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July-September 2015

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Editorial 2President’s Desk 4

ARTICLESFraud Risk Management in Banking Industries: 6Strategy and Schema for Grappling the Challenges- M Jalal Hussain FCAImplementing the Cash-Basis IPSAS: 10The First Step in the Journey- Doctor Wayne Bartlett CPADefaulted Loans and Risk Management in Banking Sector 13- M. Idris Ali FCAMonetary Policy Needs Consistency with other Economic Policies 18- Md. Shahadat Hossain FCARisk Management in Public Financial Sector 20- Dr Muhammad Abdul MazidManaging Business Risks 28- Ashish Kumar Paul FCAOperational Risk – Role of Accountants in Managing 32Operational Risk in Commercial Banks- Nigar SultanaBangladesh Economy: Performance, Problems & Prospects 41- Masih Malik Chowdhury FCACorporate Governance and Accountants 47- Dr. Rukshana BegumRisks and Risk Management in Banks 52- Md Abdus Salam FCA, FCSMaking it with ICT – for Emerging Entrepreneurs 57- K Atique-e-Rabbani FCAEffective Risk Management in Business 59- Md. Hafizur Rahman ACAA Study on the Compliance of Bangladesh Bank’s 65Policy Guidelines for Green Banking- 1Md. Ahasan uddin | - 2Sabuj Chandra BhowmikLiquidity Position of Private Commercial Banks (PCBs) 78in Bangladesh: An Empirical Overview - 1Sujan Chandra Paul ACA | - 2Abdul Alim Baser ACMA- 3Mohammad Rakibul IslamBusiness Risk Management 86- Muhammed Omar Faruk Ripon ACARisk Management by Bangladesh Bank: New Steps 94- Raihan M ChowdhuryEnterprise Risk Management 98- Aisha Siddiqua ACAImposition of Income Tax on Employee Tax Payers on 104Medical Aid Vis-a-Vis Justice and our Constitution- Md. Asaddar Ali FCAEvolving Business Risk Management 106- Md. Ziaur Rahman ACAManaging Risk in Banking 110- Md. Ashraful Azim FCAMicro Finance Business & Its Risk Management 117- Naznin Sultana ACAIn Remembrance of Jamaluddin Ahmed and Rezaur Rahman 123- M. Matiul Islam FCA

CONTENTS ISSN 1993-3649

"The opinions expressed in this publication are those of the respective authors themselves and do not necessarily reflect the views of the Editorial Board of the Institute of Chartered Accountants of Bangladesh (ICAB) or the ICAB itself."

DISCLAIMER

EDITORIAL BOARDChairmanMd Abdus Salam FCA, FCS

EditorHarun Mahmud FCA

MembersA F Nesaruddin FCAAkhtar Sohel Kasem FCANasir Uddin Ahmed FCAMd. Shahadat Hossain FCAGopal Chandra Ghosh FCAAmanullah Khan FCADr. Jamshed Sanyiath Ahmed Choudhury FCAMd. Liaquat Hossain Chowdhury FCAMd. Rokonuzzaman FCASabbir Ahmed FCAMd. Sayeed Ahmed FCAMahmudul Hasan Khusru FCASnehasish Barua FCAMuhammad Aminul Hoque ACAAbdullah-Al-Mamun ACAZareen Mahmud Hosein ACAMuraheb Malik Chowdhury ACAAbu Haider Mohammed Kibria ACASK. Md. Tariqul Islam ACAShah Md. Jubaer ACADipok Kumar Roy ACAAbuzer Ghaffari ACAMohammad Mosttafa Shazzad Hasan ACABidhan Chandra Mandal ACAMd. Yasin Miah FCA, Chairman-DRCMohammad Saif Uddin FCA, Chairman-CRC

Member SecretaryMohammed Emdadul Haque FCATechnical Adviser-ICAB

Published by the Editorial Board of the CouncilThe Institute of Chartered Accountants of Bangladesh (ICAB)CA Bhaban, 100 Kazi Nazrul Islam Avenue, Dhaka 1215Tel : 9117521, 9112672, 9115340, 9137847Email : [email protected] : www.icab.org.bd

ORIALEDIT

The changing nature of the business environment calls for a highly risk-sensitive approach in corporate entities. In the last decade, Bangladesh has recorded remarkable economic progress, having accelerated GDP (gross domestic product) growth to 6.0 per cent. However, it is observed that it has done a little against the odds, given the occurrence of frequent natural disasters, political unrest, financial frauds, loan defaults and money laundering. The new Information and Communication Technologies help to bring new dimension in trade and business, no doubt. However, the more the business encompasses with new technologies, the risk prowls at every turn; new innovations threaten the viability of old products or services, new players in the market create adverse trends in the commodity prices, inflation and deflation in currency & interest rates influences the monetary transactions. The various means of doing so may define different professions, e.g. a doctor manages medical risk, a civil engineer manages risk of structural failure, etc.

July - September 2015 The Bangladesh Accountant02

Risk Management is particularly vital for entrepreneurs because some common types of losses—such as fire, flood, legal liability, injury, or disability, financial frauds—can destroy in a few minutes what may have taken years to build. Even such losses and liabilities can affect day to day operations, reduce profits, and cause financial hardship. Many large companies employ a full time risk manager to identify risks and way forward to protect the organizations against odds.

In fact, at present while the political unrest has now eased, the World Bank estimates that Bangladesh lost about 1.0 per cent of its GDP in the first quarter of 2015 - totaling about USD 2.2 billion. As such, Bangladesh's potential growth has been dampened, constrained not only by the uncertain political climate, but also on account of internal infrastructure problems. Economic growth typically refers to the growth of potential output, i.e., production at full employment, sustained economic development, concerted actions; promote the standard of living and economic health of a nation. How the

growth threatened the standard of living, we may take into account as evident in China. China is the world's fastest growing major economy with an average growth rate of 10.0 per cent over the past thirty years. Despite its remarkable progress in economic and social development and poverty reduction, China still faces challenges to reduce residual poverty only because of lacking of proper policies to face the challenges. China's inaction on environmental damage forced children in Shang Hai to stay indoors and wear masks to guard against carbon emissions in the air. We have a striking similarity with China; the state of water bodies like the Buriganga River is no longer better one. Industrialization in Bangladesh is certainly increasing the rate of economic growth, but only at the cost of potential risks including environmental and health hazards.

In financial transactions, corruption and capital flight have been afflicting the economy for a long time. While the Finance Minister only recently admitted that corruption eats up 2-3 per

New technologies inbusiness call for highlyrisk-sensitive approach

The Bangladesh Accountant July - September 2015 03

Md Abdus Salam FCA, FCSChairman, Editorial Board andCouncil Member & Past President-ICAB

cent of the national economy.. Finance Minister AMA Muhith, MP deserves congratulations for bringing the issue into the open for all to discuss and create public awareness against such a social scourge. Also Financial Institutions need a prudent approach to identify the possibilities where such crimes may happen and to protect the organization from the crimes. This issue of the Bangladesh Accountant (July-September 2015) deals with such facts those affect the economy in covertly and discussed

way forward to get rid from the risks.

It is my privilege to communicate to you, the distinguished Members of this noble fraternity of accountancy profession through this journal covering some crucial economic issues of the country. The honorable writers have come up with their diversified thoughts regarding business risk management in this issue.

Dear esteemed Members, we seek your good self to kindly give us

your feedback about the articles, contents and any other matters which may enrich our only CA professional mouthpiece. Your valuable suggestions and opinions will highly be appreciated.

Please accept our heartiest greetings on Eid-ul-Azha.


Grooming up memberswith recurrentprofessional issues

PRESIDENT’S DESK

This issue of the Bangladesh Accountant would reach to your hands in a critical juncture; the Institute of Chartered Accountants of Bangladesh has passed through & entered into. As we are all aware, recently Jatiya Sangsad (JS) has enacted the Financial Reporting Act (FRA). This has led us in a new confronting situation. The Council of ICAB had tried its best to make the Law more functional in our country perspective. Sequentially the Council had divested the time & efforts to this end. Despite our tremendous persuasion, the Government has finally enacted the Law. It ignored ICAB’s few recommendations without pondering our neighbouring countries practices. We have to search for ways & means to find out a respite for us & the way forward.

We need to observe how the Financial Reporting Council under this Law would serve the very purpose with its composition. Pertinently, Members do not have working knowledge in accounting profession especially Financial Reporting. Apparently FRC would be professionally dependent on professional body like ICAB. However, we are ready to extend our adroit hands to it and the Nation for betterment of the country. We have to do everything for the betterment of Chartered Accountancy Profession as well by sowing the seed of a stronger

relationship with the government & the regulatory bodies. Now we have to very closely observe the entire formation process of Financial Reporting Council (FRC). We are still working to reaping out optimum outcome from the FRC under FRA.

Chartered Accountancy is a globally acclaimed prestigious profession. To bring more dynamism in education, training and workshop, we are giving relentless efforts. The brainstorming actions like training, workshops, seminars, conference were organized frequently for Members so far of the year. CAs as stakeholders always aspire in quest of searching knowledge & wisdom, which was manifested by their large scale response to our Training & CPD programmes. It is widely believed that such capacity building would benefit ICAB in coming days. For major operational challenges of ICAB, new fronts are in the offing with more dynamic operational people in coming months.

ICAB has always been searching for new front where from the members of the Institute would be benefited. On 26 July 2015 a Memorandum of Understanding (MoU) was signed between ICAB and CPA Ireland in ICAB Council Hall. Under this MoU, the two Institutes will have a partnership relating to the distribution of uniquely designed online CPA Certificate in IPSAS™. This

agreement is aimed at building a strategic partnership, which includes mutual pathways to Membership signed between the two bodies way back in 2012 through a MRA- Mutual Recognition Agreement.

Together with Finance Ministry, ICAB is working to strengthen Financial Reporting Framework for Public Sector Entities under a project of the World Bank. We believe that if ICAB and the Regulatory Bodies responsible for auditing in public entities, work by joining hands, the financial sectors of the country will be stronger. This would also ensure best use of public revenue.

With the allocation from the ICT Ministry, developing of comprehensive ERP (Enterprise Resource Planning) software is in full swing. An integrated information system in ICAB is going on and the task would be completed in five phases envisaged in a roadmap. IBCS Primax Software (Bangladesh) Ltd will do the work. A steering committee of ERP Project Sub-Committee of ICT Committee-ICAB has been overseeing the proper implementation of ERP System.

For the first time, ICPE organized a day long workshop on "How to Maintain Quality in Audit and Assurance Services" for CA Students on 18 August 2015. In order to maintain world class

Masih Malik Chowdhury FCAPresident-ICAB


education environment, ICAB refurbished its new rented campus building. A private University under ICAB has been approved by Council –ICAB is on cards for seeking approval from the government. We shall not leave any stone unturned to draw brighter & meritorious students into this profession.

Training is a regular & routine function of ICAB. This year ICAB re-named its Training Centre as ICAB Center for Professional Excellence (ICPE). It will impart training, workshops & seminars on professional issues anew & afresh. It will pick up recurrent discussions with stakeholders & regulators and at the same time undertake need based schemes in ICAB.

ICPE has organized the 3rd consecutive yearly training program on IFRS & IAS for Bangladesh Bank Officials. It was inaugurated by Deputy Governor, Bangladesh Bank Mr. Abu Hena Mohd. Razee Hassan on 2 August, 2015. Recently a two-day long workshop on the IPSAS was organized jointly by ICPE and CPA Ireland with large participation from the Members of the ICAB. The workshop particularly focused on IPSAS and its application in Bangladesh. CPA Ireland public financial management adviser Dr. Wayne Bartlett conducted the

workshop as the resource person. Under an MoU CPA Ireland and ICAB would jointly conduct online Certificate Courses on IPSAS for the Members of ICAB.

Grooming up the Members with recurrent professional issues ICAB organized CPD seminars and Members’ conferences. Members’ conference on ‘International Public Sector Accounting Standards (IPSAS) on 25 July was made unique with Dr. Wayne Bartlett, Specialist in Public Sector Financial Management and Eamonn Siggins, Chief Executive Officer, the Institute of Certified Public Accountants, Ireland as its resource persons. Mr. Siggins described their new learning method and program on online learning materials and modules of IPSAS prepared by CPA Ireland. ICAB Members can customize the modules of IPSAS in the line of practice & country perspective.

Our rigorous initiatives and efforts are all for enrichment of our noble profession. Just before enactment of FRA, to disseminate ICAB’s stand, the Financial Express on 13 August 2015 published my interview over the issue with due importance. In that interview, I stressed for an effective functioning of the proposed

Financial Reporting Council (FRC). I reminded that effective result reaping out of FRC would remain a far cry, if the formation of the body would not be need based.

"The FRA will fail to yield any better results as it does not have any provision for the professional improvements and corporate discipline, I also told the FE”.

Finally we can say, FRA is the outcome of wrong "Public Perception". It will be proved in future. Meanwhile we must to rise against any shortcomings that we have, amongst the professionals. We must prove once again that we are the best professionals who bear a social as well as operational responsibility in the economy of the country.

My heartiest greetings remain to all the Members of my fraternity and Eid Mubarak.


Introduction

The sardonic occurrence of fraud has taken place in recent times at the globalized world. All types of business are susceptible to fraud. Fraud is ubiquitous within organizations and remains a staid and costly problem for virtually every type of organization in every part of the world. The risks of fraud may has been on the rise, as we see growing globalization, more acrimonious markets, swift developments in technology, and periods of economic difficulty. Banking sector industries especially handle monetary transactions of their customers located at different countries around the world, confront the greater risk of fraud by the fraudsters. Spectacular financial and banking sector corporate downfalls and frequency of major frauds between the years 2008 to 2014, have abruptly focused the cognizance of the stakeholders, directors and regulators the extreme need to fathom, manage and contain the fraud risk. Financial crime and fraud have become prominent with the rapid globalization of world and the financial institutions like bank need to launch comprehensive fraud prevention and detection programs. Despite the serious risk that fraud presents to banking business, many banks still don’t have prescribed systems and procedures in

Fraud Risk Management in BankingIndustries: Strategy and Schema for

Grappling the ChallengesM Jalal Hussain FCA

place to prevent, detect, delve and respond to fraud. Frauds stand as bigger threat to banking sector than ever before. Various research and analyses show that banking sector industries which vigorously cope with their fraud risk gain, benefit in terms of plummeting the undesirable way of frauds. Fraud risks in banking sector industries have been considered as the greatest challenge of the time.

What is Fraud?

There’s no universally accepted definition of fraud. It fundamentally embroils using fraudulent devices to gain personal benefits at the cost of others. Frauds are committed both internally and externally by individuals or group of individuals. Fraud embraces an eclectic range of illegitimate practices and illegal actions connecting deliberate dishonesty or falsification. The International Professional Practices Framework (IPPF), a Conceptual Framework of Institute of Internal Auditors, defines fraud as: “any illegal act characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the threat of violence or physical force. Frauds are perpetrated by parties and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage.”


It’s highly essential to know different types of fraud, embezzlement, misappropriation and misdeed that are happening off and on in banking industries for effective fraud risk management. Different types of frauds are prevalent in banking sector industries. These are broadly classified as (a) fraud by insiders and (b) fraud by outsiders.

Fraud by Insiders

Rogue traders Fraudulent loans Wire fraud Forged or fraudulent

documents Uninsured deposits Theft of identity Demand draft fraud

Fraud by Outsiders

Forgery and altered cheques Stolen cheques Accounting fraud Bill discounting fraud Cheques kiting Credit card fraud Counterfeit credit cards are

known as white plastics. Booster cheques Stolen payment cards Duplication or skimming of

card information Impersonation and theft of

identity Fraudulent loan applications Phishing and Internet fraud Money laundering Forged currency notes Hi-tech crime International crime No-scene crime Faceless crime

Strategies for Prevention of Frauds in Banking Industries

From the long time research on fraud reduction strategies, prevention and disavowal are considered as one the best

strategies. Prevention is better than a cure, the universal adage, has been proved to be the most effective strategy for fraud risk management. Preventive controls, measures and ways are designed to help reduce fraud, misappropriation and embezzlement from occurring in the first place. The following group can play an important role in disavowal of frauds in banking industries:

Leadership and Governance

The Board of Directors of a banking industry plays a significant role in controlling dereliction by the senior management that helps prevent frauds and misconducts to a great extent. The Board is responsible for setting the standard of control as the “tone of the top” and ensure that institutional support is established at the highest level for ethical and accountable business practices. Board of Directors has special duty to ensure that it has active policy and planning to thwart and encounter risk of frauds and wrong doings. It should:

• Review and discuss the issues relating to entity’s fraud and misconduct assessment with the concerned departments;

• Establish code of conducts and related standards for the managers of the entity;

• Review and discuss with internal and external auditors and take actions on their suggestion for anti-fraud strategies.

Senior Management

Senior management to help ensure fraud control remains effective in line with international standard. Fraud and risk management

AN EFFECTIVE WAY TO PREVENT FRAUD IN THE BUSINESS IS TO CREATE A POSITIVE WORK CULTURE. IT’S IMPORTANT THAT THE BUSINESS OWNER AND SENIOR MANAGEMENT SERVE AS ROLE MODELS OF HONESTY, UPRIGHTNESS, TRUTHINESS AND INTEGRITY. SET CLEAR STANDARDS EXAMPLE AND ZERO TOLERANCE POLICY FOR FRAUD.

approach should be shared with the managers and staff. The Chief Executive Officer (CEO) is ideally positioned to influence and guide employee actions through his executive leadership. CEO can lead by example, allocate fund for antifraud efforts and hold management responsible for any fraud occurrence. The CEO should identify the weak and vulnerable to fraud areas and take steps to prevent frauds before happening.

Employee & Third Party Due Diligence

An important part of an effective fraud risk prevention strategy is the use of due diligence in firing, hiring, retention and promotion of employees, agents, vendors and other third parties. Such diligence may be especially important for those employees having an authority over financial reporting process. Screening of vendors, agents, consultants and temporary employees who may have access to confidential information and data, may help prevent fraudulent device.Screening applicants thoroughly before hiring the right employees is the best way to stop fraud before it happens. It’s a good idea to perform background checks on potential employees. Implementing internal controls to reduce fraud risk is one of the best strategies.

Be a Role Model and Lead by Example

An effective way to prevent fraud in the business is to create a positive work culture. It’s important that the business owner and senior management serve as role models of honesty, uprightness, truthiness and integrity. Set clear standards example and zero tolerance policy for fraud. Every banking industry should establish a system that

makes it easy for employees, vendors and customers to anonymously report suspected fraud activities.

Strategies to Detect Frauds in Banking Industries

Detecting controls are archetypes to unearth fraud, misappropriation and embezzlement in banking and financial industries. The following steps may help delve fraud and corruption in banking industries:

• Fraud Delving in Real Time: Fraud, whether less or more, is dangerous for businesses. Even anything less is a hole-in-the-wall for the criminals to get away. For batch processes, the scoring engine should evaluate the transaction, and an authorization or decline decision should take place prior to funds movement.

• Analysis of Data: Proper analytics is the only way to actually detect fraudulent patterns of behavior efficiently. The output of the analysis should contain a customer score, which determines how the activity corresponds to the customers’ actual behavior. A transaction fraud score, which determines the fraudulent nature of the transaction. Understanding customer performance is indispensable—it helps reduce the impact on the customers and the fraud operation by reducing false positives. Certain customers transact in ways that may appear fraudulent. Ultra-high-net worth individuals are more likely to spend at higher edges and in more outlandish international locations. Small business owners may have more unpredictable payment activity and online banking

activity that takes place at widely varying times, not just during normal business hours. There are far too many nuanced variables within the customersand the criminals’ behavior for verge rules to be effective. Both good and bad behavior changes unpredictably over time.

• Road Map for Fraud Detection: A well planned workflow is highly important to solving challenges with fraud resources. Financial institutions have many studs to work through to correct and manage each customer’s fraud issues. Specific actions, data and processes are required to manage each type of fraud case and to use as evidence for prosecution as per law. Depending on the type of payment swindled, there are specific steps required to make the customer whole, and every step to back out the transaction creates operational costs. A cohesive and flexible workflow engine allows analysts to consolidate and, in many cases, automate the remediation process.

• Effectual Rules Engine: The rules engine links the analytic scoring to an action based on the currently available information. Rules are essential to react swiftly to shut down fraud, and facilitating management and documentation of the processes used to define and refine the actions, in a repeatable and auditable manner.

Strategies to Retort Frauds in Banking Industries

Retort controls are designed to take corrective action and remedy the


the fraud, corruption, inefficiencies of the management of the banking institutions. Omnipresence of effective fraud risk management system would have prevented such type of loan scam and would have saved the banking institutions from incurring massive loss.

Conclusion

Fraudsters while committing frauds never discriminate. Frauds and misappropriation can happen in large or small companies across various industries and geographic locations. Occupational fraud can result in huge financial loss, legal costs, and ruined reputation and goodwill that can ultimately lead to the downfall of an organization. Having the proper plans in place can significantly reduce fraudulent activities from occurring or cut losses if a fraud already occurred. Making the company policy known to everyone from top to bottom, is one of the best ways to deter fraudulent behavior. Following thoroughly with the policy and enforcing the noted steps and consequences when someone is caught is crucial to preventing fraud. The cost of trying to control and prevent fraud is less expensive to a business than the cost of the fraud that gets committed. Banking sector industries today face increasing pressure to implement robust fraud protection, prevention, and response efforts with a strong emphasis on maintaining the institutions’ safety and soundness. Legal and structural support from the governments are sine qua non for effective fraud risk management in both developed and developing countries.

The Author is the CFO of aprivate group of companies anda Fellow Member, ICAB


loss and harm caused by fraud. The following steps may help in to take action on frauds spotted:

Investigation: When information relating to potential or actual fraud and corruption is uncovered, management should be prepared to conduct a comprehensive and objective investigation. The purpose of such an investigation to gather facts leading to a trustworthy assessment of the suspected violation so that management can decide an all-encompassing and effective course of action.

Develop a Risk Response Strategy

Once the risks have been identified and assessed, strategies to deal with each risk identified can be developed by line management; with guidance from risk management group. Strategies for responding to risk generally fall into one of the following categories:

• Risk retention

• Risk reduction

• Risk transfer

The chosen strategy should be assigned and conversed to those responsible for execution.

Enforcement and Accountability

An unswerving and trustworthy disciplinary system is a fundamental control that can be operative in daunting fraud and corruption. By authorizing meaningful sanctions, management can send a signal to both internal and external parties that the entity considers managing fraud and corruption risk a top most anteriority. Senior managers, manager and senior staff should be held accountable for any fraud or

corruption on their part or on the part of their subordinates. Appropriate action is needed to be taken as written warning, suspension, pay-cut, transfer, demotion or termination, legal action, if necessary to realize any amount embezzled.

Fraud Risk Management in Banking Sector in Bangladesh

In the context of Bangladesh, effective fraud risk management is extremely essential. The increase of non-performance-loans (NPL) in both public and private sector banking institutions, the alarming loan scam, notably of Hall Mark and Destiny Group and increase of classified loans are really worrying. A mammoth amount of bad loans of Tk 15,667 crore was written off during the last five years which was almost half of such loans erased by the banks from their balance sheets since the system of loan write-off was introduced in 2002. According to Bangladesh Bank, loans of Tk 31,500 crore have so far been written off as of March 2014. Annual average amount of write-off loans stood at Tk 3,066 crore in the last five years, while it was about Tk 1,583 crore till 2009.

Meanwhile, corrupt bankers are funneling loans worth crores of taka to businessmen backed by the country’s corrupt leaders, accepting mimic, forged and fabricated documents and ignoring the collateral security rules. In August 2014 the central bank unearthed a 36 billion taka loan scam at one of the country’s largest bank, where loans were granted to a little-known business house without the minimum collateral required as security. The present uneconomic and financially undesirable situation in this sector demands effective fraud risk management that helps bring down


It is rather strange that for many years in many countries it has appeared to have been the case that lower standards of financial reporting for the public as opposed to the private sector have been acceptable. Various reasons have been put forward for this: lower accounting capacity in the public sector, less resilient financial systems and the fact that somehow public servants do not see public funds as ‘their money’.

All these factors may be present but when you reflect on their existence it is somewhat surprising and illogical. It doesn’t really make sense that sums of money as large as those invested in the public sector of pretty much every country in the world are not looked after with more care. There is a need to ensure that not only are controls in place to ensure that money is spent ‘legally’, in accordance with the law of the land, but that it is also spent effectively. Good quality financial reporting, which reveals large amounts of important information on how much has been spent and what outcomes have resulted, is a key way into helping stakeholders hold public sector bodies to account, not just against the strict letter of the law but also in terms of achieving results.

So the moves that Bangladesh is making

Implementing the Cash-Basis IPSAS:The First Step in the Journey

Doctor Wayne Bartlett CPA

towards the effective implementation of financial reporting based on the IPSAS (‘International Public Sector Accounting Standards’) framework are welcome and important. It is of course much easier to ‘adopt’ such Standards than to ‘implement’ them. But the steps that are being taken should have significant benefits for key stakeholders in Bangladesh – especially citizens – though they are just the first in a journey that needs to be taken to enable the country to benefit from fully comprehensive accruals-based information in the medium to longer term.

The ‘IPSAS’ framework has been developed under the auspices of IFAC, the International Federation of Accountants. Under the guidance and direction of the IPSAS Board (‘IPSASB’) a suite of Accounting Standards have been developed: at the latest count there were 37 of these using accruals accounting principles, many of which are based on equivalent IFRSs, and a Cash-Basis Standard which deals with a cash as opposed to an accruals accounting environment. It is this Cash-Basis Standard that Bangladesh is in the process of implementing.

There are two key financial statements required by the IPSAS Cash-Basis Standard. The first of them is the


Statement of Cash Receipts and Payments. This requires an entity to present its cash receipts and payments for the financial year as well as its opening and closing cash balances if it has any. Note the terminology: we talk about ‘receipts’ rather than ‘revenue’ or ‘income’ which is a term associated with accruals rather than cash accounting. And we do not concern ourselves with any assets other than cash or bank balances. It is in effect a simplified cash flow statement for the public sector.

The second financial statement is the Comparison of Budget to Actual. This requires the comparison on a consistent basis of actual payments and receipts to the original and final budget for the year. It is if you like a simple form of variance analysis enabling the reader of the financial statements to see how actual receipts and spend compare to what was planned.

We should not ignore the disclosure requirements that are part of the Cash-Basis Standard. All of the IPSASs, accruals or Cash-Basis, include a number of requirements concerning disclosure notes that add additional information which enrich the numbers that are included in the financial statements. These are crucial and every bit as important as the numbers themselves. The financial statements paint a picture but it is somewhat abstract in nature. The notes help the reader to interpret that picture, to appreciate its inner meaning. The Cash-Basis Standard is no exception. It has important additional things to say that go beyond the numbers. The disclosures give the numbers true meaning by explaining more about their context.

The IPSAS Cash-Basis Standard is in two parts. The first of them is mandatory and defines what should be included in the core financial statements and the disclosure notes that accompany them. The second part is non-mandatory and has a number of ‘encouraged’ additional disclosures. These concern issues such as assets (both short-term receivables and longer-term Property, Plant and Equipment for example) and liabilities such as payables and provisions.

These additional disclosures are substantially based on what we might call ‘accruals-type’ information. They serve several purposes. Most importantly perhaps they provide crucial extra insight into matters that are not adequately covered by cash-based information. In a cash accounting regime once the initial expenditure on an asset has been spent, the asset gets effectively forgotten about in accounting terms.

This is again slightly strange. The assets owned by the public sector are, in terms of value, truly enormous. They include buildings, bridges, roads, machinery, vehicles. It is difficult to accept that in accounting terms these are items that have no ongoing value to the public sector and the citizens that benefit from public services. But adopting an accounting approach based on the cash basis of accounting means that this is exactly what happens.

Of course the move to accruals-based accounting and reporting within the IPSAS framework will not be easy. It will challenge both students and educators. Research from many countries suggests that a major accounting transition on this scale can stretch public sector educators to the limit. In this context, it is

IN THE LONGER TERM WE AS ACCOUNTANTS NEED TO ENCOURAGE THE DECISION-MAKERS IN THE PUBLIC SECTOR TO ADOPT BETTER INFORMED REPORTING AS ENSHRINED IN ACCRUALS ACCOUNTING. OF COURSE WE NEED TO BE REALISTIC; IT TAKES TIME TO COMPLETE A JOURNEY OF THIS MAGNITUDE. AND THE MOVE TO CASH-BASED ACCOUNTING BASED ON THE IPSAS STANDARD IS AN IMPORTANT FIRST STEP.

The Author is a Member ofCPA Ireland

perhaps timely to remind ourselves that ICAB have recently signed a Memorandum of Understanding with CPA Ireland regarding the distribution of the latter’s on-line ‘IPSAS Academy’ materials. This is a unique offering which enables students to access comprehensive interactive guidance on IPSAS in an e-learning environment and use the knowledge they have assimilated to deal with a number of simulated scenarios relating to the subject matter. It has already proved itself to be a popular and valuable aid to students in

countries that have adopted IPSAS accruals as their chosen accounting and reporting framework.

In the longer term we as accountants need to encourage the decision-makers in the public sector to adopt better informed reporting as enshrined in accruals accounting. Of course we need to be realistic; it takes time to complete a journey of this magnitude. And the move to cash-based accounting based on the IPSAS Standard is an important first step. But it should not be seen

as the final destination. There is a difference between being unrealistic and unambitious. Without challenging targets, we would have no planes, no cars, no internet; all things that would once have been considered impossible. We expect inventors to challenge the norm: why not accountants?



Banking sector plays a vital role in the economy of a country. Banking system is the custodian of all deposits of Government, private sector, individuals including foreigners, in other words the entire nation. Banks lend out owners’ and depositors’ money and earn interest on it to meet the operational expenses and make profit finally. If the borrowers do not repay or fail to repay the lent out money the defaulted loans make the bank a losing concern. The accumulated losses hit owners’ capital and depositors’ money and ultimately the bank runs into bankruptcy and if a bank becomes bankrupt it affects the economy and image of the country abroad. Here comes the necessity of risk management in a bank. The practice of risk management begins while appraising a loan. Accurate and professional appraisal must be done before disbursement. If appraisal cannot detect or ignores key points of risk of recovery, then the loans are very likely to be defaulted. Sometimes points of risks are ignored willfully for personal benefits or under pressure from high-powered

Defaulted Loans and RiskManagement in Banking Sector

M. Idris Ali FCA

executives or the Board members who, on the contrary might be pressurized by the political leaders. Consequently defaulted loan stems up as a cancerous element for any bank. Because once defaulted, it involves lots of persuasive actions,correspondence, arbitration etc failing which legal suits, shuttling between the court and office and the process continues for years. In Bangladesh in the case of state-owned banks risk management is very poorly or rarely practised although private banks imposes some importance on risk management. As a result currently total defaulted loans in the banking sector amount to Tk 54,657 crore out of which the state-owned banks alone are rearing 30,071 crore Taka. Privately-owned banks have Tk 22,747 defaulted loans out of disbursed loans of Tk 3,77,000 giving percentage of 6.0%. A chart of eighteen banks including nine Government-owned banks having defaulted loans is given below showing disbursed loan, defaulted loans and percentage:


In the first part of this article I wish to present some facts and incidences how defaulted loans arose in the state-owned banks and what is the current status of those defaulted loans. On taking over charge from his predecessor the Present Chairman of Basic Bank said in a Managers‘ meeting that “It is not irregularity, it is dacoity that has taken place in our bank, but such dacoity will no longer be allowed to happen in future, now it is time to turn the Bank into solvent one and to regain the confidence of depositors steps will have to be taken in all phases.” In fact compared to the quantum and nature of irregularities that have happened in Basic Bank, the statement of the chairman was not an exaggeration. But his dissatisfaction, at the same time assurance had indicated that a few dacoits will be caught and punished, but so far no visible action has been noticed. This bank was in a far better position in the past, had defaulted loan of about 5% only and used to pay dividend to Government. The situation worsened just within a span

4 to 5 years during former Chairman’s tenure. This bank lent to top 100 defaulters an amount of 4,085 crore Taka which was 89% of total disbursed loans. As on 30th June 2014, the bank had total defaulted bad loans of Tk 4,591 crore. This amount was lent to almost 1500 individuals and companies/ entities most of which are owned by one person in groups and have no addresses. On closing of the year 2014, the state-owned bank kept aside an amount of Tk 2,999 crore in the Financial statements on the plea that these loans were disbursed during the period of previous Board and the borrowers are non-existent. In fact total loan balance was shown at Tk 8,939 crore although it should have been Tk 11, 939 crore and bad loans were shown at Tk 5,109 crore although it should have been Tk 8,108 crore. The difference of Tk 2,999 crore is hidden,in other words might have been written off. It has to be noted that Paid up capital of Basic Bank has been contributed from the tax payers’ money who are public in

RISK MANAGEMENT IN A BANK IS EVERYONE’S RESPONSIBILITY, NOT JUST THE RISK DEPARTMENT’S. LEADERSHIP MUST NOT ONLY ESPOUSE A VISION BUT ALSO BEHAVE IN A MANNER CONSISTENT WITH IT AND DEMONSTRATE TO EMPLOYEES THAT PRUDENT RISK MANAGEMENT IS A CORNERSTONE TO SUCCESS.

Taka in crore

BANK Disbursed loan Defaulted loan percentage

State-owned:Basic 8,964 5,080 56.67%Sonali 29,045 8,323 28.66%Agrani 21,663 4,116 19.0%Janata 29,907 3,888 13.0%Rupali 12,470 1,247 10.0% Krishi 16,308 5,373 33.0%Rakab 4,450 1,441 32.39%BDBL 1,409 603 42.81%Commerce 1,541 495 32.14%

Private and Foreign:ICB Islamic 920 713 77.49%NBP 1,563 828 53%St Bk of India 416 100 24%Habib Bk 388 87 22.23%Wori Bk 233 24 10% Std.Chartd 10,516 573 5.45%Al Falah 677 37 5.45%HSBC 6,264 153 2.45%City NA 1,000 21 2.13%

general. If the Bank earns profit the state or people will get dividend, if it incurs loss the state or people will lose. The defaulted loans which will add to loss of the bank could be used for development work of the country. Due to bad loans capital shortage or deficit of the bank is now Tk 3,634 crore. In the budget of 2015-2016 fiscal year a lump sum allocation of Tk 5,000 crore has been made to bail out the state-owned banks. Obviously this money will be used for making good the deficit. Thus tax payers’ money will bail out the sick state-owned banks continuously for years wasting public funds.

The largest state-owned bank, Sonali has an amount of Tk 8,323 crore defaulted loans against disbursed figure of Tk 29,000 crore indicating a percentage of 28.7%. Sonali Bank had a far better position earlier about 2 years back before happening of the Hallmark scandal. Hallmark scandal was unique and dangerous one involving not only the executives and officers of Sonali Bank, but also involving those of other state-owned and private banks. This was a cunning forgery for the entire banking practice. If the accused persons are not punished banking sector may face same type or more clever forgeries in future. Among the state-owned banks Agrani Bank stands third in rank in respect of defaulted loans showing percentage of 19% of disbursed loans which is not acceptable. Janata bank ‘s defaulted loans indicate percentage of 13% of disbursed loans which was mainly due to Bismillah Group’s default recently. These five state-owned banks have lost about ten thousand crore Taka by way of defaulted loans which are very unlikely to be recovered. Except the M.D of Hallmark Group, the defaulters are at large,touring all over the world and some of them have bought

houses, cars abroad which they are enjoying. Some of the defaulters seem to be so much powerful that even the Govt. has failed to detain and take action against them. In some cases top officials and senior executives of the banks are also involved, but no action has been taken against them. This fact is clear from a recent (July) statement of the honourable Minister of Finance during his budget submission that the defaulters belong to Government party, hence it is difficult to take action against them. He has also mentioned that due to corruption GDP of the country goes down by 2 to 3 percent. The Minister must be thanked for his honest and sincere statement.

During the years from 2010 to 2014 a total amount of almost Tk 10,000 crore has become bad debt or in other words it has been misappropriated by those involved in the deal. This has taken place in the state-owned banks Sonali, Janata,Basic and Agrani. Giving loans to borrowers who have names or fake names but no existence, who have no addresses or have fake addresses, who have submitted no collateral documents or have submitted fake documents and so on, seem to be willful offences. Most of those executives or officers who have committed these offences are yet to be punished. If they are not brought to legal punishment then this type or more severe offences will continue to be committed which may turn the banking sector vulnerable and may affect the economic growth of the country. Bangladesh Bank being the authority for control of banks, have submitted their reports after investigating the offences but ACC (Dudak) has not yet imposed any punishment except a few cases. Ortho Rin Adalat has not also punished any of the offenders or recovered any loan as yet. It may be said that there is an

anarchy going on in the state-owned banks which is bad indication. The banking sector as a whole is therefore, suffering from two sicknesses, firstly those which have defaulted loans are facing liquidity crisis and have no funds for further disbursement unless their capital deficit is made good. Hence their operational losses are accumulating day by day. On the other hand, those which have excess liquidity are unable to lend out it,because businessmen are either not investing in new industries or factories or they are waiting for further reduction of interest rate. We must remember that for the last 2 to 3 years, banking system in Bangladesh has been holding an excess liquidity of Tk 1 lac to 1.3 lacs crore. This excess liquid cash is adding to cost of funds but not earning any interest by way of loan leading to overall increase of operational expenses and reduction of operational profit. This unhappy situation has made some banks desperate to apply unethical procedures to maintain their profit at minimum level or increase it. They are misusing the instruction of Bangladesh Bank. Firstly these banks are not keeping adequate provisions in the relevant year against the defaulted loans but spreading it over the rescheduled period in respect of defaulted loans which were rescheduled on the plea of loss of business due to political instability during the last part of the year 2013. Not only that Tk 5,000 crore interest was exempted and Tk 11,000 crore defaulted loan (principal) was written off during four and half years. Due to this practice banks’ profits went down during the year 2013 and 2014 against those during the previous years. The same trend is still going on. Consequently some banks are playing with provisions. According to an instruction of Bangladesh Bank in case of loans sanctioned to


general entrepreneurs a provision of 5% has to be maintained,but in case of loans given to SME, only 0.25% provision is acceptable. In order to increase their profits, some banks are classifying general customers’ loans as SME loans and keeping 0.25% provision only. This way banks’ unrealized profits in cash are going away to shareholders illegally. Bangladesh Bank should detect this malpractice soonest. Bangladesh Bank should also be strict in following up to ensure that its instructions are complied.

Risk Management

Banks are invariably faced with different types of risks that may have a potentially negative effect on their business. Risk management in bank operations includes risk identification, measurement and assessment and its objective is to minimize negative effects risks can have on the profitability, liquidity and capital of a bank. Banks are, therefore, required to maintain an organizational unit in charge of risk management. This unit will prescribe procedures for risk identification, measurement and assessment and will carry out procedures for prevention or identification of risks.

The risks to which a bank is particularly exposed in its operations are: liquidity risk, credit risk, market risks (interest rate risk, foreign exchange risk and risk from change in market price of securities, financial derivatives and commodities), exposure risks, investment risks, risks relating to the country of origin of the entity to which a bank is exposed, operational risk, legal risk, reputational risk and strategic risk.

In Bangladesh total defaulted loans as up to 31 December, 2014 amounted to Tk 51,000 crore out

of which according to Financial Stability report of Bangladesh Bank, 77.8% ie Tk 39,000 crore is not recoverable. Compared to 2013 the defaulted loans have increased by Tk 7,100 crore during 2014. And 53.60 % of these loans are existing in 5 state-owned banks which has affected the profitability and liquidity of overall banking business. If we analyze the reasons, it can be straightway opined that there was no practice or even existence of risk management in those banks. An audit committee or an Internal audit department may have been in existence which carry out most of the time post facto examination or analysis after the loans are disbursed. This department takes the place of Risk Management activities without producing effective result. Consequently identification, measurement and assessment of risk remains unearthed before sanction and disbursement of the loans. In some of the banks non professional or inexperienced officers are given the responsibility of appraisal, examination of the audited Financial Statements, genuineness of collaterals,etc. Their reports therefore, remain defective and risky. At times reports prepared by the Audit Committee or Internal audit department are ignored by the higher Management with ill intention. Had the banks attended to risk management, then there would not have been the flood of defaulted loans. The banks lost sight of the requirement to manage risk effectively and, in many cases, it is questionable if the basics of risk management were ever put in place. Adhering to managing risks—not ignoring them or believing they can be passed off—is the cure for the ailment of huge defaulted loans. Let us review “The Seven Tenets of Risk Management” to see its fundamental features.

1. Establish one Language System to Discuss and Categorize Risk

A risk manager is often overheard at intra-departmental meeting: The Basel II second pillar requires that the Board of the bank fulfill their obligations in all respect. At some points many of the participants have no idea what the risk manager is talking about, but they are too afraid to ask questions so they nod their heads in polite agreement and hope no one will ask them for their personal opinion. It is incumbent upon risk experts to translate risk issues into a language and terms that all interested parties can understand, and it is the responsibility of the other functions to make the effort to understand.

2. Develop a “Big Picture” View of Risk Exposure and Focus on the Most Important

Not all risks are created or end equally. Banks need to be mindful of credit, market, and operational risks. Within the three main areas of risk, further stratification is embedded to allow for a comprehensive overall view of risk. Tools such as VaR (Value at Risk), Monte Carlo simulations, CFaR (Cash Flow at Risk), stress testing, and others are applied to judge the level of risk and subsequently the actions required to contain the risks

3. Centralize Ownership of Process and Decentralize Decision Making

The Head office of a bank prepares policies,SOP, rules and regulations, but the branches should have the liberty to take their decision as per policies and send returns to Head Office. The Central bank in Bangladesh has currently decentralized its authorities so that commercial banks can take their own decision in accordance with


through its behaviors and through the systems and programs it puts into place. In Bangladesh risk management culture and practice has not grown up. It is high time now that with a view to preventing concurrent defaults the banks must introduce risk management expertise. A risk-management culture can be embedded in the bank through training, communications and incentives.

Conclusion

The banking sector is now almost over-burdened with defaulted loans. It is high time the Top Management of all banks must realize the importance of risk management. The role of audit committee or Internal audit Department has proved ineffective, as such this Department should be kept as supplementary to risk management. The Central Bank should also realize the vitality of a risk management Unit and advise every bank to establish it headed by qualified experts and experienced executives as soon as possible. On 9th August 2015, in a meeting of Chairmen and Managing Directors of Sonali, Rupali, Agrani and Janata Banks the Governor of Bangladesh Bank alerted the Top leaders of these banks with firm warning that if their banks do not make financial progress by recovering defaulted loans observers will be appointed according to CAMELS rating and the Government will no longer allocate public funds to make good their capital deficits. The Governor deserves thanks for his concern, but he could also advise banks to open risk management units simultenously.

The Author is aFellow Member, ICAB


policies and send its returns implying post facto control. Risk management can be most effective when it is applied consistently across the banking organization with policies and procedures developed by risk experts who have the training and experience for their specific country, area, and client mix. It is incumbent upon front-line officers to use the tools and processes to guide their daily interactions with customers. Interactions are clear. Answers are given in a timely manner and the responses leave no ambiguity about what the bank is able to do for its customer.

4. Drive the Process from the Top and Clearly Define Roles and Responsibilities

In Bangladesh the banks were making unexpected profits during the years 2010 and 2011 by engaging in share business and they piled up huge stock of shares exceeding the legal limits. When bubble in share market burst, the banks started selling the shares at cost prices and lower than cost prices. So the profits started diminishing. The situation was worse due to defaulted loans, they could not recover their low profitability as up to now. Risk management in a bank is everyone’s responsibility, not just the risk department’s. Leadership must not only espouse a vision but also behave in a manner consistent with it and demonstrate to employees that prudent risk management is a cornerstone to success.

5. Quantify Risk Exposure and Costs/ Benefits

Consistent and rigorous assessment of risk and quantification of the net benefits of appropriately dealing

with the risk cannot be replaced with promises of above-average returns with no knowledge of the potential downsides. Models of applying risk management fundamentals can be prepared which would be applied by all departments. On the other hand even the most sophisticated models will not make an organization 100 percent foolproof unless it is given due importance and applied. Regardless, strong and rigorous analytical capabilities will lessen the chance of failure.

6. Embed IT Systems to Facilitate the Risk-Management Process

The value of IT appears to be increasing over time to banking organizations as the environment grows ever more complex—so there is no change in this variable in troubled times. In most countries including Bangladesh the Central Bank even controls the commercial banks through online IT models and formats. However, the IT value will be realized only if IT systems development is driven by user needs and not vice versa. IT systems, if properly developed and used, can assist the bank in risk management by providing control and compliance monitoring technology, databases, market and industry research and analysis tools, and communication tools. These are all critical tools that assist in the delivery of the required information to decision makers in the bank. This can happen if the IT systems are developed with the user’s needs in mind.

7. Embed a Risk-Management Culture

If a bank is serious about risk management, then it should be serious from the top to bottom. Leadership will espouse a culture of responsible risk management


Monetary policy is one of the important issues of the economy of a country. Monetary policy means a process by which the monetary authority i.e. the central bank of a country controls the supply of money often targeting a rate of interest for the purpose of promoting economic growth and stability. The objective of monetary policy is to ensure economic growth through exchange stability, price, full employment, credit control, reduction of inequality and wealth etc. Every financial year Bangladesh bank publishes monetary policy for the period July to December and January to June. Recently, for the first half of the financial year 2016, Bangladesh Bank has published monetary policy. Main features of that monetary policy are to support the 7 percent growth target and the 6.2 percent inflation target for the fiscal year 2016. Reserved money is projected to grow at 16 percent and broad money at 15.6 percent which are adequate to support the growth and inflation targets. Domestic credit is projected to grow at 16.5 percent at the end of the fiscal year 2016. Private sector credit has been projected to grow at 15 percent and public credit sector at 23.7 percent. It is worthwhile to mention that whatever might be the objective of the monetary policy, its ultimate target should be the economic development of the country. For economic development of the country there must be consistency among the various policies such as monetary policy, fiscal policy,

Monetary Policy Needs Consistencywith other Economic Policies

Md. Shahadat Hossain FCA

export and import policy etc. But how far there remains coordination among the various policies of the country, is a serious question. Because, to give an overview about the objective in the monetary policy, it has been mentioned “The main objective of Bangladesh Bank’s monetary policy is moderation and stabilization of CPI inflation alongside supporting output and employment growth.” But it is logical to mention that inflation depends on various issues such as supply of broad money, supply of commodity, fluctuation of price in international market, indirect tax, government expenditure, growth of credit etc. Bangladesh Bank as the monetary authority can only control the supply of broad money and growth of credit. Other issues depend on fiscal policy of the country and utilization of government fund. For example- higher indirect taxes can cause cost push inflation which can lead to a rise in inflation, If we pay our attention to the budget speech of the fiscal 2016, it may be observed that as regards to the inflation it has rightly been pointed out that average inflation rate gradually declined and stood at 6.6 percent by the end of April, 2015. Such declining trend was supported by lower fuel prices in the international market, supportive fiscal and monetary policies, satisfactory agricultural production and improved distribution system. From the statement as mentioned in the budget speech it appears that lowering down the inflation rate was a


combined effort of all the sectors of the economy. It was not the monetary policy only to control the inflation. The issues as described above, reveal that the monetary policy as published recently might have some effect/impact on prevailing fiscal policy and how the negative impact, if any, of fiscal policy might be addressed by the monetary policy. One of the objectives of the monetary policy is to maintain equilibrium in the balance of payment. In the monetary policy of the first half of the FY-16, balance of payment has been projected to reach USD 3.55 billion deficit which will eventually reduce the overall balance to USD 1.13 bill. The jump in current account deficit from USD 1.63 billion to USD 3.55 billion is mainly originating from an augmenting trade deficit that is expected to rise from USD 10.02 billion in the financial year 2015 to USD 13.42 billion in the FY 16. Negative growth of trade deficit is the effect of 14 percent projected growth of import as against 7.5 percent projected growth of export. The recently developed export policy, which is effective from 1st July 2015, is targeted to achieve the export by 2021 by the amount of USD 60 billion as against present export amount is USD 31.20 billion. If we like to achieve the target, the yearly growth rate will have to be 12 percent instead of 7.5 percent as considered in monetary policy. So, the monetary policy which has been published by the Bangladesh Bank is not consistent with the export policy of the government. Another important element behind the decrement of the overall balance one of the components of balance of payment is abnormal decreasing projection under heading ‘other investments’. During the financial year 2014-15, overall balance has been estimated USD 4.16 billion but in financial year 2015-16 overall balance has been projected USD 1.33 billion. In the financial year 2015-16, overall balance has been reduced by the amount of USD 3.03 billion. Main reason behind such abnormal reduction of overall balance is

abnormal less projection under heading 'other investment'. During the financial year 2014-15 other investment was projected USD 2.67 billion but in the year 2015-16 such investment was projected USD 1.33 billion i.e. 50 percent less than the previous year’s estimation. But nothing has been disclosed in the monetary policy as regards to the huge reduction of the foreign other investment. Issues other than as mentioned above may be pertinent to bring into notice that despite being one of the objectives of the monetary policy no detailed information or ways and means have been mentioned in the recent published monetary policy about full employment. Likewise, one of the instruments of achieving the objective or goal of the monetary policy is the bank rate policy. The bank rating is the minimum lending rate of the central bank at which it rediscounts the first class bills of exchange and government securities held by the commercial banks.

When the central bank finds that inflationary pressures have stored emerging within the economy, central bank uses various instruments such as Bank rate policy, Open Market Operation, changes in Reserve Ratio and selective credit control etc. The expansionary and contraction impact of different instruments in the economy is different. So, it is very important to disclose instrument wise policy to be followed to increase the total supply of money in the economy more rapidly than usual under expansionary policy and under contraction policy to expand money supply more slowly than usual or even shrinks. Finally for betterment of the national economy, the monetary policy should be consistent with other economic policies as well as more detailed, informative, analytical to make it transparent to all the stakeholders.

IT IS WORTHWHILE TO MENTION THAT WHATEVER MIGHT BE THE OBJECTIVE OF THE MONETARY POLICY, ITS ULTIMATE TARGET SHOULD BE THE ECONOMIC DEVELOPMENT OF THE COUNTRY. FOR ECONOMIC DEVELOPMENT OF THE COUNTRY THERE MUST BE CONSISTENCY AMONG THE VARIOUS POLICIES SUCH AS MONETARY POLICY, FISCAL POLICY, EXPORT AND IMPORT POLICY ETC.

The Author is aCouncil Member, ICAB


Risk Management : The Conceptual Frame Work

Risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event. In everyday usage, "risk" is often used synonymously with the probability of a known loss. Risk perception is an essential factor in every human decision making. Many definitions of risk depend on specific application and situational contexts. Generally, risk is related to the expected losses which can be caused by a risky event and to the probability of this event. The harsher the loss and the more likely the event, the greater the overall risk. Measuring risk is often difficult; an engineering definition of risk is: Risk=( probability of an accident) X( losses per accident)

Financial risk is often defined as the unexpected variability or volatility of returns, and thus includes both potential worse than expected as well as better than expected returns. In statistics, risk is often mapped to the probability of some event which is seen as undesirable. Usually the probability of that event and some assessment of its expected harm must be combined into a believable scenario (an outcome) which combines the set of risk,

Risk Management inPublic Financial Sector

Dr Muhammad Abdul Mazid

regret and reward probabilities into an expected value for that outcome.

In application risk management plan and its impact analysis are important for any private business or public financial plan or activities. Through clear perception potential risks of the financial sector and finding ways to managing their impacts, will help recover quickly if an incident occurs. Types of risk vary from business to business, private or public but preparing a risk management plan involves a common process. Any risk management plan should detail the strategy for dealing with risks specific to any financial management. It's important to allocate time, budget , research and resources for preparing a risk management plan and its impact analysis. This will help meet legal obligations for providing a safe workplace and can reduce the likelihood of an incident negatively impacting on any financial dealing.

Identifying potential risks and understanding the scope of possible risks should help development of realistic, cost-effective strategies for dealing with them. It's important to think broadly when considering types of risks for any business, rather than just looking at obvious concerns (e.g. fire, theft, market competition). Before beginning the identification of risks, the review of critical


business activities, including the key services, resources and manpower , and things that could affect them, such as power failures, natural disaster and even public health issues could be critical. Regular review of business plan and identifying what couldn't do without, and what type of incidents could impact on which area is very cardinal point to ponder. Always asking 'what if?' questions like lost of power supply , having no access to the internet, key documents are lost, premises damaged, one of best staff members quit, suppliers went out of business, aid donors are not willing to provide soft loans and grants , economy suffered from a natural disaster, there is political chaos or crisis etc.

Brainstorming with different people, such as accountant, financial adviser, staff, suppliers and other interested

parties in case of private business , with stakeholders, strategic development partners as well will help the public sector manager get many different perspectives on risks to the respective business. In this respect, thinking or taking into cognizance of other events that have, or could have, affected the financial management . What were the outcomes of those events? Could they happen again? Thinking about what possible future events could affect the business. Analyzing the scenarios that might lead to an event and what the outcome could be. This will help identify risks that might be external to the business. Assessing the processes, considering the worst case scenario etc. might help identifying risks relating to the financial management , analyzing their likelihood and consequences and then come up with options for managing them.

IDENTIFYING POTENTIAL RISKS AND UNDERSTANDING THE SCOPE OF POSSIBLE RISKS SHOULD HELP DEVELOPMENT OF REALISTIC, COST-EFFECTIVE STRATEGIES FOR DEALING WITH THEM. IT'S IMPORTANT TO THINK BROADLY WHEN CONSIDERING TYPES OF RISKS FOR ANY BUSINESS, RATHER THAN JUST LOOKING AT OBVIOUS CONCERNS.

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Once identified, analysed and evaluated the risks, it is needed to rank them in order of priority. Then the question of which methods to use to treat unacceptable risks. Treating risks involves working through options to deal with unacceptable risks which range in severity; some risks will require immediate treatment while others can be monitored and treated later. While developing a plan for treating the risks, consideration of: method of treatment, people responsible for treatment, costs involved, benefits of treatment, likelihood of success, ways to measure the success of treatments.

A risk management plan is the prevention step in the prevention, preparedness, response and recovery ( PPRR) model of business continuity planning. Many risk-management activities at the enterprise level are influenced by various types of pressure. Some are external, such as compliance or regulatory changes, for example. Sometimes, unfortunate events in one’s own company or in the industry prompt internal soul searching regarding whether existing risk-management approaches are adequate. In more and more cases, however, CEOs and business leaders take a more proactive stance, as their goal is to further develop risk-management capabilities (proactively based on their strategic and economic priorities and growing aspiration levels) into a true competitive advantage—ultimately improving business decisions and increasing the value of the company in a risk-conscious way.

Systematic approach to enterprise-risk-management (ERM) capabilities focuses on five dimensions, each of which is substantiated with industry-specific

diagnostics, benchmarks, and best-practice recommendations: (1) Risk-return transparency and insight (2) Risk ownership and strategy (3) Risk-enabled decisions and processes (4) Risk governance and organization (5) Risk culture.

It's important to review the plan regularly to take into account any new risks associated with changes in the business or improvements in techniques for treating risks. Different options for treating risks might be – either (1) Avoid the risk or (2) Reduce the risk or (3) Transfer the risk or (4) Accept the risk. However, in any risk management scheme there should be adequate insurance coverage for the loss of income or any risks identified.

It is always essential to test, evaluate and update the risk management plan regularly as risks can change as business, industry, regulatory regime and the environment change. Regular review of risk management plan is essential for identifying new risks and monitoring the effectiveness of risk treatment strategies.

Start by taking these actions like (1) Research similar businesses (2) Evaluate current market trends. (3) Knowing the strengths and preferences. (4) Examining the family budget. (5) Knowing how changes in the economy will affect the business. (6) Writing a business plan. (7) Assumption means assuming the risk and the accompanying financial burdens. (8) Avoidance means removing the cause of risk. (9) However, shifting the risk and responsibility doesn't necessarily shift the liability. (10) Self-insurance entails setting aside a specified amount of money into a reserve fund each year to cover any losses incurred. (11) These methods can be used to offset

some of risks a business faces. (12) Sound insurance planning requires attention on all fronts.

Responsibility in managing risk Everyone in an organization has some responsibility in managing risk across the organization, not just the chief risk officer. Shareholders, rating agencies, and regulators and policy makers request that companies involve their top management and even their boards. However, the right structural and organizational choices, the description of roles and responsibilities, as well as the appropriate definitions of organizational units and reporting lines, are critical to ensuring robust and effective enterprise-risk management. Mind-sets and behaviors of individuals and groups inside the organization—and not only the risk organization—play a crucial role in the execution of a company’s enterprise-risk-management strategy. We have developed a proprietary approach to risk culture that, for the first time ever, allows for the creation of a specific and detailed description of the core elements of a company´s risk culture, an analytical approach toward measuring and profiling that culture, overarching industry-specific benchmarking, and the identification of specific levers for actively influencing and developing risk culture.

To assess, benchmark, and improve a client’s enterprise-risk-management (ERM) capabilities, a combination of proprietary data and unique tools, including the following may be used (1) ERM Diagnostic (2) Risk Organization Diagnostic and Benchmarking Tool (3) Risk-Culture Survey ( 4) Compliance Health Check (5) Cash Flow at Risk (CFAR) Models .

Managing Risks in Public sector

Six Principles

Principle One

An engaged Board focuses the business on managing the things that matter

Principle Two

The response to risk is most proportionate when the tolerance of risk is clearly defined and articulated

Principle Three

Risk management is most effective when ownership of and accountability for risks is clear

Principle Four

Effective decision-making is underpinned by good quality information

Principle Five

Decision-making is informed by a considered and rigorous evaluation and costing of risk

Principle Six

Future outcomes are improved by implementing lessons learnt

Public Financial Risk Management

• Risk assessment is a step in the risk management process. Risk assessment is measuring two quantities of the risk R, the magnitude of the potential loss L, and the probability P that the loss will occur.

• Risk assessment may be the most important step in the financial risk management process, and may also be the most difficult and prone to error.

• Part of the difficulty of risk management is that measurement of both of the quantities in which risk assessment is concerned can be very difficult itself. Uncertainty in the measurement is often large in both cases.

• In the estimation of the risks, three or more steps are involved, requiring the inputs of different disciplines.

• The first step, Hazard Identification, aims to determine the qualitative nature of the potential adverse consequences of the contaminant (for example, chemical, radiation, noise, etc.) and the strength of the evidence it can have that effect.

• The second step for (chemical) risk assessment is determining the relationship between dose and the probability or the incidence of effect (dose-response assessment).

• The third step, Exposure Quantification, aims to determine the amount of a contaminant (dose) that individuals and populations will receive.

Potential risks in Public Financial Management

• Actual costs of public projects are typically higher than estimated costs; costs and time overruns are common, Actual demand was often higher than estimated or approved .

• Due to such cost and demand risks, cost benefit analysis of public works projects have proved to be highly uncertain.

• The main causes of cost and demand risks are found to be optimism bias and strategic

misrepresentation. Measures identified to mitigate this type of risk are better governance through incentive alignment and the use of reference class forecasting.

Risks in Physical Infrastructure Investments in Bangladesh

• Inherent Risks arising from the complexity and magnitude of construction contracts, nature of activity

• Administrative Control Risks arising from administrative structural or process weaknesses

• Political Control Risks arising from non supportive of efforts to address inherent and administrative control risks

• to make the risk management effective in the selected commercial banks operating in Bangladesh, the major types of risks, e.g., credit risk, market risk, operational risk, interest rate risk, foreign exchange risk, equity risk, liquidity risk, money laundering risk, information technology risk, marketing risk and human resource risk need to be emphasized by the concerned bank authority.

World Bank Recommended Risks Management Plan for Bangladesh

• Using the management information system effectively

• Building financial management and control administration in the departments

• Establishing reliable cost estimates and standards

• Enhancing transparency and competitiveness of procurement


(4) the application of risk management throughout departments’ delivery networks; and

(5) the need for departments to continue to develop their understanding of the common risks they share and to work together to manage them.

The Culture Around Risk Management

The C& AG revisited approaches to risk management in departments and some arm’s-length bodies in order to understand the challenges that they face in making the most effective use of their risk management. Their work focused on: the culture around risk management: who sets the appetite for risk; who drives, encourages, and promotes its use; and what barriers might be in place to effective risk management; value for money in risk management: where risk management is not just a process but adds value to the business and provides management with assurance that risks are being managed effectively; and the benefits of better risk management: where risk


• Maintaining spending control and creation maintenance fund

• Establishing policy (like transport policy) review process

• Re establish professionalism

• Establish public oversight of physical infrastructure built up projects

• Strengthening the C&AG and Public Accounts Committee (PAC)

• Establishing a formal communications strategy to develop and promote sectoral reforms

Empirical Studies I

The British Experience

The British Comptroller and Auditor General had a common observation in its 2004 Report in respect to public financial risk management was that they found the departments are often overly optimistic in their assessment of the risk to projects and programmes, and the effectiveness of the mitigating actions they take

to address risk. Management also tends to consider project risk in isolation, without considering how risks in one project can affect other business priorities.

With the requirement for departments to achieve challenging targets for structured cost reduction whilst maintaining high quality services, the need for effective risk management should not be underestimated. Changes to organisational structures and increased delivery at arm’s-length from government adds to the complexity in identifying and managing risks.

Managing Risks to Improve Public Services the 2004 Report identified five areas which departments needed to address to take risk management forward. The C& AG highlighted requirements for

(1) sufficient time, resources and top level commitment;

(2) clarity over responsibility and accountability backed by scrutiny and robust challenge;

(3) reliable, timely and up to date information;

management is not an end in itself but contributes to performance improvements in the delivery of the organization’s objectives. Within the main body of this report, they have included summaries of the results for departments as a whole against each of the questions asked by our audit teams. Their findings indicate that there have been improvements in the processes which underpin risk management.

The C&AG observed that a large number of departments and other public sector bodies now have a well developed risk management process, and boards and non-executives are focusing increasingly on risk management information as a tool with which to challenge management. The results are, however, less consistent when considering the extent to which risk management is a key driver in decision-making, and the costing and evaluative aspects of risk management are under developed. In particular, the information which management receives to support its risk management processes is not integrated with performance and financial information. Whilst the risk management process is well developed in the majority of departments, it is therefore difficult for management to make the connection between risk management and its impact on the efficient and effective delivery of services. They have used their findings and the examples of good practice in risk management they have identified, in both government departments and the private sector, to develop six key principles which underpin and support the use of risk management to improve decision-making integrated and consistent approach to managing risks in a dynamic environment and, as such, approaches which

are tailored to their own circumstances are likely to be the most effective. Reorganizations to Departmental Boards provide a fresh opportunity for Board members to reflect on the adequacy of arrangements in place in their departments, and those bodies through which services are delivered. The C&AG encouraged Boards, and where appropriate their sub-committees, to use this report to challenge whether risk management arrangements are being used effectively to improve service delivery outcomes.

Empirical Studies II

Risks Faced by Banks in Bangladesh

The commercial Banks in Bangladesh usually face the following risks:

Credit Risk

It is the potential loss arising from the failure of a borrower to meet its obligations in accordance with agreed terms. Credit risk is one of the oldest and most vital forms of risk faced by Bangladeshi banks as financial intermediaries. Commercial banks are most likely to make a loss due to credit risk. Generally, the greater the credit risk, the higher the credit premiums to be charged by banks, leading to an improvement in the net interest margin.

Market Risk

The risk of loss from adverse movement in financial market rates (interest and exchange rate) and bond, equity or commodity prices. A bank’s market risk exposure is determined by both the volatility of underlying risk factors and the sensitivity of the bank’s portfolio to movements in those risk factors (Hendricks and Hirtle, 1997). The risk of changes in income of the

bank as a result of movements in market interest rates. Interest rates risk is a major concern for banks due to the nominal nature of their assets and the asset-liability maturity mismatch (Hasan and Sarkar, 2002). Some researchers emphasized that higher interest rates had positive impact on banks (Hanweck and Ryu, 2004; Hyde, 2007). It arises from potential change in earnings resulted from exchange rate fluctuations, adverse exchange positioning or change in the market prices managed by the Treasury Division.

Equity Risk

It is the risk of loss due to adverse change in market price of equities held by the bank.

Operational Risk

The potential financial loss as a result of a breakdown in day-to-day operational processes. Operational risk does not mean only failures in the bank’s operations, but also the causes of the failures, such as terrorist attacks, management failures, competitive actions and natural disasters (King, 1998). These caused are largely uncontrollable and unpredictable. Moreover, human or technological errors, lack of control to prevent unauthorized or inappropriate (Alam & Masukujjaman: Risk Management Practices: A Critical Diagnosis ) transactions being made, fraud and faulty reporting may lead to further losses caused by internal process, people and operating system (Medova, 2001).

Money Laundering Risk

It arises from the practice of disguising the origins of illegally-obtained money (drug dealing, corruption, accounting fraud and other types of fraud, and tax evasion, etc.) through banking


technology risk management, it is reported that IT Audit Team audits the divisions and branches.

viii)Regarding managing the liquidity risk, it is found that bank maintains that customers’ confidence is maintained in ensuring liquidity.

ix) Regarding marketing risk management, it is revealed that bank adopts the appropriate promotional activities to preserve its image.

x) In human resource risk management it is found that bank complies with an effective human resource policy.

xi) Regarding use of risk management techniques, it is found that internal rating system and risk adjusted rate of return on capital are important.

xii) In the use of Bangladesh Bank guidelines for managing risks, it is revealed that asset liability management, investment risk management Journal of Business and Technology (Dhaka) and foreign exchange risk management are much significant to the bankers. In order to make the risk management effective in the selected commercial banks operating in Bangladesh, the major types of risks, e.g., credit risk, market risk, operational risk, interest rate risk , foreign exchange risk, equity risk, liquidity risk, money laundering risk, information technology risk, marketing risk and human resource risk need to be emphasized by the concerned bank authority. Moreover, the major techniques of risk management and significant guidelines for managing risk given by


channel and the proceeds of crime are made to appear legitimate .

Information Technology Risk

It is related to IT, such as network failure, lack of skills, hacking, virus attack and poor integration of system.

Liquidity Risk

It generates from the failure or inability to meet current and future financial obligations by bank due to shortfall of cash or cash equivalent assets. Banks are exposed to liquidity risk where the more liquidity is generated, the greater are the possibility and severity of losses associated with having to dispose of illiquid assets to meet the liquidity demands of depositor (Diamond 1999; Allen and Jagtiani, 1996). However, besides depositors, (Gatev, 2006) revealed that banks that make commitments to lend are exposed to the risk of unexpected liquidity demands from their borrowers.

Marketing Risk

This risk is related to the different aspects of the promotion and branding of the bank, including image management, product promotion and advertising.

Human Resource Risk

This type of risk is generated within the bank from failure to recruit the right people in the right place, inappropriate means of recruitment, failure to provide feedback to the employees on performance, over-reliance on key personnel, inappropriate training and development etc.

On the basis of sample bankers’ opinions the following (statistically significant) results were concluded:

i) Of the various types of risks faced by the selected banks, credit risk, market risk and operational risk are the major risks to the bankers.

ii) Regarding risk management oversight, it is seen that the Board of Director performs the responsibility of the main risk oversight, the Executive Committee monitors risk and the Audit Committee oversees all the activities of banking operations.

iii) Regarding credit risk management, it is revealed that bank uses the updated credit policy approved by the Board of Director Credit risk management division and credit administration division perform their activities separately, law and recovery team monitors the performance of the loans. Internal control and compliance division directly reports to the Board/Audit Committee about the overall credit risk status.

iv) In terms of opinions as to operational risk management, it is found that operational risk is monitored and controlled within the bank through an operational risk management framework.

v) Regarding money laundering risk management, it is noticed that the Central Compliance Unit looks after the overall compliance with money laundering regulations.

vi) Regarding equity risk management, bank follows market–to-market valuations of the share investment portfolio in measuring and identifying risk.

vii) Regarding information

Bangladesh Bank demand special care for the overall success of risk management.

Resource and Risk Management

Resource management can improve both public service delivery and efficiency, if Benefits, Resource Management Requirement Targets and objectives are clearly defined and underpin the way resources are allocated. Resources can be used flexibly and expenditure is not constrained by short term annual cycles. Full cost information on an accruals basis is available and used to monitor and review performance and influence the allocation of resources. Resource allocation and management are aligned throughout the service delivery chain. Performance and resource utilisation is regularly reviewed at a senior level and informs future resource allocation. Resource can be directed at achieving key outcomes such as raising educational standards rather

than simply putting money into an activity. Expenditure can be better matched to service needs ensuring more consistent delivery throughout the year. Unspent resources are not lost but available to redeploy to other priorities. The full cost of delivering a service is known including its consumption of assets. Costs can be assessed to determine whether they are reasonable for the level and quality of outputs delivered. Information on the consumption of assets can inform future investment.

If all the key organisations contributing to a service have targets which are mutually supportive and underpinned by resources that are allocated on a consistent basis the potential to deliver higher quality services is increased. Reliable performance information allows shortfalls in service quality to be identified sufficiently early for remedial action to be taken. Non core activities can be identified providing opportunities to shift unproductive resources to front

line delivery. Risks associated with the rush to spend all money at the year end are reduced such as nugatory expenditure and poor value for money because of limited time to confirm that expenditure is justified and to determine the most cost effective procurement approach. Inefficient use of assets can be more easily identified and remedied. High cost, inefficient processes and working practices can be eliminated. Resources tied up in unproductive and inefficient activities can be more easily identified and redeployed. Supporting activities which involve duplication or are delivered out of sequence or late or are over or under resourced can be identified and addressed. Trends in the unit costs and the overheads of delivering services can be monitored and where practicable benchmarked to identify poor use of resources.


The Author is a Former Secretaryto the Government and FormerChairman, NBR. Currently Chairman,Chittagong Stock Exchange


Definition of 'Business Risk'

There is a possibility that a company will have lower than anticipated profits or it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate, and government regulations. A company with a higher business risk should choose a capital structure that has a lower debt ratio to ensure that it can meet its financial obligations at all times.

The term Business Risk refers to the possibility of inadequate profits or even losses due to uncertainties e.g. changes in tastes, preferences of consumers, strikes, increased competition, change in government policy, obsolescence, etc. Every business organization contains various risk elements while doing the business. Business risks imply uncertainty in profits or danger of loss, and the events that could pose a risk due to some unforeseen events in future which causes business to fail.

For example, an owner of a business may face different risks like in production risks due to irregular supply of raw materials, machinery breakdown, labor unrest, etc. In marketing, risks may arise due to

Managing Business RisksAshish Kumar Paul FCA

different market price fluctuations, changing trends and fashions, error in sales forecasting, etc. In addition, there may be loss of assets of the firm due to fire, flood, earthquakes, riots or war, and political unrest which may cause unwanted interruptions in the business operations. Thus, business risks may take place in different forms depending upon the nature and size of the business.

Business risks can be classified by the influence of two major risks: internal risks (risks arising from the events taking place within the organization) and external risks (risks arising from the events taking place outside the organization).

Internal risks arise from factors (endogenous variables, which can be controlled) such as human factors (talent management, strikes), technological factors (emerging technologies), physical factors (failure of machines, fire or theft), operational factors (access to credit, cost cutting, advertisement).

External risks arise from factors (exogenous variables, which cannot be controlled) such as economic factors (market risks, pricing pressure), natural factors (floods, earthquakes), and political factors (compliance and regulations of government).


Classification

The Business risk is classified into different 6 main types:

1. Strategic Risk

A possible source of loss that might arise from the pursuit of an unsuccessful business plan. For example, strategic risk might arise from making poor business decisions, from substandard execution of decisions, from inadequate resource allocation, or from failure to respond well to changes in the business environment.

They are the risks associated with the operations of that particular industry. These kinds of risks arise from:

a. Business Environment: Interaction of buyers and sellers to buy and sell goods and services, changes in supply and demand, competitive structures, and introduction of new technologies.

b. Transaction: Assets relocation of mergers and acquisitions, spin-offs, alliances, and joint ventures.

c. Investor Relations: Strategy for communicating with individuals who have invested in the business.

2. Financial Risk

A possibility that shareholders will lose money when they invest in a company that has debt and the company's cash flow proves inadequate to meet its financial obligations. When a company uses debt financing, its creditors will be repaid before its shareholders if the company becomes insolvent.

Financial risk also refers to the possibility of a corporation or government defaulting on its bonds, which would cause those bondholders to lose money.

These are the risks associated with the financial structure and

BUSINESS RISK ORIGINATES FROM MANY DIFFERENT AREAS—INTERNAL TO THE BUSINESS AND FROM EXTERNAL SOURCES. THE BEST WAYS FOR A BUSINESS TO MANAGE RISK IS TO EVALUATE RISK FACTORS AND MAKE CONTINGENCY PLANS ON HOW TO DEAL WITH THE RISK WHEN AND IF IT PRESENTS ITSELF.


transactions of the particular industry.

3. Operational Risk

A form of risk that summarizes the risks of a company or firm undertaken when it attempts to operate within a given field or industry. Operational risk is the risk that is not inherent in financial, systematic or market-wide risk. It is the risk remaining after determining financing and systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems.

These are the risks associated with the operational and administrative procedures of the particular industry.

4. Compliance Risk (Legal Risk)

Compliance risk is exposure to legal penalties, financial forfeiture and material loss of an organization, faced when it fails to act in accordance with industry laws and regulations, internal policies, or prescribed best practices.

These are risks associated with the need to comply with the rules and regulations of the government.

5. Reputational Risk

It is a threat or danger to the good name or standing of a business or entity. Reputational risk can occur through a number of ways: directly as the result of the actions of the company itself; indirectly due to the actions of an employee or employees; or tangentially through other peripheral parties such as joint venture partners or suppliers. In addition to having good governance practices and transparency, companies also need to be socially responsible and

environmentally conscious to avoid reputational risk.

6. Other risks

Other risks are more difficult to categorize. They include risks from the environment, such as natural disasters. Difficulties in maintaining a trained staff that has up-to-date skills to operate your business is sometimes called employee risk management. Health and safety risks not covered by OSHA or state agencies fall into this category as do political and economic instability in countries you import from or export to.

There would be different risks like natural disaster (floods) and others, depending upon the nature and scale of the industry.

How to Manage a Business Risk

Business risk originates from many different areas—internal to the business and from external sources. The best ways for a business to manage risk is to

evaluate risk factors and make contingency plans on how to deal with the risk when and if it presents itself. Planning for these risks is the main motive of managing a business risk, but you cannot plan for everything. So managing risks also has a lot to do with how you react when risks arise.

Step 1

Write a business plan. The process of writing and putting together a business plan is a vital step to assessing, evaluating, and planning for the risks of running a business from various standpoints of the business. This includes operations, finance, and marketing.

Step 2

Determine insurance needs and obtain coverage. Most businesses carry liability insurance or insure the building and contents where the business operates. Depending on the business activities, you need to determine the other types of insurance and obtain the correct coverage for your business. For

example, a tile installation business should carry liability insurance in case a worker is injured while installing tiles. A real estate business or legal business may obtain an errors and omissions insurance policy in case a client sues for a professional wrongdoing.

Step 3

Write a risk management plan. Separate from your business plan and write a risk management plan which lists all of the possible risks that can affect the business. The plan also lists the steps, procedures, and ways in which the business intends on dealing with the risk as it arises. For example, if your business is located in an area of a country prone to hurricanes, then you may have a hurricane preparation plan on how you can minimize the risks that are associated with this type of weather and your business.

Step 4

Train employees. Avoiding risks and dealing with the risks, if it occurs, can help the business avoid further damage or exposing itself to risk in the first place. For example, if your business deals with a heavy machine, such as forklifts, you may want to have each employee earn an OSHA certification for operating the machinery as proper operation of the forklifts to avoid injury and damage risks.

Step 5

Update plans. Even the best of planning efforts may fall short. So when the business is exposed to a risk, react accordingly and then put a formal plan and procedure in place in case the same risk occurrence happens again.

Basic ways to Manage Risk in a Business

Business owners take risks in the form of capital investments, hiring personnel and investing in new products. While it can be almost impossible to eliminate risk, you can learn the basic ways to manage risk in a business and try to avoid the losses associated with risky ventures. In order to be a successful business owner, you should work on ways to reduce business risk.

1. Follow Your Plan

When you are starting and developing your business, you should create a business plan that outlines all of the aspects of your operation, from marketing to revenue projections. While you experience many differing points of view as you run your business, you can manage the potential risk of your company by running your company according to your original business plan. Once a quarter you should reevaluate your business plan to incorporate any significant changes that may have occurred within your organization or within your industry. A dynamic but efficient business plan can help manage the risk you may take to run your business.

2. Purchase Insurance

Interacting with the public or selling to businesses introduces you and your company to risk every day. Your product could cause a serious accident that your customer would hold you liable for, or you could become involved in a frivolous lawsuit that would still cost you money. To defend yourself and manage some of the risks involved in business you

should purchase liability insurance for your business. Liability insurance can help protect your personal assets from lawsuits arising from product defects, as well as personal injury or a customer's loss of revenue. Discuss liability insurance with your agent before you start offering products or services to your customers.

3. Monitor Your Business

According to the website Risk Management Basics, in order to manage risk you must take the steps to determine when risk can occur. Just as you take the time to analyze a market and determine your target audience, you should also monitor your ongoing business activities and try to determine where you may experience risk. This includes monitoring your competition, changes in the marketplace, trends toward customer fraud or deception, and shortcomings in your company's procedures. You may find that your quality-control procedures are not comprehensive enough and that is allowing defects to make it to the marketplace. These sorts of potential risks need to be identified and dealt with to help manage the overall risk of your company.

Sources of Data1. http://www.investopedia.com/terms/ b/businessrisk.asp

2. https://en.wikipedia.org/wiki/ Business_risks

3. http://smallbusiness.chron.com/ manage-business-risk

4. http://smallbusiness.chron.com/ basic-ways-manage-risk-business


The Author is aFellow Member, ICAB


Executive Summary

A commercial bank may incur operational loss due to the occurrence of operational risk events which may arise from the failure of people, process, or technology or the impact of negative external events. The Basel III guidelines highlighted to maintain regulatory capital for operational risk. Operational risk mitigation is imperative for banks to carry on the business without taking capital charge for operational risk as per Risk Based Capital Adequacy (RBCA) Guidelines 2014 issued by the Central Bank of Bangladesh to conform Pillar II of Basel III. Operational risk mitigation follows five steps starting with risk policy and strategy, identification of risk, risk assessment and acceptance, risk recording and reporting and risk management and monitoring. Assessment of operational risk is performed through an assessment matrix which is the combination of the probability of the happening of risk event and impacts in financial and non-financial term. It is all employees’ responsibility to manage operational risk within the risk appetite of the bank. Operational risk might be kept under control through effective implementation of embedded and periodic controls. An accountant has key role in the bank to strengthen the embedded controls and ensure effective

Operational Risk – Role of Accountants inManaging Operational Risk in Commercial Banks

Nigar Sultana MBA, M. Phil.

execution of periodic controls, which assist to identify operational risk of the bank. Accountants may perform periodic controls as a measure to check whether embedded controls are working pleasingly and identifying operational risk in case of none functioning of embedded controls. In this paper, I highlighted the probable causes of operational risk and suggest steps towards risk mitigation. Banks must have a structure with learning culture to manage operational risk. Controls Self Testing (CST) and Key Risk Indicators (KRI) might be used by the bank as tools of periodic controls. CST is a qualitative periodic test of embedded controls whereas KRI is the mathematical measurement of breach of the controls. A formal operational risk management structure will be effective to mitigate operational risk of the bank to reduce capital charges for doing business efficiently.

Key Words: Operational Risk, Control Self Testing (CST), Key Risk Indicators (KRI), Escalation, Risk Control Owner, Process Universe, Risk Appetite, Risk Assessment Matrix.

Introduction

As experience shows, the sure way to disaster is to consistently neglect existing risks until everybody is convinced that


nothing will happen anyway –because nothing has ever happened (which is practically never true) and actually nothing should happen (which is practically always true). Due to such a lack of risk culture, major hazard and loss potentials can build up, unexpectedly materialize at some point in time and escalate to damage on a disastrous scale due to the often quoted “unlucky chain of events”. In the field of financial services, too, operational risk is not a negligible factor in overall terms; it is far higher than market risk for most banks and, thus, is the second biggest risk category after credit risk. In the bank’s intermediary function as both borrower and lender, banks have a central role to play in the economy as a whole. Therefore, the risk of mistakes, incompetence, criminal tendencies, loss or unavailability of employees, diverse process mistakes (account entries, settlement, valuation, etc.) or failures of technical systems as well as the dangers resulting from external factors, such as credit card skimming transactions or cheque frauds, physical threats or natural disasters, and legal risks also involve the potential of corresponding effects. This potential is even multiplied by the increasing complexity of banking, e.g. the ambivalent role of information technologies in

overcoming old risks and creating new ones, the expanding and changing business activities of banks, progressive globalization and automation, as well as more and more complex financial products. Basel III has been promulgated and Bangladesh Bank issued risk based capital adequacy (RBCA) guidelines to implement Basel III from January 2015with an ambition to full compliance from January 2020 which covered capital charge for operational risk.

Operational Risk And Operational Risk Sub-Types

Operational risk in the bank originates from the failure of people in performing their duties in line with the approved processes or departmental process guide. It may also arise from incorrect processing (e.g. duplicate payments of invoice, payments made to the wrong beneficiaries, etc.) of customers advice due to human error or malfunctioning of the systems or inadequacy of the system. In recent times, cheque and credit card frauds produce operational risk in commercial bank which is very much significant. Some examples of events by operational risk drivers are given for reference as follows:

OPERATIONAL RISK IN THE BANK ORIGINATES FROM THE FAILURE OF PEOPLE IN PERFORMING THEIR DUTIES IN LINE WITH THE APPROVED PROCESSES OR DEPARTMENTAL PROCESS GUIDE. IT MAY ALSO ARISE FROM INCORRECT PROCESSING (E.G. DUPLICATE PAYMENTS OF INVOICE, PAYMENTS MADE TO THE WRONG BENEFICIARIES, ETC.) OF CUSTOMERS ADVICE DUE TO HUMAN ERROR OR MALFUNCTIONING OF THE SYSTEMS OR INADEQUACY OF THE SYSTEM.

Figure -1: Operational Risk drivers

Failure of processIncorrect reconciliation procedures, doublepayment, processing errors, Unsubstantiatedbalancesgenerates risk.

System failure andInadequate system

System deficiencies, inadequate testingperformed for change of systems orprocesses, etc. produced operational risk.

External Cheque Fraud, unauthorized creditcard transactions in overseas countries, etc.produced operational risk.

Externals Events


Relationship Between Operational Risk and Loss

Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Loss is a direct (eg: Financial loss) or indirect (eg: reputational loss) consequence resulting from a risk exposure. The concept of Operational Risk and Loss needs to be understood within the framework of “Exposure”, “Cause”, “Event” and “Effect” detailed below:

1. Safety & Security Potential for loss or damage to health or safety of staff, customers or third parties arising from internal failures or the effects of external events.

Operational RiskPotential for loss

arisingfrom the failure ofpeople, process ortechnology or theimpact of external

events.

2. Internal crime or dishonesty Potential for loss due to action by staff which is intended to defraud, misappropriate property or to circumvent the law or company policy.

7. LiabilityPotential for loss or sanction due

to a legal claim against any part ofthe company individuals within

the company

8. External Rules &Regulations

Potential for actual or opportunity lossdue to failure to comply with laws or

regulations, or as a result of changes inlaws or regulations or in theirinterpretation or application.

9. Legal enforceabilityPotential for loss due to failure to

protect legally the Group’sinterests or from difficulty inenforcing the Group’s rights.

3. External crime Potential for loss due to criminal acts by external parties such as fraud, theft and other criminal activity including internet crime.

4. Processing failurePotential for loss due to failure of anestablished process or to a processdesign weakness.5. Model

Potential for loss due to a significantdiscrepancy between the output of risk measurement models an actualexperience.

6. Damage to assetsPotential for loss or damage to

physical assets and other propertyfrom natural disaster and other

events.

All operational risk must be categorized either of the following operational risk sub-types:

Operational Risk Sub-types

Cause Event Effect

Reason for occurrence of Operational events

People (eg: High staff turnover) Process (eg: Lapse of “Maker-Checker” control)

Technology (eg: archaic systems)

External event (eg: Earthquake)

Basel Event types (eg:)

Internal Fraud

Execution & Process Mgt (Transaction prgerror)

Business disruption & System Failure

Damage to Physical assets

Exposure

Internal & External factors that may impact the bank People (eg: inadequate training programs) Process (eg: DOIs not updated)

Systems (eg: Low investment in upgrades)

External events (eg: Acts of nature)

Result or consequence suffered by the bank

Financial Loss

Regulatory sanctions

Reputational impact

Staff and Customer (eg: Health & Safety issues)

Cause Event Effect

Reason for occurrence of Operational events

People (eg: High staff turnover) Process (eg: Lapse of “Maker-Checker” control)

Technology (eg: archaic systems)

External event (eg: Earthquake)

Basel Event types (eg:)

Internal Fraud

Execution & Process Mgt (Transaction prgerror)

Business disruption & System Failure

Damage to Physical assets

Operational Risks and Losses should be reported in Phoenix

Exposure

Internal & External factors that may impact the bank People (eg: inadequate training programs) Process (eg: DOIs not updated)

Systems (eg: Low investment in upgrades)

External events (eg: Acts of nature)

Result or consequence suffered by the bank

Financial Loss

Regulatory sanctions

Reputational impact

Staff and Customer (eg: Health & Safety issues)

Figure 2: Operational Risk sub-types

Figure -3: Relationship between Operational risk and loss

Operational Risk Management

Operational risks arise from bank’s internal activities and external sources. A commercial bank takes on additional operational risks each time they originate new transactions, take on new clients, introduce new products, open up new markets, hire new staff; and new risks can also arise from a variety of changes they make to their processes, systems, vendors, organisation structures, corporate structures and so on. The operational risk exposures can also arise from changes in the external environment.

Operational risk management comprises with five key activities: (i) formulation of operational risk policy and strategy (ii) Identification of risk (iii) Assessment and acceptance of risk (iv) Risk recording and reporting to senior management, and (v) Risk management and monitoring. The diagram below provides a high level summary of operational risk management approach.

Steps of Operational Risk Mitigation

Risk Policy And Strategy

The Board of Directors must formulate policy and procedures for managing operational risk and define risk appetite of the bank. All

the departments and employees of the bank will abide by those policies and procedures and strategies regarding operational risk.

Risk Identification

Identification of potential adverse risk events is an essential first step


Figure 4: Operational Risk Management Environment

Figure: 5 Operational risk management actions

Risk Identification

Process Universe Gross Risk

AssessmentPrioritisation of

Process Universe

Control Assessment

Residual Risk Assessment

Risk Acceptance

Risk Identification, Assessment, Control and Acceptance

The activities of the bank are segmented into a comprehensive list of discrete end-to-end processes. This provides a common reference for operational risk management.

Gross Risk Assessments are informed judgments of the realistic worst outcomes arising from the risk exposures inherent in a process. In assessing gross risk bank does not take any account of controls or other mitigants. To ensure consistency the Bank Operational Risk Assessment Matrix is used.

The effectiveness of controls and mitigants must be carefully and objectively assessed. The effectiveness of a control is determined by the way the process has been designed, the way it is implemented and by the discipline with which it is executed.

Unless formally accepted by an authorised body, all processes must be controlled such that all residual risk exposures can be rated ‘Low’ on a bank materiality basis. On occasion , higher risks may be accepted for a short period while controls are being enhanced

Risk Reporting

Ensuring that senior management attention is brought to material risks.

For each end-to-end process Management identifies the typesof operational risk events arising from the execution of that process that can result in a material loss or other adverse impact on the bank.

Residual risk exposure is the net risk exposure after taking gross risk and offsetting the effects of controls and mitigants. To ensure consistency the Bank’s Operational Risk Assessment Matrix is used.

Risk exposures and the internal and external environment are monitored on an ongoing basis. Leading Indicators provide advanced warning of potential problems. Key Control Indicators (KCI) indicate if a control is operating within acceptable tolerance levels. Risk and control monitoring informs ongoing gross and residual risk assessments

The bank’s approach to risk management relies on risk-based prioritisation. The Operational Risk function only takes specifi c second line responsibility for ensuring the effective operation of all Critical Processes (ie. Gross Risk rated Very High and High)

Control Enhancement

Controls must be enhanced if not sufficiently effective in reducing residual risk to acceptable levels, (eg: due to weakness in design or execution). Control enhancement may be a condition of short-term acceptance of material residual risks

Risk and Control

Monitoring

• Change of business

• New regulatory requirement

• Internal / External Audit findings

• New product / project

• Scenario Analysis

Identify an operational risks means at the same time identify its root cause. Few examples are given below:


in managing risks of any business. Risk identification is a forward-looking activity that considers which types of adverse event could happen in future. All critical activities of the bank have approved internal process guide to deliver the financial services. These activities/processes must have a specific owner and each control function has a specific control owner called risk control owner (RCO) who will broadly review the breaches of process controls and review appropriate

action plan is taken to mitigate risk in that process. Operational risk might be identified through following tools:

• Exception to the CST review

• Key Controls Indicator

• Claims from customers or incidents

• Key Risk Indicator (KRI) breaches

Internal fraud Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/discrimination events, which involves at least one internal party

External Fraud Losses due to acts of a type intended to defraud, misap propriate property or circumvent the law, by a third party (theft, hacking damage, etc.)

Employment Practices and Workplace Safety

Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity / discrimination events diversity

Clients, Products andBusiness practice

Losses arising from an unintentional or negligent failure to meet a professionalobligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product.

Damage to Physical Assets

Losses arising from loss or damage to physical assets from natural disaster orother events (terrorism, vandalism).

Business Disruption andSystem Failures

Losses arising from disruption of business or system failures (hardware,software, telecommunications)

Execution, Delivery andProcess Management

Losses from failed transaction processing or process management, fromrelations with trade counterparties and vendors (miscommunication, wrong data entry/ handling, delivery failures, negligent loss of clients’ assets, etc.)

Risk Assessment

Operational Risk must be assessed using an assessment matrix which is the combination of probability of happening the risky event and impacts of that event in financial and non-financial term. Once the risk event is identified, the assessment exercise must be done carefully and objectively. Based on the most unpleasant impact, each risk event is rated and mapped to ‘Low’, ‘Medium’, and ‘High’ risk. Gross risk and residual risk will be assessed for each risky event:


Figure 6: Suggested Operational Risk Assessment Matrix

Low risk

Output (Risk grade) 1FinancialLoss

<0.5% of budgetedincome

No adversenational mediacoverage

Isolated adversenational mediacoverage

Short term adversenational mediacoverage

Sustainedadverse nationalmedia coverage

Isolated customercomplaints

No regulatoryenforcement (or isnominal penalty)

Increasingcustomercomplaints wheremanagement isinvolved inmitigation plans

No regulatoryenforcement otherthanadministrativepenalties

Contained increasein customer attntion

Formal privateregulatory wamingsor censures or minorfinancial penalties.

Significantincrease incustomer attntion

Public censure byregulators

Significantsuspension ofbusiness orlicense approvals-and/or regulatoryfine.

Adverse impactto theformal regulatoryrating.

Criminal or civilinvestigations orproceedingsagainst thebank/directors.

Sustained adversenational mediacoverage resultingin government orregulatoryintervention.

Very materialincrease in customer attntion.

Very significantsuspension ofbusiness or licenseapprovals and/orregulatory fine.

Suspension ofbanking license

Material criminal orcivil investigations

>0.5% <1% ofbudgeted income

>1% <2% ofbudgeted income

>2% <5% ofbudgeted income

>5% of budgetedincome

Low

Medium

High Risk

2 3 4 5

Very High E

High D

Medium C

Low B

Very Low A

Like

lihoo

d of

the

cren

tRi

sk A

sses

smen

t

Repu

tatio

nal/d

amag

e on

futu

re e

arni

ngs

pote

ntia

ls

Medium Risk

High Risk

offsetting the effects of controls and mitigants. Residual risk exposures are rated using an Operational Risk Assessment Matrix. It is critical that the residual risk rating is based on reliable assessments of control effectiveness. Assessments must be reliably and objectively informed by Key Control Indicators (KCIs) and Control Sample Testing (CST). Controls and other mitigants can vary in whether they reduce the impact or probability of an event, or both. In order to ensure a consistent standard in residual risk ratings, the residual risk ratings of all gross risks that are Medium, or High must be proposed by the responsible process owner (First Line) and must be approved by an authorised Operational Risk officer or other Risk Control Owner, as appropriate.


(A) Gross Risk Assessment

Gross risk assessments are informed judgements of the realistic worst outcomes arising from the risk exposures inherent in a process. In assessing gross risk, we consider the realistic worst impact that could arise if the process break down.

(B) Prioritization of Process Universe

Risk management attention is directed to those risks that are most significant to the Bank, taking account of the balance between the risk vs the cost of control. Gross risk assessments form the basis for prioritisation of processes. They inform the relative priority of different risks and hence where to focus more detailed analysis and ongoing monitoring of processes, risks and controls. They also inform the degree of management attention, investment and resource allocation.

(C) Control Assessment

The effectiveness of process controls and mitigants must be carefully and objectively assessed. The effectiveness of a control is determined by the way the process has been designed, by the way it has been implemented, and by the discipline with which it is being executed. Where weaknesses have been identified in the design or execution of a control or other process, that process must be enhanced promptly. If those enhancements cannot be implemented promptly, the activity may need to be stopped or the risk may need to be subject to a temporary risk acceptance for that interim period.

(D) Residual Risk Assessment

Every gross risk exposure rated Medium or above must have a residual risk assessment. Residual risk exposure is the net risk exposure after taking gross risk and

Risk AssesmentRisk Acceptance

Risk Recoding

Risk management and monitoring

Risk reporting till closer

Risk mitigation

Risk Identification Controls inplace

CST Check

KRI

Action plan

Failure of people,process, ortechnology or theimpact of externalevents

All employees will followapproved process with appropriatecontrol standards

Gross Risk

Residual Risk

Pcriodic Controls

Operational Risk Life Cycle line

Figure 7: Operational risk life cycle

The Board of Directors and Senior Management are timely and soundly informed about material risks and change of the actual risk profile of the bank, covering causes, potential early mitigation measures, assessment and recommendation, in order to take the appropriate action. Benefit of having in place a timely reporting and escalation process as follows:

Internal View

• Enhance awareness of risk

• More informed decisions making

• Clearly defined procedures for action and remedial steps in the event of material breaches

External View

• Increase reputation versus competitors

• Reduce exposure to reputational risk through timely management of operational incidents

• Improve communication and disclosure to external stakeholders like Supervisors, Auditors, Rating agencies, Clients and Shareholders.

Reporting should include updates to responsible governance bodies on any significant features or changes in the internal or external environment, risk exposures and related controls, live or emerging events and related management responses, losses, near misses and related insights, audit reviews, regulatory reviews or other independent findings.

Risk Management and Monitoring

Risk exposures and the internal and external environment are monitored on an ongoing basis, so that we can manage and control risks accordingly. Key Risk Indicators (KRI) is the metrics which provide advanced warning of potential problems, giving management an opportunity to respond before processes break down. KRIs monitor changes in the internal and external environment, such as (but not limited to) unexpected staff turnover, spikes in transaction volumes, backlogs, capacity utilisation or incidence of external fraud. They provide early warning that controls may come under unusual pressure. KRIs must be evaluated at least monthly. Breaches against KRI triggers must be identified. The KRI data must be

analyzed to identify any deteriorating trend. Risks arising from KRI breaches and deteriorating trends must be identified.

Controls are monitored to ensure that they are working as intended and remain effective. Control monitoring is designed to ensure that if a key control activity stops working, or operates outside its normal operating conditions, it will be quickly detected in the ordinary course of line management. Control monitoring can take different forms.

Control sample testing (CST) must be done by someone independent of those directly charged with executing the process. The frequency and size of the sample testing is driven by the scale of the underlying gross risk and the importance of the control in mitigating it. Identified risk treatment may be as follows:

• Risk Avoidance (strategy: “not taking every risk”);

• Risk mitigation (strategy:”intelligently passing on risks in their development”);

• Risk sharing and transfer (strategy: intelligently passing on risks to third parties”); and

• Risk acceptance (strategy: deliberately taking certain risks in a targeted way”).


BoD - SeniorManagement

Unit A Unit B

Operational Risk ManagementFunction

Unit C

• Insurance policies & Self Insurance• Derivatives hedging

frequency

seve

rity

ACCEPT MITIGATE

H

H

L

AVOIDTRANSFER • Limitation or stop of product project• Change investment type

High Frequency / Low Severity events• Enhancement of internal controls• Business Continuity Planning (systems, supplier, staff and workspace)

High Severity / Low Frequency events

The Author is a Senior Lecturerin Accounting Department,Stamford University, Bangladesh


Role of Accountants in Managing Operational Risk

An accountant generally works in back office or support offices of the bank. In rare circumstance, they work in the front office. However, an accountant might help in managing operational rook as follows:

First Line of defense Second Line of defense Third Line of defenseWho are they?

Managers have First Line ownership of all processes operated within their respective function or business.

All individuals who have management responsibility also necessarily have First Line responsibility for managing operational risk.

Who are they?

Head of Operational Risk and other Operational Risk Control Owners, supported by their respective control functions.

Who are they?

The Third Line of defence comprises the independent assurance provided by the Bank Internal Audit function, which has no responsibilities for any of the activities it examines.

What will they do?

• Ensure all material risks are identified, assessed, mitigated, monitored and reported

• Ensure applicable external laws and regulations and internal policies, procedures, limits and other risk control requirements are implemented and complied with.

• Propose control enhancements to ensure that known risks are controlled within acceptable boundaries and to consistent standards.

• Align business (or functional) strategy with risk appetite and seek to optimise the risk-return profile of the bank.

What will they do?

In discharging this responsibility, Risk Controls Owners (RCOs) must:• Challenge and verify First Line

risk identification and assessments, in line with changes in the internal and external environment

• Identify and report key risks material to the bank

• Maintain a good understanding of applicable laws and regulations

• Design, implement and maintain controls and mitigants for exposures material to the bank

• Ensure effective communication of policies and other control requirements

• Define key control indicators and control sample testing requirements as appropriate

• Monitor compliance with and effectiveness of the risk control environment

• Monitor ‘live’ risk issues and events material to bank and verify whether appropriate management action is being taken to mitigate their impact

• Advise governance bodies on key risks, the effectiveness of mitigants and controls, and alignment of residual risks with appetite

What will they do?

• Internal audit provides independent assurance of the effectiveness of management’s control of its own business activities (the First Line) and of the processes maintained by the Risk Control Functions (the Second Line).

• As a result, internal audit provides assurance that the overall system of control effectiveness is working as required within the Risk Management Framework.

• The role of internal audit is defined and overseen by the Audit Committee of the bank.

ReferencesBasel III Accord: Enhanced RiskManagement Dr. Simon Ashby(2010) The 2007-09 FinancialCrisis: Learning the RiskManagement Lessons


Performance

Bangladesh is a developing country that is classified as a Next Eleven emerging market and one of the Frontier Five. According to a recent opinion poll, Bangladesh has the second most pro-capitalist population in the developing world.

Between 2004 and 2014, Bangladesh averaged a GDP growth rate of 6%. The economy is increasingly led by export-oriented industrialization. The Bangladesh textile industry is the second-largest in the world. Other key sectors include pharmaceuticals, shipbuilding, ceramics, leather goods and electronics. Being situated in one of the most fertile regions on Earth, agriculture plays a crucial role, with the principal cash crops including rice, jute, tea, wheat, cotton and sugarcane. Bangladesh ranks fifth in the global production of fish and seafood. Remittances from the Bangladeshi Diaspora provide vital foreign exchange.

The Bangladesh telecoms industry has witnessed rapid growth over the years and is dominated by foreign investors. The government has emphasized the development of software services and hi-tech industries under the Digital

Bangladesh Economy:Performance, Problems & Prospects

Masih Malik Chowdhury FCA

Bangladesh scheme. Bangladesh has substantial reserves of natural gas and coal; and many international oil companies are involved in production and exploration activities in the Bay of Bengal. Regional neighbors are keen to use Bangladeshi ports and railways for transshipment. Located at the crossroads of SAARC, the ASEAN+3, BIMSTEC, and the Indian Ocean, Bangladesh has the potential to emerge as a regional economic and logistics hub.

In 2015, per-capita income stood at USD 1,314. While achieving significant macroeconomic stability, Bangladesh continues to face challenges such as infrastructure deficits and energy shortages.

The gross national product grew well above average of developing countries, said WB report. It started reckoning back to early seventies, that “Bangladesh has beaten the odds of once called Basket Case”. Poverty got reduced by an impressive 24.8% in FY 2015 from 56.7% in FY 1992. The economy is now one of the worlds 25 largest developing countries. The progress in the economic development has been applauded highly notwithstanding global & national shocks, persistent political infighting, poor governance, rising costs of unplanned urbanization etc,


The factors behind the achievements are due to population control, macroeconomic stability, rapid development in financial sector with openness in economy, universal primary education at the door steps and the private sector driven moves.

A critic of many things & governance in Bangladesh country Director Ellen Gold Stien commented “Bangladesh has demonstrated to the world that it can adapt to the changing demands of a rapidly globalizing economy”

The growth accomplished by Bangladesh as per the report has been pro-poor as it came with significant fall in number of absolute poor. Income inequality although remained high, consumption grew alike for poor and the non-poor over the past decade, Although distribution of economic opportunities has remained inequitable, opportunities have increased. The NGOs have augmented the improvement of human development indicator. Migrant remittances have increased radically from GDP’s mere 4% in fiscal 2001 to 7.13% in fiscal 2015.

The average GDP growth of 6+% has become consistent. Indeed we are in the 6% trap. But to get out of this trap Bangladesh needs huge investment. Government of Bangladesh observed that to become middle income country by 2021 the instant vision-2021 Bangladesh needs to accelerate its growth to a minimum of 7 to 8%. The Government of Bangladesh report stated the average monthly wage of Bangladesh to be 43$. This rate is 61$ in Cambodia, 87$ in India, it is to 90$ in Vietnam while in China it is between 150 to 250$.

On reduction of child mortality, the under-five mortality rate was 151 per 1000 live births in 1990 which came down to 41 per 1000 live births in 2013 and hence achieved the MDG

target before the stipulated time.

Likewise, the infant mortality rate was 94 per 1000 live births in 1990, which was reduced to 32 per 1000 live births in 2013. Hence, it is also on the verge of getting to the goal.

The savings for investment is very meager in Bangladesh. The achievement of 7 to 8 % growth requires 33% investment of GDP for which Bangladesh needs to drive ahead. However, Financial sector management needs bottom up overhauling. This would control the reckless increase in NPL especially by NCB & others like BASIC Bank. Fund out flows like Hall Mark & Bismillah are persistent weak nesses in public financial management of the economy.

In 2013-14' FY the export earnings touched USD 30.5 billion. It was a modest US$ 10.5 billion in FY 2005-2006. In the same period the remittance earnings touched close to USD $ 15 billion in FY 2013-2014 from only USD 4.8 billion way back in FY 2005-2006. The remittance happened with unskilled or semi-skilled manpower. We can imagine the effect on remittance if skilled manpower could replace currently employed expatriates it effective !

The country rating, by Moody’s the globally acclaimed rating agency reported that “Bangladesh Credit Stability has been shored up by the momentum in reforms agenda”. They scored Ba3 for Bangladesh for 6 consecutive years to FY 2015. At par with us were Egypt and Philippines amongst 130 countries. This score for Pakistan is B3, Srilanka & India were B1 & Baa3/Ba1 respectively. Except for India & Indonesia, Bangladesh scored higher. Bangladesh as per further report from the agency demonstrated remarkable attainment in macro-economic performance till FY

THE GROSS NATIONAL PRODUCT GREW WELL ABOVE AVERAGE OF DEVELOPING COUNTRIES, SAID WB REPORT. IT STARTED RECKONING BACK TO EARLY SEVENTIES, THAT “BANGLADESH HAS BEATEN THE ODDS OF ONCE CALLED BASKET CASE”. POVERTY GOT REDUCED BY AN IMPRESSIVE 24.8% IN FY 2015 FROM 56.7% IN FY 1992. THE ECONOMY IS NOW ONE OF THE WORLDS 25 LARGEST DEVELOPING COUNTRIES.


2015. The FCY reserves reached $ 27 billion already. Same impressive score BB- has been offered by S & P for those years.

Bangladesh RMG & Remittance have performed tremendously well. The overseas employments have been instrumental in helping Bangladesh sustain its micro economic stability amidst global economic crisis. The upcoming avenues of Bangladesh economic prospects are Electronics, Shipbuilding’s, Pharmaceuticals, It products & service sector. With additional 3k MV electricity generation, the accumulated capacity is now 6.5 KMW. The Government of Bangladesh has been continually taking measures to consistently increase the power generation capacity. This is the sine quo non amongst the components of infrastructure development of Bangladesh. Its remittances inflow is currently above 15 billion a year. It is going to touch newer heights consistently.

In line with the Millennium Declaration, a framework of 8 goals, 18 targets and 48 indicators were set to measure progress towards the MDGs over the period from 1990 to 2015. However, from January 2008, twenty-one targets were reset and 60 indicators used to monitor the MDGs progress.

The eight MDGs were poverty and hunger, primary education, empower women, child mortality, maternal health, HIV/AIDS and other diseases, environmental sustainability and partnership for development.

Government of Bangladesh in now keen on Regional Connectivity. The R&H, Water ways, Railways & all other connectivities are being attended for immediate investment

by Bangladesh. All these are attended for earliest infrastructural upliftment, whether in City or Rural Areas. Agriculture has performed very positively while service sector’s role in GDP in on impressive increase.

Indeed, Bangladesh economy has been taken due cares by the Government of Bangladesh which is nurturing it well. The per capita, although not a very decent yardstick is on an upward track. Meanwhile, Bangladesh has already achieved low MIC status with per capita of US $ 1314.

Private sector has been performing well despite Government lapses in helping them by way of facilitating. Had the parties from both Government of Bangladesh and opposition, been pro-development our development efforts could have been more visible & manifested more easily than now our accomplishments would have been visualized better.

In 2015, Bangladesh was awarded prestigious Women in Parliaments Global Forum award, known as WIP award, for its outstanding

success in closing the gender gap in the political sphere. Bangladesh ranks 10th out of 142 countries.

Between 1990 to 2015 life expectancy rose to 7 from 59, which is more than India, Indians are however twice as reach over us. Bangladesh performed supports in Health and Education. Over 90% girls have enrolled in primacy school in 2005. Almost equal was the number for boys. Infant mortality got more than halved. Child mortality fell by 2/3rd with maternal mortality falling by ¾ . In 1990 women’s life expectancy was 1 year less than male. In 2015 females expectancy is 2 years more than males. At PPP our GDP per capita is at $3019. The growth of GDP was below 4% upto 1990. It currently sustains a growth of 6%. The fertility rate is now just 2.1 from 6.3 in 1975 and 3.4 in 1993. What a grand accomplishment. Our population now grows at just above replacement level at 2.3%. Bangladesh thus impressively reaped the possible dividend for development but yet could not optimize it.


Over 9 million people work abroad, mainly in ME our HR market needs a boost up by facilitation form Government of Bangladesh. This can be done by imparting skill in them. Newly recruited expatriates may be sent by demand based skill imparting on the basis of employment market demand. Real wages between 2000 and 2015 in agriculture grew very substantially.

Problems

It is very difficult, under a centralized administrative system, to achieve a 7% to 10% growth as revealed by the Finance Minister recently. This however has been in many occasion echoed by few other economists of eminence & prominence.

Productivity growth rate mismatches the reality. The political stability and good governance are lacking and not in consonance for achieving high growth rate. In 2015, Bangladesh had over $1 billion as FDI which is below 1% of GDP. Education work force is 2.2 million. This is a constraint to the technology driven development. Bangladesh due to pitfalls in governance & lack of investment promotional fanfare is lagging behind in attracting FDIs. However, Bangladesh offers one of the best fiscal, legal and investment protection friendly scheme & incentives regimes for FDI. Yet FDI does not pour in largely due to bureaucratic procrastination, political dogmatism, tormented & unstable policy decisions with frequent changes, repatriation problems of outward dividends. Some fiscal policy inconsistencies also aggravate these adversities.

Investment needs in economy for an accelerated growth could not be

properly addressed by Government. Neither the private sector led growth has been supplemented by public sector investment. However development in infrastructure development has been the key point offered by Government for private investment backups. On the contrary loss in SOE has always been a deterrent to the private sector expansion. BOI has become an employment bank for OSUs having had no role of oversight on grossly non-performing SOEs. BOI with one exception has always been manned with bureaucrats who are attuned to compliance but not challenges for investment needs. However BOI & privatization commission are now in the merger phase, it has been reported. That again needs to be manned by Private Sector people of business acumen.

For accomplishing all the MDG targets Bangladesh needed US$78.2 billion during 2011-2015. But an annual average Official Development Assistance (ODA) receipt was only $1.74 billion against its yearly requirement of $3-5 billion.

High bank interest rates have been a deterrent to investments. Again income tax of 35% on private sector in general is yet a hurdle. Individual investors are to pay 25% tax on dividend repatriation in the form of profit. This is additional after payment of corporate taxes. The NBR attitudes to tax payers as evaders rather than income generators for the republic are a great deterrent to resource mobilization for development. When NBR people as revenue collectors has been found to be widely corrupt, accountability of them can be ensured first to honor the tax payers. Whether in customs, Income tax, Environment,

BOI, BEPZA, VAT or elsewhere, the doing business scenarios are against the comfort of investors. Individual officers use chairs & platforms for personal benefit at the colossal cost of revenue loss for the republic. Yet these are ongoing with almost ineffective accountability points even like ACC. Despite these hurdles, private sector is thriving fast due to patriotism. FDI would only pour in with projected profit & value addition with assurance of favorable doing business scenario. Our doing business index does not however offer a competitive edge.

Towards ensuring environmental sustainability, at present there is only 13.40 percent of land in Bangladesh having tree cover with density of 30 percent and above and the area having tree cover is much lower than the target set for 2015 (20 percent).

However, access to safe water for all is a challenge, as arsenic and salinity intrusion as a consequence of climate change will exacerbate the availability of safe water, especially for the poor.

The domestic resource mobilization has been utterly poor. The development pace achieved so far gives space for a better future public financial management. One may however argue that NBR performance for tax payers has been a failure in our mission to autarky. Yet however, very densely populated Bangladesh is talked about despite being worse governed. The government is trying hard so far but with the persistently failed governance machinery, it could not perform up to the investors or electorate’s expectation. Reforms agenda of political Government has not been properly responded to by bureaucracy. Bureaucracy here is


not attuned to accountability which should have been readily accountable & in transparency all along.

The NPL of Banks, loss of SOE, lack of accountability & performance management of bureaucracy are hard deterrents in our growth. Application of law and justice needs to be same for all. Exception to this however prevails in Bangladesh at large. The financial cost of fund is too high. Again the IPO prospects are bright. But the long time taken by BSEC to process IPO and give it green signal is deterrents too. The stock exchanges need cardiac care in terms of management for investment. The demutualization alone would not suffice the economy’s need. These exchange and more so the BSEC need, capacity building to meet the increased need of economy. Otherwise diversifying bank finance & alternative dependence on IPO would remain a far cry. For the paradigm shift we are to attune ourselves.

Prospects

At nominal index for FY 15 Bangladesh’s GDP is $209 billion, 44th top economy in the world. However with $572 billion GDP at PPP it is the 33d top economy in the world. FY 2016 shows a likely growth of 7.2%. Its GDP per capita is $1314 while at PPP it is $3019. The components of GDP are Agriculture 19% industry 30% & services 5% (FY 13 estimated). The gini coefficient is 32.1 & unemployment is 4.5% (13). Our imports were $40.69 billion in FY 15.

The WB in its report – Bangladesh: Towards Accelerated, Inclusive & sustainable growth opportunities and challenges, said that of

Bangladesh can increase its trade by about 38% if the business environment alone is improved to half way to the level of India. It advised Bangladesh to act soon before the vacuum by China is taken over by others.

It said GDP growth & remittances would play vital role in getting the middle income statures. Income wise we are in low middle bracket now. Export led growth of Government Sector may not sustain if labour productivity growth does not match the pace with competitors.

For growth to excel better rapid investment in infrastructure, making industrial land available, fostering need based education & skill development programms were stressed. Additionally special attentions are needed to labour intensive agricultural sector for attaining more inclusive growth.

Bangladesh had a market of about $44 billion in 2012 for the middle class alone. The lower income strata are kept apart who have different market need potentials. The market of middle class in Bangladesh is higher than GDP of 120 countries. It gives us a globally advantageous position. Number of job entrants is equal to jobs available at 5.8 million can be cited as one of the Government of Bangladesh accomplishments.

For achieving better export results Bangladesh needs targeted area based approach to industrial development. From 2009 to 2012 Indonesia’s export of footwear fetched $ 1.7 billion to $3.3 billion due to set target and policies can be an example for sectoral approach.

Bangladesh is also in its right way. The debt servicing history of

Bangladesh is very favorable. Its public debt is $36.2 billion (Dec’2012) while it is 22.8% of GDP. Its F&Y reserves are $27 billion (FY-2015). An economy of $ 160 billion, this is its one very positive indication. Again funds for investment needs are not adequately available – this is a negative side.

About 103 countries of the globe are having less than 10 million population. Our population is closed to 150 million as per last census. Addition to labour market for employment is 2.2 millions per annum. 67% of people of workable population is between 15 to 71 years of age. Unemployment in this group of population is around 25%.

Bangladesh may have 220 million people in 2050. There will mainly be young population who are young, & educated. A country of relatively small size, Bangladesh can have world class infrastructure with an outlay of $ 200 billion at current price. The cost of climate protection is also included here.

Trying with people for employment overseas with skill would enable them for increased income in future years. This increased income will mean an increased, even double the remittance only in 3/5 years. The annual remittance of $ 15 billion is not really a complacent figure. It is a only because no skill imparting scheme is in the offing now. The prospect should be harnessed urgently and is being taken due cane by the Govt. Bravo!

With BRICS, the world had a new dream. Brazil could not really make it per anticipation. But in the next 11 Bangladesh is quite well placed. The preparations for new challenges have been in this

The author is the Founder PartnerMasih Muhith Haque & Co.Chartered Accountantsand Economist


Government’s manifesto. It is perceived that Bangladesh will keep on track on a faster and stable pace along its own development path. Excellent performance indicators are vividly presenting the enormous economic prospects. Bangladesh has entered into the growth trap of 6% and is going ahead to vision 2021. Its potentials & prospects have become new point of attention from countries & investors of the globe.

The absence of poverty may not be here with equitable distribution of wealth. With all the issues mentioned above being attended the challenge of climate change needs united and concerted efforts from all countries across the globe. In fact the west, irresponsibly acted

to the aggravating of climate scenario but their concern on its effects on other economies appear to leave no room for them to compensate for the East. Bangladesh Government has been pro-active in this concern and we can feel complacent on this at the least. We look forward to see the results.

After performing well on 8 MDG’s, Bangladesh has earned laurels from the world over. Bangladesh has with its 7 FYP from July 2015 entered into the Sustainable Development Goals (SDG) until 2030. With increased efficacy in governance amidst more transparency & accountability, Bangladesh will be more exemplary to the world. Annette

Dixon, WB Regional VP of South Asia Region has righty expected Bangladesh to be in MIC by all the 3 indices in this decade, 2020. The vision 2021 appears to be a reality even to the WB, we can see. We hope to live until then. But if not our posterity will benefit and contribute to new Bangladesh. Resources are always limited. Optimum use of the resources with good governance can reap best of us. Major achievement of MDGs by Bangladesh has demonstrated to the world about our efficacy.


Introduction

In the very recent times there have been significant changes in the economic and business scenario all over the world. Trade barriers have been lifted, the world is becoming a smaller market, and bottom lines are taking precedence. They have, increasingly, been facing competitive environment both in terms of market for products where quality is the key word to survive and for sources of finance. Subsequently, the separation of management from the ownership established under the statutory laws and regulations require appointment of a management team experienced in every sphere of branch management functions which is very essential for efficient and smooth running of the corporate business entities. Nowadays survival of a corporate body, whether it is organized under public or private sector, depends much upon the efficiency of such management or governance. The better the governance the better is the prospect of the organization. According to the latest development process the management of a corporate body must consider three Es, i.e., Efficiency, Effectiveness and Economy. The future dimension of an organization depends upon the overall outlook of the governing team and how the management adopts these three Es. It

Corporate Governanceand Accountants

Dr. Rukshana Begum

is, however, very tough to achieve these three Es without an effective and efficient governance of any corporate body. A good management control comes out from good corporate governance. The words Corporate Governance, therefore, have been becoming a popular concept in the arena of business management almost all over the glove. It covers the concepts, theories and practices of the governing boards and the activities of their directors and top management, and the relationship between boards and shareholders’, regulators, auditors and other stakeholders. It can be interpreted as a broad and somewhat vague term for a range of corporate controls and accountability mechanisms designed to meet the corporate objectives. Recently in the USA, in some Asian countries and in other countries of the world many corporate bodies collapsed due to absence of good Corporate Governance in the business organizations. Therefore, major donor organizations and International Financial Institutions have been increasingly tying up their aids and loans on the conditions of improvement of good Corporate Governance.

Accounting profession has a significant role to play both in public and private sector management in view of the fact that a corporate of the current and the next


century would be required to operate in a competitive regulatory environment where the various levels of government do not feel compelled to the generally accepted norms of good Corporate Governance.

Concept of Corporate Governance

Business entities established under statutory laws are called as corporate body or corporation and overall management of such corporate bodies might be called as Corporate Governance. It is the whole system of managing and controlling a company. Its structure specifies the distribution of rights and responsibilities among company’s different participants such as board and their directors, shareholders, management, auditors and other stakeholders. As we all know Corporate Governance is management of companies by the Board of Directors. The concept of Corporate Governance primarily hinges on complete transparency, integrity, and accountability of the management. Transparency refers mainly to disclosure of relevant, reliable, and material information in an appropriate and objective manner while accountability refers to broader company objectives to manage efficiently and effectively the social and economic resources under its disposal.

In addition to that, there is a growing realization that a good Corporate Governance system actively adds value in the long run. Considering in this context, Corporate Governance is the enhancement of the long term shareholders’ value while at the same time protecting the interest of other stakeholders.

Characteristics of Corporate Governance

Good corporate governance has eight Characteristics:

• Participatory

• Accountability

• Transparency in accounts and reports

• Consensus oriented

• Responsive

• Adherence to the rules of law

• Efficient and effective and

• Equitable and inclusive

It is not, however, necessary for a good corporate governance to have all these characteristics. Principal characteristic of effective corporate governance is:

Transparency - The disclosure of relevant financial and operational information and the internal processes of management oversight and control; protection and enforceability of the rights and prerogatives of all shareholders; and directors capable of independently approving the corporation’s strategy and major business plans and decisions and of independently hiring management, monitoring management’s performance, and integrity and replacing management when necessary.

Framework of Corporate Governance

The Framework for Corporate Governance deals mainly with executive directors (Board Directors are elected to direct the company) and non-executive directors (parts of management are employed to implement the strategy and decisions of the

ACCOUNTING PROFESSION HAS A SIGNIFICANT ROLE TO PLAY BOTH IN PUBLIC AND PRIVATE SECTOR MANAGEMENT IN VIEW OF THE FACT THAT A CORPORATE OF THE CURRENT AND THE NEXT CENTURY WOULD BE REQUIRED TO OPERATE IN A COMPETITIVE REGULATORY ENVIRONMENT WHERE THE VARIOUS LEVELS OF GOVERNMENT DO NOT FEEL COMPELLED TO THE GENERALLY ACCEPTED NORMS OF GOOD CORPORATE GOVERNANCE.

Board), separation of CEO from chairmanship, rights of all shareholders including minority, accountability towards stakeholders, internal control to deal with risks, directors remuneration to deal with shirking behavior, and statement of going concern.

Need for Corporate Governance

In the present globalization scenario, the importance of Corporate Governance is unquestionably enormous. Normally, capital flows into any country or in a region or in a company where rules and regulations are fair, and are practiced objectively in a transparent and accountable manner. Application of accounting and auditing standard ensures reliability and comparability of financial information, thereby increasing investors’ confidence. So, Good Governance can attract national and international investors and make them confident enough to invest capital.

The regulatory authorities have realized the need to focus on corporate performance in order to integrate the economy with the world market. There is also an increasingly greater focus on investor’s protection and public interest. So, good Corporate Governance serves not only the company interest but also the society in which it operates. The key to good Corporate Governance is the realization on the part of Corporate Managers that they are accountable for their performances. There is also a general feeling that there must be much more value-addition from mem-bers of the Board, particularly the Non-executive Directors. The responsibility for ensuring the success of Corporate Governance

lies on the Board, the shareholders, and the employees. Corporate Governance is, therefore, is basically a system of making Directors accountable to the shareholders for effective management of the companies and in the best interest of the companies and also with adequate concern for ethics and values. Corporate Governance guarantees divisions of labor which results best benefit to the organization. It has also a responsibility towards consumers and the environment of the businesses. There is also awareness that while the Non-executive Directors who make useful contributions in their capacity as Director in companies would normally be reappointed, they should not consider this as automatic and a matter of right. Fixed terms for Directors would enable Chairman to make changes of the Board team depending on the challenges being faced by the company from time to time, which

may require different types of experience on the Board. Fixed terms of appointment also provide opportunities for appraisal of the Non-executive Directors, like any other employee, before deciding on a fresh term. Nowadays, in making decisions whether to invest in a particular company or area, capital providers are more intently considering such factors as adequacy of disclosure, minority shareholders’ rights, board structure and process as well corruption, cronyism and bribery.

The Role of Accountants in Corporate Governance

It has been noticed in the recent past that the global corporate scene is being undergone rapid changes and transformations. Changes are being happened in management style and structure, competence, competition and in technology. To remain coping with these changes each and every modern company


sufficient trained internal audit personnel. Motivation instead of compulsion is what is required for both public and private sector corporations in Bangladesh to accept and adopt a good corporate governance framework. Every company should disclose a report on such governance along with its annual report on the performance of the company. In Bangladesh, it is found that the public sector corporations have good board structure other than private sector but usually are not manned by competent and proper personalities. Weak regularity framework characterized by inefficient bureaucratic system also is a great set back in public sector companies in Bangladesh.

In the case of private sector, there is a growing realization that good Corporate Governance is a must not only in order to gain credibility and trust but also as a part of strategic management for survival, consolidation and growth. There is, therefore, a demand for simplification, greater accountability and transparency, necessitated by increasing investor awareness and competitive market forces. The primary force is the effect of globalization which compiles the corporate bodies to have consequent realization that `International Norms’ would have to be applied and a company cannot survive with its traditional and family owned and managed practices. Hence, realization has grown more and more to practice a good Corporate Governance in running the day-to-day operations of a company.

However, there may be some troubles in the process like corporate culture, absence of transparency and accountability in some areas, mismatch in banking sector, scarcity of right personnel to act as independent


must follow the latest frame work evolved in management aptitude, knowledge and competence. There are many other changes which definitely and distinctly have remarkable implications for the professional accountants. To protect their profits, the companies have to primarily respond by managing their costs, re-engineering their processes and downsizing their work forces. But the rapid changes are throwing companies into a state of confusion regarding strategy.

Accountants have the potential of making the transition smooth and fruitful and so they must step-in. The role of Professional Accountants on the Board has become very important in making the process of Corporate Governance more and more effective. Since, all the Directors have broadly equal legal responsibilities, it is the responsibilities of the accountants, if he/she is a member of the Board to play a contributory role in Board's deliberations and decisions or if he/she is not a member of the Board to enable and ensure other Directors to play the role in the Board which is required for the interest of the company. The Accountants must also ensure and maximize shareholders' value, value to the customers and other stakeholders by playing their due role internally and externally. Furthermore, the Accountants have a great role to play as external auditors as well.

It has been observed properly that the Accountants have a great role to play to achieve good corporate governance should be confirmed by:

• All material information must be disclosed

• The information must be

prepared in accordance with accounting standards and should be audited following acceptable auditing standards, procedures and guidance

• Annual audit should provide an objective view on control

• Information should be provided on internal control systems

• Non-financial like environment and other social data also should be disclosed

• Formation and composition of audit committees, their functions and responsibilities, disclosure of audit fees, rotation of auditors/audit partners

Corporate Governance: The Present Scenario in Bangladesh

Both the public and private sector organizations must have to follow corporate governance rules in their day-to-day operations and functions. The corporation’s internal and external factors set to achieve the goals are influenced and affected by the evolving phenomenon of corporate governance. In both the sectors in Bangladesh, it is found that the Board or the Management does not try to understand that a good disclosure on corporate governance might bring good result to the company in the long run. Type and structure of corporations, even when listed, is mostly family based, are exposed to limited transparency and accountability towards other coordinates, lack of sufficient independent Non-Executive directors and audit committee members with experiences, and technical skills and absence of

The Author is an Associate Professor,Department of Accounting andInformation Systems, Universityof Rajshahi

Non-executive Directors and in audit committees, and problems of various law reforms.

Conclusion

The movement towards improved Corporate Governance is to stay in the business world. Organizations and the business environment in which they operate changes rapidly with the changes brought about by e-commerce, globalization and instant information. It is required that new acknowledgments emerge in developing countries and new investors appear in the capital market should take a closer look at the corporate governance. The Professional Accountants should continue to enhance their role in the strategic planning by helping in developing the management and implementing and operate a strategic planning process that will allow the company to optimize its competitive advantages. Successful organizations will remain competitive because of the vision and direction provided by the strategic plan. Business has to be

successful to survive and grow more. Governance, as one aspect of business like any other, has to be considered in the context of its contribution to business success. Good Corporate Governance will help both large and smaller companies of private and public sector improve their performance in relation to the interest of all the stakeholders in their success, and of course, improve thereby their relationship with each of those stakeholders. Financial audit, therefore, might become a measuring rod to judge the degree of Good Corporate Governance practiced in a company.

References

Holland J (1996) Corporate Governance and Financial Institutions, Glasgow University.

Ahmad, J.U and Bari,M.A.(2000)“Corporate Governance for Transparency and

Accountability”, the Bangladesh Accountant, April-June.

Ahmad, M.U and Yusufi,M.(2005)“Corporate Governance for Bangladesh

Perspective”, The Cost and Management, Vol.33.N.6

Belal, A. Rahman (1999)“Corporate Social Disclosure in the Bangladesh Annual

Reports”,The Bangladesh Accountant, January-March.

Dutta,S.(2000)“Corporate Governance: Role of Audit Committee” The

Management Accountant, Vol.35.N.7.

ICAB,(2004) “Draft Code of Corporate Governance in Bangladesh” The

Bangladesh Accountant, October-December. Vol.45.N.18.



Introduction

The Banking sector has a pivotal role in the economic growth of the country and has a dynamic role to play in converting the idle capital resources for their optimum utilization so as to attain maximum productivity.

In Bangladesh, the banking sector is considerably strong at present but at the same time, banking is considered to be a very risky business. Financial institutions must take risk, but they must do so consciously. However, it should be borne in mind that banks are very fragile institutions which are built on customers’ trust, brand reputation and above all dangerous leverage. In case something goes wrong, banks can collapse and failure of one bank is sufficient to send shock waves right through the economy. bankers must see risk management as an ongoing and valued activity with the board setting the example. Unsound risk management practices governing bank lending often plays a central role in financial turmoil.

Definition of Risk

A risk can be defined as an unplanned event with financial consequences

Risks and Risk Management in BanksMd Abdus Salam FCA, FCS

resulting in loss or reduced earnings. An activity which may give profits or result in loss may be called a risky proposition due to uncertainty or unpredictability of the activity of trade in future. In other words, it can be defined as the uncertainty of the outcome. In short, risk is a quantifiable uncertainty.

Risk in Banking Business

The banking sector has witnessed tremendous competition not only from the domestic banks but from foreign banks alike. In fact, competition in the banking sector has emerged due to disintermediation and deregulation. The liberalized economic scenario of the country has opened various new avenues for increasing revenues of banks. In order to grab this opportunity, Bangladeshi commercial banks have launched several new and innovated products, introduced facilities.

In the backdrop of all these developments i.e., deregulation in the Bangladeshi economy and product/ technological innovation, risk exposure of banks has also increased considerably. Thus, this has forced banks to focus their attention to risk management. In fact, the importance of risk management of banks has been elevated by technological developments, the emergence of new financial


instruments, deregulation and heightened capital market volatility.

In short, the two most important developments that have made it imperative for Bangladeshi commercial banks to give emphasize on risk management are –

Deregulation

The era of financial sector reforms which started in early 1990s has culminated in deregulation in a phased manner. Deregulation has given banks more autonomy in areas like lending, investment, interest rate structure etc. As a result of these developments, banks are required to manage their own business themselves and at the same time maintain liquidity and profitability. This has made it imperative for banks to pay more attention to risk management.

Technological Innovation

Technological innovations have provided a platform to the banks for creating an environment for efficient customer services as also for designing new products. In fact, it is technological innovation that has helped banks to manage the assets and liabilities in a better way, providing various delivery channels, reducing processing time of transactions, reducing manual intervention in back office functions etc.

Banking companies in Bangladesh, while conducting day‐to‐day operations, usually face the major risks like credit risk (including concentration risk, country risk, transfer risk, and settlement risk), market risk (including interest rate risk in the banking book, foreign exchange risk, and equity market risk), liquidity risk, operational risk and other risks (Compliance, strategic, reputation and money laundering risk).

Risk management framework in banks

An efficient and healthy banking system is a prerequisite for sustainable economic growth of a country. In this context, effective risk management practices enable the banking industry to build public trust and confidence in the institutions which is necessary for mobilizing private savings for investment to facilitate economic growth. On the flip side, inadequate risk management practices in the banking industry would result in bank failures leading to erosion of public confidence in the industry having adverse implications for the economic growth. Therefore, an effective risk management framework is a prerequisite for banks to achieve their own business objectives and also play their role in the economic growth of the country.

Ideally, banks’ risk management framework should strive to cover the full spectrum of risks by analyzing them from both business and enterprise level perspectives. Each banking institution should tailor its risk management program to its need and circumstances. The main elements of a risk management framework that apply to banking institutions irrespective of their size and complexity of business are:

First and foremost, effective risk management framework demands active involvement of the Board of Directors (BoD) and senior management in the formulation and oversight of risk management processes. Accordingly, they should provide strategic direction and approve the overall business strategies and significant policies of their institutions, including those related to managing and taking risks, and should also ensure that senior management is fully capable of managing the activities that their institutions undertake.

IDEALLY, BANKS’ RISK MANAGEMENT FRAMEWORK SHOULD STRIVE TO COVER THE FULL SPECTRUM OF RISKS BY ANALYZING THEM FROM BOTH BUSINESS AND ENTERPRISE LEVEL PERSPECTIVES. EACH BANKING INSTITUTION SHOULD TAILOR ITS RISK MANAGEMENT PROGRAM TO ITS NEED AND CIRCUMSTANCES.


Second, adequate Policies, Procedures, and Limits need to be defined by an institution’s directors and senior management to tailor their risk management policies and procedures to the types of risks that arise from the activities the institution conducts.

Third, adequate Risk Monitoring and Management Information Systems need to be developed for effective risk monitoring and to identify and measure all material risk exposures. Consequently, risk monitoring activities must be supported by information systems that provide senior managers and directors with timely reports on the financial condition, operating performance, and risk exposure of the institution.

Fourth, establishing and maintaining an effective system of controls, including the enforcement of official lines of authority and the appropriate separation of duties such as trading, custodial, and back-office is one of management’s more important responsibilities. A properly structured system of internal controls promote effective operations and reliable financial and regulatory reporting, safeguards assets, and helps to ensure compliance with relevant laws, regulations, and institutional policies.

Fifth, the Risk Management Function should be institutionalized to supervise overall risk management at the bank. Ideally, overall risk management function should be independent from those who take or accept risk on behalf of the institution.

To ensure effective risk management in banks, some of the key lessons should not be overlooked. Board of Directors

needs to be more actively engaged and involved in risk policy setting and governance, and spend more focused, higher-quality time on risk issues.

The responsibilities and influence of Chief Risk Officers (CROs) need to be elevated and strengthened with CROs actively participating in business strategy and planning as opposed to having only veto power over decisions that adversely impact risk. The risk function is not in place to manage risk, but to make sure that risks are managed. Banks need to align pay to risk-adjusted performance. There is a need to institutionalize an appropriate risk culture throughout the organization, where risk is everyone’s business from the board to the front line. Banks need to improve the transparency, quality, accuracy and timeliness of information to support risk management. The Institute enterprise wide risk management systems instead of managing the risks in silos. Use both qualitative and quantitative techniques with varied assumptions instead of blindly following the models.

Initiatives of Bangladesh Bank for Risk Management

The first decade of the 21st century, 2001 through 2010, was an extremely challenging decade for the financial services industry in many parts of the world. Banks, securities firms, insurance companies, money service providers, foreign exchange dealers, and other kinds of financial institutions in many parts of the world faced increasing competition, natural and man‐made disasters, increased volatility in interest rates, exchange rates, and share prices, asset price bubbles, deep recessions, sudden deteriorations in credit quality, and unpredictable

changes in the legal and regulatory framework. Most financial institutions were able to cope with these challenges, but a great many, including some very large and well‐known institutions, were not. Spectacular failures occurred, resulting in great cost to taxpayers and surviving institutions and in a general decline in customer confidence in banks and consumer confidence in the economy as a whole.

In view of these, Bangladesh Bank vide BRPD Circular No. 17 dated 07.10.2003 identified 5 (five) nos. core risks for the Banks & Financial Institutions and later on vide FID Circular No. 10 dated 18.09.2005 added another core risk. These six core risks areas are as under:

Credit (Investment) Risk

Asset Liability Risk

Foreign Exchange Risk

Internal Control & Compliance Risk

Anti Money Laundering Risk

Information Technology Security Risk (2005)

At the same time Bangladesh Bank has issued separate guidelines for managing each of the aforementioned risks for the scheduled Banks functioning in Bangladesh. Bangladesh Bank has also instructed to design effective policy and procedures for managing the risks effectively by the Banks. They have also instructed to follow-up, monitor the risk management issues accomplished by different Desks, Divisions, Departments, Wings closely. It is mentionable here that all the core risks are associated with the different functional organs of Banks and these risks were


The Major Concerns of the Risk Management Committees

a) Investment Risk Management Committee

Supervises and monitors investment concentration, investment risk grading, corporate clients rating, non performing investment, residual risk against investment, provision against classified investment, investment mix, asset quality etc.

b) Asset Liability Committee (ALCO)

To look after the asset-liability risk, liquidity risk, Investment Deposit Ratio (IDR), deposit mix, investment mix, gap analysis etc.

c) Foreign Exchange Risk Management Committee

Oversees foreign exchange risk, treasury, net open position, import & export business, dealing room operations and anti-money laundering aspects in foreign exchange transactions etc.

d) Internal Control and Compliance Risk Management Committee

To assess and mitigate the risk related to compliance with regulatory requirements, set rules of the Bank, internal checking system, lapses, fraud, forgeries, violations of the set rules etc.

e) Money Laundering Risk Management Committee

Looks after the money laundering activities, STR, CTR, KYC and TP related compliances. The committee also supervises and monitors the entire transactional activities of the Bank including money laundering aspects involved with foreign exchange transactions.

being managed and reviewed by them.

In 1996, Bangladesh Bank adopted the Basel-I propositions to formulate the capital adequacy regulations against risk weighted assets vide BRPD Circular No. 01/1996. The key points of that circular were to define capital following Basel-I.

Minimum Capital Standards

Determination of Risk-weighted Assets

Implementation Deadline

Reporting timeframe

In June 2004, BCBS issued a revised framework of International Convergence of Capital Measurement and Capital Standards (ICCMCS) introduced the famous “Three Pillar Concept” of Capital Adequacy for strengthening the risk management practices of the banking industry. Later, in June 2006, a comprehensive revision of ICCMCS was in public by incorporating Basel II Framework, June 2004, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the paper on the Application of Basel II to Trading Activities and the Treatment of Double Default Effects, 2005. The paper has been invariably termed as Basel-II framework.

Parallel run of Basel-I and Basel-II accord in 2009 and Full implementation of Basel-II from January 1, 2010.

As per Quantitative Impact Study (QIS) conducted in April-May 2007 by Bangladesh Bank on commercial banks, Bangladesh Bank issues BRPD Circular No. 14

dated December 30, 2007 on Action Plan/Road Map for implementing Basel-II. The key points of that guidelines/circular were to define capital are introductions and constituents of capital, credit risk, market risk, operational risk, supervisory review process and market discipline.

In the consequence of global financial turmoil and lessons learned from that to promote a more resilient banking sector, BCBS undertook the reform initiatives for enhancing capital and liquidity rules. The goal was to develop a durable banking sector that can sustain and absorb shocks arising from financial and economic stress. The outcome of the initiatives was released on December 2010 that was comprised of three core documents and known as Basel-III.

Bangladesh Bank has circulated Basel-III implementation Roadmap vide BRPD Circular No. 18 dated December 21, 2014. Implementation phases of Basel –III during January 2015 to December 2019.

The Basel-III propositions have been formulated by incorporating the theme points. These are to strengthen the capital framework of banks, uplifting the quality, constancy & transparency of the capital base, widening risk coverage, supplementing the RBC requirement with a leverage ratio, shrinking pro-cyclicality and supporting countercyclical buffers, cyclicality of the minimum requirement, forward looking provisioning, capital conservation, excess credit growth, addressing systemic risk and interconnectedness, to commence a global liquidity standard, liquidity coverage ratio (LCR) and net stable funding ratio (NSFR),

The Author is Member Council &the Past President, ICAB

f) Information & Communication Technology Risk Management Committee

Monitors and supervises the risks related to data security, physical security, network security, disaster recovery, fraud, forgery, system failure and business continuity etc.

Bangladesh Bank vide Bangladesh Bank vide their BRPD circular No.20, dated 31 December, 2009 issued a detail guideline on Risk Based Capital Adequacy (RBCA) for Banks. A separate Supervisory Review Process Guideline has also been circulated to the scheduled banks vide BRPD Circular No.13 dated 21 April, 2010 and subsequent letter No. Letter No. BRPD(BIC)661/14B(P)/2013-194 dated May 16.2013 of the Central Bank. In addition, the Central Bank vides DOS Circular 01 dated April 21, 2010 and subsequent DOS Circular No. 01, dated February 23, 2011 has also issued Guidelines on Stress Testing. In order to ensure the aforesaid Basel related guidelines, banks are asked to form more 3 (three) separate Committee which are (a) Basel Implementation Committee, (b) Stress Testing Committee and (c) Supervisory Review Process Team.

Formation of Risk Management Committee of the Board

The Government of the Peoples Republic of Bangladesh amended the Bank Company Act 1991 on the 22nd July, 2013 having the title of the Act “Bank Company (Amendment) Act 2013” Act No. 27. Section 15 (Kha) has been newly been incorporated after section 15 (ka ka) of the Bank Company Act 1991 which states: Quote: 15 (Kha): Role of the Board- (1) The Board of Directors shall be liable for formulation of policy,

implementation, risk management, internal control, internal audit and compliance of the Company there against.

(2). Each Bank Company shall form an Audit Committee comprising of those directors from the Board who are not the members of the Executive Committee.

(3). Each Bank Company shall form a Risk Management Committee comprising of the members from the Board.

In order to ensure good corporate governance in the Banking Industry, Bangladesh Bank in the light of the above Act detailed the structure and the responsibilities of Board of Directors vide BRPD Circular No. 11 dated 27 October, 2013. In this Circular, Bangladesh Bank has given a detailed Terms of Reference (ToR) of the newly introduced Risk Management Committee of the Board.

Regulatory Reporting of Risk Management

A. Risk Management Paper

Bangladesh Bank introduced Risk Management Paper (RMP) vide their letter of 24-01-2013 and advised the Bank to submit the same to the Bangladesh Bank on quarterly basis. This RMP contains 55 particulars parameters/subjects/ topics under the following risk categories:

i. Investment (Credit) Risk ( 26 particulars)

ii. Market Risk ( 5 particulars)

iii. Liquidity Risk ( 16 particulars)

iv. Operational Risk ( 1 particulars & 7 sub category)

v. Reputation Risk (1 particulars & 7 sub category)

vi. Others Risk. ( 6 particulars)

B. Capital Adequacy Statement under Basel Regime

Bangladesh Bank vide BRPD Circular No. 10 dated 25.11.2002 and advised the Bank to submit the Statement of Capital Adequacy to the Bangladesh Bank on half yearly basis. Later on Bangladesh Bank vide BRPD Circular No. 35 dated 29.12.2010 and advised the Bank to submit the Statement of Capital Adequacy to the Bangladesh Bank on quarterly basis.

C. Stress Testing Report

Bangladesh Bank vide DOS Circular No. 1 dated 23.02.2011 and advised the Bank to submit the Stress Testing Report to the Bangladesh Bank on quarterly basis.

D. Internal Capital Adequacy Assessment Process (ICAAP)

Bangladesh Bank vide letter no. BRPD/(BIC)661/14B(P) 2014-2917 dated 21.05.2014 and advised the Bank to submit the ICAAP report along with Supervisory Review Process (SRP) Document to the Bangladesh Bank on yearly basis.

Conclusion

Managing risks is one of the most complicated tasks today in the financial industry. Thus, it is essential to engage the appropriate professionals. The accounting professionals are the most recognized and capable professionals for managing risks across the businesses.



Vast Universe of ICT (Information and Communication Technology)

ICT (Information and Communication Technology) offers an ocean of opportunity. One, however, needs to be patient, do one’s own study/ research to be aware of this vast universe. Entrepreneur must also identify his/her chosen area to focus on. Any emerging entrepreneur should also realize that any window of opportunity is transient. Nevertheless with right and sustained determination and focus one can find success along the way.

The universe of ICT comprises on a broad brush of hardware and software. Hardware manufacturing/ assembly is generally capital intensive and it is the domain of few big to mega corporations in the world. Within Software, application software (or apps on mobile phones) and IT related services pose greater opportunity for emerging entrepreneurs. Application Software abound and one must creatively find a particular application area for which one wants to provide a solution. IT related services again have a very wide canvas and one must choose carefully a niche to focus on. One must also keep abreast of newer areas of opportunity/ activity evolving continually within the IT Universe. One

Making it with ICT– for Emerging Entrepreneurs

K Atique - e - Rabbani FCA

must be nimble and agile and re-strategize often as market shifts. Existing popular application software such as Facebook social media software or SAP, a leading ERP software always offer opportunities in that improvements through add-ons to add new features or enhance user experience are always good business proposition. Content creation by those suitably qualified (knowledge, language and expression wise) will continue to be in demand. Web analytics (analyzing web site traffic data, market research information generated from sites), Social media optimization (such as designing/maintaining Facebook page for corporate bodies) are also new areas for emerging entrepreneurs. Couple of suitably qualified friends armed with PCs, Internet and some tools can start off an Application Software or some IT Services company from their own homes.

Software and ICT is taking over the World

Software is taking over the world and good programmers will be the super stars of this universe. Software development and marketing companies will proliferate. Software companies are poised to take over large swathes of the economy. Apple in 2012 became the biggest company in the world in market valuation surpassing Exxon Mobil followed by Microsoft and Google. More and more businesses and

industries are being run on software and being delivered as online services from movies to banks to national defense. Software has matured over years and now can be said to work after four decades since the invention of the microprocessor and two decades into the rise of internet. More and more disruptions of traditional industry by software will happen in the coming days. Borders, a traditional mega book store (started by two brothers in 1971 in Ann Arbor, Michigan, USA) filed for bankruptcy while Amazon.com, an online BVM (books, video and music) outlet to start with (founded about 20 years later in 1994 by Jeff Bezos in Seattle, Washington, USA) grows from strength to strength. Amazon.com sells everything online and has ‘Kindle’ digital book replacing physical books. Books are now software too. Amazon.com continues to threaten Barnes & Noble, a Fortune 500 company and the largest retail bookseller in US. The underlying theme in all above is Amazon.com and such company’s ability to remain agile and improve customer experience almost on a day to day basis. Customers will expect nothing less and ruthlessly reject slow movers. Thus for most companies failure to acquire digital agility will become an existential threat. Acquiring digital agility through heightened use of Software and ICT is thus a strategic necessity. Here lies rainbow of opportunity for emerging ICT entrepreneurs.

Barriers to Entry are Low and Getting Lower but Barrier to Success is Still High

It is generally true that setting up to be an ICT / Software entrepreneur is easy. Development tools are mostly free. Sales and Marketing tools, customer support tools, social media management tools and tools in almost all product

category are free or next to free. One can turn to blogs, mentoring programs, meet-ups and other educational opportunities that did not quite exist in pre internet days. One can ask ‘StackOverflow’ if one has a technical question. But expectations from customers are set by likes of Apple, Facebook, Google. Unfortunately customers expect the same from even the small startups. Thus while entry barriers may be low success is for those with most determination and focus.

Bangladesh Perspectives

Bangladesh is a fertile place for emerging entrepreneurs in Software and ICT field in general. There are already estimated 250,000 technical people working in this sector. BASIS (Bangladesh Association of Software and Information Services) formed in 1997 with 17 charter members in Software and ITES industry (author is one of the founder charter members) now has over 800 members. There are also over 60,000 freelancers providing all kinds of IT and non IT related services using freelancing websites. These individual freelancers have also banded together to form ICT companies. BASIS member companies are involved amongst others in Software Development, Web Application Development, Web Site designing and maintenance, E Commerce, Content Development, Graphics Design, 3D Animation, Games development, Mobile Apps development and ICT Training.

ICT industry in Bangladesh has grown over 20-30% consistently in recent years. Favourable demographic and macro economic trends, high growth rate and a relatively liberal investment climate has convinced Goldman Sachs and JP Morgan to identify Bangladesh as one of the most attractive emerging economies.

World Bank funded LICT (Leveraging ICT for growth, employment and Governance) project of BCC (Bangladesh Computer Council) under ICT division launched in early 2014 aims to train 34000 male (70%) and female (30%) graduates. Training will be for 10,000 graduates in Top up IT specialized training, for 20,000 graduates in ITES Foundation training and for 4000 graduates in FTFL (Fast Track Future Leaders) (3 months training course) for employment in IT/ITES industry. SME loans for Software and IT Companies, introducing PayPal in Bangladesh, increasing limit of money repatriation for Software companies, abolition of obstacles in software import are some of the areas where Bangladesh Bank are working. Fenox Venture Capital has already invested in Bangladesh. Moreover, AB Kinnevik of Switzerland, SNT Classified, Rocket Internet of Norway and many other renowned companies of the world have invested in the ICT sector of Bangladesh. One of the world’s largest Online Payment Gateway Service (OPG) providers ‘Payoneer Inc., USA’ have opened shop in Bangladesh. This has been a relief for growing freelancers in Bangladesh earning and bringing lot of foreign currencies into the country.

Above are indicative of a Bangladesh that should be brimming with activities in Software an ICT field in the coming days. These are signs of opportunities knocking for emerging Software and ICT entrepreneurs in Bangladesh. They must go and grab them, and in the process do themselves and the country proud.


The Author is the Managing Director,The Computers Ltd. (TCL) andDirector, Dhaka Chamber ofCommerce and Industry


Introduction

Risk is the possibility of loss or injury. Project risk is an uncertain event or condition that, if it occurs, has an effect on at least one project objective. Risk management focuses on identifying and assessing the risks to the project and managing those risks to minimize the impact on the project. There are no risk-free projects because there are an infinite number of events that can have a negative effect on the project. Risk management is not about eliminating risk but about identifying, assessing, and managing risk.

In business, risks prowl at every turn, competitor innovations that threaten the viability of your products or services, new players in the market place, adverse trends in commodity prices, currencies, interest rates or the economy. Throw in potential disruptions to supply chains that have been stretched across thousands of miles and country borders by globalization, and the opportunity for something to go wrong is, to say the least, worrisome.

Organizations who are tempted to short change their risk management efforts will find potential consequences can be severe, from a loss of competitiveness to, in the extreme, having to cease operations altogether.

Effective Risk Management in BusinessMd. Hafizur Rahman ACA

Risk Management

Risk management involves identifying, analyzing, and taking steps to reduce or eliminate the exposures to loss faced by an organization or individual. The practice of risk management utilizes many tools and techniques, including insurance, to manage a wide variety of risks. Every business encounters risks, some of which are predictable and under management's control, and others which are unpredictable and uncontrollable.

Risk management is particularly vital for small businesses, since some common types of losses—such as theft, fire, flood, legal liability, injury, or disability—can destroy in a few minutes what may have taken an entrepreneur years to build. Such losses and liabilities can affect day to day operations, reduce profits, and cause financial hardship severe enough to cripple or bankrupt a small business. But while many large companies employ a full time risk manager to identify risks and take the necessary steps to protect the firm against them, small companies rarely have that luxury. Instead, the responsibility for risk management is likely to fall on the small business owner.

The term risk management is a relatively recent (within the last 20 years) evolution of the term "insurance management." The


concept of risk management encompasses a much broader scope of activities and responsibilities than does insurance management. Risk management is now a widely accepted description of a discipline within most large organizations.

Basic risks such as fire, windstorm, employee injuries, and automobile accidents, as well as more sophisticated exposures such as product liability, environmental impairment, and employment practices, are the province of the risk management department in a typical corporation. Although risk management has usually pertained to property and casualty exposures to loss, it has recently been expanded to include financial risk management—such as interest rates, foreign exchange rates, and derivatives—as well as the unique threats to businesses engaged in E commerce. As the role of risk management has increased, some large companies have begun implementing large scale, organization wide programs known as enterprise risk management.

Enterprise Risk Management

In the 1990s, the field of risk management expanded to include managing financial risks as well as those associated with changing technology and Internet commerce. As of 2000, the role of risk management had begun to expand even further to protect entire companies during periods of change and growth. As businesses grow, they experience rapid changes in nearly every aspect of their operations, including production, marketing, distribution, and human resources.

Such rapid change also exposes the business to increased risk. In response, risk management professionals created the concept of

enterprise risk management, which was intended to implement risk awareness and prevention programs on a company wide basis. "Enterprise risk management seeks to identify, assess, and control sometimes through insurance.

The main focus of enterprise risk management is to establish a culture of risk management throughout a company to handle the risks associated with growth and a rapidly changing business environment. Writing in Best's Review, Tim Tongson recommended that business owners take the following steps in implementing an enterprise wide risk management program:

• incorporate risk management into the core values of the company,

• support those values with actions,

• conduct a risk analysis,

• implement specific strategies to reduce risk,

• develop monitoring systems to provide early warnings about potential risks, and perform periodic reviews of the program.

Finally, it is important that the small business owner and top managers show their support for employee efforts at managing risk. To bring together the various disciplines and implement integrated risk management, ensuring the buy in of top level executives is vital. Luis Ramiro Hernandez wrote in Risk Management. "These executives can institute the processes that enable people and resources across the company to participate in identifying and assessing risks, and tracking the actions taken to mitigate or eliminate those risks."

ALTHOUGH RISK MANAGEMENT HAS USUALLY PERTAINED TO PROPERTY AND CASUALTY EXPOSURES TO LOSS, IT HAS RECENTLY BEEN EXPANDED TO INCLUDE FINANCIAL RISK MANAGEMENT—SUCH AS INTEREST RATES, FOREIGN EXCHANGE RATES, AND DERIVATIVES—AS WELL AS THE UNIQUE THREATS TO BUSINESSES ENGAGED IN E COMMERCE.

Risk in Business

Means of measuring and assessing risk vary widely across different professions The various means of doing so may define different professions, e.g. a doctor manages medical risk, a civil engineer manages risk of structural failure, etc. A professional code of ethics is usually focused on risk assessment and mitigation (by the professional on behalf of client, public, society or life in general).

Risk in Finance

Risk in finance has no one definition, but some theorists, notably Ron Dembo, have defined quite general methods to assess risk as an expected after the fact level of regret. Such methods have been uniquely successful in limiting interest rate risk in financial markets. Financial markets are considered to be a proving ground for general methods of risk assessment.

However, these methods are also hard to understand. The mathematical difficulties interfere with other social goods such as disclosure, valuation and transparency. In particular, it is often difficult to tell if such financial instruments are "hedging" (decreasing measurable risk by giving up certain windfall gains) or "gambling" (increasing measurable risk and exposing the investor to catastrophic loss in pursuit of very high windfalls that increase expected value).

As regret measures rarely reflect actual human risk aversion, it is difficult to determine if the outcomes of such transactions will be satisfactory. Risk seeking describes an individual who has a positive second derivative of his/her utility function. Such an individual would willingly (actually pay a premium to) assume all risk in the economy and is hence not likely to exist. In

financial markets one may need to measure credit risk, information timing and source risk, probability model risk, and legal risk if there are regulatory or civil actions taken as a result of some "investor's regret".

Every Business Faces the Same 5 Key Risks

• Development Risk

Can the original product or service idea actually be created?

• Manufacturing Risk

If the product can be developed, can it actually be produced in appropriate volume?

• Marketing Risk

If the product can be made, can it be sold effectively?


maintain equipment properly, install strong locks, smoke detectors, and fire extinguishers, keep the office clean and free of hazards, back up computer data often, and store records securely offsite.

As with so many business initiatives, the success of a risk management programme depends on the active support of senior management.

• They are Inclusive

Effective risk management programs do not rely on the work and resources of any single person or group within the organization. While often led by a risk management officer, the best programs draw on the input and co operation of every part of the organization.

• They are Transparent

Risk management programs work best and companies reap the greatest possible benefit from them when their goals, processes and results are shared with all the company’s stakeholders.

• They are Holistic

The best risk management programs not only address all the risks to which modern corporations are susceptible, they also consider how these various risks can affect the company’s stakeholders and operations.

• They are Proactive

Effective risk management programs do not merely insure companies against downside risks, they also include proactive systems and processes to maximize the opportunities the opportunities presented by variable risks.


• Financial Risk

If the product can be sold effectively, will the resulting company be profitable and can the profits actually be realized in a form that allows investors to receive cash

• Growth Risk

If the company can achieve operating profitability at one level, can profitability be maintained as the company grows and evolves?

Steps in the Risk Management Process

According to C. Arthur Williams Jr. and Richard M. Heins in their book Risk Management and Insurance, the risk management process typically includes six steps.

These steps are:

• determining the objectives of the organization,

• identifying exposures to loss,

• measuring those same exposures,

• selecting alternatives,

• implementing a solution, and

• monitoring the results.

Businesses have several alternatives for the management of risk, including avoiding, assuming, reducing, or transferring the risks. Avoiding risks, or loss prevention, involves taking steps to prevent a loss from occurring, via such methods as employee safety training. As another example, a pharmaceutical company may decide not to market a drug because of the potential liability.

• Assuming risks simply means accepting the possibility that a

loss may occur and being prepared to pay the consequences. Reducing risks, or loss reduction, involves taking steps to reduce the probability or the severity of a loss, for example by installing fire sprinklers.

• Transferring risk refers to the practice of placing responsibility for a loss on another party via a contract. The most common example of risk transference is insurance, which allows a company to pay a small monthly premium in exchange for protection against automobile accidents, theft or destruction of property, employee disability, or a variety of other risks. Because of its costs, the insurance option is usually chosen when the other options for managing risk do not provide sufficient protection. Awareness of, and familiarity with, various types of insurance policies is a necessary part of the risk management process. A final risk management tool is self retention of risks—sometimes referred to as "self insurance." Companies that choose this option set up a special account or fund to be used in the event of a loss.

Any combination of these risk management tools may be applied in the fifth step of the process, implementation.

The final step, monitoring, involves a regular review of the company's risk management tools to determine if they have obtained the desired result or if they require modification. Nation's Business outlined some easy risk management tools for small businesses: maintain a high quality of work, train employees well and

When will a Particular Strategy for Managing Country Risk be most Appropriate?

The selection of an appropriate strategy is likely to depend on characteristics of the firm, its industry and competitive environment, the resources and markets accessible in different countries, the modes of entry that are feasible to enter those countries, and other factors.

While many of these factors are idiosyncratic in nature, the relation between strategies for managing country risk and the size and/or age of the firm is likely to be more systematic, given that there are predictable differences in the ability, motivation, and awareness of large, established firms versus SMEs and young firms. Large, established firms are likely to have greater resources and more market power, which will likely lead them to pursue strategies such as diversification and control to manage country risk.

SMEs and newly established ventures, on the other hand, typically exhibit resource scarcity but also maintain organic, decentralized, and flexible organizational structures, which may give them an advantage in the implementation of strategies that require a willingness to change, particularly when change is driven by information acquired in international operations, which are generally peripheral to the organization's core.

This means that SMEs and young firms may be more likely to pursue arbitrage/prediction, real options, and adaptation strategies, though large, established firms are not necessarily precluded from pursuing these strategies as well. An overview of the eight strategies, their objectives, and their scope is presented in below :


Conclusion

The importance of risk management in projects can hardly be overstated. Awareness of risk has increased as we currently live in a less stable economic and political environment.

In pursuing this goal, companies, now more than ever, would do well to begin by identifying their top drivers, then pinpointing the top threats to those revenue drivers, and distinguishing between those that are predominantly downside risks and those that are predominantly variable risks.

While both categories of risk deserve attention, companies may discover the effectiveness of their risk management programs are most effective if they devote more of their attention to controlling risk rather than transferring it to insurance companies. And the risks that can be most directly controlled are downside risks, the very risks that are most likely to threaten company’s top revenue drivers. When downside risks are dealt with first through prevention and

Risk Management in the Internet Age

Small businesses encounter a number of risks when they use the Internet to establish and maintain relationships with their customers or suppliers. Increased reliance on the Internet demands that small business owners decide how much risk to accept and implement security systems to manage the risk associated with online business activities. "The advent of the Internet has provided for a totally changed communications landscape.

Conducting business online exposes a company to a wide range of potential risks, including liability due to infringement on copyrights, patents, or trademarks, charges of defamation due to statements made on a Web site or via e mail, charges of invasion of privacy due to unauthorized use of personal information or excessive monitoring of employee communications, liability for harassment due to employee behavior online, and legal issues due to accidental noncompliance with foreign laws.

Strategy Objective Firms mostlikely to usestrategy

Strength, Weakness, orLimitation in Scope

Minimization ofdownside risk

All Opportunity risk (i.e., risk ofmissing opportunities thatcompetitors exploit)


All Markets for hedginginstruments are widespread,but upside risk may decline.


All SMEs use due to resourcescarcity.Large firms use due to riskaversion.


Established,large firms

Requires deep resources.

Exploitation ofupside risk

SMEs, youngfirms

Requires decentralized,organic stucture.


SMEs, youngfirms

Not feasible for inert. rigidorganizations.


Established,large firms

Requires deep resources andmarket power.


SMEs, youngfirms

Requires ability to allowperipheral activities tochange the firm’s core.

Avoidance

Financial Hedging

Transfer

Diversification

Arbitrage/PredictionReal Options

Control

Adaptation

control, it enables senior management to deal more aggressively with variable risks. In short they become more proactive and strategic with their risk management approach.

Because companies indicate that they expect having trouble finding the time, budget and people necessary to implement or maintain a strong risk management program, senior management must demonstrate leadership in championing and funding this initiative. The number one consequence of poor risk management is loss of competitiveness.

By implementing an effective risk management program, companies protect their ability to compete. Nothing is more fundamental to business success.

References

Amram, M., & Kulatilaka, N. (1999): Real options. Harvard Business School Press.

Chapman, C., & Ward, S. (1997): Project risk management. JOHN WILEY & Sons.

Courtney, H., Kirkland, J., and Viguerie, P. (1997): Strategy under uncertainty. Harvard Business Review. November/ December

Kagan, C. B. and Ford, D.N. (2002): Using Options to Manage Dynamic Uncertainty in Acquisition Projects. Acquisition Review Quarterly Fall 2002

Barnett, M.L. (2005): Paying attention to real options. R&D Management Blackwell Publishing Ltd

Hausmann, R., Sturzenegger, F. (2007): The Valuation of Hidden Assets in Foreign Transactions: Why “Dark Matter” Matters. The Journal of the

National Association for Business Economics, Volume 42, Number 1

Knight, F. H. (1921): Risk, Uncertainty, and Profit. Houghton Mifflin Company.

Peter Romilly, P. (2007): Business and climate change risk: a regional

time series analysis. Journal of International Business Studies.

Ephraim Clark, E., Marois, B. (1996): Managing Risk in International Business. Intl Thomson Business Press.

Oetzel, J.M., Bettis, R.A. and Zenner, M. (2001): Country Risk Measures:

How Risky Are They? Journal of World Business .


The Author is an AssociateMember, ICAB


Abstract

Environmental safety & sustainability is no more a mere ‘catchphrase’ for the people of the planet. The human and corporate citizens are working jointly towards building the Earth as a safe abode for all of us. In consequence, ‘Green Banking’ has evolved as the symbol of responsibility and accountability that different banks have towards the earth and its people. Bangladesh has accepted the green banking initiatives and practices cordially and in line with that Bangladesh Bank has issued a comprehensive guideline for green banking. This study aims to analyze the compliance of Bangladesh Bank’s guideline by the private commercial banks (PCBs) of Bangladesh. Further, the study is targeted to justify whether the compliance level is affected by any other factors. The study has utilized the secondary data available in annual reports, related websites and research papers. The findings of the study show the average score of compliance by the PCBs is 12.96 (13 approximately) out of 24 disclosures requirement. And most of the banks fall between the ranges of ±4 from 13 and it also concludes that compliance level is not significantly affected by the considered factors (Paid-up Capital, Investments, Loans & Advances, Profit after Tax and CSR Cost) of this study. In conclusion, the study recommends some

A Study on the Compliance of BangladeshBank’s Policy Guidelines for Green Banking

1Md. Ahasan Uddin | 2Sabuj Chandra Bhowmik

significant steps to be taken and sketches the route for further study to be made on same direction.

Keywords: Green Banking, Environmental Sustainability, Bangladesh Bank, Compliance Level, Private Commercial Banks, Bangladesh Bank’s Policy Guideline.

Introduction

Earth is the only known inhabitable planet in our universe. But the earth is getting endangered gradually by the human activities. The environmentally destructive activities of people are making our planet less livable. It has now become a sacred duty of every citizen to come forward and to contribute in saving the world from the environmental pollution and this is where the concept of ‘Green’ comes into picture. The term ‘Green’ actually refers the green environment of our planet which has made it habitable. Bank is one of the most important corporate citizens as it influences the industrialization and the economic development of any country to a large extent. Banks have the power to affect the environment a lot through their activities. So the banks should engage in taking up the responsibility of safeguarding the environment as well. ‘Green Banking is the way in which banks can take part in the sustainable development of the environment. Green


banking has become a very important concept of today’s world. Many of the countries along with Bangladesh have accepted the green banking activities. ‘Green Banking’ mainly is an umbrella term referring to the activities, practices and guidelines that make the banks sustainable in economic, environment and social dimensions (Green Banking Framework, IDRBT, 2013). Green Banking activities are nothing different from the banks normal activities, it only refers that the activities of a bank are socially responsible and are guided to ensure the environmental sustainability. Green banking activities includes ensuring in-house green performance and also promoting environmentally safe (green) products, supporting green activities and engaging in green finance (investing in environment-safe projects), thus ensuring the external safeguard as well. Green banking is not just a part of banks’ CSR activities; making customer aware of the bank’s attitude towards environment will in turn make a strong and loyal customer base.

Bangladesh is one of the worst sufferers of environmental degradation. As a result, Bangladesh has also accepted the green banking activities whole-heartedly. Bangladesh Bank is the first central bank in the world which has taken real initiatives and has issued a comprehensive policy guideline for green baking (Green Banking Report of Bangladesh Bank, 2012).Bangladesh Bank issued a policy guideline for green banking (BRPD Circular No. 02) in February 2011 in which Bangladesh Bank has set out some initiatives to be maintained by all scheduled banks to ensure the green banking activities. There are many previous studies conducted to depict the prospects of green banking in Bangladesh or the initiatives that have been taken by particular bank. This study aims at

finding out the current situation of the banks in complying Bangladesh Bank’s guideline and also to assess whether the level of compliance in each bank is influenced by any other factor. This study is conducted on the scheduled private commercial banks.

Literature Review

Global warming, Climate change and Environmental degradation are the biggest challenges the world is facing today. The financial and economic development of any country is inextricably linked to the extent of their environmental vulnerability. Banks have an undeniable duty towards the environmental safety and to justify that several researches have been made on ‘Green Banking’. Alice Mani (2011)has stated “As Socially Responsible Corporate Citizens (SRCC), banks have a major role and responsibility in supplementing governmental efforts towards substantial reduction in carbon emission. Bank’s participation in sustainable development takes the form of “Green Banking”. Saleena T.A. (2014) acknowledged the reasons for going green in her paper.

Banks should not squeeze investments and clamp down on economic activities only; rather they need to concentrate on sustainable finance to cope with the changes in the climate or in the environmental condition (BB Green Banking Report, 2012). While presenting the paper ‘Green Banking Prospects in Bangladesh’; Rahman, Ahsan, Hossain&Hoq (2013) has stated that the banking sector is one of the major sources for financing in commercial projects such as; brick field, steel, paper, cement, chemical, power, textiles etc. which cause maximum carbon emissions. Thus, banking sector can contribute a lot in the economic development and environment protection by financing

DESPITE THE FACT THAT BANGLADESH IS FAR-FLUNG FROM ACHIEVING THE STATUS OF A ‘GREEN ECONOMY’, IF THE CITIZENS, HUMAN AND CORPORATE BOTH, REALIZE THEIR ROLE IN CURBING THE POLLUTION AND ENVIRONMENTAL DEGRADATION AND WORK HAND-IN-HAND, THE JOINT EFFORT CAN SURELY SMOOTHEN THE ROAD AND LEAD THE WAY TO LEAVE A BETTER WORLD FOR OUR OFF-SPRINGS.

in green projects. It is suggested that banks can be green through bringing changes in six main activities: Investment management, Deposit Management, Housekeeping, Human Resources, CSR and increasing awareness (Rahman, Ahsan, Hossain&Hoq, 2013).

Banks operate for profit. But the profit should not be earned at the cost of the dearest Earth and its sustainability. Hossain&Kalince (2014) showed that the green banking activities has a positive relation on bank’s profitability which is further encouraging the banks to expand their green movements. Thus the concept of green banking has evolved to ensure profitability besides environmental safety. Masukujjaman & Serena (2013) has shown in their paper that Bangladesh lagged far behind from other developed countries in adopting green banking. But they

added that the picture of adoption of green banking in Bangladesh is consistently developing. As the customers are getting well aware about their sustainable development, the level of engagement in green activities by any bank is becoming vital for their growth as well. As a result, banks are getting step-forwarded in evaluating the factors essential for their survival. Six main factors: Economic Factor, Policy Guideline, Loan Demand, Stakeholder Pressure, Environmental Interest, and Legal Factors are found to have influence on the green banking activities of a bank (Ahmad, Zayed&Harun, 2013).

Green Finance has become the major way in which banks are contributing to environment safety. Islam & Das (2013) stated green finance as a branch of green banking that makes significant role to the transition to resource efficient and low- carbon

industries. They also have supported similar findings as Masukujjaman & Serena (2013) that the advancement of green banking practices in Bangladesh are not satisfactory till now. Apart from the green financing activities green products, green marketing, online and mobile banking etc. are the initiatives that are adding to the green approach towards making a green economy. Khan (2012) has stated in his article that green economy is the one whose growth in income and employment is driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, prevent the loss of biodiversity and ecosystem services.

Bangladesh is one of the worst sufferers of environmental pollution and has already taken steps for green banking. Ullah (2013) conducted a comparative analysis of green banking activities


studied banks are listed in DSE (Dhaka Stock Exchange). The other 6 banks which are listed in DSE could not be selected due to their unavailability of information needed for this study (Selected 25 banks are disclosed in Appendix 1).The study is conducted during 2014-2015. As the data of 2014 were not available at the time of this study and the data of 2013 were the latest, the data of 2013 have been used for the purpose of the study. The study is entirely based on secondary data. The secondary data have been collected from annual reports, related research papers on sustainability reporting, green banking reporting and websites of the respective banks. All of the annual reports are collected from respective banks’ websites.

Content Selection

A manual approach has been followed to collect the contents of this study. For preparing the compliance checklist, a conclusive set of 24 requirements (Appendix 1) have been developed from the Bangladesh Banks’ Policy Guidelines for Green Banking. Then, the compliance checklist(Appendix 1) has been prepared by examining those 24 requirements individually for each of the 25 studied banks. For the second part of the analysis, 5 important variables have been chosen purposively to test their relationships with the calculated compliance score derived from Appendix 1. The amounts of those 5 variables have been presented in Appendix -2.

Calculation of the Total Compliance Score

The total compliance score has been calculated in a dichotomous process. The compliance has been indicated as ‘1’ and


of State-Owned Commercial Banks (SCBs), Specialized Development Banks (SDBs), Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs). He concluded that the performance of PCBs and FCBs in green banking is remarkable, whereas SCBs and SDBs have not shown any noticeable progress.

Bangladesh Bank has already taken real initiatives and approach for green banking. It has published a comprehensive policy guideline for green banking in February, 2011 (BRPB Circular No. 02) in which it guided banks to finance projects like solar energy, bio-gas, ETP to create individual climate risk funds and to incorporate the environmental risk rating in banks’ core risk management. As green banking concept is worth to delve into and the banks of Bangladesh are instructed to comply with the guidelines of Bangladesh Bank, this study is devoted to explore the situation of compliance of Bangladesh Bank’s Policy Guidelines by private commercial banks (PCBs) in Bangladesh.

Rationale of the Study

Green Baking is one of the tools which ensure environmentally sustainable activities performed by a major group of stakeholders. The banks in Bangladesh are also responsible to follow the green activities in their banking business. Bangladesh Bank has made it mandatory for all the scheduled banks to accomplish a certain green tasks within specified deadlines. The banks have already progressed a lot in performing those green activities. But all the banks have not fulfilled equal stage of the specified guideline. Some banks have accomplished all of the requirements whereas some other banks have not completed the first phase yet. This study is targeted to

find out the level of compliance in scheduled private commercial banks. It will present the compliance score individually for each studied bank and will also show the compliance list which will help in finding out which bank has not fulfilled which of the tasks yet. The study further aims to find out whether the compliance score is affected by any other variable as the compliance among banks differs significantly. The findings of the study will facilitate further research and will be able to contribute in the steps taken by the policy makers. This study will as well contribute in Bangladesh Banks’ approach of encouraging banks to take-up green banking activities.

Objectives of the Study

The broad objective of the study is to analyze the compliance of ‘Bangladesh Bank’s Policy Guidelines for Green Banking’ by the scheduled private commercial banks (PCBs). The specific objectives of the study are to provide an insight on the Bangladesh Banks’ Policy Guidelines for Green Banking (BRPD circular no. 02), to find out the compliance score of green banking requirements for each studied bank. The study also aims to evaluate the level of compliance accomplished by studied PCBs and analyze whether the compliance score is influenced by any other factors and finally, to draw a conclusion on the analyzed data and to justify the findings derived.

Methodology of the Study

One of the main objectives of the study is to find out the compliance score of green banking requirements. For this purpose 25 scheduled private commercial banks (PCBs) have been selected purposively. 24 out of the 25

non-compliance as ‘0’. The set of compliance derived in this process for 25 banks are disclosed in Appendix 1. This un-weighted approach has been followed by assuming that each of the 24 requirements is equally important for all of the banks. Thus, the total compliance score is calculated as follows.

Total Compliance Score:

Where, 1 = if the item xi is complied with; 0 = if the item is not complied with; n = number of items.

Techniques used for Data Analysis

Some statistical techniques such as- Mean, Standard Deviation, Standard Error and Correlation have been used in this study. STATA software version - 12 has been used for analyzing the data.

Overview of Green Banking

Green banking is creating a buzz in the financial world. It is a form of banking taking into account the social and environmental impacts and its main motive is to protect and preserve environment (Alice Mani, 2012). Green bank is an ethical bank or environmentally sustainable bank that ensures the environmental safety and its concern towards the well being of citizens through its internal and external activities. Green banking is the effort to make the industry go green and restoring the natural environment as well. This concept is equally beneficial to the industry, economy and the environment.

Banks hold aunique position in an economic system that can


The banks are guided to formulate the policy and adopt broad environmental strategy approved by their Board of Directors. They are also required to establish a separate Green Banking Unit or Cell which will watch over the green banking issues of the bank. Banks are further guided to incorporate Environmental and Climate Change Risk as a part of their existing Credit Risk Methodology (CRM) and to conduct the EnvRR (Environment Risk Rating) before financing for any project. Initiating in-house environment management is another important specification of the Phase – I. It includes reducing the energy, water and paper consumption; circulating ‘Green Office Guide’ to every employee of the organization and installing solar panels at the bank premises.

Banks are encouraged to finance in eco-friendly business activities and energy- efficient industries. Green Finance by banks is offered to get extra benefits. Banks are directed to create ‘Climate Risk Fund’ as a part of their CSR expenses and encouraged to finance in economic activities of the cyclone, drought, and flood prone areas. Banks are further guided to introduce ‘Green Marketing’, which are marketing of the products that are presumed to be environmentally safe. It also includes activities like product modifications, changes in production process and in packaging as well as in the advertising process. Engaging in Online Banking and supporting Employee Awareness and Training Programs to encourage green banking are parts of Phase – I too. And finally banks are ordered to report their initiatives/ practices to Bangladesh Bank and in their respective websites. Following figure shows the requirements of Phase – I collectively.

influence production, distribution and other economic activities through their financing and thus can pollute the environment to a great extent. That’s why; energy and water efficiency and waste reduction are of vast concern for the banks (BRPD Circular No. 02). Green banking involves two main approaches: firstly, green banking refers the green transformation of bank’s internal operations and secondly, green banking involves the environmentally responsible financing, weighing up the environment-risks related to a project before financing for it(Green Banking in Bangladesh, Bangladesh Bank).

Summary of the Bangladesh Bank’s Policy Guidelines for Green Banking

Bangladesh Bank has issued a policy guideline for green banking (BRPD Circular No. 02) in February, 2011. The guideline has specified the requirements needed to be fulfilled by the banks of Bangladesh. Bangladesh Bank has adopted a comprehensive green banking policy in a formal and structured manner to encourage the green banking activities in Bangladesh. The guideline is divided into three phases and each phase has a deadline within which every bank needs to cover the requirements specified in that phase. The phases are briefly described below:

Phase – I (Foundation)

In Phase – I, Banks are guided to formulate their green banking policy and show commitment towards environment through the initiation of in-house green performance. This phase was directed to be accomplished within December 31, 2011.

Phase – II (Intensification)

For strengthening the initiatives taken in Phase – I, Phase – II is formulated with further advanced steps. It is the intensification stage where banks are guided to follow other requirements after they have fulfilled the requirements of Phase – I. The time lining for Phase – II was December 31, 2012.

Banks are directed to formulate their Sector Specific Environmental Policies as the first requirement of Phase – II. The sectors for which

banks are guided to formulate environmental policies are the sensitive sectors such as; Agriculture, Tannery, Leather, Textile, Engineering, Chemicals, Ship breaking etc. Banks are further directed to set their ‘Green Strategic Planning’ and a range of achievable green targets and to disclose them in their annual reports and in the websites. Apart from these, banks are required to set up ‘green branches’ under this phase. The green branches of any bank are entitled to display a

special logo approved by the Bangladesh Bank. The banks are also required to ensure the improved in-house performance and to carry out rigorous programs to educate employees and clients. Finally, banks under this phase are directed to start publishing their separate ‘Green Banking and Sustainability Report’ showing their past performances, current activities and future initiatives. The following figure depicts the requirements of Phase – II collectively.

Phase – III (Diversification)

The last phase of the guideline is about diversifying the green banking activities of a bank. It is directed that a system of Environmental Management should be in place before the initiation of the activities of Phase – III in a bank. Banks are expected to address the whole eco-system

through their environment friendly activities and to design and introduce innovative green products.

Banks are further directed to publish independent ‘Green Annual Report’ following internationally accepted format like GRI (Global Reporting Initiatives) and there must be an arrangement

for verification of these publications by an independent third party.

Finally, banks are said to report their ‘green banking practices’ in a quarterly basis to Bangladesh Bank in the stated format and also guided to keep their annual reports and websites updated with the disclosures of green banking practices and initiatives.


Figure 1: First Phase of Bangladesh Bank’s Green Banking Policy Guideline

Source: Bangladesh Bank, BRPD Circular No. 02, 2011

Creation of Climate Risk Fund

Reporting Green Banking Practices

Supporting Employee Training, Consumer Awareness

Introducing Green Marketing

Phase – ITime Limit: 31 December,

2011.

Policy Formulation and Governance

Incorporation of Environmental Risk in CRM

Initiating In-House Environment Management

Introducing Green Finance Online Banking

Figure 2: Second Phase of Bangladesh Bank’s Green Banking Policy Guideline


Sector Specific Environmental Policies Setting up Green BranchesGreen Strategic Planning

Formulation of Bank Specific Environmental Risk

Management Plan & Guideline

Improved In-House Environment Management Phase – II

Time Limit: 31 December, 2012.

Rigorous Programs to Educate Clients

Disclosure & Reporting of Green Banking Activities

Analysis and Findings

This study is targeted to analyze the compliance level of green banking activities of scheduled private commercial banks. Further the relation of the compliance level with other variables has been evaluated to find out whether the level is affected by other factors or not. Thus, the analysis of this study is segregated into two sections: the first section describes the analysis of the compliance level of each bank and the second section describes the relation of disclosures score with different considered factors(variable) and the rest conclude the analysis of this study by presenting the findings in summary.

Analysis of the Compliance Level of Each Bank

been produced. The compliance is indicated by ‘1’ and the non-compliance is indicated by ‘0’ in the ‘compliance score calculation sheet’. The sheet presents requirement-wise compliance; the total score along with the percentage of compliance for each bank has been attached in the Appendix 1 of this paper.

Following chart (Chart-1) represents the result which has been derived from the ‘compliance score calculation sheet’. Here, the compliance score for each bank has been disclosed on the top of each bar. The chart delivers that the maximum compliance score is 20 which is accomplished by Trust Bank; whereas the minimum compliance score is 6 which is performed by two banks- One bank and Southeast Bank. Other 22 banks have resulted between the ranges of 6 to 20.

Presentation of the Compliance Level

The banks of Bangladesh are guided to follow the requirements of green banking specified by Bangladesh Bank in their “Policy Guidelines for Green Banking” (BRPD Circular No. 02, 2011). There are total 24 requirements specified in that guideline. This study is targeted to find out the extent to which the private banks have complied with that guideline. The data related to the green banking which has been gathered from different sources such as the annual reports, the website of respective banks, green banking disclosures, and from sustainability reports is used in developing the total compliance score for each bank. The sections of those disclosures have been thoroughly read and thus the total compliance score out of 24 for each bank has


Figure 3: Third Phase of Bangladesh Bank’s Green Banking Policy Guideline


Phase – IIITime Limit: 31 December, 2013

Reporting in Standard Format with External Verification

Reporting Green Banking Practices on Quarterly Basis

Designing and Introducing Innovative Products

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Total Compliance Requirement :24

Chart 1: Individual Green Banking Compliance Score of Each Bank

Percentage of Compliance

After calculating the total compliance score, the percentage of compliance for each bank has been derived. Percentage of compliance is derived to sum-up the performance in green banking of all 25 banks in some definite categories. So, the percentage of

compliance has been divided into four categories: 1-30%, 31-60%, 61-80%, 81-100%. Following pie-chart (Chart-2) shows the number of banks in each category and also specifies which bank belongs to which category. The chart delivers that the majority of banks (11 banks here) have complied 31-60% of the total

green banking compliance requirements. On the other hand, only 1 bank belongs to the highest range (81-100%) of compliance of total requirements. And, the minimum range (1-30%) has been complied by 4 banks whereas 61-80% has been complied by second major group (9 banks in total).


9

Bank Asia, BRADBBL, Exim BaNCC Bank, PriStan-Chart Ban

AC Bank,ank, IBBL,me Bank,

nk, UCBL

1

Trust

4

Bank

11

Southeast BSIBL, SJIOne Ba

AB Bank, City Eastern Ba

Jamuna Bank, Mutual

Premier BanStand

1-30%

31-60%

61-80%

81-100%

Bank,BL,nk

Bank, Dhaka Bnk, IFIC Bank, Mercantile BanTrust Bank,

nk, Pubali Bankdard Bank

%

%

%

ank,

nk,

k,

Chart 2: Percentage of Compliance and No. of Banks in Each Category


Analysis of the Compliance Level of Banks

The policy guideline for green banking is mandatory for every bank to comply with. And the Chart 1 above has showed us that the maximum rate of compliance is 20 and the minimum is 6 out of total 24 requirements. On average, banks have complied with 12.96 (13 approximately) requirements till date. And most of the banks fall between the ranges of ±4 from 13. Following table depicts the value of mean, standard deviation, maximum and minimum rate of compliance accomplished by the studied banks.

Table 1: Average Compliance Score & Dispersion among Compliance Rates

Variable Observation Mean Std. Dev Maximum Minimum

Compliance Score 25 12.96 4.247352 20 6

Source: Developed by Authors using STATA Software

Following table shows the standard error of the sample mean which is 0.85 (approximately). The standard error helps predicting what the Population Mean would have been. The range of 95% confidence interval which has been derived using the standard error depicts the range within which the population mean would possibly lie. It is seen that the calculated sample mean 12.96 falls within the range and the range is close to the sample mean score. So, it can be said with 95% confidence that the sample mean significantly represent the population mean. Thus, the analysis which has been conducted to obtain the average compliance score issignificantly representative of all banks’ compliance performance.

Table 2: Analysis of the Sample Mean Compliance Score

Variable Observation Mean Std. Error [95% Confidence Interval]

Compliance Score 25 12.96 0.8494704 11.20678 14.71322

Source: Developed by Authorsusing STATA Software

Previouslyin Chart 1, the compliance score for each studied bank has been presented individually and in Chart 2, the number of banks is being shown under four major percentage categories. Now, the following table is aimed to present the percentage of banks under each compliance score. The table also shows the ranges of 95% confidence interval for each compliance score. All of the sample percentages fall within the range which delivers that the percentage of banks under each compliance score represents the population’s performance significantly.

Table 3: Percentage of Banks under Each Compliance Score

Compliance Score Proportion Std. Error [95% Confidence Interval]6 0.08 0.0553775 -0.0342935 0.19429357 0.08 0.0553775 -0.0342935 0.19429358 0.04 0.04 -0.0425559 0.12255599 0.04 0.04 -0.0425559 0.122555910 0.04 0.04 -0.0425559 0.122555911 0.08 0.0553775 -0.0342935 0.194293512 0.08 0.0553775 -0.0342935 0.194293513 0.12 0.0663325 -0.0169035 0.2056903514 0.04 0.04 -0.0425559 0.122555915 0.08 0.0553775 -0.0342935 0.194293516 0.08 0.0553775 -0.0342935 0.194293517 0.04 0.04 -0.0425559 0.122555918 0.12 0.0663325 -0.0169035 0.2056903519 0.04 0.04 -0.0425559 0.122555920 0.04 0.04 -0.0425559 0.1225559

Source: Developed by Authors using STATA Software (Number of Observation: 25)

Analysis of the Relation of Compliance Level with Other Variables

After the analysis of the compliance score of each bank for green banking activities, it is now time to test the relation of compliance score with other variables present in a banking business. It has been seen that the compliance score is different for different banks and there must be some reasons why some banks have complied with more requirements than other banks. Green banking activities of a bank is influenced by many factors. But there are some factors which are powerful contributor than other factors. The six major factors have been found out by Ahmad, Zayed&Harun (2013). Those factors are Economic Factor, Policy Guideline, Loan Demand, Stakeholder Pressure, Environmental Interest, and Legal Factors. They explained that there are several factors under these six major categories and those factors can affect the green banking activities of a bank.

This study is targeted to find out the relation of compliance score of green banking with some specific factors. For this purpose, five important variables have been chosen. The variables are Paid-up Capital, Investments, Loans & Advances, Profit after Tax and CSR (Corporate Social Responsibility) Cost. There are particular reasons to choose these five variables purposively. The reasons are: Paid-up capital can be an important indicator of a bank’s willingness to contribute to the environment as stakeholders will be more encouraged to invest in an environmentally conscious organization. On the other hand, the Investments and the amount of Loans & Advances can also give a hint of a bank’s environment friendly initiatives. Then, the Profit

after tax can illustrate an indication of whether a more profitable organization is more environmentally aware or not. And finally, as green banking activities are also a part of an organization’s CSR activities, the CSR Cost of a bank can also be a sign of their willingness to comply with the requirements.

The data required for the purpose of constructing a model to test the relation between compliance score and the five selected variables have been collected from the Annual Reports of 2013 of each bank. The amounts of Paid-up Capital (BDT), Investments (BDT), Loans & Advances (BDT), and Profit after tax (BDT) have been assembled from the financial statements of 2013 of individual banks. But the CSR Cost has been calculated separately for each bank as the amount of CSR Cost here includes some other variables. The CSR Cost of a bank includes the total disbursement in CSR activities, the green budget, the total amount of green financing, the climate risk fund, expense in employee training/awareness building and other relevant cost made for green banking purpose.

Analysis of the Relation

To test whether there is any relationship present between the

selected variables and the compliance score, it is important to state the hypotheses in the first place. The hypotheses which are targeted to test are given below:

H0= There is no significant relationship present between the compliance score and the selected variables (paid-up capital, investments, loans & advances, profit after tax and CSR cost).

H1 = There is a significant relationship present between the compliance score and the selected variables (paid-up capital, investments, loans & advances, profit after tax and CSR cost).

Now to test the relationship among these variables, the correlation analysis has been conducted at a 5% significance level. The correlation analysis has demonstrated whether there are any statistically significant relationships present between disclosures index in one hand and the selected variables(paid-up capital, investments, loans & advances, profit after tax and CSR cost) on the other hand. Apart from the correlation value, the analysis has estimated a p-value which is used to determine whether the relationship is significant or not. Following table delivers the result of the correlation analysis.



The Correlation matrix table above shows the correlation coefficients and the significance level for each pair of variables. It is found that the Compliance Score is positively associated with all other variables but the associations are not statistically significant for any variable. The Paid-up Capital is positively associated with disclosures index with a correlation value 0.16 which indicates a very low level of association between variables. The relationship of Loans & Advances and CSR Cost with disclosures index are not statistically significant at 5% level with a correlation value 0.36 and 0.31 respectively which indicates loan and advance activities of the company do not directed to the green banking initiatives also CSR cost does show that bank CSR cost is not associated with implementing green banking initiatives provided by Bangladesh bank. Investments have positive association with disclosures index with a correlation value of 0.20 also indicates a very low level of association between these two variables. Finally bank’s profit response to green banking initiatives is also dissatisfactory

The average rate of compliance drawn from the sample significantly represents the average rate of compliance that would have been derived from the population.

The proportion of studied banks under each compliance score has been derived separately and analyzed herein.

The analyzed model does not show any significant relationship present between the compliance score and the selected independent variables (paid-up capital, investments, loans & advances, profit after tax and CSR cost).

Recommendations of the Study

The findings of the study has shown the compliance level of green requirements by the studied banks and has also justified that compliance level is not affected significantly by the abundance of other factors. This indicates that the extent to which one bank is involved in green banking depends mainly on the level of their dedication towards their social

suggested by the correlation value 0.20 that does not show any statistically significant relationship. Actually none of the variables shows any statistically significant relationship associated with selected variables therefore, we can accept our null hypothesis other is no significant relationship present between the compliance score and the selected variables (paid-up capital, investments, loans & advances, profit after tax and CSR cost).

Summary of the Findings

The findings which have been derived through the analysis and which have been discussed thoroughly in the above sections are presented here to overview at a glance:

The total compliance score of the studied banks are minimum 6 and maximum 20 (out of 24).

Majority of the studied banks have completed 31-60% of the guidelines till date.

The average score of compliance among the studied banks is 12.96 (13 approximately).

Table 5: Correlation Matrix of Different Pairs of Variables

Variables Compliance Score

Paid-up Capital

Investments

Loans & Advances

Profit after Tax

CSR Cost

Correlation of Compliance Score 1.0000p-value -

Correlation of Paid-up Capital 0.1605 1.0000p-value (0.9998) -

Correlation of Investments 0.2012 0.4779 1.0000p-value (0.9978) (0.2110) -

Correlation of Loans & Advances 0.3585 0.7224* 0.6516* 1.0000

p-value (0.7062) (0.0007) (0.0062) -Correlation of Profit after Tax 0.2045 0.1678 0.5734* 0.5113 1.0000

p-value (0.9974) (0.9997) (0.0402) (0.1268) -Correlation of CSR Cost 0.3134 0.5966* 0.4554 0.8346* 0.3501 1.0000

p-value (0.8881) (0.0309) (0.3194) (0.0000) (0.7707) -

Source: Developed by Authors using STATA Software (*indicates significant at 5% level)

responsibility. Therefore, the following points are recommended through this study:

Bangladesh Bank should take additional steps to make the banks and the general people of the country more aware about the ‘Green Banking’ concept and about its activities.

Bangladesh Bank should take stern steps for those banks that have not completed the first phase yet and as well as reward the banks which have completed almost all of the requirements.

It has been experienced while performing this study that some of the banks do not disclose any information about their green banking activities let alone following the directed framework for disclosure. Bangladesh Bank should identify these banks as early as possible and should give them a deadline to comply at least with the minimum requirements.

Banks need to be more encouraged and guided to publish their ‘Separate Sustainability & Green Banking Report’ as it will help the customers to choose the environment-friendly banks.

Bangladesh Bank is suggested to publish their ‘Green Banking Report’ on a regular basis as it has not published the report of 2013 yet.

Limitations of the Study

The data on which the study is prepared have been collected carefully and meticulously. The study is also conducted with due diligence and perseverance. However, the study may still be subject to some limitations. The

limitations which may be present in this study are as follows:

All the data of this study have been collected from secondary sources.

The study has been conducted purposively on private commercial banks (PCBs) only.

Only 25 PCBs are used as the scope of this study.

The study has faced unavailability of information in case of some banks.

Variables that have been used to justify the relation with the compliance score were selected randomly.

The study has been made within a short span of time which has limited the scope for a broader study.

Direction to Further Study

This study has been conducted on selected private commercial banks (PCBs) only. There is a plenty of scope to study further on same direction. This study can be conducted on the state-owned commercial banks (SCBs) or foreign commercial banks (FCBs). Moreover, the study can also be made in a conclusive approach by taking the whole banking industry of Bangladesh as the scope of this study. Future study can also be conducted when the latest information will be available. Besides, this study has considered only five variables to justify the relation of them with the compliance level. Here remains a lot more scope to find out whether any relation actually exists with any other variable. Further study can be made by considering several other important variables and thus finding out whether those variables affect the compliance

level. So, it is comprehensible that this study is able to direct and help future studies which will be made on same direction.

Conclusion

Green Banking is a collective approach to save our earth from environmental degradation. It is not a sole obligation of the bankers; rather ‘Green Banking’ can be flourished only when performed in cooperation with the customers. Bangladesh Bank has the legal power to monitor and supervise the activities and therefore is able to take a strong stance against those banks that do not comply with the guidelines of Bangladesh Bank. This study has justified that the compliance level of banks do not show significant relation with other organizational variables. Only Loans and Advances have shown some influence over the compliance level. Thus, it is understandable that creating awareness and social responsibility among banks can make them acknowledge ‘Green Banking’ as a moral duty rather than a burden on them. Despite the fact that Bangladesh is far-flung from achieving the status of a ‘Green Economy’, if the citizens, human and corporate both, realize their role in curbing the pollution and environmental degradation and work hand-in-hand, the joint effort can surely smoothen the road and lead the way to leave a better world for our off-springs.

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Alice, M. (2011),“Green Banking through Green Lending”, available at: http://www.ibmtedu.org/gvcg/Papers/IC-140.pdf (accessed December 2014)


The Authors are:1Lecturer, Dept. of Accounting & Information Systems, Faculty of Business Studies, University of Dhaka2Lecturer, Dept. of Accounting & Information Systems, Faculty of Business Administration,Jatiya Kabi Kazi Nazrul Islam University


Alice, M. (2012),“Major Banks should lead the way towards Green Banking”, available at: http://www.deccanherald.com/content/296615/major-banks-should-lead-way.html (accessed December 04, 2014)

Bangladesh Bank (2012), Bangladesh Bank’s Initiatives and Bank’s Activities - Green Banking Report, Bangladesh Bank Coordination Cell for Green Banking, Dhaka: Bangladesh Bank Head Office.

Institute for Development and Research in Banking Technology (IDRBT) (2013),Green Banking for Indian Banking Sector, Green Banking Framework. India: IDRBT Publication.

Bangladesh Bank (2012),Green Banking in Bangladesh: Fostering Environmentally Sustainable Inclusive Growth Process, Department of Communications and Publications, Dhaka: Bangladesh Bank Head Office.

Hossain, S. & Kalince, T.A. (2014),“Green Banking Nexus Banks’ Performance”, Swiss Journal of Research in Business and Social Sciences, Vol. 1, No. 3, pp. 01–16.

Saleena, T.A. (2014), “Go Green: Banking sector’s perspective”, Journal of Research in Commerce & Management, Vol. 3, No. 11,pp. 26–35.

Sharma, N., Sarika, K. & Gopal, R. (2013),“A study on customer’s awareness on Green Banking initiatives in selected public and private sector banks with special reference to Mumbai”, in Indian Education Society’s Management College and Research Centre proceeding of the 7th International Business Research Conference in India, 2013, IOSR Journal of Economics and Finance (IOSR – JEF),pp. 28 – 35.

Ullah, M. (2013),“Green Banking in Bangladesh: A Comparative Analysis”, World Review of Business Research, Vol. 3, No. 4, pp. 74-83.

Wikipedia, Ethical Banking, available at: http://en.wikipedia.org/wiki/Ethical_banking (accessed December, 2014).

Islam, S. & Das, C.P. (2013),“Green Banking Practices in Bangladesh”, IOSR Journal of Business & Management (IOSR – JBM), Vol. 8, No. 3, pp. 39–44.

Jaman, M. & Akter, S. (2013),“Green Banking in Bangladesh: A Commitment towards the Global Initiatives”, Journal of Business and Technology (Dhaka), Vol. VIII No. 1 & 2, pp. 17–40.

Khan, T. A. (2012),“Green Banking: Go Green, Think Green”, The Daily Star, available at: http://archive.thedailystar.net/suppliments/2012/environment/pg1.htm (accessed June 5, 2014).

Bangladesh Bank(2011), Policy Guidelines for Green Banking, BRPD Circular No. 02,Banking Regulation & Policy Department, Dhaka: Bangladesh Bank Head Office.

Bangladesh Bank(2013), Quarterly Review Report on Green Banking Activities of Banks and Financial Institutions, Green Banking & CSR Department, Dhaka: Bangladesh Bank Head Office.


Abstract

This paper attempts to portray an indicative picture of liquidity position of Private Commercial Banks (PCBs) in Bangladesh for the period of ten years (2004 to 2013). The study employed the liquidity measures of PCB, and on that basis the performance in terms of liquidity position was established. This paper utilizes secondary data from Prime Bank Limited (PBL), United Commercial Bank Limited (UCBL), Southeast Bank Limited (SEBL), AB Bank Limited (ABBL), Dutch Bangla Bank Limited (DBBL), Bank Asia Limited (BAL). The criteria used are: Core deposit to total funding, Liquid asset to demand liabilitiesand Gross loans to total deposit for the period of ten years. A hypothesis was developed to know whether all these banks have same liquidity positions or not. Finally the hypothesis was tested toknow whether there is a significant difference in terms of liquidity position by using ANOVA test. The findingsrevealed that the private commercial banks under study have strongest liquidity level although it varied over years andthe last year of the sample years has an excess liquidity which affects the growth of private sector credit in Bangladesh and leads to the drop of overall investment in the country significantly, hampers employment

Liquidity Position of Private Commercial Banks(PCBs) in Bangladesh: An Empirical Overview

1Sujan Chandra Paul ACA | 2Abdul Alim Baser ACMA | 3Mohammad Rakibul Islam

opportunities and economic growth of the country.

Keywords: Liquidity; Core deposit, Total assets, Liquid assets, Gross loans, Private commercial banks.

Introduction

Liquidity creation is a one of the core functions of banks and an economic service of substantial importance to the economy. “Liquidity creation” refers to the fact that banks provide illiquid loans to borrowers while giving depositors the ability to withdraw funds at par value at a moment’s notice (e.g., Bryant, 1980; Diamond and Dybvig, 1983). In spite of having importance of liquidity level for the economy of a country, excess liquidity is a burden for the economy.

There are 39 private commercial banks in Bangladesh (As per Wikipedia –The Free Encyclopedia). Among these, 31 banks are conventional banks and the remaining 8 banks are Islamic banks. Besides these, among the 39 PCBs, 30 banks are listed in DSE and CSE. Bangladesh Bank has issued licenses to nine new banks to act as commercial banks early in the first half of 2013. Rahman M. K. (2013) stated that getting licenses for 9 new banks under the turmoil condition of both questionable banking practices and profitability decline


of most of the banks is really observable. The author added that many concerned persons and institutions related to national economy raised question and asked for justification for new banks again when even the existing banks are not performing up to the mark.

Commercial banks in a country are the major catalysts for industrial growth and economic development as well. The economy of the country was suffering from series of shutdowns and blockades since the beginning of the year 2013. Strikes and blockades have affected manufacturing, services and trade sectors, for which the demand for money has declined substantially and “the sluggish demand for money has been affecting banks’ business and swelling their unutilized funds”, Bankers said. Rahman S. (2013) stated thatthe banking sector of our country had nearly Tk 83,000 crore in excess liquidity at the end of November 2013, according to Bangladesh Bank data, reflecting a slowing demand for money in the market. The amount was Tk 80,000 crore in July 2013. The author added that Disbursement of industrial term-loan at Tk 8,880 crore for the July-September period of 2013 is also the lowest in the last five quarters.

The excess liquidity affects the growth of private sector credit in Bangladesh. “The rate of private sector credit growth came down to 10.60 per cent in December 2013 from 10.95 per cent in November 2013 and the rate was 16.61 per cent in December 2012. Since the private sector credit growth shows grim picture, the overall investment in the country has also dropped significantly hampering employment opportunities and economic growth.”-Kabir H.

Literature Review

Ibe, S.O. (2013) stated that liquidity management is indeed a crucial problem in the banking industryand recommended that banksshould engage competent and qualified personnel in order to ensure that right decisions are adoptedespecially with the optimal level of liquidity and still maximize profit.

Bank liquidity creation is important for the macro economy (e.g, Bernanke, 1983; Dell’ Ariccia, Detragiache, and Rajan, 2009), and becomes even more prominent during financial crises (e.g., Acharya, Shin, and Yorulmazer, 2009). Vodava (2011) stated that bank liquidity is positively related to capital adequacy, interest rates on

IN SPITE OF HAVING IMPORTANCE OF LIQUIDITY LEVEL FOR THE ECONOMY OF A COUNTRY, EXCESS LIQUIDITY IS A BURDEN FOR THE ECONOMY.

loans, share of non-performing loans and interest rate on interbank transaction and negatively related to inflation rate, business cycle and financial crisis.

Akhter S. and Rahman S.N. (2013) made a comparative analysis and compared the liquidity position of the leading banksin Bangladesh from the period of 2007 to 2011. They observed that in caseof maintaining liquidity, Islamic banks are in better position than the conventionalbanks.

Barua A. (2001) reviewed the liquidity position of commercial banks that prevailed during late 80s and throughout the 90s decade. Before 1995, almost ten years, commercial banks in Bangladesh had been experienced excess liquidity; in late 1995 a sudden acute liquidity shortage and then from mid 1996 and onward, a tight liquidity.

Bhatt & Ghosh (1992), observed that the profitability of commercial banks depend on several factors some of them areendogenous and some exogenous. The endogenous factors represent control of expenditure, expansion of bankingbusiness, timely recovery of loans and productivity. The exogenous factors consist of direct investments such as SLR(Statutory Liquidity Ratio), CRR (Cash Reserve Ratio) and directed credit programs such as region wise, populationwise guidelines on lending to priority sectors.

Kabir M. R, Qayum M.A. et (2013) observed that there is no significant difference in current depositmanagement and investment to deposit ratio. Their study also found that the IBBL (Islami Bank Bangladesh Limited) depositmanagement is more efficient than that of the PBL (Pubali Bank Limited).

Methodology of the Study

The study used panel secondary data collected from the respective commercial banks’ annual reports and financial statements for the period of 2004 to 2013. On the basis of total assets of all listed private commercial banks in 2012 (Annexure-1), they are ranked. From these ranking, 6 banks are selected randomly for sample from first 15 banks. Islamic banks were ignored for this study because separate liquidity guidelines are prescribed by Bangladesh Bank for Islamic Shariah based banks. The criteria used are core deposit to total funding, liquid asset to demand liabilities and Gross loans to total deposit for the period of ten years, and finally the hypothesis was tested to know whether there is a significant difference in terms of liquidity position by using ANOVA test. Exploratory research design is suitable for exploratory studies whose main emphasis is to formulate a problem for more precise investigation or developing a working hypothesis from an operational point of view. In descriptive research design, the major emphasis is on determining the frequency with which something occurs or the extent to which two variables differs. Descriptive studies are also concerned with specific predictions, narrations of facts and characteristics concerning individuals, groups or situation. The study employed a descriptive type of design due to the fact that there were empirical studies which exist on liquidity evaluation of different companies. The strategy of the study was a cross-sectional, meaning that it covered a certain period of time and the use of time series data. Liquidity was measured using financial measurement. Financial variables were computed ratios which pin pointed the

liquidity of private commercial banks. The secondary data collected was processed by EXCEL where all the required liquidity measures were calculated. Statistical analysis was employed in order to test the validity of the hypotheses.

Findings and Result

Analysis of Liquidity

Bank is the trader of money-the most liquid asset. Very naturally managing liquidity is of paramount importance for its existence. This article aims to analyze the liquidity of Bangladesh Private Commercial Banks’ by taking some first category PCBs as sample. The yardstick criteria for this analysis are: Core deposit to total funding, Liquid assets to demand liabilities and Gross loans to total deposits - definitely all are ratio measures.

Core Deposits to Total Funding

As shown by the Figure-1, this ratio of the sample banks did not behave in a uniform and consistent manner, over the years started with 2004 and ends in 2013. The trend, in case of ABBL, was apparently inconsistent with a rise-fall mood and severely declined in 2011 with a figure of 71.96%, albeit in 2013 it gained momentum to reach to 80.55%. Obviously one of the reasons was the political instability that squeezed investment in other sectors.

In the case of UCBL, the picture is apparently consistent. But PBL, showing an average ratio of more than 80% over the years definitely outperformed others in this regard. Moreover a single money was available against deposits of on an average83.50% for SEBL and DBBL whereas 79.53% for Bank Asia Limited. Both SEBL and DBBL could maintain a ±80% of this


decade, it maintained more than 100% liquid assets to demand liabilities -- surely, a sign of management inefficiency-ultimately increasing the effective cost of deposits.

Meeting up a single currency demand liabilities as they become due in case of SEBL, DBBL and Bank Asia pose a different view, with SEBL posed to threat from year 2004 to 2010, but DBBL and Bank Asia could maintain more than a single currency liquid against a single currency demand liabilities up to 2009. Then, obviously shows the same picture of declining trend compatible with other banks on sample.

Gross Loans to Total Deposits:

Gross loans to total deposits ratio


ratio. But Bank Asia Limited’s performance in this regard is mostly below 80% with a volatile mood.

Clearly, for all banks, core deposits in other word-- assets creating fund -- is in a good condition with a rising tendency. Credit in this regard could be given to a steady rate of economic growth – an average 6.24% a year for the past one decade-- apart from management excellence.

Liquid Assets to Demand Liabilities

This ratio measure can be termed as the main yardstick of judgment in analyzing bank’s liquidity management scenario. ABBL shows a very inconsistent picture in this regard. From 2004 to 2007, it was more or less consistent with

±2 percentage point deviation, having a compatible shoulder with demand liabilities. But from 2010, it resembles a declining trend though picked it up in 2013 with a standard figure of 100.29%. Very naturally it can be concluded that in the year 2010-2012, it faced difficulty in meeting the demand of depositors thanks to a liquidity crisis.

For UCBL, fulfilling demand liabilities were much easier in the year 2004 to 2008, maintaining more than required liquid assets. Again from 2010 to 2012 it faced liquidity crisis also. But liquidity position beefed up in 2013 with a figure of 110.80%.

The picture of PBL in this aspect is completely reverse in comparison to other banks. Over the last

Figure :1. Comparative core deposits to total funding

Year PBL UCBL SEBL ABBL DBBL BAL2004 84.47% 76.38% 82.77% 82.68% 85.78% 75.63%2005 86.74% 83.68% 88.37% 87.05% 84.39% 79.13%2006 86.79% 85.24% 84.01% 82.75% 88.17% 82.97%2007 89.86% 85.65% 86.18% 87.68% 85.29% 78.08%2008 88.60% 84.29% 84.64% 83.99% 84.99% 79.51%2009 79.70% 84.09% 85.79% 81.57% 82.88% 79.86%2010 85.70% 85.91% 81.65% 77.72% 82.60% 79.47%2011 81.49% 87.06% 80.54% 71.96% 81.98% 80.68%2012 79.93% 82.59% 80.59% 75.93% 80.47% 78.41%2013 76.87% 82.20% 80.47% 80.55% 78.48% 81.51%

Figure :2. Comparative liquid assets to demand liabilities

Year PBL UCBL SEBL ABBL DBBL BAL

2004 136.47% 106.55% 92.88% 100.02% 114.28% 97.94%2005 147.71% 116.89% 100.46% 96.65% 127.35% 103.22%2006 137.28% 103.31% 90.39% 101.72% 102.47% 113.60%2007 136.49% 96.25% 84.20% 98.42% 103.83% 113.93%2008 113.29% 114.82% 86.40% 105.63% 108.39% 99.56%2009 103.12% 85.14% 84.01% 105.13% 99.47% 93.60%2010 102.48% 86.69% 93.68% 89.53% 91.70% 97.52%2011 115.78% 87.05% 114.58% 81.71% 98.60% 123.75%2012 117.74% 80.48% 84.52% 77.05% 94.67% 93.48%

2013 110.61% 110.80% 91.56% 100.29% 100.42% 111.21%

dictates the amount of assets created from the deposit collected. The ratio of ABBL as well as other five is more or less consistent with an increasing trend with an exception to DBBL that is very much volatile in this regard. Obviously, PBL in this field outperform others having an average ratio of more than 84.84% over the last decade, though a drop to 76.07% is evident in 2013.

Another thing is clearly evident that over the decade Bank Asia’s gross loan to total deposit ratio was much higher than the industry average and obviously for more than Bangladesh bank’s set cap of 85%. Arguably this is the sign of aggressive banking or rise in NPL, though a declining trend is visible from 2011-2013.It is worth mentioning that all the banks have outweighed the industry (70.35%) and definitely very close to the ceiling by BB (85%).

Overall Commentary on the Liquidity Analysis

Besides above findings some other findings are very much integral and inevitable to have a crystal clear picture of liquidity scenario. All the six banks have a declining trend from the years 2010-2012 as to all the three ratios taken for justification. This could be the cause of economic aftermath of the economic recession of 2008. Other reasons could be slowdown of investment activities in the country, sluggish remittance inflow as well as fall in export earnings. None-the-less, the increase in Non-Performing Loans (NPLs), buoyed by declining trend in credit growth along with risk management scenario also have a stake to this scenario. The reason of increasing liquid assets to demand liabilities in 2013 for all the banks can also be justified by taking into cognizance that low

level of demand for credit by the private sector has declined severely in the last 2 quarters of 2013 – from 2.21% in July – September to 1.98% in October to December.

This manifested in excess liquidity of banking sector reaching over Tk. 955.81 billion in December 2013 and tk. 830 billion at the end of November 2013 whereas this was tk. 800 billion in July 2013. Definitely, this scenario poses the poor condition of investment which might drag down the current growth of GDP.

Moreover entrance of the new banks did have impact on this picture. They are virtually hunting customers from the existing banks with aggressive banking strategies. Those banks’ average loan deposit ratio is 54% which is much lower than the industry average 70.35% and the Bangladesh Bank ceiling of 85%, as of February 2014.

Hypothesis Testing

“There is no significant difference in the liquidity positions among the private commercial banks in Bangladesh.”

ANOVA test

H0: There was no significant difference in liquidity positions among the private commercial banks in Bangladesh”

H1: There was a significant difference in liquidity positions among the private commercial banks in Bangladesh”

Results of the test of significance at 95% Confidence interval (that is, 0.05 level of significance) for liquidity indicated the following results.

All the selected private commercial banks have almost same ratio of



Table 1: Core deposits to total funding

Sum of Squares DF Mean Square

F(Calculated

Value)

F(Table Value)

Decision

Between Groups 0.0163 5 0.0032612.205094 2.386 H0

acceptedWithin Groups 0.06355 54 0.001177Total 0.07986 59

Table 2: Mean and standard deviation of Core deposits to total funding

Banks Mean N Standard deviationPBL 84.0150 10 4.29589UCBL 83.7090 10 2.97979SEBL 83.5010 10 2.75013ABBL 81.1880 10 4.88090DBBL 83.5030 10 2.81088BA 79.5250 10 1.99767Total 82.5735 60 3.67896

Table 3: Liquid assets to demand liabilities


F(Calculated

Value)

F(Table Value)

Decision

Between Groups 0.5565 5 0.1112944.598115 2.386 H1


Figure :3. Comparative gross loans to total deposit

Year PBL UCBL SEBL ABBL DBBL BAL

2004 82.72% 73.36% 78.77% 60.10% 54.26% 88.05%2005 88.60% 82.29% 85.08% 78.16% 74.70% 96.59%2006 82.25% 79.08% 89.34% 74.36% 70.62% 88.00%2007 81.81% 88.87% 86.82% 76.66% 97.40% 94.84%2008 85.38% 81.57% 87.73% 82.71% 55.01% 94.20%2009 83.45% 79.37% 80.17% 85.31% 71.41% 91.67%2010 89.28% 82.66% 85.82% 92.26% 80.80% 95.10%2011 86.88% 82.81% 84.54% 81.48% 78.69% 87.53%2012 88.38% 79.79% 83.21% 75.75% 73.03% 84.87%2013 76.07% 80.40% 76.44% 86.58% 72.96% 78.59%

Conclusion

This study intended to assess the liquidity position of the private commercial banks of Bangladesh with special reference of ABBL, PBL, SEBL, UCBL, DBBL and BAL. The analysis was for ten years started from 2004 to 2013. Liquidity was evaluated in terms of core deposit to total funding, liquid asset to demand liabilities and


core deposit to total funding but in case of the liquid assets to demand liabilities and gross loans to total deposit, there are significant differences between these commercial banks.

When the concentration is focused on the overall banking industry to measure the liquidity position, it is seen that the ratio of core deposit to total funding is about 83%,

liquid assets to demand liabilities is about 103% and gross loans to total deposit is about 82%. If these ratios are compared with Table 7, it is found that ratios of core deposit to total funding and liquid assets to demand liabilities have rating 1 which indicates strongest position. On the other hand, ratio of gross loans to total deposit has rating 4 which signifies comparatively weaker position.

Table 6: Mean and standard deviation of Gross loans to total deposit

Banks Mean N Standard DeviationPBL 84.4820 10 4.06588UCBL 81.0200 10 3.89431SEBL 83.7920 10 4.14351ABBL 79.3370 10 8.7392DBBL 72.8880 10 12.35747BAL 89.9440 10 5.61417Total 81.9105 60 8.65565

Table 7: Liquidity measure of Private Commercial Bank (PCB) in Bangladesh

Ratings Explanation of Rating

Core deposits to total funding

Liquid assets to demand liabilities

Gross loans to total deposit

1 Strong Above 80% Above 90% Below 70%2 Very good 60%-80% 80%-90% 70%-75%3 Good 40%-60% 70%-80% 75%-80%4 Weak 20%-40% 60%-70% 80%-85%5 Very Weak Below 20% Below 60% Above 85%

Table 4: Mean and standard deviation of Liquid assets to demand liabilities

Banks Mean N Standard DeviationPBL 122.0970 10 16.03346 UCBL 98.7980 10 13.42355 SEBL 92.2680 10 9.42268 ABBL 95.6150 10 9.73733 DBBL 104.1180 10 10.39893 BAL 104.7810 10 10.24466 Total 102.9462 60 14.88391

Table 5: Gross loans to total deposit


F(Calculated

Value)

F(Table Value)

Decision

Between Groups 0.5565 5 0.1112944.598115 2.386 H1


The Authors are: Lecturers,Department of Accountingand Information Systems,University of Barisal

Liquidity Rises Further. Published in The Daily Star (The English Daily Newspaper in Bangladesh) in December 15, 2013.

9. Kabir H. Excess Liquidity In Banks Slows Down Growth. Published in Business Outlook (The English Online News) in May 11, 2014.

10. Barua A. Liquidity Scenario in Commercial Banks of Bangladesh: Liquidity Shortage in 1995, Before and After. Journal of Business Research, vol. 3, 2001.

11. Bhatt, P. R., and Ghosh, R. (1992). Profitability of Commercial Banks in India. Indian Journal of Economics, India.

12. Kabir M. R, Qayum M.A and Islam M. R. (2013). Efficiency in Deposit Management of Islami Bank Bangladesh Ltd and Pubali Bank Ltd: A Comparative Study. ASA University Review, Vol. 7 No. 1, January–June, 2013.

13. The Financial Express – 22 March 2014

14. The Daily Star –4 April 2014

15. The Daily Star – 16 April 2014

gross loans to total deposit. Statistical analysis was done using one way Analysis of Variance (ANOVA) whereby the hypothesis was tested. Analysis indicated that the liquidity for the private commercial banks is not uniform as they change over years. On the other hand, they show significant improvement while the other years are showing the decreasing trend although not significant. Generally the liquidity of private commercial banks was strong enoughfor giving a reasonable assurance of the economic stability as well as threat for non-utilization of excess liquidity of all commercial banks. The hypothesis tested was on the significant differences in liquidity positions for private commercial banks. As two out of three hypotheses reveal that there are significant differences between the liquidity positions in the private commercial banks in Bangladesh, a statement can be drawn from these analysis that liquidity position in private banks in Bangladesh differs significantly from bank to bank.

References

1. Ibe, S.O. (2013). The Impact of Liquidity Management on the Profitability of Banks in Nigeria. Journal of Finance and Bank

Management 1(1); June 2013 pp. 37-48.

2. Bryant, J. (1980). ‘A model of reserves, bank runs, and deposit insurance,’ Journal of Banking and Finance 4: 335-344.

3. Bernanke, B. S. (1983). ‘Nonmonetary effects of the financial crisis in propagation of the Great Depression,’ American Economic Review 73: 257–276.

4. Acharya, V. V., H. S. Shin, and T. Yorulmazer (2009). ‘Endogenous choice of bank liquidity: The role of fire sales,’ Working Paper.

5. Vodova, P. (2011). Liquidity of Czech commercial banks and its determinant. International Journal Mathematical Models and Methods in Applied Science.

6. Akhter S. and Rahman S.N. (2013). Comparative Analysis of Liquidity Position of Banks: A study on some selected Conventional and Islamic banks in Bangladesh. Daffodil International University Journal of Business and Economics, Vol. 7, No. 1 June, 2013.

7. Rahman M. K. (2013). Private Commercial Banks: Threats or Prospects. The Bangladesh Accountant. July-September 2013.

8. Rahman S. (2013). Banks Excess



Preface

Running a business can be a dangerous occupation with many different types of risk. Some of these potential risks/hazards can destroy a business, while others can cause serious damage that can be costly and time consuming to repair. Every business encounters risks, some of which are predictable and under management's control, and others which are unpredictable and uncontrollable.

In business, risks lie at every turn – competitor, innovation of products or services, new players in the market place, adverse trends in commodity prices, currencies, interest rates, etc.

Despite the risks implicit in doing business, CEO and/or risk management officers can prepare for them if they know what they are. If and when risk becomes reality, a well-prepared business can moderate the risk's impact. Money losses, lost time and productivity and the negative impact on customers can all be minimized.

Risk - Formal Definition

Risk is often mapped to the probability of some events which is seen as undesirable. Risks are events, situations or

Business Risk ManagementMuhammed Omar Faruk Ripon ACA

circumstances which lead to negative consequences for business. Risk is distinct from "threat." A threat is a very low probability but serious event which some analysts may be unable to assign a probability in a risk assessment because it has never occurred, and for which no effective preventive measure is available. Risk can be internal and external. Risk" is a function of three variables -

1) The probability that there's a threat

2) The probability that there are any vulnerabilities

3) The potential impact.

If any of these variables approaches zero, the overall risk approaches zero. If the risk negligible, this is often called a residual risk.

What is Business Risk? Risk = Probability x Impact

Simply it means any risk associated with a business. A risk, in a business context, is anything that threatens an organization's ability to generate profits at its target levels. Most commonly used definition of business risks - “The possibility that a company will have lower than anticipated profits, or that it will experience a loss


rather than a profit due to uncertainties e.g., changes in tastes, preferences of consumers, strikes, etc.” There is always an inherent business risk assumed by all parties involved that often goes unspoken as the eyes are always on the prize. In financial term, business risk may be defined as the probability that an actual return on an investment will be lower than the expected return. Enterprise risks could be in terms of risk related to resources, product and services or the market environment in which the enterprise operates. Basic risks such as fire, windstorm, employee injuries, and automobile accidents, as well as more sophisticated exposures such as product liability, environmental impairment, and employment practices, are the province of the risk management department in a typical corporation. Although risk management has usually pertained to property and casualty exposures to loss, it has recently been expanded to include financial risk

management—such as interest rates, foreign exchange rates, and derivatives—as well as the unique threats to businesses engaged in E commerce. Most categories of risk have a financial impact, in terms of extra costs or lost revenue. But the category of financial risk refers specifically to the money flowing in and out of business, and the possibility of a sudden financial loss.

Types of Business Risks

Risk is celebrated as the brave and alluring basis for economic progress. But risk has a dark side. As much as taking a risk is celebrated, nobody wants risks to be realized. Businesses want to take the risks that are most likely to achieve business objectives and minimize non-essential risk. In other words, businesses seek to manage and control risk. The following risk categories represent the most common types of business risks-

MOST CATEGORIES OF RISK HAVE A FINANCIAL IMPACT, IN TERMS OF EXTRA COSTS OR LOST REVENUE. BUT THE CATEGORY OF FINANCIAL RISK REFERS SPECIFICALLY TO THE MONEY FLOWING IN AND OUT OF BUSINESS, AND THE POSSIBILITY OF A SUDDEN FINANCIAL LOSS.


Main Category Sub-Category with Brief Discussion.

Strategic Risks

1) Corporate Governance Risk: Insiders (employees) won't act in the best interests of owners (stockholders) and the community.

2) Competitive Risk: The general risk that you'll lose out to the competition.3) Innovation Risk: The risk that the competition will out innovate you. 4) Intellectual Property Risk: Risk related to intellectual property.5) Merger & Acquisition Risk: The risks related to integrating firms.6) Business Risk: The risk that your overall business strategy and plan will be

ineffective (e.g. will fail to meet revenue targets).7) Economic Risk: The risk that the economy will go into recession.8) Technological Change: The risk that technology investments will become obsolete.9) Change Management Risk: The risks associated with managing change.10) Project Risk: The risk that projects will fail.11) Ethics Risk: The risk that your guiding principles and ethics will be breached.12) Reputational Risk: The risk of damage to your corporate image. Reputational risk can

reduce trust in your business and lead to destruction of value.13) Sustainability Risk: The risk that you'll fail to meet sustainability objectives and

targets.

Financial Risk is an umbrella term for multiple types of riskassociated with financing, including financial transactionsthat include company loans in risk of default.

14) Profit Risk: The general risk that profits will fall.15) Capital Availability: The risk that you won't be able to fund your business.16) Asset Risk: Risks related to asset prices (e.g. real estate).17) Interest Rate Risk: The risk that an investment's value will change as a result of a

change in interest rates. 18) Currency Risk: The risk of a change in exchange rates against your favor. Also called

foreign exchange risk. 19) Inflation Risk: The risk of price increases in critical inputs. 20) Investment Risk: The risk of a change in value of investments (e. g. Equity &

Commodity Market Risk). 21) Liquidity Risk: The risk that you won't be able to sell an asset efficiently (e.g. quickly

at a fair price).There is two types of liquidity risk: a) Asset liquidity and b) Funding liquidity.

22) Systemic Risk: The risk that the entire global financial system or the financial system of a country will collapse. It influences a large number of assets. It is virtually impossible to protect against this type of risk.

23) Unsystematic Risk: sometimes referred to as "specific risk". It affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees.

24) Concentration Risk: The risk of over-lending to a small number of debtors or investing in a narrow selection of assets.

25) Credit Risk: The risk that a borrower will default on a debt. Also called default risk. 26) Fraud Risk: The risk of fraud losses.27) Accounting Risk: The risk of accounting errors.28) Fiduciary Breach Risk: The risk that your firm will breach its fiduciary duties (e.g.

insider trading).29) Counter Party Risk: The risk that other firms will break their contractual obligations

to you (e.g. an insurance company that goes bankrupt and can't pay you).30) Tax Risk: The risk that your taxes will increase or an audit will reassess taxes of

previous years.31) Foreign Investment Risk: Risk of rapid and extreme changes in value due to smaller

markets; differing accounting and auditing standards; confiscatory taxation; economic conflict, political or diplomatic changes, regulatory issues, etc.

32) Country Risk: refers to the risk that a country won't be able to honor its financial commitments. When a country defaults on its obligations, this can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are issued within a particular country.


Main Category Sub-Category with Brief Discussion.

Marketing & Sales Risk is most familiar of all risks. Also referred to as volatility.The four standard market risk factors are equity risk, interest rate risk, currency risk, and commodity risk.

33) Revenue Shortfall Risk: The general risk that revenue will fall short. 34) Demand Risk: Lower than expected demand for your products. 35) Market Competition Risk: The risk that competitive forces will reduce revenue (e.g. a

price war). 36) Sales Forecast Risk: The risk that sales forecasts will be inaccurate. 37) New Product Development Risk: The risk that new products will fail on the market. 38) Customer Relationship Risk: The risk of damaged relationships with customers. 39) Brand Value Risk: The risk of a decline in brand value. 40) Publicity Risk: The risk of bad publicity. 41) Large Account Risk: The risk of losing a large customer. 42) Location Risk: The risk of choosing a bad location (e.g. a retail location).

Operational Risk exists in every organization, regardless of its size, in any number of forms including hurricanes, blackouts, computer hacking, and organized fraud. Managing those risks is critical to an organization’s success

43) Infrastructure Risk: Risks related to infrastructure (e.g. electricity outage). 44) Maintenance Risk: Risk of maintenance failure. 45) Product Failure Risk: The risk that your product or services will fail. 46) Product Liability Risk: Business may incur legal liability related to your products and

services. 47) Operational Quality Risk: The general risk of operational failures (website goes

down). 48) Production Shortfall Risk: You fail to meet production targets. 49) Logistics Risk: The risk of logistics failure. For example, you fail to deliver goods to

your retail locations on time for customers. 50) Procurement Risk: Risks related to procuring goods and services.

Information Technology related Risk

51) Architectural Risk: The risk that your architecture will fail to meet business objectives.

52) Data Quality Risk: The risk of poor quality data. 53) Technology Quality Risk: The risk of software and hardware quality problems (e.g.

failures, usability issues). 54) Platform Risk: The risk of choosing a technology platform that's not fit for purpose. 55) Information Security Risk: The risk of information security incidents.

Human Resource related Risk

56) Workplace Safety Risk: The risk that accidents or poor environment impacts the health of employees.

57) Employer Reputation Risk: The risk that you'll get a bad reputation as an employer and find it difficult to recruit top talent.

58) Employer Liability Risk: The risk that you'll be sued for employment related practices or incidents.

59) Employment Law Compliance Risk: The risk of non-compliance with employment related laws and regulations.

60) Talent Management Risk: The risk of losing top talent. 61) Compensation and Benefits Risk: The risk that compensation will be

misappropriated (e.g. a manager overpays her sister-in-law). 62) Hiring Risk: The risk that you will hire the wrong candidate or violate recruiting

ethics or law. 63) Employee Information Privacy Risk: The risk that you will leak personal information

about your employees.

Compliance & Legal Risk

64) Compliance Risk: The risk that you will fail to comply with laws and regulations. 65) Mandatory Reporting Risk: The risk that you will fail to meet regulatory filing

requirements. 66) Liability Risk: The risk of lawsuits.

Catastrophic Risk

67) Force Majeure: Acts of nature, war and terrorism. 68) Political Risk: Risk associated with political change. It represents the financial risk

that a country's government will suddenly change its policies. This is a major reason why developing countries lack foreign investment.

In another way, risks may be classified as – a) Direct v Indirect Risk; b) Internal v External Risk; c) Inherent v Incidental Risk; d) Systematic v Unsystematic Risk; e) Financial v Physical Risk; f) Quantitative v Qualitative Risk; g) Mitigated v Residual Risk; h) Insurable v Uninsurable Risk [Top 5 Uninsurable Risks - Reputational Risk; Regulatory Risk; Trade Secret Risk; Political Risk and Pandemic Risk]

Every Business Faces the Same 5 Key Risks

1) Development Risk: Can the original product or service idea actually be created?

2) Manufacturing Risk: If the product can be developed, can it actually be produced in appropriate volume?

3) Marketing Risk: If the product can be made, can it be sold effectively?

4) Financial Risk: If the product can be sold effectively, will the resulting company be profitable and can the profits actually be realized in a form that allows investors to receive cash?

5) Growth Risk: If the company can achieve operating profitability at one level, can profitability be maintained as the company grows and evolves?

Direct Risks to Business:

Natural Disasters - floods, storms, etc.

Pandemic - human influenza, swine flu, etc.

Legal - insurance issues, resolving disputes, contractual breaches, non-compliance with regulations, and liabilities

Global Events - pandemics and interruptions to air traffic

Technology - computer network failures and problems associated with using outdated equipment

Regulatory and Government policy changes - water restrictions, quarantine restrictions, carbon emission restrictions and tax

Environmental - climate change, chemical spills and pollution

Work Health and Safety - accidents caused by materials, equipment, or location of your work

Property and Equipment - damage from natural disasters, burst water pipes, robbery and vandalism

Security - theft, fraud, loss of intellectual property, terrorism, extortion and online security and fraud

Economic and Financial - global financial events, interest rate increases, cash flow shortages, customers not paying, rapid growth and rising costs

Staffing - industrial relations issues, human error, conflict management and difficulty filling vacancies

Suppliers - issues within their

business or industry resulting in failure or interruptions to the supply chain of products or raw materials

Market - changes in consumer preference and increased competition

Utilities and Services - failures or interruptions to the delivery of your power, water, transport and telecommunications.

Indirect Risks to Business

While your business might not bedirectly affected by a natural disaster, you may still suffer, if it affects your suppliers, customers or general location.How these scenarios could affect your business, as instance –

If your suppliers are affected, you may run out of the products you sell, or the materials you need to make products

If your customers are personally affected their priorities may change and you could experience a reduced demand for your products or services.

Risk Management Plan (RMP)

A risk management plan and a business impact analysis are important parts of business continuity plan. By understanding potential risks to business and


DIRECT & INDIRECT RISK TO BUSINESS

People often make the mistake of overlooking

things that don't directly impact their business and are therefore unprepared

to deal with change.

Managing Risk/ Risk Management

Every business encounters risks, some of which are predictable and under management's control, and others which are unpredictable and uncontrollable. Risk Management is a structured approach to manage uncertainty and includes actions taken to Identify, Assess, Monitor and Taking steps to reduce the impact of risks to Business. A good risk management plan with appropriate risk management strategies can minimize costly and stressful problems, and may also reduce insurance claims and premiums.The practice of risk management utilizes many tools and techniques, including insurance, to manage a wide variety of risks.

Risk management is particularly vital for small businesses, since some common types of losses, such as theft, fire, flood, legal liability, injury, or disabilitycan destroy in a few minutes what may have taken entrepreneur years to build. Such losses and liabilities can affect day to day operations, reduce profits, and cause financial hardship severe enough to cripple or bankrupt a small business. But while many large companies employ a full time risk manager to identify risks and take the necessary steps to protect the firm against them, small companies rarely have that luxury. Instead, the responsibility for risk management is likely to fall on the small business owner.

The term risk management is a relatively recent (within the last 20 years) evolution of the term "insurance management." The concept of risk management encompasses a much broader scope of activities and responsibilities than does

finding ways to minimize their impacts, you will help your business recover quickly if an incident occurs.

Types of risk vary from business to business, but preparing a risk management plan involves a common process. Risk Management Plan should detail of strategy for dealing with risks specific to business.

It's important to allocate some time, budget and resources for preparing a risk management plan and a business impact analysis. This will help meeting legal obligations for providing a safe workplace and can reduce the likelihood of an incident negatively impacting on business.

A risk management plan includes tools or methods of analysis that allow minimizing, delay or avoid potential risks. In a small business, it is not possible to eliminate all of the financial, material or physical risks one might encounter in a given project or initiative or business, but it is possible to minimize risk through proper planning. A good risk management plan helps to steer clear or potential risks before they become actual problems that can cost time and money by causing delays in manufacturing, distribution or sales of products or services. Developing an effective Risk Management Plan can help keep small issues from developing into emergencies. Different types of Risk Management Plans can deal with calculating the probability of an event, and how that event might impact business, what the risks are with certain ventures and how to mitigate the problems associated with those risks. Having a plan may help dealing with adverse

situations when they arise and, hopefully, head them off before they arise. RMP includes several steps to develop –

Define the Business/Project

Get input from others

List all identified risk elements

Identify the consequences of each risk

Eliminate irrelevant issues

Assign probability and impact

Determine risk for the elements

Rank the risks

Develop mitigating strategies

Determine who will be responsible for each area of risk

Establish what person or department can authorize funds to be used to mitigate any potential risks

Develop contingency plan

Analyze the effectiveness of strategies

Compute effective risk

Monitoring

Plan an appropriate response to each risk

Business Risk Management (BRM)



insurance management. Risk management is now a widely accepted description of a discipline within most large organizations.

Basic risks such as fire, windstorm, employee injuries, and automobile accidents, as well as more sophisticated exposures such as product liability, environmental impairment, and employment practices, are the province of the risk management department in a typical corporation. Although risk management has usually pertained to property and casualty exposures to loss, it has recently been expanded to include financial risk management. As the role of risk management has increased, some large companies have begun implementing large scale, organization wide programs known as enterprise risk management.

The types of risk management differ on the basis of the nature of operations of a particular organization and other factors like its overall goals and performance. All these types of risk management processes and risk management reports play a significant role behind the growth of an organization in the long run.

Principles of Risk Management

The International Organization for Standardization (ISO) identifies the following principles of Risk Management. Risk management should -

Create value - gain should exceed pain

Be an integral part of organizational processes

Be part of decision making process

Explicitly address uncertainty and assumptions

Be a systematic and structured process

Be based on the best available information

Be tailor-able

Take human factors into account

Be transparent and inclusive

Be dynamic, iterative and responsive to change

Be capable of continual improvement and enhancement

Be continually or periodically re-assessed

Managing Risk

ISO 31000:2009 gives a list on how to deal with risk -

1. Avoiding risk by deciding not to start or continue with the activity that gives rise to risk.

2. Accepting or increasing the risk in order to pursue an opportunity.

3. Removing the risk source.

4. Changing the likelihood.

5. Changing the consequences.

6. Sharing the risk with another party or parties (including contracts and risk financing).

7. Retaining the risk by informed decision.

Ways to Handle Risk (Only one is bad)

There are four (04) ways an organization can deal with identified risk. As outlined below, these decisions have a number of impacts on time, money and resources for an organization.

1) Accept(able): Accepting the risk is a business decision that is reflective on the level of “acceptable risk level,” or the willingness for organization to assume the risk..

2) Avoid: Avoiding risk means you are going to do nothing with the identified risks. When you accept the risk, you are actually doing something; you have chosen to accept the risk and the impacts to that decision.

3) Mitigate: While it may be cost restrictive to reduce all risks, certainly based on the level of acceptable risk, the remaining should be mitigated. Mitigating risk means that you are reducing risks by implementing controls, fixes or other countermeasures that have a direct effect on the risks identified. Residual Risk = Identified Risk – Mitigated Risk.

4) Transfer: Many organizations are turning towards transferring risk as an alternative to the options above. Transferring risk can take various forms, including cyber liability insurance and outsourced services.

Five (5) Characteristics of a Strong Risk Management Program:

1) Senior Management Champions the Program: Success of a risk management program depends on the active support of senior management.

2) They are Inclusive: Effective risk management programs largely rely on co-operation of every part of the organization.

3) They are Transparent: Risk management programs work best and companies reap the

The Author is an AssociateMember, ICAB

Several large auxiliary generators can keep as back-up system to provide electrical energyuntil utility power is restored.

Offline and online data back-up systems should be used to protect critical documents.

Conclusion

Business is about taking risks. Nobody ever built a business by hiding in a shell. Remember, not all risks are known, there are uncertainly in everything that we do, thus when risks can be quantified, it is extremely important to take these seriously and make the appropriate decision. While business risks are abound, and their consequences can be destructive, there are ways and means to insure against them, to prevent them and to minimize their damage if and when they occur.

greatest possible benefit when their goals, processes and results are shared with all the company’s stakeholders.

4) They are Holistic: The best risk management programs not only address all the risks to which modern corporations are susceptible, they also consider how these various risks can affect the company’s stakeholders and operations.

5) They are Proactive: Effective risk management programs also include proactive systems and processes to maximize the opportunities.

Some Tools to Manage Business Risks

Insurance

Preventive measures - Employee Training, Safety Checks and Maintenance

Hiring a Risk ManagementConsultant [The Institute of Risk Management (IRM)is the leading professional body for risk management]

Employment of a full time Risk Manager

Form a Risk Management Committee with members’ specific tasks who is to report to the Risk Manager.

Review Risk Management Reports

Immediate resolve of any identified problems

Diversification.

Prioritizing of identified Risksbased on assessed probability.

Make sure all employees know the exact street address of the building, know the location of all exits.

Install fire alarms and smoke detectors.

Double signature requirements for checks and payablesto prevent embezzlement and fraud

A thorough background check before hiring personnel



The government’s latest move to give full autonomy to Bangladesh Bank's Financial Intelligence Unit to deal with financial crimes independently is no doubt a welcome step. We believe such empowerment will help a lot to reduce the risks being surfaced in sync with the growing businesses in Bangladesh.

The finance ministry has already sent a proposal to the Cabinet Division which includes some major changes in the Money-Laundering Prevention Act-2012.

According to the proposed change in the law, the government will appoint the chief executive and deputy chief executive of Bangladesh Financial Intelligence Unit (BFIU) on a full-time basis. Officials of Bangladesh Bank will work for the unit on deputation.

The central bank governor now picks a BB deputy governor and an executive director for the posts of the chief executive and deputy chief of BFIU. The two perform their duties at the unit as additional duties. They consult the BB governor before making any important decisions.

The BFIU is responsible for analysing suspicious transaction reports, and information related to money laundering received from reporting agencies and

Risk Management byBangladesh Bank: New Steps

Raihan M Chowdhury

other sources and disseminating information/intelligence thereon to relevant law enforcement agencies, according to BB website.

Experts said Financial Action Task Force, a global money-laundering watchdog, had recommended that the government make the BFIU stronger. Accordingly, the finance ministry has made the move to make the intelligence unit an independent institution.

As per law, banks, financial institutions, stock exchanges, and other organisations involved in financial dealings send information to the BFIU about any suspicious transactions. Information about transactions by ministers, lawmakers and other high-profile people is also sent to the BFIU.

The intelligence unit analyses the information, take punitive action against irregularities and in some cases, forward transaction data to other organisations, including the ACC.

The cabinet on August 10 approved an amendment to the ACC law, giving back the police the responsibility of investigating fraud cases filed by private citizens. The ACC has been doing the job since 2013 despite manpower shortages.


However, the cases involving government property, civil servants or government bank employees would be probed by the graft watchdog.

According to another proposed change in the law, money-laundering-related crimes will be investigated by the police, National Board of Revenue (NBR) and other relevant organisations. Presently, the Anti-Corruption Commission is tasked with the job.

According to the Bangladesh Bank Financial Stability Report 2014, banks might face the challenges in adopting new business model in coming years. Mentioning loan default as a matter of concern, the Report emphasized on exerting relentless effort in reducing the rate of the defaulted loan. Various advanced tools have been introduced in identifying risk and vulnerability in the banking sector. So it is our expectation that introduction of these tools will contribute to maintaining stability in the financial sector. He further added that some new departments have been created in Bangladesh Bank to intensify oversight role of Bangladesh Bank on internal control and corporate governance in the banks.

The business risks under the capital market, insurance market and in other areas must be handled through proper implementation of the existing rules and regulations. Without establishing good corporate governance, such risks cannot be minimized. A strong commitment from both the regulatory sides and other stakeholders is urgently needed to end such business risks.

The Bangladesh Bank Financial Stability Report 2014 said remarkable changes have taken place in the financial system of Bangladesh attributable to lower

assets concentration and operation of newly established banks.

It mentioned that the financial system of Bangladesh was stable and shock resilient in calendar year 2014 on an overall basis. Bangladesh financial sector was able to stand on strong base despite different obstacles and achieved 6.1 percent GDP growth on an average. Major macroeconomic indicators maintained steady growth due to appropriate and timely policy measures taken by the Government and Bangladesh Bank. The foreign exchange reserve has touched the landmark of USD 25 billion which is ranked second highest among the SAARC countries and is also a record in the history of Bangladesh. On the other hand, Bangladesh has already become a lower-middle income country with per capita income of USD 1314. Bangladesh Bank, like the central banks of many other developing countries, has encouraged financing socially responsible, inclusive and environment friendly sustainable sector for managing the risks from instability and imbalance in financial sector. This initiative is helping reduce poverty rapidly. In the last few years, remarkable changes also took place in terms of regulation and supervision of financial intermediaries.

The report said, capital base of banks has improved in last five years due to transferring of a major portion of banks’ profit into capital. Re-capitalization and decline in provision shortfall have strengthened the base of financial sector.

The GDP growth rate remains stable and the inflation rate remains at a tolerable level. Foreign exchange reserve reached the record level of USD 25 billion. Balance of trade decreased owing to increase in export earning which is favourable

THE BUSINESS RISKS UNDER THE CAPITAL MARKET, INSURANCE MARKET AND IN OTHER AREAS MUST BE HANDLED THROUGH PROPER IMPLEMENTATION OF THE EXISTING RULES AND REGULATIONS. WITHOUT ESTABLISHING GOOD CORPORATE GOVERNANCE, SUCH RISKS CANNOT BE MINIMIZED. A STRONG COMMITMENT FROM BOTH THE REGULATORY SIDES AND OTHER STAKEHOLDERS IS URGENTLY NEEDED TO END SUCH BUSINESS RISKS.


for macro-economy and the banking sector as well.

The Bangladesh Bank Financial Stability Report 2014 In Brief:

* The growth of Real GDP in Bangladesh continues to be stable. The growth rate of GDP increased to 6.1% in FY 2013-14 which was 6.0% in FY 2012-13.

* Monetary Policy of Bangladesh Bank played crucial role in keeping the inflation rate at tolerable level.

* Inflation rate declined from 7.4% in June 2014 to 7.0% in December 2014. Notably, both Food and Non-food inflation declined during later part of CY14.

* Foreign exchange reserve stood at USD 22.3 billion which was 23.3 percent higher than that of end-December 2013 and was adequate to meet more than six months’ import payments.

* Trade deficit narrowed due to larger export earnings in comparison with increase in import payments.

• Banking sector Capital Adequacy Ratio (CAR) was 11.4 percent at end-December 2014 slightly higher than the minimum requirement of 10.0 percent.

• Banks having CARs within the range of 10 to 16 percent covers a large proportion of banking sector assets (79.0 percent) which indicate financial stability.

• Banking sector profitability declined in 2014. ROA & ROE decreased by 20 & 260 basis

points respectively from the ratios of 2013 and reached to 0.7 & 8.1 percent respectively. Increase in classified loans in a state owned commercial bank is one of the prime reasons of it.

• Liquidity stress remained at an acceptable level in 2014 due to stable call money rate and desired level of Advance-to-Deposit Ratio (ADR) (70.98 percent). Call money rate was within 6-8 percent range. However, ADR recorded a notable increase in the later part of the year indicating an expected rise in economic activities in the near future.

• The share of term deposits was 56.4 percent of total deposits which shows banking sector’s greater reliance on term deposits and contributes to the stability of the financial system. Almost half of the deposits (51.7 percent) was concentrated in 10 banks. This concentration is expected to be reduced gradually as 9 (nine) new banks commenced business.

• The capacity of the Deposit Insurance Trust Fund (DITF) is BDT 363.6 Crore which is expected to reach over BDT 1000.0 Crore in 2019. The current fund is capable to reimburse the deposit claims in 26 banks (lowest in consideration of deposit).

• The banking sector classified loans increased slightly in 2014 and reached to 9.7 percent (8.9 percent in December 2013). But, higher maintained provision has increased the loss absorbing capacity of the banking sector. It is mentionable that

adjustment of maintained provision with the classified loans makes the rate of net classified loan 4.2 percent which is less than half of the gross classified loan.

• New 9 (nine) banks’ classified loan and profitability ratios are lower than the banking sector, however, capital adequacy ratio (29.9 percent) is relatively higher than that of the entire banking sector. A higher portion of safer investment in liquid assets is one of the prime reasons of it.

Banking Sector Risks

• At end-December 2014, credit risk appears to be most significant, attributed 85.7 percent of the total Risk Weighted Assets (RWA) of the banking system. The risk was mostly from on-balance sheet items.

• A stable credit rating and very little downward migration of rating of the rated entities in 2013-2014 confirm resiliency of the financial system.

• Stress Testing results reveal that the individual banks and the banking system, as a whole, are resilient enough to different level of stress scenarios. Banks are resilient for more than 5 business days with severe liquidity stresses.

Non-Bank Financial Institutions (NBFIs)

• Asset quality of the non-bank financial institutions improved in 2014. Classified loans and leases dropped by 30 basis points and reached to 5.3 percent. On the other hand, capital adequacy ratio (CAR)

The Author is Business Editor,The Financial Express


and bringing mass population under the umbrella of financial inclusion.

• With the aim of ensuring and maintaining financial stability through strengthening policy coordination among financial regulators and to avoid contradictions and unnecessary duplications, Bangladesh Bank has taken an initiative to develop a 'Coordinated Supervision Framework' for the financial system.

• Bank Health Index & Heat Map for assessing banks’ health and Early Warning System for non-bank financial institutions are in process of implementation.

increased 290 basis points and reached to 21.2 percent. Stress Testing results revealed that 23 (twenty three) out of 31 (thirty one) NBFIs were resilient in 2014.

Foreign Exchange Market

• Despite a little depreciation of Real Effective Exchange Rate (REER) from January 2013, the nominal foreign exchange rate movement was quite stable and resilient during CY14. Both the issuance and settlement of Letter of Credit increased. Export proceeds and inward wage earners’ remittance also increased.

Microfinance Institutions

• Size of Microfinance Institution (MFI) sector is relatively small compared to the banking sector (asset size of the MFI sector is only 5% of the

banking sector). It does not pose any immediate threat to the stability of the financial system. Besides the lower NPLs (4.18% in MFIs) compared with that of the banking industry (9.7% in Dec 14) suggest presence of effective check and balance mechanism in the MFIs.

Developments in Financial Infrastructure

• In 2014 Bangladesh Bank decided to commence implementation of Basel III framework from 2015 with a view to strengthening the capital base of the banking sector and enhancing risk resilience of the banks.

• Bangladesh Bank took different initiatives to bring under banking services the unbanked people through agent banking and mobile financial services


Preface

Risk is a reality of doing business. Whether large or small, public or private, domestic or international, companies today operate in a risk-filled world. In many cases, risk is necessary for long-term operational success; however, failure to control risk effectively can often lead to adverse outcomes, including damaged reputation, loss of profits, disruption in productivity, or in severe cases, the end of the entity altogether. Therefore, Risk management and Security have been major concerns for all companies. Nowadays, business leaders heavily invest in security risk management, which aims to remove guesswork and ensure that operations run smoothly and efficiently.

Risk Management

Risk management is a structured approach to managing uncertainty and includes actions taken to:

• Identify

• Assess

• Monitor

• Reduce the impact of risks to your business

Enterprise Risk ManagementAisha Siddiqua ACA

Enterprise Risk Management (ERM) definitions that drive the establishment of risk management frameworks include:

• The Institute of Internal Auditors (IIA) defines ERM as “a structured, consistent and continuous process across the whole organization for identifying, assessing, and deciding on responses to and reporting on opportunities and threats that affect the achievement of its objectives.”

• International Organization for Standardization (ISO), April 2008 states that-“Risk Management is a key business process within both the private and public sectors around the world. Effective risk management and the resulting controlled environment are central to sound corporate governance and for this reason, much of the law that has been created in response to corporate collapses and scandals, now requires effective risk management.”

Risk Management Plan

A risk management plan,

• Describes the potential risks

• Contains an analysis of the impact of each risk


• Includes risk strategies to help the business reduce the consequences if the event occurs

A good risk management plan with appropriate risk management strategies can minimize costly and stressful problems, and may also reduce insurance claims and premiums.

Preparing a Risk Management Plan and Business Impact Analysis

The process of identifying risks, assessing risks, and developing strategies to manage risks is known as risk management. A risk management plan and a business impact analysis are important parts to business continuity plan. Understanding potential risks to business and finding ways to minimize their impacts will help your business recover quickly if an incident occurs.

Types of risk vary from business to business, but preparing a risk management plan involves a common process. Your risk management plan should detail your strategy for dealing with risks specific to your business.

It is important to allocate some time, budget, and resources for preparing a risk management plan and a business impact analysis. This will help you meet your legal obligations for providing a safe workplace and can reduce the likelihood of an incident negatively impacting on your business.

The steps involved in preparing a risk management plan and a business impact analysis for business are:

Identify Risks to Your Business

The first step in preparing a risk management plan is to identify potential risks to your business. Understanding the scope of possible risks will help you develop realistic, cost-effective strategies for dealing with them.

It is important that you think broadly when considering types of risks for your business, rather than just looking at obvious concerns (e.g. fire, theft, market competition).

Assessing Your Business

Before you begin identifying risks, you need to assess your business. Think about your critical business activities, including your key services, resources and staff, and things that could affect them, such as power failures, natural disaster and illness. Assessing your business will help you work out which aspects you couldn't operate without.

Ways of Identifying Risk

Once you have a clear picture of your business, you can begin to identify the risks. Review your business plan and think about what you could not do without, and what type of incidents could impact on these areas. Ask yourself:

• When, where, why and how are risks likely to happen in your business?

• Are the risks internal or external?

• Who might be involved or affected if an incident happens?

The following are some useful techniques for identifying risks.

Ask 'What if?' Questions

Thoroughly review your business plan and ask as many 'what if?' questions as you can. Ask yourself what if:

WHILE ONE MAY BE ABLE TO PREDICT AND DEAL WITH A LARGE NUMBER OF POTENTIAL RISKS, THERE WILL BE SOME THAT ARE UNEXPECTED OR IMPOSSIBLE TO PLAN FOR. PREPARING AN INCIDENT RESPONSE PLAN AND A RECOVERY PLAN AS PART OF ONE’S OVERALL BUSINESS CONTINUITY PLAN CAN HELP DEALING WITH THESE SITUATIONS IF IT HAPPENS.


• You lost power supply?

• You had no access to the internet?

• Key documents were destroyed?

• Your premises were damaged or you were unable to access it?

• One of your best staff members quit?

• Your suppliers went out business?

• The area your business is in suffered from a natural disaster?

• The services you need, such as roads and communications, were closed?

Brainstorm

Brainstorming with different people, such as your accountant, financial adviser, staff, suppliers and other interested parties will help you get many different perspectives on risks to your business.

Analyze Other Events

Think about other events that have, or could have, affected your business. What were the outcomes of those events? Could they happen again? Think about what possible future events could affect your business. Analyze the scenarios that might lead to an event and what the outcome could be. This will help you identify risks that might be external to your business.

Assess Your Processes

Use flow charts, checklists and inspections to assess your work processes. Identify each step in your processes and think about the

associated risks. Ask yourself what could prevent each step from happening and how that would affect the rest of the process.

Consider the Worst Case Scenario

Thinking about the worst things that could happen to your business can help you deal with smaller risks. The worst case scenario could be the result of several risks happening at once. For example, someone running a restaurant could lose power, which could then cause the food to spoil. If the restaurant owner was unaware of the power outage or the chef decided to serve the food anyway, customers could get food poisoning and the restaurant could be liable and suffer from financial losses and negative publicity.

Once you've identified risks relating to your business, you'll need to analyses their likelihood and consequences and then come up with options for managing them.

Analyze and Evaluate the Impact of Risks

Once you have identified the risks to your business, you need to assess the possible impact of those risks. You need to separate minor risks that may be acceptable from major risks that must be managed immediately.

Analyzing the Level of Risk

To analyze risks, you need to work out the likelihood of it happening (frequency or probability) and the consequences it would have (the impact) of the risks you have identified. This is referred to as the level of risk, and can be calculated using this formula:

Level of Risk = Consequence * Likelihood

Level of risk is often described as low, medium, high or very high. It should be analyzed in relation to what you are currently doing to control it. Keep in mind that control measures decrease the level of risk, but do not always eliminate it.

Level Likelihood Description

4 Very likely Happens more than once a year in this industry

3 Likely Happens about once a year in this industry

2 Unlikely Happens every 10 years or more in this industry

1Very

unlikely Has only happened once in this industry

Consequences Scale Example

Likelihood Scale Example

Level Consequence Description

4 Severe Financial losses greater than $50,000

3 High Financial losses between $10,000 and $50,000

2 Moderate Financial losses between $1000 and $10,000

1 Low Financial losses less than $1000

A risk analysis can be documented in a matrix, such as the following:

Note: Ratings vary for different types of businesses. The scales above use 4 different levels; however, you can use as many levels as you need. Also use descriptors that suit your purpose (e.g. you might measure consequences in terms of human health, rather than dollar value).

Evaluating Risks

Once you have established the level of risk, you then need to create a rating table for evaluating the risk. Evaluating a risk means making a decision about its severity and ways to manage it.

For example, you may decide the likelihood of a fire is 'unlikely' (a score of 2) but the consequences are 'severe' (a score of 4). Using the tables and formula above, a fire therefore has a risk rating of 8 (i.e. 2 *4=8).

Your risk evaluation should consider:

• The importance of the activity to your business

• The amount of control you have over the risk

• Potential losses to your business

• Any benefits or opportunities presented by the risk.

Once you have identified, analyzed, and evaluated your risks, you need to rank them in order of priority. You can then decide which methods you will use to treat unacceptable risks.

Treat Risks to Your Business

Treating risks involve working through options to deal with


Risk Rating Table Example

Risk rating Description Action

12-16 Severe Needs immediate corrective action

8-12 High Needs corrective action within 1 month

4-8 Moderate Needs corrective action within 3 months

1-4 Low Does not currently require corrective action

unacceptable risks to your business. Unacceptable risks range in severity; some risks will require immediate treatment while others can be monitored and treated later.

Risk analysis and Evaluation will help you priorities the risks that need to be treated. When you are developing a plan for treating the risks, consider:

• Method of treatment

• People responsible for treatment

• Costs involved

• Benefits of treatment

• Likelihood of success

• Ways to measure the success of treatments.

How and why you have chosen to treat risks should be outlined in your risk management plan. It is important to review your plan regularly to take into account any new risks associated with changes in your business or improvements in techniques for treating risks. The

following are different options for treating risks.

Avoid the Risk

If it is possible, you may decide not to proceed with an activity that is likely to generate risk. Alternatively, you may think of another way to reach the same outcome that does not involve the same risks. This could involve changing your processes, equipments, or materials.

Reduce the Risk

You can reduce a risk by:

• Reducing the likelihood of the risk happening - for example, through quality control processes, auditing, compliance with legislation, staff training, regular maintenance or a change in procedures

• Reducing the impact if the risk occurs - for example, through emergency procedures, off site data backup, minimizing exposure to sources of risk, or using public relations.

Transfer the Risk

You may be able to shift some or all of the responsibility for the risk to another party through insurance, outsourcing, joint ventures, or partnerships. You may also be able to transfer risk by:

• Cross-training staff so that more than one person knows how to do a certain task and you don't risk losing essential skills or knowledge if something happens to one of your staff members

• Identifying alternative suppliers in case your usual supplier is unable to deliver

• Keeping old equipment (after it is replaced) and practicing doing things manually in case your computer networks or other equipment cannot be used

Make Sure You Have Adequate Insurance

You should also check that you:

• Have coverage for the loss of income you could incur if customers affected by the crisis stop ordering your product or service

• Have appropriate insurance to cover other related issues such as on-site injuries to staff or visitors, or for loss of your customers' goods or materials

• Have coverage in case your supplier/s are affected by a crisis and can't deliver necessary supplies for your business

• Are meeting your workers’ compensation obligations in case any of your staff are injured in a crisis. Find out more about business insurance.

Accept the Risk

You may accept a risk if it cannot be avoided, reduced, or transferred. Other risks may be extremely unlikely and therefore too impractical or expensive to treat. However, you will need to develop an incident response plan and a recovery plan to help you deal with the consequences of the risk if it occurs.

Review and Update Your Risk Management Plan

You will need to test, evaluate, and update your risk management plan regularly as risks can change with change in your business, your industry and the environment you

operate in. Regularly reviewing your risk management plan is essential for identifying new risks and monitoring the effectiveness of your risk treatment strategies.

Strategies for Testing Your Risk Management Plan

Find out about strategies for testing, evaluating, and updating your risk management plan and your business continuity plan.

Business Continuity

Your risk management plan should be part of a broader business continuity plan that includes strategies for responding to and recovering from incidents if they do happen. Making sure your business continuity plan is reliable and up to date will help you resume operations quickly after an incident and reduce the impact to your business.

While one may be able to predict and deal with a large number of potential risks, there will be some that are unexpected or impossible to plan for. Preparing an incident response plan and a recovery plan as part of one’s overall business continuity plan can help dealing with these situations if it happens.

A risk management plan is the prevention step in the prevention, preparedness, response and recovery (PPRR) model of business continuity planning.

Conduct a Business Impact Analysis

Once you have developed a risk management plan, you can conduct a business impact analysis to assess the likely impact of these risks on your business operations. This is the preparedness step in the prevention, preparedness, response and recovery (PPRR) model for


The Author is anAssociate Member, ICAB

developing a business continuity plan.

Critical Business Activities

A business impact analysis identifies the activities in your business operations that are key to its survival. These are referred to as critical business activities. You should consider things such as:

• The records and documents you need everyday

• The resources and equipment you need to operate

• The access you need to your premises

• The skills and knowledge your staff have that you need to run your business

• External stakeholders you rely on or who rely on you

• The legal obligations you are required to meet

• The impact of ceasing to perform critical business activities

• How long your business can survive without performing these activities

As part of your business impact analysis, you should assign

recovery time objectives to each activity to help determine your basic recovery requirements. The recovery time objective is the time from when an incident happens to the time that the critical business activity must be fully operational in order to avoid damage to your business.

Your business impact analysis will help you develop your recovery plan, which will help you get your business running again if an incident does happen.

Key Questions in a Business Impact Analysis

To conduct a business impact analysis for your business, ask yourself:

• What are the daily activities conducted in each area of my business?

• What are the long-term or ongoing activities performed by each area of my business?

• What are the potential losses if these business activities could not be provided?

• How long could each business activity be unavailable for (either completely or partially) before my business would suffer?

• Do these activities depend on any outside services or products?

• How important are the activities to my business? For example, on a scale of 1 to 5 (1 being the most important and 5 being the least important), where would each activity fall in relation to the rest of the business?

As the risks to the business change, so will their potential impacts. When you update your risk management plan, you will also need to conduct a new business impact analysis.

Conclusion

While business risks are abounding, and their consequences can be destructive, there are ways and means to insure against them, to prevent them and to minimize their damage if and when they occur. Finally, hiring a risk management consultant may be a prudent step in the prevention and management of risks.



The Tax referred to the caption has been made lawfully mandatory on certain criterion as per amended Rule 33 I (CHA) at Page 76 of Bangla Booklet titled PAPRIPATRA-2014 (Income tax) published by the Government for Changes in Income Tax Rules in the Budget for 2014-2015 Financial Year.

I give here went to my thoughts for perusal of any kind consideration by the relevant authorities either in order to replace it by the earlier legal provision with more benefit to the employees in general or retain it as a legalised and enforced right of the Government in view of the following facts.

Most of such employees are members of modern single families (if joint families of the past) and can't afford to bear medical expenses with monthly salary income only, except those having other sources of income. Their employers are generally entrepreneurs with limited financing sources, but even then they are kind enough to accord medical help to such employees--mostly on humanitarian grounds.

Under such circumstances, our state extends medical aid to an employee accorded by an employer on humanitarian grounds instead of providing any state

Imposition of Income Tax on Employee Tax Payerson Medical Aid Vis-a-Vis Justice and our Constitution

Md. Asaddar Ali FCA

welfare, benefit on genuine Human Rights, although a democratic country may not be a Welfare State as per constitution. But even then, such a country should not be blind to the Welfare and the Human Right Benefits altogether. In our country, many persons rightly enjoy financial exemptions/benefits for their personal contribution to the nation in their relevant fields of politics, economy and society.

Black Money Tax Payers also enjoy some benefits with certain conditions for making such white with reduced tax rate compared to generally higher tax rate applicable to genuine Tax Payers. But the poor Employee Tax Payers can't even think of such opportunities, rather they represent the other side of the coin (Thanks to the coin of our erstwhile British Rules). Incentive to the Black Money Holders encourages them to explore their network for enlarging their group both with fund and persons, if not on physical contact, at least by the allurement paying less tax on legalised rights of honour.

On the other hand, the constitution of our country, in Article 15, states, "It shall be a fundamental responsibility of the state to attain, through planned economic growth, a constant increase of productive forces and a steady improvement in the material and cultural standard of living of the

The Author is aFellow Member (deceased), ICAB


people, with a view to securing to its citizens --

(a) the provision of the basic necessities of life, including food, clothing, shelter, education and medical care;

[(b) (c) and (d) - (not relevant in the subject matter hereof)].

From the facts stated above, it is apparent that it is a fundamental responsibility of the State to secure to the needy people much medical care by rendering such services through its different types of Hospital all over the country. But how far it is justified for the Government to share Humanitarian Medical Aid contributed some benevolent employers to the poor Employee Tax Payers; The Employers personally

see the Health and Financial Woes of their needy Employees walk hand in hand and so the Employers open up their purse to render medical help.

Therefore, the concerned Government Authorities may, please, re-think the issue of justification of sharing such medical aid and may, please, take remedial measures, if they are convinced with.

Begged to be excused if I have dealt with any irrelevant matter for my wrong understanding.

OUR STATE EXTENDS MEDICAL AID TO AN EMPLOYEE ACCORDED BY AN EMPLOYER ON HUMANITARIAN GROUNDS INSTEAD OF PROVIDING ANY STATE WELFARE, BENEFIT ON GENUINE HUMAN RIGHTS.


Executive Summary

Risk management teams are fighting to keep pace with a range of new and evolving risks that impose significant threats to their business. The evolving risks that have a financial impact on their business were supply chain/infrastructure, environmental, cyber and directors’ and officers’ liability risks. The global financial crisis has triggered risk management to rise up the corporate program, but evolving risks have not yet been embedded in board level discussions on wider risk management issues. The cause is the lack of management attention as the biggest barrier to effective risk management, and this in turn hints to lack of human resources and risk management tools and processes to manage them. Today’s risk challenges demand a cross-disciplinary approach, with the risk function working closely alongside the

Evolving Business Risk ManagementMd. Ziaur Rahman ACA

business to identify, assess and mitigate key exposures. Compounding this complexity is that fact that risks are often interconnected: real world events do not respect neatly delineated risk categories. Evolving risks create a number of obstacles to success, as they combine to create a hugely challenging environment not just for professional risk managers, but also for all senior executives. Creating the right framework for enterprise risk management, and building the knowledge and tools to track and mitigate all these risks, is hugely challenging. If the insurance industry is to meet expectations of risk managers and senior executives it will need to make a shift from ‘product’ to a ‘service’ mentality, and clients will need to shift from a transactional to a strategic approach to their insurance partnerships.

Overview

The global financial crisis has undoubtedly caused risk management to rise up the corporate agenda and, although the worst of the crisis may now be behind us, its aftermath continues to be felt in an ever more complex and dynamic risk environment.

Some risks, such as cyber risk, are relatively new. Others like environmental and directors and officers (D&O) risks, have been around for a long time, but


have taken on a new dimension due to social, economic and regulatory change. Indeed, the impact of increased regulation can repeatedly be seen in this survey. So too can the impact of increasing globalization, which is creating new exposures, as companies expand internationally via more complex, extended supply chains.

Identifying and monitoring evolving risks is far from straightforward. It requires non-traditional approaches and a willingness to listen to dissenting voices that are willing to challenge received wisdom.

Compounding this complexity for risk managers is the fact that these risks are often interconnected. Real world events do not respect neat categories. An environmental incident affecting an important supplier in Thailand can quickly become a supply chain risk with a severe financial impact for a company on the other side of the world. Understanding the interdependencies between different processes, operations and players in the global supply chain is one the most critical tasks an organization can undertake in today’s business environment

Innovative Methodologies

Identifying and monitoring evolving risks is far from straightforward. It requires non-traditional approaches and a willingness to listen to dissenting voices that are willing to challenge received wisdom. However, the dynamic nature of today’s risk environment means that it should be a growing priority for companies to have the right capabilities and processes to monitor their evolving risks, as part of a broader enterprise-wide approach to risk management.

Similarly, identifying and managing evolving risks cannot be an isolated activity. Cyber risks cannot be the responsibility of the IT function alone, any more than supply chain risks being the sole responsibility of the operations team. Today’s risk challenges demand a cross-disciplinary approach, with the risk function working closely alongside the business to identify, assess and mitigate key exposures. The risk management function plays a vital role in this process. Perhaps most important of all, this study also suggests that many senior executive teams could give more attention to the discussion of evolving risk. By setting the right tone from the top, their businesses will be more likely to ensure that they take a more proactive approach towards their management.

We must remember, however, that the risks covered in this report are often a corollary of the opportunities that companies are rightly pursuing in their quest for growth. By understanding and responding to this array of evolving threats and challenges, risk managers can help their organizations to put their strategic plans on a sustainable footing. And, by working with them in a collaborative way and taking a strategic approach to their client relationships, insurance brokers and

CYBER RISKS CANNOT BE THE RESPONSIBILITY OF THE IT FUNCTION ALONE, ANY MORE THAN SUPPLY CHAIN RISKS BEING THE SOLE RESPONSIBILITY OF THE OPERATIONS TEAM. TODAY’S RISK CHALLENGES DEMAND A CROSS-DISCIPLINARY APPROACH, WITH THE RISK FUNCTION WORKING CLOSELY ALONGSIDE THE BUSINESS TO IDENTIFY, ASSESS AND MITIGATE KEY EXPOSURES.


underwriters can ensure they support economic growth and recovery.

Evolving Risks

It is clear from our study that the issues that most keep risk managers awake at night right now are not only the headline grabbers. Exposures to terrorist threats or confiscation of their assets in far-flung places, important as these are, do not supplant other equally important risks. Instead, the evolving risks have a financial impact on their business are supply chain/infrastructure, environmental, cyber and D&O liability. The embedded, systemic nature of these risks makes them difficult to isolate and complex to manage and success will require increasing corporate focus and better quality dialogue between risk managers.

Supply Chain and Infrastructure

Of all the risks facing businesses today, supply chain and infrastructure risk is the one that business leaders expect to have the biggest financial impact. Today’s high-tech supply chains are the backbone of business performance, but they are also increasingly vulnerable, particularly as companies continue their drive to cut costs. Failing to strike the right balance between lean supply chains and resilience can lead to devastating risk events.

Environmental Risk

The risk barometer research also indicates the rising importance of environmental risks, which are second only to supply chain and infrastructure in terms of financial influence. With tougher government regulation and more vocal stakeholder concerns, companies are being held accountable for their environmental impact as never before.

Cyber Risk

It is also no wonder that risk managers are becoming increasingly concerned about the possibility of cyber risk. In recent years, cyber risk has become virtually unavoidable as companies become increasingly dependent on technology. Indeed, it was recently identified in other research as the top systemic threat facing global financial markets and infrastructures. But there are signs that companies may still be underestimating cyber risk.

D&O Burden

Directors and officers risk has been a key issue on the boardroom agenda for the past decade. Respondents place it joint third, in terms of its likely financial impact on their business over the next few

years. Although hardly a new risk, D&O liabilities are constantly evolving against the backdrop of the global financial crisis, changing regulation and companies’ international footprint. Business executives are particularly concerned about reporting errors and exposures related to bribery, fraud and corruption.

Impediments to Success

These risks combine to create a hugely challenging environment not just for professional risk managers, but also for all senior executives. Creating the right frameworkfor enterprise risk management, and building the knowledge and tools to track and mitigate all these risks, is hugely challenging.

The obstacles to effective risk management are two-fold. First, companies are not making sure that the right people are giving attention to the right risks at the right time. When asked what they consider to be the biggest barriers to the management of evolving risks, respondents point to lack of management attention as the number one factor.


Managing evolving risks requires a multidisciplinary effort, with all functions working together, and with external experts to augment capabilities and address challenges.

The Chief Risk Officer must lead the corporate response to these challenges, monitoring new threats and pinpointing the right issues for management’s attention. But, most important of all, managing evolving risks requires a multidisciplinary effort, with all functions working together to address these challenges effectively, as well as working with external experts to augment capabilities. Ultimately as ever in risk management, it is a question of having the right culture in place, backed by strong governance and best practice processes.

The second biggest obstacle is a lack of human resources and skills. Resourcing is itself a major issue, particularly against a backdrop of ongoing cost-cutting and efficiency drives. In other words, companies are not yet investing in the headcount or external support needed to manage a highly dynamic evolving risk environment.

The Role of Insurance Markets

Specific insurance market products are evolving as risks become more complex. The industry has an opportunity to bring its wider knowledge and expertise to bear in ways that help its clients to improve their risk management approach.

But it is clear that the insurance industry as a whole—including underwriters, brokers, claims managers and loss adjusters—needs to communicate more effectively with the risk managers that we serve. The big four risks that top our barometer require a more consultative approach.

Ultimately, if the insurance industry is to meet expectations it will need to make a shift from a ‘product’ to a ‘service’ mentality and clients will need to shift from a transactional to a strategic approach to their insurance partnerships. This will allow insurers to partner better with companies on risk management as well as risk transfer. Today's more complex operating environment and the era of 'big data' will also require insurers, brokers and

clients to get into the habit of sharing more and better quality information with each other.

Conclusion

Evolving risks are such risks which can’t be treated as isolated rather those should be treated as interconnected with various departments, geographical locations etc.The evolving risks may cast huge impact on the business’s financial and non-financial activities. The ultimate success of the business depends on the proper handling of those risks. In this case management should be proactive rather than reactive. To survive in the so highly competitive market management should invest fund and develop corporate culture to turn the evolving risks into key success factors of the business.



Risk

Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment.

Risks are uncertain future events that could influence the achievement of the Bank’s objectives as well as others, including strategic, operational, and financial and compliance objectives.

Uncertain Future Events Could Be:

• Failure of a borrower to repay a financing

• Fluctuation of foreign exchange rates

• Fraud, incomplete security documentations, etc

• Non-compliance with law and principles

• Other events that may result in a loss to the Bank

Risk Management

Risk taking is an inherent element of the banking business and indeed, profits are in part the reward for successful taking in

Managing Risk in BankingMd. Ashraful Azim FCA

business. On the other hand, excessive and poorly managed risk can lead to losses and thus endanger the safety of a Bank’s depositors. Risk management involves identification, measurement, aggregation, evaluation, mitigation, monitoring and controlling of risks to ensure that:

a) The organization’s risk exposure is within the limits established by the board;

b) Risk taking decisions are explicit and clear;

c) Risk taking decisions are in line with the business strategy and objectives set by the board;

d) The expected payoffs compensate for the risks taken; and

e) Sufficient capital as a buffer is available to take risk.

Sound Risk Management Systems Enable Managers to Take Risk Knowingly

Sound risk management systems enable managers of banking companies to take risks knowingly, reduce risks where appropriate and strive to prepare for a future, which by its nature cannot be


predicted with absolute certainty. Risk management is a discipline at the core of every banking company and encompasses all activities that affect its risk profile. Risk management is very important especially when the banks are dealing with multiple activities, involving huge funds having both local and international currency exposure.

Core Risk in Banks

Banks are exposed to six (6) core risks through their operation, which are-Credit Risk Management (CRM), Asset/Liability Management Risk (ALM), Foreign Exchange (Forex.). Risk, Internal Control & Compliance Risk, and Anti Money Laundering (AML) risk and Information and Communication Technology risk. Brief elaborations of all core risk in banking are given below:

Credit Risk Management

Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank’s dealings with or lending to corporate, individuals, and other banks or financial institutions. Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders.

Credit Risk Management Should be Organized in the Following Three Major Sections

A. Policy Guidelines

B. Preferred Organizational Structure

C. Procedural Guidelines

A. Policy Guidelines

• Lending Guidelines

• Credit Assessment and Risk Grading

• Approval Authority

• Segregation of Duties

• Internal Audit

Policy Guidelines-Lending

• Industry and Business Segment Focus

• Types of Loan Facilities

• Single Borrower/ Group Limits

• Lending Caps

• Discouraged Business Types

• Loan Facility Parameters

• Cross Border Risk

Policy Guidelines -Credit Assessment

• Borrower Analysis

• Industry Analysis

• Supplier/Buyer Analysis

• Historical Financial Analysis

• Projected Financial Performance

• Account Conduct

• Adherence to Lending Guidelines

• Mitigating Factors

• Loan Structure

• Security

• Name Lending

Policy Guidelines-Risk Grading

• Superior-Low Risk

• Good-Satisfactory Risk

• Acceptance-Fair Risk

• Marginal/Watch List-Above Average Risk

• Special Mention-Potential weakness

• Substandard-Weak Financial Condition

THE ESSENCE OF RISK MANAGEMENT IS NOT AVOIDING OR ELIMINATING RISK BUT DECIDING WHICH RISKS TO EXPLOIT, WHICH ONES TO LET PASS THROUGH TO INVESTORS AND WHICH ONES TO AVOID OR HEDGE.

• Doubtful-Repayment Unlikely (non-performance)

• Bad and Loss-On the verge of wind-up (non-performance)

Policy Guidelines-Approval Authority

• Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate) and it should be reviewed annually by MD/CEO/Board

• The credit approval function should be separate from the marketing/relationship management (RM) function and approvals must be evidenced in writing, or by electronic signature. Approval records must be kept of file with the Credit Applications.

Policy Guidelines-Segregation of Duties

• Credit Approval/Risk Management

• Relationship Management/Marketing

• Credit Administration

Policy Guidelines-Internal Audit

Banks should have a segregated internal audit/control department to conduct audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures, and Lending Guidelines and Bangladesh Bank requirements.

C. Procedural Guideline

• Approval Process

• Investment (Credit) Administration

• Investment (Credit) Monitoring

• Investment (Credit) Recovery

Procedural Guideline-Credit Administration)

• Disbursement

• Custodial Duties

• Compliance Requirements

Procedural Guideline-Credit Monitoring)

To minimize credit losses, monitoring procedures and Early Alert Process should be in place that provide in early inductions of the deteriorating financial health of a borrower.

Procedural Guideline -Credit Recovery)

• NPL Account Management

• Account Transfer Procedures

• NPL Monitoring

• NPL Provisioning and Write Off

Other Regulations of BB Relating to Credit Risk

• Policy on Loan classification

• Policy on single Borrower Exposure

• Policy for Rescheduling of Loans

• Policy for loan write off

• Guidelines on managing core risk in Banking

• Guidelines on Environmental Risk Management

• Restrictions on Lending to Directors of Private Banks

• Implementation of Credit Risk Grading Manual

• Prudential Guidelines for Consumer Financing and Small Enterprise Financing

• Green Banking

Asset Liability Management (ALM)

ALM means ensuring efficient and effective use of available resources. Therefore Asset Liability

Management (ALM) can be defined as “a well-planned, well-organized and systematic process of monitoring and maintaining assets and liabilities of the Bank which focuses on maximization of profit through minimization of various risks like liquidity risk, market risk, rate of return risk etc. and ultimately leads the Bank to a healthy and stable growth.”

Foreign Exchange Risk

The risks of an investment's value changing due to changes in currency exchange rates. The risks that an investor will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates also known as "currency risk" or "exchange-rate risk".

Internal Control & Compliance Risk

Internal control is the process, effected by a company's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the effectiveness and efficiency of operations, the reliability of financial reporting and compliance with applicable laws, regulations, and internal policies. Internal controls are the policies and procedures established and implemented alone, or in concert with other policies or procedures, to manage and control a particular risk or business activity, or combination of risks or business activities, to which the company is exposed or in which it is engaged.

Anti Money Laundering Risk

Money laundering is the process of making illegally-gained proceeds (i.e. “dirty money”) appears legal (i.e. "clean"). Typically, it involves three steps: placement, layering and integration. First, the


Bangladesh Bank’s guidelines. All banks will be required to maintain the following ratios on an ongoing basis:

I. Common Equity Tier 1 of at least 4.5% of the total RWA.

II. Tier-1 capital will be at least 6.0% of the total RWA.

III. Minimum CRAR of 10% of the total RWA.

d) Basel-III has added a leverage ratio as a backstop for the risk-based capital approach, to ensure banks do not become unduly leveraged on a non-risk-weighted basis and standards for bank liquidity and funding, designed to promote the resilience of a bank’s liquidity risk profile to both short and longer-term disruptions.

“Three (3) pillars" Concept of Basel-III Accord:

I. Pillar-1: Minimum Capital Requirements (MCR),

II. Pillar-2: Supervisory Review Process (SRP) and,

III. Pillar-3: Market Discipline.

Pillar-1: Minimum Capital Requirements:

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces:

I. Credit risk,

II. Market risk and,

III. Operational risk

1) The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB

2) For operational risk, there are


illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean.

Information & Communication Technology Risk

ICT risk management is the application of risk management methods to information technology in order to manage ICT risk. Security of information for a Bank has gained much importance and it is vital for us to ensure that the risks are properly identified and managed. Moreover, information and information technology systems are essential assets for the Bank as well as for customers and stakeholders. Banks must take the responsibility of protecting the information from unauthorized access, modification, disclosure and destruction. Bank must ensure security of information and information systems such as data security including facility design, physical security, network security, disaster recovery and business continuity planning, use of hardware and software, data disposal and protection of copyrights and other intellectual property rights.

Basel-III and Risk Management

To strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector, the Basel Committee on Banking Supervision (BCBS) issued “Basel III: A global regulatory framework for more resilient banks and banking systems” in December 2010.

Basel-IIII. BASEL III is a global regulatory

standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11.

II. Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.

Necessary of this global standard (Basel Accord)

Basel-III Accord or global standard is vital for a healthy financial system because:-

a) Basel III requires banks to maintain higher levels of capital with minimum common equity Tier-1 holdings at banks at least 4.5% of total Risk Weighted Assets.

b) Basel-III has introduced a capital conservation buffer 2.5% of RWA. Banks are required to maintain a capital conservation buffer of 2.5%, comprised of Common Equity Tier 1 capital, above the regulatory minimum capital requirement of 10%. Banks should not distribute capital (i.e. pay dividends or bonuses in any form) in case capital level falls within this range. However, they will be able to conduct business as normal when their capital levels fall into the conservation range as they experience losses

c) Instructions of Basel-III will be adopted in a phased manner starting from the January 2015, with full implementation of capital ratios from the beginning of 2019, as per

three different approaches - Basic Indicator Approach (BIA), Standardized Approach (STA), and the internal Measurement Approach (AMA).

3) Market risk: Here equities portfolio and foreign exchange position are considered for calculation of capital charge.

charge for foreign exchange risk will be @ of the required minimum capital adequacy ratio of bank’s overall foreign exchange exposure including gold.

Example for Calculation of Risk Weighted Assets (RWA):

a) Capital charge for equity position risk: The capital charge for equities would apply on their current market value in bank’s trading book and capital charge for both specific and the general market risk will be @ minimum CRAR.

b) Capital charges for foreign exchange risk: The capital

Example for Calculation of Risk Weighted Assets (RWA):

Credit Risk: (For claims on corporate)

Clients Exposure(Tk. in Crore) Credit rating BB’s equivalent rating Risk Weight

RWA(Tk. in Crore)

X 100.00 AA 1 20% 100*20%=20.00

Y 50.00 BBB 3 100% 50*100%=50.00

Z 50.00 Unrated Unrated 125% 50*125%=62.50

Total 200.00 Total Credit Risk Weighted Assets 132.50

Market Risk:

RWA= Equities Exposures X Beta Factor (MCR)------------------ =25.00*10=250.00 croreNet Long Position X Beta Factor------------------------=100.00*10%=10.00 crore

Operational Risk

SL Operational Risk year 1 Year 2 year 3 RWA1 Gross Income 500.00 550.00 600.00 82.50 crore

Basic Indicator Approach: Capital Charge=(Year1+ year2+year3)/3*15%

Total RWA (Credit Risk+ Market Risk+ Operational Risk) =475.00 croreSuppose the Regulatory Capital of ABC bank is BDT. 60.00 crore

1. Capital to Risk Weighted Assets Ratio (CRAR):

The Capital to Risk-weighted Asset Ratio (CRAR) is calculated by taking eligible regulatory capital as numerator and total RWA as denominator. Such as:-

CRAR=

So, CRAR= Total Eligible Capital/ Total RWA =60.00/475.00 =12.63%

Total Regulatory Capital

Credit RWA+ Market RWA+ Operational RWA


Other Risks Related to Banking Operation• Residual Risk

• Concentration Risk

• Interest Rate Risk

• Liquidity Risk

• Reputation Risk

• Strategic Risk

• Settlement Risk

• Appraisal of Core Risk Compliance

• Environmental and Climate Change Risk

• Other Material Risk

Residual Risk

While banks use different techniques to reduce their credit risk, improper application of these techniques give rise to additional risks that may render the overall risk management less effective. Accordingly, these additional risks (e.g. documentation risk, valuation risk) are termed as Residual Risks.In the context of Bangladesh Bank, Bangladesh Bank has observed that Residual Risk arises mainly out of the situations from Error in Documentation and Error in valuation of collateral

Concentration Risk

Concentration risk arises when any bank invests its most or all of the assets to single or few individuals or entities or sectors or instruments. That means when any bank fails to diversify its loan and investment portfolios, concentration risk emerges.

Profit (Interest) Rate Risk

Interest Rate Risk is the current or potential risk to the interest rate

sensitive assets and liabilities of a bank’s balance sheet items arising out of adverse or volatile movements in market interest rate.

Liquidity Risk

Liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit) or when a bank is unable to fulfil its commitments in time when payment falls due.

Reputation Risk

Reputation Risk is the current or prospective risk to earnings and capital that arise from decline in the customer base, costly litigation to adverse perception of the stakeholders. It can originate from the lack of compliance with industry service standards or regulation, failure to meet commitments, inefficient and poor quality customer service, lack of fair market practices, unreasonably high cost and inappropriate business conduct.

Strategic Risk

Strategic risk means the current prospective risk to earnings and capital arising from imperfection in business strategy formulation, inefficiencies in implementing business strategy, non-adaptability/less adaptability with the changes in the business environment and business decisions.

Settlement Risk

Settlement risk arises when an executed transaction is not settled as the standard settlement system suggests or within predetermined method.

Environmental and Climate Change Risk

Environmental and climate change risk refers to the uncertainty or probability of losses that originates from any adverse environmental or climate change events (natural or manmade) and/ or the non-compliance of the prevailing national environmental regulations.

Other Material Risk

The risks which have not been identified earlier but are material for the institution is known as material risk.

Operational Risk Management

As per Basel-III, Operational Risk is the Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events....

Types of Operational Risk: Strategic or External Risk and Internal Failure Risk

Strategic or External Risk

It refers to the risk of choosing inappropriate strategy in response to environmental factors, such as Political, Regulation, taxation, societal, competition etc. It is also known as external operational risk.

Internal Failure Risk

It arises from the people, process and technology used in pursuit of a business strategy.


The Author is a Fellow Member, ICABand Vice President of a PrivateCommercial Bank


Conclusions

The essence of risk management is not avoiding or eliminating risk but deciding which risks to exploit, which ones to let pass through to investors and which ones to avoid or hedge. Risk management prevents an organization from suffering acceptable loss that can cause failure or can materially

management should actually be bank specific dictated by the size and quality of balance sheet, complexity of functions, technical/ professional manpower and the status of Management Information System of the bank.

damage its competitive position. Risk management should be a continuous and developing process which runs throughout the organization’s strategy and the implementation of that strategy. It should address as many of the risks surrounding the organization’s activities past, present and in particular, future, as possible. In the case of a bank, functions of risk

Operational Risk Cause Factors and Their Examples

Risk Cause Factors Explanation of risk cause factors

Process

• Inadequate/inappropriate Guidelines, Policies & Procedures,failure of communication

• Erroneous data entry• Inadequate reconciliation• Poor legal documentation• Inadequate security control• Breach of regulatory & statutory provisions requirements• Inadequate change management Process• Inadequate back up/ contingency plan

People

• Breach of internal guidelines• Breach of delegated authority• Criminal acts (Internal)• Inadequate segregation of duties• Inexperienced staff• Unclear rules & responsibilities• High turnover

System • Inadequate hardware/network/server maintenance

External

• Criminal acts• Vendor mis-performance• Manmade disaster• Natural disaster• Political/legislative/regulatory causes

Prologue

Microfinance is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services. Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services.

Micro Finance Business &Its Risk Management

Naznin Sultana ACA


Risk FactorsMFI’s risk can be categorized into the following:Risk Category Subcategories Specific risks

Financial risks

Credit

Loan portfolio(internal)Interest rate (internal or external)Loan enforcement practices (internal)Loan rescheduling and refinancing practices (internal)

Market

Prices (external)Markets (external)Exchange rate (currency) (external)Value chain (external)

Liquidity (internal) Cash flow management issues (internal)

Operational risks

Transaction (internal)Fraud and Integrity (internal) Branch-level authority limits on lendingTechnological (internal) Information on and technologyHuman Resources (internal) Staff training Operational manualsLegal and Compliance (internal) Operational audits, financial auditsEnvironmental (external) Specific environmental impacts

Strategic risks

Performance (internal) Generating profits and returns on assets and on equity to attract investors

External Business (external) New financial sector lawsReputational (external) Competitive pressures (existing, new

actors)Governance (internal) Changes in regulatory practices

(licensing and reporting requirements) (external) Lack of board consistency and direction on (internal)

Country (external) Relationships with donors and government programs (external)

Producer risksExperienceTechnologyManagement Ability

Regulatoryrisk Country laws and regulation Change in country laws and regulation.

Risk Minimization Strategy

Risk taking is an inherent element and integral part of financial services in general and of microfinance in particular and, indeed, profits are in part the reward for successful risk taking in business. On the other hand, excessive and poorly managed risk can lead to losses and thus endanger the safety and soundness of microfinance institutions and safety of microfinance institution’s depositors. Consequently, microfinance institutions may fail to meet its social and financial objectives. This implies that proactive risk management is essential to the long term sustainability of microfinance institutions. Therefore, it is believed that effective risk management allows MFIs to capitalize on new opportunities and to minimize threats to their financial viability.

The process of risk management should be commensurate with the size and complexity of the institution. While the types and degree of risks in microfinance institutions may vary upon a number of factors such as size, complexity, business activities, volume etc.

There is no single risk management system that would fit for all microfinance institutions. However, risk management program should at a minimum cover the following most common risks:

a. Strategic risk

b. Credit risk

c. Liquidity risk

d. Interest rate risk

e. Operational risk

Risk Management Process

Risk management is a continual process of systematically identifying,

measuring, monitoring and managing risks in the organization.

Risk Management is a discipline at the core of every institution and encompasses all the activities that affect its risk profile. Risk management as commonly perceived does not mean minimizing risk; rather the goal of risk management is to optimize risk-reward trade-off. This can be achieved through putting in place an effective risk management framework which can adequately capture and manage all risks an institution is exposed to. Risk Management entails four key processes. Regardless of the risk management program, each risk management program should include the following:

a. Risk Identification: The first step in risk management is to identify risk. Almost every product and service offered by microfinance institutions has a unique risk profile composed of multiple risks. For example, at least four types of risks are usually present in most lending activities: credit risk, interest rate risk, liquidity risk and operational risk. Risk identification should be a continuing process and risk should be understood at both the transaction and portfolio levels.

b. Risk Measurement: Once the risks associated with a particular activity have been identified, the next step is to measure the significance of each risk. Risks should be measured in order to determine their impact on the MFI’s profitability and capital. Each risk should be viewed in terms of its three dimensions: size, duration and probability of adverse occurrences. Accurate and timely measurement of risk is essential to effective risk management systems.

THE PROCESS OF RISK MANAGEMENT SHOULD BE COMMENSURATE WITH THE SIZE AND COMPLEXITY OF THE INSTITUTION. WHILE THE TYPES AND DEGREE OF RISKS IN MICROFINANCE INSTITUTIONS MAY VARY UPON A NUMBER OF FACTORS SUCH AS SIZE, COMPLEXITY, BUSINESS ACTIVITIES, VOLUME ETC.


c. Risk Control: Following risk identification and measurement, microfinance institutions should control or minimize risks. There are basically three ways to control significant risks, or at least minimize their adverse consequences: avoiding or placing limits on certain activities/risks, mitigating risks and/or offsetting risks. It is a primary management function to balance expected rewards against risks and the expenses associated with controlling risks. Microfinance institutions should establish and communicate risk control mechanisms through policies, standards and procedures that define responsibility and authority.

d. Risk Monitoring: Microfinance institutions need to establish a management information system (MIS) that accurately identifies and measures risks at the inception of transactions and activities. It is equally important for management to establish MIS to monitor significant changes in risk profiles. In general, monitoring risks means developing reporting systems that identify adverse changes in the risk profiles of significant products, services and activities and monitoring changes in controls that have been put in place to minimize adverse consequences.

Basic Elements of Risk Management Framework

A risk management framework encompasses the scope of risks to be managed, the process/systems and procedures to manage those risks and the roles and responsibilities of individuals involved in risk management. The

framework should be comprehensive enough to capture all risks an institution is exposed to and have flexibility to accommodate any change in business activities. Sound risk management system of each microfinance institution should at least contain the following key elements of a sound risk management system:

a) Active board and senior management oversight;

b) Adequate policies, procedures and limits;

c) Adequate risk measurement, monitoring and management information systems; and

d) Comprehensive internal controls.

a) Active Board and Senior Management Oversight:

Board:-

Rev

Reviewing and approving policies of major activities

Boards of directors have ultimate responsibility for the level of risk taken by their microfinance institutions. Accordingly, they should approve the overall business strategies and significant policies of their organizations, including those related to managing and taking risks.

Ensuring that the microfinance institution maintains the various risks facing it at prudent levels.

Ensuring that senior management as well as individuals responsible for managing individual risks facing the microfinance possess sound expertise and knowledge to accomplish the risk management function.

Ensuring that the microfinance institutions implement sound fundamental principles that facilitate the identification, measurement, monitoring and control of all risks facing it.

Ensuring that appropriate plans and procedures for managing individual risk elements are in place.

Obtaining reasonable assurance that the institution is in control on a regular basis

Senior Management Oversight:-

Senior management is responsible for the implementation of risk policies and procedures keeping in view the strategic direction and risk appetite & specified by the board. For an effective management of risks facing a microfinance institution, senior management should at the minimum be responsible for:

The development and implementation of procedures and practices that translate the board's goals, objectives, and risk tolerances into operating standards that are well understood by microfinance institution personnel.

Establishing lines of authority and responsibility for managing individual risk elements in line with the Board’s overall direction.

Risk identification, measurement, monitoring and control procedures. d. Establishing effective internal controls over each risk management process.

Ensuring that the MFI’s risk management processes are properly documented and adequate awareness about same created amongst the generality of staff so as to make risk management a part of the


corporate culture of the microfinance institution.

b) Adequate Policies, Procedures and Limits

The board of directors and senior management should tailor their risk management policies and procedures to the types of risks that arise from the activities of the microfinance institution. Once the risks are properly identified, the microfinance institution’s policies and procedures should provide detailed guidance for the day-to-day implementation of broad business strategies and should include limits designed to shield the microfinance institution from excessive and imprudent risks.

While all microfinance institutions should have policies and procedures that address their significant activities and risks, the coverage and level of details in these documents will vary among microfinance institutions Management is expected to ensure that policies and procedures address material areas of risk to a microfinance institution and that they are modified when necessary to respond to significant changes in the activities or business conditions of the microfinance institution.

To ensure that, an institution's policies, procedures, and limits are adequate, the same should at minimum address the following:

policies, procedures, and limits should provide for adequate identification, measurement, monitoring, and control of the risks posed by its significant activities;

policies, procedures, and limits should be consistent with complexity and size of the business, the institution's stated goals and objectives, and the overall financial

strength of the microfinance institution;

policies should clearly delineate accountability and lines of authority across the institution's activities; and

policies should provide for the review of activities new to the institution to ensure that the infrastructures necessary to identify, monitor, and control risks associated with an activity are in place before the activity is initiated.

c) Adequate Measurement, Monitoring and Control:

Effective risk monitoring requires microfinance institutions to identify and measure all material risk exposures. Consequently, risk-monitoring activities must be supported by information systems that provide senior managers and directors with timely and accurately reports on the financial condition, operating performance and risk exposure of the microfinance institution, as well as with regular and sufficiently detailed reports for line managers engaged in the day to day management of the institution’s activities.

The sophistication of risk monitoring and MIS should be consistent with the complexity and diversity of the microfinance institution’s operations. Every microfinance institution must have a set of management and board reports to support risk measuring and monitoring activities. Microfinance institutions are expected to have risk monitoring and management information systems in place that provide directors and senior management with a clear understanding of the microfinance institutions’ risk exposures.

In order to ensure effective measurement and monitoring of risk and management information systems, the following should be observed:

the institution's risk monitoring practices and reports address all of its material risks;

key assumptions, data sources, and procedures used in measuring and monitoring risk are appropriate and adequately documented and tested for reliability on an on-going basis;

reports and other forms of communication are consistent with the institution's activities, structured to monitor exposures and compliance with established limits, goals, or objectives and, as appropriate, compare actual versus expected performance; and

reports to management or to the institution's directors are accurate and timely and contain sufficient information for decision-makers to identify any adverse trends and to evaluate adequately the level of risk faced by the institution.

d) Adequate Internal Controls

A microfinance institution’s internal control structure is critical to the safe and sound functioning of the microfinance institution, in general and to its risk management, in particular. Establishing and maintaining an effective system of controls, including the enforcement of official lines of authority and the appropriate separation of duties is one of management’s more important responsibilities.

Indeed, appropriately segregating duties is a fundamental and essential element of a sound risk management and internal control


system. Failure to implement and maintain an adequate separation of duties can constitute an unsafe and unsound practice and possibly lead to serious losses or otherwise compromise the financial integrity of the microfinance institution. Serious lapses or deficiencies in internal controls including inadequate segregation of duties may warrant supervisory action, including formal enforcement action.

When properly structured, a system of internal controls promotes effective operations and reliable financial and regulatory reporting, safeguards assets and helps to ensure compliance with relevant laws, regulations and institutional policies. Given the importance of appropriate internal controls to microfinance institutions, the results of audits or reviews, conducted by an internal auditor or other persons, should be adequately documented, as should include management’s responses to them. In addition communication channels should exist that allows findings to be reported directly to the board’s Audit Committee.

Major Challenges

Microfinance institutions face several additional challenges that are unique and relevant to the microfinance industry’s current level of development. While every MFI is unique, they share some common challenges including rapid growth and expansion, management succession, and new product development.

Rapid Growth and Expansion

A rapid growth requires more careful monitoring and monthly trend reporting on loan volumes and portfolio quality to detect problems early on. Internal audits

can be helpful in identifying fraud and portfolio quality problems before they result in significant losses.

MFIs use several risk management strategies when faced with rapid growth:

• Careful attention to staff recruitment and training. The MFI can reduce operational risk by carefully growing staff and ensuring that employees’ interests are aligned with those of the goals of the organization.

• Control growth to allow time to develop internal systems and prepare staff for changes resulting from the expansion.

• Carefully monitor loan growth and portfolio quality to better understand growth (e.g., number of loans per client, average loan size, growth in number of borrowers) and to not let growth mask increases in delinquency.

• Good communication from senior managers to reinforce the MFI’s culture and commitment to quality service and integrity. These efforts should motivate new employees, as well as existing employees who are being asked to do more.

Succession Planning

As a young industry, many MFIs are just beginning to experience the first management transition from founder to successor. While leadership change is part of growth and evolution into a mature industry, few MFIs have planned for the inevitable succession of senior management. MFIs should not wait until key management staff nears retirement, as the need for a successor is not always predictable. Senior management may leave suddenly for another job

opportunity or become temporarily or permanently incapable of performing their duties following an unforeseen event or tragedy. Similar to the issues involved in rapid growth, MFIs that do not plan for management succession risk having operations run by inexperienced or under-qualified managers, which increases the operational risks resulting from poor decision making and ineffective leadership. In addition, under-qualified managers can seriously affect employee morale and motivation, resulting in productivity declines and increased staff turnover, both of which result in direct costs to the MFI. As these leaders begin to leave their MFIs, they will need to create strong management structures to help institutionalize those elements to ensure the ongoing survival and success of the institution. They will need strong management, as well as strong boards of directors to provide oversight and continuity, and well-established organizational cultures that can maintain the core competencies of the institution going forward. Board and management development will be a key challenge for many MFIs in the next few years.

New Product Development

New product risk is the potential loss that can result from a product that fails or causes unintended harm to the MFI. Since many MFIs are experimenting with new product innovations, identifying and managing this risk is increasingly important. Key risks for new products include:

• Unintended consequences, in which a great product idea can result in unintentional harm to the MFI, e.g. new savings products that offer higher rates might attract high demand but also excessively increase the MFI’s cost of funds.



• Reporting, in which the new product is combined with the total portfolio, can mask delinquency patterns.

• Not allocating all the unit costs associated with a new product, thereby distorting income projections.

For example, rural microfinance institutions that introduce agricultural lending products expose themselves to new risks. The risk of natural disaster can reduce crop production for several borrowers simultaneously, which increases credit and liquidity risks. To minimize risks, agricultural lenders avoid geographic concentrations and diversify their portfolios by lending to different types of farmers. To reduce the risk of introducing products that do more harm to the MFI than good,

management should subject new lines of business to a thorough risk/reward analysis before introducing the new product or service.

Contingency Planning

Notwithstanding all the efforts that may be made to identify measure, monitor and control risk, it is always possible that an event or events may occur that were not contemplated at the time a risk management framework was developed. Contingency planning is therefore an essential component of effective risk management. The process starts with the assumption that an unexpected event can occur at any time and as microfinance institutions develop their various risk management systems, they are expected to give

due consideration to the occurrence of such an unexpected event. Effective contingency planning requires microfinance institutions to have arrangements in place that will allow them to recover as soon as possible after the occurrence of an event and be in a position to resume acceptable levels of service. Achieving these objectives will minimize the impact that the event will have on the microfinance institution’s earnings, capital and reputation. Contingency planning is relevant to all of the risk but is most important in the context of the management of liquidity and operational risk.


I recently lost two friends in quick succession - Mr. Jamaluddin Ahmed and Mr. Rezaur Rahman. All three of us were graduates of Chittangong Commerce College and all three of us were chartered accountants. I did my chartered accountancy from Pakistan while both of them did theirs from the UK.

Rezaur Rahman returned to Dhaka from London in the late 50s and took charge of the office of the audit firm Price Waterhouse Peat & Co. but launched his own chartered accountancy firm in 1963 when former finance minister Saifur Rahman resigned from Pakistan Oxygen and joined Rezaur Rahman along with Tashfin Huq to form Rahman Rahman Huq, which soon became one of the most prestigious audit and consultancy firms of the country. At that time, having joined the civil services of Pakistan, I was posted as an Additional Secretary in the Department of Finance under the Government of East Pakistan (GoEP).

In 1966, Rezaur Rahman was selected as a member of the Pakistan delegation to the United Nations General Assembly in New York where he met Peggy, fell in love and married her. His Gulshan house then became the venue for me and my wife for brunch every Sunday. Jamaluddin also returned to Dhaka in the early 60s,

In Remembrance of JamaluddinAhmed and Rezaur Rahman

M. Matiul Islam FCA

joined an international oil marketing company and got married. He was initially posted in Chittagong.

I often expressed my intent to join the profession but never had the courage to take the decisive step, but very soon fate took that step. I was forced to go into retirement from the civil services by martial law authorities in 1969 and had to look for new job openings in the private sector. Rezaur Rahman graciously offered me the post of a partner in his firm and asked me to take over their Karachi office. A car was also purchased for my use. I did go to Karachi but was inundated with a number of good offers and thus, could not join Rahman Rahman Huq.

After rejoining government services in January 1972, I was posted in the World Bank in Washington from 1974 to 1977. On the way back home, I stayed in London for some time and discovered that Rezaur Rahman was also staying there after taking a long leave from Rahman Rahman Huq. Initially, he joined Altaf Gauher in an outfit created by Aga Hasan Abedi but soon started his own business by taking up a costly office in Piccadilly. This was a bold attempt to get established in London. But he did succeed through his hard work and devotion. He also showed his business


acumen back home. He bid for and acquired Messers Shaw Wallace, a British shipping company, from the Bangladesh government.

Rezaur Rahman offered me to join Rahman Rahman Huq in Dhaka for the second time when I expressed my desire not to rejoin the government. On my return to Dhaka, I did join the company but did not last there for more than two months. Although, President Ziaur Rahman agreed to my joining the firm during my first meeting with him, he soon changed his mind and gave me an ultimatum to rejoin the government as secretary of the Ministry of Industries. Meanwhile, Jamaluddin, who held a senior position in an oil marketing company, was inducted as the Minister of Industries by the president. I had no clue that Jamaluddin was working behind the scene to get me appointed as the secretary in his own ministry.

During the next four years, the Ministry of Industries became the most productive ministry and this was because Jamaluddin gave me a free hand to operate and backed me up on all important matters like the formulation of new industrial policies, incentive packages for private sector, and the finalisation of a new act for promotion and protection of foreign investments. The Board of Directors of Ashuganj Fertilizer Company was reconstituted with me as the chairman and Mr. Muhith, Mr. Abul Khair and Mr. Al Hussaini as directors. Jamaluddin agreed to give the board the powers of the government on all matters concerning the company. When Haldor Topsoe came to Dhaka and proposed the setting up of a fertilizer company in the private sector, Jamaluddin instantly approved my approach and I had no problem in taking it forward. The same story was repeated for the creation of EPZ

in Chittagong and the Aga Khan-sponsored IPDC, the first DFI in the private sector in Bangladesh.

In recognition of his dynamism, Jamaluddin was promoted as the deputy prime minister, over a number of his senior colleagues, in 1979. He was a terrific public orator and was very important politically for President Ziaur Rahman. In 1980, when President Zia decided to allow commercial banks in the private sector, Jamaluddin was made the chairman of the selection committee. Being at the end of my contract with the government, when I decided to float a joint venture commercial bank and sought a foreign partner for that, Rezaur Rahman introduced me to the Galadari brothers who owned Dubai Bank and were willing to invest in Bangladesh. Arab Bangladesh Bank, with 60 percent foreign shareholding with UCB and National Bank, got quick approval. As I was leaving the government to join UNIDO in Vienna, Jamaluddin advanced the date for a grand opening of Ashuganj Fertilizer Factory in recognition of my services as its chairman.

Rezaur Rahman and Peggy regularly visited Vienna, where I was posted from 1982 to 1987. I was then posted to Delhi where both Rezaur Rahman and Jamaluddin were house guests. I returned to Dhaka in 1993 and in 1996 decided to set up a finance company, International Leasing and Finance Company, where both Rahman and Jamaluddin invested. Jamaluddin was also a director of ILFSL while I was its chairman. Jamaluddin floated a credit rating company, CRISL, of which I became a promoter director.

When Peggy died of cancer in 1997, my wife and I visited London where she was buried. It was there that Rezaur Rahman expressed his wish to be buried next to his wife.

AN IRREPARABLE LOSS TO THE ACCOUNTING PROFESSION.


The Author is a Fellow Member,ICAB and was the First FinanceSecretary of Bangladesh Government

During this period, Rezaur Rahman made a special request to help him float a housing finance company. Shaw Wallace was his first promoter and finally, with 20 promoters, I applied to Bangladesh Bank for a license. It took me two years to get this proposal through Bangladesh Bank and I finally got the license in 1998. I had no shareholding in National Housing but gave two years of my life to redeem my pledge to my friend.

On the relinquishment of my directorship in ILFSL and retirement from the chairmanship of National Housing, communication with Rezaur

Rehman and Jamaluddin became few and far between. Age took its toll on all of us. Rezaur Rahman was showing first signs of Alzheimer's. Jamaluddin also had health problems which deteriorated with age and he breathed his last on January 3, 2015, after being bedridden for most of 2014.

Rezaur Rahman did not have any children. He created the Mujibur Rahman Foundation, in the name of his late father who was a mathematical genius and was nominated in the Indian Civil Services. He donated Tk. 10 crore to Dhaka University to build and

develop a separate building for the Mathematics Department.

Rezaur Rahman's Alzheimer's worsened over time and he had to be under the care of a nursing home in London, where he died on June 1, 2015. He was laid to rest next to his wife.

May their souls rest in peace.


*The Article is reprinted from the Daily Star


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