USA, Canada, UK, Korea, Philippine and India where 49 officials from

relevant ministries, planning commission, Bangladesh Bank and FIs took participation. (Source: IPFF Project Cell,

Bangladesh Bank).


has around 20 new PPPs in the pipeline; in Canada, 20% of new infrastructure is

designed, built and operated by the private sector; USA is a pioneer with contracting

out and have started experimenting with other forms of PPPs; emerging democracies

from central Europe are also doing good. In this regard, the former Prime Minister of

Czech Republic, Jiri Paroublek, rightly mentioned that "just like any other market

economy, we are trying to multiply our economic potential and implement projects

for which the public sector alone has neither the strength nor the resources". In recent

years, the Czech Republic has achieved significant progress in PPPs.

Box 3: An Example of Financing Structure and Technique of PPP Project in Australia

Hills M2 Motorway Australia

Hills M2 is a 21 km, four-lane motorway that links the lower north shore and the northwest

regions of Sydney, Australia. This $644m toll road opened to traffic in May 1997 and is

now a key part of the Sydney motorway network.

In Hills M2 Motorway, the sponsors and institutional financiers have provided equity

through a combination of shares in the Australian Stock Exchange, infrastructure bonds

and a 15-year syndicated bank loan. Two economic entities were established for the

development of the project: Hills Motorway Limited (HML) and Hills Motorway Trust

(HMT). HML is a listed company, which was granted a concession (the project deed) and

was responsible for the implementation of the project. HMT is a listed unit trust, which

was the sole borrower for the construction and project loan facilities provided by the

lenders, and the issuer of the CPI bonds. HMT issued CPI indexed bonds in two tranches of

A$100m each in December 1994 and June 1996, with terms of 27 and 25.5 years

respectively and also borrowed a traditional bank debt facility of around A$120m. Then the

proceeds of bonds and debt facility were lent to HML for the construction of Hills M2

Motorway. Upon completion of the construction phase the project sponsors will jointly

invest A$30m in equity. HML entered into a turnkey contract with a contractor for the

construction of the motorway and an operation contract with an operator for the operation

of the motorway. This dual corporate structure was developed to meet the different needs

of the debt and equity providers.

In this dual-corporate structure, there is a trap for unwary lenders. If the trust allows its

funds to be linked to the project company without any security, debt security will suffer. In

Hills M2 Motorway, the trust-and-company structure hid the investable inevitable losses by

allowing the trust funds to be linked to the company without any security. While the

company and trust are distinct legal entities, those entities must effectively be controlled by

people at the board level.

Source: Based on Akintoye & Beck (2009)


Box 4: Bank of Ireland Finances School PPP Projects

The Irish Government is keen to promote the domestic PPP market for social infrastructure

development in the country and it (the Government) encourages private sector including

financial institutions to implement the agenda. The Government has made the country‟s

PPP market very much „open for business‟ for international bidders and funders. Bank of

Ireland is fully committed to supporting current and future Irish infrastructure projects

being promoted by Government Departments and State Agencies. As part of its continuing

effort for PPPs, the bank has arranged a debt financing package of €100m for the

construction and maintenance of six schools over a period of 25 years under the

Department of Education and Skills' Schools Public Private Partnership (PPP) Programme.

As the lead arranger, Bank of Ireland has raised the fund along with NIBC Financing NV

and the European Investment Bank (EIB). The project will be developed by a consortium

comprising Macquarie Partnerships for Ireland, Pierse Contracting and John Sisk & Son

Ltd. Pierse and Sisk will construct the schools. The construction of the five secondary

schools and one primary school will result in up to 1,000 jobs and, when complete, will

create approximately 4,500 new school places. The schools are in counties Cork, Limerick,

Wicklow, Kildare and Meath.

Bank of Ireland is also a lead funder of the recently opened M7/M8 Motorway PPP. The

first Schools PPP project and the State's first Motorway Service Areas project, both of

which were funded by Bank of Ireland, will be open 2010. The bank is also supporting

bidders across a range of other sectors and projects including education, rail and road PPPs

Source: Based on Bank of Ireland‟s Press Room Report (2010)

(http://www.bankofireland.com/about-boi-group/press-room/press-releases/item/36/bank-of-ireland-finances-

schools-ppp-projects/ )

In the developing world, PPP is being increasingly used in India, China, and a

number of countries in Southeast Asia and the Middle East. In particular, PPP

investments have witnessed spectacular progress in India, Bangladesh‟s closest

neighbour, since that country took the initiative a decade ago. India has currently $27

billion worth of PPP projects under implementation and has plans to implement

another $500 billion in the next five years. As far as current status of projects is

concerned, there have been 758 PPP projects in different sectors that are either

operational, have reached construction stage, or at least construction/implementation

is imminent. The total cost of these projects is estimated to be about Rs.383,332.1

crore (PPP Database of India, 2011)30. Besides, more than 900 projects are in

pipeline across the states which would be implemented by 2015 (Box-5 shows an

example of PPP Finance Project in India). Sri Lanka is also moving forward to PPP

initiatives for accelerating infrastructure development especially in electricity and

port sectors. Since 1995, the Sri Lankan Government has actively sought private

sector participation in the development of port infrastructure through partnerships in

the form of either Build-Own-Operate (BOO) or BOT transactions. A major

milestone was reached in 1999 when the Government took necessary steps to

30

Public-Private Partnerships in India, Ministry of Finance, Government of India, 2011

(http://www.pppinindia.com/database.php)


http://www.bankofireland.com/about-boi-group/press-room/press-releases/item/36/bank-of-ireland-finances-schools-ppp-projects/

http://www.bankofireland.com/about-boi-group/press-room/press-releases/item/36/bank-of-ireland-finances-schools-ppp-projects/

modernize and increase the facilities of the Colombo port through a PPP mechanism.

The expansion and modernization of the port completed in 2003 and since then the

port is meeting the increased demand of the regions with quality services. Today the

Colombo port is rated as one of the top 35 ports in the world. By realizing the

continuing role of PPPs, the Government established a separate PPP Unit within the

Board of Investment (BOI) in 2006 to facilitate PPP projects in the country. The

investment in PPP projects over the last fifteen years in Sri Lanka amounts to 15

projects with total investments of US $1651.9 million31. Some African nations are

also adopting PPP for infrastructure development. For example, in Africa, between

1990 and 2004, approximately 14% of public sector infrastructure was provided

through a PPP, the most common sectors being water, energy and transport (Deloitte

2006). It is observed that increasing number of local authorities is engaging in PPP

arrangements to produce much needed services. Instances of successful PPP efforts

can be cited from other parts of the world as well, from which lessons can be drawn

for Bangladesh.

Box 5: An example of Financing PPP Project in Indian Transportation Sector

Delhi Gurgaon Expressway

The Delhi Gurgaon Expressway is one of the successful PPP projects in India

which has converted the existing 4 lanes of the NH-8 into 8/6 lanes access

controlled expressway for connecting Delhi and Gurgaon. The purpose of the

expressway is to augmenting the capacity of the National Highways (NH)

connecting the four metros (Delhi-Jaipur-Ahmedabad-Mumbai) under the

prestigious Golden Quadrilateral project to ensure safe and efficient movement of

vehicles by avoiding traffic congestion. The expressway consists of 9 flyovers, 4

underpasses and 2 foot-over bridges and 3 toll-plazas. The project has been

implemented by forming an SVP called Delhi Gurgaon Super Connectivity Ltd. on

Build-Operate-Transfer (BOT) basis. The total cost of the project was Rs. 1,175

crore and concession period is 20 years. The Financial Structure of the project

includes debt of Rs. 383.3 crore and equity of Rs. 164.2 crore (including Rs. 61

crore of grants from National Highways Authority of India which acts as public

body here). Of the debt, Rs. 200 crore was provided by Housing and Urban

Development Corporation Limited (HUDCO), Rs. 100 crore was extended by four

commercial banks and the rest of the amount was raised by the SPV by issuing

convertible debentures. Equity was provided by the two sponsors at the ratio of

51% by Jaiprakash Industries and 49% by DS Constructions. Project cost overrun

was arranged by the sponsors. The fund providers will get revenues from the tolls

paid by the users of the expressway.

(Continued)

31

Source: Central Bank of Sri Lanka Annual Report-2005, (www.riunt.com)


Box 5: (Continued)

Source: Based on PPP Toolkit (Case studies) (2010)

(http://toolkit.pppinindia.com/water-sanitation/module3-rocs-dge1.php?links=dge1http://toolkit.pppinindia.Com/

water-sanitation/module3-rocs-intro.php?links=rocs1)

V. Initiatives of Banks in Financing PPP Projects in Bangladesh: Survey

Observations

Banks Response to PPP Policy

For encouraging PPPs to accelerate infrastructure development of the country, the

Government has already enacted „The Policy and Strategy for PPP‟ in 2010 for

operationalisation of PPP and also has introduced clear-cut procedural guidelines for

PPP projects for the sake of ensuring transparency and building confidence among

the private sector players. Successful application of PPP concept through this “Policy

and Strategy” document is likely to open up the doors for increased flow of

investment from both local and foreign investors. The policy and guideline for PPP

has already been circulated for mass awareness and concerns. As a vital organ of the

country‟s economic and financial system, banking industry is already familiar with

the policy. It is evident from the survey that all banks are well aware of the „Policy

and Strategy for PPP 2010‟ circulated by Government. In response to the question of

whether the „PPP policy is good enough to encourage PPP initiatives‟, it was

observed that majority of the bankers (78%) think that the policy, as whole, is

sufficient to enhance infrastructure development through PPP model if proper steps

are taken to materialize the objectives. But 39% of the respondents claimed that the

policy has some limitations. They think that the policy did not elaborate on how

banks would be involved in PPP projects. According to their opinion, the existence of

some gaps to address the financiers may fail to attract the banking sector to

participate in financing PPP projects.

Some of the respondents said that the project selection, feasibility and approval

process detailed in the PPP policy for each project and contract is extensive, requiring

inputs and approvals from various authorities and external parties. As per the policy,

the timeframe between project identification and negotiation and contract award

requires approximately 26-52 weeks for large projects, 22-42 weeks for medium

projects and 14-28 weeks for small projects, the timeline of which may be relaxed

under special circumstances. In order to be more attractive to private sector investors,

the process should be shortened. Critical dependencies on approvals in the process

may also be revisited to the extent possible to make the exercise more time-efficient.

The expressway is fully operational and is handling a significant traffic volume

of more than 180,000 PCUs (Passenger Car Units) per day (as compared to

estimated 13,000 to 15,000 PCUs per day), growing at 9% year-on-year. The

expressway has reduced the travel time from 65 minutes to 25 minutes between

Delhi and Gurgaon by increasing average travel speed from 25.65Km/Hr to

66 Km/Hr.


http://toolkit.pppinindia.com/water-sanitation/module3-rocs-dge1.php?links=dge1

http://toolkit.pppinindia.com/water-sanitation/module3-rocs-dge1.php?links=dge1

http://toolkit.pppinindia.com/%20water-sanitation/module3-rocs-intro.php?links=rocs1

To attract private sector investors to PPP projects, the Government will need to

provide an incentive package at least in the early stage of development of such

initiatives. This is because private investors generally are interested in investing in

only those projects from which they can earn good return in the short run, but many

infrastructure projects may not be commercially viable or may not offer the best

return in the short run. There are, in fact, projects where economic benefits are more

substantial than immediate financial gains. In order to attract the private sector to this

type of projects, Government will need to provide financial subsidies and some other

types of support, including guarantees against political risk and protection against

certain events of force majeure.

In the PPP Policy, there are provisions of some incentives such as fiscal

incentives (e.g., tax exemption, reduced tax) and special incentives for the private

sectors to participate in PPP projects. But, on an average, 50% of the bankers feel that

the incentives are not sufficient to attract the private sector initiating and financing

PPP projects, whereas 44% of them believe that the incentives are sufficient. Some

of the respondents pointed out the facts that fiscal and special incentives are not

clearly detailed in the PPP policy. Under fiscal incentives, further detailing the extent

and tenor of the proposed tax exemptions/reductions would provide more clarity to

private sector investors in making their investment decisions. In addition, as further

incentives to private sector investors, the policy may consider reductions or

exemptions in tax on interest/returns received on investment.

According to the survey findings, 67% of the respondents claimed that there is a

serious lack of coordination between Participating Financial Institutions (PFIs) and

implementing agencies/line ministries regarding providing relevant information about

PPP projects, bidding process, project feasibility study etc. In this regard, some of the

bankers believe that to minimize the potential gaps between PFIs and implementing

agencies, the potential private investor input and opinions may be considered during

the selection of consultants for the Detailed Feasibility Study (DFS) by the Office for

PPP to ensure transparency and avoid information asymmetry. The policy may also

consider a basic set of universal pre-qualifications to supplement the Request for

Qualification (RFQ) process and eliminate the need to evaluate investors who do not

meet the qualification criteria upfront.

It should be remembered that the major partner in the PPP framework is the

private sector. The public sector‟s participation in PPP should mainly be as a

facilitator. Hence, in order to make the PPP concept meaningful and effective, rules

and regulations governing the PPP mechanism should be framed in line with that

same partnership spirit so that there is an equitable sharing of profits/losses between

the two partners. To attract the private sectors to participate in PPP projects and

hence taking full advantages of the PPP initiatives for accelerating economic growth,

the public sector has to play the dominant role without being biased. Majority of the

respondents put their opinion by emphasizing that the Implementing Agencies, Line


Ministries and Office for PPP should ensure complete information transparency with

regard to the DFS, implementation/monitoring reports, utilization of funds and

ongoing developments during the implementation process. The relevant parties

should also minimize decision making time in case of unforeseen circumstances and

delays to prioritize project completion in as timely a manner as possible. Some of the

respondents believe that relaxation of single borrower exposure limit, treating PPP

investment as bank‟s CSR activities, role of public party as a facilitator and one stop

service provider (who would take care of all necessary government approvals,

information etc.) would stimulate the private financiers to engage in PPP projects.

PPP Financing by Banks

The banking and financial sectors have indeed come of age and are capable of

affording huge financial arrangement through syndicated term loans32. Now, banks

are planning to finance big infrastructure projects under PPP programs and already

some of them have financed a few projects completed under PPP framework (some

examples of PPP projects financed by banks are in Appendix, Table-3). The survey

results show that 60% (12 banks out of 20 banks selected for the study) of the banks

have exposure in PPP projects and some of the rest of the banks are yet to finance

PPP projects. The following table (table-2) shows the amount of loans extended to

PPP projects by banks in different sectors.

Table 2: Amount of Loans to PPP Projects by different Banks

Name of Banks Amount of Loans (Tk. in millions) Prime 3,900 DBBL 1343.3 NCC 2230 Dhaka 1075 BRAC 30 EBL 775 UCBL 6300 Mercantile 200 IFIC 110 Janata 28,901.31 IBBL 2230 Total 47,094.61

Source: Survey findings

32

Bangladesh Bank Governor Dr. Atiur Rahman commented on the proven capacity of Banking and Financial

sectors to arrange large amount of syndicated term loans at the closing ceremony of the deal of US$114.49m

syndicated loan for Biman's two B777-300ERs purchase. EBL has arranged the loan along with other 9 banks.

Report: The Daily Star, May 6, 2010.


From the survey it is observed that majority of the banks prefer to finance the

power sector. The reason behind their preferences in power sector is the certainty of

revenue/cash flow as Government purchases the output and they feel secured

financing here. According to the survey, 56% of the banks‟ investment goes to

power sector and land ports and water treatment plants captured 22% each of the

funds equally.

Refinancing Facility availed by Banks from IPFF in Financing PPP Projects

Some of the banks involved in PPP financing have availed of refinancing facility

from IPFF Cell of Bangladesh Bank for on-lending in PPP projects. IPFF is a project

co-financed by the World Bank and the Government of Bangladesh and mandated to

extend financing facilities to infrastructure projects undertaken through PPP. It

provides fund to PPP projects through Participating Financial Institutions (PFIs) as

refinancing scheme. For enjoying refinancing facilities from IPFF, a bank/FI needs to

be enlisted with IPFF as a PFI33. From the survey, it is found that 55% of the banks

are listed with IPFF as PFI, 35% are not listed. Surprisingly, 10% of the surveyed

banks are not interested to be enlisted with IPFF. The banks which are not interested

to be enlisted with IPFF are Islami Shariah based banks. Being Islami Shariah based

bank they, in principle, cannot take refinancing from any bank/FI/source at

conventional mode of interest bearing rate and condition. Among the 11 commercial

banks enlisted as PFI with IPFF, 4 banks have already availed of refinancing facility

to finance seven power projects being implemented under PPP model, four banks did

not enjoy the facility and one bank is yet to get the refinancing facility. Table-3

shows the amount of refinancing facility availed of by four banks for subsequently

lending in PPP power projects.

Table 3: Amount of Refinancing Facility Enjoyed by Different Banks to

Finance in PPP Projects

Name of Banks Amount of Refinancing (Tk. in millions)

DBBL 1074

NCC 1780

Dhaka 670

EBL 620

Total 4,144

Source: Survey findings

33

As on January 2012 a total of 18 banks and financial institutions are listed with IPFF as PFIs. Of them, 11 are

commercial banks (DBBB, Dhaka Bank, EBL, NCCBL, Prime Bank, BRAC Bank, Trust bank, MTBL, The City

Bank, AB Bank and UCBL) and remaining 7 are NBFIs (IDLC, ILFSL, Prime Finance & Investment, ULC, Uttara

Finance & Investment, IIDFC and GSP Finance Company).


IPFF provides loans to PFIs for supporting PPP projects according to its

Operational Directives (OD) and some terms and conditions. Specifically, IPFF cell

provides loans to a PFI upon request of private investor to the PFI for such loan. PFI,

upon receiving request from the private investor makes an application to IPFF cell for

funding. IPFF cell considers the application based on the operational directives of the

facility and disburses the fund to PFI, and PFI then extends the same to the private

investor. Thus, the financing by IPFF cell often involves a lengthy process and time

to reach PFI and then subsequently to the promoter. IPFF follows specific financial

model/norms while providing loan to PPP projects. According to IPFF financial

model, the private sector promoter needs at least 25% equity contribution to access

IPFF loan, whereas PFIs need to finance at least 15% of the project cost and the

remaining 60% may be financed by IPFF. The maximum term of the loan repayment

is 20 years with 3-10 years grace period. The interest rate for PFI is weighted average

yield of 1 year Treasury bill plus 30 basis points (if floating loan). Facility loan can

also be made in dollar or other currency with 30 basis points above the relevant

interbank rate.

Figure 4: IPFF Fund Flows to PPP Projects

Source: IPFF Project Cell, Bangladesh Bank

Although IPFF follows stringent terms and conditions in extending loan to PFIs

for on- lending to PPP projects and the PFIs need to undergo a rigorous operational

procedure, most of them feel comfortable to work with IPFF and see the refinancing

scheme as stimulatory for enhancing PPP initiatives in the country. It is found from

GoB & WB

IPFF Project (BB)

Private Investor

PPP Infrastructure Projects

Participating Financial

Institution (PFI)

IPFF Loan

Request for

No Objection

from WB

IPFF Loan

PFI‟s Loan & IPFF Loan

Facility Loan, other FIs Loans & Investors Equity

Request for

Fund

Request for

Fund


the survey that 72% of the PFIs feel comfortable at the operational procedures and

17% has claimed that operational procedure is lengthy and complex. In terms of

assuming credit risk of PPP projects under such financing modalities, IPFF/WB is

absolutely reluctant. Under the stipulated refinancing terms and conditions, PFIs

have to bear 100% credit risk arising from the default by the project sponsors. The

PFIs have to give repayment guarantee of the entire loan to IPFF if project sponsor

fails to meet obligations. Because of absolute credit risk, many banks are not

interested to be enlisted as a PFI with IPFF for getting refinancing for subsequent

lending in PPP projects.

“The commercial banks may invest in infrastructure sectors through syndication

loans along with the Government”34. PPP can be an ideal strategy to finance

infrastructure projects as an alternative to industrial lending. In an opinion survey

conducted by the author on the top management executives of different banks, it was

found that banks are willing to finance roads, railways, mega power plants, ports and

bridges. Even banks are interested to finance PPP projects without taking support

from any external sources. According to the survey results, it was found that 60% of

the banks are interested to extend loans to PPP projects without taking refinancing

facility from IPFF, but 33% of the banks are not willing to finance PPP projects with

their own fund. „Asset-Liability Mismatch‟ and „Single Borrower Exposure Limit‟

have been pointed out as the two major limitations for banks to provide loans in PPP

projects. As banking is the business of running short, i.e., banks do bulk of the

borrowing for short-term and lend for medium and long-term and thus make profit.

As a result, banks always face risk arising from asset-liability mismatch. And, as

financing tenors in PPP projects are usually medium to long-term, asset-liability

mismatch risk would be more severe in such cases. Moreover, banks have single

borrower exposure limits which may be violated in case of financing PPP projects.

Although single borrower exposure limit may a potential problem for banks in

financing PPP projects, they can solve this problem by way of lending in syndicated

mechanism. According to survey observations, only 11% of the banks assume that

„single borrower exposure limit‟ may be a problem in financing PPP projects,

whereas 78% of the banks feel that „asset-liability mismatch‟ would be a major threat

in financing PPP projects. As banks are eager to extend financing in infrastructure

projects through PPP modalities, they can raise medium to long-term funds from

different sources. According to the survey observations, it was found that banks are

interested to borrow from NBFIs (such as IDCOL), insurance companies, pension

funds that usually have the capacity to lend for long-term. They have also identified

some other sources of long-term fund. For example, they want to issue different types

of financial instruments such as bonds/debentures to raise funds for PPP projects if

regulatory authorities allow them.

34

Bangladesh Bank Governor Dr. Atiur Rahman emphasized on banks investment in infrastructure projects in

partnership with government while speaking at a discussion meeting. Report: The Financial Express: Vol. 18,

No. 221 Dhaka, April 30, 2010.


Preparedness of Banks to Finance PPP Projects

PPP financing involves complex contractual arrangements as well as risk

management strategies and techniques. This requires special knowledge in legal and

contractual aspects, expertise in project feasibility study and financial modeling, risk

mitigation techniques etc. For handling PPP projects, banks need expert and

dedicated manpower along with appropriate organizational set up. At this moment,

majority of the banks have required but not sufficient manpower to handle PPP

projects. The survey shows that 67% of the banks have preparation with required

organizational set up to deal with PPP project financing and remaining 33% of the

banks are not prepared to undertake PPP projects. Although 67% of the sample banks

has claimed that they are capable to handle PPP projects with their existing

organizational set up and manpower, 95% of the banks do not have separate unit/cell

for handling PPP projects/infrastructure projects.35 As previously mentioned, 11

banks have investment in PPP projects (Table-2) but they did not follow/formulate

any policy for PPP financing. They have disbursed loan to PPP projects according to

their existing credit policy. According to survey information, no bank has formulated

any PPP financing policy within the bank yet. But 39% of the banks have started

policy level discussion/meeting internally to formulate separate policy/guidelines for

financing PPP projects. This indicates that banks are planning to participate in PPP

projects in future.

As PPP is relatively new in Bangladesh and it calls for special organizational set

up and expert manpower to accomplish success, bank executives require training on

PPP policy issues, PPP theme, project evaluation process and feasibility study,

financial structuring, legal aspects, project documentation, risk management

strategies etc. According to survey observations, 40% of the banks have already

arranged different training programs on PPP financings for their employees.

Problems faced by Banks in Financing PPP Projects

PPP Initiative will be successful only if there is a high level political support

behind it. Large infrastructure projects need a relatively longer period for their

implementation. Governments may, however, change in the regular election cycle

during the implementation phase of the project, and with that, their attitude to PPP

investments may also change, as has often been the culture in many developing

countries. Hence, in order to ensure policy continuity over time irrespective of any

change in the political power regime, the Government should make strong efforts to

build consensus among, and obtain support of, all political parties and representative

civil society groups about the needs and imperatives for large PPP projects for the

country‟s economic development. A broad national consensus on the concept of PPP

will also boost the trust and confidence of investors. It will also generate interest

among overseas entrepreneurs to invest in the PPP projects and enhance opportunities

for getting more foreign direct investment in the country.

35

As on November 30, 2011, only one commercial bank (NCCBL) has separate unit/cell for handling PPP and

infrastructure projects financing.


Banks that have already financed PPP projects have pointed out some problems.

The major hindrances as identified by banks are lack of proper policy direction to

banks, how banks will participate in PPP projects, specification of incentives and

their extents, lack of political stability, lack of their expertise to ascertain cash flows

from the projects etc. According to survey information, it is found that 56% of the

banks feel less confident in financing PPP projects due to their fear of political

stability in the country, 39% of the respondents claimed that the „PPP Policy &

Strategy 2010‟ has not clearly mentioned how the private sector will arrange the

required financing for the PPP projects and what will be the financing role of banks,

44% mentioned that they have lack of expertise to handle PPP projects and 27% feel

that they faced some sort of uncertainty of future cash flows generation. Of the

respondents, 22% pointed out some additional problems viz., fund constraints, delay

in execution of PPP policy & guidelines, lack of cooperation of the implementing

agencies/line ministries, etc. (figure-5)

Figure 5: Problems faced by Banks in Financing PPP Projects

Opinions and Suggestions by Banks for Enhancing PPP initiatives in Bangladesh

PPP is operationalized through a bilateral relationship between a public body and

a private sector company and successful project implementation entails a win-win

situation for all. So, for fruitfully implementing PPP initiatives for infrastructure

development and hence accelerating desired economic and GDP growth, both public

and private sectors have to work side by side. At the initial stage of adopting new

financial avenues i.e., PPP for accelerating infrastructure development of the country,

it is expected that the public sector has to play a proactive role. From the survey

conducted on the banks, it is observed that they also demand proactive role from the

public sector in PPP initiatives. The survey results show that 90% of the banks expect

better coordination between public and private parties which is currently lacking.

22%

56%

27%

44%

39%

Other problems

Problem faced due to lack of political stability

Problem faced due to Uncertainty about CFsprojections

Problem faced due to Lack of Expertise tohandle PPP

Problem faced due to lack of legal &regulatory support

Problems faced by Banks in Financing PPP Projects

Lack of Legal & Regulatory Support

Lack of Expertise to Handle PPP

Uncertainty about CFs Projections

Lack of Political Stability

Other Problems


Among the respondents, 85% emphasizes on the execution of institutional framework

for PPP (main focus on starting operations of the „Office for PPP‟), 72% expects that

the concession granting authority will ensure transparency in project awarding and

implementation, 65% of the respondents desire proactive role from the public body

i.e., public party would explore new projects to be implemented through PPP and

invite the private parties to implement the projects, 57% focuses on creating

awareness among the stakeholders about PPP. Of the respondents, 40% wants the

refinance granting authority (here IPFF/WB) to share part of the credit risk likely to

arise from nonpayment of loan by the project sponsors which is absent in current

refinancing terms and conditions. And, 35% of the bankers prefer equity

participations of the Government in PPP projects. Figure-6 summarizes the opinions

provided by banks in this regard.

Figure 6: Opinions and Suggestions by Banks to enhance PPP Initiatives

VI. Observations and Recommendations

The PPP is a major policy initiative by the Government and, if properly

implemented, it would help mobilize required resources for financing large and costly

but much demanded infrastructure projects. The success of the initiative would,

however, depend on a number of factors, as the experiences of many developed and

developing economies indicate. The following issues and recommendations can be

placed here for meeting the challenges of the PPP initiatives and adopting the new

financing technique for accelerating infrastructure development of Bangladesh.

One, it is necessary to have an appropriate legal and institutional framework

to govern the PPP mechanism. The legal framework would lay down the obligations

of the private sector partners, allow provisions for cost recovery and address

35%

65%

90%

85%

57%

72%

40%

Equity Participation by Govt.

Proactive role of Govt. to implement PPP…

Better Coordination between Public &…

Execution of Institutional Framework for…

Building Awareness among Stakeholders…

Ensure Transparency in Project Awarding…

Credit Risk Sharing by IPFF/WB and PFIs in…

Opinion to Enhance Banks Initiatives in PPP Financing


compensation and redress mechanisms. Global experience suggests that the most

successful PPP projects are those that are managed under a legal/ regulatory

framework, not under executive guidelines. The GoB has already enacted a complete

PPP Policy and Strategy for governing the PPP mechanism. But the policy did not

elaborate on how banks/FIs would be involved in PPP projects, what would be their

appropriate role in PPPs etc. The policy may be revisited or a separate manual under

„The Policy & Strategy for PPP 2010‟ may be issued by mentioning the specific role

to be played by the financiers in PPP projects. In addition, various guidelines

directing VGF and TA components of PPP projects, PPP screening manual etc. may

be published as soon as possible for better understanding of the stakeholders.

Moreover, as the regulator of commercial banks, Bangladesh Bank may formulate a

uniform guideline for the scheduled banks regarding the participation modalities of

the banks in PPP projects.

Two, the policy may consider standardizing a subset of Key Performance

Indicators (KPI) to effectively monitor project implementation and contractual

obligations, as well as standardize processes and procedures in case of breaches, as

opposed to case-by-case situations based on each signed contract. In addition, the

policy may consider adding the requirement for the technical expertise of a third

party to contribute to the implementation phase of the Periodic Progress Report

prepared by the Office for PPP and/or the reports prepared by the respective line

ministries. Project and legal documentations should also be standardized so that

vetting from government agency can be avoided. This may ensure transparency and

accountability of the public party as well as encourage the private parties towards the

PPP deals.

Three, in order to strengthen PPP efforts, implement the PPP budget and

coordinate the project‟s stakeholders, a dedicated and fully operational PPP Cell is

necessary. The PPP cell would work as a one stop service provider (i.e., it would take

care of all necessary government approvals, information, coordination among

stakeholders etc.). Under the current PPP Policy and Strategy, an Office for PPP has

been established as a separate entity under the Prime Minister‟s Office for the

promotion and efficient handling of PPP projects. The Office for PPP has been formed

as an autonomous unit having significant independence on administrative and financial

matters in discharging its mandated functions. The PPP office is supposed to efficiently

carry out the diverse tasks of choosing between alternative modes of project

implementation, completion of projects on an expeditious basis, project supervision,

and providing inducements to potential private sector entrepreneurs to participate in

PPP projects. The office would also carry out the tasks of project identification,

conducting feasibility studies, inviting bids, expediting the project approval process,

issuing work orders, evaluating financial and economic viability of PPP projects,

maintaining coordination among various committees etc. The PPP Office will therefore

need to be staffed with technically skilled and experienced personnel with specific


knowledge on the technicality of these implementation methods, and the design,

financing and management of the projects. Unfortunately, still now the PPP Office is

not fully equipped with necessary resources and manpower and has not started its

function yet. For accelerating the PPP initiatives from the Government‟s side, the PPP

Office should be fully operationalized as soon as possible.

Four, it has been observed from the field survey that there exists a coordination

gap among private sponsors, participatory financing institutions (PFI) and

implementing agencies/line ministries which are creating some sort of barrier for

promoting PPP financing in Bangladesh. In this regard, implementing agency/line

ministry should be proactive with respect to providing adequate information to all the

concerned parties about the status of the projects. If required, inputs and opinions of

potential private investor may be considered during the selection of consultants for

the Detailed Feasibility Study (DFS) by the Office for PPP for ensuring transparency

and avoid information asymmetry. The policy may also consider a basic set of

universal pre-qualifications to supplement the RFQ process and eliminate the need to

evaluate investors who do not meet the qualification criteria upfront. In fact,

elimination of gap regarding project screening, approval, implementation,

management etc. may encourage the private parties including banks towards PPP

projects and ensure transparency as well.

Five, as PPP projects are large in size and the implementation of those is very

much challenging, the selection of private sector partners must be done strictly on the

basis of their financial and technical capacity. Project awarding should be transparent

and unbiased. In this regard, instead of direct negotiation, the choice of private sector

partners shall need to be made through a transparent and competitive bidding process

following international standard. This would ensure creditworthiness of PPP projects.

The selection criteria of private sponsors done by line ministry/implementing agency

should also meet the criteria desired by the financiers (lenders).

Six, one of the critical factors of the success of PPP initiatives will be the

capacity of the private sector partners to raise resources for the project. As stated

earlier, the ratio of private and public sector investments in PPP projects is assumed

to be 70:30, i.e., 70% of the project‟s funding will be arranged by private parties and

remaining 30% will be arranged by the public party. However, the capacity of the

domestic private sector to raise long-term finance for large infrastructure projects is

rather limited. It may not be possible to attract large foreign investments at this

moment due to unfavourable investment environment in the country and, moreover,

huge foreign investment as well as their involvement in PPP projects may create

pressure on balance of payments as foreign currency would be repatriated in future.

Government may search for financial and technical participation of multilateral and

regional developments banks (i.e., World Bank, and ADB) for PPP projects, but the

terms and conditions of getting funds from these organizations are not satisfactory at


times. Moreover, there are lots of uncertainties of getting funds from them as we

experienced the phenomenon from some recent events (like funding uncertainty for

proposed Padma Bridge). In this context, it may be expected that domestic financial

institutions, especially commercial banks, can mobilise a major portion of funds to

PPP projects. But commercial banks that usually deal with short-term credits are

unlikely to be willing to provide infrastructure loans for longer terms of 10-15 years

or more. Because of asset-liability mismatch, they will face liquidity risk. Single-

borrower exposure limit will also be a problem for the banks. However, if banks are

allowed to issue bonds for raising funds for PPP projects and they get some sort of

guarantee either from Government or Bangladesh Bank, they would be able to

mobilize funds for PPP projects. Actually, banks may play a role primarily as an

intermediary for channeling funds to the projects and, if possible, they would lend to

these projects from their own funds.

Seven, to attract private sector investors to the PPP projects, the Government will

need to offer a lucrative incentive package at least at the initial stage of the

development of such initiatives. The reason is that private investors generally are

interested to invest in only those projects from which they can earn a good return, but

many infrastructure projects may not be commercially viable or may not give the best

return in the short run. In fact, there are projects where economic benefits are more

substantial than direct financial gains. So, in order to attract the private sector to this

type of projects, Government will need to provide financial subsidies and some other

types of support, including guarantees against political risk as well as protection

against certain events of „force majeure or act of God‟. Although, in the PPP Policy

there are provisions of some incentives such as fiscal incentives (e.g., tax exemption,

reduced tax) and special incentives for the private sector to participate in PPP projects

but the incentives are not clearly detailed in the PPP policy. Further detailing of the

extent and tenor of the proposed tax exemptions/reductions would provide more

clarity to private sector investors in making their investment decisions.

Eight, for making PPP initiative successful, a very high level of political support

and commitment is required. Large infrastructure projects usually need a relatively

longer period for their implementation. During the implementation phase of the PPP

projects, change of political regime/power should not affect the projects anyway.

Government should make strong efforts to build consensus among, and obtain

support of all political parties and representative of civil society groups to ensure the

policy continuity over the life of the project. Only then may PPP initiatives ensure

desired infrastructure development of the country. In this regard, a broad national

consensus on the concept and benefit of PPP will also boost the confidence and trust

of investors. It will also generate interest among entrepreneurs both from home and

overseas to invest in the PPP projects and hence open up the opportunities for getting

more foreign direct investment in the country.


Nine, in the current refinancing facility of IPFF project of Bangladesh Bank for

PPP projects, PFIs bear absolute credit risk that may arise by the default of the

project sponsor. That is, if the project sponsor fails to pay the installment to PFIs,

they (PFIs) are bound to repay the IPFF loan with full guarantee. Although, IPFF as

an agent of WB and GoB provide loan to PPP projects through PFIs, they do not

assume any credit risk under current terms and conditions. This may discourage the

PFIs to avail of the refinancing facility for on-lending to the PPP projects. There

should be a mechanism for sharing credit and other operational risks of the project by

all parties/co-investors. In this regard, IPFF should share of the implementation risk

of the project alongwith credit/liquidity risk.

Ten, IPFF follows specific financial structure/norm and imposes stringent terms and

conditions while providing loan to PPP projects through PFIs. The financing by IPFF cell

often involves a lengthy process as it disburses funds to PPP projects after getting final

approval and clearance from World Bank which is the main sponsor of this fund.

Whether a project will get IPFF fund or not absolutely depends on the decision of the

World Bank. Therefore, there is a chance that all efforts given by private parties

including PFIs to prepare and implement a project under PPP may go in vain if the

project is finally rejected by the World Bank. It will not only waste time, energy and

money but also will discourage the prospective private sponsors and PFIs to initiate such

projects. There are a few instances of PPP projects in the country which were rejected by

WB at the last stage of approval of fund from IPFF. So, the operational procedure of

IPFF should be simplified and WB approval should be made more flexible.

Eleven, as PPP is a relatively new concept in Bangladesh, awareness building

programs should be taken at government as well as private levels. PPP related

training, workshop, seminar may be arranged for capacity building regarding PPP

concepts, techniques, legal issue etc. for line ministries/implementing agencies,

private sponsors and other stakeholders. In this regard, there may be arrangement for

knowledge and expertise transfer from developed economies.

Twelve, every bank should set up a separate and dedicated PPP unit for dealing

with PPP projects. Banks should formulate separate PPP guideline. Moreover,

adequate manpower with sufficient expertise would be required to handle such

projects. For increasing expertise and building up capacity, bank executives may

require training on PPP policy and legal issues, PPP theme, feasibility study and

project evaluation process, financial modeling, legal aspects, project documentation,

risk management techniques etc.

Thirteen, it should be remembered that the major partner in the PPP process is

the private sector. The public sector‟s participation in it should mainly be as a

facilitator. Hence, in order to make the PPP concept meaningful and effective, rules

and regulations governing the PPP mechanism should be framed and executed in


line with a partnership spirit so that there is equitable sharing of risk and reward

between public and private parties. Inevitably, Government should take such

initiatives to build confidence of the private sector including financiers for

sustainability of the initiative.

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Appendix

Table 1: List of PPP Projects Financed by IDCOL and Other Financial

Institutions

Sector Sl. Project Name PPP Model Investment (Tk. mil)

Power and Energy

1 Meghnaghat 45 MW Power Plant BOO 21,000.0 2 Summit Power 33 MW Power Plant BOO 1250.0 3 Summit Uttaranchal Power Company

44 MW Power Plant BOO

1970.0

4 Summit Purbanchal Power Company 66

MW Power Plant BOO

3000.0

5 VERL 34 MW Power Plant at Bhola BOO 1200.0 6 BEDL 51 MW Power Plant at Sylhet BOO 1830.0 7 34 MW Malancha Holdings Power

Plant at Dhaka EPZ BOO

1650.0

8 Shah Cement 11.6 MW Power Plants Captive Power Plant

590.0

9 Thermax Trade Limited CNG Refueling

Station Under License

from

Petrobangla

55.0

Renewable

Energy

10 IDCOL Solar Energy Program

Implemented by

NGO and

Private Sector

20060.0

11 National Domestic Biogas and Manure

Program

2150.0

12 250KW Bimas gasification Based

Power Plant Under a

License from BTRC

25.0

13 50 KW Biogas Based Power Plant Under a

License from

Government

5.0

Port

and Comm

unicati

on

14 Panama Hilli Land Port BOT

180.0 15 Panama Sonamasjid Land Port 200.0

(Continued)


Appendix Table 1: (Continued)

Teleco

mmunication

Techno

logy

16 Grameen Phone Network Expansion

Project

Under a

License from BTRC

45340.0

17 Pacific Telecom Network Expansion

Project 21560.0

18 Ranks Tel PSTN Project 2300.0 19 DNS Satcomm Satellite Earth Station

Project 160.0

20 BanglaTrac International Communication Gateway Project

670.0

21 M & H Telecom Interconnection

Exchange Project 660.0

ICT 22 Shoanchalok ICT Program

Implemented

by some Banks

and Financial

Institutions

500.0

Source: Invigorating Investment Initiative through Public Private Partnership, A Position Paper Published in 2009

by Finance Division, Ministry of Finance. Government of the Peoples' Republic of Bangladesh

Table 2: PPP Projects in Pipeline (Till April, 2011)

PPP Projects under IPPs

Sl. Name of

Projects

Project

Term

(yrs)

Executing

Agency Date of

PQ Notice

PQ

Statement

Submission

Date

Current Status

1 Bibiyana

300-450

MW (Phase-I)

22 Power Cell 3-May-10 30-Sep-10 In the month of

October 2010

Summit Power Limited was

awarded for the

project.

2 Meghnag

hat 300-450 MW

IPP Cell,

BPDB 21-Jan-10 15-Apr-10 Summit Power

Limited of Bangladesh has been

awarded for the

project.

(Continued)


Appendix Table 2: (Continued) 3 Bibiyana

300-450

MW

(Phase-II)

22 IPP Cell,

BPDB 1-Mar-10 2-May-10 Summit Power

Limited of

Bangladesh has been

awarded for the project.

4 Bhola

150-225

MW

22 IPP Cell,

BPDB 1-Mar-10 2-May-10 Ranhill Berhad of

Malaysia has been

awarded for the

project.

5 Keraniga

nganj 150-225

MW

22 IPP Cell,

BPDB 5-Apr-10 6-Jun-10 Pre-bid meeting held

on 19 September 2010 and BPDB

issued RFP to the

PQ bidders.(deadline

not found) 6 Madanga

nj 150-225 MW

22 IPP Cell,

BPDB 5-Apr-10 6-Jun-10 Pre-bid meeting held

on 19 September 2010 and BPDB

issued RFP to the

PQ bidders.(deadline

not found) 7 Sayedpur,

Nilphamary

100±10%

MW

15 IPP Cell,

BPDB 1-Mar-10 2-May-10 BPDB received PQ

Statements from nine (9) bidders.

Selection of Pre-

qualified bidders is under process.

8 Katakhali

, Rajshahi

50±10%

15 IPP Cell,

BPDB 1-Mar-10 2-May-10 BPDB received PQ

Statements from

eleven (11) bidders. Selection of Pre-

qualified bidders is

under process. 9 Chapaina

babganj

100±10%

MW

15 IPP Cell, BPDB

28-Mar-10 30-May-10 PQ evaluation under process

(Continued)


Appendix Table 2: (Continued) 10 Khulna

100±10%

MW

15 IPP Cell,

BPDB 28-Mar-10 30-May-10 PQ evaluation under

process

11 Jangalia, Comilla

50±10%

15 IPP Cell, BPDB

28-Mar-10 30-May-10 PQ evaluation under process

12 Jamalpur 100±10%

MW

15 IPP Cell, BPDB

5-Apr-10 6-Jun-10 PQ evaluation under process

13 Chittagong

100-200 MW Wind

Power Plant

25 BPDB 12-Apr-10 21-Jun-10 PQ evaluation under

process

14 Sharishabari

, Jamalpur 3 MW Solar

15 BPDB 7-Apr-10 23-May-10 PQ evaluation under

process

15 Sirajganj

300-450 MW

22 Power Cell 7-Jul-10 30-Sep-10 Floated PQ notice

on 7 July 2010

PPP projects under BPDB

16 Dhaka 100 + 10% MW,

BOO basis.

15 BPDB 7-Oct-10 15-Nov-10 Under Tendering Process

17 Dhaka 50 + 10% MW,

BOO basis.

15 BPDB 7-Oct-10 15-Nov-10 Do

18 Chittagong

100 + 10% MW, BOO

basis.


19 Chittagong

50 + 10% MW, BOO

basis.


20 Rajshahi 100 + 10%

MW, BOO

basis.


21 Rajshahi 50 + 10% MW,

BOO basis.


(Continued)


Appendix Table 2: (Continued) 22 Khulna 100

+ 10% MW,

BOO basis.


23 Barisal 50 + 10% MW,

BOO basis.


Recent PPP under BPDB 24 Khulna 150-

300 MW

Coal Fired

Power Plant

25 BPDB 3-Nov-10 31-Jan-11 Under Tendering Process

25 Chittagong

150-300

MW Coal

Fired Power Plant

25 BPDB 3-Nov-10 31-Jan-11 Do

26 Maowa,

Munshiganj 300-650

MW Coal

Fired Power

Plant


27 Chittagong

300-650

MW Coal Fired Power

Plant


28 Kaliakoir

Hitech Park, Gazipur

100-150

MW Plant


Cross Sector PPP Projects

29 Ashulia Flyover on

PPP

Bangladesh Bridge

Authority

Feasibility is under process

30 Second

round Land

Ports on PPP

Bangladesh

Land Port

Authority

Under Tendering

Process

(Continued)


Appendix Table 2: (Continued) 31 New

Mooring

Container

Terminal

Chittagong

Port

Authority

PQ completed

32 Metro Rail

under PPP Project is Identified

33 Appointment of

Investor-

cum-

operator for Chittagong

Dry dock

Ltd

Chittagong Dry Dock

Ltd

Engagement of Transaction Advisor

is under process

34 New

Airport

through PPP

Ministry of

Civil

Aviation

Pre-Feasibility is

under Process

35 Sattelite

Cities

through PPP

RAJUK

Project is not

defined yet

36 Second

Padma

Bridge

through PPP

Bangladesh

Bridge

Authority

Project is not

defined yet

Source: IPFF Project Cell of Bangladesh Bank

Table 3: Successful PPP Projects financed under IPFF Project

Sl

No. Name of Projects Nature &

Capacity of the

Projects

Project

Duration Costs

(Tk. Mil) Financing

Structure Name of

Financiers

1 Doreen Power

Generations and

Systems ltd.at Feni

22 MW Gas

fired power

plant

15 years 1150.00 Debt-70% &

Equity-30% NCCBL &

IPFF

2

Doreen Power Generations and

Systems ltd.

Tangail

22 MW Gas fired power

plant

15 years 1150.00 Debt-70% & Equity-30%

NCCBL & IPFF

3

Doreen Power

Generations and

Systems ltd. At

Narsingdi

22MW Gas

fired power

plant

15 years 1130.00 Debt-70% &

Equity-30% NCCBL &

IPFF

(Continued)



4

Doreen Power

House and

Technologies Ltd.

at Fei

11 MW Gas

fired power

plant

15 years 564.60 Debt-65.40%

&

Equity-

34.60%

Note*

5 Regent Power Ltd.

at Barabkunda,

Chittahong

22 MW Gas

fired power

plant

15 years 1108.17 Debt-57% &

Equity-43% Note**

6

United Power

Generation &

Distribution Ltd.

(Power Plant at CEPZ)

44 MW Gas

fired power

plant

30 years 1919.00 Debt-70% &

Equity-30% Note***

7

United Power

Generation & Distribution Ltd.

(Power Plant at

DEPZ)

35 MW Gas

fired power plant

30 years 1649.00 Debt-70% &

Equity-30% Note****

Total 178 MW


* Dhaka Bank Limited, International Leasing, IIDFC, SABINCO and IFIC Bank

** Eastern Bank Limited, Uttara Finance and Investment Ltd, IDLC Finance ltd., Bangladesh Commerce Bank Ltd,

Trust Bank Ltd. and State Bank of India

*** AB Bank Ltd., The City Bank Ltd., Prime Bank Ltd., IDLC Finance Ltd. and Shahjalal Isami Bank Ltd.

**** Mercantile Bank Limited, Mutual Trust Bank Limited, Standard Chartered Bank, Standard Bank Ltd., Uttara

Bank Ltd., IFIC Bank Ltd., Infrastructure Development Co. Ltd. and Saudi-Bangladesh Industrial and

Agricultural Investment Co. Ltd

Table 4: PPP Projects in Pipeline under IPFF Financing

(March 2011-December 2012)

Sl. Project Name Location Estimated

IPFF

Investment

Status

1 Summit Bibiyana phase

I & II Power Plants

( Gas fired plants

having generation

capacity of 341MW

each)

Bibiyana,

Sylhet

US$115.00

mil

The Power Cell has issued the

Letter of Intent to Summit.

2 D-Water C ETP

Ecosystem (Bd.) Ltd.

Dhaka

EPZ

BDT 100 .00

BEPZA awarded a contract to

D-Water C ETP Ecosystem (BD)

Limited to install a central ETP

plant in Dhaka EPZ. The loan

proposal is now under

consideration of the World Bank

for approval/NOC

(Continued)



3 D-Water Tech Ltd. (a

water treatment plant

in CEPZ with capacity

of 30 lac gallon per

day)

Chittagong

EPZ

BDT 100.00

BEPZA awarded a contract to a

local firm D Water Tech Ltd to

install a central water treatment

plant in Chittagong EPZ. The loan

application for fund from IPFF is

under consideration of the World

Bank for approval/NOC

4 Desh Cambridge

Kumargaon Power

Company Limited

(DCKPL) for 10MW

Natural Gas Generated

Power Plant

Sylhet

BDT 280.00

DCKPL, a BOO basis rental power

plant, went in to commercial

operation on 18th March 2009,

applied to IPFF on 2009, the loan

sanctioning is under process.

5 River Container

Terminal (RCT) &

Container and Freight

Station (CFS)

Rupganj

US$19.14

CEMCOR, a proposed inland

container river terminal, is a

subsidiary of Summit Alliance

Port Limited (SAPL) and will

receive LOI from BIWTA soon.

6 Dhaka Elevated

Expressway

Dhaka US$100.00

Italian- Thai Development Public

Company Ltd. (ITD) has won the

bid and concession agreement has

been signed with the GoB on 19th

January, 2011 to implement a four-

lane dual Elevated Expressway of

25.50 km

7 New Mooring

Container Terminal

Chittagong

Port

-

Expected Total IPPF

funding

- BDT 2100

crore



List of Abbreviation

ADB Asian Development Bank

BBO Buy-Build-Operate

BIFF Bangladesh Infrastructure Finance Fund

BLPA Bangladesh Land Port Authority

BOI Board of Investment

BOLT Build-Own-Lease and Transfer

BOO Built-Own-Operate

BOOST Build-Own-Operate-Share -Transfer

BOOT Build-Own-Operate-Transfer

BOT Build- Operate-Transfer

BTO Build-Transfer-Operate

DBO Design-Build-Operate

DFS Detailed Feasibility Study

FI Financial Institutions

GoB Government of Bangladesh

GDP Gross Domestic Products

IDA International Development Agency

IDCOL Infrastructure Development Company Limited

IFC International Finance Corporation

IIFC Infrastructure Investment Facilitation Centre

IPFF Investment Promotion and Financing Facility

LBO Lease-Build-Operate

NBFI Non-Bank Financial Institutions

NOC No Objection Certificate

OD Operational Directives

PFI Participatory Financial Institutions

PICOM Private Infrastructure Committee

PSIG Private Sector Infrastructure Guidelines

PPP Public Private Partnership

REP Request for Proposal

RFQ Request for Qualification

ROT Rehabilitate Operate Transfer

SPV Special Purpose Vehicle

TA Technical Assistance

VGF Viability Gap Funding

WA Wraparound Addition


Paper Five

An Assessment of the Operations of Trade Payment

Methods in Bangladesh

Mahmood-ur-Rahman

Lecturer, BIBM

Antara Zareen Lecturer, BIBM

An Assessment of the Operations of Trade Payment

Methods in Bangladesh

I. Introduction

The spree of economic integration process has inflated the trade volumes

dramatically during the last few decades. And here an enhanced volume of

international trade consequently demonstrates the extent of globalization with

increased spatial interdependencies amongst the participants of the global economy

and their level of integration. The volume of exchanged goods and services between

the nations is taking a growing share in generating wealth, mainly by offering

economic growth opportunities in new regions and by reducing the costs of

procurement for a wide array of tradebales. The initiatives under the rubric of

multilateralism by the WTO, the bilateral as well the regional agreements popularly

known as the PTAs, gargantuan efforts undertaken by the ICC to simplify the trade

procedures and practices, tremendous emphasis on external sector liberalization

proposed by the think tanks and business community compelling the policy makers

across the globe to go for opening up-all these worked as the pertinent catalysts for

huge surge in trade volumes. Now, the international trade continues to grow every

year as nations expand their global trade and new nations are joining in.

In these ever-increasing trade transactions, trade payment is particularly very

important. In international transactions, securing payment might be affected by a

number of factors such as the relative strength of the counterparties, credibility of the

traders as well as the domestic regulatory requirements. Most important among these

are the potential risks and costs which the exporters and the importers are willing to

share between them. To succeed in today‟s global marketplace, exporters must offer

their customers attractive sales terms supported by the appropriate payment method

to win over the foreign competitors. The risks and costs of today‟s global payment

system, associated in international trade transactions have been exerting pressure on

the trade volumes. It calls for an assessment of the various aspects of international

trade payment methods based upon which the trade payment related financial services

have developed and expanded by banks to support the expansion of world trade.

Traders commonly believe that the major banks are the primary providers of these

services.

There are four primary methods of payment for international transactions-Cash in

Advance or Prepayment; Open Account or sale on credit; Documentary Collection;

and Documentary Credit. Cash in Advance or prepayments, under which payment is

expected by the exporter, in full or part, prior to goods, are being shipped. It is the

most secured method of payment for exporters and consequently the least attractive


http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/interdependence.html

for buyers. On the other extreme, Open Account is the least secured method of

payment for the exporters, but the most attractive to buyers. Documentary Collection

is more secured for an exporter than Open Account trading, as the exporter‟s

documents are sent from the exporter‟s bank to the buyer's bank, and the process is

governed by a set of rules of ICC called "Uniform Rules for Collections" publication

number 522 (URC522). However, of all these modes, Documentary Credit distributes

risks in the most balanced way in which both exporters and importers are almost

equally protected. Moreover, Documentary Credit process is governed by a very

popular and widely recognized guiding framework of ICC known as „Uniform

Customs and Practice for Documentary Credit‟ publication number 600 (UCPDC

600, the current version).

The trade payment is well affected by the considerable changes in international

trade transactions and practices due to ongoing globalization process. The new and

emerging electronic payment forms, tendencies of switching to International

Factoring and Forfeiting as a means of moving to Open Account trading, threats

posed up by the digitization of trade documents for the Documentary Credit which

requires presentation of paper documents - these are quite a few challenges for the

existing trade payment modalities which we could identify.

In the context of Bangladesh, the information on the practices of international

payment methods is not readily available due to absence of research activities in the

area. With that end in view, BIBM conducted a comprehensive study few years back

to gauge out the nitty-gritty of trade payment modalities in Bangladesh which has

earned a lot of appreciation from the trade service experts covering the practitioners,

academicians and the policy makers. This proposed study is basically an upgradation

of that earlier conducted study again simply to evaluate the existing scenario as well

as to identify interim dynamism along with the trends regarding the trade payment

modalities.

The recent cost effective competition is shifting the demand for Documentary

Credit to Open Account trading. Because importers in many developed as well as

developing countries are now demanding more favorable payment terms. Greater

involvement of costs in Documentary Credit operation (as compared to the other

modes such as Open Account or Cash in Advance) is believed to be one of the main

reasons of switching to other modes of payment. However, declining reliance on

Documentary Credit over the period may raise payment related risks and may result

in accentuated payment related difficulties and higher number of cases of non-

payment. One crucial question in this regard might be–how this cost-risk trade-off

could be handled?

Resembling the findings of the previous study we have detected that,

Documentary Credit had been widely used as a method of trade payment in the

country for both exports and imports, which is followed up Documentary Collection

and the other two modalities are the least used ones. It is a vital question whether the


involved traders as well as the bankers have got the adequate knowledge (regarding

both domestic and international guidelines) required to deal with this most popular

payment modality i.e. Documentary Credit as well as if the traders are well aware of

the costs and risks associated in other trade payment methods.

This study is basically an attempt of assessing international trade payment

methods practiced in the country. To find out the answers of research questions, the

study identified the following objects-one, to identify the existing practices of trade

payment methods in Bangladesh for both export and import and examine the trends

regarding the use of payment methods; two, To analyze the regulatory framework

for trade payment methods and deviations experienced in practice; three, To

identify the concerning issues related with trade payment practices to be discussed

in the workshop.

The research workshop paper is based on both primary and secondary data to

support the existing objectives. Secondary data is collected from different

publications. The sources are primarily related to international trade payment

practices, ICC documents and domestic rules, regulations and provisions connected

with trade payment methods of the country. Mainly, the secondary data sources are

related to ICC publications, different articles, domestic laws and regulations related

to the trade transactions.

Regarding primary data collection, a questionnaire survey has been conducted.

Both open ended and closed ended questions were incorporated in the questionnaire

for the survey. The survey area (AD branches of commercial banks) has been

determined purposively based on three considerations: one, trade payment practices

of banks of the country should be brought under the survey; two, AD branches that

are involved in all types and large volumes of trade payment transactions should be

covered by the study; and three, the study should also reflect the practices of

different administrative divisions of the country. Four sets of questionnaires have

been prepared for conducting the survey. These are designed for the selected bank

branches, heads/dealing officers of the selected bank branches, importers and

exporters (bank clients). And the data has been gathered by classifying the

scheduled banks in three major broad groups – SCBs, PCBs and FCBs. To

comment on the different payment methods used for international trade during

2010, information from 30 AD branches of 23 banks covering 5 SCBs, 16 PCBs

and 2 FCBs have been gathered. For collecting primary data we have also talked to

the officials of the regulator i.e. the Bangladesh Bank. Besides, banking financial

institutions other relevant parties involved in the international trade transactions

most importantly the traders (exporters, importers), officials from the customs and

the port authorities have been considered and questioned to have a grasp on the

issues from their point of view.


This paper has identified some issues and difficulties relating to trade payment

practices based on a survey. The list of issues is definitely not exhaustible. Those

issues have been placed in a forum, comprising up of veteran bankers for discussion,

who also unearthed and discussed on several new concerns. The paper has

incorporated some probable solutions based upon that fruitful interaction.

The paper is organized under four sections; after an introductory section with the

objectives and methodological issues, section two deals with the procedures and legal

frameworks of international trade payment methods, used in Bangladesh. Section

three entails the most vital aspect- assessment of different international trade payment

methods used in Bangladesh. The survey observations in regard to the formalities and

requirements related to trade payments in the context of Bangladesh are also

compiled in this section. The final section summarizes the observations, issues and

difficulties relating to trade payment methods. It also puts forward the

recommendations and concluding remarks.

II. International Trade Payment Methods: Modes and Regulatory Framework

One may come across a number of methods of payment which are being used for

receiving and making international trade payments. The ICC Guide to Documentary

Credit operation (Busto, 1994) divides international trade payment methods into four

categories: cash in advance, open account, collection method (documentary

collection) and documentary credit.

Cash-in-Advance

The most secured method of trading for exporters and, consequently the least

attractive for buyers. Payment is expected by the exporter, in full, prior to goods

being shipped. With cash-in-advance payment terms, the exporter can avoid credit

risk because payment is received before the ownership of the goods is transferred. So

if the exporter is not sure about the buyer's creditworthiness, a last resort is to ask for

cash in advance. This may be acceptable to a first-time buyer who trusts seller to

deliver the goods. Wire transfers and credit cards are the most commonly used cash-

in-advance options available to exporters. However, requiring payment in advance is

the least attractive option for the buyer, because it creates cash-flow problems.

Open Account

An open account transaction is a sale where the goods are shipped and delivered

before payment is due. Open account is the reverse of cash in advance. Obviously,

this option is the most advantageous option to the importer in terms of cash flow and

cost, but it is consequently the most risky option for an exporter. Because of intense

competition in export markets, foreign buyers often press exporters for open account

terms since the extension of credit by the seller to the buyer is more common abroad.

However, the exporter can offer competitive open account terms while substantially


mitigating the risk of non-payment by using of one or more of the appropriate trade

finance techniques, such as export credit insurance. Though the seller can avoid a lot

of banking charges and other costs, but he has no security that he will be receiving

payment in due course. For this reason, the exporter may not be willing to accept this

sort of mode of payment.

Documentary Collections

Documentary Collection is a process, where the seller instructs his bank to

forward documents related to the export of goods to the buyer's bank with a request to

present these documents to the buyer for payment, indicating when and on what

conditions these documents can be released to the buyer. The Uniform Rules for

Collections, ICC Publication No. 522, which describes the conditions governing

collections (including those for the presentation, payment and acceptance terms), is

issued by the International Chamber of Commerce (ICC) in Paris, France. The buyer

may obtain possession of goods and clear them through customs, if the buyer has the

shipping documents (original bill of lading, certificate of origin, etc.). The

documents, however, are only released to the buyer after payment has been made

("Documents against Payment") or payment undertaking has been given - the buyer

has accepted a bill of exchange issued by the seller and payable at a certain date in

the future ("Documents against Acceptance"). Under documentary collection, after

the importer and the exporter have established a sales contract and agreed on

documentary collection as the method of payment, the exporter ships the goods. In a

documentary collection, the importer is known as the “drawee” and the exporter is the

“drawer”. After the goods are shipped, documents originating with the exporter (e.g.

commercial invoice) and the transport document (e.g. bill of lading) are delivered to a

bank, called the remitting bank for collection. The role of the remitting bank is to

send these documents, accompanied by a collection instruction giving complete and

precise instructions to a bank in the importer‟s country, referred to as the collecting/

presenting bank. The collecting/ presenting bank acts in accordance with the

instructions given in the collection instruction and releases the documents to the

importer against payment or acceptance, according to the remitting bank‟s collection

instructions. The exporter‟s bank and the remitting bank need not be the same. Also,

the collecting bank and presenting bank need not be the same. Each task could be

performed by a different bank. Payment is forwarded to the remitting bank for the

exporter‟s account and the importer can now present the transport document to the

carrier in exchange for the goods. Documentary collections facilitate import/export

operations. However, they do not provide the same level of security as letters of

credit, but, here, the costs are lower. Unlike the letters of credit, for a documentary

collection the bank acts as a channel for the documents but does not issue any

payment covenants (does not guarantee payment). So here payment is not that much

secured like documentary credit. In this circumstance the risk in payment under

documentary collection can be reduced by introducing the contract of sale.


The United Nations Convention on Contracts for the International Sale of Goods

(CISG) is the main convention for international sale of goods. Established by

UNCITRAL, the Convention governs the conclusion of the sale contract; obligations

of the buyer and seller. It is neither concerned with the validity or provisions of the

contract nor its effect on the property sold. The importance of CISG is its

interpretation. International context, uniformity and observance of good faith must be

regarded when interpreting the Convention. Matters not expressly settled by CISG

are to be determined according to the general principles of CISG; or in such absence,

according to rules of private international law. The UNIDROIT Principles on

International Commercial Contracts also provide a „gap-filling‟ role to supplement

CISG, so long as it supports a principle deduced from the Convention.

Documentary Credit

Documentary Credits, more commonly known as letters of credit are a widely

used method to effect payments in domestic and international trade. It is basically a

mechanism, which allows importers/buyers to offer secured terms of payment to

exporters/sellers in which a bank (or more than one bank) gets involved. A written

undertaking is issued by a bank (usually referred to as the issuing bank) on the

instructions of the buyer of goods to the seller. The payment is made under conditions

stated in the undertaking. The Uniform Customs & Practices for Documentary Credit

(UCPDC) published by International Chamber of Commerce (2007) Revision,

Publication No. 600 defines Documentary Credit: “Credit means any arrangement,

however named or described, that is irrevocable and thereby constitutes a definite

undertaking of the issuing bank to honor a complying presentation.”

The specified bank makes the payment upon the successful presentation of the

required documents by the seller within the specified time frame. Note that the bank

scrutinizes the 'documents' and not the 'goods' for making payment. Thus the process

works both in favor of the buyer and the seller. The seller gets assured that if

documents are presented on time and in the way that they have been requested on the

LC, the payment will be made. A seller may ask for a documentary credit when the

counterparty is unknown or financially weak, the goods are specifically designed or

seasonal or the country is politically unstable or financially weak. On the other hand

LC makes the buyer assured that the bank will thoroughly examine these presented

documents and only when they meet the terms and conditions stipulated in the LC,

the payment will be honored.

The idea in an international trade transaction is to shift the risk from the actual

buyer to a bank. Thus a LC (as it is commonly referred to) is a payment undertaking

given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer.

The Buyer is the Applicant and the Seller is the Beneficiary. The Bank that issues the

LC is referred to as the Issuing Bank which is generally in the country of the Buyer

and the seller's bank (advising/confirming bank, which is generally in the country of


http://en.wikipedia.org/wiki/United_Nations_Convention_on_Contracts_for_the_International_Sale_of_Goods

the Seller, informs the seller that the L/C has been issued and perhaps adds its

confirmation to the L/C (in other words, guarantees the payment if the seller wants to

be sure the issuing bank will not default). Though legally beneficiary (exporter) and

issuing bank or in case of confirmed credit also confirming bank are the main parties.

To accommodate the diverse needs of the various business sectors, different types of

documentary credits have evolved. Under UCP 600 all documentary credits are

irrevocable. Before that the credit was divided into two categories: Revocable Credit

and Irrevocable credit.

Generally speaking, banks provide documentary credit services on a commission

basis, worked out as a percentage of the credit amount or drawing on the credit.

Usually these commissions are payable by the credit applicant since it is his

responsibility to provide the seller with the price agreed in the sales contract. The

buyer and the seller can agree on a different division of the costs between themselves.

However, in the absence of any agreement to the contrary, the banks will usually be

entitled to look for payment in the first instance to the customer giving the

instruction.

Regulatory Framework for International Trade Payments

Creation of appropriate institutional framework and supportive environment

facilitates the growth of external trade. Accommodation of trade payment laws is one

of the activities of the United Nations Commission for International Trade Law,

which has proposed a variety of rules for international adoption. World business, as

represented by ICC, holds firmly to the conviction that the rules-based multilateral

trading system, managed through the World Trade Organization (WTO), is one of the

central pillars of international economic cooperation, with an impressive record of

achievement. The ICC, through its headquarters in Paris and its national committees

in London, New York and in other jurisdictions, has developed, in consultation with

the commercial and legal communities a sophisticated system of rules for a wide

range of matters. The widely used and acceptable guidelines/rules formulated by ICC

include UCPDC (Uniform Customs and Practice for Documentary Credit; Publication

no-600) and its different revisions, URC (Uniform Rules for Collection; Publication no-

522), URR (Uniform Rules for Bank-to-Bank Reimbursement Arrangement; Publication

no-725), ISP-98 (International Standby Practice 1998), DOCDEX (Documentary

Instruments Dispute Resolution Expertise) Rules etc. ICC also offers trade terms

(Incoterms) that have been very useful for interpreting delivery terms. Some of the ICC

guidelines are summarized below.

Uniform Customs and Practices for Documentary Credit (UCP 600)

Terms and conditions governing the issuance and execution by banks of letters of

credit are laid down in what is known as the Uniform Custom and Practice for

Documentary Credits. UCP 600 is the latest version of the rules that govern letters of


credit transactions worldwide. UCP 600 is prepared by International Chamber of

Commerce‟s (ICC) Commission on Banking Technique and Practice. The rules have

been effective since 1st July 2007. This revision of the Uniform Customs and

Practice for Documentary Credits (commonly called as "UCP") is the sixth revision

of the rules since they were first promulgated in 1933. It was in the spirit that the

UCP were first introduced - to alleviate the confusion caused by individual countries'

promoting their own national rules on letter of credit practice. The objective, since

attained, was to create a set of contractual rules that would establish uniformity in

that practice, so that practitioners would not have to cope with a plethora of often

conflicting national regulations. The universal acceptance of the UCP by practitioners

in countries with widely divergent economic and judicial systems is a testament to the

rules' success. Here matters of particular interest to the commodity trade include the

basic responsibilities of banks when examining documents tendered for payment

under letters of credit governed by the UCP 600, and the requirements pertaining to

different types of documents that may be tendered under letters of credit. The major

advantage of incorporating UCP 600 in the sales contract for a is that, where the UCP

600 rules are incorporated, he will know in advance the criteria against which the

banks will examine the shipping documents in deciding whether or not to pay under

the credit. The major advantage for a buyer is that he will know in advance the

criteria against which the price for the goods will be paid against tender of

documents. So the stated goals of the current revision have been identical to previous

ones, i.e. taking into account the developments in banking, transportation and

insurance sectors and reviewing the wordings of the UCP to avoid differing

interpretations and applications. In a note to its members and the national committees

the ICC itself labeled the new revision as "the most comprehensive in the entire

history of the rules." Comprehensiveness however did not lead to substantive

changes. The ICC has shortened the number of articles from 49 to 39. This change is

mostly cosmetic however, since substantive changes are barely noticeable.

The UCP 600 are not divided into the same seven sections as the UCP 500 which

were lettered A to G and headed in turn: General Provisions and Definitions; Form

and Notification of Credits; Liabilities and Responsibilities; Documents;

Miscellaneous Provisions; Transferable Credit and finally Assignment of Proceeds.

Now the UCP 600 does not expressly follow this allocation of Articles by subject-

matter.

Uniform Rules for Collection (URC 522)

The ICC Uniform Rules for Collections are a practical set of Rules to aid bankers,

buyers, and sellers in the collections process. The Rules have been prepared to

resolve problems that practitioners have experienced in their everyday operations

since 1979. URC 522 underlines the need for the principal and/or the remitting bank

to attach a separate document, the collection instruction, to every collection subject to

the Rules - makes it very clear that banks will not examine documents, particularly


not to look for instructions - addresses problems banks experience in respect of

documents against acceptance (D/A) and documents against payment (D/P) - clearly

indicates that banks have no obligation to store and insure goods when instructed.

The latest version of the URC was drawn up in 1995. To get coverage under ICC

URC 522, in the operation of documentary collection, it is to be stated on the

collection instruction that the payment is as per Uniform Rules for Collection 522.

The URC has 26 articles that are divided under seven broad heads.

Uniform Rules for Bank-to-Bank Reimbursement (URR 725)

The Uniform Rules for Bank-to-Bank Reimbursements under Documentary

Credits (“rules”), ICC publication No 725, shall apply to any bank-to-bank

reimbursement when the text of the reimbursement authorization expressly indicates

that it is subject to these rules. ICC's Uniform Rules for Bank-to-Bank

Reimbursements under Documentary Credits (URR) have recently been revised.

URR 725 contains a number of technical changes from the previous version, URR

725, and will be used by most letter of credit practitioners around the world. This

revision was approved by the Commission on Banking Technique and Practice in

April 2008 and came into effect on 1 October 2008. They are binding on all parties

thereto, unless expressly modified or excluded by the reimbursement authorization.

International Standby Practices (ISP98)

International Standby Practices fills an important gap in the market place. Though

standby letters of credit have similarities with commercial letters of credit and other

financial instrument, there are significant differences in scope and practice. A new set

of Rules was therefore required for this workhorse of commerce and finance. ISP98

reflects a distillation of practices from a wide range of standby users: bankers,

merchants, rating agencies, corporate treasurers, credit managers, government

officials and banking regulators. Like the UCP for commercial credits, ISP98 is

destined to become the industry standard for the use of standbys in international

transactions. Another set of invaluable ICC rules, ISP98 offers a precise and detailed

framework for practitioners dealing with standby letters of credit.

Incoterms 2010

From the 1st January 2011, the ICC‟s Incoterms 2010 came into force. This is the

eighth revision of the Incoterms Rules, with the last revision dating back to 2000. The

introduction to the new 2010 rules stresses the need to use the terms appropriate to

the goods, to the chosen means of transport and to whether or not the parties intend to

impose additional obligations on the seller or buyer. In addition, there are Guidance

Notes (and a diagram) at the front of each Incoterms Rule containing information to

assist in making a choice on which Rule to use. The new Rules have been separated

into two classes: (i) Rules for use in relation to any mode or modes of transport,


which can be used where there is no maritime transport at all or where maritime

transport is used for only part of the carriage and (ii) Rules for sea and inland

waterway transport, where the point of delivery and the place to which the goods are

carried to the buyer are both ports. FAS, FOB, CFR and CIF belong to the second

class of Rules. In respect of FOB, CFR and CIF, reference to the “ship‟s rail” has

now been deleted and this has been replaced with the goods being delivered when

they are “on board” the vessel.

DOCDEX Rules and ICC Arbitration

DOCDEX Rules are about a service known as „Documentary Instrument Dispute

Expertise‟ that are provided in connection with any dispute related to ICC

regulations/guidelines and their applications that are made available by the ICC

through its International Centre for expertise. The purpose of the ICC DOCDEX

Rules is to provide parties with a specific dispute resolution procedure that leads to

an independent, impartial and prompt expert decision settling disputes involving the

UCP, URDG, URR and URC. First launched in 1997, the DOCDEX Rules were

originally aimed at providing an alternative dispute resolution system for parties

using ICC rules relating to letter of credit transactions. Over the years, DOCDEX has

evolved. Today, the DOCDEX Rules are of course applicable to the newest versions

of the ICC banking rules, especially the UCP 600 and the URDG 768, as well as to

all disputes relating to former versions of these rules.

Since the inception of DOCDEX, ICC expert panels have decided over a hundred

DOCDEX cases. The objective is to offer an independent, impartial and prompt

expert decision on how the dispute should be resolved based on the terms and

conditions of the documentary credit, the collection instructions, or demand

guarantees. The ICC Court is the leading international arbitration institution in the

world. The arbitration process starts with a written request for arbitration to the ICC

Court. ICC and Committee Maritime International (CMI) offer separate arbitration

rules to meet the special requirements of maritime users.

Laws of International Carriage of Goods

International carriage has also been the subject of much discussion over the years.

The world-wide nature of international trade and the necessity for efficient transport

have led to a series of rules, covering carriage by sea, by road, by rail and by air. The

Hague Rules of 1924, and The Hague-Visby Rules of 1968, together with the

Hamburg Rules 1978, now provide the basis for carriage of goods by sea. The Warsaw

Rules 1929 exist for air transport and there have been variations, most notably in

Montreal rules adopted in 1975. Since rail/road does not link the continents, as do sea

and air transport, it should not be surprising that rail/road transports lacks a global,

multilateral set of rules. Nonetheless, in Europe and in certain contiguous countries

linked to European rail network, rail transport is governed by the 1980 Convention


concerning International Carriage by Rail (COTIF), which entered into force in 1985

and applies in around 40 countries. Similar to the rail transport, a number of

countries-mostly European- have signed CMR 1956 convention on the Contract for

the International Carriage of Goods by Road. Other than these, UN Convention on

the International Multimodal Transport of Goods (1980) covers multimodal transport.

Domestic Regulations/Guidelines/ Policies

ICC guidelines are not the complete set of rules in regulating and guiding

international trade payment transactions. Since the payment guidelines do not provide

comprehensive and complete set of rules for international trade payment transactions,

national laws play an important role. Even in the ICC guidelines it is clearly stated

that in case of any ambiguity or dispute the local laws are going to be prioritized and

followed by the related parties. This is particularly true for the issues related with

operational procedure of documentary credit which are not addressed

comprehensively by the UCPDC intentionally. For example, the legal nature of the

credit itself and legal nature of the relationship between different parties (relationship

between issuing bank and applicant or rapport between nominated bank and

beneficiary) have not been addressed in the UCPDC. As well as the other ICC

frameworks like URC, governing documentary collection and most importantly the

other methods which are guided by the sales purchase contract have got that same

flaw embedded in their operations which impedes the smooth functioning. Moreover,

it has been a cause of concern and already has raised a whole lot of questions

amongst the bankers. For effective international trade payment operation, it is

required that domestic laws are capable of providing solutions to various unaddressed

issues of international trade payment procedure which have been demanding proper

attention for long. Foreign Exchange Regulation Act (FERA, 1947)

In Bangladesh, Foreign Exchange Regulation Act, 1947 (FERA, 1947) has been

the most important domestic regulation for international banking. Foreign exchange

regulation act, 1947, adopted in Bangladesh immediately after independence along

with its (Amendments) has empowered Bangladesh Bank to regulate certain

payments, dealings in foreign exchange and securities and the import and export of

currency and bullion. Empowered by the act, Bangladesh Bank issues Authorized

Dealers licenses to the selected bank branches for arranging trade payments and

conducting other international banking operations (such as remittance, financial

flows). The act has 27 sections and a number of sub sections which cover an array of

issue such as definitions of authorized dealers, foreign currency, foreign exchange,

foreign securities, special accounts, restrictions on dealing in foreign exchange,

receipts, payments and settlement as well as restrictions on agents and foreign

companies, government acquisition of foreign exchange and securities, and other

supplementary provisions (punitive measures for any contravention, legal procedure,

grant of immunity etc.). Most importantly it has given Bangladesh Bank the authority


to call for information, power to inspect and finally to draft rules based upon which,

Bangladesh Bank issues circulars/guidelines time to time to regulate trade payment

and international banking activities to be followed by the banks. The main objectives

of the act are to conserve the hard earned limited foreign currencies and to ensure that

the available foreign currencies are utilized only for priority requirements in the

economic and financial interests of Bangladesh. It also focused on the maintenance of

the proper accounting of foreign currency receipts and payments. Bangladesh Bank is

responsible for administration, supervision, monitoring as well as framing up

different guidelines governing all the transactions denominated in foreign currencies

under the act. Being empowered by the Foreign Exchange Regulation Act 1947 the

central bank issues general licenses to deal in foreign currencies. The authorized

dealers must maintain adequate and proper records for all foreign exchange

transactions and furnish such particulars in the prescribed formats in form of regular

monthly submission of returns to the Bangladesh Bank.

Guidelines for Foreign Exchange Transactions (GFET, 2009)

While dealing in international trade payment, other than FERA, 1947 and

Bangladesh Bank circulars compiled in Guidelines for Foreign Exchange

Transactions (GFET, 2009), banks are required to follow the trade policy directives

issued by the Chief Controller of the Ministry of Commerce of the country

empowered by the Imports and Exports (Control) Act, 1950. The existing trade

policies, prepared by the Ministry of Commerce are known as the Import Policy

Order 2009-12 and the Export Policy 2009-12 which do play a pivotal role in

governing the real flow in international trade whereas the flow of funds being taken

care of by the monetary regulator.

International trade encompasses two categories of flows-flow of tradeables (both

goods and services) and flow of funds. If we consider legal trade other than

smuggling in or out, then all the financial flows (import payments and receipts from

export proceeds) must be settled through the banking channel. As mentioned earlier,

Bangladesh Bank has got a set of drafted guidelines for directing the banks to

conduct international banking operations in form of GFET which has got two

volumes. The first volume, which has got nineteen chapters mainly, gives the

directives regarding the procedural modalities and the second one contains the details

of monthly reporting of FE transactions. From operational banking point view, the

importance of this GFET is imperative and the officials working at different desks of

foreign departments in AD branches must know these rules well. GFET vol-1 chap-9

in four sections has detailed out the pros and cons related with import business.

Section one covers issues like as import trade control, terms of imports, registration

of importers, LCAF, endorsement on LCAF, cancellation of LCAF endorsement

made mistakenly, amounts for which LC may be opened and remittances made under

LCAF, remittance in excess of the value of the LCAF, LCAF issued in the name of a

person/firm other than applicant imports under special arrangements, use of correct

HS Code, PSI, imports on FOB basis, remittance of proceeds of dishonored bills,


disposal of fully utilized or unutilized LCAF, import against LCAF without opening

LC, applicable exchange rate on retirement of import bill, remittance against goods

imported under penalty. Section two contains the aspects such as LC covering

imports, terms on which LCs may be opened, period for which LCs may be opened,

LCs based on only against firm contracts, credit report of the foreign suppliers,

approved methods of payment, remittance against discrepant documents/documents

received directly by the importers, advance remittance against imports, applications

for remittances against imports, forms on which applications for remittances should

be made, indication on IMP form for government imports, submission of the

authenticated copies of 'Bill of Entry' and 'Certified Invoices', extension of time limit

for submission of bill of entry etc., disposal of IMP Forms, loss of goods, LCs on

deferred payment basis, payment of import liability. Section three has dealt with the

provisions related with back to back LCs- opening of back to back import LC, inland

back to back LC, BTB import LC against inland BTB LC, payment settlement against

BTB LCs, retention of foreign currency in single pool for back to back import

payments under bonded warehouse system, payment of import bills (other than back

to back) from direct and deemed export earnings. Lastly, section four has described

the issues related with deposit of counterpart fund in respect of imports under non-

project commodity loans/grants/credits. Chapter-8 of GFET has got two sections,

where in the first one issues such as- export exempted from repatriation of export

proceeds, export trade control regulations, prescribed form for declaring exports,

method of receiving payments against exports, registration of exporters, certification

of EXP Forms by ADs, making out and delivery of shipping documents, endorsement

of shipping documents by the ADs, disposal of EXP forms, submission of export

documents to ADs, scrutiny of documents, exports subject to receipt of advance

payments or confirmed and irrevocable LC, deduction of commission, brokerage or

other trade charges, using appropriate incoterms, prescribed period within which

payment should be received, export of raw jute and jute goods on usance basis,

reporting of overdue cases, part drawings and advance remittances, partial receipt of

advance remittance, short shipments, shipments shutout entirely, shipments lost or

damaged in transit, receipts of advance remittances against exports, shipments on

FOB terms, export proceed realization certificate against direct and deemed exports,

export of software and data entry/processing services where export is undertaken in

physical form, where export is undertaken in nonphysical form, time limit for

repatriation of export earnings. Section two details out the principles and procedures

of various transactions of EPZs (repatriation of export proceeds from the EPZs,

disposal of export proceeds, sale of Bangladeshi goods to EPZ enterprises).

Trade Policies

Trade policy in a country refers to the set of policies, which govern external trade

sector of its economy. In a developing country like Bangladesh, trade policy is one of

the many economic instruments, which is used to suit the requirements of economic

growth. In recent years, Bangladesh‟s trade policies revolve around the instruments


and techniques of export promotion and import management. The trade policies

specifically prescribe the policies/rules of the government in regard to the export and

import transactions and procedure and operations of making and receiving trade

payments. The prime objective of the trade policy of Bangladesh is to maintain a

favorable balance of trade through adopting an export led development strategy.

Import Policy Order (2009-2012)

The existing Import Policy Order, 2009-2012, has been formulated, keeping in

mind the market economy ideology for making the easy availability of the

commodities to consumers at fair prices through removing the barriers to movement

of goods internationally. The recent import policy on 2009-12 is designed to support

the export promotion strategy of Bangladesh. For example, the import of capital

machinery and raw materials without any LC by RMG industries, import of

reconditioned generator and generating sets on commercial basis, crude soybean and

palm oil import by industries and import of telecommunications machinery for

private-sector operators have been allowed in the new import policy. At this moment,

the number of commodities kept under the restricted (for import) list is only more

than 20. The new import policy has allowed opening of LC for importing capital

machinery even without IRC and other flexible measures to keep up with the

momentum of rapid industrialization through ensuring required imports. The limit of

import without LC has been raised also. For enhancing easy availability of industrial

raw materials and consumer goods at fair prices, some commodities have been

declared importable as raw materials. The present version of the import policy order

has got nine chapters.

Export Policy Order (2009-2012)

The Export Policy primarily aims at making the economic activities more

dynamic and outward looking to help Bangladesh survive in the rapidly changing and

competitive global trading system. The government is facilitating expansion of trade

and taking necessary steps to modernize and simplify the country‟s trade policy in

accordance with WTO obligations and upholding country‟s interest. Recently,

pressure from the buyers is mounting for improvement of quality of products, export

of products free from any hazardous and toxic substances, along with fulfillment of

other standards and compliance-related conditions. Comprehensive efforts are being

made for increasing productivity and improving quality of products and fulfillment of

other compliance-related concerns. Efforts have been made to hone the skills of the

exporters on the rules and regulations of international trade. There is no denying the

fact that the present trading system, especially the export business is experiencing

increased use of modern technology and this, in turn, is helping the exporters become

more competitive. On the other hand, the objectives of reducing cost of doing

business alongside enhancement of the efficiency of exporters through increased use

of modern technology in the export sector could be attained. The government is

firmly committed to ensuring the maximum use of e-Commerce and modern


technology to accomplish this objective. In order to sustain the growth of exports in

Bangladesh as well as to enhance it the productive capacity of the domestic export

oriented industries should be increased along with ensuring quality of exportable

products and its market diversification. For this reason, all efforts should be taken for

converting our comparative advantage of human resources to competitive advantage.

In doing so, labor-intensive export-oriented industries have to be encouraged,

massive training programs have to be organized to enhance the skills of workers and

various incentives have to be rolled out to encourage and diversify exports. Besides,

loan facilities at reduced interests have to be arranged, infrastructural development

activities have to be geared up and establishment of backward and forward-linkage

industries have to be encouraged. Also, steps have to be taken to develop utility

services, to install state-of-the art laboratories for controlling the quality of exports, to

set up product-based industrial zones or clusters, to ensure easy availability of raw

materials for exports, to disseminate updated information to the producers on markets

and technology on a regular basis, and to ensure overall development of the

Chittagong and Mongla Ports including further simplification of procedures for

releasing goods. The current Export Policy of Bangladesh has underscored the

aforementioned needs for expanding export as well as increasing the productivity of

export-oriented industries and facilitating the overall development of the export

sector through capacity building of local export-oriented industries. Five Business

Promotion Councils are already in place under public-private partnership to enhance

the capacity and awareness of the exporters and mitigate the supply-side constrains

paving the way for enhanced uninterrupted supply of export products. The Export

Policy of 2009-2012 has considered software and ICT products, agro-products and

agro-processing products, light engineering products (including auto-parts &

bicycles), shoes and leather products, pharmaceuticals products, textile, shipbuilding,

toiletries products as the thrust sectors for our export development. In addition,

electronic products, handicrafts, herbal medicine and medicinal plants, production of

finished leather, frozen fish production and processing, natural flowers, jute products,

plastic products, ceramic products, service export, furniture, uncut diamond etc. have

been considered as special development sectors in the current export policy. The

current export policy has accommodated fiscal, financial and other incentives in line

with the requirements of globalization. III. Trade Procedure and Payment Practices: Bangladesh Scenario

As described earlier, sellers and buyers can choose any one from the above

mentioned four significantly different methods of payment in cross-border

transactions. Starting from the most favorable to the seller to the most favorable to

the buyer, the options include cash in advance or prepayment, open account or

supplier‟s credit requiring post-shipment payment, payment through documentary

collection and payment by letter of credit. To comment on the different payment

methods used for international trade during 2010, information from 30 AD branches

of 23 banks covering 5 SCBs, 16 PCBs and 2 FCBs have been gathered.


Methods of Payments used in Making Imports Payment from Bangladesh

The survey data reveals that, still for making import payments documentary letter

of credit is the mostly used mechanism with almost a 90% share in the total. In very

few cases, documentary collection (with a contribution in between 1% to 5% for

various banks) and cash in advance (contribution not exceeding 1%) have been used.

In the context of Bangladesh, documentary letter of credit is the most popular and

widely used for making import payments from Bangladesh. Practically exchange

control arrangements or guidelines in many developing countries ask to use

documentary credit for their imports. As the survey data indicates (table-1) about

90% (both in terms of number of cases and amount) import payments from the

country are made through letter of credit. The figure would be even over 95% if we

consider data for only domestic nationalized and private sector banks. However, it is

observed that a number of foreign bank clients (estimated to be around 20%) use

documentary collection in making import payments. The respondents of the survey

questionnaire (head of Trade Services Department/ Dealing Officer) have revealed

that some of the import payments are also made in the form of cash in advance.

Especially, exporters‟ retention quotas are sometimes utilized to import accessories

by making advance payment. But the open account payment method is totally absent

in case of imports. Absence of open account payment (i.e. sending goods before

receiving payments by the foreign exporters) in case of imports in Bangladesh does

not only indicate the superior bargaining power of the foreign exporters but also the

lack of credibility of our importers. But most importantly, stringent domestic

framework to preserve the country reputation would be the probable reason of this

absence due to the previous bitter experience of importing through open account.

Table 1: Use of Methods of Import Payment (in % of number) in 2010

Cash in Advance 3%

Open Account -

Documentary Collection 08.22%

Documentary Credit 88.88%

Source: Survey data

Table 2: Use of Methods of Import Payment (in % of volume) in 2010

Cash in Advance 4%

Open Account -

Documentary Collection 07.05%

Documentary Credit 88.95%

Source: Survey data

Greater use of letter of credit in Bangladesh as the main method of payment is

clearly attributed to the country‟s regulatory requirement. As per the Import Policy

(2009-12) of the country, unless specifically stated, import transactions can only be


made through irrevocable letter of credits. Some specific kinds of goods such as

easily perishable goods, journals, books, magazines, medicines etc. may be imported

upto certain limits through registered LCA (Letter of Credit Authorization) form

without opening letter of credit. However, under the same arrangements (registered

LCAF) capital machinery and industrial raw materials may be imported without any

limit. Other than this regulatory requirement, foreign exporters‟ preference of letter of

credit as the means of payment has been identified as the other responsible factor

according to the opinions of the respondents. Thus, it appears that, while importing

we are subjected to sellers market condition and thus follow sellers‟ terms and

conditions.

Import Procedure of Bangladesh

As mentioned earlier, import of goods into Bangladesh is regulated by the

Ministry of Commerce through the issuance of Import Policy Order time to time. For

governing the movement of the tradables (both goods and services) the Office of the

Chief Controller of Imports and Exports has been entrusted with. In Bangladesh,

generally the importers must obtain Import Registration Certificate (IRC) from the

Chief Controller. But for public sector importers and in some other special cases,

there are flexibilities. First of all, the importer has to contact the seller and make a

purchase and sale contract with the seller. But in our country the traders usually rely

on proforma invoices heavily which are not as comprehensive as the standard sales

purchase contracts; as they don‟t contain detailed provisions regarding settlement of

disputes and others. Then the question of mode of payment arises which is usually

stated in the proforma invoice. Import procedure differs with different modes of

payments. In most cases, import payments are made by the documentary letter of

credit in Bangladesh. Imports under documentary letter of credit must be irrevocable

and guided by the existing version of ICC guideline which is UCPDC 600.

Formalities and Margin Requirement while Opening LC

Import license is not always required for import in Bangladesh. However,

registration (LCAF) is a requirement to import into the country. Other than filling up

the LC application form, submission of the copy of proforma invoice (or

purchase/sale contract), insurance cover note along with LCAF to the bank is a

regulatory requirement. According to the BB Guidelines on Foreign Exchange

Transactions (2009), for opening LC, ADs should obtain confidential reports on

foreign exporters if the transaction amount is beyond the thrash hold level for

satisfying themselves regarding the performance capabilities of the foreign exporters.

Gathering such a credit report requires outflow of foreign currencies which can be

minimized through proper collaboration. Either in explicit or implicit form, issuing

bank does have an agreement with the applicant while opening a letter of credit on

his/her behalf. As per the agreement, if documents submitted by the exporter are in

order (as per LC conditions), then the issuing bank makes payment to the beneficiary

or beneficiary‟s bank (nominated/negotiating bank), and the importer (applicant)

makes reimbursement to the issuing bank. However, banks generally do not finance


the entire LC amount and ask for some margin that ranges between 0% to 100% and

varies from one client to another. Generally, the margin is determined by the head

office based on the banks‟ relationship with the clients. The survey data reveals that

the extreme cases of 0% or 100% are insignificant in number and most of the cases

fall between 1%-25% ranges. The opinion survey (Dealing Officers/head of Trade

Services) indicates that most LCs are opened at the range of 1%- 10% margin.

Forms of Letter of Credit in Use (in making import payment)

In Bangladesh all letters of credit opened are irrevocable in nature as required by

the import policy order of the country. Of the total credit, a significant number is

back-to-back letter of credit. This is because of the garment sector that imports raw

materials from abroad for meeting their export orders. The survey shows that 40% of

the total LCs are back-to-back (foreign) that amounted to 27% of the total amount for

which the sample banks have opened letter of credit during 2010 (table-3 and 4).

Against the general perception of the number and volume of confirmed letter of

credit, the survey reveals that only 3% of the total number of letter of credit required

confirmation (amounting up to 4% of total amount) during the period. There has not

been a single case of transferable, red clause, and revolving credit. Absence of

revolving and red clause LCs is due to the restriction prescribed in Bangladesh Bank

guidelines (BB Guidelines on Foreign Exchange Transactions, Vol-1). Imports

through deferred LCs are also found but the GFET has clearly discouraged the use of

deferred LCs for commercial imports.

Table 3: Forms of Import LC Opened (in % of number) During 2010

Confirmed 03% Back to back 40% Transferable 0% Red clause 0% Revolving 0% Irrevocable (other than the five mentioned above) 57%

Source: Survey data

Note: Number of back-to-back includes only foreign LC, all LCs are irrevocable

Table 4: Forms of Import LC Opened (in % of Amount) in 2010

Confirmed 04%

Back to back 27%

Transferable 0%

Red clause 0%

Revolving 0%

Irrevocable (other than the five mentioned above) 69%

Source: Survey data

Note: Number of back-to-back includes only foreign LC


No significant difference has been observed in terms of volume and number of

letters of credit opened by the different types of domestic banks (both government

and private). As expected, the branches having no apparel sector clients have not

opened a single back-to-back LC during 2010. Understandably, the foreign banks

have not opened any confirmed LC (as issuing bank). However, the proportion of

back-to-back letter of credit is less in the foreign banks as compared to the

domestic banks.

Advising, Confirmation, and Amendment of Credit

All banks advised letters of credit through another bank known as advising bank.

In most cases, issuing banks select their own advising banks. According to the

opinions of survey respondents (head of trade services/dealing officers), banks prefer

to select those banks as advising banks with whom they have correspondent

relationships. Some banks also try to accommodate exporters‟ choice. It has been

observed that a few banks are a bit rigid in selecting advising banks because of

maintaining their business relationship or commission sharing with the counter

parties. To accommodate exporters choice, banks also avail the services of second

advising banks. In such a case, additional cost burden falls on the trading parties.

Almost in all cases, confirming banks are selected by issuing banks, basically these

are the banks with which the credit lines exist. However, sometimes banks try to

accommodate exporters‟ choice if they have arrangement with the banks. For

amendment of letters of credit, generally importers approach to the issuing bank on

behalf of exporters. Though, some issuing banks ask for copies of letters, mails etc. to

ensure exporters consent in this connection, they hardly find amendment risky for

themselves. According to the observation of survey respondents (head of trade

services/dealing officers), most of these amendments are practically go in favour of

exporters (extension of expiry or shipment date), and so risks of either accepting or

rejecting is minimum.

Documentary Requirements (Import LC)

The survey results depict that, in case of all the letters of credit opened from the

country, issuing banks ask for transport documents (bill of lading, airway bill, truck

receipt etc.), commercial invoice and certificate of origin. In selecting documents,

generally banks‟ dealing officers play a dominating role (as revealed by the

respondents namely Head of Trade Services/ Dealing Officer and importer) through

offering consultancy services. Only in case of a few big firms, the applicants dictate

terms and select documents. As per UCP 600, transport documents (title documents),

commercial invoice (sellers‟ bills) and insurance documents are essential documents

and are expected to be asked as conditions for making payments. In Bangladesh,

insurance documents are rarely asked as according to the country‟s import policy,

insurance is to be covered by domestic importers (as a measure to restrict foreign

currency outflow and promoting domestic insurance companies). Importing goods

under CIF (cost, insurance and freight), CIP (Carriage Insurance Paid To) is subject

to the permission of Bangladesh Bank except imports by non-resident Bangladeshis


and foreign investors using their own foreign currency earned outside the country.

Submission of signed commercial invoice is another regulatory requirement. Under

UCP 600, commercial invoice may not be signed if it is not asked for. However,

according to BB Guidelines (on Foreign Exchange Transactions, volume-1), all LCs

must ask for submission of signed invoices.

Table 5: Documentary Requirement in LC Issued from Bangladesh

Documents asked under LC Frequency

Transport Document All

Insurance Document Very rarely

Commercial Invoice All

Certificate of origin All

Bill of Exchange Very Frequently

Packing List Very Frequently

Weight List Less Frequently

PSI Certificate Less Frequently

Source: Survey data

According to the Import Policy 2009-12, submission of „certificate of origin‟ to

the customs authority is a must while releasing goods except in cases of cottons,

readymade garments, and export oriented industries. Though a significant number of

clients of the banks (sample banks) are from readymade garments sector, not a single

case has been observed where certificate of origin has not been asked for. Other than

these, the documents that are very frequently asked for the letters of credit issued by

the domestic banks are „bill of exchange‟ and „packing list‟. Weight list and PSI

certificates are also asked though less frequently (table-6).

Table 6: Documentary Requirement: Transport Documents [Import LC]

Transport Document [types] Frequency

Ocean bill of lading 75%

Airway bill 11%

RRI 14%

Multimodal 0%

Others 0%

Source: Survey data

The most commonly used transportation mode that is in use for importing in the

country is ocean/sea way mode. Of the total number of transport documents 75%

cases (number of LCs) asked for ocean bill of lading. In a considerable number of

cases, truck receipts are asked for that comes under RRI (Road, Rail, and Inland

Waterway). While importing, use of multimodal transport documents, courier or

postal receipts have not been found in the sampled banks.


Availability of Credit (Making Payment- Import LC)

A letter of credit must point out whether the credit is available at sight, deferred,

acceptance, or negotiation basis. The issuing bank is also required to mention that

whether the payment will be made from the counter of the issuing bank or a

nominated bank (negotiating bank). In all cases banks offer scope for negotiation in

Bangladesh. In most cases (as the survey data indicates), the letter of credit issued

from the country are freely available which means any bank could be the negotiating

or nominated bank, at the counter of which documents can be submitted by the

foreign exporter/beneficiary for obtaining payment. In such a case, exporter can

submit documents at the counter of its own bank in the country of his/her domicile.

Some banks (mainly foreign and a few domestic private sector banks) however prefer

to restrict negotiation at the counter of certain banks as they maintain correspondence

relationship. The survey data indicates in most cases (69% of the total) payments is

designated on sight basis from the counter of negotiating bank. Another 20% cases

use acceptance basis payment and 11% deferred payment (table-7).

Table 7: Availability of Credit: Import Payment from Bangladesh

Credit Available Frequency

Sight 0%

Deferred 11%

Acceptance 20%

Negotiation 69%

Source: Survey data

Note: Sight means if payment is available only at the counter of issuing bank

In connection with the availability of credit, the survey data (table-7) of banks

may give a different picture of the practices of making payment to the foreign

exporters. As the survey respondents (Head of Trade Services/dealing officers) reveal

that in most cases foreign negotiating banks actually do not negotiate documents.

Either they make advance to the foreign exporters or make payment only after

receiving payments from issuing banks (by debiting issuing banks‟ nostro account or

receiving payments through reimbursing banks). This practice clearly indicates that

in most cases the exporters‟ banks do not negotiate documents and simply forward

documents to the counter of issuing bank or make payment only after ensuring receipt

of payment irrespective of the status of documents (in regard to discrepancy). In

most of the cases, it is found that, the issuing banks are quite prompt in making

reimbursement to the foreign counterparts under compliant presentation but in some cases few banks were to be found late in affecting payment without any valid reason.


Examination of Documents as Issuing Bank (Making Payment-Import LC)

In connection with examination of documents the provisions covered by the 39

articles of UCP 600 and the „International Standard Banking Practices‟ entailed in

ISBP 681 as well as the terms and conditions of the respective LC are the guidelines

(article 2 of UCP 600). Among domestic regulations, guidelines on foreign exchange

transactions (prescribed by Bangladesh Bank) along with FE circulars issued by

Bangladesh Bank (being empowered by FERA, 1947) and the import policy order of

the country are to be followed. According to article 14 of UCP 600, banks have

maximum five banking days following the day of receipt of documents to judge the

status of the documents if they are either compliant or discrepant. The survey data

shows that in 65% cases documents are examined within two banking days and in

35% cases within 3-5 banking days (table-8). Another interesting observation is that a

few banks have a practice of sending discrepancy notices within 2-3 days after

receiving documents either being pressurized by the applicant or simply to have

discrepancy charges. Banks consider this act as a protective measure on their part.

Charging of discrepancy fee appears to be an act of retaliation by the banks, as the

respondents of the opinion survey (head of trade services/ dealing officers) have

claimed that such practices are also very common in a number of foreign countries.

But these practices are frequently coming down.

Table 8: Time Required to Examine the Documents (as issuing bank)

Time Requirement Frequency (no of cases)

0-2 65%

3 to 5 35%

Source: Survey data

Table 9: Examination of Documents (as issuing bank): Common Discrepancies

Found (of the different types of discrepancies)

Discrepancies Frequency (no of cases)

Late Shipment 65%

Late Presentation 50%

LC Expired 20%

Missing words/dates 10%

Others (Wrong HS code, LC value overdrawn, Absence

of documents, Bill of exchange drawn on wrong party,

absence of the name of vessel in B/L) 15%

Source: Survey data

Note: In a number of instances, a single LC has more than one discrepancy.

In all cases, banks have been observed to approach importers to get their opinion

before rejecting documents. In regard to discrepancies, late shipment, late

presentation, expiry of the LC are very common. According to the survey


observations, of the total discrepant cases, 65% cases are of late shipment and 50% is

of late presentation of documents. Moreover, the survey data reveals, the cases of

non-payment due to discrepant documents are very insignificant although sometimes,

the applicants also try to miss utilize the provision of UCPDC 600 regarding

discrepancy notice in different ways (either to get concessions from the foreign

exporters or to check the consignment).

Methods of Payments used for Receiving Export Proceeds in Bangladesh

Regarding export proceeds, it has been found that again documentary letter of

credit is having almost 42% share (ranging between 40% to 70% bank wise). But

here, documentary collection is playing quite a big role with almost 50% proportion

(the share is ranging between 10% to 80%) and gaining popularity. Surprisingly,

advance T.T. did make quite a remarkable contribution in terms of export receipts

(with an average of 5%) last year. The remaining 3% is attributed to open account

trade where the proceeds are usually received within 120days. The survey data

indicates (table-10) in 42% (in terms of number of cases) cases of exports, LC

payment methods have been used during 2010 that amounted up to 50% of the total

export receipts received through the sampled banks. However, as compared to the

methods of import payments, use of documentary collection is much higher in case of

export receipts. According to the survey data (table-10), out of the total cases of

export receipts during 2010, in 50% cases collection method has been used. There are

also some cases (insignificant and accounted for only 4% of the total cases of export

receipt) where payments have been made in advance by the foreign importers during

the period.

Table 10: Use of Methods of payment in Export Receipts

(in % of number) in 2010

Cash in Advance 5%

Open Account 3%

Documentary Collection 50%

Documentary Credit 42%

Source: Survey data

Table 11: Use of Methods of payment in Export Receipts

(in % of Volume) in 2010

Cash in Advance 5%

Open Account 1%

Documentary Collection 54%

Documentary Credit 40%

Source: Survey data


Comparatively extremely limited use of open account (under which Bangladeshi

exporters may offer suppliers credit) payment method is mainly because of the

country‟s regulatory requirements. As per Bangladesh Bank requirement, export

receipts must be repatriated into the country within a period of 4 months from the

shipment date. Requirement of signing EXP form by the bankers imposes an equal

obligation of export repatriation on both exporters and bankers. As per the BB

Guidelines on Foreign Exchange Transactions (GFET, 2009), „ for delay in

repatriation or non-realization of export proceeds, the exporter as well as the

concerned AD and its officials certifying the EXP forms render themselves liable to

punitive action under FER Act.‟ Practically, such a requirement restricts the use of

open account under which it is very difficult to ensure repatriation of export receipt

within the stipulated time period by the banks. Some of the survey respondents of the

questionnaire for bank clients (exporters) are found to be interested in even sending

their goods to the foreign importers on credit; but could not do so because of the

regulatory bindings.

Export Procedure of Bangladesh

According to the Imports and Exports (control) Act, 1950, exporters likewise the

importers must get registration granted by the Chief Controller of Imports and

Exports. Under the Exports Policy of Bangladesh the exporter has to get the valid

Export Registration Certificate (ERC-which requires yearly renewal) from the chief

controller. After obtaining the ERC, the exporter may proceed to secure the export

order through signing a contract. Generally, exporters ask the buyer for Letter of

Credit clearly stating terms and conditions of exports and payments. Then the

exporters remain busy in procurement of raw material and in manufacturing. After

the shipment of the goods, the exporters submit documents and obtain payments

through banks. But recently, it has been observed that our export market is gradually

becoming buyer dominated which has raised the use of contract based payment

methods for exports more specifically documentary collection. The increasing use of

contract based payment method i.e. documentary collection in our country

underscores the tremendous significance of using comprehensive sales-purchase

contracts. Importers, exporters and indenters are required to be registered in

Bangladesh under Importers, Exporters and Indenters Registration Order 1981.

Moreover, Customs Act 1969, various SROs, gazette notifications issued by the

different government departments (NBR, Customs, and Port Authorities) involved in

international trade is also applicable to execute the trade transactions that deal with

levy and collection of customs duties and other allied matters such as handling of the

consignments.

Documentary Collection: Procedures and Formalities

Documentary collection is the second most popular method of payment used in

Bangladesh in receiving and making payment. The survey data reveals (table-1) that

of the total cases of import payment about 8% uses collection method where as of the


total cases of export payment about 50 %( table-10) uses collection method. It is

obvious that collection method (or what the bankers in Bangladesh call contract basis

payment) provides relatively less protection to the exporters. The survey data in this

regard indicates relatively less bargaining power of the country‟s traders revealing the

fact that our export market is buyer dominated. In regard to the collection instruction

or the use of the services of collecting banks, exporters generally rely on remitting

banks, the banks that are entrusted to collect payment on behalf of exporters.

Remitting banks generally select collecting banks of their own choice in the

importers‟ country. More precisely, the foreign correspondents/agents usually have

been entrusted by the local remitting banks to act as the collecting/presenting banks.

Both the modes of releasing documents i.e. D/P (Documents Against Payments) and

D/A (Documents Against Acceptance) are used by both domestic and foreign

exporters. It has been observed that in a number of instances bankers are unable to

distinguish between documentary collection and documentary credit while dealing

with documents submitted for collection by a domestic exporter. The common

documents that are submitted by an exporter to the remitting bank for collection

includes transport document, commercial invoice, bill of exchange, and packing list

which are almost similar to those submitted by an exporter at the counter of a

negotiating/nominated bank under LC. And thus, sometimes, the dealing officers,

deployed in export desks are found to be confused about the role of

negotiating/nominated bank and remitting bank in handling the documents under two

different payment methods. A bank‟s purchase and discount of export bills under

collection basically depends upon the banker-customer relationship. However, there

are a few instances where export bills have been purchased and discounted by the

remitting banks but subsequently have remained unpaid. Most of these occurrences

are because of the ignorance of the dealing officers/concerned offices in regard to the

liability of the foreign banks (collecting banks) and importers. In a lot of cases, the

concerned officers failed to differentiate between documents under collection and LC

and could not identify the risks involved in these transactions. In

purchasing/discounting export bills under collection, some banks are also observed to

use OD (sight) or Usance rate in place of TT Doc Rate.

Forms of Export Letter of Credit Received by Local Exporters

In Bangladesh all letters of credit received are irrevocable in nature as required by

the domestic regulation of the country. Out of the total export letters of credit, a

significant number is transferable letter of credit. Existence of a large number of

buying houses is one of the reasons for the dominance of transferable LCs. Buying

houses (of the garment products) are not the actual manufacturers and therefore, for

procuring the finished goods, they are required to transfer the LCs to the real

manufacturers. Moreover, the practice of subcontracting by the garment

manufacturers is also very common for which LC is transferred. In contrast to the

import LC, back-to-back letter of credit is completely absent in case of export LC

(table-12 and 13). The survey data reveals that though the number and volume is very


insignificant, Bangladeshi exporters also do receive confirmed letters of credit.

Of the total export letters of credit, 0.15% was confirmed LC during 2010. These

exporters are mainly clients of foreign banks and the credits were mostly issued from

African countries.

Table 12: Forms of Export LC Received (in % of number) in 2010

Confirmed 0.15%

Back to back 0%

Transferable 76.85%

Red clause 0%

Irrevocable (other than C,B, T& R) 23%

Source: Survey data

Note: Number of back-to-back includes only foreign LC; LCs considered for which banks are negotiating banks,

all LCs are irrevocable

Table 13: Forms of Export LC Received (in % of Amount) in 2010

Confirmed 0.20%

Back to back 0%

Transferable 72.25%

Red clause 0%

Irrevocable (other than C,B, T& R) 27.55%

Source: Survey data

Note: Number of back-to-back includes only foreign LC; LCs considered for which banks are negotiating banks, all

LCs are irrevocable

Documentary Requirements (Export LC)

It is detected from the survey data that, all the LCs received by the country‟s

exporters ask for transport documents (bill of lading, airway bill, truck receipt, etc.)

and commercial invoice. Generally in LC operations, transport documents (title

documents), commercial invoice (sellers bill), and insurance documents are regularly

asked as conditions for making payment. It can be observed from the survey data

(table-14) that insurance documents are less frequently asked in the LCs, which are

received by Bangladesh exporters (not very different from the LC opened by banks

located in Bangladesh for foreign exporters). Such practice points out the similarity

of regulatory requirement in the trading partners for promoting the domestic

insurance industry. Other than these, the documents that are very frequently asked

for in the letters of credit received from the foreign countries are certificate of origin,

bill of exchange, packing list. Weight list and PSI certificates are also asked though

less frequently (table-14).


Table 14: Documentary Requirement in LC Received in Bangladesh

Documents asked under Foreign LC Frequency

Transport Document All

Insurance Document Less Frequently

Commercial Invoice All

Certificate of origin Very Frequently

Bill of Exchange Very Frequently

Packing List Very Frequently

Weight List Less Frequently

PSI Certificate Less Frequently

Source: Survey data

Table 15: Documentary Requirement: Transport Documents (Export LC)

Transport Document [types] Frequency

Ocean bill of lading 84.5%

Airway bill 10%

RRI 4%

Multimodal 1.5%

Others 0%

Source: Survey data

Like imports, most commonly used transportation mode for exports from the

country is sea/ocean mode. The survey data indicates that of the total number of

transport documents, 84.5% is ocean bill of lading (table-15). In 10% of the total

number of cases airway mode is in use and 4% of the LCs ask for truck receipt (that

comes under RRI as per UCP 600). Though while importing, use of multimodal

transport document has not been found, however, 1.5% of the total exports under LCs ask for multimodal transport documents (table-15).

Availability of Credit (Receiving Payment-Export LC)

UCPDC 600 requires that LCs must indicate whether the credit/payment is

available at sight, deferred, acceptance, or negotiation basis. In all cases of

documentary credit received by Bangladeshi exporters offer the scope for negotiation.

In most cases (as the survey data indicate), the letters of credit received from outside

the country are freely available which means any bank can be the negotiating or

nominated bank at the counter of which documents are to be submitted by the

domestic exporter/beneficiary for obtaining payment. The survey data has found that,

in most cases (70% of the total) payments are designated on sight basis from the

counter of the negotiating/nominated bank. Of the total, 14% cases are of acceptance

basis payment and 16% is in deferred payment (table-16).


Table 16: Availability of Credit: Export Receipt into Bangladesh

Credit Available Frequency

Sight 0%

Deferred 16%

Acceptance 14%

Negotiation 70%

Source: Survey data

Note: Sight means if payment is available only at the counter of issuing bank

The survey respondents (Head of trade services/dealing officers) revealed that in

most cases domestic negotiating/nominated banks actually do not negotiate

documents. Generally, they forward the documents to the counter of the issuing bank

and make advance to the domestic exporters. Thus, in connection with the availability

of credit, the practices of local negotiating/nominated banks are not different from the

practices of foreign negotiating/nominated banks (in case of import LC). As it is

known, UCP 600 also does not impose any obligation on negotiating/nominated bank

in this regard. Therefore, in almost all cases payments are first of all, received from

the counter of the issuing banks and then made available to local beneficiaries.

The reason behind this sort of practices might be as in most of the cases, particularly

in the RMG sector the domestic banks usually go for substantial amount of pre-shipment financing where already they have tied up significant amount of fund.

Examination of Documents as Nominated Bank (Export LC)

While examining the documents, UCP 600, ISBP 681 guidelines on foreign

exchange transactions (prescribed by Bangladesh Bank) along with the FE circulars

issued by Bangladesh Bank, the export policy of the country and most importantly the

terms and conditions of the LC are to be followed. The survey data shows that in 87%

cases documents are examined within two banking days and in 13% cases 3-5 banking

days (table-17). As mentioned earlier, in most cases local negotiating/ nominated banks

are simply forwarding the documents to the counters of the foreign issuing banks.

Some respondents of the survey questionnaires (for head of trade services/dealing

officers) have claimed that in very few cases, they receive discrepancy notices within

2/3 days of sending documents to the foreign issuing banks where charging of

discrepancy fees appears to be the main reason of such practices .

Table 17: Time Required to Examine the Documents

(as negotiating/negotiating bank)

Time Requirement (Days) Frequency (no of cases)

0-2 87%

3 to 5 13%

Source: Survey data


Table 18: Examination of Documents (as negotiating/negotiating bank):

Common Discrepancies Found [of the different cases of discrepancies]

Discrepancies Frequency [no of cases]

Late Shipment 75%

Late Presentation 60%

LC Expired 20%

Missing words/dates 15%

Others [B/L Claused, B/L stale, Description of goods not as

per LC Contract, Absence of documents] 15%

Source: Survey data

Note: In a number of instances, a single LC has more than one discrepancy.

Regarding the nature of discrepancies, late shipment, late presentation, expiry of

LC are the most prevalent ones (also revealed in the survey questionnaires for head of

trade services/dealing officers). According to the survey observations, of the total

discrepant cases, 75% is of late shipment and 60% is of late presentation of

documents. The survey data unfolds that, the cases of non-payment due to discrepant

documents are very few.

Handling Problems/Difficulties in connection with Trade Payment

According to the survey respondents, whenever bankers face problem in regard to

giving decisions in making and receiving payments, they generally consult their own

colleagues, and go through ICC rules (mainly UCP 600) in this connection.

Table 18: Measures for Handling Payment Related Difficulties

Consult ICC Materials 90%

Consult with Colleagues 90%

Consult with External Experts 0%

Others Steps 0%

Source: Survey data

Some bankers individually keeps copies of ICC rules (like UCP, ISBP, URC and

URR), BB Guidelines, Export-Import Policies etc. with them and most of the AD branches are observed to keep such materials.

IV. Some Issues and Recommendations

The following issues along with recommendations have been identified and discussed

in the workshop.


One, in the chapter 7 of GFET, 2009 the directives for import on usance basis

have been entailed. A section therein captioned as „LC on deferred payment basis‟

has permitted that subject to the compliance with other conditions laid down by

Bangladesh Bank for import as well as the Import Policy Order 2009-12, LCs may

be opened on deferred payment/usance basis only for five categories of items such

as capital machinery, industrial raw materials, costal vessels (oil tankers, ocean

going vessels), agricultural implements and chemical fertilizers. Here the tenor

could range between 90 days to 360 days. Moreover, the domestic regulatory

framework has also discouraged commercial imports on usance basis. But

sometimes, different applicants approach banks for issuing deferred LCs for items

regarding which neither any clear cut direction is given in the local regulatory

framework nor the products could be easily categorized as both industrial nor

commercial items creating difficulties for the desk officials. Suppose, a trader may

approach a bank for issuing deferred LC to import electricity generating

equipments. The participating bankers opined that, the list containing items allowed

for import on deferred basis should be more specific and exhaustive.

Continuing with the same issue, it has been also found that, it is a common

practice that certain types of industrial raw materials and capital machineries are

regularly imported where 50% payment is affected based upon the presentation of

compliant documents (implying a sight LC) but remaining 50% is arranged later on

(deferred payment), based on the importer‟s certification regarding the performance

of the imported goods (after installment if the machineries have been performing up

to the desired level). Sometimes, importers of food items (powder milk) want to avail

this sort of facility i.e. sight payment followed by the payment of remaining portion

only after getting the green signal regarding the quality of the products (presence of

melamine) from the authorities such as Atomic Energy Commission, BCSIR etc. But

these provisions are not clearly specified in the local regulations.

Two, in the chapter 7 of GFET, 2009, there is a directive regarding the disposal of

the fully utilized, partly utilized and unutilized LCAFs (exchange control copies)

stating that even the partly utilized or fully unutilized LCAFs should also be

surrendered by the ADs to Bangladesh Bank after expiry of the validity period of the

remittance. It is difficult to justify the surrendering of the unutilized copies as the

banks did not send any copy of LCAFs to CCI&E. Regarding the disposal of

unutilized LCAFs the forum commented that, unutilized LCAFs should not be

reported to Bangladesh Bank.

Three, if we would like to discuss about the difficulties faced by the desk

officials facilitating imports then an obvious issue must be the Bill of Entry. In the

domestic guidelines, it has been stated that the concerned ADs related with import

trade must have the copy of the customs BoEs or certified invoices (in case of import

by post/courier) at their disposal within 120 days from the remittance date. Moreover,


due to the irregularities and fraudulent practices evolving the shipments through land

ports, the directives are more stringent. But surprisingly in some cases, the concerned

ADs didn‟t receive the BoEs. In spite of the penalty imposed by the Bangladesh Bank

on the importers with overdue BoEs, barring the ADs form opening fresh LCs on

their behalf, the concerned ADs do face tremendous difficulties in dealing the

inspection teams if they do not possess the BoEs in due time. So, there could be such

arrangements under which the ADs can straightway have online access to the BoEs

issued by the Customs. Moreover, if the ADs can have online access to BOEs,

payment settlement can be expedited, particularly in cases of waiver where there is a

time lag between the delivery of documents to the local importers and receipt of

BoEs. Sometimes, it takes 8 /10 days even. But in between the payments are not yet

being affected as without the BoEs the local issuing banks can not affect payments in

due to documentary discrepancies. The online access to the BoEs will also enhance

the country image through expediting payments.

Again it is written in our domestic regulations, that the issuing banks must have

the stamped embossed BoEs from the importers, evidencing the payment of import

tariffs. But the bankers have argued that it is not the responsibility of the banks to

oversee the payment of duties. Customs certified assessment copy of BOEs should be

sufficient for the banks for recording purpose and no further evidence of duty

payment is required. The banks should not bargain with the importers on that issue.

Only if there are problems in the description of commodities (material discrepancy of

BoEs) only then it should be considered.

Again, if there is an overdue BoE, the importer is going to be placed in the list of

defaulting importers prepared by Bangladesh Bank prohibiting him from further

imports. But there had been instances where, even after the collection of the overdue

BoE copy the importer was still enlisted. So, some mechanism should be devised

which will automatically remove such importers when they have duly submitted the

BoE copy. Online access of BoEs by banks is hugely important and BB, NBR and the

Customs should create platform through which BoEs could easily be collected by the

banks without hassle.

Four, in article 16 of UCPDC 600, it is clearly stated how to deal with the

discrepant documents as well as it has mentioned four scenarios regarding the

handling of the documents by the banks after lodging discrepancy notices. But in

practice, a lot of bankers have complained that the applicants are defiant of both the

UCPDC provisions as well as the local regulations regarding discrepant documents

and waiver. Cases have been found where, in spite of compliant documents the

applicants requested the banks to lodge discrepancy notices to halt the payments

momentarily on the grounds such as goods hadn‟t arrived. More interestingly, in few

cases it has been observed that in spite of the arrival of the consignment, the

applicants approached issuing banks to delay payment through issuing discrepancy

notices, clearly violating the norms, to get the documents from the banks, either for


inspecting the goods at the ports or for getting the goods cleared from the ports based

on the documents. Later on they waived to affect the payments and demanded

discount in some instances. If payment of sight LCs are delayed, banks should use

own judgment to gauge out the exchange rate fluctuation risk. In no way, they should

be bypassing the local laws and facilitate the local importers in fraudulent practice.

Five, late payment is quite a common phenomenon in our trade services

operations. In a lot of instances, it is observed that, in spite of receiving compliant

documents under sight LCs, the payments have been lingered. This practice is more

prevalent amongst the SCBs which not only harm their institutional reputation but

also taints the country image. And so, the confirmation charges are on the rise in

spite of a good country rating by institutions such as Moody, Standard & Poor etc.

It implies that we have failed to take the advantage of good country rating and high

confirmation charges are making our imports dearer. Even, this is not the end of the

story, sometimes the foreign counterparts retaliate through late payment

(Bangladeshi exports).

Six, for making the payments under local Back to Back LCs (denominated in

foreign currency) there are two alternatives for banks. Either they can use the Nostro

A/Cs (using swift MT 202) or they can use the FC Clearing Accounts mentioned with

Bangladesh Bank, which is also preferred by BB. It is observed that a lot of banks are

utilizing the services of foreign correspondents abroad as the payments are affected

through the Nostro Accounts which are maintained with them. Here, easily the

remittance could have been arranged between the local banks using the FC Clearing

Accounts with Bangladesh Bank more, which will have prevented foreign currency

outflow in form of charges. The reason behind these sorts of practice is simply to

gain in business with the correspondent agents resulting in higher revenue in form of

charges. So, the local banks should be compelled for using the FC Clearing Accounts.

Back to back letter of credit (local) payment settlement (through the BB Clearing

House) should not be done through POs or FDDs. BB must enforce the use of

BEFTN for faster settlement of back to back letter of credit payment. It will help in

faster settlement of back to back LC liabilities. Now it takes almost a week for

settlement through Pos or FDDs. It will also remove the chances of FDDs/POs being

lost. It will also reduce the cost of deemed exports. Again, delay in settling local LCs

should be strongly monitored by Bangladesh Bank on monthly basis (report of

payment). Based on that report, Bangladesh Bank can take initiative for making

payment by debiting the accounts of the banks maintained with them. It will allow

banks to go for other financing propositions.

For foreign back to back LCs, sometimes the banks face a lot of difficulties due

to either non-realization/late-realization of export proceeds or delay in disbursement

from the EDF. So, then the banks have to go for own financing. Bankers have asked

the Bangladesh Bank to chalk out tentative alternatives for this.


Seven, for verification of shipment under local LCs, sometimes peculiar terms

and conditions (signature of the official of the nominated bank on the back of the

delivery chalan) are asked for. Although, from money laundering point of view, it is

justified, but some bankers have been found to be unhappy about that as it simply

raises the onus of the bankers.

Eight, to handle discount claims on exports, in the guidelines it is given that, all

the cases of discounts claimed by the importers on account of different grounds

should be submitted to the FEPD, BB for recommendation or otherwise to the

Discount Committee, created for the purpose as per prescribed format and prior to

refereeing such cases to the Committee, ADs must be satisfied about the

genuineness and merit of the cases. Moreover, the ADs may remit export claims not

exceeding 10% of the repatriated export proceeds on the grounds such as short

weight claim, quality claim and part shipment. But nowadays, a lot of exports LCs

usually incorporate terms where it is mentioned that in case of discrepancies

(late shipment or others) the applicants will waive on the basis of discounting and

they also contain the amounts of discount. If there are discrepancies then simply the

foreign issuing banks communicate the local nominated/negotiating banks

regarding the discrepancies and also the applicable discount amounts as per the LC

terms (sometimes exceeding the limits mentioned in the guidelines) and ask to reply

within 48/72 hours with their standings. If the amounts are beyond the thrash hold

level, mentioned in the guidelines the cases are to be referred to the Discount

Committees, which usually take more than 48/72 hours to give their verdicts.

In between as punitive measures the discounts usually go further up. So, the

respective nominated/negotiating banks could be authorized with some prerogative

power in dealing with such cases of discount up to an extent/thrash hold level.

To cope up with the issue of discount on export value Bangladesh Bank may allow

post facto approval of discount value up-to 10% - 15% or more than that (a limit

beyond which approval from Discount Committee is required).

Again this particular issue adversely affects the overdue back to back obligations

with the OBUs of the nominated banks as well as the disbursed packing credits.

If there is a delay in receiving export proceeds, (due to the delay of the committee) at

least BB should permit the banks to settle the back to back liabilities for the

enhancement of the reputation.

Nine, in case of the foreign buying houses the transferring banks are located

outside Bangladesh. In most of these cases, the transfers of the LCs are done through

the SWIFT (MT 720 field) where the realization clauses are attached. It virtually

makes the transferred LCs very risky as there is no payment guarantee from the

transferring banks.


For domestically transferred transferable LCs, most of the local banks (SCBs, few

PCBs) transfer through endorsement on the back of the master LCs. It basically raises

the scopes for fraudulent practices and forgery. Most importantly, LCs are not

negotiable instruments which could be transferred through that process. All the local

banks must have established RMAs amongst themselves and they should use the

SWIFT (MT 720 field) for transferring for prompt settlement of back to back LCs.

Ten, in most cases, transferable LCs, received by the first beneficiaries are

transferred 100 percent to the second beneficiaries in Bangladesh. Incorporation of

sub-article 38 (k) in UCP 600 has created problems to our banking and trading

communities. For this specific issue, ICC Banking Commission in their opinion not

only has given the issuing bank the sole right to change/amend/modify the

transferable LC but also it has given the flexibility to the transferring bank for

exclusion of article 38(k) and subsequently communicating the issuing bank

regarding the 100% transfer as well as exclusion of article 38 (k). Currently, the

transferring bank informs second beneficiary/beneficiaries and issuing bank that the

documents can directly be sent to the counter of issuing bank. The practice is in line

with ICC opinion on UCPDC 600 38 (k). Still this issue of amendment procedure

remains debatable. Banks should follow conscious approach in this connection and

the transferring bank must be very agile in communicating the issuing bank regarding

exclusion of article 38 (k).

Article 38 of UCP has described, under which considerations (LC value,

shipment date, insurance coverage etc.), a transferable LC can be modified/amended.

Some bankers even raised questions like as such–if we are actually operating under

the framework of UCP for transferable LCs as there is no mentioning in article 38 of

UCP regarding the service charges and commissions of the buying houses, which are

typically reflected in our transferred LCs.

Eleven, article 2 of UCP contains the definition of banking day from which the

banking holiday could easily be distinguished. UCP provisions have barred the

operations (issuance, transmission, advice, amendment of LC, dispatch and receipt of

documents, issuing bank guarantee etc.) of trade services department on other than

regular banking days. But time to time, to facilitate the local trading communities

Bangladesh Bank asks the different AD branches in different locations to keep their

offices opened during specific national holidays through notifications. Although, it is

known that local regulations are prioritized over the international ones, but it creates

ambiguity amongst the bankers.

Twelve, there is no clear-cut time frame in UCP 600 for affecting payment under

sight LC. Only it has been said that any bank could have maximum five working days

for determining the compliance of the documents. There have been quite a few

complains that, some banks are miss utilizing that.


Thirteen, again, in UCP, there is not any precise directive for the nominated

banks for dispatching the documents to the issuing/confirming banks which are

submitted by the beneficiary. If under a sight LC, a nominated bank dispatches the

documents to the issuing bank long after the presentation made by the beneficiary

(although within the expiry period) then it is not evident who will compensate for the

loss of the beneficiary. UCP could be more precise in binding the

nominated/negotiating banks through fixing up a definite time line for disposal of the

documents.

Fourteen, according to the BB Guidelines on Foreign Exchange Transactions

(2009), for opening an LC, ADs should obtain confidential reports on foreign

exporters for satisfying themselves regarding the standing of the exporters through

consulting the existing books of reference issued by international credit agencies in

all cases where the amount exceeds BDT 5 lac against proforma invoices issued

directly by foreign suppliers and BDT 10 lac against indents issued by local agents of

suppliers. Gathering such a credit report requires spending foreign currencies of

around USD150 for each report. Credit report of the same suppliers collected for one

importer may be used for other importers during the validity period. In many cases

though a number of importers are importing from the same suppliers, credit reports

are collected separately, for each, spending the scarce foreign exchange of the

country. Another very crucial complain against D & B is that, sometimes, they are

quite late and sends the credit reports even after the LC has already been issued. So, if

the report shows that the credit standing of the foreign buyer is not satisfactory

enough then virtually it raises the risks of the LC issuing banks as well as eventually

the importer is in danger. This problem is particularly very acute for big LCs as well

where the international market price is quite volatile. Moreover, the ratings

sometimes do not match the practical experience (a poorly rated foreign supplier

performs very well and vice versa). It is proposed by the participating bankers, that a

Memorandum of Understanding amongst the banks may be helpful to have an

arrangement for sharing the credit reports to preserve the country‟s foreign exchange.

But possibly, D & B may not allow that to happen. A central database developed by

either Bangladesh Bank or any other organization such as FBCCI or BAB could play

a very vital role in this connection. It will be maintained upon yearly subscription

basis where the banks could take part in a collective manner. Here, the platform will

entail the entire data base of foreign buyers which could be easily available to the

banks at a reduced cost. But the problem is that, it will lead to business losses for D

& B for which it again won‟t be willing to make a deal for the platform. Alternatively

they won‟t be prepared to provide online access to the data base (already denied by D

& B in Bangladesh although they are providing it in other countries). For that,

arrangements should be made to reduce the monopoly market power of D & B

through tagging other rating agencies such as Ceydes.


Fifteen, for governing the transactions with the units of EPZ, there are a lot

directives incorporated within the domestic regulatory framework. But there are

opinions that these are not adequate. A comprehensive framework supporting both

the exports and imports of EPZs covering all the aspects of the various transactions is

required to be drafted.

Sixteen, recently, in quite a few instances it is found that to retain the clients in

this competitive market the banks are sometimes undertaking undue risks even by

passing the regulatory framework. Cases such as financing by the ADs to the

exporters through opening back to back LCs (deferred by 180 days) under open

account trade could be extremely risky if the foreign buyers default or don‟t make

payment. Although any default case has not been yet reported, but as the concerned

ADs are endorsing the transport documents (title to the goods) to the foreign buyers

directly, it can be commented that such practices are immensely risky as the ADs

have already financed also. It can be commented that through endorsing the transport

documents (title to the goods) to the foreign buyers directly, the ADs are undertaking

huge risk. So, the ADs should curb their risk appetite.

Seventeen, in various commercial transactions, there are different international

formats for contract. But unfortunately, in Bangladesh the use of sales and purchase

contract is not so prominent due to the intense use of documentary credit. But it is

well known that other three payment methods are guided by the purchase/sales

contract. In Bangladesh, exports proceeds are mainly received through documentary

collection under which contract is extremely crucial. In such a circumstance our

banking system needs a standard format for purchase/sale agreement, considering the

risks to preserve the interests of the clients in a better manner. Based on some

international standard format, the sales/purchase contracts should include the names

and the addresses of both exporter and importer. If there is involvement of agent then

the full address with name could be given. The information on description of the

good (which reflects the product name, product type, quantity/amount of the product

as well as the quality requirements), price of the product could be the major

components of the contract. The different trade terms like Incoterms, payment terms,

delivery terms etc are needed to be incorporated. Destination, freights, and different

fees are also needed to be in the contract. If any dispute arises on the transaction, the

dispute settlement procedure, default liabilities, penalties, indemnity, terms of

arbitration – these provisions should be cleared in the contract. These are the major

contents for a standard format but there are some other important issues which are

needed to be covered up in the contract. Moreover, the information requirement in the

contract format may vary from transaction to transaction depending upon the need of

the trading parties. It will make the international trade more protective. In the

workshop, there had been a contentious discussion to develop a standard format for

the sales purchase contract. As, now a days, the banks are facilitating the Bangladeshi

exporters under documentary collection more, (augmented by the survey findings)


which is guided by the contract, so we all emphasized on the importance of a

comprehensive contact to govern the trade deal. It is well perceived that, a complete

contact format with extensive provisions such as dispute settlement clauses will

protect the interests of the traders as well as the participating bankers. Regarding

settlement of disputes, all suggested that, incorporation of ICC rules in the contract

under documentary collection will be desirable as it is unbiased. So, we jolted down

the following provisions as to be included in the contact (for minimum coverage) for

safeguarding the related parties-

i. name and detailed addresses of the parties

ii. address of notifying party

iii. banks of both the trading parties

iv. method of payment

v. tenor of payment

vi. addresses of the participating banks

vii. incoterms

viii. mode of transportation

ix. ports/places of both loading/taking in charge and

delivery/dispatch/destination

x. endorsement of transport documents

xi. payment settlement process

xii. dispute settlement process (arbitration or litigation and the governing

laws)

xiii. insurance coverage

xiv. verification of contact

Although some bankers pointed that, from a banking point of view, judging the

authenticity of the contact will be risky but others argued that there is already an

existing process through which foreign buyers like HNM (Hong Kong) has given the

derogative power to some banks to authenticate the contracts executed by them.

Again there are thoughts that, in our country the remitting bank can engage the

foreign counterparts in that regard. But in many cases, as the contracts are replaced

by the LCs (which is done for mainly cost minimization) so the standardization of

contracts may not be required. Moreover, some argued that, different countries have

got different regulatory requirements which somewhat binds the traders to go for

different provisions, which may not be in line with the counterpart‟s country

requirements. Even the traders have got their own preferences as well as conservative

approaches. Again, there are sector wise diversified needs, so standardization of

contact format may not be as easy as said. Regarding the issue of sales purchase

contract, the bottom line is that, as the big MNCs and even the ICC have developed

different formats of contacts (there were suggestions for modification/up gradation of

ICC format), based upon those the banks in Bangladesh can go for drafting a standard

format of contacts (covering minimum provisions, as well as may vary depending


upon the specific requirements of the sectors) and make the traders aware of those.

The Bangladesh Bank or Bangladesh Association of Banks can have a decision that

these formats are binding upon the local banks for financing under contract. All these

will reduce the risks of the banks and also will assist the traders.

Eighteen, the participating bankers have mentioned about some malpractices

regarding endorsement of transport documents. As per the GFET (chapter 8 of

Guidelines for Foreign Exchange Transactions, 2009), other than the cases such as

Advance TT received by the domestic exporter or for EPZ exporters, the shipping

lines are not permitted to issue Straight B/Ls (directly consigned to the foreign

buyers) without the N.O.C. from the local A.D. (the nominated/ negotiating/

remitting bank). It is also a vital condition for the shipping lines to obtain license

from Bangladesh Bank. But quite a few banks have complained that some shipping

lines have violated that as well as there had been cases where although the copy of

the FCRs were issued in the name of local ADs but surprisingly the Original Master

B/Ls were directly endorsed in the favour of the foreign buyers. In these cases, the

ADs threatened the carriers of lodging complains to BB if they did not get cautious.

But these cases should be distinguished from the cases where the big shipping lines

such as APL, Mareskline, NYK usually issue straight B/Ls favouring the foreign

importers as they are the nominated agents of those foreign buyers. Practically, either

cases such as where significant amount of advance remittance has already been

received or cases such as where for advance remittance intimation of shipment is

required then these shipping lines usually fax the copy of original B/Ls to the

foreign buyers with an implicit payment guarantee to the local exporters. Although as

per the guidelines, these cases might appear to be very risky as well as violation, but

practically, these are not that much risky as substantial amount of proceeds would

ultimately be received before transferring the title to the consignment to the foreign

buyers. But for small shipping lines it should not be allowed as their risk undertaking

capacity is not as high as of the giant ones.

REFERENCES

Awasthi, G S (1997), Trade Payments, Paris: International Chamber of Commerce.

Bangladesh Bank (2009), Guidelines for Foreign exchange Transactions, Vol. 1 & 2, Dhaka: Bangladesh Bank.

Busto, Charles (1994), ICC Guide to Documentary Credit Operations, ICC Publication No. 515, Paris: International Chamber of Commerce.

Byrne, James E (2001), “Overview of Letter of Credit Law and Practice” in Ed.

Byrne, James E and Christopher S. Byrnes (2001) Annual Survey of Letter of Credit Law and Practice, USA: Institute of International Banking Law and Practice.

Byrne, James E (2000), ISP98 and UCP500 Compared, Institute of International Banking Law and Practice, USA.


Collyer, Gary and Ron Katz (2002), ICC Banking Commission Collected Opinion 1995-2001, International Chamber of Commerce, Paris.

Choudhury, Toufic A and Shah Md. Ahsan Habib (2006), „Moving into the New

UCP‟ keynote paper presented in the seminar organized by ICC, Bangladesh on January 05, 2006.

Clarke, Brain W (1995), “ Documentary Letters of Credit” in Clarke, Brain W (Ed.) Handbook of International Credit Management, Gower, USA.

Goode, Roy (1992), Guide to the ICC Uniform Rules for Demand Guarantee, Paris: International Chamber of Commerce.

Jimenez, Guillermo (1997), ICC Guide to Export and Import Basics ICC Publication No. 543, Paris: International Chamber of Commerce.

International Chamber of Commerce (2007), Uniform Customs and Practice for

Documentary Credit- UCP 600, Paris: International Chamber of Commerce.

International Chamber of Commerce (2007), International Standard Banking Practice

for the Examination of Documents under Documentary Credits, Publication no. 681, Paris: International Chamber of Commerce.

International Chamber of Commerce (1994), Guide to ICC Arbitration, International Court of Arbitration, Paris: International Chamber of Commerce.

Lardionis, Jacques (1995), “Documentary Collections” in Clarke, Brain W (Ed.) Handbook of International Credit Management, Gower, USA.

Mann, Ronald J (2001), “Role of Letter of Credit in Payment Transactions” in Byrne,

James E and Christopher S. Byrnes (Ed.) Annual Survey of Letter of Credit Law and Practice, USA: Institute of International Banking Law and Practice.

Ministry of Commerce (2010), Export Policy 2009-12, Government of Bangladesh, Dhaka.

Ministry of Commerce (2010), Import Policy Order 2009-12, Government of Bangladesh, Dhaka: Ministry of Commerce.

Rowe, Michael (1998), Trade and Project Finance in Emerging Markets, United Kingdom: Euromoney Publications.

Virdi, Surender Singh (1992), Documentary Letter of Credit and UCPDC, New Delhi: Tata McGraw-Hill Publishing Company Limited.

Watson, Alasdair (1988), Finance of International Trade, United Kingdom: The

Chartered Institute of Bankers.

Pierron, A. and S. Sankar (2008), International Trade & Trade Finance. Celent.


Paper Six

Mobile Banking in Bangladesh

Md. Mahbubur Rahman Alam Assistant Professor, BIBM

Md. Shihab Uddin Khan

Associate Professor, BIBM

Kaniz Rabbi Assistant Professor, BIBM

Mobile Banking in Bangladesh

I. Introduction

Mobile banking is a banking which provides financial services to un-banked

communities efficiently at affordable cost without branch network. Providing

banking and financial services, such as cash-in, cash out, merchant payment, utility

payment, salary disbursement, foreign remittance, government allowance

disbursement, ATM money withdrawal through mobile technology devices, i.e.

mobile phone, is called mobile banking.

Mobile banking enables mobile phone users to access basic financial services

even when they are miles away from their nearest branch or home computer. Mobile

banking is already flourishing in the Philippines, Brazil and Africa like other parts of

the world. In the United States, about 10 percent of consumers, i.e., 1.7 million

people currently use their cell phones to conduct bank transactions. That number was

expected to grow to 35 million by 2010 (www.cnbc.com).

The number of mobile phone users worldwide have already crossed five billion

recently. In Japan, nine out of 10 people have cell-phone accounts, and in countries

such as Italy, Norway, Sweden, United Kingdom, Saudi Arabia and Malaysia the

market penetration of mobile phones has already exceeded 100% (ITU ICT

Indicators, 2010).

Mobile banking is now a global phenomenon. Apart from the developed

countries, the developing countries are experiencing strong growth in the mobile

banking. The mobile banking market has grown significantly over the past several

years, particularly in the developed countries, where many financial institutions

now offer some form of mobile services for their customers. This trend contributes

towards the anticipated growth of mobile financial information services, funds

transfer, bill payment and presentation, account management and customer service

solutions.

Mobile banking is most often performed via SMS or the Mobile Internet. But it

can also use special programs called ‗clients downloaded‘ to the mobile device. The

standard package of activities that mobile banking covers are: mini-statements and

checking of account history; alerts on account activity or passing of set thresholds;

monitoring of term deposits; access to loan statements; access to card statements;

mutual funds/equity statements; insurance policy management; pension plan

management; status on cheque, stop payment on cheque; ordering check books;

balance checking in the account; recent transactions; due date of payment


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(functionality for stop, change and deleting of payments); PIN provision, change of

PIN and reminder over the internet; blocking of (lost/stolen) cards; domestic and

international fund transfers; mobile recharging; commercial payment processing; bill

payment processing; withdrawal at banking agent; and deposit at banking agent.

Banks play a vital role in developing the economic and social conditions of a

country. The major share of the profit of banks generally comes from spread. But the

profitability of banks is under tremendous pressure because of continuous shrinking

of spread. It becomes important for banks to reduce the cost per transaction for

increasing spread that in turns will increase the profitability of banks. Using

technology in banks reduces the cost. Banks have realized that cost of transaction

drastically reduces from brick and mortar structure of the branch to electronic

delivery channels like ATM, POS Terminal, Mobile Phone, Internet, etc. Bank also

enjoys lower overheads, establishment, premises and maintenance costs, which

results in reduction of transaction cost. With the emergence of mobile telephony, the

concept of mobile banking is gaining momentum. Low transaction cost is one of the

main reasons why Mobile banking is getting popularity. According to Diniz (1998)

Internet banking provides the lowest transaction cost in USA of $0.01 whereas other

delivery channels like ATM and Phone banking cost $0.27 and $0.52 respectively. In

India transaction cost in an old generation bank is Rs. 256 while it is of Rs. 150 of a

new generation computerized bank. ATM transaction costs Rs. 27, Phone banking

have a cost of Rs. 15 whereas transaction costs through Internet is least at only of Rs.

11 (Bhasin, 2003). Bangladesh also shows a reduction of transaction cost as a result

of using computer technology. Here, transaction cost is $3.33 (Tk. 200.00) for a

manual branch, $2.5 (Tk. 150.00) in a computerized branch [Rahman 2003] and $ 0.6

(Tk. 40.00) for ATM (Shirin, 2010). On the other hand, in USA, transaction cost is

only $1.14 in a computerized branch of a bank (Diniz, 2003). Mobile Phone

transaction costs only $0.16 in USA.

Since Mobile banking offers some smart services benefiting both banks and

customers compared with traditional banking system, it has become imperative to

make necessary room for the scheduled banks to increase mobile banking. Among

others, attractiveness of mobile banking includes: it lowers transaction cost; provides

24-hour services; ensures increased security and control over transactions; reduces

fraud risk; performs higher volume of transactions at less time; increases number and

volume of value payment through banks; allows remote transactions facilities that

replace physical presence of a customer in a bank branch and increases transaction

speed and accuracy. On the other hand, traditional banking is time-consuming and

more costly and therefore, mobile banking is replacing traditional banking all over

the world. In Bangladesh, mobile banking facilities are yet to be fully developed

although some technology-driven products and services have been in operation over

the last few years.


Rahman (2003) provides statistics on the use of electronic devices in banking

activities of Bangladesh from which it is shown that the initial cost of mobile banking

may be high, but it can be recovered within a few years. This indicates that the

introduction of mobile banking is profitable for the banks. From the point of view of

profitability, the study supports the assertion that the adoption of mobile banking in

banking activities helps in generating higher profit.

The basic objectives of the study are as follows: One, to explore the various

facets of different mobile banking models including their merits, demerits and

security issues; Two, to share the mobile banking implementation status of selected

countries; Three, to explore the current mobile telecommunication infrastructure of

Bangladesh and understand the awareness and readiness of customers regarding

mobile banking; Four, to evaluate the current status and preparedness of banks to

facilitate mobile banking in Bangladesh; Five, to raise some issues which need to be

discussed for smooth operation and implementation of mobile banking in

Bangladesh.

This paper is based on both primary and secondary data. A good number of

literatures have been reviewed to sharpen the thought on mobile banking and its

different facets in the context of Bangladeshi banks. Data on various indicators

relating to the readiness of the mobile communication infrastructure of the country as

well as banks have been collected from different sources such as Bangladesh Bank

publications and reports; websites of different banks and BTRC (Bangladesh

Telecommunication Regulatory Commission). Information has also been collected

from several daily news papers, Wikipedia and other Internet resources. Various

policies and circulars of Bangladesh Bank related to mobile banking have also been

consulted for preparing this paper.

A total of nine banks permitted for offering mobile banking have been selected

for the study. The primary data has been collected by the authors through

questionnaire. In order to accomplish the stated objectives, a key-note paper was

prepared and presented in a day-long workshop participated by a number of senior

level bankers from different banks which was followed by a group discussion by the

participants. Several issues were raised in the discussion and the final report has been

prepared after incorporating the valuable suggestions where it is thought appropriate.

The paper is organized in eight sections. Section I describes the introduction,

objectives and methodology. It is followed by a theoretical framework of mobile

banking including different channels and models with comparison. Section III depicts

the different country experiences regarding mobile banking adoption. Section IV

describes the mobile telecommunication infrastructure of Bangladesh. Economic

benefits and customers‘ awareness are discussed in section V and VI, respectively.

Current implementation status of mobile banking in Bangladesh is outlined in section


VII. Finally section VIII comes up with some recommendations for effective

implementation of mobile banking in Bangladesh.

II. Mobile Banking Technology

Mobile Banking Business Models

A wide spectrum of mobile/branchless banking models is evolving. These models

differ primarily on the question that who will establish the relationship (account

opening, deposit taking, lending etc.) with the end customer, the Bank or the Non-

Bank/Telecommunication Company (Telco). Models of branchless banking can be

classified into three broad categories - Bank Focused, Bank-Led and Non Bank-Led.

Mobile Channel Platforms

In creating a mobile banking solution, financial institutions use a variety of mobile

media channels including IVR (Interactive Voice Response), Short Message Service

(SMS), Unstructured Supplementary Service Data (USSD), mobile web (WAP), and

mobile client applications. Each mobile media channel has its strengths and weaknesses,

and it is important to identify the delivery mode that is the most appropriate for each

banking service.

Potential Threats

Financial institutions should be aware of the types of potential threats that can affect

their mobile banking services. These include: Cloning, Hijacking, Malicious Code,

Malware, Man-in-the-Middle Attack, Phishing, Redirecting, SMiShing, Spoofing and

Vishing.

Mobile Banking Technology Models

Elements of the Mobile Channel

The use of mobile brings two new elements to the financial services equation:

The mobile device itself

The communications channels offered by mobile network operators.

Both vary considerably in their functionality, as described in turn below.

Mobile device

The handset consists of several layers of components as shown in Figure-1 below.


Figure 1: Elements of the mobile handset

Source: Bankable Frontier Associates

Standard handsets are devices that contain:

A mobile radio to communicate with the mobile network

The capability to send Voice, SMS, USSD, and DTMF over the radio interface

An operating system that ties all the elements on the handset together

Human interfaces for audio (speaker and microphone), a keyboard and a display

At the Application level the standard handset passes the SMS, USSD, DTMF and

voice ―directly‖ between the display, the keyboard and the audio human

interfaces and the bearer services.

A capability to interface via SIM toolkit to SIM based applications also exists.

The SIM Toolkit programmable application facility on the SIM is the way that

standard handsets can be made secure and be given additional menu based

‗application‗ functionality – such as mobile banking.

Standard handsets do not provide:

Facilities to secure or encrypt data before sending it to server based applications

at mFSPs.

Ability to run programs on the handset.


Where needed, data security can be added to the standard handset by providing

this on a new SIM through applications loaded into the SIM and accessed through

SIM Toolkit.

Advanced Handsets have all the functionality of standard handsets and in addition

can communicate using IP data (GPRS, EDGE, 3G HSDPA)

have the ability to run applications under the handset operating system (usually in

a J2ME/Java environment)

browse WAP and Internet sites – these are the ‗advanced‘ features.

Advanced handsets fall into two sub-types:

feature phones – handsets that have browsers and J2ME environments.

They are usually locked down, in that they do not have easily accessible

programming environments and often are MNO controlled in what software they may

run. Typically feature phones can be described as the high end mobile phones.

smart phones – handsets with programmable environments.

The environment on the handset resembles a small personal computer and on

most the user is free to choose and run whatever software they choose. The handsets

typically have large displays and can perform full function Internet browsing.

Examples of these phones are Apple iPhone and Nokia N95.

Advanced handsets provide facilities to secure data before sending it to server-

based applications at mFSPs. This security is provided by the browsers and J2ME

environments on the phones. Application based data security can also be provided on

the advanced handset using the SIM. Secure applications can be loaded into the SIM

and accessed through SIM Toolkit (Bankable Frontier Associates, 2008).

Communication Channels

The mobile network comprises the components which carry a data message to

and from the handset to the mFSP. The features of the mobile channels used to carry

those data messages are summarized in Table-1.


Table 1: Mobile Channel Features

Channel

Technology

Description Supported

on

Handsets

Security of

transaction

on handset

End-to-

end

Security

Supports

Multiple

MNOs

IVR

A call is made to (or from)

an automatic system and

the user receives pre-

recorded prompts and

responds by selecting keys

Standard

Handset

None No Yes

Structured

SMS

A SMS text message is

sent to the mFSP. The

message is interpreted and

acted upon and a response

SMS sent

None No Yes

USSD

A number is called from the

handset and a menu then

displayed on the handset

that the user navigates

through and selects

options and enters data

None No Yes *

SIM toolkit

(WIB / SAT /

Java / custom)

Implemented within the

SIM that is inserted in the

handset. The functionality

appears as a set of

additional menu/s on the

handset

Provided in

SIM Yes Possible **

J2ME Applications that can run

on the handset

Advanced

Handset

Provided

within the

application

Yes Yes

WAP

Internet Browsing using a

WAP protocol browser.

Same as browsing off a PC.

WAP provides optimised

(data usage and size of

screen presentation)

interaction for the mobile.

As provided

by the WAP

browser

Yes - SSL Yes

HTTPS -

Internet

browser

Standard Internet browsing

off the mobile to the bank's

web site. Mobile performs

the function of a PC

As provided by

the Internet

Browser Yes - SSL Yes

*Requires a common USSD short-code on every MNO

**Because of the need for access to the MNO SIM. Typically MNOs do not run common 3rd

party applications



Technology-related Use Cases

Technology choices regarding handset and network define four main Use Cases

which have different risk characteristics. These Use Cases can be distinguished

according to:

the level of handset functionality required: Standard or Advanced; and

the degree of independence from a MNO or many MNOs.

Table-2 shows how the four Use Cases are derived from these two factors.

Table 2: Use Cases

Mobile Handset Capability

Standard (all) Advanced

Indep

enden

t o

f M

NO

Yes

Use Case 1:

Use what is there, existing

generic mobile bearer services

provided on all phones accessible

directly by user

Use Case 2:

Use mobile browsing services

that are provided on phones

Use Case 3:

Use advanced application

services provided on phones

No

Use Case 4:

Use a secure environment on

the mobile provided by the MNO

or MNOs

Use Case 4 prime:

Dedicated secure application

environment on a handset


The technologies associated with each of these Use Cases, along with some of the

more general associated risks, are seen in the following table (Table-3).

Table 3: Main Use Cases Identified By Technology

Use Case Approach Technologies

available Associated Risk

Use Case 1

SMS

Voice/IVR USSD There is no encryption of information so the

channel from the mobile to the mFSP is open to monitoring, replay, modification

and impersonation

Use Case 2

HTTPS = normal web browsing

WAP phase 1

WAP phase 2

Same risks as for a PC on the Internet. Channel is less exposed than regular

Internet as much of it is within MNOs

(Continued)



Use Case 3

J2ME Same as client side applications on PCs.

Mobiles less exposed to the Internet and the threats. However issues around the trust

(integrity and authenticity) of the applications

exist and need to be managed

Use Case 4

SIM Toolkit

WIB, S@T and

Java cards

The highest technical end-to-end security as

the application runs securely within the SIM

and the encryption keys are kept within the

SIM


Under Use Case 1, the usual practice is to combine the available technologies.

An example is the use of structured SMS messages which are sent to the mFSP.

The mFSP then prompts the user using a USSD prompt to enter their PIN. Five

sub-use cases incorporating such combinations have been defined for Use Case 1.

They are outlined in Table-4 below.

Use Case 1A is the only Use Case where the transaction and PIN are sent at the

same time. All the other Use Case 1s interactively ask for the PIN which reduces a

number of risks and thus makes the Use Cases (1B to 1E) more secure and less risky.

Table 4: Sub-Use Cases of Use Case 1

1A. Structured SMS Send plaintext SMS with instruction mnemonic, value and

PIN to the mFSP number, the SMS content is processed and a

response sent back to the handset

1B. Structured SMS

with confirmation and PIN

authorisation via

IVR

Send plaintext SMS with instruction mnemonic and value to

the mFSP number, the SMS content is processed. IVR calls back asking for confirmation of transaction and PIN. PIN

entered as DTMF. A SMS response sent back to the

handset

1C. Structured SMS

with confirmation

and PIN

authorisation via USSD

Send plaintext SMS with instruction mnemonic and value to

the mFSP number, the SMS content is processed. USSD message sent back to handset requesting confirmation of

transaction and PIN. PIN entered in USSD menu. A SMS

response sent back to the handset

(Continued)



1D. IVR call to

setup transaction and

IVR call- back

for PIN

authorisation

Call in to IVR to setup transaction via IVR voice prompts and DTMF responses. Transaction is processed and

checked. IVR calls back asking for confirmation of

transaction and PIN. PIN entered as DTMF

1E. USSD menu with

PIN login

USSD shortcode entered by user to initiate a USSD session,

prompt for PIN sent from USSD server, PIN entered and session opened and menu displayed. Follow menu to set up

transaction and then submit it for processing. USSD

transaction confirmation and thereafter a confirmatory SMS


Security by Use Case: The differences in the path and security associated with data

messages can be distinguished by the Use Cases (Bankable Frontier Associates,

2008). These are summarized in successive figures below.

Use Case 1 - The mobile channel for SMS, USSD and IVR DTMF

In this Use Case, the intrinsic security available in the network is used.

This intrinsically available security is not end-to-end but is instead built up of the

security available at each of the individual elements that make up the path that the

transaction takes from the mobile handset through to the mFSP. Thus at insecure

elements the transaction can be copied, altered, resent (replayed) and or destroyed.

Figure 2: The Mobile Channel for SMS, USSD and IVR DTMF – Use Case 1


Use Case 2 – The mobile channel for IP Data Browsing

In this Use Case, because it is possible to run an explicit security program on the

handset in the form of a browser with SSL it is possible to secure the data link


end-to-end from the handset to the WAP or HTTPS Web Servers. The handset

HTTPS browsing is the Internet banking from a mobile handset scenario.

Figure 3: The Mobile Channel for IP Data Browsing – Use Case 2


Use Case 3 – The mobile channel for IP Data Applications

In this Use Case, because it is possible to run a custom made client program with

explicit security on the handset, in this case a J2ME application with a cryptographic

capability, it is possible to secure the data link end-to-end from the handset to the

Application Server. The custom program can take the form of a banking application

or a payment wallet.

Figure 4: The Mobile Channel for IP Data Applications – Use Case 3


Use Case 4 – The mobile channel for SIM toolkit

In this Use Case an application is securely placed into the SIM. The handset

communicates with the SIM and thus the application using a set of commands called

SIM Toolkit. The communication allows the application on the SIM to appear as part

of the celphone‗s menu. The display and selection of menu items and the entry of

data is then possible.


Figure 5: The Mobile Channel for SIM Toolkit – Use Case 4


Vulnerabilities of the mobile channel

There are a set of generic vulnerabilities (irrespective of Use Case/technology

choice) which are common to all m-FS applications: Use of weak user PINs, Reset

of PIN or password by fraudster, Linkage of imposter MSISDN against the bank

account, Issuing PIN to Imposter, Steal and use mobile device, Incorrect transaction

due to user error and Lack of user knowledge or experience. There are a set of

particular vulnerabilities of the mobile channel relating to handset, mobile channel,

mobile payments application and developing economy environments in particular

(Bankable Frontier Associates, 2008).

Risk Control Measures

As noted above, we have chosen to embed prudent risk countermeasures or

controls into each use case scenario in arriving at the risk evaluation. However, given

the importance of these measures, this section focuses on them separately.

Conventional risk control measures include:

Reject—by changing the model to avoid the risk

Accept—pricing for the risk

Transfer—by moving the risk to another party (e.g. buying insurance)

Mitigating the risk through control strategies to stop vulnerabilities being

exploited.

Model Selection

In general, in developing countries, the mass market for the foreseeable future

will have only standard handsets; hence m-FS models which seek wide reach are

likely to fall into Use Cases 1 or 4. These situations are more likely to be

―Transformational‖ because of the potential to extend financial services to people

who are without them. For applications in the upper end of developing markets or in

developed markets, Use Cases 2 or 3 are likely to apply. Use case 4 prime is not yet

widely available.


In general, Use Case 1, which is common in developing countries and can

provide ubiquitous access, presents higher inherent technology-related risks largely

because of the lack of end-to-end secure encryption of messages. This increased risk

may be mitigated by effective business process and or product design controls. While

Use Case 4 addresses the encryption risk by providing encryption within the SIM,

and provides the most security; its use and market may be limited by the need for

MNO cooperation and a SIM with SIM Toolkit capability. In Use Cases 2 and 3, the

risks (and services) increasingly converge with standard Internet banking risks.

The mobile technology options available today allow for a variety of choices

when implementing Mobile Financial Services. Options range from technologically

secure end-to-end implementations to less secure options that do not have full mobile

to banking system security.

It is possible to offset the increase in risk caused by using less secure mobile

technologies by introducing operational controls. The ubiquity of less secure mobile

technologies, namely Voice/DTMF/IVR, SMS and USSD on all mobile handsets and

the feasibility to offset the risks introduced by their use in mobile financial service

provision makes it possible to extend financial services to all mobile subscribers.

Given the lower levels of mobile handset technology prevalent in many

developing countries, transformational mobile banking can be accomplished by a

careful appraisal, introduction and management of operational controls (including

user education) necessary to offset the higher technical risks inherent in choosing

ubiquitous but less secure technologies. The following diagram (Figure 2.6) depicts

the security models that can be used and the relative tradeoffs between technical

security and operational controls that are discussed in this report. Moving to prudent

and adjusted security models requires a proportionate regulatory framework within

which to ensure on-going and active supervision of risk management.

Figure 6: Tradeoffs between Technical Security and Operational Controls



In case of Bangladesh, with all respects, adjusted mobile security model will be

the best selection. But with the advancement of technology, increased customer

knowledge, availability of smart phones we can shift to Use Case1. Use Case 2,3 and

4 will be dream for us now and can be achieved at least five to ten years later.

III. Mobile Banking in Selected Countries

Mobile devices are now the centerpiece to consumer lifestyles. From e-mail

communication, social networking, banking, games, music and video, mobile devices

have forced a radical shift in the way in which organizations service their customers.

In a June 2010 report on Internet trends, Morgan Stanley predicted that by 2012 the

number of smart phones shipped will exceed the total number of desktop and

notebook PCs. And today, more than 80 percent of adults in Europe and the United

States own a mobile device.

Mobile Banking in USA

According to a Study by the Entrust USA (2010), some of the largest U.S. banks -

- Bank of America, Citibank, Wachovia, Washington Mutual, Wells Fargo, and ING

Direct – are providing mobile banking services that gives one access to his/her

accounts wherever he/she is. Like regular online banking, the mobile service allows

consumers to transfer funds, check balances, make bill payments, and look up branch

locations from their mobile devices. Though still in its infancy, banks are hoping the

mobile service will catch on with consumers. Mobile banking is an obvious extension

of online banking as cell phones get more powerful and begin to mimic computers.

Bank of America and Wachovia both offer a browser-based service, which is a

simplified version of the online site that fits within a cell phone and PDA screen. Any

customer that has Internet access on their cell phone can log on to their accounts by

typing the banks URL into their mobile browser.

The mobile banking services of Citibank is called ‗Citi Mobile‘. It is a

downloadable application. Customers need to log on to citi.com/citimobile on their

computers and download Citi Mobile to their cell phones. The application then

resides on the phone. A use can access his/her account anytime.

To generate interest in the mobile service, banks and wireless providers are

teaming up. Wachovia has partnered with AT&T and Firethorn to have the bank's

mobile service preinstalled in AT&T phones starting in the fourth quarter of 2007.

AT&T customers who don't have Wachovia Mobile installed in their devices will be

able to download the application from the Wachovia or AT&T website.


https://web.da-us.citibank.com/cgi-bin/citifi/scripts/prod_and_service/prod_serv_detail.jsp?BS_Id=CitiMobile&M_M=S

In USA, one drawback for mobile banking users is the fees. Even though banks

are not charging for their service, carriers do charge for accessing data through their

phone. Carriers typically charge by each kilobyte they use to access data. Customers

can select instead to pay a monthly fee to use an unlimited amount of data – a price

that varies depending on the carrier and type of phone you use. AT&T, for example,

charges $19.99 a month for unlimited data usage.

Some customers may also be hesitant to sign up for mobile banking because of

security concerns. The banks say that their mobile service will have the same strict

log ins and security available to their online banks. Mfoundry, the company that built

the Citi Mobile application, says that if a customer looses their cell phone they can

call Citibank and the entire application will be deleted from the phone. Firethorn said

their applications would have a similar function.

Banks are hoping to extend mobile banking as technology improves. In USA

Citibank has two ongoing cell phone trials. The first is a partnership with

MasterCard, AT&T, and Nokia that places chips in cell phones allowing Citi debit

and credit to make payments by waving the cell phone at a participating store‘s

register.

Citi‘s other pilot is with Obopay that lets debit and credit customers transfer

money between mobile phones. Analysts say even more revenue is possible in the

coming years when more functions are added to cell phones like international

transfers, and booking travel arrangements. While mobile banking is relatively new,

the service has shown some traction with customers. Citi Mobile says it had more

subscribers than expected while the service was being piloted around the country in

the spring. Wachovia Mobile says their service has been getting about 50,000 unique

visitors a week since its launch. Celent predicted that by the end of 2010, 35% of all

online banking households would be using mobile banking.

The mobile banking market has grown significantly over the past several years in

the United States, where many financial institutions now offer some form of mobile

services for their customers. Although more U.S. consumers currently use PCs rather

than mobile phones for banking, Figure-7 shows this gap narrowing. It is reasonable

to assume based on Figure-7, that the adoption rate of mobile banking in the U.S. will

follow the adoption rate of online banking. The following chart has been extrapolated

from an Online Banking Report (Entrust 2010) that compares the ramp-up period for

online banking to the estimated ramp-up for mobile banking. It took approximately

ten years (1996 -2006) to reach 40 million online banking users. According to the

report, it is expected to take 10 years to reach a similar penetration rate for mobile

banking.


Figure 7: Mobile Banking vs Online Banking Forecast

Source: Mobile Marketing Association

Financial institutions are no exception to the pressure to extend their services to

the mobile channel. A January 2011 Forrester Research study predicted that by 2015

mobile banking will reach one in five adults in the United States (Figure 3.4).

Figure 8: Forecast: US Mobile Banking Adoption, 2010 To 2015

Source: Forrester Research Mobile Banking Forecast, 2010 To 2015 (US)


Perhaps more significant in terms of the impact of mobile devices on banking,

Forrester Research Study predicted that 18 percent of adults in the United States who

have yet to adopt online banking will use their mobile device to access their accounts

by 2015. And for many customers, mobile banking will become the preferred channel

for basic banking transactions (e.g., checking account balance, transferring money

and paying bills). Today, 23 percent of smart phone users in the U.S. are checking

financial accounts.

Mobile Banking in Europe

In Europe, mobile penetration rates are around 80% and Germany is the largest

European mobile market with 50 million mobile users (Forrester, 2009). German

banks distribute their products via multi-channels (Bahadur, Desmet & v. Bommel).

According to Forrester‘s Research, 84 % of German consumers make use of

Automatic Teller Machines (ATM) - the most popular transaction channel. Banks

have recognised this trend and reacted with strategic alliances. For instance large

private banks such as Commerzbank, Deutsche Bank, Dresdner Bank,

Hypovereinsbank, and the Postbank have established an alliance called ―cashgroup‖.

This enables bank customers to withdraw money without paying extra fees at 7,000

ATM‘s throughout Germany (Cashgroup). Similar alliances have been made among

saving banks as well as co-operative banks.

In Europe, mobile banking trends are similar to those in the United States—as

many as 12 percent of Europeans who are online take advantage of some mobile

banking. However, adoption rates remain low and, at this time, it is predominantly

used for simple SMS (Short Message Service) text messages. A much smaller

number, only 4 percent, are actually accessing mobile banking (Hoehle, 2009).

While the convenience and immediacy offered by mobile banking is clearly the

primary driver for these users, particularly for simple transactions, there are still a

number of concerns that are holding back widespread adoption. In Europe, between

35 and 40 percent of adults currently banking online see no value in mobile banking.

And those accessing mobile banking websites are the typical early adopters, the vast

majority of whom are already banking online (Eusebio, 2009).

But the growth in mobile devices has also driven the incidence of fraud targeting

these devices. Whether simple rogue text messages, fictitious billing scams or more

malicious attacks using malware installed on the device, the number of attacks are

increasing at an alarming rate—mobile malware increased by more than 45 percent in

2010 compared to 2009. And with less education about mobile threats, users seem

more inclined to fall victim to them during mobile sessions. And for many, it‘s the

lack of security on these devices that is a major inhibitor to their adoption of mobile

banking. Twenty-two percent of adults banking online in Europe indicated that lack

of security was stopping them from using mobile banking (Eusebio, 2009).


Financial institutions are being urged to improve the mobile end-user experience

and develop new functionality in the mobile banking space to differentiate it from the

online experience. Mobile banking offers an immediacy and persistent ―always-on

communication‖ that is not available in other channels, including online banking.

This provides an opportunity for banks to differentiate offerings in the mobile space

from the more traditional channels.

Improved security will be a prerequisite to recognize the exponential growth in

mobile banking that is projected by leading analyst and research firms. And in the

mobile environment, where the expectation is for instant, unobtrusive

communication, end-user security and strong authentication needs to be simple, quick

and transparent.

Online banking is utilized by only 30 percent of consumers (Forrester, 2010). On

the other hand, 52 percent of them still rely on traditional physical branch services to

satisfy their banking needs – despite the fact that automated channels such as ATM‘s

or online banking offer lower transaction fees (Forrester, 2010).

In Germany, in order to access mobile banking services, customers should own a

mobile handset and subscribe to a MNO. There are four major MONs: T-mobile,

Vodafone, E-Plus, and O2. All German MNOs have recently introduced 3G/UMTS

services. The new data transmission rates appear to close the existing gap between

―wired‖ Internet access and mobile Internet. For instance E-Plus offers a ―flatrate‖ for

unlimited data transmission with transfer rates up to 384 Kbits/s (E-Plus, 2006).

Apart from general data/network usage none of these four network providers charges

customers for mobile banking services separately. All of the banks have websites that

can be viewed from any device, independently of the wireless service provider.

A research study (Solon 2009) on mobile banking services offered by the top 100

German banks found that surprisingly only 14 German financial institutions allow

their clients to interact via the mobile channel. Three out of these 14 offered very

simplistic SMS-notification services. Most banks do not charge customers extra fees

for SMS services.

Mobile Banking in South Korea

In terms of the evolution of services being offered on mobile applications, South

Korea is showing the way. The big push came when LG Telecom Ltd., the smallest

of Korea's three mobile service providers teamed up with the Kookmin bank to

launch the ‗Bank on' service. Under this scheme mobile users were able to use smart

chips embedded in cell phones for accessing all of the transaction and enquiry based

services. The chip-based service automated the authentication of users when they

accessed their bank's financial services to make the whole process much faster and


convenient. The icing on the cake came with the ability of these chip enabled cell

phones to be used simultaneously as cash cards. By October 2004 there were already

about 100,000 infrared readers adapted to take payment directly from mobile phone

handsets in Korea. Users can now use their cell phones to pay for everything, from

restaurant bills, travel tickets, merchandise and even haircuts (Infogile, 2007).

Mobile Banking in India

A study of Infogile (2010) found that when Reliance Infocomm, India rolled out

its CDMA network, (at the time the mobile market in India was still in its infancy,

and data services were almost never heard of) it made sure that all handsets supported

Java. The Reliance application platform, also known as R-World brought Java

compatibility even to the lower end phones.

Reliance used a novel way to overcome the memory limitations of lower-end

mobile phones, which hampered deploying of multiple standalone J2ME based

clients. Instead of storing applications statically on their cell phones, users access a

single menu based application called R-World, which connects them to the Reliance

servers. Using the menu based user interface, mobile users select the application,

which they want to run and download them over-the-air to their cell phones. These

applications are then executed locally on the mobiles. From mid-2004 Reliance tied

up with two of the popular private sector banks, HDFC and ICICI, to provide a host

of their enquiry and transaction based mobile banking services through its R-World

environment.

Reliance Communications (R Comm), an Anil Dhirubhai Ambani Group

company, has announced introduction of money transfer through mobile phones

across India with the help of ICICI bank as a joint venture partner. This new facility

for the subscribers of Reliance Communications is an easy to use alternative for

account-to account transfer of money which is normally associated with banks and

other agencies.

The money transfer market, according to R Comm, is more than $24 billion

annually including global transfers to India. This will help customers having accounts

with ICICI Bank to send and receive money anytime anywhere using Reliance mobile

phones. The service is made available to the masses on Reliance mobile world

enabled phones including the recently launched Reliance Classic range in the range of

Rs 777 and Rs 1,234. The customers will be charged a mobile transaction fee of Rs

10 and can transfer money up to Rs 5,000 with multiple transactions in a day.

ABN AMRO Bank brings to the convenience of mobile banking using an

application called MPOWER. It allows customers to access their account for inquiry

& transactions using simple SMS messages.


One can do the following using MPOWER:

Balance and Transaction Inquiry

Share Holdings in Demat Account

Funds Transfers to ABN AMRO and other banks

Bill Presentment and Payment

Cheque Inquiry and Stop Cheque

Online Fixed Deposit Opening

Request for Cheque Book and Statement

Request for new PIN and change PIN online

Others services provided by the Indian banks are given below (Table-5).

Table 5: M-Banking: The Services Bouquet

ICIC

I B

an

k

HD

FC

Ba

nk

IDB

I B

an

k

HS

BC

Ba

nk

of

Am

eric

a

Cit

iba

nk

AB

N A

mro

Balance enquiry √ √ √ √ √ √ √

Last few transactions √ √ √ √ √ √ √

Cheque payment status √ √ √ √ √

Stop payment of cheques √

Statement request √ √ √ √ √ √

Cheque book request √ √ √

Source: Infogile (2010)

IV. Mobile Telecommunication Infrastructure of Bangladesh

The proliferation of mobile telephony has brought dramatic changes in

Bangladesh. Mobile Teledensity, which stood at less than 1% ten years ago, has

surpassed 47% mark in May, 2011 (BTRC). Mobile penetration that reached the

remotest interiors across Bangladesh has united most of the unwired community. The

phenomenal growth triggered by deep mobile penetration has become the ultimate

choice of the Bangladeshi people to stay connected.

According to ITU (2010), position of Bangladesh in the World Mobile

Penetration index is 172 th, (46.17 per 100 inhabitants). Top position is carried by

Macao, China (206 per 100 inhabitants). Among the SAARC countries Bangladesh is

in 6th position, whereas Maldives and Nepal hold the first and eighth position

respectively. At the end of 2010, global cellular subscriptions crossed 5370 million

and 80 out of 100 inhabitants holds a mobile phone in the world (Figure-9).


Figure 9: Global Mobile Subscriber

Source: ITU World Telecommunication/ICT Indicators

Following figures (Figure-10 and Figur-11) also compare the mobile penetration

of Bangladesh compared to other SAARC and selected countries.

Figure 10: Mobile Penetration of SAARC Countries

Source: ITU, 2010.

0

1000

2000

3000

4000

5000

6000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Su

bsc

rip

tion

s (m

illio

n)

0

10

20

30

40

50

60

70

80

90

100

Pe

r 1

00

inh

ab

itan

ts

S ubs criptions (in m illions )

P er 100 inhabitants

S ource: ITU World Telecom m unication /IC T Indicators

G lobal mobile cellular s ubs criptions , total and

per 100 inhabitants , 2000-2010

Mobile Penetration of SAARC Countries

0

20

40

60

80

100

120

140

160

180

Mald

ives

Sri L

anka

India

Pakis

tan

Bhuta

n

Bangla

desh

Afg

hanis

tan

Nepal

Per

100 I

nh

ab

itan

ts


Figure 11: Mobile Penetration of some Selected Countries

Source: ITU, 2010.

The total number of Mobile Phone subscribers in Bangladesh has reached 75.484

million at the end of May, 2011. There has been large amount of investments from

domestic and foreign investors in the mobile technologies. Due to this, access to

telecommunications increased rapidly. The phenomenal growth has enabled the mass

unwired population of Bangladesh to stay connected. Multinational mobile phone

companies are providing private sector telecommunications infrastructure. Rising

teledensity is a major indicator of its contribution- in 2002 teledensity in Bangladesh

was only 0.54%; this increased to 53% in May, 2011 (PSTN and Mobile).

In Bangladesh, liberalization of the mobile phone sector led to large increases in

the accessibility of telecommunications to consumers due to low tariff costs. BTRC

has been able to fix call charges for all cellular phone operators and has been able to

bring all the companies under a uniform regulatory framework. The mobile operators'

call charges now range between a maximum of Tk 2 and minimum of Tk 0.25 per

minute. It is evident from the graph (Figure-12) that in 2001 the average call charge

was 11.7 Tk/minute, whereas in April, 2010 it has come down to 0.66 Tk/minute.

Mobile Penetration of some Selected Countries

0

20

40

60

80

100

120

140

160

180

200

Sa

ud

i A

rab

ia

Ru

ssia

Ma

ldiv

es

Sin

ga

po

re

Un

ite

d K

ing

do

m

Ma

laysia

Au

str

alia

Fra

nce

Ja

pa

n

Un

ite

d S

tate

s

Sri

La

nka

Ca

na

da

Ch

ina

Ind

ia

Pa

kis

tan

Bh

uta

n

Ba

ng

lad

esh

Afg

ha

nis

tan

Sie

rra

Le

on

e

Ne

pa

l

Ch

ad

Co

ng

o

Bu

run

di

Cu

ba

Eth

iop

ia

So

ma

lia

Mya

nm

ar

Pe

r 1

00

In

ha

bit

an

ts


Figure 12: Average Tariff 2001-2010

Source: BTRC

Market shares of mobile operators exhibit contrasting outcome of performance and

success. While the oldest mobile operator lags at the bottom of market dominances,

three operators who commenced their services almost at the same time do vary

significantly in their market positioning. Grameen Phone outperformed all other

operators and enjoys a clear lead in the race of securing market share (Figure-13).

Figure 13: Market Share of MNOs (Total 75.484 Million)

Source: BTRC, May 2011

Average Tariff

11.37

9.8

4.5

32.3

1.781.35

0.88 0.66

7.45

0

2

4

6

8

10

12

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Year

Taka/M

inu

te

Robi

14.35

Banglalink

20.047Grameen

Phone

33.261

Airtel

4.911Citycell

1.747

Teletalk

1.166


V. Economic Benefits of Mobile Banking

To know the economic benefits of mobile banking we shared the theoretical

knowledge with the practitioners, Chief Technical Officers (CTOs) of nine banks. All

of them said that if a large group of un-banked people can be covered by mobile

banking a huge amount of money can be collected as deposit for the banks that can be

mobilized for further business enhancement.

Around 33% of them think that mobile banking is a demand of time and

technology. About 22% agreed that without mobile banking it will be very difficult to

survive in this competitive era. 44% of them believe that it‘s a CSR that will help to

develop the country. But 88% of the CTOs dream is that it will help to diversify their

business as well as will increase business volume by including un-banked people.

Regarding benefits that will be received from mobile banking, all of them said

that it will increase revenue and will create new market for cross sell of products like

micro credit and micro finance through this channel. Micro saving schemes also can

be adopted to increase deposits of banks.

We also examined the indirect and direct strategic benefits of mobile banking for

DBBL, BRAC and Trust Bank (as they are the only provider of transactional mobile

banking in Bangladesh) whether such benefits are apparent in each of the banks.

Following Table-6 describes this.

Table 6: The Strategic Benefits of Bangladeshi Mobile Banking Services

DBBL BRAC Trust

Indirect benefits

Cross-selling √√ √√√ √

Cheaper customer acquisition

√ √ ×

Customer loyalty √ √ √

Direct benefits

Customer benefits √√ √√√ √

Cost reduction × × ×

× = no evidence; √ = low; √√ = medium; √√√ = high Source: BIBM Survey 2011

As Table-6 demonstrates, the main beneficiaries of mobile banking services in

Bangladesh are the customers. The data analyzed provide evidence that the

Bangladeshi banks generated benefits through cross selling but no evidence for

cheaper customer acquisition. There is also no evidence of cost reduction.


There is some indicative evidence that some of the banks have implemented a

mobile banking strategy to promote customer loyalty. By offering another banking

channel, the banks are making their services more accessible for their existing

customers.

The biggest advantage that mobile banking offers to banks is that it drastically

cuts down the costs of providing service to the customers. For example, in USA,

an average mobile transaction cost is about $0.18 each, whereas an electronic

transaction costs only about $1.14 each (Deniz 2010). Additionally, this new channel

gives the bank ability to cross-sell their other complex banking products and services

such as vehicle loans, credit cards, etc.

For service providers, mobile banking offers the next surest way to achieve

growth. Mobile banking is helping service providers increase revenues from the now

static subscriber base. Service providers are increasingly using the complexity of their

supported mobile banking services to attract new customers and retain old ones.

A very effective way of improving customer service could be to inform

customers better. Credit card fraud is one such area. A bank could, through the use of

mobile technology, inform owners each time purchases above a certain value have

been made on their card. This way the owner is always informed when their card is

used, and how much money was taken for each transaction. 77% of CTOs believe

that by this way card frauds will be reduced.

Similarly, the bank could remind customers of outstanding loan repayment dates,

dates for the payment of monthly installments or simply tell them that a bill has been

presented and is up for payment. The customers can then check their balance on the

phone and authorize the required amounts for payment. The customers can also

request for additional information. They can automatically view deposits and

withdrawals as they occur and also pre- schedule payments to be made or cheques to

be issued. Similarly, one could also request for services like stop cheque or issue of a

cheque book over one‘s mobile phone. This will reduce customer‘s hassles and save

time, all CTOs agreed.

There are a number of reasons that should persuade banks in favor of mobile

phones. They are set to become a crucial part of the total banking services experience

for the customers. Also, they have the potential to bring down costs for the bank

itself. Through mobile messaging and other such interfaces, banks provide value

added services to the customer at marginal costs. Such messages also bear the virtue

of being targeted and personal making the services offered more effective. They will

also carry better results on account of better customer profiling.


Yet another benefit is the anywhere/anytime characteristics of mobile services.

A mobile is almost always with the customer. As such it can be used over a vast

geographical area. The customer does not have to visit the bank ATM or a branch to

avail of the bank‘s services. Research indicates that the number of footfalls at a

bank‘s branch has fallen down drastically after the installation of ATMs. As such

with mobile services, a bank will need to hire even less employees as people will no

longer need to visit bank branches apart from certain occasions.

The banks add to this personalized communication through the process of

automation. For instance, if the customer asks for his account or card balance after

conducting a transaction, the installed software can send him an automated reply

informing of the same. These automated replies thus save the bank the need to hire

additional employees for servicing customer needs.

All CTOs believe that mobile banking will minimize usage of cash, its associated

cost and fake note circulation, which is one of the main objectives to implement

mobile banking in Bangladesh. But we have to have patience; it will take time, they

added. With a high hope 55% of the CTOs believe that mobile banking will be

profitable in the long run by reducing number of branches and employees, and

increasing business volume. But 33% of them are confused about the profitability.

Almost all CTOs said that Government, MNOs and third party agents will be

benefited highly in the long run. They also added that credit and deposit systems

could be developed through mobile banking, especially for un-banked people. A big

new job market will also be created in this regard. But about reduction of

administrative cost 66% of the CTOs replied positively, 22% of them negatively and

rest of the CTOs have no idea at all. They are confused.

Finally, we can say that, by using mobile banking banks will enjoy reduced

administrative cost. Certainly, this technology will increase banks revenue. Green

banking can‘t be thought without this technology. Moreover, customers can save their

time and money also. Transportation cost can be reduced if a customer gets banking

services at his/her door steps. Corruption regarding distribution of govt. subsidies and

allowances could be minimized. Hassle free tax payment to govt. through mobile

phone will help to increase total amount of tax collection by the govt. Govt. revenue

will be increased from different mobile banking services also. Mobile banking in

Bangladesh will also help to create a new job market where a number of

employments will be created. Thus the use of mobile technologies is in a win-win

proposition for the banks, MNOs, agents, bank‘s customers and government also.


VI. Customers’ Awareness and Readiness Status of Bangladesh

The un-banked people targeted for mobile banking are very much poor and

illiterate. Moreover, they have no high technical skill regarding mobile channels and

handset operations. But mobile booming in Bangladesh indicates that users have at

least minimum basic knowledge to operate the set. Initially, this basic knowledge can

be applied in mobile banking operations. At least understanding, sending and

receiving text message (SMS) and to read out menus (USSD) is a must in most cases.

Language may be a great barrier, as message and menu is totally based on English.

Though SMSs of mobile banking services will have a fixed format, we can assume

that within a very short period of time customer will be able to understand the

operational details with the help of mobile agents.

Regarding awareness of customers 50 users of mobile phone in three districts

were interviewed to know about their interest about mobile banking. A stratified

random sampling is used to interview customers. Table-7 below describes the

sampling method.

Table 7: Determination of Sample Size

MNO

Mar

ket

Shar

e

(%)

Cust

om

er

Inte

rvie

wed

Mal

e

Fem

ale

Hav

e A

ccount

Hav

e n

o B

ank

Acc

ount

Dhak

a

Sunam

gonj

Mym

ensi

ngh

Grameen Phone 43 16 10 6 3 13 4 8 4

Banglalink 27 12 8 4 1 11 3 5 3

Robi 19 8 5 3 1 7 2 4 2

Airtel 7 6 4 2 0 4 2 4 1

Citycell 2 4 3 1 1 3 2 1 1

Teletalk 2 4 2 2 0 4 2 1 1

Total 100 50 32 18 6 44 15 23 12

Several questions were asked to the users of mobile phone regarding mobile

banking. Following graph (Figure-14) summarizes the output.


Figure 14: Customers’ Awareness regarding Mobile Banking

Source: BIBM Survey 2011

From the graph it is clear that people have mixed reaction about mobile banking.

About 55% respondent said that they have no idea about mobile banking and its use.

Moreover, they are afraid of the security of their money. Around 62% respondents

believe that it will help to develop our country and corruption may be eliminated.

42% of the respondents said that they have no clear knowledge about the technology.

About 38% of them are not aware about the benefits also. Most of them said that yet

they haven‘t heard about this new banking technology. In this scenario, it‘s not

surprising that over 52% of the respondent think that it is complicated to use. While

interviewing, it was found that awareness about mobile banking services was higher

among urban people. While overall awareness remains very low, people are keen to

try out mobile banking. 15% of the respondents evinced interest in the services.

Given the convenience factor—the fact that mobile banking can be used from

anywhere in the country as long as one can send and receive SMS‘—15% were

interested and 32% thinks that it will increase savings habit.

VII. Current Status of Mobile Banking in Bangladesh

Bangladesh Bank permitted the following nine banks for mobile banking

operations: The Trust Bank Limited, DBBL, BRAC Bank Limited, Mercantile Bank

Limited, Eastern Bank Limited, Dhaka Bank Limited, AB Bank Limited, Premier

Bank Limited and Bank Asia Limited. Though there are many types of mobile

0% 10% 20% 30% 40% 50% 60% 70% 80%

I see no value in using it

I don't believe it is safe

I don't want to pay for it

I don't have enough knowledge about it

I don't know how much it would cost

I don't know whether my bank offer it

It is complicated to use

My bank does not offer it

I can't find enough information about it

I like to visit bank branch/ATM

My cell phone is not enough for banking

I dno't know what is mobile banking

I want to enjoy it

I think It will help to grow savings habit

I believe it will help to eliminate corruption


banking services that can be offered in Bangladesh by taking the permission from the

central bank of Bangladesh, only five banks got the permission for most of the

services; rest of the banks permitted only for inward foreign remittance transfer

(Bank Asia also permitted for P2P and cash-in/cash-out). Table-8 lists the mobile

banking services that are permitted by Bangladesh Bank to date.

Table 8: List of banks with mobile banking permissions

C

ash

in

/ C

ash

Ou

t

P2

B P

ay

men

ts

B2

P P

ay

men

ts

G2

P P

ay

men

ts

P2

G P

ay

men

ts

P2

P P

ay

men

ts

Oth

ers

(DP

S,

Insu

ran

ce,

Mic

rofi

na

nce

etc

.)

Inw

ard

F

ore

ign

Rem

itta

nce

s

TBL √ √ √ √ √ √ √ √

DBBL √ √ √ √ √ √

BRAC √ √ √ √ √ √ √

MBL √ √ √ √ √ √ √ √

EBL √ √ √ √ √ √ √ √

DBL √

ABBL √

PBL √

BAL √ √ √


Among nine banks only three banks, DBBL, BRAC Bank and Trust Bank

Limited have already started mobile banking with maximum features. Mercantile

Bank Ltd is yet to start this banking though it got the permission many months ago.

Rest of the banks mainly got the permission only for inward foreign remittance

transfer. Among the permitted banks only seven banks are in operations. This section

investigates transactional mobile banking services offered by the three banks, namely,

DBBL, The Trust Bank Ltd and BRAC bank Ltd.

DBBL Mobile Banking

DBBL offers Customer Registration, Cash-in (cash deposit), Cash-out (cash

withdrawal), Merchant Payment, Utility Payment, Salary Disbursement, Foreign

Remittance, Air-time Top-up and Fund Transfer facilities to their mobile banking

customers. Customer can register at any authorized agent point of DBBL – at present

these are the retailers of Citycell, Airtel & Banglalink throughout the country who

can display ‗DBBL Agent Certificate‘ and ‗DBBL Mobile Banking Banner‘.


PIN is the key for transaction of mobile banking in DBBL. Only correct match of

PIN & Mobile Number can access the Mobile Account. PIN is needed to verify the

A/C owner by the system. If a PIN is disclosed, respective account is at risk;

therefore, PIN should be handled very carefully. PIN is required to be inputted during

cash withdrawal from an Agent or DBBL ATM. PIN ensures security of user‘s

money and protects fraudulent transactions.

Moreover a check digit is also required for mobile banking with DBBL. Mobile

number is public and known to many people. Without knowing your check digit,

none will be able to deposit money at your account, thus it helps to keep your mobile

account confidential. On the other hand, a check digit eliminates typing error, thus

protecting sending or depositing money to a wrong account.

Customer having any mobile from any Mobile Operator can be registered for

DBBL at any agent point of Airtel, Banglalink and Citycell. All these Mobile

Account holders will be able to deposit and withdraw money from the Agents.

However the customers having mobile from operators other than Airtel, Banglalink

and Citycell will not be able to initiate many self-initiated services like Balance

checking, fund transfer, utility payment, Air-time top up, PIN Change etc. Customers

having mobile from Airtel, Banglalink and Citycell will be able to enjoy all the

services – agent-initiated as well as self-initiated.

Any type of mobile set can be used for DBBL mobile banking. And a customer

can open a DBBL Mobile Account with an initial deposit of Taka 10/- (taka ten)

only.

DBBL mobile banking is highly secured as it uses either USSD or SMS+IVR as

its communication channel. In case of USSD, both the instructions and PIN are

communicated using USSD while in case of SMS+IVR, instructions are sent via SMS

and PIN via IVR (voice channel) both the USSD and IVR are secured for

transmission of PIN. Customer‘s money is safe as none can withdraw his/her money

without taking possession of Mobile set, PIN and Check digit together. None will be

able to deposit unwanted money into a mobile banking Account without knowing the

check digit (although the mobile number is publicly known).

Customer can cash-out (withdraw) at any authorized agent of DBBL (at present

Airtel, Citycell & Banglalink agents, A2I and Sundorban Courier Service), DBBL

ATMs and DBBL Branch. Customer also can cash-in (deposit) at any authorized

agent of DBBL (at present Airtel, Citycell & Banglalink agents, A2I and Sundorban

Courier Service) or DBBL Branch.

There may be scarcity of cash at agent points. DBBL wants to serve as many

customers as possible from each agent points. On the other hand, it is required to


minimize fraudulent loss, if any. To arrest all the above, a transaction limit in terms

of frequency and amount have been set in the system. Current limit for the customers

are as under:

Cash-in frequency per day = 5 times

Cash-out frequency per day = 5 times

Cash-in / cash-out amount per transaction = 5,000/-

Cash-in frequency per month = 20 times

Cash-out frequency per month = 20 times

Moreover, Corporate Office can disburse the salary of their employees and

Government can disburse different allowances like elderly allowance, freedom fighter

allowance to the people within a few moment in a hassle free way.

DBBL also has a customer care/call center to serve any problem to the customers.

Customer care center is available for 24 hours. For any help, customer has to just dial

16216 from any phone, land or mobile.

DBBL started mobile banking by using different outlets of Airtel (59), Citycell

(485) and Baglalink (169) as pay points. Moreover, they have also selected Union

Information Service Centers (181) and Sundarban Courier Service (14) to work as

pay points. Total 908 pay points are working in 24 districts of Bangladesh. Total

number of customers registered up to October, 2011 is 35,855. The web site of DBBL

www.dbbl.org.bd provides necessary information to customers. Their target is 60

million customers within next ten years.

BRAC Bank (bKash)

BRAC bank offers its mobile banking services through an extension of BRAC

Bank, called bKash, a full-scale mobile phone-based payment switch. bKash Limited

is a joint venture between BRAC Bank Ltd., Bangladesh, and Money in Motion LLC,

USA. Ensuring access to a broader range of financial services for the people of

Bangladesh is the ultimate objective of bKash. It has a special focus to serve the low

income people of the country and promote sustainable micro-savings to achieve

broader financial inclusion by providing financial services that are convenient,

affordable and reliable.

The mission of bKash is to provide a complete mobile financial service solution

to increase access to a broader range of financial services for every citizen of

Bangladesh and promote sustainable savings to achieve the ultimate goal of financial

inclusion.


bKash with a vision wants to build a highly scalable mobile money platform,

allowing people of Bangladesh to safely store, transfer, and receive money via their

mobile phone. By providing financial services that are convenient, affordable, and

reliable, bKash aims to widen the net of financial inclusion.

bKash assumes that their mobile banking services will highly benefit the country

as 83% of the population lives under $2 a day and access to finance can help in

improving their economic situation. About 13% of Bangladeshis are connected to the

formal financial system whereas 47% of total population has mobile phones.

Providing financial services using this mean can make the service more accessible

and cost effective for the vast population of Bangladesh.

To provide the service bKash is working jointly with BRAC , BRAC bank, Bill &

Melinda Gates Foundation, Fundamo (the world's largest specialist provider of

enterprise mobile financial services software is the technology partner of mobile

financial service platform of bKash, situated in South Africa), Money in Motion

(Money in Motion, based in the USA, is in the business of developing banking

services for the unbanked, utilizing new information and communication

technologies, in particular mobile devices.), Robi and ShoreBank International

(ShoreBank International delivers a broad range of financial services to financial

institutions and their funders globally, dedicated to expanding access to capital for

small businesses, entrepreneurs and households.)

The following services are provided by bKash:

Cash In and Cash Out

Send Money

Token

o Create Token

o Redeem Token

Payment

My Wallet

o Check Balance

o Request Statement

o Change PIN

Registration is an easy one time process to become a customer of bKash. Once

you have done it, you can use the bKash wallet the way you want. At the moment,

Robi subscribers can register for bKash, very soon, subscribers from other operators

will also be able to use bKash Wallet.

bKash has started mobile banking operations along with 1968 pay points [BRAC

office (1500), Robi (400), A2I (68)] in all districts of Bangladesh. Total number of

customers registered up to October, 2011 is about 30000. The average amount per

transaction is Tk. 1100. The web site of bKash www.bkash.com provides necessary

information to customers. Their target is 100 million customers within next ten years.


http://www.bkash.com/Send_Money.php

http://www.bkash.com/Create_Token.php

http://www.bkash.com/Create_Token.php

http://www.bkash.com/Redeem_Token.php

http://www.bkash.com/My_Wallet.php

http://www.bkash.com/

Trust Bank Mobile Money

Trust Bank Ltd has introduced Trust Mobile Banking service. Trust Mobile

Money is a deposit prepaid account facilities for the banked and un-banked citizen of

Bangladesh where bank has its branches and accredited Pay-points to

open/registration prepaid account.

Customer will be able to transfer fund; deposit and withdraw money from the

accredited Pay-points by using Mobile/Card. Customers also will be able to send

remittance faster to the remote place of Bangladesh by availing this product.

Trust Mobile Money Features:

Account to Account Transfer (Intra and Inter Bank)

Local Remittance (Person to Person)

Transaction at POS

At partners Merchant Stores

o At partners service organizations (Gas station, Hospital, Cinema hall, etc.)

o Person to Business payments (Utility bill, Insurance Premium, Loan

installments, E-top-up for mobile phone, E-ticketing etc.)

Business to person payments

Government to person payments (Agricultural Subsidies, Widow Allowances,

Freedom Fighter Allowances etc.)

Person to Government payments.

Currently 240 pay points are working in 3 districts of Bangladesh for mobile

banking of Trust Bank Ltd. Up to October 2011, total number of customers registered

is 976, though it is the first Bangladeshi bank which got permission from the central

bank for mobile banking. Perhaps this bank is going very slow in this respect.

The web site, www.trustbd.org, of this bank does not provide necessary information

to customers. It targets 20 million customers by the next ten years.

Comparisons of Banks Providing Mobile Banking Services

It is found that 66% of the banks are using or planning to use SMS technology for

mobile banking. USSD is used by 33% banks, whereas IVR is also used by three of

the banks. One of the banks is also trying to use J2ME technology. Four banks are

using a combination of SMS, USSD, J2ME and IVR. CTOs of the banks express that

only one channel is not secured enough, a combination of two or more channels is

good to ensure security. Table-9 summarizes the opinion of respondents about the

various aspects of technology.


Almost all, except The Mercantile Bank, are going to implement transformational

model. For this reason, existing customers have to open a separate new account for

mobile banking. It may be a new hassle for the existing customers. Moreover, banks

have to set up new technologies (hardware, software, database, etc.) for this service

with a huge cost. But in additive model, existing set up is enough with a slide change

to implement these services. Mercantile bank is going to implement both additive and

transformational models.

Table 9: Current Status of Banks: Mobile Banking Technology

Banks

Transactional

Mode Multi

MNO

Multi

Bank SMS USSD IVR WEB

SIM

Toolkit J2ME

Trust Bank Transformational √ √ √

DBBL

Transformational √ √ √ √

BRAC Bank Transformational √ √

Mercantile

Bank

Additive &

Transformational

√ √ √ √

Eastern Bank

Transformational √

Premier

Bank

Transformational √

Dhaka Bank Transformational

Bank Asia Transformational √ √

AB Bank Tansformational √ √


Additive-extension of existing banking operation to mobile channel (account

exists, registration exists, mobile channel opened). Transformational-start of new

banking relationship with new customers (account created with mobile access, new

registration).


Table 10: Marketing Strategy of the Banks in Bangladesh for Mobile Banking

New

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el

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Web

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Th

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Mo

bil

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ets

Th

rou

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ng

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stom

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Th

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gh

Mo

bil

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Th

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Ca

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ente

r

Th

rou

gh

Th

ird

Pa

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Th

rou

gh

Sis

ter

Con

cern

Trust Bank √ √ √ √ √ √ √ √

DBBL

√ √ √ √ √ √ √ √ √ √ √

BRAC Bank √ √ √ √ √ √ √ √ √

Mercantile Bank √ √ √ √ √ √

Eastern Bank

√ √ √ √ √

Premier Bank

√ √ √ √ √

Dhaka Bank √ √ √ √ √ √

Bank Asia √ √ √ √ √ √ √ √ √

AB Bank √ √ √


Numbers of customers targeted by different banks are given in the table below

(Table-11). To achieve this target and increase the awareness of targeted customers,

banks are using various methods like counseling, advertising, campaigning, etc.

All CTOs explained their marketing strategies and understands that it is not an easy

task to achieve the target by means of these ways. More strategic ways must be

incorporated to full fill the target. Huge cost, time and manpower are required, they

claimed. Table-10 shows marketing strategies in details.


Table 11: Target and Achievements of the Banks (October 2011)

DBBL BRAC TB

Operation Started May, 2011 July, 2011 August, 2010

No. of Pay Points 908 1968 240

No. of Customers Registered 35855 30000 976

District Covered 24 64 3

Expected Customers

(within 2021)

60 million 100 million 20 million


The three banks started truly mobile banking services like cash-in, cash-out and

balance transfers since 2010. Figure-15 show the growth in customer inclusion of

DBBL from May 2011 to October 2011.

Figure 15: Customer Inclusion of DBBL


Though six mobile network operators (MNOs) has been working in Bangladesh,

different banks selected different MNOs for their operations. Though targeted groups

of customers use different MNOs, most of the banks selected more than one MNOs

for more coverage of the business. Table-12 holds details.

0

5000

10000

15000

20000

25000

30000

May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11

DBBL Mobile Accounts (May-Oct, 2011)


Table 12: Agreement with MNOs

DBBL BRAC TB BAL MBL EBL Premier DBL ABBL

Grameen

Phone √ √

Tele Talk √ Banglalink √ √ √ Airtel √ √ √ Robi √ √ Citicell √ √ √ √


Initially, it is found that transaction charge is very high for cash-in and cash-out

in this service due to higher carrier charges. For mobile banking transactions, carrier

charge is also very high compared to voice or SMS charges. It ranges from Tk. 5 to

Tk. 17 per transaction (Cash-in/Cash-out). All CTOs are afraid of this matter.

This issue may be the main barrier to the growth of mobile banking introduction in

Bangladesh. Moreover, carrier charges vary from bank to bank and carrier to carrier.

It is also mentionable that banks charge nothing for mobile account operations.

No opening charge also required to open a mobile banking account.

Regarding transaction process control to avoid risks, all of the banks

implemented a set of restrictions, controlling the maximum amount per transaction

and total number of transactions per day. They are in a wait and see status for further

control if required; as mobile banking is in the initial stage and they are actually

piloting the system. Table-13 carries out the information.

Table 13: Process Control for Mobile Banking Services

DBBL BRAC MTB

Cash-in frequency per day 5 5 5 Cash-out frequency per day 5 5 5 Cash-in / cash-out amount per transaction 5000 30000 10000 Cash-in frequency per month 20 150 30 Cash-out frequency per month 20 60 30 Money Transfer per day 20 5

Token per day 3 Money Transfer per month 600 150

Token per month 90



Most of the banks got the permission for operating mobile banking during 2010

and 2011. But except two banks namely DBBL and BRAC, adoption of mobile

banking is at very initial stage. In case of transferring inward foreign remittances

roles of two banks namely, Eastern Bank Ltd and Dhaka Bank Ltd are satisfactory.

Table-14 includes the information.

Table 14: Inward Foreign Remittance Transfer up to October, 2011.

Eastern Bank Dhaka Bank Premier Bank

MNO Banglalink Robi Banglalink Grameen

Phone Operations Started Sep, 2010 May, 2011 Apr, 2010 Sep, 2011 Total Transactions 14282 700 2143 100 Total Amount 4.5 Crore 20 lac 1.8 crore 22 lac


Most of the targeted clients residing in the rural areas of Bangladesh are poor

with low literacy level, especially with respect to technology. In addition, almost all

mobile handsets use English as a medium of instruction and operations. As banks

also offering services in English, it will not be easy for customers to handle the

service initially. A strong support will be required for this segment of customers.

A 24-hour call centre service will be needed in this regard. Moreover, to train up the

users, a strong workforce will also be required. But all of the CTOs believe that

language will not be a barrier in the long run, but initially strong support and care is

required. Agents those will work on behalf of banks may play a great role in this

regard. Surprisingly, 77% banks have no call centre as yet.

In answering questions titled ―How will you provide mobile banking services in

case of the failure of carrier services (MNOs) for any natural disaster; like power

outage, storm, earthquake and for any sudden interruption of the government to stop

the carrier services under any national emergency?‖ all CTOs answered, ―We don‘t

know. Currently there is no solution. We have to wait and see.‖ They also give the

same answer in regarding of question, ―What will happen if any fraud perpetrated on

the MNO side?‖

In responding to another question ―What solution will you provide to the

consumer (consumer protection) for any fraud/ wrong operations due to the fault of

carrier, bank or agent?‖ CTOs replied ―Consumer will communicate with our nearest

branch/customer care/call centre and we will try to solve it.‖ However, we found that

there are no clear solutions to the banks for consumer protection right now. ―But

consumer can register complaint with Bangladesh Bank to mediate the dispute‖-

Bangladesh Bank guidelines include.


About 77% banks verify KYC form by using the agents. And rest of the banks

directly verifies the KYC form before opening the account by their own employees.

It‘s an important factor. Banks should re-think about this matter and put more

emphasis on this. Because, it may create identification problem of the customers in

the long run and fraudulent transactions including money laundering may increase.

Most of the banks started mobile banking on a pilot basis. Currently, all districts

are not covered by different banks. But in case of transferring inward foreign

remittance all districts are covered. Banks are mainly using different mobile

operators‘ outlets as their pay points. Moreover, Union Information Service Centers,

Post Office, Courier Services are also in the list.

Of 9 banks, 7 banks have agreed that cash management will be a problem,

especially for mobile outlets because of their poor infrastructure. But with the

assumption that, cash-in and cash-out will be almost equal per day, it will not be an

issue. But cash transfer from pay points to banks and vice versa will be a challenge,

as the security of the rural areas is not good, they added.

For the development of mobile banking infrastructure, 77% of the CTOs said that

money is not a problem for them. But 33% of them added that though money is not a

problem, procedures of expenditure is not an easy task. Policies of the banks are not

so friendly; more time passes for purchasing technology. Sometimes, it becomes

impossible to purchase necessary instrument within the estimated time and budget.

Tender and retender procedures sometimes poses as the main obstacle. By this time,

new technology may come; it creates another problem for implementation. 11% of

the CTOs said management decision is a common problem for them. The proper

knowledge of management and their co-operation, including govt. rules and

regulations are also main challenges for them.

Regarding guidelines of Bangladesh Bank for mobile financial services, most of

the CTOs claimed that this is not the right time to make any comment. They

comment that it is at the initial stage and we have to see. But monitoring of

Bangladesh Bank must be very effective. One of the CTOs suggested that audit team

must be highly technical with latest effective technological skills. ―Monitoring should

be very tight regarding money laundering, risk mitigation, record retention and

complaints from customers‖ another added.

―SCBs have a great role in future to include mobile banking as they are behind

the implementation of online banking and they have the largest coverage in the

market with highest number of branches (in the rural and urban areas), customers and

employees. Govt. should come forward in this regard.‖-explained three CTOs.

―This technology is very appropriate for them.‖- one added.


―Govt. revenue can be collected and subsidies/ allowances can be distributed

through mobile banking channels. This will create an indirect pressure and encourage

the people to open and operate a mobile bank account.‖ –all CTOs agreed. ―As a

result corruption and hassles of govt. agencies will be eliminated in one way and

govt. taxes and revenues will be increased in another way.‖-they added.

Around 66% of the CTOs agreed that there is a need of a trusted central

organization to share known vulnerabilities and risk experience. 33% of them don‘t

like to share and disclose their experiences.

Regarding lacking of inter-bank transaction facility, 44% of the CTOs believe

that it will not hamper mobile banking implementation, if the market is captured by

one or two banks mainly. ―But if the customers are evenly distributed among all

players in the market, it will be a great problem for account to account transfer

between banks‖-rest of the CTOs explained. ―This may hamper the potential growth

of mobile banking‖-they added.

Approximately, 66% of the CTOs reported that their top level management and

policy makers are aware of this technology, implementation process and risks. 33%

respondents think that top level management have interest about mobile banking

but positive attitudes are still necessary to establish their interest. Only 11% of them

informed that management has no clear mission and vision regarding this issue

though they got the permission from Bangladesh Bank.

Regarding investment and return, though the initial cost is very high for mobile

banking implementation, all the banks are thinking about long term return.

The minimum and maximum investment (fixed cost) in introducing mobile banking

is reported as Tk. 20 million and Tk. 800 million, respectively. Moreover, average

variable cost is about 12% of fixed cost. Service charges and maintenance cost are

also 10% and 15% of the above, per year respectively.

The major challenges that banks have been facing related to mobile banking

adoption are: Software crisis within an affordable cost; lack of proper ICT

professionals, especially for mobile banking; weak policy and marketing strategies;

non co-operation of carrier services; more operational cost; non educated customers

and poor management support. One of the banks reported that bureaucracy and lack

of leadership including delay in policy decision are also great problems.

About the future of the mobile banking in Bangladesh, 33% of the CTOs

explained its bright future and agreed with the strong potential of it, 44% said that the

task is not as easy as the dream, 22% hoped that it would take long time and the rest

of the respondents claimed that they don‘t see any bright future. They started mobile

banking to increase their image in the market and would like to give latest

technological services to their valuable customers.


VIII. Recommendations and Conclusion

Based on the previous discussion and stakeholders observations the paper came up

with the following recommendations:

One, there are different types of model in mobile banking. Banks are largely free

to adopt any one. But security, operational control, available technology in user‘s

handsets must be consistent with the knowledge of customers in selecting the right

model. In this scenario, transformational mobile banking can be accomplished

through a careful appraisal, introduction and management of operational controls

(including user education) necessary to offset the higher technical risks inherent in

choosing ubiquitous but less secure technologies. In case of Bangladesh, considering

all these issues, adjusted mobile security model may be the best selection (SMS,

USSD and IVR). But with the advancement of technology, increased customer

knowledge, availability of smart phones we can shift to Use Case1. Use Case 2, 3 and

4 will be impractical for us now and can be achieved five to ten years later.

Regarding transaction process control to avoid risks, all the banks can implement a

set of restrictions, controlling the maximum amount per transaction and total number

of transactions per day. Banks can wait and see status for further control if required as

mobile banking is in the initial stage.

Two, revenue sharing is a great concern among MNOs, banks and agents. MNOs

are demanding higher rate per transaction that will increase the transaction cost and

hamper the mission of mobile banking. Bangladesh Bank along with BTRC, MNOs

and commercial banks can take initiatives to settle this problem. Though agents are

the key operator to increase the growth of mobile banking, they must be properly

benefited. Commercial banks should encourage them by giving reasonable portion of

revenue. Three, the unbanked people targeted for mobile banking are very much poor and

illiterate. Moreover, they don‘t have high technical skill regarding mobile channels

and handset operations. But mobile booming in Bangladesh indicates that users have

at least minimum basic knowledge to operate the set. Initially, this basic knowledge

can be applied in mobile banking operations. At the minimum, understanding,

sending and receiving text message (SMS) and to read out menus (USSD) is a must

in most cases. Language may be a great barrier, as message and menu is totally based

on English. Though SMS of mobile banking services will have a fixed format, we can

assume that within a very short period of time customers will be able to understand

the operational details with the help of mobile agents. But at this initial stage,

transaction related problems, dispute resolve and customer care is a great concern.

To face these challenges, commercial banks providing mobile banking services

should have a call center to provide 24-hour services to serve the targeted group, as

they are illiterate and have poor knowledge in technology. Proper training should be

given to the agents for better understanding and operations of mobile banking.


As a result, agents will be able to give proper support and guidelines to the

customers. To resolve any dispute, customers can get help from the call center of

respective bank. In case of any non-cooperation and harassment, customer can

directly communicate with Bangladesh Bank‘s help desk just dialing 16236 from any

mobile phone.

Four, regarding mobile banking, people have mixed reaction. About 55%

respondents said that they have no idea about mobile banking and its use. Moreover,

they are afraid of the security of their money. About 42% of the respondents said that

they have no clear knowledge about the technology and 38% of them are not aware

about the benefits also. Most of them said that they haven‘t yet heard about this new

banking technology. It is found that awareness about mobile banking services is

higher among urban people. While overall awareness remains very low, people are

keen to try out mobile banking. In this scenario, increase of customers‘ awareness

and marketing strategy is a great challenge to achieve the targeted customer.

The marketing channels currently being used are away from customers‘ reach.

To achieve the target, mobile banking agents can play a vital role. Since a large

number of mobile phone users meet the agents daily to recharge their mobile phone

accounts, the agents can easily motivate the customers. Various methods like

counseling, advertising, campaigning, etc. also can be applied through agents.

Advertising through BTV and Bangladesh Betar can help in this regard. MNOs can

also help by sending SMS regarding mobile banking to all its customers. Five, it is found that mobile banking transaction charge is very high for cash-in

and cash-out due to higher carrier charges by MNOs. Carrier charge ranges from

Tk. 5 to Tk. 17 per transaction (Cash-in/Cash-out). This issue may be one of the main

barriers for the growth of mobile banking operation in Bangladesh. Moreover, carrier

charges vary from bank to bank and carrier to carrier. It is also mentionable that

banks charge nothing for mobile account operations. No account opening charge is

required to open a mobile banking account. In our study, it is found that MNOs are

not properly helping banks to adopt mobile banking. In this regard Bangladesh Bank

can request BTRC, as a regulatory body of Bangladesh government to take initiatives

to solve this problem.

Six, with respect to technology adoption, the PCBs and FCBs have achieved

greater success as compared to other bank categories but their coverage is

concentrated mainly in urban and semi-urban areas. The rural parts of Bangladesh

still remain outside their services. SCBs and SBs can play a vital role to increase

mobile banking adoption rate since they have the largest coverage in the market with

highest number of branches (in the rural and urban areas), customers and employees.

But both groups of banks are far behind in implementing online banking. They have

also been facing different problems like shortage of power supply, absence of reliable

professionals and poor technical support. Government should come forward in this

regard. Government should take immediate initiatives and phase-wise plan to solve


these problems. Solar energy can be used as a source of power supply in remote and

rural areas. As IT professionals are highly paid, with the existing govt. salary

structure it is very hard to employ and retain in a government bank for long term.

After acquiring experiences even the existing professionals switch to private

banks. As a result, to encourage the IT professionals a special incentive

package/allowance/bonus can be given.

Seven, for the development of mobile banking infrastructure, 77% of the CTOs

opine that money is not a problem for them. But 33% of them add that though money

is not a problem, procedures of expenditure is not an easy task. Policies of the banks

are not so friendly; lot of time is required for purchasing technology. Sometimes, it

becomes impossible to purchase necessary instrument within the estimated time and

budget. Tender and retender procedures sometimes pose as the main obstacle. Due to

delay in procurement process, existing technology becomes obsolete and new tech

products arrive; it creates another problem for implementation. The proper

knowledge of management and their co-operation, including govt. rules and

regulations are also main challenges for them. Top level management has vital role to

implement mobile banking in banks for enhancing business. But in reality, there is a

gap between top level management and IT management in decision making and

planning processes. BB and BIBM can take initiatives to minimize the distance

between both parties. BB and BIBM can jointly conduct workshops, round table

discussions and seminars on IT and Banking business development for top level

executives of banking sector to motivate them in this respect.

Eight, inter-bank mobile banking transactions can play a vital role in enhancing

the use of mobile cash or digital cash instead of paper notes or plastic cards. For

smooth operation of mobile banking business, national payment gateway plays a

vital role. The payment gateway is a fast, secure and transparent payment vehicle. It

provides safeguard to the banks, service providers and customers against fraud,

embezzlement, money laundering, theft and cheating. It can play a vital role to

promote m-commerce and inter-bank transactions in Bangladesh. Under the control

of Bangladesh Bank, a central Mobile Payment Gateway may be built up to

interconnect all banks providing mobile banking services. Before implementing the

National Payment Gateway, new policies, rules and regulations need to be enacted

by the Bangladesh Bank. The task is now easier as we have the "Information and

Communication Technology Act" in our hand.

Nine, the growth of financial operation through mobile devices has also enhanced

the incidence of frauds. 22% of adults do online banking in Europe, and 35% in USA,

opined that lack of security was stopping them from using mobile banking. So

improved security is a prerequisite for reliable mobile banking operations. We should

take security measures/initiatives at the beginning stage of mobile banking operation

in our country. In this regard, a cell or trusted central organization can be established

with the joint collaboration of banking sector and government whose responsibility


will be to maintain and evaluate the known vulnerabilities, and to recommend

guidelines for security updates.

Ten, insurance of client‘s data, Data Center and Disaster Recovery Site is a

burning issue to ensure the high reliability of mobile banking services. The

insurance of IT equipments exists in our country but there is no example of data

insurance. In developed countries, banking authority provides insurance of client‘s

data, data center and DRS. Government, BB and scheduled banks may take

initiatives in this regard.

Eleven, although mobile banking has bright prospects, it involves some financial

risks as well. The major risk of mobile banking includes operational risks (e.g.

security risks, system design, implementation and maintenance risks); customer

misuse of products and services risks; legal risks (e.g. without proper legal support,

money laundering may be influenced); strategic risks; reputation risks (e.g. in case

the bank fails to provide secure and trouble free mobile banking services, this will

cause reputation risk); credit risks; market risks; and liquidity risks. Bank should

strictly follow the guidelines on Mobile Financial Services (MFS) circulated by BB.

Security and risk management issues of mobile banking should be added in the IT

Security guideline of BB. IT management should properly communicate and motivate

top level management to implement security measures. Banks may follow the Risk

Management Principles and Practices of Basel Committee of Banking Supervision.

Twelve, in order to achieve the mission of Digital Bangladesh within 2021, govt.

can take the initiatives to allow G2P and P2G payment services through mobile

banking channels. Govt. revenue can be collected and subsidies/ allowances can be

distributed through mobile banking channels. This will create an indirect pressure and

encourage the citizens to open and operate mobile banking accounts. As a result,

corruption and hassles of govt. agencies will be eliminated and govt. taxes and

revenues will be increased.

Mobile banking activities have been revolutionizing the banking industry all over

the world though it is a relatively new phenomenon in Bangladesh. Many countries in

the world are now in the state of performing most of their banking activities even

being at home through mobile phones while the banks‘ clients in Bangladesh mostly

stay in the long queue for performing their daily banking business.

In Bangladesh, mobile banking facilities are yet to be fully developed though it

has a bright future and strong potential. Only three banks started transactional mobile

banking with maximum features. The major challenges that banks have been facing

related to mobile banking adoption are: low mobile penetration; lack of awareness;

poor technical knowledge; availability of standard handset; inadequacy of reliable

and secure mobile communication infrastructure; sluggish ICT penetration in banking

sector; insufficient legal and regulatory support for adopting mobile –banking;


mobile banking software crisis within an affordable cost; lacking of proper skill in IT

project implementation; weak policy and marketing strategies; non co-operation of

carrier services; more operational cost; and poor management support. Bureaucracy

and lack of leadership including delay in policy decision are also great problems in

banks. In Bangladesh, cost of mobile phone and tariff are still beyond purchasing

capacity of unbanked people in the rural areas and huge investment requirement for

establishing mobile banking services are prime drawbacks.

In this backdrop, with high potential of mobile banking, Bangladesh Bank as the

regulator of banking and financial sector, government of Bangladesh, MNOs, agents

and the scheduled banks together need to come forward with necessary initiatives for

successful introduction of mobile banking in Bangladesh. Both individual and joint

efforts are needed to overcome the constraints in promoting mobile banking in the

country. Monitoring of Bangladesh Bank should be very effective. Audit team must

be highly technical with latest effective technological skills. Monitoring should be

very tight regarding money laundering, risk mitigation, record retention and

complaints from customers. In particular, the SCBs and SBs should take appropriate

actions for increasing their coverage in offering mobile banking services with a view

to increasing their performance and raising their market competitiveness.

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www.attevo.com

www.bankablefrontier.com

www.bb.org.bd

www.cnbc.com

www.entrust.com

www.mmaglobal.com

www.infogile.com

www.trai.gov.in


http://www.attevo.com/

http://www.bb.org.bd/

http://www.cnbc.com/

http://www.entrust.com/

http://www.infogile.com/

Appendix

Table 1: Current examples of each Use Case scenario

Mobile Handset Capability

Standard (all) Advanced

MN

O indep

end

ent

Yes

Use Case 1: G-Cash (Ph) Wizzit (SA) FNB (SA)

ABSA (SA)

Use Case 2:

Nedbank (SA)

FNB (SA) ABSA (SA)

Obopay (US) Use Case 3: J2ME

Obopay (US) Monitise (UK)

No

Use Case 4: G-Cash (Ph) Smart (Ph)

MTN Banking (SA)

M-Pesa (Ke)

Use Case 4 prime: Obopay (US)

Firethorn (US)

Note: No one Use Case may totally fit the situation of an existing or prospective mFSP. Additionally a mFSP

may use multiple technologies and offer mobile banking services under one or more of the Use Cases.

However, the Use Cases do represent the main technology related choices which affect the risk environment

of an mFSP.

Table 2: Vulnerabilities in specific Use Cases

Use Case I — SMS, IVR and DTMF End-to-end security

NOT available

Use Cases 2&3 — Browsing & Applications

End-to-end, security

available applications

Use Case 4 — SIM Toolkitt '

End-to-end security

available

1

Storage of sent SMSs in the handset Outbox is default on

handsets

Storage of cached data

in input fields and auto-

prompts

n/a

(Continued)



2

Spoof USSD and/or SMS

to phish the user Spoof

SMS to phish the user, IVR confirmation spoof and

PIN request phish USSD confirmation spoof

and PIN request phish

e-mail, USSD and/or

SMS phishing or

Pharming of the user (identical to Internet

attack) WAP2 allows

for a push message from

a server which can launch the browser and

direct it to a phishing or

Pharming site

Spoof USSD and/or

SMS to phish the

user

3 SIM swap SIM swap SIM swap

4

Movement of

funds beyond

defined beneficiaries

Movement of funds

beyond defined

beneficiaries

Movement of

funds beyond

defined

beneficiaries

5 Replay of messages by

attacker Replay of messages by

attacker n/a

6

Messages between the handset to the bank that get

lost

Messages between the

handset to the bank that

get lost

Messages between

the handset to the

bank that get lost

7 Failure of the SMS and/or IVR and/or USSD Channel

to the bank Data Channel to the bank

fails

Failure of the SMS and/or Data

Channel to the

bank

8

The lack of protection of

the SMSC and/or IVR and/or USSD servers


the SMSC server

The lack of

protection of the

Wireless Gateway server

The lack of protection of the SMSC server

9 The lack of protection of the

interface between SMSC

and/or IVR and/or USSD servers to mFSP


the interface between

SMSC to the mFSP

The lack of

protection of the

interface between SMSC to the

mFSP

(Continued)



10 Infection of handset by a virus -

Standard phones

n/a Infection of handset

by a virus - Standard

phones

11 Infection of handset by a virus

- Advanced (programmable) Feature and Smart phones

Infection of handset by a

virus, man in the middle, man in the browser and

keyboard loggers —

advanced

(programmable) phones

Infection of

handset by a virus, man in the middle,

man in the

browser and

keyboard loggers —advanced

(programmable)

phones

12 Injection of transactions into

the network purporting to come

from the User's MSISDN (spoofed originator ID)

n/a n/a

13 Capture of transaction

information during radio transmission over the air

n/a Capture of transaction

information during radio transmission

over the air

14 Message path insecurity (

insecure BTS/BSC, Abis and SS7 link traffic monitoring,

network element exposure,

false BTS)

n/a Message path

insecurity ( insecure BTS/BSC, Abis and

SS7 link traffic

monitoring, network

element exposure, false BTS)

15 n/a n/a Compromise of the

encryption key

scheme in the SIM and Hardware

Security Modules


Table 3: Examples of Fielded mFSP Implementations

mFSP Mode Country Multi

MNO Multi

Bank SMS

Alerts SMS USSD IVR WEB SIM

toolkit J2ME

ABSA Add South Africa Yes No √ √ √ √

Celpay Add Zambia Yes Yes √ √ √

First National

Bank Add South Africa Yes No √ √ √ √ √

eTranzact Add Nigeria, Zimbabwe Yes Yes √ √ √ √

GCash XFM Philippines No Yes √ √ √ LUUP XFM Norway EU Yes Yes √ Monitise Add UK and USA Yes Yes √ √ √ √ √ mPesa XFM Kenya No No √ √ MTN Banking XFM South Africa No No √ √ √ Nedbank Add South Africa Yes No √ √ √ Obopay Add/XFM USA Yes Yes √ √ √ √ √

Smart XFM Philippines 1 No √ √ √ Wizzit XFM South Africa Yes No √ √ √ √

Add = additive — extension of existing banking operation to mobile channel (account exists, registration exists, mobile channel opened)

XFM = transformational — start of new banking relationship with (account created with mobile access, new registration

Re

search

Wo

rksh

op

Ke

yn

ote

Pap

er 2

63

List of Abbreviations

Abbreviation Term

AT&T American Telephone and Telegraph Company

ATM Automated Teller Machine

B2P Business to Person

BSC Base Station Controller

BTRC Bangladesh Telecommunication Regulatory Commission

BTS Base Transceiver Station

. CDMA Code division multiple access

CSR Corporate Social Responsibility

CTO Chief Technical Officer

DPS Deposit Pension Scheme

DTMF Dual-tone multi- frequency signaling

EDGE Enhanced Data for Global Evolution

G2P Government to Person

GPRS General Packet Radio Service

GSM Global System for Mobile Communications

HLR Home Location Register

HSDPA High-Speed Downlink Packet Access

HSM Hardware Security Module

HTTPS Hyper Text Transfer Protocol Secured

ICT Information and Communication Technology

IP Internet Protocol

ITU International Telecommunication Union

IVR Interactive Voice Response

J2ME Java 2 Platform, Micro Edition

mFSP Mobile Financial Services Provider

MNO Mobile Network Operator

MSISDN Mobile Systems International Subscriber Identity Number

P2B Person to Business

P2G Person to Government


P2P Person to Person

PDA Personal Digital Assistant

PIN Personal Identification Number

POS Point-of-Sale

PSTN Public Switched Telephone Network

S@T SIM Alliance Toolkit

. SAARC South Asian Association for Regional Cooperation

SAT or STK SIM Toolkit

SIM Subscriber Identity Module

SMS Short Message Service

SMSC Short Message Service Centre

SS7 Signaling System 7

SSL Secure Sockets Layer

UMTS Universal Mobile Telecommunications System

USSD Unstructured Supplementary Service Data

WAP Wireless Application Protocol

WIB Wireless Internet Browser


Paper Seven

Risk Assessment of Banks’ Involvement in the Capital

Market: Bangladesh Perspective

Md. Alamgir

Assistant Professor, BIBM

Md. Zakir Hossain Lecturer, BIBM

Risk Assessment of Banks’ Involvement in the Capital

Market : Bangladesh Perspective

I. Introduction

Risk assessment of banks‟ involvement in the capital market has acquired a great

deal of attention from researchers, regulators and financial institutions in recent times

as the capital market of Bangladesh is highly volatile and this exposure can erode

capital of the bank. Since commercial banks compete against merchant banks for

corporate finance transactions, stock market movements affect the liquidity and

operating funds available to commercial banks. Commercial banks manage their

funds in part by investing in securities markets. If stock markets decline, the value of

outstanding shares may decrease resulting the potential losses of the bank fund. The

adoption of merchant banking functions means that commercial banks became

heavily reliant on borrowing liquidity in open financial markets.

Commercial banks mobilize funds by selling a number of deposit products to its

clients. Customers' liquidity and financial health are also affected by financial assets

held away from the bank. The amount of deposits maintained by the customers and

the repayment behaviour of loans by its customers affect the bank's profitability,

which severely penalizes liquidity and hence risk arises.

According to research performed by the University of Florida after passage of

Gramm-Leach-Bliley Act, unrealized or paper losses of a commercial bank have little

impact on its liquidity. However, when a commercial bank books losses to increase

liquidity during periods of declining securities values, the bank probably reports

lower earnings along with decreased capital levels. Some evidence suggests that

expanding bank activities into capital markets by allowing banks to hold equity

stakes in companies might generate efficiency gains. For example, Li and Masulius

(2004) find that, by holding stakes in a company‟s equity, underwriters reduce IPO

under pricing when they underwrite.

The drawbacks of Basel-II approach become clear during the global financial

crises, when many banks found that they did not have the financial strength to

withstand the losses on capital market investments that proved to be much riskier

than their models suggested. Consequently, the BCBS has started considering and

eventually finalized new international rules, popularly known as “Basel-III” for the

banks which have a lot of exposure in investments of capital market. Basel-III

measures will require about 4-fold increase in the capital market exposure capital

requirements for banks. As per Basel-II guidelines, the maximum allowable

investment in a single institution for a bank is 15% of the total capital of the bank and


the total amount of investment in the capital market for a bank should not exceed

60% of total capital. Apart from these, if a bank‟s investments exceed this limit, then

that bank should maintain additional capital which is equal to above-limit

investments in the capital market. At present in Bangladesh, banks‟ exposure in the

capital market should not go beyond 10% of their total liabilities. Currently central

bank is thinking to tag the total capital of the bank for capital market exposure instead

of liability. Volcker Rule which is named after Paul Volcker, former chairman of US

Federal Reserve, would bar banks from trading in the capital market for their own

profits. The rule is one specific part of the Dodd-Frank Wall Street Reform and

Consumer Protection Act. It was first proposed in 2009 when Volcker served as the

chair of President Obama‟s Economic Recovery Advisory Board. After nearly two

years of discussion between regulators and financial firms, an official draft of the

Volcker Rule proposal was published by the Federal Reserve, Federal Deposit

Insurance Corp. and the Office of the Comptroller of the Currency and later approved

by the Securities and Exchange Commission of USA.

Well-functioning capital markets including equity and corporate debt markets are

one of the most important factors needed to attract investors, both local and foreign.

Greater emphasis on generating competitive and strong capital markets would ensure

a sustainable flow of sufficient funds and efficient mechanisms for financing the

private sector. To say the least, the Bangladesh capital market till today is not broad

or deep enough. Issuers do not use the full potential of the market for raising equity

capital by issuing shares or for borrowing funds by issuing corporate bonds.

Moreover, savers feel uncomfortable in investing in Bangladesh capital market

instruments as it is highly volatile and risky. However, banks in Bangladesh are

entering in the capital market in the form of Treasury investment, merchant banking

operations and through forming of brokerage house. The exposures are different in

each case as the activity differs.

Therefore, the objectives of this paper are to assess the current position of banks

regarding their exposure in the capital market, and to identify the problems towards

banks‟ involvement in the capital market. Another objective is to assess the risks that

are involved for banks‟ participation in the capital market through the formation of

brokerage houses and merchant banking as subsidiaries. Finally a set of observations

and recommendations are to be formulated after the discussion with the participants

of the research workshop.

Both primary and secondary data have been procured for analyses to attain the

objectives of the research project. For the purpose of collecting secondary data,

annual reports, published financial statements, other publications of banks and their

subsidiaries have been consulted. In order to obtain the primary data, personal

interview and three sets of questionnaire (one for banks including central bank,

another one for merchant banks and last one for brokerage houses) have been used.

Both open-ended and close-ended response questionnaires have been administered.


After data collection necessary screening has been performed before tabulation and

graphical presentation. Statistical, financial and accounting tools and concepts have

been applied in the study where appropriate. A key note paper was presented in a

day-long workshop participated by a number of senior level bankers which was

followed by group discussion by the participants. Several issues were raised in the

discussion and the final report has been prepared after incorporating the suggestions

where it was thought appropriate.

The paper is organized into eight sections. The first section describes the background,

objectives, methodology. The introductory section is followed by the status of capital

market of Bangladesh. Third section depicts market volatility as measured by

coefficient of volatility. Section four portrays the position of banks‟ involvement in

the capital market of Bangladesh. Section five presents problems faced by banks for

their involvement in the capital market of Bangladesh. Section six exhibits the

functions and roles of merchant banks and brokerage houses as subsidiaries of banks.

Section seven displays the recent measures taken by SEC to rejuvenate the capital

market. Finally some observations and recommendations have been made in section

eight.

II. Status of Capital Market of Bangladesh

Bangladesh capital market is one of the smallest in Asia but the third largest in

the South Asia region. It has two full-fledged automated stock exchanges namely

Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) and an over-

the-counter exchange operated by CSE. It also consists of a dedicated regulator, the

Securities and Exchange Commission (SEC) and it implements rules and regulations,

monitors their implications to operate and develop the capital market. It consists of

Central Depository Bangladesh Limited (CDBL), the only Central Depository in

Bangladesh that provides facilities for the settlement of transactions of dematerialized

securities in CSE and DSE. Dhaka Stock Exchange was set up on 28th April, 1954

that started formal trading on early 1956. Post-independence government did not

promote a capital market during the first five years, and it was activated again in 1976

with 9 issues on board. In 1995, a second bourse, the Chittagong Stock Exchange,

was set up with sophisticated logistic support and modern management. After 1999,

the government took a number of strong measures to strengthen the capital market

including the implementation of the Capital Market Development Program (CMDP).

A significant development and growth of the stock market has been seen with rapidly

expanding investment intermediation, investor base, number of listed securities, and

increasing effort to protect the general investors from unwanted shocks and loss.

A very smooth and rapid growth of the stock index is backed by aggressively

increasing enthusiasm of new investors targeting abnormal profit taking

opportunities. But after the 5th December, 2010, the market started to collapse and

nosedived devastatingly.


III. Measuring Market Volatility

The volatility of stock market has attracted attention of the regulators,

government, investors, institutional investors and policy makers. There is a

perception that high volatility can lead to a general erosion of investor‟s confidence

and flow of capital away from the equity market. As a matter of fact, volatility is the

variability of the asset price changes over a particular period of time and it is very

hard to predict correctly and consistently (Kumar, 2006). However, in this study

market volatility has been measured by coefficient of variation (CV).

Table 1: Market volatility measured by CV

Year DSE20 DGEN

2001 5.58 5.51

2002 6.45 5.65

2003 7.23 5.81

2004 19.48 25.03

2005 9.36 7.12

2006 6.47 7.45

2007 19.20 20.90

2008 5.24 5.85

2009 7.97 18.77

2010 20.02 16.66

2011 9.87 9.60

Data Source: DSE Library and Authors‟ own calculation

During the last decade, it is observed that volatility is persistent in the stock

market in Bangladesh. The coefficient of variation of DSE20 has jumped to 20.02

percent in 2010 followed by 9.87 percent in 2011. In the year 2007 it recorded 19.20

percent which is slightly lower than the year 2004. Moderate volatility is observed in

the rest of the years. The DSE general index similarly jumped to 25.03 percent in

2004. All the other years the market seems to be volatile according to DGEN.

IV. Position of the Banks’ involvement in the Capital Market of Bangladesh

The current exposure of banks and their performance of trading portfolio

investment in the capital market as at July 31, 2011are shown in the following tables:


Table 2: Capital Market Exposure by Type of Banks

(As at July 31, 2011)

Types of Banks

Exposure Total Exposure

to total

Liabilities (%)

Own portfolio

(Tk. in crore)

Loan to

Subsidiaries

(Tk. in crore)

SCBs 3779 100 3.10%

PCBs 5613 3692 4.20%

Islamic PCBs 673 530 1.66%

FCBs 12.23 - 0.04%

BDBL 563 - 49.11%

Total 10640.23 4322 -

Source: Department of Off-site Supervision, BB

Table 3: Profit/Loss Made by Type of Banks from the Capital Market.

(Tk. in crore)

Types of Banks 2009 2010

SCBs 56.06 62.01

PCBs 221.21 267.04

Islamic PCBs 54.23 61.20

FCBs 2.03 2.76

Total 333.53 393.01

Source: Annual Reports of Various Banks

Table-2 shows that all the banks except BDBL have their exposure below 10% of

their total liabilities whereas BDBL alone has the exposure of around 49% of their

total liabilities in the capital market. Bank-wise exposures as a percentage of their

total liabilities are shown in the Figure-1.It is seen from the figure that though most

of the banks are well below the regulatory requirements yet a large number of banks

are well above the regulatory requirements. Table-3 shows that all the banks have

made profits by participating in the capital market through their trading portfolios.


Figure 1: % of Total Exposure to Total Liabilities of Various Banks

V. Problems faced by Banks for their Involvement in the Capital Market

Banks are facing the problems of frequent and relatively quick changes in

regulations for their participation in the capital market (Survey results). Initially there

was no rigid bar for banks‟ involvement in the capital market just like the NBFIs and

insurance companies. But when the barometer (usually measured by index) of the

capital market of Bangladesh was moving upward abnormally and reached nearly

9000 in the month of December, 2010, then Bangladesh Bank (the central Bank of

Bangladesh) formulated a regulation that no banks would be allowed to take their

position in the capital market beyond 10% of their total liabilities and this

adjustments must be made within shortest possible time. So all banks, at a time tried

to dispose of their holdings in the capital market with no consideration of their profit

or loss. BB was also contemplating to make a rule that Banks can take the equity

position in the capital market upto 10 % of their equity capital. If this regulation was

circulated in the banking system, then again banks would have been in hurry to

reduce their exposure in order to comply with the regulation. This would have hit the

volatility of the capital market of Bangladesh.

Thus all the banks in Bangladesh are having uncomfortable situation in their

exposure in the capital market due to frequent and quick change in regulatory

guidelines of the central bank as well as Securities and Exchange Commission. A few

days back Bangladesh Bank asked all the banks to adjust their respective single

borrower exposure limit given to the subsidiaries by December 31, 2011. As a result,

the stock market experienced the downward volatility. However, due to political and

market pressure, Bangladesh Bank is forced to extend the time limit of adjusting

single borrower limit up to December 31, 2012. The presence of institutional

investors is expected to ensure better valuation levels due to their specialised


analytical skills. But unfortunately most of the banks in Bangladesh do not possess

any such research cell as would help for making decision regarding buying or selling

or holding previously bought securities in the capital market (survey results). All the

merchant banks of various banks are facing the regulatory restrictions on the use of

omnibus accounts and they also face the frequent change of their margin loan

maintenance.

VI. Functions and Roles of Merchant Banks and Brokerage Houses as

subsidiaries of Banks

Merchant banking is an emerging sector in the capital market of Bangladesh.

According to Securities and Exchange Commission (Merchant Banker and Portfolio

Manager) Rules, 1996, merchant banker 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.”

Generally the term merchant banking refers to a negotiated private equity

investment by financial institutions in the unregistered securities of either privately

or publicly held companies. Previously there was not much restriction about

Merchant Banking operation by the Commercial bank. They could operate without

license from the SEC.

But, early in the 1996 the SEC insisted that the commercial bank need

permission. The SEC regulation was that the Commercial bank may have a subsidiary

entity. The permission of forming subsidiary had to be obtained from the Bangladesh

Bank. The capital market regulators have decided to allow commercial banks to

operate as Merchant banks through separate wings. With this regulation in place,

Bangladesh Bank has made it mandatory for all commercial banks to form the

requisite subsidiaries in order to participate in the capital market actively. As per

Merchant Banking Regulations, a merchant bank can perform mainly three activities

which are:

Issue Management

Issue Management function of merchant Banking helps capital market to increase

the supply of securities. Being a Issue Manager the merchant banks provide

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.


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 and

can earn a substantial amount of commission as fee-based income. 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.

Portfolio Investment Management Services

One of the most important functions of merchant banking is to provide Portfolio

Management service to the customer. In addition a merchant banker in Bangladesh

can also perform the activities of Project Counselling, Pre-Investment Studies,

Merger & Acquisitions, Factoring, Asset Securitization, etc.(Survey results)

One of the concerns of the paper is how the merchant banks and brokerage houses as

subsidiaries of the banks are performing in the capital market. Already 11 banks have

established both merchant banks and brokerage houses as their subsidiaries, 9 banks

have set up only brokerage houses and 6 banks have formed merchant banks as their

subsidiaries (Table-4). The table also displays that the merchant banks and other

subsidiaries have so far collected 99 to 100 per cent of their funds from their parent

companies.

Table 4: List of Merchant Banks, Brokerage Houses and their Capital Position

Name of

Banks Name of

Subsidiaries Date of

Commencement Bank’s

Subscription

(Tk. in crore)

Other’s

Capital

(Tk. in crore)

Janata Bank

Ltd.

Janata Capital &

Investment Ltd. 26/09/2010 10 0

Agrani Bank

Ltd.

Agrani Equity &

Investment Ltd. 16/03/2010 200 0

Sonali Bank

Ltd. Sonali Investment Ltd. 22/04/2010 100 0

AB Bank Ltd. AB Investment Ltd. 10/03/2010 499.48 0.01

AB Securities Ltd. 02/10/2010 19.942 0.058

Bank Asia

Ltd.

Bank Asia Securities

Ltd. 17/04/2011 44.9955 0.0045

BRAC Bank

Ltd.

BRAC EPL Investment Ltd.

18/04/2000 19.89 19.11

BRAC EPL Stock

Brokerage Ltd. 16/05/2000 5.1 4.9

(Continued)



BCBL Commerce Bank securities & Invest. Ltd.

Under Process 20 0

The City Bank

Ltd.

City Brokerage Ltd. 15/11/2010 59.994 0.006

City Bank Capital

Resources Ltd. not started 9.999 0.001

Dhaka Bank

Ltd. DBL Securities Ltd. 02/13/2011 15 0

Eastern Bank

Ltd.

EBL Securities Ltd. 06/12/1997 0.75 0.5

EBL Investment Ltd. 30/12/2009 30 0

IFIC Bank

Ltd. IFIC Securities Ltd. 02/11/2010 79.9994 0.0006

Jamuna Bank

Ltd.

Jamuna Bank Capital

Management Ltd. 29/11/2010 25 0.00016

Jamuna Bank Securities Ltd.

Under Process 40 0

Mercantile

Bank Ltd. Mercantile Bank Ltd. 27/06/2010 60 5

Mutual Trust

Bank Ltd.

MTB Securities Ltd. 22/09/2010 99.99 0.001

MTB Capital Ltd. 18/04/2011 9.999 0.001

National Bank

Ltd. NBL Security Ltd. 10/03/2011 99.995 .005

NCC Bank

Ltd.

NCCB Securities & Financial Services Ltd.

07/03/2011 25 0

NCCB Capital Ltd. Under Process 25 0

Premier Bank

Ltd.

Premier Bank Securities

Ltd. Under Process 49.998 0.002

Prime Bank

Ltd.

Prime Bank Investment

Ltd. 28/04/2010 300 0

Prime Bank Securities 29/04/2010 71.25 3.75

Pubali Bank

Ltd. Pubali Bank Ltd. 01/02/2011 160 0

Standard

Bank Ltd.

SBL Capital

Management Ltd. 09/01/2011 149.995 0.005

Southeast

Bank Ltd.

Southeast Bank Capital Services Ltd.

01/12/2010 90 10

Trust Bank

Ltd.

Trust Bank Investment

Ltd. 14/11/2010 300 0

Al-Arafah

Islami Bank

Ltd.

AIBL Capital Market Services Ltd.

not started 207 193

(Continued)



EXIM Bank

Ltd.

EXIM Islami Investment Ltd.

01/12/2010 99.99 0.01

IBBL

Ismali Bank Securities

Ltd. (IBSL) 22/03/2010 269.9946 .0054

Islami Bank Capital Management Ltd.

Under Process 30 0

SJIBL Shahjalal Islami Bank

Securities Ltd. Under Process 22.5 22.5


Table-5 depicts that only 10% merchant banks are maintaining the discretionary

balance of more than Tk. 50 crore while 100% of merchant banks are maintaining

non-discretionary balance of Tk over 100 crore for their customers. The merchant

banks as a whole maintain the discretionary balance of Tk. 628.86 million and non-

discretionary balance of Tk.51341.28 million ( Source; SEC) . For the discretionary

accounts, the merchant banks have to keep the loss limit and that‟s why when the

market as a whole moves downward, then there is chance on the part of merchant

banks to sell the shares of the discretionary accounts in order to maintain the loss

limit. So, discretionary accounts are risky for the whole capital market.

Table 5: Portfolio Management Activities of the Merchant Banks

(Figure in „000)

Level of client accounts’

balance of Merchant Banks

( in ‘000)

Discretionary

(Closing Balance) Non-Discretionary (closing

Balance)

0 - 50,000 90% 0% 51,000 – 100,000 0% 0%

101,000 – 200,000 0% 0% 201,000 – 500,000 0% 0% 501,000 – 1000,000 10% 0%

More than 1000,000 0% 100% Source: SEC of Bangladesh

Table-6 & 7 shows that most of the merchant banks and brokerage houses are

maintaining the requisite research cell for evaluating the investment worthiness of the

securities to be invested. Around 60% of the merchant banks are the full depository

participant of the CDBL. As high as 80% of the merchant banks are full-fledged

merchant banks, i.e. they can provide all the merchant banking services

(Underwriting, issue management and portfolio management services) to their

existing and potential clients. Only 30% merchant banks are maintaining the KYC

(Know Your Customer) profile of their customers while the remaining 70% are not

maintaining KYC profile which is too risky for them as well as for their customers

also. More or less all the merchant banks and brokerage houses are maintaining the

margin accounts for their clients.


Table 6: Availability of Relevant Features of Sampled Merchant Banks

Availability of

relevant

features of

Merchant Banks

Research

cell Margin

A/cs KYC

profile

Full

depository

Participant

Full-fledged or

partial merchant

banking License

Available 70% 100% 30% 60% 80%

Not available 30% 0% 70% 40% 20%

Source: Survey results

Table 7: Availability of Relevant Features of Sampled Brokerage Houses

Availability of

relevant features of

Brokerage Houses

Research

cell Margin A/cs KYC profile

Full

depository

Participant Available 70% 100% 20% 60%

Not available 30% 0% 80% 40%


Since the profit/ loss and business volume of an organization can display its

performance, so the following tables show the amount of profit/loss of the sampled

merchant banks and brokerage houses. Table-8 shows that most of the merchant

banks have made a substantial amount of profit after commencing their businesses.

Survey results also show that the merchant banks which have started their business

earlier have made more profits than the late starter.

Table 8: Profit/Loss of Sampled Merchant Banks

Profit level of Merchant Banks

(Tk. in crore) 2010 2011 (upto June)

0.00- 5.00 70% 0% 6.00 – 10.00 0% 20% 11.00 – 15.00 10% 20% 16.00 -20.00 0% 10%

More than 20.00 20% 50%


Table-9 shows that most of the brokerage houses have made a handsome amount

of profit after commencing their businesses. Survey results also show that those

brokerage houses which have started their business earlier have made more profits

than the late starter. The study demonstrates that subsidiary forms of the merchant

banks and brokerage houses of the banks are performing better than their branch-form

or treasury-form capital market involvements.


Table 9: Profit/Loss of Sampled Brokerage Houses

Profit level of Brokerage Houses (Tk. in crore)

2010 2011 (upto June)

0.00- 5.00 60% 0% 6.00 – 10.00 0% 20%

11.00 – 15.00 20% 20% 16.00 -20.00 0% 20%

More than 20.00 20% 40%

Source: Survey Results

VII. Recent Measures to Rejuvenate the Capital Market

The regulatory authority of the capital market of Bangladesh recently announced

a short, medium and long-term rejuvenation package to revive the capital market. The

implementation of the short-term measures will start immediately, the medium- term

ones in three months and the long-term ones in six months. The ten short-term

measures include: 1) The loans provided by banks to their capital market subsidiaries,

will not be taken into account while estimating their 'exposure to stock market'; 2)

The long-term equity investment made by a bank in any company will not be

considered as 'capital market exposure 3) The repatriation of commission money,

which has to be paid to foreign brokerage firms in case of foreign investment, will be

made speedier, subject to submission of relevant documents; 4) The 10 per cent tax

imposed on the profits earned by investments by foreign institutional and non-

resident Bangladeshis will be withdrawn; 5) The central bank will consider the banks'

exposure limit to the stock market on a 'net-off' basis, instead of 'marking to market',

basis;6) The deadline for adjusting single-borrower exposure limit of banks has been

extended by another two years, up to December 31, 2013; 7) The commercial banks

will make more investment in the stock market 8) Insurance companies (life and non-

life) have agreed to inject their surplus funds in the stock market; 9) The sponsor-

directors of listed companies will have to own at least 30 per cent stakes of their

respective companies; and 10) the merchant banks and other subsidiary firms will be

allowed to mobilize 49 per cent of their funds from sources beyond their parent

companies. The mid-term measures are: 1) the securities regulator will take initiatives

to launch the 'Investment Advisory Service' to make the market an informed one. For

this, brokerage firms will have to employ professional and expert investment

managers; 2) The securities regulator will make available 'Equity Research

Publication' to ensure access to information by investors, academicians and policy

makers; 3) A corporate governance guideline will be formulated to ensure

transparency and accountability of the listed companies; and 4) The securities

regulator will immediately take measures to increase the capital of merchant banks

and other subsidiary firms. The long-term measures are: 1) Financial Reporting Act

(FRA) will be formulated in a bid to increase the quality accounting and auditing

disclosure by listed companies; 2) The present 'insider trading' rules will be upgraded


and made and made stricter. 3) The regulator will make the 'Small Investor

Protection' law more time- befitting; 4) The proposed demutualisation of the two

stock exchanges will be completed very soon to ensure their corporate governance; 5)

Necessary measures will be taken to strengthen the mutual funds and make those

more attractive to investors; and6) The securities regulator will further strengthen the

monitoring activities in the stock market by establishing improved surveillance

system. By studying the rejuvenation package, it is observed that the banks should

play a vital/main role to revive the capital market. Nearly Tk. 11, 105 crore is given

by the 53 merchant banks and brokerage houses as margin loan to the capital market.

These loans have been provided by their parent banks and financial institutions and

these banks and financial institutions are accounting their interest against these loans

in their income statement, though its recovery is not made from the capital market. As

a result, the capital market has become the loan market of the banks and financial

institutions. So the question is whether Bangladesh capital market is going to be

bank-based capital market or independent capital market. The rejuvenation packages

also indicate that the full concentration has been placed on banking system. But

capital market of any country should not be based on the banking system.

VIII. Observations and Recommendations

One, during the post global financial crisis, there is a demand all over the globe

that commercial banking and investment banking should be separated. In this regard,

Volcker Rule which states that commercial banks should be prevented from trading in

the capital market for their own profits has been drafted. It is true that regulation is

required to separate the commercial banking from investment banking in order to

ensure the interest of depositors. Commercial banks need certain return. But from the

stock market it is almost impossible to earn a certain return. Moreover, investment in

the stock market may increase the cost of fund for the banks.

Two, from the report of capital market investigation committee, it is observed that

there was gross manipulation in the pre-IPO stage of issuance of various companies‟

shares with the direct patronization and collaboration of SEC officials. To speak the

truth, an illegal kerb market was created under the umbrella of SEC in order to

transfer/trade those pre-IPO placement shares with the help of token instead of using

script or dematerialization of those shares. Though it is not possible to trade shares

without the requisite permission of SEC, yet shares were traded in real sense. These

pre-IPO placement shares were distributed among the top officials of SEC, DSE,

CSE and high-ups of civil and defence system in order to strengthen the whole

syndicate (Khaled, et.al 2011). So it is not possible to ensure stability of the capital

market of Bangladesh without the political commitment of the government as well as

the policy-makers of the country. In this regard, there should have a code of conduct

for SEC officials and third party supervisory body may act as watchdog of the

activities of SEC. Pre IPO process should be more transparent and it may be allotted

only to the institutional investors so that it cannot be used as a tool of manipulation.


Three, development of strong market risk capabilities can contribute to the

development of the capital markets. Moody's recent survey shows that the resilience

of the South African financial system during the current global financial crisis is due

to the depth of the country's capital markets. Capital market depth in Bangladesh has

increased tremendously over the last few years. In our opinion depth in capital market

does not help to stabilise the banking system. Though both are interlinked in their

operation, banking system should have separate regulation.

Four, it is said that key instruments in mitigating market risk in the trading

portfolio of banks and their subsidiary brokerage houses are the derivatives. The

introduction of derivative instrument in the market is feasible only when the regulator

can handle it and investors understand the full functioning of the instruments.

Five, merchant banks operation ultimately consolidates with banking operation

through group accounts and disbursement of profit is made up based on group profit.

Therefore, finance in merchant banks 99 to 100 per cent of funds from their parent

companies (Table-4) makes bank operation risky. Therefore, the merchant banks and

other subsidiary companies should mobilize 49 percent of their funds from sources

beyond their parent companies, and as a result the capital market will also boost up.

Six, bank can invest in shares of various companies in aggregate with the amount

of 10% of total liabilities of its own which is unrealistic. It should be linked to the

capital. Because capital is the fund which will ultimately absorb the losses to be

incurred by the banks.

Seven, in some neighbouring countries there is co-existence of commercial banks

and merchant banks as underwriters. This is in conflict with main function of

commercial bank. In our country separation of commercial banks from merchant

banks as underwriters is under process. In our opinion, underwriting activities should

be conducted through merchant bank entity.

Eight, demutualization is the process by which a customer-owned mutual

organization or co-operative changes its legal form to a joint stock company i.e.

absolute separation of management from ownership. The basic objective of

demutualization of stock exchanges is to keep away the brokers from the

management of the stock exchanges and to convert the exchanges into business

entities so that they are professionally managed. Once the bourses DSE and CSE are

transformed from a mutual to a demutualised structure, it will bring a change in the

ownership structure and legal and organizational forms. Therefore, the

demutualization process will enhance the stock market in terms of value, liquidity,

market perception, efficiency and independence considering the interests of all

stakeholders. It will also ensure transparency, resolve conflict of interest.


Nine, as per our survey results, there is margin loan amounting to TK. 9500

crore in the stock market of Bangladesh. The market which is developed by

depending on borrowed funds from the commercial banks, merchant banks or

brokerage houses becomes vulnerable. Again some of the listed companies have

memberships and they have merchant banking licenses. Ultimately this type of

interrelationship creates an environment of conflict of interest. Therefore, margin

loan facility should be restricted and loans should be given from merchant banks

own fund. The merchant banks should not have brokerage houses to resolve the

conflict of interest in this regard.

Ten, mutual funds in Bangladesh virtually have no control over the market.

Development of mutual funds is a necessary condition for a sound and balanced

development of a capital market, but the scenario in Bangladesh is quite different and

it reflects limited role of mutual funds and domination of other stakeholders in the

market. Not many investors are found interested to invest in mutual funds that are

considered safe investment tools worldwide. To make the mutual fund lucrative

investment destination, awareness should be built among the investors and we can

add some incentives on investments in mutual funds. Eleven, it is said that capital market of Bangladesh is too risky because of poor or

absence of governance in the market. Too few heads are very easy to manoeuvre.

Three members and a Chairman of the Securities and Exchange Commission are

solely responsible with inputs from executive directors and there is no code of

conduct for the employees of SEC. We think qualitative reform rather than radical

reform in terms of political affiliation free appointment, increase of manpower,

technological development and active supervisory board can contribute development

in the capital market.

Twelve, too much close relationship and too much co-ordination between the

SEC and the stock exchanges reflect powerful influence of stock exchanges. Too

close relationship between regulator and regulatee undermine regulations and allows

Exchanges to weaken the implementation of rules by SEC. In this case, the relation

between SEC and stock exchange should be consultative without injuries of

respective right and responsibility. The relation should not be restricted to providing

directives only.

Thirteen, the Bangladesh Association of Banks (BAB), an organisation of the

owners of the country's private commercial banks, has come up with a plan to float a

fund of Tk 50 billion, which it calls, market stabilisation fund (MSF) to help prop up

the flagging stock market. This is the second and the latest one of similar kind of

funds that the people who someway or other involved with the stock market have

proposed to float to 'stabilise' the market. The proposal about the floatation of the

second fund instead of creating the desired positive mood among the investors

triggered a free fall in stock prices. Such fund may not bring good result. Investors‟

confidence is the main issue in capital market.


Fourteen, demirguc-Kunt et al. (1996) suggest that an economy without a

well-functioning capital market may encounter three types of deficiencies: (i) limited

ways of risk diversification for investors and entrepreneurs (ii) firms cannot optimally

structure their financing decisions and (iii) lack information about the prospects of

firms thereby restricting their promotion of investments and its efficiency. Insider

trading should be restricted through formulating hard rule and there should be

application of the rule by providing punishment of the insiders.

Fifteen, brokerage houses and their branches should extend services beyond

metropolitan areas. They should invest adequately in quality research to provide

valuable information on listed companies, their industry and national economy. The

extension of services by brokerage houses can help the capital market to increase its

depth but there should have a research cell as well to guide the investors with

requisite suggestions and advisory services.

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Paper Eight

Implication of the Legal Framework Guiding Loan

Recovery

Syed Ahmed Khan Former Faculty Member, BIBM

Quazi Golam Morshed Farooqi

Faculty Member, BIBM

Implication of the Legal Framework Guiding

Loan Recovery

I. Introduction

Prior to the passing of The Money Loan Court Act, 1990 and The Bankruptcy

Act, 1997, it was observed and felt seriously that the existing laws in Bangladesh

were not adequate to solve the issues faced by banks and financial institutions

connected with poor loan recovery position. The banking sector in Bangladesh was

burdened with huge amount of non-performing loans. The poor recovery of loans

resulted in accumulation of large amount of non-performing loans. The issue of

recovery of loans still remains a major cause of concern for the central bank,

Government and policy makers of the country. With the implementation of Financial

Sector Reforms program, necessary laws were enacted and existing laws were

amended to improve the recovery position of bank loans. A series of amendments

were made to The Money Loan Court Act, 1990 and 2003. The main objective of the

subsequent amendments to this Act was to speed up the process of recovery of stuck

up loans of banking sector. Latest amendments to this Act were made on March 31,

2010. Continuous amendments of existing laws were aimed at improving the

recovery of non-performing assets of the banking sector. Besides, promulgation of

laws, amendment of existing laws and various non-legal measures were also

undertaken by Bangladesh Bank, Government and by concerned banks to address this

issue of loan recovery. In the meantime, nationalized banks were corporatized to

improve their overall financial performance. Despite all these attempts on different

fronts, recovery of bank loans still remains the main problem of the banking industry

in Bangladesh. Total classified loans stood at Tk. 233.79 billion or 8.67 percent of

total loans of Tk.2695.25 billion as on 30th June 2010. The paper identified the

following objectives: One, to discuss briefly the existing legal infrastructure

(including amendments) enacted so far for recovery of bank loans; Two, to identify

the efforts other than legal measures towards recovery of bank loans; Three, to

analyse & discuss the recovery status under The Money Loan Court Act, The

Bankruptcy Act., and The Public Demands Recovery Act; Four, to discuss and raise

issues relating to loan recovery problem under the present legal framework in

Bangladesh.

The study was undertaken through collection of information from secondary

sources. Mainly, bank officials of concerned desks in state owned banks and some

private sector banks were interviewed to bring out the actual dimension of poor loan

recovery. The banking system in Bangladesh has undergone a series of reforms

program including changes in laws, rules, process and operating systems of banking

institutions. But the problem of defaulted loans remains the major headache for


Government, Bangladesh Bank and policy makers. The study was organized into five

sections. Section I of the study provides introduction including objectives and

methodology of the study. Section II gives a literature review on the topic. Section III

briefly provides brief discussion on existing legal infrastructure of Bangladesh

towards loan recovery. Section IV presents some case studies relating to loan

recovery efforts by banks. Section V raises and discusses issues relating to loan

recovery problems under the existing legal framework.

II. Literature Review

Before the implementation of Financial Sector Reforms Program, legal

infrastructure for recovery of loans was almost absent in Bangladesh. The First

Mission under Commercial Bank Restructuring Project (CBRP) of the World Bank,

which started in May, 1997, stated, “The three pillars of banking-effective legal

system, good management and strong and effective central bank need to be rebuilt”.

They also pointed out, “In Bangladesh, the legal punishment is very low in case of

forgeries in Banks”. According to the Mission‟s view, in Bangladesh maximum fine

is US $ 500 only, and there is no example of punishment in Bangladesh in case of

forgeries in banks. Subsequently, under the Financial Sector Reforms Program, The

Artha Rin Adalat Ain 1990 and The Bankruptcy Act, 1997 were enacted and were

amended further with the objective of implementing bankers recourse laws for

recovery of stuck up loans of banking industry in Bangladesh. Our neighbouring

country, India promulgated Recovery of Debts Due to Banks and Financial

Institutions Act, 1993 commonly known as Debt Recovery Tribunal (DRT) Act for

speedy recovery of bank loans. Three theoretical paradigms were used in quest for a

socio-political explanation of the bank loan default problem of Bangladesh: the

rational actor theory, the pluralist incrementalist theory and the organizational

bargaining theory. (Prof. Muzaffar Ahmed 1997). He rightly opines that unless the

major defaulters are brought to book and soundness of financial institutions are

ensured, the confidence of depositors and productive well-intentioned borrower in the

domestic financial system would be eroded (p.36). Bhattacharya (1998, p. 134) cites

the example of the explosive credit expansion in the decade of the 1990s as reasons

for loan default in Bangladesh. Bank loan default problem in Bangladesh is caused

primarily by the wilful defaulters, who have been thriving from the so-called, default

culture‟ engineered by diversion of bank loans to legal and illegal trading and other

pursuits at home and capital flight abroad. (A Search For a Theoretical Structure

Explaining Bank Loan Default In The Private Sector In Bangladesh)

III. Legal Measures

The preamble to The Money Loan Court Act says: “Whereas it is expedient to

further amend and consolidate the existing law relating to recovery of loan given by

the financial institutions. It is hereby enacted as follows:- ……”. Prior to the

enactment of this Act in 1990, it was felt that the existing laws were not adequate to


solve the default problems faced by banks. In addition, considerable manpower of

banks and financial institutions gets involved in the recovery process wasting their

other regular constructive assignments. In this background, the Act was first

promulgated in 1990. Since then the Act was in operation but expected recovery of

bank loans was not possible. In this situation, the banking industry in Bangladesh got

trapped in the situation of ever rising trend in classified loans, shortfall in

provisioning requirement, off and on liquidity crises, rise in the number of problem

banks etc. Under this Act, Exclusive Court was established to get rid of innumerable

pending suits in the Civil Court. Under the 2003 Money Loan Court Act, some

privileges were allowed to default borrowers viz. ex-parte decree may be set aside if

the defendant deposits an amount equivalent to 10% of the decreed money within 15

days of submission of application for setting aside the ex-parte decree. Besides, under

section 46 of the Act, default borrowers of Term Loan get time for one year more if

they deposit 10%, 15% and 25% of payable amount respectively after the

commencement of the repayment of the loan as per repayment schedule. Under the

Act, the default borrowers have the privilege of settlement of cases under Settlement

Conference (Section 21) and under Mediation (Section 22). Under Section 12 of this

Act, financial institutions have been empowered to sell mortgaged property of the

defendant to adjust the sale proceeds towards repayment of loans before filing of suits

in the Money Loan Court. For selling the mortgaged property of the borrower, Bank

shall publish sale notice (Section 33) in a widely circulated national Bengali daily

giving at least 15 days time. Under the Money Loan Court Act, 2003 (under Section

41 and 42), appeal and revision against a judgment or decree have been discouraged.

Appeal shall be admitted for action, if an amount equivalent to 50% of the decreed

money is deposited, in cash, in the decree holder financial institution. Revision

application will be accepted if 75% of decreed money is deposited. Civil

imprisonment under Section 34 of the Act upto 6 months is relaxable if the judgment

debtor, detained in civil prison, repays, in cash, an amount equivalent to 25% of the

outstanding amount and executes a bond to the effect that he shall repay the rest of

the amount within the next 90 days. The Court shall then release him from detention.

In view of the above circumstances, the default borrowers in many instances for fear

of losing property or honor in the society tend to communicate with banks for

settlement of suits.

Massive amendments were made on March 31, 2010 in the Money Loan Court

Act of 2003. Section 12, 22, 28, 30, 32, 33, 50 of Money Loan Court Act, 2003

were amended mainly to address the prevailing situation in banking industry

towards recovery of bank loans. Section 12(3) of Money Loan Court Act, 2003 was

amended deleting the words “Power of Attorney”. It indicates that financial

institutions shall have right to sell the mortgaged property towards adjustment of

default loan without having Power of Attorney from the side of borrowers. Section

21 of Money Loan Court Act 2003 has been abolished. Section 25 of Money Loan

Court has been amended. Under the amendment any suit above Tk. 5 crores claimed


by financial institutions to be settled under Alternate Dispute Settlement must be

approved by Chief Executive or Managing Director of the concerned financial

institution. Section 32 of Money Loan Court Act, 2003 has been amended. Under

the amendment while filing written objection against execution suit the defendant

shall submit security or bond equivalent to 10% of unrealized amount instead of

25% earlier. Section 33 of Money Loan Court Act, 2003 has been amended. Under

the amendment while executing any decree or order, the Court shall, in case of sale

of any property through auction, invite tender. Every bidder shall submit with the

tender as security through bank draft or pay order equivalent to 20% of quoted price

if bid amount is upto Tk 10 lakhs, 15% of quoted price if bid amount ranges

between Tk 10 lakhs and Tk 50 lakhs and 10% percent of quoted price if bid

amount exceeds Tk. 50 lakhs. New additions have been made under Section (33)

where under subsection (6K), 6(Kha), and 7(K) the decree holder shall

automatically get possession of property after six years on written application to the

Court by the decree holder. The above amendments were made in 2010 aiming

further at strengthening the recovery of bank loans.

IV. Loan Recovery Status under Existing Acts

Implications of implementation of these laws seem to be profound in the banking

industry not only for loan recovery but also for building awareness among concerned

parties. In this situation of high ratio of non-performing assets, banks set aside a

portion of income as loan loss reserve. It reduces banks loanable funds by stopping

recycling of funds. A high percentage of NPL leads ultimately to erosion of banks

capital. The growth of banks, thus, suffers immensely. As of 31st December, 2010 as

many as 75513 suits were settled (cumulative) under The Money Loan Court Act and

the amount of recovery (cumulative) stood at Tk. 5942.14 crores. But as on the same

date 35,835 suits were under trial and the amount claimed against these suits was Tk.

23218.72 crores. Thus it seems that there remains enough scope for further recovery

under MLC, Act. The amount of recovery under The Bankruptcy Act, 1997 was Tk.

315.76 (cumulative) against settled cases of 237 as on 31st December, 2010. The

amount of recovery under The PDR Act, 1913 stood at Tk. 688.59 crores

(cumulative) against settled suits of 572662 (Appendix-1). It may be mentioned that

with the implementation of Debt Recovery Tribunal (DRT) in India, classified loans

declined from 39 percent to 9 percent while in Bangladesh classified loans declined

from 34.9 percent in 2000 to 9.2 percent in June 2009. (Table-I). If the amount of

written –off loans and rescheduling amount were taken into consideration at the time

of calculation of NPL, the ratio would have been much higher than the figure

depicted below.


Table 1: Ratio of NPL to Total Loan by Type of Banks (Period end June)

Bank

Types 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

SCBs 38.6 37.0 33.7 29.0 25.3 21.4 22.9 29.9 25.4 21.4

DFIs 62.6 61.8 56.1 47.4 42.4 34.9 23.7 28.6 25.5 25.9 PCBs 22.0 17.0 16.4 12.4 8.5 5.6 5.5 5.0 4.4 3.9 FCBs 3.4 3.8 2.6 2.7 1.5 1.3 0.8 1.4 1.9 2.3 Total 34.9 31.5 28.0 22.1 17.6 13.6 13.2 13.2 10.8 9.2

Source: Annual Report, Bangladesh Bank, 2009-10

Writ Petition

Writ petitions filed by defendants may be one of the important causes of steep

rise in non-performing loans of banking industry in Bangladesh. A case is presented

below in this respect.

Case Study 1

Ref: 2010 BLD (HCD) 30

Nazmun Ara Sultana and Md. Ruhul Quddus, JJ

Fatema Begum

V.

The Artha Rin Adalat, Narayangonj and Others

The case in short is that Fatema Begum‟s father late Dudu Mian was the lawful

owner in possession of 8.04 decimals of land out of 20 decimals appertaining to

C.S. Khatian No. 278, Dag No 354 corresponding to S.A. Khatian No. 333, Dag No

490 and R.S. Khatian No. 459 under Mouza Dewbhoge of Police Station and

District Narayanganj. The petitioner (Fatema Begum), her brother and sisters

inherited the said property after the demise of their father Dudu Mian and have

been enjoying and possessing the same for more than twelve years without any

interruption. She (Petitioner) came to know from a reliable source on 18-2-2010

that their land would be auctioned in execution of a mortgage decree passed by the

Artha Rin Adalat, Narayanganj in Mortgage suit No. 72 of 1996. She rushed to

Court on 23-2-2010 and obtained an information slip, from which she specifically

learnt that respondent No.2 (IFIC Bank Ltd, B.B. Branch, Narayanganj) had

obtained a mortgage decree against respondent No 3 Alhaj Abul Hossain in

Mortgage Suit No. 72 of 1996 from the Artha Rin Adalat, Narayanganj in respect

of unspecified 7(seven) decimals of land from the same plot. The decree holder

bank put the decree in execution by filing Mortgage Decree Execution case No. 25

of 2001, which is still pending.

(Continued)


Case Study 1: (Continued)

In the guise of the above provision in the Constitution the default borrowers get

privilege to file writ petition. As a consequence of this Right, huge amount of default

loans of banking industry in Bangladesh remains stuck up. Not only the piling up of

default loans, a huge number of pending cases are under trial in the Court at different

stages. In view of the above situation, should banks go for pursuing cases for

indefinite period incurring huge amount of legal expenses or take other measures for

recovery of loan?

Directed Lending

Special Agricultural Credit Program (SACP) was launched in mid-February,

1977 with a target of Tk. 100 crore. SACP was introduced to increase the

participation of NCBs in agricultural financing and also to expand the credit

operations of BKB. Besides SACP, adequate finance was arranged from the banking

system to finance jute trade and jute mills during the decade of the 1970s and 1980s.

Under the above circumstances, the petitioner, her brother and sisters filed an

application for release of their property from the schedule of the mortgage suit as

well as Mortgage Decree execution case. The learned judge rejected the same by

impugned order dated 10-3-2010 on the ground that the petitioners did not deposit

25% of the decretal amount according to section 32(2) of the Artha Rin Adalat

Ain, 2003.

In deciding the writ petition filed by the petitioner (Fatema Begum) on the point of

controversy the learned judge mentioned sections 2(Ga), 6(5) and other provisions

of the Artha Rin Adalat Ain, 2003 which strongly suggest that the law is enacted

for recovery of loan from the defaulter loanee i,e., the borrower, guarantor,

mortgagor and the person placed in similar position. In the present case the

petioner is in no way connected with the loan, she does not claim the auctioned

land and there is no cause of realization against her. Such a person is not intended

by the law to bear extra financial burden of 25% of the decretal amount as a pre-

requisite to get relief.

In view of the above, we (the learned judge) find substance in the Rule.

Accordingly, the Rule is made absolute. The impugned order dated 10-3-2010

passed by the Artha Rin Adalat, Narayangainj summarily rejecting Miscellaneous

Case No. 3 of 2010 in Mortgage decree Execution Case No. 25 of 2001 is hereby

declared to have been passed without lawful authority and is of no legal effect.

“A person‟s right to property guaranteed under the Constitution can not be taken

away without giving him/her an opportunity to probe his/her claim” - The verdict

states.


Refinance facility was also allotted to the banks from Bangladesh Bank at bank rate

to finance the jute sector, sugar mills, textile mills, petroleum import, rural credit,

small loan, loans for weavers etc. during 1970s and 1980s. These financing facilities

produced adverse impact and most of these loans became bad loans. The trend of

directed lending still exists. Small enterprise financing without collateral, financing

for goat rearing etc. are examples of directed financing in recent years. As a result,

the percentage of bad loan constituted major share in total classified loan which is

shown in table II below.

Table 2: Major Share in Total Classified Loan

Year TCL*

as % of TL**

Sub-standard

Loans as % of

TCL

Doubtful

Loans as % of

TCL

Bad/ Loss

Loans as %

of TCL 1999 41.11 5.26 8.27 86.47 2005 13.55 8.66 6.96 84.37 2008 10.79 9.43 9.42 81.14 2010 8.67 13.17 7.76 79.04

*TCL= Total Classified Loan

**TL= Total Loan

Source: Financial Sector Review, Bangladesh Bank, January, 2009.

It is evident from the above table that in Bangladesh the share of Bad/ Loss loans

to total classified loans of scheduled banks was 86.47 percent in 1999, 81.14 percent

in 2008 and 79.04 percent in 2010. In India, the percentage of loss assets to total

advances of scheduled commercial banks was only 0.24 percent in 2010 (end March)

compared to 0.20 percent (end March) in 2009. In Bangladesh, bad/ loss loans as

percent of total loans outstanding stood at 6.85 percent as at end June, 2010. This

indicates a dismal picture of classified assets position in Bangladesh.

Banks in Bangladesh are burdened with heavy non-performing assets. Banks are

endeavoring hard to find out ways to recover non-performing loans. Out of total

cumulative cases of 111348 for an amount of Tk. 35486.67 crores (cumulative) as

at end December 2010 under The Money Loan Court Act only 75513 cases

(Cumulative) were settled. The amount of actual recovery under The Money Loan

Court Act, 2003 stood at Tk. 5942.14 crores upto 31st December 2010. Similarly, an

amount of Tk. 315.76 crore was recovered under The Bankruptcy Act, 1997 during

the same period. Under PDR Act an amount of Tk. 688.59 crores was recovered

against 572662 settled cases upto 31st December 2010. It is reliably learnt from

concerned divisions of banks that hearing of cases in the Money Loan Court are

being shifted for unknown reasons. Even in some instances shifting/ postponement

of dates of hearing have been changed keeping the concerned bank unaware. The

Court, in some instances, relieves guarantors from charges of guarantee. Section 17

of Artha Rin Adalat Ain is, thus, not being implemented under various pretexts.

A case is presented below highlighting the time taken to settle a case under Money

Loan Court Act, 2003.


Case Study 2

Star Bank Ltd. (not the actual name of the bank) sanctioned house-building loan

amounting to Tk. 10.00 lakhs to an individual customer. The bank filed suit against

the default borrower on 06-02-2005 for an amount of Tk. 39.22 lakhs. The bank got

decree in its favour. Under the process of auction the property was registered in the

name of a bidder on 27-02-2008. but the default borrower filed a Mis case against

the bank and the buyer of the auctioned property. In the meantime, the borrower

applied to Star Bank Ltd. to repay loan after some waiver of interest. Star Bank Ltd.

through official decision received an amount of Tk. 32.94 lakhs from the borrower

towards adjustment of the loan. The amount was transferred to the sundry deposit

account of the branch from where loan was disbursed. As per instruction of the

Head office, on 22-04-2010, a petition was filed to Court to withdraw Appeal Case

and the case is still pending as per Order of the Court.

In the above case, Star Bank Ltd. got back its claim but the Appeal case is still

pending.

Loan Without Security

In many instances, collateral securities against which banks/financial

institutions provided loans, are not in the possession of banks. If these securities

were in the possession of banks the implementation of the Act and subsequent

possession by banks would have been easy (case-III). In many instances thousands

of cases of banks and financial institutions remained unattended for lack of proper

attention and follow-up.

Case Study 3

Discontinuation of Execution Cases due to non-availability of borrower(s)/

guarantor(s) having no collateral and/or other securities against their loans

for realization of bank dues

Green Bank Ltd. (not the actual name of the bank) from its Motijheel branch

sanctioned cc (Pledge) loan limit of Tk. 20.00 lakhs to Lilac Paints and Chemicals Co.

Ltd. The loan became default and the bank filed a case against the borrower on 23-06-

1997 and got decree in favour of the bank. The bank filed execution case on 06-04-2002 for Tk. 132.67 lakhs. The bank had no security at its disposal and the borrower

is also not traceable. Total legal expense of the case stood at Tk. 1.27 lakh as on 31-

10-2008. It may be mentioned that the branch manager is no longer in the services of the bank and no disciplinary action was taken against him for disbursement of loans

without taking proper security. The account was referred to recovery agent and was

returned. The chance of recovery of the loan is bleak as the borrower is untraceable and no security was provided by the borrower. The Green Bank Ltd. referred 52 such

cases (loans given without security) to Bangladesh Bank for discontinuation of cases

against the concerned borrowers to get rid of further legal expenses. Bangladesh

Bank, in reply, advised Green Bank Ltd. to continue and pursue such cases.


Non-Legal Measures

In addition to legal measures, Bangladesh Bank provided necessary guidelines

towards recovery of bank loans. These are: Rescheduling of loans, write-off of loans,

appointment of Loan Realization Agent. Impositions of Restrictions on Loans to

Directors of banks, Restructuring of NCBs/ Distressed bank, Large Loan

Restructuring Scheme, to make mandatory of Credit Rating of banks by external

agencies, Single borrower exposure limit etc. Under write-off policy of Bangladesh

Bank, banks may, write-off loans classified as bad/loss. Loans remaining classified as

bad/loss for last 5 years and above and if 100% provisions were kept against these

bad loans, these loans may be written-off immediately. The total amount of yearly

written-off bad loan position is shown in Table-III. The extent of written-off bad

loans stood at Tk. 174.0 billion as on 30-6-2010. The question arises who should bear

the ultimate burden of this write-off amount? Banks are required to keep 100 percent

provision against the write-off bad loans. The position of profit of banks would have

been higher if provisions were not required to be kept. The general shareholders are,

thus, being deprived of getting due return from their investment.

Table 3: Write-off Bad Debts in Different Bank Categories

(Billion Taka)

Source: Annual Report, Bangladesh Bank, 2009-10

V. Issues and Problems to be Discussed

One, a total amount of Tk. 35486.67 crores were claimed by the banking community

in Bangladesh against 111348 cases (cumulative) upto 31st December, 2010 under

The Money Loan Court Act, 2003. Actual recovery (cumulative) stood at Tk.

5942.14 crores against 75513 settled cases. Similarly, under PDR Act, a cumulative

amount of Tk. 688.59 crores was recovered against 572662 settled cases. Thus, there

remains a large number of unsettled cases against which huge amount of Taka was

claimed by banks. Now the question arises, what are the possible means other than

existing means to dispose of pending cases lying with the Courts?

Two, the default borrowers get privileges to file writ petition against claim of the

bank under Section 12 of Money Loan Court Act, 2003. In some instances, the

borrowers file several writs against a particular case. The banks are not even

Bank

Types 30-06-04 30-06-05 30-06-06 30-06-07 30-06-08 30-06-09 30-06-09

SCBs 26.3 29.7 35.7 42.8 48.4 64.5 70.5

DFIs 17.4 27.6 28.6 30.4 31.0 31.8 31.8

PCBs 21.2 32.9 40.7 45.5 49.4 54.7 69.6

FCBs 0.9 1.1 1.5 1.6 1.7 2.0 2.1

Total 65.8 91.3 106.5 120.3 130.5 153.0 174.0


informed by the Court regarding the filing of Writ petitions by the default borrowers.

In this situation, should banks wait for indefinite period and incur huge amount of

legal expanses to get verdict?

Three, the banks in many instances do not have security at their disposal against

the loan they have provided. The default borrowers are also not traceable. The

Recovery Agent entrusted to do the job of loan recovery also failed. Some bank

referred such cases to Bangladesh Bank for discontinuation of such cases. Bangladesh

Bank, in reply, advised the concerned bank to continue and pursue such cases. What

should banks do in these circumstances?

Four, the detention order against the default borrowers passed by the Court does

not reach the concerned Police Station in due time and proper way. Even if it reaches

the concerned Police Station, there is lack of desired action by the concerned law

enforcing agencies. The law enforcing agency do not even inform the Court regarding

the position of default borrowers. In this process many cases remain stuck up. What

are the ways to get out of this situation?

Five, the percentage of bad/ loss loans in total classified loans is higher in

Bangladesh compared to our neighboring country, India. What are the possible ways

to come out of this situation? Bangladesh Bank provided guidelines to write-off bad

loans against keeping of 100 provisions. But ultimately who is going to bear the

burden of these written-off assets?

Six, it is evident that the recovery efforts made by banks through non-legal

measures and legal measures are not producing good results towards recovery of

loans. Then, what additional methods/ measures should banks undertake to speed up

the process of loan recovery?

Seven, it is understood that bank management under some political pressure

disburse directed loans. But the recovery positions of all directed credit in

Bangladesh is not at all satisfactory. What are the ways on the part of bank

management to realize these directed loans?

Eight, many sections of Money Loan Court Act, 2003 have been amended in

2010 with the prime objective of strengthening loan recovery. What are the possible

ways to implement these amendments towards better recovery of stuck up loans of

banks?


VI. Observations and Recommendations

One, it is a fact that large number of suits are being filed by banking companies

in The Money Loan Court to recover their default loans. But the disposal of suits is

very minimum. It is, thus suggested that number of Exclusive Courts as well as

number of Judges for trial of cases towards recovery of loans should be increased.

Two, writ petitions filed by default borrowers under section 102 of the

Constitution stand as a great barrier towards speedy disposal of cases under The

Money Loan Court Act, 2003. It is , thus, suggested not to allow or entertain writ

petitions by default borrowers by the High Court. At all if it is desired, separate

benches in the High Court may be established to trial such cases. There should be

some definite time limit in the disposal of writ-petition. It is further suggested that

some percentage of down payment system should be introduced while filing writ

petitions by the defaulters.

Three, there are lackings in the persuation of cases in the Court by the lawyers

appointed by banks. It is , thus, imperative to appoint competent advocates to persue

cases in The Court to derive benefit out of filing of cases under the Money Loan

Court Act, 2003. The remuneration of lawyers should be increased.

Four, employees entrusted with the responsibility of looking after the Legal

Section of banks should be run by persons with legal background. They should be

competent, honest and dedicated towards follow-up of cases filed by their banks.

Five, political pressure in the disbursement of bank loans ultimately leads to

default culture in Bangladesh. If arrangements are made to publish in the newspapers

the names of default borrowers along with their photographs, the number of

defaulters may decline in Bangladesh.

Six, Debt Recovery Tribunal like India may be established in Bangladesh headed

by Retired High Court Judges for those defaulters who are filing writ-petitions to

avail stay orders from the Court.

Seven, The success of the implementation of the filed cases under The Money

Loan Court Act, 2003 depends not only on the efficiency of employees of banks but

also on the Court, law enforcing agencies and political will of the government in

power. It is, thus suggested that concerned affords should be undertaken to get out

this problem of poor disposal of cases by The Money Loan Court. Necessary

amendments of The money Loan Court Act,2003 may be effected to make this law

suitable towards recovery of bank loans.


REFERENCES

Choudhury, Toufic, Ahmad and Kumar Adhikary Bishnu (2002), “Loan

Classification, Provisioning Requirement and Recovery Strategies: A comparative

Study on Bangladesh and India”, Bank Parikrama, Vol. XXVII, Nos 2 & 3, June &

September 2002.

Choudhury, Toufic, Ahmad, Md. Liakat Hossain Moral and Prashanta Kumer

Banerjee (1997), “Impact of New Loan Regulations on Loan Portfolio Management

in Banks”, Bank Parikrama, Vol. XXII, No. 2, June 1997.

Islam, Muinul and Mohiuddin Siddique (2010), A Profile of Bank Loan default in the

Private Sector in Bangladesh, Chapter 1 & 2.

Legal Aspects of Banking Operations, Indian Institute of Banking & Finance, Module

C(P377-78).

Moral, Md., Liakat, Hossain (2000), “Enforcement status of Laws Relating to Default

Bank Loans”, Bank Prikrama, Vol. XXV, Nos. 2 & 3, June & September 2000.

Ministry of Law, Justice and Perliamentary Affairs, Government of the Peoples

Republic of Bangladesh (2003), The Money Loan Court Act 2003, (Act No. VIII of

2003), Dhaka: Ministry of Law, Justice and Perliamentary Affairs.

National Assembly, Bangladesh (2010), The Money Loan Court Act 2010

(Amendment), 31st March, 2010, Dhaka: National Assembly.

Report on the Trend of Banking in India, 2009-10.

Seminar on „Recovery of Default Loan Through Private Initiative – Success Failures‟

organized by Peoples Development Services Corporation Ltd.

The Bankruptcy Act, 1997.


Appendix

Table 1: Suits Filed and Settled in the Artha Rin Adalat Ain / Bankruptcy Act / PDR Act

(Tk. in crores)

Category of

Banks

Period

Ended

Suits Field (Cumulative) Suits Settled Suits under trial

Number of

suits

Amount

claimed

Number

of suits

Amount

claimed

Actual

recovery

Number

of suits

Amount

claimed

Recovery

against

claim

SCBs 31-12-2007 60566 13482.11 35225 2363.67 2024.70 25341 11118.44 300.61

31-12-2010 63975 16499.25 43309 5036.13 3311.86 20666 11463.12 815.64

DFIs 31-12-2007 23663 3841.56 16742 1783.02 364.89 6921 2058.54 23.12

31-12-2010 26716 4406.61 19694 2394.09 630.09 7022 2012.52 229.33

PCBs 31-12-2007 17815 9037.37 9387 2361.02 955.84 8428 6676.35 943.35

31-12-2010 20313 14166.45 12264 4687.88 1907.96 8049 9527.19 1241.42

FCBs 31-12-2007 296 216.39 232 156.94 81.43 64 59.45 43.56

31-12-2010 344 414.36 246 198.47 92.23 98 215.90 5.68

Grand

Total

31-12-2007 102340 26577.43 61586 6664.65 3426.85 40754 19912.77 1310.64

31-12-2010 111348 35486.67 75513 12316.58 5942.14 35835 23218.72 2292.08

Re

search

Wo

rksh

op

Ke

yn

ote

Pap

er 3

01

Table 2: Bankruptcy Act, 1997

(Tk. in crore)

Category

of Banks

Period

Ended


Number of

suits

Amount

claimed

Number of

suits

Amount

claimed

Actual

recovery

Number of

suits

Amount

claimed

Recovery

against claim

SCBs 31-12-2007 176 900.84 43 306.60 101.83 133 594.25 3.26

31-12-2010 179 900.85 57 395.40 174.85 122 505.45 1.70

DFIs 31-12-2007 107 881.75 41 277.71 0.43 66 604.04 1.23

31-12-2010 118 946.53 69 382.91 0.43 49 563.62 0.00

PCBs 31-12-2007 172 751.31 100 258.86 29.22 72 492.45 3.20

31-12-2010 182 786.83 109 312.32 140.38 73 474.51 4.87

FCBs 31-12-2007 1 0.09 1 0.9 0 0 0 0

31-12-2010 2 7.62 2 7.62 0.09 0 0.00 0.00

Grand

Total

31-12-2007 456 2533.99 185 843.27 131.48 271 1690.72 7.70

31-12-2010 481 2641.83 237 1098.25 315.75 244 1543.59 6.58

302 R

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ey

no

te Pap

er

Table 3: PDR Act, 1913

(Tk. in crore)

Category

of Banks

Period

Ended


Number of

suits

Amount

claimed

Number of

suits

Amount

claimed

Actual

recovery

Number

of suits

Amount

claimed

Recovery

against claim

SCBs 31-12-2007 439322 366.79 371603 225.40 229.96 67719 141.29 60.73

31-12-2010 468104 428.24 394798 289.76 289.96 67719 141.29 60.73

DFIs 31-12-2007 255410 73865.16 146947 49523.12 33398.52 108463 24342.04 1595.97

31-12-2010 285636 86085.70 177842 52763.60 39823.76 107794 33322.10 6554.76

PCBs 31-12-2007 618 241.66 21 56.67 85.54 597 184.99 4.44

31-12-2010 624 242.85 22 63.56 58.98 602 179.29 23

FCBs 31-12-2007 0 0 0 0 0 0 0 0

31-12-2010 0 0 0 0 0 0 0 0

Grand

Total

31-12-2007 695350 1107.86 518571 721.30 564.53 176779 386.56 76.73

31-12-2010 754364 1291.52 572662 818.04 688.59 181702 473.49 90.27

Source: Banking Regulation and Policy Department, Bangladesh Bank, H.O., Dhaka

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ape

r 303