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Banking Research Series 2011
A Compilation of Research
Workshop Keynote Papers
BANGLADESH INSTITUTE OF BANK MANAGEMENT Mirpur, Dhaka
Banking Research Series 2011
Published: February 2012 Editorial Team : Dr. Toufic Ahmad Choudhury : Dr. Shah Md. Ahsan Habib : Abed Ali Support Team : Sharmina Nargish : Papon Tabassum : Sarder Aktaruzzaman : Md. Awalad Hossain Published by Bangladesh Institute of Bank Management (BIBM) Plot No. 4, Main Road No. 1 (South), Section No. 2 Mirpur, Dhaka-1216, Bangladesh PABX : 9003031-5, 9003051-2 Fax : 88-02-9006756 E-mail : [email protected] [email protected] Web : www.bibm.org.bd
Printed by Nahida Art Press, Gopibag, Dhaka, Bangladesh
The views in this publication are those of authors only and do not necessarily reflect the views of the institution involved in this publication.
Forewords
Bangladesh Institute of Bank Management (BIBM) has introduced a number of research-based roundtable discussions/workshops on contemporary financial and banking issues in its annual training calendar from 2010. In these discussions and workshops, a keynote paper is usually prepared by the faculty members of the BIBM, highlighting issues which called for wider dissemination to and discussion with a mature audience of banking professionals. After thorough deliberations on the relevant issues, a number of recommendations are usually derived on different aspects of the topic which are incorporated into the final version. We have published the first issue “Banking Research Series 2010” in 2011. The present compendium, the second of the Banking Research Series would, we hope, attract attention of not only bankers, but of other professionals like credit analysts, economic consultants, economists, development practitioners as well as the academic community. BIBM would also welcome comments, critiques and suggestions on the themes contained in these research-based discussions/workshops. Dr. Toufic Ahmad Choudhury Director General
Contents
Paper One
An Impact Evaluation of Green Initiatives of Bangladesh Bank Dr. Shah Md. Ahsan Habib, Md. Shahid Ullah, Tahmina Rahman
01-38
Paper Two
Implementation Status of Basel-II: Bangladesh Perspective Md. Nehal Ahmed, Atul Chandra Pandit
41-68
Paper Three
Disclosure Requirements of Banks: Bangladesh Perspective Atul Chandra Pandit, Md. Mahabbat Hossain, Maksuda Khatun
71-116
Paper Four
Financing PPP Projects in Bangladesh: Bank’s Initiatives Md. Ruhul Amin
119-168
Paper Five
An Assessment of the Operations of Trade Payment Methods in Bangladesh Mahmood-ur-Rahman, Antara Zareen
171-209
Paper Six
Mobile Banking in Bangladesh Md. Mahbubur Rahman Alam, Md. Shihab Uddin Khan, Kaniz Rabbi
213-265
Paper Seven
Risk Assessment of Banks’ Involvement in the Capital Market: Bangladesh Perspective Md. Alamgir, Md. Zakir Hossain
269-286
Paper Eight
Implication of the Legal Framework Guiding Loan Recovery Syed Ahmed Khan, Quazi Golam Morshed Farooqi
289-303
Paper One
An Impact Evaluation of Green Initiatives of Bangladesh Bank
Dr. Shah Md. Ahsan Habib Professor and
Director (Training), BIBM
Md. Shahid Ullah Lecturer, BIBM
Tahmina Rahman Lecturer, BIBM
An Impact Evaluation of Green Initiatives of
Bangladesh Bank
I. Introduction
Policy makers in many economies have been undertaking initiatives and
formulating rules to support green banking activities by the financial sectors
throughout the world. Central banks have been addressing environmental and social
needs and responding positively to the demands and suggestions of stakeholders1.
Alongside issuing guidelines for ensuring environmental compliance, central banks
have been formulating green policies and offering incentives for developing Green
Banking (GB) practices among commercial banks and Environmentally Responsible
(ER) practices among businesses. Today, it is recognized that banks can play
important roles in economic development and environmental protection through
performing and promoting green practices in banking and businesses.
Environmental concern is at the centre of GB policies and strategies. The public
concern of the state of environment has been growing rapidly in the last few years,
mostly due to unusual weather patterns, rising greenhouse gases, declining air
quality, etc. (Zeitlberger 2007). Banks hold a unique position in an economic system
that can affect production, business, and other economic activities through their
financing. Today, an increasing number of banks are going green by providing
innovative products that cover financial services to support the activities that are not
hazardous to environment and help conserve environment. Such activities are known
as ‘Green Banking Activities’ and the banks that are performing green banking
activities are popularly called ‘Green Bank.’ Green Banking is conducted in such
areas and in such manners that help overall reduction of carbon footprint2 and other
pollutions; and help preserving scarce resources for future generation.
In response to various legislative and regulatory bindings and incentives to
promote good corporate citizenship, a good number of banks in developed countries
have been demonstrating their commitment to the earth through incorporating
environmental risk in financing; using recycling programs; focusing on energy
efficiency, purchase of carbon offsets; and sponsoring environmental events.
In contrast, the status of environmental management has not been satisfactory in
many developing countries, largely due to poor enforcement of existing laws and
policies, lack of incentives and inadequate pressure from civil society and interest
groups (Habib 2010). Bangladesh Bank (BB) has been helping government in
implementing provisions of key environmental regulations in the financial sector and
1 In the endeavour of green banking, different stakeholders- government, IFIs and IGOs, environmental NGOs,
business firms, and commercial banks ( in addition to central banks) have been contributing in different ways. 2 It is the total set of greenhouse gas emissions caused by an organization, event, product or person.
Research Workshop Keynote Paper 01
from time to time it (BB) has issued a few environmental circulars and introduced
refinance facilities to encourage banks for environmental financing. The recent
circular on ‘Policy Guidelines for GB’ is a remarkable step on the way to developing
green banking practices in the financial sector of Bangladesh. Commercial banks’
responses are crucial for positive outcomes of these initiatives. Now the questions
are: Are the commercial banks responding to the initiatives of BB? Are the
commercial banks using refinance facilities of BB? Is there any change in the green
banking activities of the commercial banks after BB’s initiatives? What difficulties
are banks and the end users facing in this connection? How can these challenges and
issues be handled? There is no doubt that favourable legal framework; supportive
policy framework; conducive market environment are crucial for achieving the
desired goals. In finding the answers of the research questions, the study identified
the following specific objectives of the paper: one, discussing conceptual issues and
reviewing literature on domestic policy initiatives on green practices in global
perspective; two, discussing the green initiatives of BB to develop GB in Bangladesh
; three, identifying supportive legal, policy and market environment for developing
GB in Bangladesh ; four, examining the implications of the BB initiatives for the
commercial banks; and five, identifying measurers to handle challenges and issues
relevant for developing green practices in the banking sector of Bangladesh.
The research workshop paper is based on both primary and secondary
information. Secondary and published literature, research papers, and sustainability
reports of different banks and environmental organizations have been reviewed to
understand conceptual issues and domestic policy initiatives in global perspective.
Websites, published documents of BB and other commercial banks; and primary data
from BB and commercial banks have been used to attain the basic objectives of the
paper. The research team interviewed bank officials of relevant desks of the BB and
twenty-five selected commercial banks (covering 4 state-owned3, 17 local private
commercial banks,4 2 foreign commercial banks5 and 2 specialized banks6).
Unstructured questionnaires/schedules have been used to gather primary information.
A few cases have been gathered and added to the report to understand the
perspectives of commercial banks and end-users of green products. On the way to
finding measures for effective implementation of green banking practices in
Bangladesh, the relevant issues and challenges were placed in a workshop
(participated by a good number of experienced practitioners) where the participants
came up with some specific recommendations.
3 Sonali Bank Ltd., Agrani Bank Ltd, Janata Bank Ltd. . and Rupali Bank Ltd.,
4 Mutual Trust Bank Ltd., Mercantile Bank Ltd., Trust Bank Ltd., National Bank Ltd., Prime Bank Ltd.,
Uttara Bank Ltd., Southeast Bank Ltd., Dhaka Bank Ltd., Islami Bank Bangladesh Ltd., Al Arafa Islami Bank
Ltd., NCC Bank Ltd., EXIM Bank Ltd., BRAC Bank Ltd., Shahjalal Islami Bank Ltd., Eastern Bank Ltd., Dutch-
Bangla Bank Ltd. and Pubali Bank Ltd. 5 HSBC and Standard Chartered Bank
6 BASIC Bank Ltd. and Bangladesh Krishi Bank
02 Research Workshop Keynote Paper
The paper is organized into six sections. After stating the background, objectives
and methodological aspects in section I, section II attempts to discuss some
conceptual issues of GB and stakeholders’ role. Domestic policy and regulatory
initiatives both in global and Bangladesh contexts are discussed in section III. Section
IV identifies BB’s initiatives for the development of GB practices and the market
readiness. The implications of the BB’s initiatives are assessed in section V. Finally,
section VI comes up with some recommendations for effective implementation of
green banking practices in line with BB initiatives.
II. Green Banking Initiatives: Conceptual Aspects and Stakeholders’ Role
Green Banking Practices are Global Public Goods with Positive Externalities
The green banking initiatives have been linked with the concepts of market
failure-public goods and externalities. The concepts of externalities and public goods7
are closely associated. In today’s world, focus on Global Public Goods (GPGs)8 and
innovative financing mechanisms are closely related to the sustainable development
(Binger 2003). The GPGs having negative impacts is known as Global Public Bads
(GPBs). The results of the global pollutions and emissions like global warming,
contamination, disruption of eco-systems etc are GPBs. The negative externalities
and GPBs are the burdens of the entire society. In economic theory, the green
initiatives to handle these negative externalities and GPBs are GPGs (Habib 2010).
It is well known that green banking is a component of the environment
conservation effort by a group of stakeholders. International Financial Institutions
(IFIs) and Inter Governmental Organizations (IGOs) have been engaged in designing
principles and undertaking initiatives for framing international policy architecture;
governments have been formulating policies and enacting relevant rules and
regulations and enforcing emission standards; central banks have been formulating
rules and policies and implementing green banking practices in the financial sector;
environmental NGOs are engaged in the role of formulating guidelines and
monitoring business firms and banks; a section of consumers are paying premium in
the form of higher prices; some business firms are contributing by adopting voluntary
environmental protection programs; and a section of banks and Financial Institutions
(FIs) have been undertaking internal environment management and offering green
products. These efforts are expected to bring positive changes in the environment,
which are mostly non-excludable and non-rival in nature. Thus, as a whole,
the ongoing green initiatives by different stakeholders are GPGs where the society as
a whole is the target beneficiary. The green financing products that help create
favorable impact on environment have positive externalities.
7 A public good, as defined in economic theory, is a good that, once produced, can be consumed by an additional
consumer at no additional cost. 8 GPGs are public goods with benefits or costs that extend across countries and regions and across rich and poor
population groups, and even across generations (Inge et al. 2003).
Research Workshop Keynote Paper 03
Table 1: A Framework of Environmental Degradation and Green Initiatives
Source: Habib (2010)
Green Banking is a Multi-stakeholders’ Endeavour
Stakeholders’ roles are crucial for the development of green banking practices in
any country. Governments of a good number of developed countries and some
developing countries (like USA, EU, China etc.) and their central banks have been
remarkably active in offering regulatory and policy supports for the development of
green banking in their respective banking sectors. In the international arena, IGOs
and IFIs have been contributing a lot in developing international policy architecture
that enables countries and stakeholders to better anticipate and respond to
environmental initiatives. In this connection, Kyoto Protocol9 is a remarkable
9The Kyoto Protocol is a protocol of the United Nations Framework Convention on Climate Change, aimed at
fighting global warming. The UNFCCC is an international environmental treaty with the goal of achieving
stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous
anthropogenic interference with the climate system.
Society as a whole
are affected by GPBs and
Negative
Externalities
Producers Banks/Financial
Institutions Finance
Production
Air Pollution, Water Pollution, GHG
Emission etc
Global Warming, Contamination from
Pollution, Disruption of Eco-system etc
Negative
Externality
Global
Public
Bads
Green Initiatives by IFIs, IGOs,
Governments, Central Banks, Businesses,
NGOs and Banks
Global
Public
Goods
Output
Consumers
Consumption
Society as a whole
are benefitted by
Green Initiatives
04 Research Workshop Keynote Paper
initiative, which was adopted in 1997. As of October 2010, 19110 states have signed
and ratified the protocol under which 37 industrialized countries committed
themselves to a reduction of four greenhouse gases and all member countries gave
general commitments. A good number of environment related principles, guidelines
and standards have been developed over time by the international organizations for
the improvement of the green practices. Some notable examples include Equator
Principles (EPs), UN Principles for Responsible Investment (UNPRI), UNEP Finance
Initiative Statements, etc. The UNPRI was developed by institutional investors that
recognize the increasing relevance of environmental, social and corporate governance
issues that apply to asset management. The EPs are a set of voluntary standards that
commit signatory banks to take social and environmental risks into account when
providing project finance11. UNEP FI12 Statements recognize the role of financial
service sector in making global economies sustainable and commit to the integration
of environmental considerations into all aspects of their operations. Banks and
financial institutions13 have also been involved in designing and framing guidelines
and standards to be followed by the banking and financial communities. There are
important international standards and principles14 relevant for different
environmentally sensitive sectors prepared by international organizations and NGOs.
Banks can use these guidelines in formulating their sector specific policies and
strategies.
As a reporting standard, Global Reporting Initiative (GRI) is a remarkable
development. Developed by UN, GRI15 aims at standardizing sustainability reporting
procedure. It was conceived in 1997 by the Coalition for Environmentally
Responsible Economies (Ceres) which is a useful framework for producing annual
sustainability reports, promoting banks to not only describe policies but also to
measure their implementation. A number of global banks have been using this
framework for assessment and reporting purposes (Bank Track 2010).
10
http://en.wikipedia.org/wiki/List_of_Kyoto_Protocol_signatories 11
During last five years, project finance is applied more frequently in the environmentally sensitive sectors like
electricity generation (45%), oil and gas (34%), and mining (8%). It means that the EP applies to a considerable
share of a bank’s activities in the financing of these specific sectors (Ceres 2009). 12
The UNEPFI promotes investment in clean and renewable energy by financial institutions and other investors.
The UNEP Statement by Financial Institutions on the Environment & Sustainable Development applies to all
financial services. 13
For example, UNEP Finance is a collaborative effort of UN and over 190 financial institutions. The EPs are
designed by a group of banks based on the environmental and social policies and guidelines of IFC. 14
For example, the Guidelines for Investment in Operations that Impact Forests, published by WWF (World
Wildlife Fund) in September 2003, help banks identify critical issues in the sector and develop a forest policy (Bank
Track 2010). 15
The framework contains principles to define report content (materiality, stakeholder inclusiveness, sustainability
context, and completeness) principles to define report quality (balance, comparability, accuracy, timeliness,
reliability, and clarity) and guidance on how to structure the report.
Research Workshop Keynote Paper 05
Environmental NGOs have been engaged to play a role of watchdog for the banks
against financing dirty companies. For example, Green America16 and its allies
protested the plans of financing to build 11 new coal-fired plants17 in Texas by some
USA mega-banks in 2007, which helped stopping 8 of the 11 plants (Habib 2010).
NGOs have also been helpful to the banking community in formulating guidelines
and correcting paths. For example, Bank TracK (2010) published essential elements
that should be part of banks’ sector18 specific lending policies. Recently,
Pricewaterhouse Coopers LLP (2010) independently reviewed how ‘Climate
Principles Adopting Banks’19 are fulfilling their commitments.
The voluntary initiatives of business firms (the main clients of banks) have been
working as a complement to strictly regulatory approaches and are crucial incentives
to the green banks. In USA, recent developments in technology have made it easier to
undertake environment protection measures by a good number of corporate
businesses (Bhat 2008). Large Japanese companies such as OKI, Asahi, Fuji, Fujitsu
and Sumitomo have led the way to establishing zero-emissions plants. Voluntary
cleaner production initiatives have also existed for some time in developing countries
like Taiwan, Thailand and China (Welford 2004). In recent years, a good number of
global businesses have adopted ISO 1400020 as a part of their commitment to
environment and the society.
The business firms and banks had not always been very receptive to the pressures
being put on them by NGOs and environmental organizations. However, the growing
environmental concern has brought about a new era of communication and
cooperation between the business/banks and the NGOs worldwide (Kennedy 2008).
Some NGOs have also been supporting banks through educating consumers and
businesses21.
Consumer awareness and responses improved over the years, though a lot more is
expected for the betterment of environment and society. A study by Javelin Research
(2009) observes that consumers have more interest in ‘thinking’ green than actually
‘acting’ green. The study finds that while environmental issues have grown in
16
Green America is a not-for-profit membership organization founded in 1982 with a mission to create a socially
just and environmentally sustainable society. 17
There’s no doubt that climate change presents a serious threat—so it makes no sense to continue building carbon-
spewing coal-fired power plants. 18
Covers agriculture, fisheries, forestry, mining, oil & gas and power generation. 19
In December 2008, a group of global financial institutions including Credit Agricole, HSBC, Munich Re,
Standard Chartered and Swiss Re– announced their adoption of the Climate Principles, a set of commitments on
climate business strategies developed by the Climate Group, a UK-based climate advocacy group. 20
The ISO 14000 family addresses various aspects of environmental management. The very first two standards, ISO
14001:2004 and ISO 14004:2004 deal with environmental management systems (EMS). ISO 14001:2004 provides
the requirements for an EMS and ISO 14004:2004 gives general EMS guidelines. 21
For example, in USA PayItGreen and NACHA have been engaged in educating consumers and businesses about
the positive environmental impact of choosing electronic bills, statements and payments over paper.
06 Research Workshop Keynote Paper
importance with consumers, green banking habits have yet to take hold. The report
notes that most consumers want to do the right thing, but if the process appears
confusing or inconvenient, they simply are not going to bother changing their
banking habits (Javelin Research 2009). The following table shows systematically the
whole picture.
Table 2: Role of Stakeholders in the Development of Green Banking
Source: Habib (2010)
Market Based Economic Incentives are Crucial for Green Banking
Refusing to lend to ‘dirty’ industries is one thing but making a commitment to
clean up one’s own act is even harder (Goth 2008). Sometimes it is difficult for the
banks to balance environmental concerns and business demands. Banks need market
incentives for that. Policy and regulatory supports exist in most industrialized
economies in favour of developing a congenial atmosphere for providing green
products by banks22. In the past, environmental regulations were either absent or there
22
For example, banks’ engagements in environmental and community development activities are entitled to receive
incentives from US Department of the Treasury. The Treasury offers certification to banks as a Community
Development Financial Institution (CDFI) and access to CDFI Fund to provide commercial loans to the renewable
energy, green building, fishing, foods and agriculture industries. Banks are also receiving funding from the USA
Small Business Administration (SBA) for ER financing (Fed Atlanta 2009).
Banks/Financial Institution
-Green Financing
- Environmental Risk
Assessment in Financing
-Environmental Programs
-Internal Environment
Management
-Environmental Reporting
NGOs developing
guidelines &
monitoring
banks’
activities
IFIs/ IGOs are
developing
international
policy
architecture
Govt. formulating
regulations
and providing
incentives
Central Bank
formulating
guidelines, promoting
green
initiatives by
banks Business Firms
voluntarily accepting
environmental principles
and pay premium
Consumers becoming
aware and increasingly ready to
pay premium
Research Workshop Keynote Paper 07
was lack of enforcement in developing countries. Nowadays, environmental liabilities
are starting to represent real economic risks and environmental legislation in many
developing countries is rapidly converging to the path followed by the path of
industrialized countries. There is no doubt that mandatory or legal imposition may
not work for long and will not bring optimum result. Thus, it is important to convert
regulation-driven approach of corporate to market based approach for long run
effective environmental protection.
‘Environmental liability’ is one reason why lenders are exposed to credit risk,
should the borrower have difficulties repaying. In fact, many different types of costs
can arise as a result of pollution or compliance with environmental laws. Growing
market risks may work in favor of developing responsible practices. There are
instances in Argentina, Chile, Mexico and the Philippines where stock markets
reacted negatively to citizens' protests reported by the economic press (World Bank
1998). In many instances, stock prices reward the announcement of superior
environmental performance such as greater pollution control or the adoption of
cleaner technologies.
Besides credit and market risks, damage to an institution’s reputation often acts as
an important driver for international banks. A study by Mercier and Oliver (2002)
notes, for many financial institutions, credit and market risks have not been the
primary motivation for adopting an environmental program. A Senior Executive
Vice-President for group risk management at ABN AMRO states ‘I believe that
environmental damage is primarily a risk to our reputation rather than a credit risk’
(ABN AMRO 2006).
Consumers or business firms are more likely to accept environmentally sound
financial products if it does not have an associated economic cost, or is, in fact, more
affordable than the environmentally degrading alternative. Over the years, greater
consumer awareness and voluntary environmental activities of an increasing number
of business firms have been contributing towards creating an environment of better
economic and market based incentives for green banks. Best practice analyses and
awards are some forms of incentives to the banks that may also work as marketing
tools and recognition23.
III. A Review of Effective Domestic Policy Initiatives and Regulatory
Environment for Green Banking
Effective Policy and Regulatory Environment in Global Economies
US banks are the early starters that drastically began changing their policies after
enforcement of the Comprehensive Environmental Responses, Compensation, and
Liability Act (CERCLA) by the US government in 1980. CERCLA holds US banks
23
For example, Financial Times and IFC recognize the Best Sustainable Bank for every year.
08 Research Workshop Keynote Paper
directly responsible for contamination caused by their clients (Weber et al. 2008).
Due to strict environmental disciplines imposed by the competent authorities across
many countries, the industries would have to follow certain standards to run their
business. In the case of failure, it would lead to closure of the industries leading to a
likelihood of default to the bank. For example, the enactment of CERCLA in the US
in the late 1980s resulted in huge loss to the banks in the US as banks were held
directly responsible for the environmental pollution of their clients and made to pay
the remedial cost. This is the reason the banks in the US are ahead of other countries
in integrating environmental concerns into their business operations (Bhat 2008).
Of the different early initiatives under these regulations, Superfund24 is the first
program in the world to tackle USA’s 150-year industrial legacy and to make those
responsible for the clean up. In recent years several other countries (more in Europe)
are seen adopting policies that have made banks responsible for the misdeeds of their
clients. For example, in the United Kingdom, the breach of terms of the license given
by integrated pollution prevention control would lead to prohibition, financial
penalties and enforcement notice. All such notices can have significant financial
implications for the business as well as the financial institutions that have put money
into it (Stavros 2005).
Using government support, small and local FIs and banks in USA and some other
European countries have led the way in embracing green development and creating
targeted green lending programs. These programs use public subsidies to reduce
interest rates on loans issued by participating lenders that homeowners use to finance
energy-efficient improvements. In USA, The Department of Natural Resources
subsidizes one-half of the financing for the energy-efficient improvements, making
the loan more affordable. Banks engagements in environmental and community
development activities are entitled to receive incentives from US Department of the
Treasury. The Treasury offers certification to banks as a Community Development
Financial Institution (CDFI) and access to CDFI Fund. CDFI funding increases a
bank’s capacity to provide commercial loans to the renewable energy, green building,
fishing, foods and agriculture industries (Fed Atlanta 2009).
The UK Government is committed to achieving the transition to a green
economy and delivering long-term sustainable growth. This will require more
sustainable use of natural assets, less environmental damage, improved resource
efficiency and greater energy security and resilience, while also maximizing growth
and creating high value employment. Policy makers of developed countries are
also responding positively to the suggestions of stakeholders. In 2009, Green
24
In 1980, USA Congress enacted CERCLA, which authorized the ‘Superfund’, the Federal government’s program
to clean up the nation’s uncontrolled hazardous waste sites. To do this, EPA works closely with communities ,
potentially responsible parties (polluters), scientists, researchers, contractors, and state, local, tribal, and other
federal authorities. Working with these groups, EPA identifies hazardous waste sites, tests the conditions of the
sites, formulates cleanup plans, and begins cleaning up identified sites. (Source: www.america.gov/st/energy and
www.epa.gov/superfund/index.htm)
Research Workshop Keynote Paper 09
Alliance proposed to set up a Green Investment Bank in order to deliver a low
carbon economy in the UK, and the government responded positively (Reuters
2010). Australia is the worst contributors in terms of per capita green-house gas
production. Recently the Australian government proposed to impose carbon tax on
500 companies at the rate of USD 25 per ton from the coming year which would
rise by 2.5 percent every year. This scheme aims to cut Australian carbon emissions
by 5 percent of 2000 levels by 202025.
In regard to supportive policy environment, the approaches of governments and
central banks have changed dramatically over time even in developing countries.
In view of the financial globalization and ever increasing environmental regulations,
many financial institutions operating in developing and emerging countries are
pressed to better manage risks arising from environmental liabilities. In the past,
it was sometimes argued that environmental regulations in developing countries are
either non-existing or lack enforcement. Today, environmental legislation in many
developing countries is rapidly converging to the path followed by the industrialized
countries, while the prospects for enforcement seem to loom larger. In 2007, a Green
Credit Policy was jointly developed by the State Environmental Protection Agency,
the People's Bank of China, and the China Banking Regulatory Commission with the
objective to guide loan financing away from highly polluting and/or energy
consuming enterprises and projects. According to the policy, firms that fail to pass an
environmental assessment or implement state environmental protection regulations
will be disqualified from receiving loans from any financial institution. The policy
sends a strong message to banks concerning new responsibilities towards
environmental protection (Business Issues Bulletin 2009). The environmental
regulations in India can be broadly classified into two broad categories i.e. command
and control regulations and liability law. The command and control regulations are
designed to dissuade environmentally damaging projects and are implemented by
setting industry specific pollution standards, scrutinizing the projects and
granting/denying permissions by the concerned authorities like Ministry of
Environment and Forest. The liability laws are ex post in nature and are implemented
by enforcing authorities through imposing fines, closing down the defaulting
industries etc. However, there is no law and rule in India that can hold banks
responsible for scrutinizing investment projects before financing and for the
environmental damage created by its client (Sahoo and Nayak 2008). In fact, many
different types of costs can arise as a result of pollution or compliance with
environmental laws. For example, in Columbia, Banco de Colombia was held
responsible for cleaning up a site received from the National Federation of Cotton
Growers in payment of a loan.
25
The Daily Star, July 11, 2011.
10 Research Workshop Keynote Paper
Supportive Policy and Regulatory Environment of Green Banking in Bangladesh
Key environmental legislations/rules in Bangladesh include Water Pollution
Control Ordinance, 197026; The Environment Pollution Control Ordinance, 197727;
The Bangladesh Environment Conservation Act, 199528; The Environmental
Conservation Rules, 199729; and The Environment Court Act, 2000; and the
recently amended Environment Court (Amendment) Act, 201030. Recently the
Bangladesh Environment Preservation (Amendment) Act, 2010 has been enacted to
impose restrictions on pollution generating stockpiling and transportation of
hazardous waste as well as provisions for the aggrieved persons to sue directly in
the environment court.
The issue of climate change, waste management and wildlife protection received
attention of the policy makers of Bangladesh in recent years. In order to utilize the
resources of Climate Change Trust Fund in an effective and suitable manner, the
Climate Change Trust Act, 2010 has been enacted. According to the recent budget
speech of the Finance Minister, National Action Plan 2020 has been formulated and
the Wildlife Protection Act, 2010 would be finalized soon for preservation of
environment. Further, in order to manage different waste in an environmentally and
hygienically acceptable manner the Solid Waste Management Rules, 2011 and the
Hazardous Waste and Ship Breaking Waste Management Rules, 2011 would be
enacted soon.
To protect the environment, government formulated Environmental Policy in
1992 and made commitments as a signatory of a number of Multilateral
Environmental Agreements31. In fact, the awareness build up and conservation effort
started in Bangladesh in the 1980s when several developments took place, and during
that period a separate Ministry called Ministry of Environment and Forest (MoEF)
and The Department of Environment (DoE) were established (Islam 2002). The
Department of Environment (of the MOEF) developed a sector-specific industrial
guidelines and standards as per the requirements of the country’s environmental acts.
Government has also undertaken some initiatives to encourage environment
friendly industries and for saving scarce energy resources. In Bangladesh,
a Renewable Energy Policy has been prepared in order to generate environment-
26
An ordinance to provide for the control, preservation and abatement of pollution of water of Bangladesh. 27
An ordinance to provide for control prevention and abatement of pollution of the environment of Bangladesh. 28
An act to provide for conservation of the environment, improvement of environmental standards and control and
mitigation of environmental pollution. 29
To exercise the powers conferred by section 20 of the Bangladesh Environmental Conservation Act, 1995, the
Government of Bangladesh passed this rule. 30
An act to provide for the establishment of environment courts and special magistrate courts in all districts. 31
Bangladesh is a signatory of the Rio Conventions (RCs), i.e. United Nations Framework Convention on Climate
Change (UNFCCC), Convention on Biological Diversity (CBD) and United Nations Convention to Combat
Desertification (UNCCD).
Research Workshop Keynote Paper 11
friendly power from renewable energy sources. Various action plans have already
been undertaken with the target to generate 5 percent and 10 percent of total power
production by 2015 and 2020 respectively32. The government has also initiated to set
up a Sustainable Energy Development Authority (SEDA) and is working to finalize
Sustainable Energy Development Act, 2011.
Mandatory Jute Packaging Act, 2010 passed with the intention to boost the
classic environment friendly sonali ansh (golden fibre). It has made the use of jute
bags for packaging all agricultural produce, food stuffs and even cement legally
binding. This golden fiber’s potential is immense: paper pulp from green jute and
yarn for household linen, upholstery and clothing, not to forget existing items like
carpets, rugs, twine and sacking (www.worldjute.com).
Industrial waste has been a problem for Bangladesh. Polluting water, land and
air by throwing industrial wastes have been growing concerns. In order to manage
the solid waste, ship breaking waste and hazardous waste in an environmentally and
hygienically acceptable manner, two rules, namely, the Solid Waste Management
Rules, 2011 and the Hazardous Waste and Ship Breaking Waste Management
Rules, 2011 will be enacted soon, as declared in the budget speech. E-waste is
another growing environmental concern of developing world including Bangladesh.
The country has no regulation specifically dealing with e- waste till date. As
Bangladesh is a signatory to Basel convention, import of any kind of waste requires
government’s permission. In the adopted National ICT Policy, 2009, environment,
climate and disaster management is identified as one of the ten objectives, which
aims to ensure safe disposal of toxic wastes. Government has already prepared a
draft National 3R (Reduce, Reuse & Recycle) Strategy where e-waste issues have
been addressed.
Bangladesh Environmental Conservation Act (ECA), 1995 is the umbrella Act.
ECA 1995 and ECR 1997 together provide the framework of environmental
regulations relevant to industries of the country. According to the framework,
‘no industrial unit or project shall be established or undertaken without obtaining
environmental clearance from the Director General, DOE in the manner prescribed by
the rules’. EIA is an instrument of environmental planning of new projects that is
expected to carry out the process of clearance33 that rests on DOE. It is to be noted
32 Two wind powered power plants with 1 MW capacity each have been built to supply electricity to coastal belts of Kutubdia and Feni. Solar panels have already been installed in various public and private organizations including the Prime Minister’s office. Government has decided to install a 100 MW (offshore) windmill power plant at Anwara, Chittagong. 40 solar-based irrigation pumps are also going to be set up by
the government gradually. Government planned to install solar bulbs in some of the streets of Dhaka City Corporation area. This program will be rolled out to all the City Corporation subsequently.
33 Application for environmental clearance requires documents like NOC from local authorities for Green and
Amber-A categories, and in addition require Environment examination report, Pollution Minimisation Plan etc. for
Amber-B and Red categories of Industries.
12 Research Workshop Keynote Paper
that the clearance from the DOE is one of the requirements for obtaining finance from
commercial banks for the industrial units grouped under different categories of EIA.
For the purpose of issuing the Environmental Clearance Certificate, the industrial unit
and projects shall in consideration of their location and impact on the environment be
classified into the following 4 categories34: (i) Green, (ii) Orange-A, (iii) Orange-B
and (iv) Red. ECR 1997 prescribes various performance standards35 requirements
that are both general and industry specific.
IV. Green Initiatives by Bangladesh Bank and the Market Environment for
their Implementation
Green Initiatives by Bangladesh Bank
Bangladesh Bank has undertaken certain initiatives to help implement the
relevant provisions of environment related acts enacted by the government of the
country. In 1997, commercial banks of the country were asked36 by the central
bank to undertake necessary steps for implementation of certain decisions in
regard to environmental conservation and protection by the National Environment
Committee. Banks of the country were asked to ensure that steps have been
undertaken to control environmental pollution before financing a new project or
providing working capital financing to the existing enterprises37. According to the
BB requirements, the industrial units (that may cause environmental pollution) to
be established under bank credit would get permission for opening LC to import
machineries only after ensuring that the list of machines includes equipments to
set up waste treatment plant38. A comprehensive guideline on Corporate Social
Responsibility (CSR) has been issued by BB where banks have been asked to
concentrate hard on linking CSR at their highest corporate level for ingraining
environmentally and socially responsible practices and engaging with borrowers
in scrutiny of the environmental and social impacts39.
34
This categorization indicate that green is least polluting and red is most polluting, with the two orange
categories regarded as having medium-scale impacts. In its Schedule I, ECR 1997 includes a list of 22
industrial units or projects under Green, 26 types under Orange A, 69 types under Orange B and 69 types
under Red. For the each category of industries, there are different levels of documents to be provided at the
time of seeking the Environmental Clearance Certificate (Ministry of Environment and Forest, BEI
Guidelines for Industries, June 1997). 35
The following are the prescribed standards: Water (Schedule 3), Sound (Schedule 4), Sewage discharge
(Schedule 9), Waste from industries (Schedule 10), gaseous emissions from industries (Schedule 11) and sector -
wise industrial effluent or emissions (Schedule 12). When operating the industries, these performance standards
have to be met in order to ensure that there is no legal non-compliance. 36
BB BRPD Circular No-12 dated August 10, 1997. 37
BB BRPD Circular No-12 dated October 08, 1997; BRPD Circular No-21, November 10, 1999; and BRPD
Circular No-17, December 29, 2010. 38
BB BRPD Circular No-12 dated October 08, 1997. 39
BB DOS Circular No-1, June 1, 2008.
Research Workshop Keynote Paper 13
Online banking has been the starting point of GB in many instances. Bangladesh
Bank has been encouraging commercial banks to undertake online banking activities.
Banks have been brought under the purview of E-commerce with a view to providing
the customers with online-banking facilities covering payments of utility bills, money
transfer and transactions in local currency through internet as well40.
Considering the adverse effects of climate change, banks have been advised by
BB to be cautious about the adverse impact of natural calamities and encourage the
farmers to cultivate salinity resistant crops in the salty areas, water resistant crops in
the water logged and flood prone areas, drought resistant crops in the drought prone
areas, using surface water instead of underground water for irrigation and also using
organic fertilizer, insecticides by natural means instead of using chemical fertilizer
and pesticides41. Bangladesh Bank has also been taking initiatives for the
rehabilitation of cyclone and other natural disaster affected people of the country time
to time. For example, Bangladesh Bank issued a circular on Agri-loan Facilities for
rehabilitation of agriculture sector in cyclone Aila affected areas in July, 200942.
Moreover, banks were asked to undertake CSR activities in the areas of the affected
people for their rehabilitation43.
There is no doubt that environmental protection had not been on the priority list
of the policy makers in Bangladesh. However, some recent initiatives by the BB are
really encouraging. Banks have been advised to finance in solar energy, bio-gas plant,
Effluent Treatment Plant (ETP) and Hybrid Hoffman Kiln (HHK) in brick field under
refinance program of BB44. BB introduced Taka 2.0 billion refinance line in FY 10
against bank loans for investments in solar energy, biogas plants and ETPs. A year
back, BB switched over to solar-powered lighting by setting up a 20 kilowatt solar
panel, as a move towards encouraging green energy in Bangladesh. A new refinance
facility of Taka 5.0 billion has also been introduced to capacitate jute sector, the age-
old green pillar of Bangladesh economy (Rahman 2010).
The recent comprehensive circular45 of BB on ‘Policy Guidelines for Green
Banking’ is a remarkable step on the way to develop GB practices in the banking
sector of the country. As per the circular, commercial banks will have to adopt a
comprehensive GB policy by December 2013 as a part of the central bank's efforts to
make banking practices more responsible to social and environmental causes. Besides
introducing internal environment management, the banks are expected to introduce
environment friendly green financing to address the environmental challenges of the
country. The policy is segregated into three phases. In phase-I, the banks are to
40
BB Circular No-2, dated February 27, 2011. 41
BB ACSPD Circular No-04, dated July 14, 2009. 42
BB ACSPD Circular No-05, July 14, 2009. 43
BB DOS Circular No-2, June 2, 2009. 44
BB ACSPD Circular No-9, July 08, 2010. 45
BB BRPD Circular No-2, February 27, 2011.
14 Research Workshop Keynote Paper
develop green banking policies and show general commitment on environment
through in-house performances by December 31, 2011. Banks are required to
formulate environmental policy and create a GB cell or unit under this phase. A high-
powered committee should be responsible for reviewing the banks' environmental
policies, strategies and programs. The banks are to allocate sufficient fund in their
annual budget for GB; and are to introduce a green office guide for practicing internal
environment management. The banks should take measures to save electricity, water
and paper consumption as per the requirement. Instead of relying on printed
documents, online communication should be extensively used for office management.
Energy saving bulbs should replace the regular ones in branches/offices of the banks
and employees should be encouraged to purchase energy efficient cars. Banks are
also to create a climate risk fund to finance the economic activities of the flood,
cyclone and drought prone areas at the regular interest rate without charging
additional risk premium.
In phase-II of the Green Policy Guidelines that would not exceed December 31,
2012, banks have to formulate specific policies for different environmentally
sensitive sectors46 and will have to determine a set of achievable targets and
strategies, and disclose these in their annual reports and websites. They are
expected to set up green branches and should increasingly rely on virtual meeting
through video conferencing. Banks are to develop and follow environmental risk
management manual in their assessment and monitoring of project and working
capital loans under phase-II. The Phase-III, which is to be attained by December
31, 2013, requires banks to publish independent Green Annual Report following
internationally accepted format like GRI (details in appendix-2) with the
arrangement of external verification.
The circular on policy guidelines for GB requires reporting to BB on quarterly
basis first of which was due on July 15, 2011. The circular points out some incentives
in the form of preferential treatments for the compliant banks: BB will give points to
compliant banks on management component while deciding on its CAMELS rating;
BB will name top ten banks for their overall performances in green banking; and BB
will take into account green banking in giving permission to open new branches.
BB prepared and circulated a Guideline on Environmental Risk Management
(ERM)47 on January 30, 2011 to streamline solutions for managing the environmental
risks in the financial sector. The guidelines cover different conceptual aspects,
approaches, applicability, stages and benefits of ERM by banks. The ERM guideline
prescribes a set of sector specific ‘Environmental Due-diligence Checklist’ for
46
Agriculture, agri-business, agro farming, leather, fisheries, textile, renewable energy, pulp and paper, sugar and
distilleries, construction, engineering and basic metal, chemicals, rubber and plastics, hospitals, brick
manufacturing, and ship-breaking. 47
BB BRPD Circular No-1, January 30, 2011.
Research Workshop Keynote Paper 15
financing environmentally sensitive sectors48 by banks. As per the guideline, banks
should establish and maintain a database of NPLs that are due to environmental
reasons to ensure that the banks/FIs streamline their own institutional knowledge for
better decision-making in their future financing. Banks/FIs are required to have a
reporting system on an annual basis and should form a part of their Annual Report.
The Policy Guidelines for GB (circulated in February 2011 and discussed earlier)
requires complying with the instructions stipulated in this detailed guidelines on
ERM.
Supportive Environment for Development of Green Banking: Is Bangladesh Ready for a
Change?
Other than policy and guiding supports from BB, a congenial market environment
with active support from government, businesses, NGOs and consumers are crucial
for the development of GB practices in the country. Government of Bangladesh has
taken some notable measures for improving environmental governance in recent
years. Alongside enactment of a pool of environmental regulations (discussed in
section III), the government has undertaken the National Capacity Self-Assessment
(NCSA) initiative to assess the capacity needs and prepare a capacity development
action plan in sustainable environmental governance in the year 2007. Recently, a
Monitoring and Enforcement Section has been set up in the DOE to monitor the
compliance of conditions set out in the environmental clearance certificate. Creation
of ‘Climate Change Trust Fund’ is a very positive step on the part of the government.
The fund has been created in order to mitigate the effects of disasters and natural
calamities through capacity building with a total of Tk. 1,400 crore. Another fund
titled ‘Bangladesh Climate Change Resilience Fund (BCCRF)’ with an amount of
USD 113.5 million has also been created with the financial support from different
development partners. Two projects resourced from this fund has been undertaken to
establish cyclone centers and carry out afforestation. In the budget of FY2011-12, a
target has been set to create block gardens in 16000 hectares of land, strip forests
covering 3500 kilometers of land and to distribute around 35 lakh plants. Moreover, a
special project named ‘Clean Air and Sustainable Environment’ has undertaken to
identify the sources of air pollution and work out necessary action plans to reduce the
pollution level in the capital city Dhaka. Recently, government initiated steps to
replace 28 million incandescent bulbs with Compact Fluorescent Lamp (CFL) bulbs
to ensure savings and proper use of power49. Government is also encouraging the
factories producing incandescent bulbs to switch over to CFL bulbs production
gradually. In addition, government has declared to start special programs (Energy
Star Labeling Program) to encourage people to save energy (Budget Speech 2011).
48
Agri-business, cement, chemicals, housing, engineering and basic metals, pulp and paper, tannery, Sugar and
distilleries, textile and apparels, and ship-breaking. 49
In FY 2010-11, Bangladesh saved almost 250 MW by distributing 10.5 million of Compact Fluorescent Lamp
(CFL) bulbs free of cost (Budget Speech 2011).
16 Research Workshop Keynote Paper
However, if there is no arrangement for disposal or recycling of energy saving bulbs/
CFL bulbs50 then, these could prove to be even more dangerous for the environment
and health in the long run. Practically, developed countries can afford such
arrangements51 which may not be so easy for a low-income country like Bangladesh.
Environmental responsibility comes as a part of CSR practices among businesses
in Bangladesh. Capturing a set of CSR issues52 based on primary and secondary
survey of three stakeholders53 group, a CPD (2003) study observes that 64 percent of
the business firms54 have a ‘sustainable development policy’. The data of the CPD
study indicate about two-thirds of the civil society representatives are dissatisfied
with the state of corporate responsibility as practiced by companies in Bangladesh.
In regard to environmental responsibility, CPD (2003) analysis shows that only 49
percent of the corporations recognize their responsibility in protecting the
environment and very insignificant proportion of companies have policies or
strategies related to environment. The study revealed quite an outstanding difference
between company policy to manage the waste generated and existing system for their
implementation. Practically, environmental pollution and violation of related
regulations are widespread in the country. However, the number of companies in the
survey which were found violating environmental legislation, and for that reason
experienced penalty, is very limited (only 9 percent). The situation indicates weak
enforcement of regulations and poor performance of the law-enforcing agencies that
are responsible for penalizing environment polluters. However, it is encouraging that
the DOE is increasingly becoming active and has taken punitive measures55 against
the polluting industrial units during recent period.
Industrial wastes have reached to the dangerous level and have been one of the
major sources of pollution and environmental degradation in the country.
A commonly known fact is that a good number of industrial units of the country have
50
There are potential hazards associated with certain types of CFLs. Emissions from open CFLs have demonstrated
significant environmental (land contamination, air and water pollution etc) and health risks (like radiation exposure, skin cancer, mercury contamination, etc.) associated with their use and disposal (www.ehow.com). 51
US EPA asserts that no mercury is released into the environment when CFL bulbs (regardless of type) are intact
or in use. However, all CFLs must be disposed of properly during replacement or due to breakage because of the
risk of mercury contamination via skin or airborne transmission. For safely handling, broken CFLs, the EPA advises
wearing protective gloves, carefully scooping up glass fragments and powder using stiff paper or cardboard and
placing the remnants in a glass jar with a metal lid or in a sealed plastic bag (www.ehow.com). 52
Sustainable Development, Business Ethics, Human Rights, Legal Compliance, Corporate Governance,
Stakeholders Dialogue, Fair Employment, Health & Safety, Labour Standards, Community Relations,
Environmental Responsibilities. 53
Companies/Employers, Civil Society Groups, Employees 54
A total number of 151 business enterprises that include RMG, Energy, Leather, Pharmaceuticals, Constructions,
Textiles, Jute, Ceramics, Plastic, Software, Engineering, Food and Agro-based industry. 55
For example, in June 2011, DoE penalized Tk. 3 million to a textile dyeing unit for polluting water resources
and farming land; on April 20, 2011 DOE fined a brick field Tk. 1.5 million for expanding its kiln filling up the
Dhaleshwari River bank; on January 24, 2011, DOE ordered a real estate company in Chittagong to pay Tk . 7
lakh in fines for cutting down a hill; on December 30, 2010, DOE sealed Experience Textiles Ltd, a Pakistani
venture for fabric dyeing at Bhaluka in Mymensingh, and fined it Tk . 2.24 crore for polluting over 232 acres of
agricultural land.
Research Workshop Keynote Paper 17
ETPs (as per regulatory requirement) that are kept shut. Very recently six factories
were slapped hefty fines for not using their ETPs56. It is encouraging that recently the
High Court of Dhaka, Bangladesh has prohibited scrap ships from entering the
country. Moreover, some recent philanthropic and voluntary green activities57 of
businesses could be very helpful in creating awareness among common people.
Government agencies are also extending hands to them58.
One relevant vulnerable area in Bangladesh is inadequate responses and
awareness among consumers on the issue. Consumer awareness is still very low with
limited market surveillance by consumer organizations and there is no consumer
representation in any standardization activity (Consumer International,
www.consumersinternational.org). The Consumers Association of Bangladesh
(CAB), a consumer organization in the country, is not that much active for building
consumer consciousness concerning green products (Shamsudoha 2005). In 2008,
Consumer International and UNIDO undertook initiatives to raise public awareness
on quality (in terms of safety, health, performance, reliability, environment, and
consistency) standards and to encourage informed choice (as part of Bangladesh
Quality Support Program of UNIDO) in the country. Shamsudhoha and Alamgir
(2009) observes, though green marketing seems to be getting popular, it has not been
very successful in practice in Bangladesh either in attracting customers or in helping
the environment. The study also notes, neither customers know nor producing
organizations clearly state environmental benefits of any products. Generally,
consumers are not found to be committed to improve their environment and may be
looking to lay too much responsibility on industry and government. Considering
income levels of the greater proportion of the country’s people, it is also not easy to
impose external cost of pollution directly on their shoulders.
There are probably more and bigger NGOs in Bangladesh than in any other
country of a similar size of population in the world. A few NGOs are actively
involved in the environmental sectors of Bangladesh by doing research and
advocacy59, and as pressure group. These are implementing several projects with
government and international donor agencies and international environmental
NGOs60. A good number of NGOs have collaborated with the government in
56
DOE fined six factories BDT 1 crore on July 13, 2011 for keeping ETPs idle in their factories. DOE also ordered
closure of an unit for not installing ETP (The Daily Star, July 14, 2011). 57
For example, Holcim (Banagldesh) Ltd, a cement company, has inaugurated ‘Holcim Green Heart Society’ by
welcoming Bengali New Year to increase the awareness of presenting a green environment to our future generation
(Bangladesh Brand Forum, A monthly magazine, Issue-2, Vol-3, April, 2011). . 58
Grameenphone Ltd and Dhaka City Corporation have taken a joint initiative to clean up some areas of Dhaka
city on the Pahela Baishakh eve on April 14, 2011 with the pledge ‘Shobuje Thakun, Kachey Thakun’ to build a
greener and cleaner world (Bangladesh Brand Forum, April, 2011). 59
Bangladesh Centre for Advanced studies (BCAS) and Centre for Natural Resources Studies (CNRS) are basically
involved in relevant research activities. 60
International NGOs like Greenpeace, IIED, ACOPS, IUCN, Actionaid, Winrock International are working in
Bangladesh with collaboration of the governmental agencies and national and local environmental NGOs.
18 Research Workshop Keynote Paper
formulating National Environmental Management Action Plan in 2007 (NEMAP).
Some of these are now engaged in implementation of NEMAP related and other
environmental projects. Considering the insignificant roles of government in
environmental protection in the country, some environmental NGOs61 are trying to
put pressure on the government to undertake protective measures to save critical
sectors like wetland conservation, pollution control and biodiversity protection.
They are also trying to motivate people, and in some cases the government is
accepting their ideas (Ahsan et al. 2009).
Research, advocacy and campaign on environmentally responsible practices of
banks or GB are extremely limited. The issue is not on the priority list of the
environmental NGOs of the country till date. CSR or green practices of businesses
also found priority in an insignificant number of research activities. CPD conducted
an informative and comprehensive study on corporate responsibility practices by
businesses in Bangladesh in 2003 in association with TERI-UK62. Manusher Jonno
Foundation63 sponsored some research activities on social accountability of
businesses64 and banks65 in recent years. Bangladesh Enterprise Institute (BEI)66
conducted some research and published some guidelines on Corporate Governance,
CSR and ER practices of Bangladesh covering business sector including banks.
Sponsored by Katalyst 67, BEI conducted a survey to develop guidelines for financial
institutions in promoting environmentally and socially responsible business practices
in 2005. The study came up with a proposed framework for socially and
environmentally responsible practices by banks in Bangladesh. BIBM has undertaken
a few research activities and training programs to create awareness and improve
understanding of the GB in Bangladesh among bankers.
V. Examinations of the Implications of Bangladesh Bank’s Initiatives for Banks
and End-users
Green or ER practices are generally seen as a part of CSR practices in the
banking sector of Bangladesh. Most financial institutions in Bangladesh have not
integrated CSR in their routine operation; rather they are in the form of occasional
charity or promotional activities (Rahman 2009). The CSR that includes mainly
61
Bangladesh Poribesh Andolan (BAPA), Bangladesh Environmental Lawyers Association (BELA), Ongikar
Bangladesh are examples of such types of NGOs. 62
The Energy and Resources Institute (TERI) works for solutions to global problems in the fields of energy,
environment and current patterns of development, which are largely unsustainable. 63
Manusher Jonno Foundation is a Bangladeshi based group of NGOs to promote human rights and good
governance in Bangladesh. 64
For example, Raihan, Ananya conducted a study on Social Accountability: Prospects and Challenges for the
conference organized by Manusher Jonno in 2005. 65
For example, a case study by Shah Md. Ahsan Habib was prepared on Social Accountability of Bank: Role and
Challenges for a Conference organized by Manusher Jonno in 2005. 66
Bangladesh Enterprise Institute is a non-profit centre for research and advocacy work focusing on the growth of
private enterprise in Bangladesh. 67
Katalyst is a market development project funded by some donor agencies in Bangladesh.
Research Workshop Keynote Paper 19
philanthropic activities of banks generally cover education, health, disaster relief,
sports, art and culture, environment etc. According to BB (2010), only 1 PCB and 1
FCB have direct environmental intervention in 2009 as a part of their CSR activities.
Moreover, during 2008 and 2009, 5 PCBs and 1 FCB have taken direct steps to
provide aid and rehabilitation program they considered necessary to the group of
people affected in different natural disaster (BB 2010). In recent years, some banks of
the country have undertaken remarkable steps covering plantation, resource saving,
financing green initiatives etc. (some examples are in appendix -1). It is encouraging
that overall CSR expenditures (that includes expenditure on environmental
initiatives) of banks have increased significantly from BDT 226 million in 2007 to
BDT 3896 million in 2010.
Table 3: CSR Expenditure of Banks over 2007-2010
Source: BB Data, 2011
As mentioned earlier, banks allocate funds for environmental reasons as a part of
their CSR expenditure. According to a BIBM survey (Habib et al. 2010), only 11
percent banks have separate funds to support environmental activities. The situation
has not changed following the issuance of the circular on ‘Policy Guidelines for
Green Banking’ in February 2011. The policy guidelines require banks to create a
‘Climate Risk Fund’ to be used in case of emergency in the flood, cyclone and
draught prone areas. The fund should be used to ensure smooth credit flows in these
areas even at the time of emergency. It could be a separate fund or a component of
CSR fund. The study did not observe any initiative in this connection.
Green Governance
Bangladesh Bank’s initiatives have made no significant change in regard to the
creation of green governance frameworks in commercial banks till date. The survey
data of the study reveal that as of June 2011, 16 percent banks have environmental
polices. About 26 percent commercial banks claimed to had CSR/environment related
policies and 11 percent had related cell or posts in mid 2010 (Habib et al. 2010).
20 Research Workshop Keynote Paper
According to the survey information, only 12 percent banks have posts or cells
related to GB. In response to the circular of ‘Policy Guideline for GB’, only 4 percent
banks have formulated high level committee (comprising board members and
employees) to oversee the green activities of banks. However, there is no doubt that
the BB’s initiatives have brought remarkable change in the awareness and approach
of banking communities, as observed by the survey team.
Table 4: Green Governance in Banks (% of banks)
Done Planned
Green Policy Formulation 16 84
Separate Green Banking Cell 12 88
Creation of New position as the Head of Cell 12 88
Formulation of a Separate Committee 4 96
Source: Survey observation
Internal Environment Management
Banks have very limited initiatives in regard to resource inventory preparation
and management, paper, water and power saving etc. It is good to observe that now a
good number of banks are thinking or planning of introducing internal environment
management initiatives (table-5). Almost three-fourths banks have online banking
services and can offer online bank statement. Banks are generally aware of the
necessity of adopting online banking to serve their customers. However, using online
application as a tool to protect environment is not part of the banking strategy in
Bangladesh till date. Other than some scattered initiatives68, banks generally do not
have specific strategies to popularize online statement to save papers.
Table 5: Initiatives on Internal Environment Management (% of banks)
Done Planned To be decided
Green Office Guide 16 76 8
Preparation of Inventory 4 72 24
Using Duplex Printer 84 12 4
Using Eco-font (ink saving) 44 36 20
Saving Daylight 469
12 84
Automatic Computer Shutdown system 470
00 96
On-line banking 68 32 00
Internet banking 56 24 20
Mobile banking 8 32 60
Source: Survey Findings
68
Standard Chartered Bank initiated tree-plantation for using e-statements by its clients (one tree for one account
holder); it discourages printing of e-mail by the receiver to save papers. 69
Only Head Office has the arrangement. 70
Only head Office has the arrangement.
Research Workshop Keynote Paper 21
Banks generally do not have estimations on their level of environmental
pollutions or related activities, and do not maintain inventory of the consumption of
energy, water, electricity etc. Following the issuance of the circular on ‘Policy
Guidelines for GB’ some banks started making plans. However, banks having large
branch network found the task impossible within the given timeframe for
implementation. No local bank has any set environmental goal in connection with
internal environment management to attain in near future. In the guideline, such
type of target setting will be required in phase-II after preparing inventories by
banks in phase-I.
Environmental Risk Mitigation
Clearance from the DOE is one of the requirements for obtaining finance from
commercial banks for the industrial units. Banks have been complying with the
requirements. However, it is obvious that the arrangement is hardly playing any role
in environmental protection. According to the survey observations, 35 percent banks
have some internal environmental risk management requirements or arrangement71;
and 30 percent have made plan to introduce some requirements in near future. The
ERM guideline requires banks to establish and maintain a database of NPLs that are
due to environmental reasons and to have a reporting system on an annual basis.
However, the ‘Policy Guidelines for GB’ that incorporated ERM Guideline in CRM,
requires reporting on quarterly basis. The survey did not come across any preparation
of banks for creating and maintaining database or complying with the upcoming
reporting requirements as per BB circulars.
Green Products or Financing
Though on a limited scale, 68 percent banks of the country have some initiatives
related to financing environment friendly projects, according to survey information.
Some banks have financed reasonably good amount in solar, bio-gas, ETP and HHK
projects in recent years. A few banks have submitted targets72 (as required by BB at
the request of the Ministry of Energy in 2010) to BB in regard to financing renewable
energy projects. The survey data reveal that though three-fourths of the country’s
banks have got one or more green lending scheme/schemes, some of these have not
financed even a single project. A few banks73 have specially designed project for the
vulnerable areas affected by climate change.
71
For example, engaging technicians to visit the site and report to the management. 72
The target submitted by banks are Sonali Bank- BDT 10 million; Agrani Bank-BDT 500 million; Rupali Bank-
BDT 120 million; RAKUB- BDT 60 million; AB Bank-BDT 66 million; Islami Bank- BDT 300 million; UCBL-
BDT 20 million; Al-Arafa- BDT 30 million; Social-Islamic Bank- BDT 20 million; Mercantile- BDT 62 million;
Standard Bank- BDT 10 million; Mutual trust- BDT 350 million; Uttara-BDT 100 million; Bank Asia-BDT 30
million; First Security-BDT 50 million; and Trust bank –BDT 10 million (ACD, BB,2011). 73
For example NBL financed over BDT 100 crore in drought prone areas for irrigation purposes; Mutual Trust,
Agrani and NCCBL have also some programs in the vulnerable areas.
22 Research Workshop Keynote Paper
Table 6: Lending under Green Financing Scheme by Banks (% of banks)
Product Done Planned Yet to be decided
Solar 24 56 20
Biogas 20 64 16
ETP 45 55 00
HHK 8 32 60
Source: Survey observation
Availing Refinance Facilities of BB
Till date, a few banks have used very insignificant portion of refinance facilities
offered by BB. The survey information reveals that only five banks (table-7) of the
country availed refinance facilities as of June 30, 2011, and the current outstanding
amount is less than BDT 14 crore which is less than 7 percent of the total available
amount. However, it is encouraging that another 15 banks have entered into
agreements with the BB to avail the facilities. According to the survey observation,
a number of banks are found to have no interest to avail refinancing facilities
of BB. The reasons as identified by the banks include: complexity in disbursement
process; uncertainty in getting BB refinance facilities; and availability of own funds
to finance.
In some instances, bank managers find it a thank-less effort as the acclaim of the
success of these projects goes to the head office people. So, bank managers are
reluctant to offer extra-effort for these schemes.
Table 7: Availing Financing from BB by Commercial Banks
(as upto June 30, 2011)
Name of Banks Total Amount under (BDT million) Trust Bank Ltd. (Biogas) 50.15 Mutual Trust Bank Ltd. (Solar and Biogas) 76.14 Prime Bank Ltd(ETP) 8.98 Mercantile Bank Ltd. (ETP) 1.80 National bank Ltd(Biogas) 0.74 Total 137.81
Source: BB (2011)
Research Workshop Keynote Paper 23
About the refinance facility of jute sector, an amount of BDT 500 crore has
already been disbursed to the four SCBs in June 2010 with the guarantee of the MoF
for on-lending. In this connection, government’s recent steps74 are encouraging.
These are expected to boost jute production75 and processing market. It may help
getting fair price by the farmers and also may help reducing reliance on plastic
products which is environmentally harmful.
Awareness, Promotional Activities, and NGO Linkages
Green marketing or promotional activities are yet to get popularity in the banking
community. According to the survey information, 32 percent banks have some kinds
of promotional activities76 for their green initiatives. Though apparently the
percentage is high, practically it covers very limited activities. There are very limited
instances of NGO-linkages of banks for green causes. According to the survey
observation, 52 percent banks have NGO-linkages. However, only 4 percent banks77
are found to have linkages with NGOs to promote green initiatives.
Table 8: Awareness, Promotional Activities and NGO Linkages
Done Planned Yet to be decided
Training program 52 48 00
Promotional activities 32 56 12
Environmental NGO Linkage 4 16 80
Customer Awareness program 32 48 20
Source: Survey Information
A few banks have initiatives for awareness development of consumers and
employees. According to a BIBM survey in 2010 (Habib et al, 2010), 47 percent
banks facilitate environment related training to their employees which actually meant
that the banks from where at least one participant participated in environment related
74
In March 2011, the government has lifted ban on export of raw in a bid to help local jute traders sell their unsold
stocks and earn more foreign currency. The Ministry of Textiles and Jute issued a circular to this effect on March 09
amid a growing demand of the natural fibre in global market. The government's decision will help farmers sell their
products at fair prices, as the item has global demand. 75
Jute cultivation rose 20 percent to 13.8 lakh acres in the current season from 11.5 lakh in the previous season,
according to the estimate of Department fo Jute (The Daily Star, July 15, 2011). 76
For example, Mutual Trust and HSBC have calendars to promote green; Standard Chartered Bank discourages
printing; BRAC Bank promotes green banking through its web; Southeast use a slogan ‘Go green with Green
Financing’ in their publications; HSBC promotes e-statements; HSBC introduced HSBC-The Daily Star Climate
Award to promote individual and institutions. 77
For example HSBC has arrangements with Green World and IPac to perform tree-plantation and rain water
conservation activities respectively.
24 Research Workshop Keynote Paper
training programs arranged by the BB, BIBM or other NGOs. Sponsoring of green
events78 by a few banks could prove to be very effective for green awareness in the
country.
Waste Management
Generally banks do not have any concrete waste management policy till date.
However, a few banks have some inspiring initiatives for in-house waste management
and financing. For example, HSBC recycles used papers to make envelope for re-use.
DBBL has financed a project79 that produces quality organic fertilizer from fruits and
vegetables wastes. Growing e-waste has been another related problem for banks. Few
corporate offices in Bangladesh have taken initiatives regarding their re-use of
e-waste. Some are distributing computers to different schools and organizations for
reuse. Among the banks surveyed, Standard Chartered Bank has an arrangement with
D Net80 to distribute their used PCs to schools. HSBC also provides computers to
different schools for re-use.
Disclosure and Reporting of Green Activities
Generally, banks do not publish separate reports of their green activities or CSR
programs and do not use comprehensive standard formats such as the GRI (BB
2010). One notable exception is HSBC in Bangladesh, which has published
Corporate Sustainability Report 2009 and 2010 covering some environmental
issues81. However, 75 percent government controlled commercial banks and 97
percent private commercial banks have reported about their CSR initiatives in their
annual financial reports in accordance to the directive of BB. A survey in 2010 by
BIBM (Habib et al. 2010) shows that only 11 percent banks have some kind of
arrangement (as a part of Annual Report or website) to disseminate environment
related information. According to the ‘Policy Guideline for GB’ banks were to
furnish their first quarterly reports within July 15, 2011. According to the survey
observation, only one bank reported to the concerned department as of July 17, 2011.
78
Programs like Earth Day celebration and Green Day by HSBC could prove to be crucial for customer and
employee awareness of banks. 79
DBBL has disbursed loan for about BDT 4 Crore to WWR Bio Fertilizer Bangladesh Ltd. which has formally
released its first high quality organic fertilizer, produced from fruits and vegetables waste from the markets of
Dhaka on 21st March, 2009. ACI ensure the marketing of this fertilizer. The new born bio fertilizer, named Waste
Concern Jaiba Sar (WCJS), is being produced on the organic waste composting plant at Bhulta (Narayanganj) in the
outside areas of Dhaka.The current project aims at setting up two more plants by 2010 to have a total capacity of
handling 700 tons of waste from the Dhaka City Cooperation (DCC) markets on a daily basis. The project has the
objective of reducing 89,000 tons of green house gas (GHG) in the coming years and has a positive impact on the
environment. 80
A development NGO working with ICT. 81
HSBC in Bangladesh initiated a carbon footprint management study at the Bank’s Dhanmondi branch managed
by Waste Concern Consultants Ltd. in 2009; HSBC has undertaken 5 environmental initiatives in 2010 that include
HSBC-Daily Star Award; Rainwater Harvesting Program; HSBC Climate Championship; and Carbon Footprint
Management Initiative (HSBC Corporate Sustainability Report, 2010).
Research Workshop Keynote Paper 25
Time Frame of the Green Banking Policy Guideline of BB
According to the survey observation, 52 percent banks think that it is possible to
implement phase-I by the stipulated one year and another 24 percent believe that it
can only be partly implemented. Of the respondents, 24 percent found it difficult to
comply with the phase-I guideline within the time line.
Responses from End-Users: Mostly Unaware and Hesitant
Mostly, end users or borrowers have been availing environmental financing as
per the regulatory requirement in certain sectors82. However, there are a few success
cases (table-9, 10, 11). According to the survey observation, as a whole, the end-users
are unaware about the benefits and processes and are hesitant to obtain the facilities.
Table 9: Environmental Financing to Women getting Good Responses
Source: Agrani Bank, 2011; the name of the loan recipient is changed.
Table 10: A Biogas Plant under BB Refinancing
Source: BRAC Bank, 2011; the name of the loan recipient is changed
82
For example, ETP is to be installed by the factories in certain sectors as per the country’s ECA.
Mrs. Jahan Ara, residing at Shibpur in Norshingdi, took a ‘Composite loan’ (for
purchasing cow and produce organic fertilizer through Vermi-compost method) of BDT
1,00,000 under ‘Agrani Prani Shampad’ scheme. The bank set her installment on weekly
basis. As it takes at least 45 days to generate organic fertilizer under vermin-compost
method, the borrower repays her installment by selling milk that she gets regularly and she
is comfortable with it. These loans are mainly given to women who are widow or beggars
as part of the bank’s CSR activities. In Norshingdi district, the bank has financed a good
number of woman under the scheme and ensured successful repayment
Five members of Mr. Akbar’s family of Aliar village in Comilla started a small poultry
farm in 2007 which became a big project having an area of over five bigha land and
about 15,000 adult poultry birds and 5,000 chicks over time. Being successful in poultry
and fisheries, they felt responsible to people, society and environment and took
initiative to set a biogas plant using litter of poultry birds. BRAC Bank Ltd. financed
Tk. 1.5 million to the project under refinancing scheme of BB. Two domes of the biogas
plant burns 14,000 kg of litter a day to produce 150 cubic meter of gas. The gas
generates 8 KV power which meets total electricity requirement of the plant. And the
rest of gas is used to fire 40 burners in surrounding households. According to the
opinion of the entrepreneurs, ‘although the plant does not bring much financial benefits
due to high installation cost, still we are happy to be able to do something for the people
and environment’. According to them, ‘the biogas has huge demand from nearby
households. We may meet the demand by expanding the plant in future.’ A large
number of people of the village work in foreign countries and sent remittances. Success
of BRAC Bank-financed Pall Layer Farm cum biogas plant may encourage the
expatriates to invest in different productive sectors in the area.
26 Research Workshop Keynote Paper
Table 11: A Composite considers Bio-gas a Viable Business
Mr. Sabbir, resides at Gazipur, has established an ideal composite set up. The firm
use recyclable plastic poultry cases; poultry wastes are used for bio gas generation
for fuel and electricity; and other wastes are used for compost fertilizer. His
produced feed is used by his own poultry firm and is also sold. He uses manure of
the poultry firm to produce biogas which is used for electricity generation and
cooking for farm laborers. To build this eco-friendly poultry composite, he was
awarded the best Trophy in the year of 1998 from the Directorate of Youth
Development. Mutual Trust Bank financed him a composite credit facility of BDT
106.00 lac in different forms. Total cost of the project is BDT 1200 lac in an area
of 12 bigha land at Gazipur and the estimated cost of the Bio gas plant is BDT
9.00 lac where MTB financed BDT 6.00 lac under refinance scheme of BB. The
plant size is 8000 cubic feet (20 x 20x 20) having a capacity of generating 3000 cft
biogas. The gas is currently used for household cooking and generating electricity
for the poultry firm and household purposes. According to the entrepreneur, this
type of project is quite viable as it helps to generate gas, electricity and organic
fertilizer which can be used both for personal as well as business purposes in a
profitable manner. The owner is thinking about commercial production and sale of
the gas and electricity. He suggests that the government should make the bio-gas
plant establishment mandatory for all entrepreneurs engaged in poultry business to
ensure a clean environment besides a profitable business concern.
Source: Mutual Trust Bank Limited, 2011; the name of the loan recipient is changed
VI. Issues, Challenges, and Recommended Measures
The workshop paper comes up with the following issues, challenges, and
recommended measures:
One, the survey team does not come across remarkable responses to BB’s
environmental initiatives from banking community as of July 2011. There is no doubt
that it is a very short time-span to assess impacts of BB’s initiatives, most of which
have been mainly undertaken a few months back. However, considering the
timeframe of the ‘Policy Guidelines for GB’ by BB, the preparedness of most of the
banks were not found to be adequate. Moreover, the implementation statuses of
earlier circulars of BB have not been upto the mark. Understanding and readiness of
banks are crucial for getting optimum response to BB’s initiatives. There is no doubt
that the initiatives taken by BB seem to be adequate at this stage. However, it is too
early to say whether BB’s steps are sufficient for the effective implementation of its
initiatives by the banks; once the implementation process starts new requirements
might arise. Effective implementation of GB practices requires commitment of board
members, employees, and BB; it also requires effective training and awareness
development programs, continuous monitoring from BB and dissemination of success
stories among the stakeholders.
Research Workshop Keynote Paper 27
Two, supportive regulatory, policy, and incentive structure are crucial for the
development of GB practices in any country. Bangladesh has a pool of recently
enacted regulations and some relevant policy initiatives. Though enforcing agencies
like DOE has shown improvement in actions, enforcement of government’s
regulations and policies remain weak till date. Initiatives of environmental NGOs and
businesses remain inadequate. In such a situation, it may not be easy to encourage all
banks to offer enthusiastic response to BB’s initiatives. Bankers opined that more
incentives are required to inspire commercial banks for undertaking green initiatives.
Incentives may be provided in different forms like allowing tax rebate, allowing
higher credit-deposit ratio for GB practicing banks and awarding bank employees as
well as green practitioners in the real sector.
Three, ‘Policy Guidelines for GB’ incorporates some specific actions to be
performed by commercial banks by December 2013 covering policy formulation,
creation of GB cell, in-house environment management, preparing inventory of
resource use, promotional activities, environmental risk management, green financing
and green reporting. According to the participating bankers, the activities of different
phases are logically placed but the stipulated timeline may not be logical for all;
opinions of different banks should have been considered before setting the time line;
and timeline should be set considering size of the banks and other existing situations.
Four, an internal mechanism approved by the Board is crucial for future smooth
running of any activities. The BB policy guidelines require intervention of board
members in the green activities of banks. Understanding and awareness of board
members, management and employees are crucial for effective functioning of GB
practices. All broad groups should be convinced about the necessity and accruable
benefits of GB. General observation is that the board members are not aware as well
as not convinced to undertake GB and all bank management and employees do not
have required understanding of GB. To improve the understanding of board members
and bank management different training, seminars, symposiums, workshops, etc. can
be arranged by the joint collaboration of BB, BIBM, BAB, ABB and other
institutions; BB and BIBM can arrange discussion meeting for the board members
under the direct supervision of BB Governor.
Five, a few commercial banks have used refinance facilities of BB for
environmental financing. The outstanding volume of the loans under refinance
schemes remains insignificant. Some banks also identified some problems that
include the complexity in terms and conditions of the scheme; end users are not
coming forward with viable projects; Islamic banks can not participate in the present
mode of refinance, etc. For better participation of banks and end-users in the
refinancing facilities, BB needs to undertake necessary steps like building awareness
about refinance scheme; making the terms and conditions of refinancing easier to
implement; issuing a separate guideline for Islamic banks.
28 Research Workshop Keynote Paper
Six, consumers remain the most vulnerable stakeholder of GB. Development of
consumer awareness is among the most crucial tasks of policy makers and banks for
development of GB practices. Green marketing could be a great tool in this
connection. Linkages with NGOs could also play a useful role. Till date, a few banks
have insignificant initiatives of green marketing. Some green initiatives like
sponsoring different programs of environmental NGOs; tagging CSR with
environmental NGOs; financing environmental NGOs at a concessional rate;
motivating NGOs for promoting more green practices; conducting road show for
awareness building; observing GB week, etc. would help developing awareness
among consumers and other stakeholders.
Seven, ‘waste disposal and management’ is a growing problem of corporate
entities including banks. Especially e-waste disposal and management has become
one of the major concerns. Banks in the country have very limited initiatives. Banks
have been using CFL bulbs to save energy and to reduce carbon emission.
However, absence of disposal arrangement of these bulbs could even be more
dangerous. A concrete strategy from the procurement to the disposal is the need of
the time. At the time of procurement of electric equipment, banks may identify and
adapt a disposal strategy. For the formulation and successful implementation of
waste disposal and management strategy in Bangladesh, banks may provide special
incentives for establishment of e-waste plant; and banks may participate in the establishment of e-waste treatment plant under PPP.
Eight, most of the commercial banks of Bangladesh have failed to attain the
first milestone of the ‘Policy Guidelines for GB’ that requires reporting to BB by
July 15, 2011. As per ERM guidelines, reports are to be furnished by banks on
annual basis. The different time lines for two guidelines may confuse banks when
ERM has been incorporated as environmental risk management tool in the ‘Policy
Guidelines for GB.’ Moreover, banks should publish independent Green Annual
Report following GRI by December 2013 with the arrangement of external
verification. To comply with the reporting requirements, banks need adequate
preparation. Specific reporting format might help the banks to report in time. To
report to BB following GRI by 2013, banks need more support like training about
GB, detail reporting format by BB, etc.
Research Workshop Keynote Paper 29
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32 Research Workshop Keynote Paper
Appendix 1
Some Environmental Initiatives of Banks in Bangladesh
Box 1: Al-Arafah has Remarkable Initiatives on Solar Panel Financing
Al-Arafah Islami Bank Limited has been financing some green products
successfully. Its green products include Al-Arafah Renewable Energy Program
(solar panel), Unnata Chula (Fuel saving stove), Biogas plant, Effluent
Treatment Plant (ETP), Wind power plant, etc. They have established a
separate unit named Power and Technology Unit under SME to offer green
financing. They also appointed twenty five technicians to take care of financing
green projects. Till 23 may, 2011 they have provided financing facilities
amounting to Tk. 2,57,19,000 for solar panel to 873 families generating about
44145 watt electricity. They provide three years after-sale services. The bank
has 100% recovery of investment from solar project financing. They have
distributed some solar panels free of cost to the local community in Madabpur
and Habigonj Chor areas under CSR. The bank financed in solar panel in
different areas of the country like Hobiganj, Khulna, Gazipur, Rangpur,
Noakhali, Comilla, Modbari, Naogaon, Akhaura etc. The Jatrabari Branch of
the bank is fully powered by solar energy.
Source: Al-Arafah Bank 2011
Box 2: Mutual Trust Bank is Well-ahead in Internal Green Management
Mutual Trust Bank Limited practices green banking activities with utmost care.
It is one of the participants of BB’s refinancing scheme for green products.
The corporate Head office of the bank, located at 26, Gulshan is a modern building
using technologies for efficient utilization of resources. The building has been built
in such a manner so that day-light can be utilized. The bank uses energy saving
bulbs. The bulbs and computers have sensor and they are automatically switched
on/off with the presence and absence of people respectively. All water taps also
have sensor. As a result water falls only when one’s hand is placed below the tap.
All sorts of correspondence of the bank are made through e-mail and i-mail (only
between head office and branch) to save paper. The bank’s Sirajgonj and Ishwardi
SME branches are running with own solar panel system. The online banking
facilities of the bank allows customers do online transactions via internet such as
withdrawals, transfer payment, checking account status etc. lead to saving paper
and reducing carbon emissions. The bank has already prepared green credit policy
and an inventory of its utilities as per the policy guidelines for green banking.
The bank conducts different training programs for its employees’ awareness
development.
Source: Mutual Trust Bank 2011
Research Workshop Keynote Paper 33
Box 3: HSBC has Remarkable Initiatives in line with its Global Activities
HSBC is a globally ‘Carbon Neutral bank’. Some initiatives of the bank are
praiseworthy. It introduced fully Solar Powered ATM at Dhanmondi Branch. Tree
plantation is a remarkable step of the bank. A total number of 300 trees have been
planted at Lauachora in Sylhet with the help of green World, an environmental
NGO funded by the USAID and will be transferred to the local community after 3
years. The bank ensures shut down of computer during lunch time. The bank has
initiated ‘Go green’ campaign for business customers. It celebrates the ‘World
Environment Day’ (5th June related to Earth Day) by wearing green costumes by all
employees of the bank and on the same day they arranged plantation programs and
a ‘Quiz Contest’ on environmental issues. The bank also introduces HSBC- The
Daily Star Climate Awards to the eminent personalities of the country for their
contribution towards protection and preservation of environment. The award is
given for four categories of works: Climate change adaptation, Climate change
mitigation, Climate change research and knowledge management and Green
Business Entrepreneurship. As a part of its commitment, HSBC has set up rain
water harvesting devices in two major schools of Dhaka city - Residential Model
School and Rajuk Uttara Model College. Now, over 2200 students benefit from
these projects. The program has been implemented at HSBC’s Dhaka main office
building too. As a part of this program, in 2010, one of the Bangladeshi climate
champions implemented a project where HSBC volunteers planted over 300
varieties of saplings over a one-km stretch in Srimongal, Moulvibazar.
Source: HSBC 2011
Box 4: Agrani Bank Promoting Women Entrepreneurship through Green
Initiatives
Agrani Bank has been providing loan for plantation at 2 percent interest rate in
different districts. The bank financed in environment friendly ‘Easy Bike’ which
was run by battery but recently Govt. has stopped this initiatives. The Bank offered
composite loans for purchasing cow and produce organic fertilizer through Vermi-
compost, of BDT 100,000 under ‘Agrani Prani Shampad’ scheme. A good number
of women have received financing facilities under the scheme. In Norshingdi
district, the bank financed 647 women entrepreneurs till mid June, 2011. The bank
recently undertook a pilot project to expand green banking initiatives.
Source: Agrani Bank 2011
34 Research Workshop Keynote Paper
Appendix 2
Global Reporting Initiative: G3 Guidelines
Application Levels were introduced with the release of GRI’s G3 Guidelines in
October 2006. The Application Level system provides organizations with a pathway
towards continuous improvement of their sustainability reporting. The Levels are
intended to motivate reporters to enhance the quality of their reporting over time.
Application Levels also meet the needs of reporting organizations in terms
of objectively displaying their use of the GRI Guidelines. There are three different
Application Levels: A, B & C. Reporters are required to assess their Application
Level. GRI offers a service for organizations to have their Application Level
checked. Some reporters choose to have their Application Level checked by a third
party. In such cases, the third party executing the check is selected by the reporter.
None of these third parties are affiliated with GRI, nor are their methodologies known
to or formally endorsed by GRI. In addition, to support reporting organizations in
correctly applying the Guidelines and making valid assessments of their Application
Levels, GRI has assembled the G3 Checklist . These Checklists details which data
points are contained within each of the G3 Profile Disclosures and Performance
Indicators (covering 1.1-4.17; and Performance Indicators). GRI advises reporting
organizations to include the Application Level table in the reporting. This provides
context for report readers to understand the requirements for the different Application
Levels.
Standard
Disclosure
Report Application Level
C C+ B B+ A A+
G3 Profile
Disclosure
Report on:
1.12.1-2.10;
3.1-3.8;
3.10-3.12;
4.1-4.4;
4.14-4.15
Report
Externally
Assured
Report on all
listed for C+:
1.2; 3.9; 3.13;
4.5-4.13;4.13-
4.17
Report
Externally
Assured
Same as
Requirement
of Level B
Report
Externally
Assured
G3
Management
Approach
Disclosure
Not
Required
Management
Approach
Disclosures
for each
Indicator
Category
Management
Approach
Disclosures
for each
Indicator
Category
(Continued)
Research Workshop Keynote Paper 35
Appendix 2: (Continued)
G3
Performance
Indicators and
Sector
Supplement
Performance
Indicators
Report on a
minimum of
10
performanc
e indicators
including at
least one
from each:
Economic,
Social and
Environmen
tal
Report on a
minimum of
20
performance
indicators
including at
least one from
each:
Economic,
Human right,
labour,
society,
product
responsibility
and
Environmental
Report on
each core G3
and sector
supplement
indicator
with due
regard to the
materiality
principle by
either: a)
Reporting on
the indicator;
b)
Explaining
the reason
for omission
Source: http://www.globalreporting.org/reportingframework/g3guidelines/
36 Research Workshop Keynote Paper
List of Abbreviation
ACD Agricultural Credit Department ACOPS Advisory Committee on Protection of the Sea BAPA Bangladesh Poribesh Andolan BB Bangladesh Bank BCAS Bangladesh Centre for Advanced studies BCCTF Bangladesh Climate Change Trust Fund BCCRF Bangladesh Climate Change Resilience Fund BEI Bangladesh Enterprise Institute BELA Bangladesh Environmental Lawyers Association BIBM Bangladesh Institute of Bank Management BRPD Banking Regulation and Policy Department CAB Consumers Association of Bangladesh CAMELS Capital adequacy, Asset quality, Management quality, Earnings,
Liquidity, Sensitivity to Market Risk CBD Convention on Biological Diversity CDFI Community Development Financial Institution CERCLA Comprehensive Environmental Responses, Compensation, and
Liability Act CERES Coalition for Environmentally Responsible Economies CFL Compact Fluorescent Lamp CNRS Centre for Natural Resources Studies CPD Centre for Policy Dialogue CRM Credit Risk Management CSR Corporate Social Responsibility DBBL Dutch Bangla Bank Limited DCC Dhaka City Cooperation DoE Department of Environment ECA Environmental Conservation Act E Commerce Electronic Commerce ECR Environment Conservation Rules EIA Environment Impact Assessment E-mail Electronic Mail EMS Environmental management systems EP Equator Principle EPA Environmental Protection Agency ER Environmentally Responsible ERM Environmental Risk Management ETP Effluent Treatment Plant E-waste Electronic waste FAO Food and Agricultural Organization FCB Foreign Commercial Bank FIs Financial Institutions FY Financial Year GB Green Banking GHG Green House Gas GPB Global Public Bad
Research Workshop Keynote Paper 37
GPG Global Public Good GRI Global Reporting Initiative HHK Hybrid Hoffman Kiln HSBC Hong Kong and Shanghai Banking Corporation ICT Information and communication technology IFC International Finance Corporation IGOs Intergovernmental organizations IFIs International Financial Institutions IIED International Institute for Environment and Development I-mail Intra Mail ISO International Standard Organization IUCN International Union for Conservation of Nature LC Letter of Credit MoEF Ministry of Environment and Forest MoF Ministry of Finance NBFI Non Bank Financial Institution NCSA National Capacity Self-Assessment NEMAP National Environmental Management Action Plan NGO Non Government Organization NPL Non-Performing Loan PCs Personal Computers PCB Private Commercial Bank PPP Public Private Partnership RCs Rio Conventions RMG Ready Made Garments SBA Small Business Administration SCB State Owned Commercial Bank SEDA Sustainable Energy Development Authority TERI The Energy and Resources Institute UN United Nation UNCCD United Nations Convention to Combat Desertification UNEP United Nations Environmental Program UNEP FI United Nations Environmental Program Financial Institution UNFCCC United Nations Framework Convention on Climate Change UNIDO United Nations Industrial Development Organizations UNPRI United Nations Principles for Responsible Investment USAID United States Agency for International Development WCJS Waste Concern Jaiba Sar WTO World Trade Organization WWF World Wildlife Fund
38 Research Workshop Keynote Paper
Paper Two
Implementation Status of Basel-II: Bangladesh Perspective
Md. Nehal Ahmed Associate Professor, BIBM
Atul Chandra Pandit Assistant Professor, BIBM
Implementation Status of Basel-II: Bangladesh
Perspective
I. Introduction
Globalization and financial innovation have over the last two decades or more
multiplied and diversified the risks carried by the banking system. In response, the
regulation of banking in the developed industrial countries has increasingly focused
on ensuring financial stability. The appropriateness of this move is being debated
even in the developed countries, which in any case are at a completely different level
of development of their economies and of the extent of financial deepening and
intermediation as compared to the developing world. Despite this, many developing
countries including Bangladesh have already implemented or in the process of
implementing capital adequacy guideline popularly known as Basel guideline.
The regulators and supervisors of the banking system are increasingly challenged
worldwide by the development of the risk-sensitive financial markets. Financial
institutions, especially the banks, are in the business of risk management and
reallocation, and they have developed sophisticated risk management models to
encounter it. Their efforts cover many components of risk namely, identification and
definition of risk the firm is exposed to, assessment and measurement of their
magnitude, development and implementation of effective risk mitigation techniques,
and setting aside sufficient capital for potential losses.
Capital adequacy is defined as the level of capital which is required to protect a
bank from portfolio losses. However, debate on the quantum of minimum level of
capital seems to be never-ending. Though different methods and approaches were
adopted at different points in time, they were insufficient to capture new dimensions
and magnitudes of risk emanating from the continuous innovations in the domestic
and international business. Consequently, banking business in last few decades
experienced many uncertainties and volatilities that caused serious problems.
The Basel Committee, based on this idea, designed Capital Regulation, which is
known as the Basel Accord. Two fundamental objectives of the Accord were: (a) to
strengthen the soundness and stability of the international banking system and (b) to
obtain a high degree of consistency in its application to banks in different countries
with a view to diminishing an existing source of competitive inequality among
international banks.
Banks are highly-leveraged financial institutions that borrow fund mainly from
the depositors which are mostly repayable on demand. On the other hand, it lends
money to the borrowers. That way, banks always run a risk of insufficient liquidity as
the future is uncertain and borrower might be in default. Besides, globalization of
Research Workshop Keynote Paper 41
banking business, introduction of complex banking products, increased complexity in
operation, increased adoption of information technology, increased awareness of the
stakeholders about risk etc. are some factors that impels banks to focus on risk
management. Since risk is inherent in the banking business, nobody can ignore the
importance of risk management. Maintaining adequate amount of capital is an
integral part of the process of risk management in banks as capital is regarded as the
shock absorber. Accordingly, the international community adopted risk based capital
adequacy standard for banks, popularly known as Basel-II.
Banks of the country are working to comply with the risk based capital adequacy
(RBCA) guideline, which has been formulated by Bangladesh Bank in line with
global Basel-II framework. They have already started reporting as per the guidelines.
In this background, it is important to identify the level of compliance so far achieved
by the banks, the challenges they are facing, issues to be dealt with, and experiences
of the international community regarding its implementation. Accordingly, the
current project has been undertaken to focus on the above mentioned issues.
The paper aims to highlight the issues relating to implementation status of
Basel-II in the context of Bangladesh. Specific objectives of the paper are: One, to
assess the current implementation status of Basel-II in the banking sector of the
Bangladesh; Two, to review Basel-II implementation status in different Asian
countries and compare the outcome with that of the Bangladesh scenario; Three, to
identify challenges and issues which need to be addressed for smooth implementation
of Basel-II framework.
The paper is based on both primary and secondary information. A detailed
questionnaire has been designed to collect the information from the different banks
for collecting primary data. The questionnaire was sent to a number of sample banks.
The study used purposive sampling in order to ensure the availability of the data and
quality of the response. A total of 14 banks (1 state-owned commercial bank,
11 private commercial banks and 2 foreign commercial banks) were selected in the
sample. The response from the sample banks were accumulated, compiled and
analyzed to identify the current implementation status of Basel-II along with the
challenges related to the implementation of Basel-II. Secondary data on all the banks
has been considered and used in the study. Secondary data has been collected from
Annual Reports, different departments of Bangladesh Bank and literature survey.
Different statistical techniques have been used to analyze the data.
In order to fulfil the objectives of the study, a keynote paper was prepared and
presented in a day-long workshop which was attended by a number of senior level
bankers. After the presentation of the keynote paper, a group discussion was arranged
for the participants. Several issues were raised in the discussion and the final report
has been prepared after incorporating the valuable and appropriate suggestions of the
participants.
42 Research Workshop Keynote Paper
The paper is organized into six sections. The first section describes the
background, objectives, methodology. The introductory section is followed by the
theoretical framework of Basel-II. Third section depicts the different country
experiences regarding the Basel-II implementation with special focus on South Asian
countries. Section four portrays the current implementation status of Basel-II in
Bangladesh including a comparison with selected SAARC countries. Section five
presents the key challenges regarding the implementation of Basel-II. Finally issues
and suggestions related to Basel-II implementation have been placed in section six.
II. Theoretical Framework of Basel-II
The implementation of New Capital Adequacy Framework (Basel II) has gained a
lot of interest all over the world. The effective adoption of this new international
supervisory regulation is confronted by many challenges and issues. With
globalization, expansion of the financial sectors and introduction of new financial
products, the financial institutions have become more exposed to diversified structure
of risk. The complexity of this risk structure is aggravating as the changes are rapidly
taking place on the financial landscape of different countries.
Until the late 1970s, banks were highly regulated and protected entities with
hardly any competition among them. Collapse of the Bretton Woods agreement put
them in a new environment of increased competition, leading to gradual erosion of
capital that started to alarm the regulators. Hence, a special committee was set up
under the auspices of the Bank for International Settlements (BIS) in Basel.
The Committee1, initially known as the Cooke Committee and later renamed as the
Basel Committee on Banking Supervision (BCBS) formulated a proposal in which,
it suggested that a common framework for calculating the capital adequacy of banks
should be adopted. This document, known as the 1988 Basel Capital Accord, became
a huge success after its adoption – it not only managed to ensure a level playing field,
but it also brought national practices on capital adequacy of banks in line.
The Basel I, the earlier version of regulation, had a number of drawbacks.
For instance it was relatively risk insensitive, as it did not properly differentiate
between credit risk and other types of risk. Because of the “capital economizing
efforts”, the banks were motivated to hold the lower quality assets on their balance
sheet and off-loading their high quality (less risky) assets (Chami, Khan, Sharma,
2003). On the other hand, financial innovations in the form of derivatives and
securitization played an important role in the decline of traditional banking. Banks
are now focusing more on innovative banking rather than traditional banking. This
changing scenario has posed important implications for the future of banking
1 Committee on Banking Regulations and Supervisory Practices or in short the Basel Committee was established in
1974 by the governors of central banks of the Group of Ten (G10) countries (Belgium, Canada, France, Germany,
Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom and USA) and Luxembourg.
Research Workshop Keynote Paper 43
industry and created new challenges for regulators. It was recognized that Basel I
has lost its usefulness for the complex financial innovations driven by new
technologies (Fakhar, 2005).
To address these limitations, the Basel Committee on Banking Supervision
(BCBS) formalized Basel II in June 1999. The final version of New Capital
Adequacy Framework (Basel II) was released in June 2004. The new capital
framework consists of three pillars: minimum capital requirements, which seek to
refine the standardized rules set forth in the 1988 Accord; supervisory review of an
institution's internal assessment process and capital adequacy; and effective use of
disclosure to strengthen market discipline as a complement to supervisory efforts.
Pillar-I - minimum capital requirement - develops the capital allocation
methodology by covering three major components of risk that bank faces; credit risk;
market risk and operational risk. As such the first pillar is similar to the existing
Basel I capital adequacy requirement with the changes made in the calculation
method for risk weighted assets. There are two approaches to measuring credit risk -
a Standardized Approach and Internal Rating Based Approach (IRB). The first
approach is more likely to be used by the banks who are engaged in less complex
form of credit operations and deals with less sophisticated financial transactions. This
option is more suitable to small banks that cannot develop their own technical models
to evaluate credit risk. External Rating Agency provides the necessary credit ratings
based on predefined risk model. On the other hand, under the IRB approach, the
amount of capital that a bank will have to hold against a given exposure will be a
function of the estimated credit risk of that exposure.
Four parameters are used to predetermine the estimated credit risk. They are
probability of default (PD), loss given default, (LGD); exposure at default (EAD),
and maturity (M). With the application of this approach, the banks would be able to
absorb the unexpected credit loss at 99.90% confidence level statistically. Banks
operating under the “Advanced” variant of the IRB approach will be responsible for
providing all four of this parameter themselves based on their own internal models.
Banks operating under “Foundation” variant of the IRB Approach will be responsible
only for providing the PD parameter, with the other three parameters to be set
externally by the Basel committee (Kashyap and Stein, 2004).
Pillar-II – Supervision – addresses the need of “effective supervisory review” by
allowing the supervisors to evaluate a bank‟s assessment of its own risk and
determine whether that assessment seems reasonable (Caruana, 2006). The risk which
are not captured in Pillar I, are covered in Pillar II. Pillar II provide implicit
incentives to the banks to develop their own internal models for risk evaluation. The
role of supervisors in this complex Basel II regulatory framework is to verify that
Banks hold enough capital to cover their actual risk profiles.
44 Research Workshop Keynote Paper
Pillar- III – Market Discipline – ensure that effective market discipline provides
an extra set of eyes besides the supervisor. The aim of this pillar is to enhance market
discipline through greater disclosure by banks. The market also requires instruments
(e.g. equity or subordinated debt) which serve as a means of disseminating the
market‟s evaluation of financial institutions, and as a vehicle for rewarding well- run
entities (Chami, Khan, Sharma, 2003).
III. Basel-II Implementation Status: Country Experience
Different countries around the world have different implementation plans, which
depend on a number of factors. These include the size, structure and the state of
development of financial sector, existing level of economic development, depth and
efficiency of financial intermediation, sustainability of banking sector reforms, other
economic reforms, existing regulatory and supervisory framework, state of
technology, political stability, etc.
There are differences regarding the pace and sequencing of smooth migration to
Basel II in different countries. As far as Asia Pacific is concerned, there are varying
implementation plans. Australia, Korea, Singapore, New Zealand are among those
countries where both the simplest and the most advanced approaches are available
initially. In Hong Kong, Japan, Indonesia, Thailand the simplest approaches are
available at the beginning of the implementation plan and at least one of the most
advanced approaches is available within a year or two thereafter. Malaysia and
Philippines are broadly implementing the simple approaches initially. They will take
two or three years to implement the most advanced approaches.
Table 1: Capital Adequacy Ratio of Different Countries
(In percent)
Economy 2007 2008 2009 2010*
China 8.4 12.0 11.4 12.2 Hong Kong 13.4 14.7 16.8 15.9 Indonesia 19.3 16.8 17.4 17.2 Korea 12.0 12.7 14.6 14.7 Malaysia 12.8 12.2 14.9 14.4 Philippines 15.9 15.7 16.0 16.5 Singapore 13.5 14.7 17.3 18.6 Taipei, China 10.6 10.8 11.6 12.0 Thailand 15.4 14.1 16.1 16.2
* Data for Philippines is as of Jun 2010
Source: National Sources and Global Financial Stability Report April 2011, International Monetary Fund
Research Workshop Keynote Paper 45
China, India and Pakistan are taking a slow but steady approach for transition
towards Basel II, initially implementing the simple approaches. Implementation
status in India and Pakistan would provide better understanding of implementation
challenges for Bangladesh.
Across the EU, the Basel II agreement is given legal “life” by the capital
requirement directives covering 27 EU member states. In contrast to the rest of the
world, United States has adopted only one option under Basel II - the advanced
approach. All U.S. home country banks and U.S. subsidiaries of foreign banks, after
meeting certain size or foreign exposure criteria, will be expected to adopt the
advanced approach, whereas the other domiciled banks would have the option to
adopt the other versions of Basel II.
Implementation Status in India
India implemented Basel I guidelines in 1999. Later, India's central bank, the
Reserve Bank of India (RBI), issued the guidelines for implementation of Basel II
from March 31, 2007 by adopting the standardized approach for credit risk and basic
indicator approach for operational risk. The India‟s central bank extended the
implementation period in two phases. The foreign banks operating in India and the
Indian banks operating abroad were asked to implement it by March 31, 2008.
The other banks were asked to do it by March 31, 2009.
Table 2: Capital to Risk Weighted Assets Ratio
(In percent)
Bank Group Basel-I Basel-II
2009 2010 2009 2010 Public Sector Banks 12.3 12.1 13.5 13.3 Nationalized Banks 12.1 12.1 13.2 13.2 SBI Group 12.7 12.1 14.0 13.5 Private Sector Banks 15.0 16.7 15.2 17.4 Old Private Sector Banks 14.3 13.8 14.8 14.9 New Private Sector Banks 15.1 17.3 15.3 18.0 Foreign Banks 15.0 18.1 14.3 17.3 Schedule Commercial Banks 13.2 13.6 14.0 14.5
Source: Report on Trend and Progress of Banking in India 2009-10
Now, the Indian central bank has set a phase by phase timeline for transition to
the next phase - the advanced approach. It set March 31, 2011 for implementing
internal models approach for market risk. For implementing the standardized
approach for operational risk was September 30, 2010. For implementing internal
ratings-based approaches for credit risk and the advanced approach for operational
risk is March 31, 2014.
46 Research Workshop Keynote Paper
Implementation Status in Sri Lanka
The Central Bank of Sri Lanka joined the global trend by implementing the Basel
II, in January 2008. Accordingly, banks were required to apply the standardized
approach for credit risk, the standardized measurement method for market risk and
the basic indicator approach for operational risk, in computing the capital
requirements.
Figure 1: Capital to Risk Weighted Assets Ratio
Source: Annual Report, Central Bank of Sri Lanka, 2010
The Central Bank has decided to move to more advanced approaches (IRB
approaches) beginning 2013. Once the Central Bank is satisfied that the banks have
the appropriate models and risk management systems, the permission will be granted
for them to proceed with the IRB advanced approaches.
Implementation Status in Pakistan
The State Bank of Pakistan has chalked out a roadmap for the transition of the
banking system towards Basel II. The central bank of Pakistan adopted the
standardized approach for credit risk and basic indicator approach for operational risk
from January 1, 2008. Banks adopted Internal Ratings Based Approach from January
2010. To ensure smooth transition to Basel-II there was a parallel run of one and half
year for Standardized Approach and two years for IRB Approach.
Research Workshop Keynote Paper 47
Table 3: Capital to Risk Weighted Assets Ratio
(In percent)
2008 2009 Jun-2010 Dec-2010
Public Sector Commercial
Banks 13.4 15.1 13.9 12.8
Local Private Banks 11.9 13.9 14.0 14.2 Foreign Banks 21.8 23.0 22.7 26.4 Commercial Banks 12.6 14.5 14.3 14.2 Specialized Banks (4.9) (1.5) (1.5) 4.7 All Banks 12.2 14.0 13.9 14.0
Source: Quarterly Performance Review, State Bank of Pakistan, December 2010
Healthy growth in banking profits in 2010, coupled with accumulation of the
reserves, improved the solvency profile of the banking sector. The baseline Capital
Adequacy Ratio (CAR) strengthened and reached to 14.0 percent in December 2010.
This improvement was on account of enhanced MCR requirements of Rs.7 billion set
by SBP as well as banks‟ lower risk appetite.
IV. Implementation Status of Basel-II in Bangladesh
Being the supervisory authority, Bangladesh Bank (BB) has decided to adopt the
Risk Based Capital Adequacy standard for banks in line with capital adequacy
framework devised by the Basel Committee on Banking Supervision. Accordingly,
banks operating in Bangladesh are maintaining capital since 1996 on the basis of risk-
weighted assets in line with BCBS capital framework (Basel I guideline) published in
1988. Considering present complexity and diversity in the banking industry and to
make the banks‟ capital requirement more risk-sensitive, BB has prepared a guideline
in line with Basel-II framework devised by BCBS to be followed by all scheduled
banks from January 2009. According to Bangladesh Bank roadmap, the year 2009
has been considered as the year for parallel run with the preceding Basel I regime,
with full transition to Basel II from 2010. Subsequently, a revised guideline was
suggested by the central bank in December 20102. Besides, guidelines have also been
issued on Internal Capital Adequacy Assessment Process (ICAAP) and stress testing.
Bangladesh Bank asked the banks to strengthen their capital base and maintain a
minimum of 10 per cent of its risk weighted asset as capital in three different phases.
As per the directive, under Pillar-1, banks have to maintain minimum capital @ 8%
of its RWA by June 2010 in the first phase, 9% of its RWA by June 2011 in the
second phase and afterwards it should be 10% of its RWA.
2 Guidelines on Risk Based Capital Adequacy, Bangladesh Bank, December 2010
48 Research Workshop Keynote Paper
As per RBCA guideline, banks are following standardized approach for credit
and market risk, and basic indicator approach for operational risk under Pillar-1 of
Basel-II. In Pillar-2, banks should not only hold adequate capital cushion against all
risks associated with their businesses but also ensure that proper risk management
system is in place. Wherever banks would be found deficient in their risk
management practices, there is provision for supervisors to ask for the injection of
additional capital as part of Pillar-II of Basel-II. As per the BB roadmap, the banks
are required to take necessary initiatives for migration to IRB approach by 2012.
This study has identified the implementation status of Basel-II framework in
Bangladesh, which is presented same in the following section.
Minimum Capital Requirement
Basel II Accord, first of all, aims to align banks‟ capital with their basic risk
profiles. It is very elaborate and far superior in terms of its coverage and details.
It exploits effectively the new frontiers of risk management. It seeks to give impetus
to the development of a sound risk management system which, hopefully, will
promote a more efficient, equitable and prudent allocation of resources. It is
perceived to be the indication of the future outlook of bank supervision and an
evolutionary path for the banking industry.
As per RBCA guideline, banks are required to maintain Capital Adequacy Ratio
(CAR) of not less than 10.0 percent. But the central bank has reduced the ratio and set
a new timeframe for the banks to maintain their capital against 8 percent of the risk-
weighted assets by June 2010 and 9 percent by June 2011. Table-4 below shows that
as of June 2011, the SCBs, DFIs, PCBs and FCBs maintained CAR of 9.49, -7.05,
10.41 and 17.08 percent respectively, which has been increased from 8.92, -7.25,
10.08 and 15.63 percent, respectively in December 2010.
Table 4: Capital Adequacy Ratio (CAR) by Type of Banks3
(In percent)
Types of Bank 2007 2008 2009 2010 June, 2011 SCBs 7.9 6.9 9.0 8.92 9.49% DFIs -5.5 -5.3 0.4 -7.25 -7.05% PCBs 10.6 11.4 12.1 10.08 10.41% FCBs 22.7 24.0 28.1 15.63 17.08% Total 9.6 10.1 11.6 9.31 9.75%
Source: Department of Off-Site Supervision, BB
3 Up to 2009, CAR was calculated on the basis of Basel-I framework, afterwards the calculation was based on new
risk based capital adequacy guideline i.e. Basel-II.
Research Workshop Keynote Paper 49
Looking at the group-wise CAR position, it is evident that both Private
Commercial Banks (PCB) and Foreign Commercial Banks (FCB) are successful in
maintaining required CAR. Only one PCB failed to maintain the required CAR,
which arose because of the huge amount of accumulated loss and it is categorized as
a problem bank. Although SCB group improved their performance from December
2010 and crossed the target CAR of 9% in June 2011 but the problem lies with the
DFI group. Of the four DFIs, two banks fall short of target. One of the banks in DFI
group suffers so badly that the entire group went into the red. Both the banks give
most of their loans to agricultural sector as per government directive. As a result,
these banks cannot maintain their financial health up to the standard.
The compliance status of the commercial banks in terms of their achievement
regarding the capital adequacy ratio is shown in Table-5. The table shows that 4
banks fall short of the target and yet to attain the required CAR of 9 percent by June
2011. The remaining picture is quite optimistic as many of the banks are well above
the target. Out of the total 47 banks, 30 of them have already crossed 10 percent
marks. Even some of the banks (14 banks) are doing so well that they have exceeded
12 percent benchmark.
Table 5: Distribution of Banks by CAR
Number of Banks
CAR Less than 9 % 9% to 12% 12% to 15% Over 15% Total Dec 2010 8 26 5 8 47 June 2011 4 29 5 9 47
Source: Department of Off-Site Supervision, BB and Author‟s own calculation
Individual performance of banks (figure-2) shows that within the SCB group,
Sonali Bank is in the leading position in terms of achieving CAR, which is 10.23%
but Agrani Bank fails to achieve the required CAR. Although Rupali Bank achieved
the overall CAR but its Tier-1 capital is well below the target. Janata Bank
marginally crossed the limit. Of the 30 PCB, except ICB Islamic Bank, all the PCBs
successfully reached the target CAR of 9%. Among them 19 banks have already
crossed the 10% mark which is a very good sign as all the banks need to maintain
CAR of 10% from the July 2011. ICB Islami Bank posted a CAR of minus 37.20%.
50 Research Workshop Keynote Paper
Figure 2: Bank-wise Capital Adequacy Ratio as on June 30, 2011
Source: Department of Off-Site Supervision, BB
Within the PCB group, Social Islami Bank (13.59%) is at the top of the table in
attaining CAR followed by Prime Bank (12.52%) and Al-Arafah Islami Bank
(12.36%). All the banks in the FCB group are well above the target rate and their
group CAR already reached 17.08%. But the situation of the DFI group is severe
especially for BKB and RAKUB. The condition of BKB is really alarming as it
observed a CAR of -25.91%. Although RAKUB posted a positive CAR but still it is
far from the target.
According to central bank statistics, till June 2011, the total Minimum Capital
Requirements (MCR) by the banks were Tk. 43,226 crore against which the banks
maintained a capital of Tk. 46,169 crore and the overall surplus was Tk. 2,943 crore
(table-6). This surplus is the outcome of good performance of both PCBs and FCBs
which observed a capital surplus of Tk. 4,284 crore and Tk. 2,403 crore, respectively.
Although SCB‟s achieved capital surplus of Tk. 494 crore but DFIs posted a huge
capital deficit of Tk. 4,238 crore.
Table 6: Bank-group wise Capital Composition
(Tk. in Crore)
Types of
Bank Required
Minimum
Capital
Tier-1
Capital Tier-2
Capital Tier-3
Capital Total
Eligible
Capital
Capital
Surplus/
Shortfall SCBs 9148.40 6670.74 2971.43 0.00 9642.17 493.77 DFIs 2376.37 -2609.17 747.35 0.00 -1861.82 -4238.19 PCBs 27938.88 25256.90 6966.73 0.00 32223.63 4284.75 FCBs 3762.41 5573.26 592.46 0.00 6165.73 2403.32 Total 43226.06 34891.73 11277.97 0.00 46169.71 2943.65
Source: Department of Off-Site Supervision, BB
Research Workshop Keynote Paper 51
From the table, it is evident that out of total regulatory capital for all banks, 75.6
percent was maintained as core capital in June 2011 which was 71.7 percent in
December 2010. Disaggregated figures show that except for the DFIs, actual core
capital was 19.2 percent, 28.4 percent and 40.39 percent higher than the requirement
for SCBs, PCBs and FCBs, respectively. If we look at the capital composition of the
different group of banks, we can conclude that there is no Tier-3 capital in the
banking sector of Bangladesh. Only 25 percent of the total regulatory capital is in the
form of Tier-2 capital, of which only 7 banks raised a portion (14 percent) of their
Tier-2 capital through subordinated debt. Although subordinated debt both long-term
(Tier-2) and short-term (Tier-3) was used as a capital component in the existing
regulatory capital framework but it will not be treated as a capital component in the
upcoming framework. The contribution of subordinated debt in the capital formation
will definitely be helpful in the transition to the future framework.
Figure 3: Capital Mix of Schedule Banks
Source: Department of Off-Site Supervision, BB
The above figure represents the capital mix, both Tier-1 and Tier-2, of all
scheduled banks operating in Bangladesh. From the figure, we find that except
retained earnings, all the components of Tier-1 capital have increased from December
2010 to June 2011. Retained earnings show slightly declining trend because of the
accumulated loss by the DFI group. The biggest increase was observed in paid up
capital as banks are continuously offering bonus share, right share in the form of
dividend to the shareholders in an effort to enhance their core capital base. Also in
recent years, many banks are found to increase their authorized capital from its
current level to Tk.1,000 crore, which is an indication of the further increase of the
paid up capital by the banks in future. Although Tier-2 capital is slightly increased in
absolute term but eventually it showed a little reduction in percentage term. The
biggest component in this category is the „general provision‟, which is about
Tk.6,000 crore (13% of the total regulatory capital), is an outcome of the continuous
increase of the loans & advance by the banking sector.
52 Research Workshop Keynote Paper
From figure-4, it is observed that as opposed to required 4.5 percent of the
minimum core capital, SCB, PCB and FCB maintained 6.56 percent, 8.16 percent and
15.44 percent respectively in the form of core (Tier-1) capital. Even after the worse
condition of the DFI group, the average core capital reached 7.37 percent, which is an
indication of high concentration on Tier-1 capital by the banking sector of
Bangladesh. This outcome is a very good indication, as we know that Basel-III sets
extreme importance on core capital, which might have an added advantage for the
banking sector of Bangladesh while implementing Basel-III in future.
Figure 4: Percentage of Core Capital by Different Group of Banks
Source: Department of Off-Site Supervision, BB
The Credit Risk Weighted Assets (CRWA), with 83.58 percent share, was the
leading component of aggregate RWA (table-7). The banks‟ concern in equity and
interest exposures marginally enhanced their overall market risk exposure which
witnessed a growth in its share to 7.81 percent during first half of the year. Further,
share of Operational Risk Weighted Assets (ORWA) slightly increased on account of
rise in banking profits4.
4 The operational risk weighted assets are calculated under the Basic Indicator Approach of Basel II Framework that
requires the banks to set ORWA equal to an average of three years of annual gross income. So rising gross income
would result in higher capital charge for operational risk
6.56
-9.88
8.16
15.44
7.37
-12
-8
-4
0
4
8
12
16
SCB DFI PCB FCB ALL Bank
Perc
en
t
Minimum Core Capital Actual Core Capital
Research Workshop Keynote Paper 53
Table 7: Composition of Risk Weighted Assets
December 2010 June 2011 Amount
(in crore taka) Share (%) Amount
(in crore taka) Share (%)
Credit RWA 374,139.02 84.53 395,941.83 83.58 Market RWA 32,347.57 7.31 36,983.92 7.81 Operational RWA 36,136.65 8.16 40,814.22 8.62 Total RWA 442,623.24 100 473,739.97 100
Source: Department of Off-site Supervision, BB
Although central bank has a framework in place to curtail operational risk
through Customer Due Diligence / Know Your Customer (KYC) measures,
it continuously monitors the progress of banks and amends these guidelines for
stricter compliance.
Figure 5: Ratio of Risk Weighted Assets to Total Assets5
Source: Department of Off-Site Supervision, BB
Figure-5 represents the ratio of risk weighted assets to total assets, which is
increasing over the years. In the initial years the ratio was moving around 50 percent
mark. But in 2010, the ratio reached almost 92 percent, which is very high for a
country like Bangladesh. This is because of the implementation of Basel-II
regulation. Basel-II regulation was put into operation in Bangladesh from 2010 where
calculation Of Risk Weighted Assets (RWA) were more rationalized than that of
Basel-I regime. This caused increase in the ratio, which indicates the banks
involvement in high risk sensitive assets. Another important reason of such increase
5 Total Assets is net of specific provision, interest suspense, cash collateral
45.71
53.28 54.84
91.3887.22
0
10
20
30
40
50
60
70
80
90
100
2007 2008 2009 2010 2011 (June)
RW
A to
Tot
al A
sset
(%)
54 Research Workshop Keynote Paper
was the risk weight of unrated corporate clients. The ratio has slightly declined in the
first half of 2011 because of the little improvement of the rating scenario by the
unrated corporate clients. The ratio could have decreased further if it was possible to
increase the rating coverage. Although banks are compliant in terms of maintaining
required CAR, but the risk weighted exposure is very high as compared to the
neighboring countries. In Pakistan, the ratio is only 64 percent in December 2010. So
banks should concentrate for reducing its exposure to high risky assets in order to
ensure better risk management and increased financial stability.
Supervisory Review Process
The second Pillar of Basel II capital regime requires banks and the supervisors
not just to ensure that banks hold adequate capital cushion against all risks
associated with their businesses, but also to ensure that banks have policies and
processes in place for assessing, monitoring and prudent management of the risks.
For the banks this second pillar requires active board and senior management
oversight, forward looking capital adequacy assessment; adequate processes for
monitoring and reporting of risk exposures; and periodically reviewed strong and
effective internal control processes. For supervisors the second pillar demands
regular review of adequacy and effectiveness of capital assessment, risk
management and internal control practices in banks; seeing to it that banks operate
above their minimum regulatory capital ratios; intervening early for preventing
slippages of capital ratio below the regulatory minimum; and rapid remedial actions
in the event of any such slippage.
The key principle of the Supervisory Review Process (SRP) is that “banks have a
process for assessing overall capital adequacy in relation to their risk profile and a
strategy for maintaining their capital at an adequate level”. Banks should have an
exclusive body (called SRP team) where risk management unit is an integral part, and
a process document (called Internal Capital Adequacy Assessment Process-ICAAP)
for assessing their overall risk profile, and a strategy for maintaining adequate capital.
Adequate capital means enough capital to compensate all the risks in their business,
and to develop and practice better risk management techniques in monitoring and
managing their risks. ICAAP includes regulations of a bank‟s own supervisory
review of capital positions aiming to reveal whether it has prudent risk management
and sufficient capital to cover its risk profile. Supervisory Review Evaluation Process
(SREP) of BB includes dialogue between BB and the bank‟s SRP team followed by
findings/evaluation of the bank‟s ICAAP. During SRP-SREP dialogue BB will
review and determine additional capital of banks.
Recently central bank has developed a guideline to evaluate the individual bank‟s
process document for determining the adequacy of the capital. In the guideline, BB
has identified 10 different risk components and provides capital calculation
methodology against those risk components. Bangladesh Bank circulated their
Research Workshop Keynote Paper 55
guideline through website and almost all the commercial banks have decided to adopt
this guideline as basis of their process document. Sample survey showed that 40
percent of the respondents have already developed their own ICAAP, another 40
percent is in the process of development and the remaining 20 percent is yet to
develop any process document. All the respondents under the survey have exclusive
team for SRP, approved capital plan and submitted the capital calculation report
under Pillar-II to the Bangladesh Bank. Bangladesh Bank is yet to start SRP-SREP
dialogue. While assessing the capital requirement for the following risk components
the respondents have identified some practical difficulties which are summarized and
given in the appendix.
The following table is the summary output of the survey conducted in the sample
banks. First four columns represent respectively Banks Identity (which is not
disclosed), Eligible Regulatory Capital, Minimum Capital Requirement (MCR) and
Adequate Capital Requirement as per Pillar-2 of Basel-II. Fifth column represents the
percentage of MCR within total eligible regulatory capital. Sixth column is the
capital in excess of MCR already maintained by the respective banks, which may be
used to cover additional capital. The average amount of extra capital over the
minimum is approximately 20 percent. Final column of the table shows the
percentage of additional capital to eligible regulatory capital of the sample banks.
The survey data shows that the percentage varied from 4 to 27 percent with an
average of 16 percent.
Table 8: Eligible Capital, Minimum Capital and Additional Capital of Sample Banks
(Tk. in Crore)
Name of the
Bank
Eligible
Regulatory
Capital MCR
Additional
Capital
Requireme
nt
MCR to
Eligible
Capital (%)
Surplus
Capital
Over MCR
(%)
Additional
Capital to
Eligible
Capital (%) Sample-1 953.64 694.28 69.00 72.80 27.20 7.24 Sample-2 358.55 200.00 12.73 55.78 44.22 3.55 Sample-3 1001.88 849.01 170.00 84.74 15.26 16.97 Sample-4 1298.85 761.92 131.00 58.66 41.34 10.09 Sample-5 668.53 623.63 138.56 93.28 6.72 20.73 Sample-6 669.49 513.61 109.87 76.72 23.28 16.41 Sample-7 2207.64 1586.73 270.46 71.87 28.13 12.25 Sample-8 3699.52 3254.96 970.72 87.98 12.02 26.24 Sample-9 1254.88 971.19 129.41 77.39 22.61 10.31
Sample-10 1320.01 1430.81 200.31 92.26 7.74 14.00 Total 10775.34 13543.79 2202.06 79.56 20.44 16.26
Source: Department of Off-Site Supervision BB, Survey Result and Author‟s own Calculation
56 Research Workshop Keynote Paper
The result indicates that, on an average, banks are already in a position to
maintain the additional amount of capital (in excess of MCR), which leads to increase
soundness and higher financial stability by the banking sector of Bangladesh.
Currently, central bank is giving high emphasis on implementing the supervisory
review process, for which banks are required to maintain some additional capital
under Pillar-2 for different forms of risk other than credit, market and operational risk
of Pillar-1. Although banks were very much concerned about this extra capital
requirement and this was considered as one of the biggest challenge, the result shows
an optimistic view in this regard.
Stress Testing
Stress testing, as defined by BIS, is a risk management technique used to evaluate
the potential effects on an institution‟s financial condition of a specific event and / or
movement in a set of financial variables. It refers to the process to cover multiple risk
measures across categories and complements traditional risk models. It is also an
integral part of the BIS capital adequacy framework. Considering the importance and
complexity of the methodology of stress testing, BB issued a guideline on stress
testing in 2010 and made it mandatory for banks.
The following table shows the survey result conducted to find the capital
condition under different stressed situation. It is evident that none of the sample
banks falls short of the capital in case of minor level shock whereas 100 percent will
face the capital shortage if it has to face the major level shock.
Table 9: Shortage of Capital at Different Level of Shocks
Level of Shock Yes No Minor level - 100% Moderate level 20% 80% Major level 100% -
When the respondents were asked whether the shock level used in different areas
of stress testing are justified or not, majority of the respondents considers that the
shock levels are not justified. They have already mentioned some comments
regarding the shock level of stress testing which are summarized below:
Downgrading the top ten customers directly to B/L category is not justified
The level of shock should be determined through a scientific process and can be a
blending of the historical trend, probable level of disaster considering the
economic strength/condition of the country.
Research Workshop Keynote Paper 57
Market Discipline
Market discipline, the third Pillar of Basel II complements the regulatory capital
and supervisory review pillars, with requirement of sufficient transparency to enable
stakeholders to make their own assessments about the risk profiles of the asset
holdings of a bank and the adequacy of its capital in meeting probable losses. This
pillar requires banks to develop formal disclosure frameworks providing sufficient
qualitative and quantitative disclosure of validated (i.e., audited) material information
at regular periodicity.
A bank should decide which disclosures are relevant for it based on the
materiality concept. Banks should provide 8 categories of information (Scope of
application, Capital structure, Capital adequacy, Credit risk, Equities, Disclosures for
banking book positions, Interest Rate Risk in the Banking Book (IRRBB), Market
risk, Operational risk) required to disclose in both qualitative and quantitative form as
at the end of March of each year along with annual financial statements. So a bank
has to disclose 16 different categories of items in order to comply with Pillar-III of
Basel-II guideline.
Some of the banks disclose sufficient information under Pillar III of Basel II.
At the same time, some of the banks do not disclose at all and some of the banks do
not follow the prescribed format. The following table illustrates the survey result
where 27 banks were taken as sample. Of the sampled survey, only 5 banks (18.52
percent) were found fully compliant as per the guideline in terms of disclosure. Out
of required 16 items, 8 banks were found to report maximum of 13 to 15 items and
also 8 banks were found to disclose less than 7 items. The quantity of disclosure for
the remaining 6 banks varies from 7 to 12 items (disclosure percentage varies from
40 percent to 80 percent), which represents only 22 percent of the respondents.
Since disclosure is a mandatory requirement for all banks, the percentage reflects
weak compliance of Pillar-III under Basel-II by the banking sector of Bangladesh.
All the banks should come forward to disclose required information under Pillar III
of Basel II.
Table 10: Distribution of Banks in Terms of their Disclosure Percentage
Actual disclosed
items out of 16 items Percentage of
Disclosure No. of
Banks Percentage of
Banks 16 100% 5 18.52
13-15 >=80% to <100% 8 29.63 10-12 >=60% to <80% 3 11.11
7-9 >=40% to <60% 3 11.11 1-7 >0% to <40% 8 29.63 0 0% 0 0.0
Source: Annual Reports of Different Banks
58 Research Workshop Keynote Paper
Comparative Scenario of Basel-II Implementation
Comparative statement of selected indicators of Basel-II implementation in
selected SAARC countries are presented in Table-11 below. The table shows that the
Capital Adequacy Ratio (CAR) of Bangladesh is only 9.31 percent where as the same
of Sri Lanka, the best performer, is 14.90 percent. Bangladesh is also lagging behind
other countries in terms of two other ratios namely core capital ratio and risk
weighted assets to total assets. Sri Lanka is the top performer in the group.
Table 11: Basel-II Implementation Scenario in Selected SAARC Countries
(As on December, 2010)
Bangladesh India Pakistan Sri Lanka
Capital Adequacy Ratio (%) 9.31 14.50 14.00 14.90 Core Capital Ratio (%) 7.37 10.10 11.80 13.00 RWA to Total Assets (%) 91.38 N/A 64.10 N/A
N/A = Not Available
Source: Department of Off-Site Supervision BB, Report on Trend and Progress of Banking in India 2009-10,
Quarterly Performance Review, State Bank of Pakistan, December 2010, Annual Report, Central Bank of Sri
Lanka, 2010
SAARC countries are implementing Basel-II in different phases. At present,
banks in Bangladesh are following standardized approach for credit and market risk,
and basic indicator approach for operational risk. As per Bangladesh Bank roadmap,
Banks are expected to migrate to the advanced approaches by 2012. In Pakistan,
Banks adopted Internal Ratings Based approach from January 2010 with provision
for two years parallel run of Standardized and IRB approach. Sri Lanka is following
the simpler approaches at the moment and the Central Bank of the country has
decided to move to advanced approaches (IRB approaches) beginning 2013. Indian
central bank has set a phase by phase timeline for transition to the next phase - the
advanced approach. It set March 31, 2011 for implementing internal models approach
for market risk. For implementing the standardized approach for operational risk was
September 30, 2010. For implementing internal ratings-based approaches for credit
risk and the advanced approach for operational risk is March 31, 2014.
Research Workshop Keynote Paper 59
V. Challenges Faced by the Banks while Implementing RBCA Guideline
The current study has identified the challenges faced by the banking community
in the process of implementing the Basel-II guidelines in Bangladesh by a
questionnaire survey and literature review. Identified challenges are presented in the
section below:
Non-compliance of MCR requirements by DFIs
DFI group is suffering from severe capital shortage as per the new guideline.
Especially, BKB and RAKUB are showing acute shortages. The condition of BKB is
really alarming as it observed a CAR of -25.91%. Although RAKUB posted a
positive CAR but still it is far from the target. This condition is a big challenge for
the banking sector of the country as it significantly reduces the overall CAR position
of the banking sector.
Poor Compliance of Pillar-II and Pillar-III
For being Basel-II compliant, implementation of all three pillars is equally
important. From this study, it has been observed that banks were somewhat
successful in attaining required CAR but the compliance of other pillars (Pillar-II and
Pillar-III) are still far from the target. This is big a challenge on the way to become
Basel-II compliant. In this context, all the concerned parties need to play proactive
role so that all Pillars of the capital adequacy framework is implemented at its full
length.
Low Credit Rating Coverage
One of the two approaches prescribed for Credit Risk in Basel II is the
standardized approach. The standardized approach of determining capital for credit
risk depends heavily on the credit rating by ECAI. While the BB has accredited a
number of rating agencies operating in Bangladesh (CRISL, CRAB, NCRL, ECRL),
the rating penetration is rather low. Based on our sample, approximately 16% of the
corporate borrowers are rated in Bangladesh. This is because of the unwillingness of
borrowers to be rated, high cost of rating, short validity of rating, poor quality of
rating, lack of independence, lack of trust on the rating agency etc. Besides, the risk
weighting scheme under standardized approach also creates some incentive for some
of the bank clients to remain unrated since such entities receive a lower risk weight of
125 per cent vis-à-vis 150 per cent risk weight for a lowest rated client. This might
especially be the case if the unrated client expects a poor rating. Because of poor
rating coverage, banks are facing challenge in this regard as they are applying high
risk weight in the absence of rating and are maintaining higher capital accordingly.
60 Research Workshop Keynote Paper
Development of ICAAP
The key principle of the Supervisory Review Process (SRP) is that the banks
should have their own process (ICAAP) document for assessing overall capital
adequacy in relation to their risk profile and a strategy for maintaining their capital at
an adequate level. Development of Internal Capital Adequacy Assessment Process
(ICAAP) under the Pillar-2 of the framework would perhaps be the biggest challenge
for the banks in Bangladesh as it requires a comprehensive risk modeling
infrastructure to capture all the risks that are not covered under the other two Pillars
of the framework. From our questionnaire survey, it has been found that only a few
banks have developed their own ICAAP while many others have none. A few other
banks are in the process of developing their ICAAP. So, ICAAP development and
capital maintenance as per ICAAP is a challenge for the implementation of Pillar-II.
Availability of Reliable Data
Strong MIS and reliable database on the borrowers, security, documentation and
on similar other issues is indispensable for the successful implementation of the
Basel-II. For capturing these data in a timely and less costly way, bank should
redesign their information system, need to expand the IT infrastructure, need to
develop new software. These are yet to be done in many banks. Even some banks are
doing manual banking in the rural level branches. So availability of reliable data on a
timely basis is still a major challenge for the implementation of Basel-II in the
banking sector of Bangladesh.
Availability of Skilled Human Resources
The banks have to interpret the new regulations and have proper understanding of
its effects on banking business. So, skilled human resources are the “tools” for the
gradual implementation of Basel II. Proper interpretation of data is crucial for
accurate decision-making. Those who are skilled at decision-making will give better
results than those whose judgments are poor. Moreover, Basel-II is mainly focused
on risk management at all level of banks. So human resources capable of
understanding risk management issues at all levels are essential. But there is a dearth
of skilled and trained manpower for risk management, which is also a challenge for
Basel-II implementation.
IT Infrastructural Requirements of the Banks
Some of the banks are still running under decentralized and less sophisticated IT
platform. So, data management, storage and processing remains a major challenge.
The single largest cost of implementing Basel II is the IT costs. A high-end IT
infrastructure with risk management software is needed. This preparedness is not
present in all the banks. The required expenditure would be far higher than small
banks could bear, which posses a big challenge for implementation of Basel-II.
Research Workshop Keynote Paper 61
Assessing Capital Requirement for Residual Risk
Assessing capital requirement for residual risk is a big challenge for many banks
because of the unavailability of data on error in documentation, cases of physical
non- existence of collateral, error in valuation etc. Besides, determining the capital
requirement by considering delay in process of legal action and execution of court
verdict (time value of money + legal processing cost) is complex.
Absence of Comprehensive Checklist for Assessing Compliance of Core Risk
A comprehensive checklist is needed for evaluation of the degree of compliance
of core risk management guidelines by banks. But acceptable and comprehensive
checklist is yet to be prepared by the banks. As a result, banks are facing problem at
the time of determining the capital requirement for the compliance of core risk
management guidelines.
Non-cooperation in Assessing Environmental & Climate Change Risk
For assessing capital requirement for Environmental & Climate Change Risk,
cooperation from customer is a must. But respondents of questionnaire survey opined
that customers do not cooperate in many instances particularly where there is
possibility of gross environmental pollution. Offering appropriate incentives for the
customers is a big challenge as it may be costly for the banks.
Absence of Guidelines/ Job description for the Risk Management Unit
Banks have already formed SRP team and established risk management unit as an
integral part of SRP. But the process of determining risk profile is yet to be
completed. Even in some cases they are not provided with guidelines or sufficient job
descriptions. For successful implementation of the Pillar-II, this challenge needs to be
addressed in the coming days.
Appropriate Risk Evaluation Techniques
Application of appropriate techniques for risk evaluation is an implementation
issue. This is where the modeling comes into play. Modeling is used as a popular
technique for identifying, quantifying and analyzing risks to enable the
management to decide on the allocation of capital. But one need not entirely
depend on modeling and be out of reality as modeling will produce a statistical
outcome depending on the data you feed into a set of equations or a simulation
model. Modeling also involves issues such as focus on loss data, validation,
calibration and issues on floors and ceilings.
Stress Test and Capital Shortfall
The idea of stress test is new in Bangladesh. The BB started carrying out stress
tests of banks to determine whether they are able to withstand various shocks, which
is very important to assess the financial stability. The recent global financial crisis has
62 Research Workshop Keynote Paper
brought the issue of stress test of financial institutions, particularly banks, in the
limelight. Bangladesh Bank has already given the stress test guideline. As per the
guideline banks are submitting their reports to central bank. The BB already carried
out the stress test on the data given by the banks as of end-March 2011. Majority of
the banks will face a capital shortage in moderate and major level of shocks in
different risk category, which is a challenge for the banking sector.
Challenges in the Implementation of Disclosure Requirements
The purpose of market discipline (Pillar-3) is to complement Pillar I and II by
encouraging public disclosure of key information on risk exposures and capital
adequacy. Disclosures are applicable at the bank level as well as supervisory level.
While checking the implementation status, it has been observed that the disclosure
practices are still at a nascent stage in the banking sector so far as it is concerned with
Pillar-3 disclosure. Challenges of Pillar-3 implementation are basically coming from
two different areas : (i) Approved disclosure framework – a large portion of the
respondents said that they are yet to have their own disclosure framework approved
by the Broad of Directors; and (ii) Poor qualitative disclosure – it has been observed
that the banks are really very reluctant to make qualitative disclosure. So, achieving
sufficient appropriate qualitative disclosure is a big challenge.
Operational Cost of Basel-II
One of the most serious and widespread challenges is the operational cost of
Basel II. There is a heavy compliance burden of Basel II and the growing burden of
domestic and internal regulation is the biggest risk facing the banks as
implementation of new rules entails a very high cost for the banks. A right balance in
this risk – return trade-off is very essential. Moreover, it can be argued that Basel II,
unfairly gives advantage to the larger banks that are able to bear the high compliance
cost but the smaller banks will be discouraged.
Adverse Selection and Moral Hazard Problem
The existence of imperfect markets is a major challenge for the implementation
of Basel II. Banks engage in information – intensive activities and their profitability
depends on keeping that information private (Chami, Mohsin and Sharma, 2003).
Adverse Selection, Moral Hazards and Agency problems stem from the informational
asymmetry between banks and other economic agents such as borrowers, lenders, and
regulators. Asymmetry of information creates price distortions. Market surveillance
by regulator could minimize the distortions.
Cross-border Challenges
One of the most difficult aspects of implementation is the cross-border
challenges. With the openness of the economies, capital flows freely among the world
economies. The conclusion derived from empirical evidence is that there will be a
Research Workshop Keynote Paper 63
decline in credit flows from banks of developed countries to the developing countries
because of the higher risk perception of their financial system, and lack of appropriate
rating and risk-management systems (Akhtar 2006). There is a dire need to find a
robust and a workable solution to this potential threat to the world economies.
Migration to Advanced Approaches
As per the roadmap of BB, banks are supposed to migrate from the current
approaches to advanced approaches (Internal Rating Based (IRB) approach, Internal
Model Approach Standardized/advanced measurement approach) for calculating
RWA against credit, market and operational risk by 2012. Initiatives so far taken
include organizing training, designing borrower database, use of different
sophisticated techniques to calculate various risks etc. These initiatives are
insufficient to migrate to the advanced approaches by 2012. Most of the
respondents thought that shifting to advanced approaches by 2012 will be a great
challenge for the banking sector. The advanced approaches would put a difficult
responsibility on the supervisors of not only guiding the banking system through
the implementation phase but also of validating the internal models, system and
processes adopted by the regulated banks. This, needless to say, would require
considerable capacity-building and augmentation of the domain knowledge and
expertise of the supervisors themselves to ensure a non-disruptive migration to the
advanced approaches under Basel II.
VI. Issues for Discussion and Suggestions
One, as per RBCA guideline, banks total risk weighted assets are categorized into
credit, market and operational risk. From Table-7, it is apparent that credit risk
weighted assets constitute almost 84 percent of the total RWA of the banking sector
of Bangladesh. Efforts to minimize capital requirements will not be successful unless
credit risk weighted assets are reduced. So reducing the credit risk weighted assets is
major issue for the banking sector for better capital management. The scenario may
be improved by encouraging good clients to be rated and also by accepting good rated
new corporate exposure. Increasing the number of rated clients may not always be
possible unless internal or external interferences are removed or reduced to a
minimum level.
Two, under the Standardized Approach, the banks have to rely heavily on
External Credit Assessment Institutions (ECAI) in order to get their client rated.
One of the key implementation challenges is to get the credit rating of the clients.
To overcome this, rating coverage needs to be increased. In order to increase the
rating coverage, benefits/rewards may be offered to the good rated clients in the form
of reduced interest rate, sharing of the rating cost by the bank etc. Regulatory
enforcement like incorporating the rating issue in the credit assessment process,
inclusion of rating in the listing requirements of stock markets may also be helpful in
increasing the rating coverage.
64 Research Workshop Keynote Paper
Three, basel-II is a highly technical and data-sensitive regulation. Particularly,
the advanced approaches are more complex, which requires highly skilled staff.
This would need innovative strategies and concerted efforts on the part of the banks
to be able to attract and retain the right mix of talent in the organization. To ensure
sufficient supply of skilled and competent workforce, employees should be developed
through focused training program both home and abroad.
Four, most of the banks are following the BB‟s evaluation guideline as their
process document in order to determine the adequate capital requirement under
Pillar-2. But banks are supposed to prepare their own ICAAP for this purpose.
For doing this, banks are even taking the service from the foreign expert, which is a
costly exercise. Banks should concentrate on development of their own ICAAP with
help of local talented workforce.
Five, assessing capital requirement for various risks under Pillar-2 is subject to
different challenges starting from understanding methodology to development of
ICAAP. For obtaining branch level data related with the calculation of capital
requirement for various risk under SRP, banks may expand their IT infrastructure and
strengthen the capacity and coverage of internal audit.
Six, stress test is a technique by which banks can assess their position under
different stress scenario – minor, moderate and major. Although central bank has
started the stress testing but it is yet to assess the impact of such test and take the
necessary action accordingly. Banks can themselves learn some lessons from the
test and be benefited by taking necessary policy decision in advance. In this
regard banks may be encouraged to use stress test information for their policy
formulation in respective areas and stress test result should be reflected in the
capital plan of the banks.
Seven, the level and content of Pillar III disclosures will vary according to the
measurement and calculation approaches adopted by a relevant bank. In terms of
Basel II, the disclosures would have to be made on an annual and semi-annual basis.
In the context of Bangladeshi banking system, non-compliance of disclosure
requirements as per Basel-II guideline is observed. Even if there are some
disclosures, the quality is questionable. For improving disclosure practices, banks
having good disclosures may be rewarded, supervisory efforts to ensure quantity and
quality may be intensified, scope of the auditors may be enhanced and finally
awareness programs may be undertaken to increase the awareness of the stakeholders.
Eight, implementation of Basel-II entails a very high cost for the banks. The
major sources of cost is designing risk management system, developing ICAAP,
adoption of new standards, training cost for the human resources and cost of
developing infrastructure. In some cases, small banks suffer greatly because of the
cost involvement. In order to reduce the cost a number of steps can be undertaken.
For example, common software may be developed jointly by banks‟ common fund
for risk management, local expertise may be shared by banks.
Research Workshop Keynote Paper 65
Nine, basel II requires the involvement of the senior management in the process
of identification, evaluation and mitigation risks. The bank management should
address this issue early. Top management should be educated in terms of risk
management and Basel accord. The senior management and the board members
should use some supervisory and monitoring powers to ensure that the technical and
other officers continue to engage in risk mitigation activities and that the board is
satisfied with action taken by them. To attain this objective, Board risk committee
may be formed and board may be appraised of the risk management, stress testing
and Basel-II implementation outcome.
Ten, when financial market innovation takes place globally, new products such as
derivatives, securitization will be introduced and they are likely to bring in new risks
including operational risks. It is evident that Basel II enables banking to be based on
more market-driven systems which are conducive to financial innovation and it
requires setting aside risk mitigation processes to deal with ever increasing financial
innovation.
Eleven, the advanced approaches would require considerable capacity-building
for both the supervisory authority as well as the banks. These approaches are very
data intensive and require high-quality, consistent, time-series data for various
borrower- and facility-categories for a period of five to seven years to enable
computation of the required risk parameters (such as default probability and loss
given default, etc.). Although majority of the banks are not ready to conduct a
thorough review of their internal processes with a view to redesign and upgrade them
to be able to capture the information needed for creating the requisite databases but
most banks understand the need and they are preparing themselves in order to ensure
the process of adoption.
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Leeladhar V., Deputy Governor of the Reserve Bank of India (2007), “India‟s
Preparedness for Basel-II Implementation”, at the panel discussion during the FICCI-
IBA Conference on Global Banking: Paradigm Shift, Mumbai, September.
Mathew, Maria (2009), “How will Basel-II change Banking in India?” Chennai: Loyla Institute of Business Administration.
Rashid, Mamun (2008), “Challenges for BASEL-II Implementation in Bangladesh”, The Financial Express, 21st August.
Report on Trend and Progress of Banking in India 2009-10.
Vlaar, P. J. (2000), “Capital Requirements and Competition in the Banking Industry,” Federal Reserve Bank of Chicago, Working Paper 18.
Reserve Bank of India (2010), Annual Report.
State Bank of Pakistan (2010), Annual Report.
Walter, Stefan, Secretary General, BCBS (2010), “Basel III and Financial Stability”
5th Biennial Conference on Risk Management and Supervision, Financial Stability Institute, Bank for International Settlements, Basel, 3-4, November.
Ward, J. (2002), “The New Basel Accord and Developing Countries: Problems and Alternatives”, Cambridge Endowment of Research Finance, Working Paper No. 4, p. 14.
Research Workshop Keynote Paper 67
Appendix
Table: Summary Issues of SRP
Risk Components Mention the Difficulties (a) Residual Risk Identification of error in documentation
Calculating time value of money in case of
delayed and/or partial recovery.
Identification of security overvaluation
Difficulties in identifying basis point due to lack of sufficient information
(b) Evaluation of Core Risk Management
Determining the degree of compliance of
core risk management guidelines
Absence of core risk management checklist
for assessing CRM (c) Credit Concentration Risk Superior MIS support required which is
costly (d) IRRBB Lack of customer historical information
MVE calculation does not include any
changes from 1% increase in interest rate scenario thus have no impacts on capital
charge. (e) Liquidity Risk Total Adjusted Cash Inflow has been taken as
a percentage of Total Cash Outflow instead
of Total Cash Inflow (logical confusion) (f) Reputation Risk Dual effect on capital charge with regard to
settlement risk. (g) Strategic Risk Difficulty in defining intervention of Board
(h) Settlement Risk Dual effect on capital charge with regard to reputation risk
(i) Environmental Risk Non-cooperation from customers
68 Research Workshop Keynote Paper
Paper Three
Disclosure Requirements of Banks: Bangladesh Perspective
Atul Chandra Pandit Assistant Professor, BIBM
Md. Mahabbat Hossain
Lecturer, BIBM
Maksuda Khatun Lecturer, BIBM
Disclosure Requirements of Banks: Bangladesh
Perspective
I. Introduction
Business organizations interact with many interest groups in the process of doing
business. Such interest groups or stakeholders include but are not limited to the
shareholders, suppliers, customers, government, tax authority, regulatory authority,
employees, prospective investor, etc. Stakeholders need a lot of information for
making their business decisions effectively. This is relatively more important in those
businesses where management is separated from ownership i.e. in case of corporate
form of business. The information need of the stakeholders may be satisfied through
public disclosure of information by business organizations. Such disclosure also plays
vital role in the process of doing business by influencing the decisions of the
stakeholders. So, business organizations willfully disclose information to the public.
But such willful disclosure is limited by the cost-benefit consideration and
confidentiality. Problem also lies in the diversity of information requirements from
different interest groups. Besides, the possibility of adverse selection, moral hazard,
poor governance, corruption and insider trading increases in the absence of
appropriate and timely disclosure by companies. Minimum common public
disclosure is, sometimes, made mandatory by enacting laws, issuing regulations and
by adopting disclosure standards in the absence of appropriate willful disclosure by
business organizations. So, the identification of the disclosure requirement is always
important. Such identification of disclosure requirements helps companies to make
appropriate and cost effective disclosure and thereby helps to avoid many problems.
Like other businesses, banks need to make public disclosure of information for
keeping their stakeholders informed about different aspects of banking operation,
operating performance, financial position and many other issues of interest. A bank in
Bangladesh is required to comply with a lot of laws and regulations because of its
nature and systemic importance in the national economy. Such laws and regulations
require a lot of disclosures in different forms. Besides, disclosure is the only
instrument of Market Discipline under Basel-II as adopted in Bangladesh. Huang
(2006) said that enhanced accounting disclosure leads to better transparency and
stronger market discipline in the banking sector and it is an important ingredient of
banking sector stability. In the above context, the current study is a timely initiative
to identify the disclosure requirements of banks and to determine the degree of
compliance. Improvement in the disclosure practices of banks is expected to bring
multiple benefits in different forms, such as, informed decision making, improved
governance, less corruption, pro-active management, etc. It may also be used as a
marketing tool for the concerned bank conveying their image to the stakeholders.
Research Workshop Keynote Paper 71
The current study aims to achieve some specific objectives which are: one, to
identify the disclosure requirements of banks keeping the global practices and local
regulatory requirements in view; two, to understand the present status of banks in
terms of disclosure requirements; three, to identify the association between corporate
attributes and the extent of disclosure by banks; and four, to identify the issues and
problems relating to disclosure of banks and to propose courses of action in order to
enhance disclosure practices by banks.
There are forty seven (4 State Owned, 4 Specialized, 9 Foreign Bank, 23 Private
and 7 Islamic Banks) banks operating in Bangladesh (BB 2011c). Purposive sampling
technique has been followed. The study covers 25 banks that include 3 State Owned
Banks, 2 Foreign Banks and 20 Private Banks incorporated in Bangladesh including 6
Islamic Banks (Appendix-A).
A disclosure checklist has been prepared with 140 items of disclosure
(Appendix-B). The constructed disclosure checklist has seven broad groups of
disclosure and these are (i) Statements and Reports, (ii) Board‟s Reports Information,
(iii) Corporate Governance & IAS Compliance Checklist, (iv) Disclosure under Pillar
III of Basel II, (v) Information Regarding Subsidiary, (vi) Information on Financial
Statements and Notes and (vii) Others. For preparing the disclosure checklist,
researchers considered relevant laws, regulations and circulars (Table-1) particularly
the Companies Act, 1994; the Banking Companies Act, 1991; Securities and
Exchange Rules, 1987; Listing Regulations of the Dhaka Stock Exchange Limited;
Listing Regulations of the Chittagong Stock Exchange Limited; Circular issued by
Bangladesh Bank (BRPD Circular No. 14/2003, BRPD Circular No. 16/2003; BRPD
Circular No. 10/2010, BRPD Circular No. 06/2010 BRPD Circular No. 14/2009);
Guidelines on Risk Based Capital Adequacy (Revised Regulatory Capital Framework
for banks in line with Basel II) issued by Bangladesh Bank in December 2010;
Environmental Risk Management Guidelines for Banks and Financial Institutions in
Bangladesh issued by Bangladesh Bank in January 2011; Prudential Regulations for
Banks (Credit Rating) issued by Bangladesh Bank; The Securities and Exchange
Commission Notifications (No. SEC/CMRRCD/2008-181/53/Admin/03/28, dated
June 4, 2008 and No. SEC/CMRRCD/2006-158/Admin/02-08, dated February 20,
2006). BB circular on Green banking and BFRS -7 have not been included in the
constructed checklist as their compliance is expected in 2011 or later.
72 Research Workshop Keynote Paper
Table 1: List of Laws, Regulations and Circulars that Require Disclosure
Sl. Laws, Regulations and Circulars
1. BRPD Circular No. 14/2003 (Amendments to the forms of the First Schedule of
the Bank Companies Act, 1991), issued by Bangladesh Bank, dated June, 25,
2003.
2. Guidelines on Risk Based Capital Adequacy (Revised Regulatory Capital
Framework for banks in line with Basel II), issued by Bangladesh Bank,
December 2010.
3. BRPD Circular No. 10/2010 (Revised regulatory capital framework in line with Basel II), issued by Bangladesh Bank, dated March 10, 2010.
4. BRPD Circular No. 06 (Restrictions in respect of responsibilities and
accountabilities of the board of directors and the CEO), issued by Bangladesh
Bank, dated February 04, 2010.
5. BRPD Circular No. 2/2011 (Policy Guidelines for Green Banking), issued by
Bangladesh Bank, dated February 27, 2011.
6. Environmental Risk Management Guidelines for Banks and Financial
Institutions in Bangladesh issued by Bangladesh Bank, January 2011.
7. BRPD Circular No. 14/2009 (Guidelines on Subordinated debt), issued by
Bangladesh Bank, dated October 14, 2009.
8. BRPD Circular No. 16/2003 (Restrictions in respect of responsibilities and
accountabilities of the board of directors and the CEO of private bank), issued by Bangladesh Bank, dated July 24, 2003.
9. Prudential Regulations for Banks (Bank Charge), issued by Bangladesh Bank.
10. Prudential Regulations for Banks (Credit Rating), issued by Bangladesh Bank.
11. Guidelines for Conducting Islamic Banking (Guidelines on the Specimen Reports and Financial Statements for Banks under Islamic Shariah), issued by
Bangladesh Bank, November 2009,
12. The Companies Act, 1994, Act No. 18 of 1994.
13. The Banking Companies Act, 1991, Act No. 14 of 1991.
14. Securities and Exchange Rules, 1987, The Bangladesh Gazette No. S.R.O 237-
L/87, Dhaka, the 28th September, 1987.
15. The Securities and Exchange Commission (SEC) Notification No.
SEC/CMRRCD/2008-181/53/Admin/03/28, dated June 4, 2008.
16. The Securities and Exchange Commission (SEC) Notification No.
SEC/CMRRCD/2006-158/Admin/02-08, dated February 20, 2006.
17. The Securities and Exchange Ordinance, 1969, Gazette of Pakistan,
Extraordinary, June 28, 1969.
18. The Securities and Exchange Commission (SEC) Notification No. SEC/Section-
7/SER/03/132 dated October 22, 1997, published in official gazette On December 29, 1997.
19. Listing Regulations of the Dhaka Stock Exchange Limited, Notification No.
SEC/Member-II, dated April 8, 1996. (Continued)
Research Workshop Keynote Paper 73
Table 1: (Continued)
20. Listing Regulations of the Chittagong Stock Exchange Limited-CSE, dated May
29, 1997.
21. The Securities and Exchange Commission (Capital Issue of Public Limited
Company) Rules, 2001, dated March 28, 2001.
22. The Securities and Exchange Commission (Over-the-Counter) Rules, 2001,
dated December 12, 2001.
23. Bangladesh Accounting Standards (BASs) issued by Institute of Chartered
Accountants of Bangladesh (ICAB).
24. Bangladesh Financial Reporting Standards (BFRSs) issued by Institute of
Chartered Accountants of Bangladesh (ICAB).
Source: Researchers‟ Analysis
Both primary and secondary data sources have been utilized in the study. Primary
data have been collected through observation, interview and opinion survey to
determine the degree of compliance and identify the issues related to disclosure.
Particularly, the branch-related disclosure requirements have been confirmed by
visiting and observing notice boards of the bank branches. 10 branches of different
banks were visited for the purpose. Besides, the depositors, borrowers, shareholders,
banks, regulators have been interviewed to collect and document their opinion.
Secondary data have been collected by checking the annual reports of the sample
banks for the year ended December 31, 2010 against the constructed checklist.
Scoring of Disclosure
In this study un-weighted approach has been followed to determine the disclosure
score of a bank although there are two methods for determining the extent of
disclosure: weighted and un-weighted. Here the underlying assumption is that all the
disclosure items are equally important. Wallace (1988); Rahman (1999); Akhtaruddin
(2005); believe that all disclosure items are equally important to the average users.
Score 1 is assigned if a company discloses an item otherwise 0. The total disclosure
score (TDS) is arrived for a particular bank by adding together the disclosed items as
follows:
n
i
diTDS1
;
Where TDS = Total disclosure score of a particular bank, d = 1, if the di is disclosed,
d = 0, if di is not disclosed and n = number of items on disclosure.
Hypothesis of the Study
As mentioned in the objective, for identifying the degree of association between
different corporate attributes and extent of disclosure, the following hypothesis is
tested:
74 Research Workshop Keynote Paper
Ho: There is no significant association between a number of corporate attributes
(viz. solvency, liquidity, size, profitability and assets quality) and the extent of
disclosure made by banks.
The multiple linear regression technique is used to test the hypothesis.
The operational definition of variables, expected sign and relationship in the
regression are presented in Table 2.
Table 2: Operational Definition of Variables, Expected Sign and Relationship
Variable Operational definition Source of
information Expected sign and
relationship TDS Total disclosure index Annual report Index CAR Solvency measured by
capital adequacy ratio Annual report (+) CAR has a significant
positive relationship with
the level of disclosure LAtoSTL Liquidity measured by
liquid assets to short-
term liabilities
Annual report (+) LAtoSTL has a significant positive
relationship with the level
of disclosure TREV Size measured by total
revenue Annual report (+) TREV has a significant
positive relationship with
the level of disclosure ROA Profitability measure by
return on assets Annual report (+) ROA has a significant
positive relationship with
the level of disclosure CLtoTLA Assets quality measured
by classified loan to total loans and advances
Annual report (-) CLtoTLA has a
significant negative relationship with the level
of disclosure
Dependent Variable
Total disclosure score, as defined earlier, is used as the dependent variable in the
regression.
Explanatory Variables
Five corporate attributes are used as explanatory variables. These are:
(i) solvency of bank measured by Capital Adequacy Ratio (CAR); (ii) liquidity of
bank measured by liquid assets to short-term liabilities; (iii) bank size measured by
total revenue ; (iv) profitability of bank measured by return on assets; and (v) assets
quality measured by classified loan to total loans and advances.
Research Workshop Keynote Paper 75
Solvency: Solvency is an important measure of strength and soundness a bank.
Solvency can be measured in different ways. This study used Capital Adequacy Ratio
(CAR) for measuring solvency. It is expected that banks with higher CAR will
disclosure more items than other banks in their annual reports to obtain competitive
advantage.
Liquidity: Prior studies have used liquidity as an explanatory variable for
examining association with the level of disclosure (e.g. Nurunnabi, et. al 2011).
Among different measures Liquid Assets to Short-Term Liabilities (LAtoSTL) is
used as a measurement of liquidity in this study. It is expected that the banks with
better liquidity will provide more disclosure in their annual reports.
Size: Most of the studies found that size of firm does affect the level of disclosure
(Rouf and Hossain 2011). The size was measured in the prior studies by sales, total
assets, number of employees, number of shareholders etc. (Akhtaruddin 2005). In the
present study, the size of the bank is determined by taking into account the total
revenue (TREV). It is expected that there is a significant association between bank
size and the extent of disclosure.
Profitability: Banks are likely to feel comfortable in disclosing favorable rather
than unfavorable information (Karim, et. al 2011). Prior researchers (Akhtaruddin
2005, Hossain 2000, Karim 1996) used profitability as a determinant of corporate
disclosure. In this study, the researchers used Return on Assets (ROA) to measure
profitability of banks. It is expected that banks with higher Return on Assets (ROA)
disclose more information than that of the banks with Return on Assets (ROA).
Assets quality: Banks mainly earn from their financial assets. But more
important is the quality of those assets. Quality of assets significantly affects the
earnings and economic value of the bank. Therefore, the researchers used this
variable as a determinant of disclosure. For this purpose, Classified Loan to Total
Loans and Advances (CLtoTLA) is used as a measure of assets quality. It is expected
that banks with lower CLtoTLA will disclosure more items in their annual reports
than other banks.
The paper is organized into five different sections. After an introduction, section
two, presents literature review; section three, discusses the disclosure requirements of
banks in Bangladesh; section four, presents a summary of the disclosure compliance
status, stakeholders‟ responses and result of hypothesis test and finally, section five,
summarizes the issues, difficulties related to disclosure and probable solution.
76 Research Workshop Keynote Paper
II. Literature Review
According to Weygandt, Kieso and Kimmel (2005) users of accounting
information are classified into two groups: internal users and external users. Internal
users of information are managers of the company. External users include customer,
supplier, investors, creditors, tax authority, regulatory agencies, labor union,
economic planners etc. Businesses are required to make disclosure considering the
need of the users. Banks are not an exception. Banks are also required to disclose
information considering needs of different stakeholders like depositors and
borrowers, shareholders, regulators etc. Regulators require banks to publicly disclose
financial and other information which help shareholders, depositors, and other
stakeholders to assess the level of risk and make investment decisions. In a study
Huang (2006) presented the importance of bank disclosure as (i) enhanced accounting
disclosure leading to better transparency and stronger market discipline in the
banking sector, (ii) accounting disclosure is raised to a particularly high level of
importance for banking organizations compared to not-financial firms, for banks are
inherently more opaque, (iii) transparency and disclosure is an important ingredient
of banking sector stability. Although state-owned banks do not issue share but they
are also required to disclose information publicly. In this context Huang (2006) stated
that enhanced accounting disclosures should be required for not only publicly-traded
banks, but also for privately-held and state-owned banks, because of the systemic
importance of banks in national economy, their deposit-taking from the general
public, and the safety net extended to them financed by taxpayers.
The financial reporting and disclosure of banking companies in India are
regulated by the Companies Act, 1956, the Banking Regulation Act, 1947, the rules
of the Securities And Exchange Board of India and the guidelines of the Reserve
Bank of India, as well as the recommendations of the Institute of Chartered
Accountants of India (Hossain, 2008). Corporate disclosure and reporting by listed
firms in Malaysia are largely influenced by the Companies Act, 1956 and accounting
standards approved by the Malaysian Accounting Standard Board (MASB)
(Akhtaruddin, et al, 2009). The main disclosure requirements for Singapore banks are
those stipulated under the Companies Act, the Statements of Accounting Standard
issued by the Institute of Certified Public Accountants of Singapore (ICPAS) and, for
banks listed on the Stock Exchange of Singapore (SES), the SES‟s listing rules
(Committee on Banking Disclosure, 1998). In Bangladesh, corporate disclosure is
governed by a number of statutes like, the Companies Act, 1994, Securities and
Exchange Rules 1987, International Accounting Standards adopted by ICAB,
Nationalized Order 1972, Banking Companies Act, 1991, Income Tax Ordinance
1984 (Akhtaruddin, 2005).
There are a number of studies in the area of financial reporting in the context of
emerging economies and there are a number of studies in the area of compliance of
International Accounting Standards (IASs) in developing and/or emerging economies
Research Workshop Keynote Paper 77
(Nurunnabi, 2009; Ahmed, 2009). Abd-Elsalam and Weetman (2003) stated that
there is a shortage of existing literature which has investigated compliance disclosure
(mandatory or voluntary) in Corporate Annual Reports of the banking sector in the
context of an emerging economy in general and Bangladesh in particular. The extent
of information disclosure, its adequacy, relevance and reliability are important
characteristics of financial reporting practices prevalent in a country (Hossain, 1999).
In case of Singapore, it is said that banks have been subject to lower standards of
disclosure than other corporations for two reasons; first, the high regulatory and
supervisory standards practiced by the Monetary Authority of Singapore compensate
somewhat for a more limited disclosure and second, disclosure is constrained by
concern that fuller disclosure of banking information may have an adverse impact on
the stability of the banking system since, relative to other corporations, banks are
especially vulnerable to a loss of confidence (Committee on Banking Disclosure,
1998). Though the committee suggested that in the move from banking regulation to
supervision in Singapore, greater transparency in financial reporting is now desirable
(Committee on Banking Disclosure, 1998).
Kahl and Belkaoui (1981) investigate the extent of disclosure by banks located in
18 countries. The results of their study showed that the degree of disclosure was
relatively different among the countries covered, with US banks leading the list.
The financial statements of banks in the United States, the United Kingdom and
Australia are fully in compliance with or exceed the requirements of IAS 30, but
accounting practices in some countries, notably Japan and Switzerland, still deviate
considerably from IAS 30 guidelines (Committee on Banking Disclosure, 1998).
Singapore banks have improved their standard of disclosure but this is still below that
of the United States, the United Kingdom and Australia (Committee on Banking
Disclosure, 1998). Hossain (2008) categorizes the mandatory items as (i) Balance
sheet items, (ii) Profit and loss account, (iii) Director‟s report, (iv) Corporate
governance report, (v) The management discussion and analysis and (vi) Circular
issued. Jayadev, Monga and Tiwari conducted a study on the annual reports of nine
banks from India, Australia, Russia, Brazil, China, USA etc. The results of their study
proved that, in terms of disclosures, Indian banks are lagging behind their
counterparts in other developing countries on various fronts such as assets and
liabilities related disclosures, investments and NPA (non-performing asset) related
disclosures, etc. Banks in China, Russia, and Brazil are subject to much more
stringent disclosure norms (Jayadev, Monga and Tiwari). Unlike the United States,
the United Kingdom and Australia, Singapore banks do not separately disclose the
amount of specific and general provisions for loan losses and movements in
provisions (Committee on Banking Disclosure, 1998).
Shakoor (1989) has focused on the financial reporting practices of the 6
nationalized commercial banks by evaluating the performance of nationalized
commercial banks in Bangladesh during 1972 to 1984. Shakoor (1989) commented
that financial reporting system of banks needs to disclose more information to be
78 Research Workshop Keynote Paper
disclosed and be more methodical. Islam (1996) attempted to evaluate the practices
relating to disclosure of accounting policies in the financial statements of the banks
working in Bangladesh on Islamic principles and commented that the banks should
disclose confidently promulgation as to compliance with the professional
requirements that are followed. Based on 10 years published annual reports of the
commercial banks working in Bangladesh, Islam (1997) observed that selected banks
mainly comply with the legal requirements. Islam (1997) also commented that the
existing forms including contents of bank balance sheet and profit & loss account do
not provide adequate data to calculate important ratios and items of information
evaluating the performance and risk, solvency, liquidity and profitability of the
banks. Hossain (2008) investigate empirically the extent of both mandatory
(101 items) and voluntary (81 items) disclosure by listed banking companies in India.
The study revealed that in disclosing mandatory items, the average score is 88, whilst
the average score for voluntary disclosure is 25 only. According to the findings of
Hossain (2008), size, profitability, board composition, and market discipline variables
are significant in explaining the level of disclosure. Hossain (2008) opined that his
study can be a good example for other developing countries, who are trying to have a
high level of compliance in mandatory disclosure. Ahmed (2009) empirically
examined the relationship between the disclosure score and selected corporate
attributes (like, size, profitability, credit deposit ratio, capital adequacy ratio,
debt-equity ratio, shareholder‟s risk ratio) in a developing country like Bangladesh.
Observing 12 banks over 5 years period (from 2002 to 2006), the extent of disclosure
has been measured in his study and the results showed that disclosure levels are
associated with some company characteristics (e.g., return on assets and capital
adequacy ratio). Ahmed and Dey (2009) showed that Arab Bangladesh Bank
(AB Bank) appeared to have the highest levels of disclosure and Standard Bank
appeared to have the lowest levels of disclosure. Akhtaruddin (2005) opined that
companies in general have not responded adequately to the mandatory disclosure
requirements of the regulatory bodies. Improved disclosure reduces the gap between
management and the outside world (Karim, 1996; Hossain, 2000). As per Lang and
Lundholm (1993) disclosures are higher for larger firms. Rouf & Hossain (2011) state
that size of the firm does not affect the level of corporate social responsibility
disclosure. Nazli, et al. (2003) suggested that the disclosure have a public relations
bias, with very general, „good news‟ type of disclosures being the norm and „bad
news‟ disclosure are minimal. Lobo and Zhou (2001) demonstrated that companies
that are performing well are likely to provide more information than poorly
performing companies. Hossain (2000) showed that size of company and profitability
is positively related to the disclosure of the company. Bhuiyan and Biswas (2007)
opined that disclosure index is significantly influenced by the SEC notification.
Rahman (1999) showed that no company disclosed all mandatory information items
in its annual reports. The present study concentrates on mandatory disclosure by the
banks operating in Bangladesh under different laws, regulations, circular and
notifications of the regulators and medium of disclosure to the stakeholders.
Research Workshop Keynote Paper 79
Huang (2006) prepare a composite Bank Disclosure Index of each of the around
180 countries surveyed yearly since 1994. Using a checkbox approach to analyze
financial statements of individual banks, the index seeks to quantitatively measure the
actual disclosure practices of commercial banks around the world, in relation to their
assets, liabilities, funding, incomes, and risk profiles. The Disclosure Indices are first
created for individual banks and then national Indices are created by taking the asset-
weighted average of the bank-level Disclosure Indices. He identified seventeen
disclosure items under six categories like, (i) Loans, (ii) Other earning assets,
(iii) Deposits, (iv) Other funding, (v) Memo lines and (vi) Incomes. He also
emphasized that a simplified, relevant, and standardized checklist of core disclosure
items needs to be developed for low and mid-income countries. Table 3 and Table 4
below are prepared on the basis of the Hung (2006) study.
Table 3: Regional Status of Banking Disclosure
Country/
Region Major findings
OECD
Countries High income OECD (Organisation for Economic Co-operation and
Development) countries in general adopt better disclosure practices
that other countries and especially the disclosure index value of US
has remained rather stable over time. In the past several years, the most salient improvement on the
national Disclosure Index was seen in Spain. During late 1990s, starting from the worst, Germany had rapidly
converged to the average disclosure standard. France experienced stagnation. UK‟s Disclosure Index is not impressive. UK regulator traditionally
dislikes hands-on approach on standardization of banks‟ financial
reporting. BRIC (for Brazil,
Russia,
India and China)
Improving banking sector transparency is likely to be the highest for
policy-makers in these BRIC countries. China seems to be heading for bigger improvement after three of the
four Big Fours have enlisted international reputable banks on board
as minority shareholders and will all finish IPOs in Hong Kong by
2006/2007. Compared to China and Russia, Brazil has had fewer problems from
the beginning (of this Report‟s survey period) and accounting
information on Brazilian banks has been quite detailed and abundant (at least in terms of quantity)
Over the past decade India‟s Disclosure Index value has been rising
consistently, and today has reached the level of Brazil, although
there has been less improvement in the disclosures of loan compositions (in which Brazil is particularly strong).
(Continued)
80 Research Workshop Keynote Paper
Table 3: (Continued)
Asia In the region, Hong Kong clearly stands out as the consistent leader
in transparency and disclosures of banks. The Disclosure Index for Singapore in 1996 confirms industry‟s
perception that disclosure by Singapore banks was poor until a few
years ago. Banks in Thailand, India, Philippines, Singapore, and Indonesia were
much more secretive in presenting their balance sheets, compared to
those located in Malaysia, Korea and Hong Kong. The main challenge in the region remains China, which has the
largest (and also currently most problematic) banking system in Asia
(excluding Japan). The sheer size of the Chinese banking system makes the problems
not only domestic, but also regional and international, and attracts keen attention from international investors and policy-makers.
India has been making consistent and significant progress over the
past decade, while Pakistan, starting from not much worse than its
neighbor, has not made many strides in improving bank accounting disclosure practices.
Bangladesh is lagging behind both India and Pakistan. Latin
America In the region, banking systems in Brazil and Mexico are always
ahead of their neighbors on standards of information disclosures. Back in 1996, Chile scored much lower in the Disclosure Index than
her regional peers and subsequently situations improved
significantly after enacting of the General Banking Act in 1997. Chile‟s Disclosure Index was already at par with Peru, which was
previously one of the regional leaders in public disclosures. The gap between Brazil and Chile could reflect the different
philosophies of the two countries‟ policy makers. Turkey In the wake of 2000/2001 financial crisis, a “Banking Sector
Restructuring Program” was initiated in Turkey in May 2001 to
strengthen privately owned commercial banks. The impact of the reforms is clearly seen in Turkey‟s Disclosure
Index, which received one large upgrade after another over the past
few years. Today, in bank disclosure practices, Turkey has already clearly
distinguished herself from all of her major regional peers including
Russia, Egypt, and her richer neighbor Greece, which several years
ago still had a ten point lead over Turkey on the Bank Disclosure Index.
Source: Based on Huang, R. (2006)
Research Workshop Keynote Paper 81
Table 4: Top Transparent and Opaque Countries in the World
Rank Most Transparent Country Most Opaque Country 1 Hong Kong Argentina 2 Sweden France 3 Italy Czech Republic 4 Netherlands Morocco 5 Finland Russian 6 Norway Chile 7 Switzerland Luxembourg 8 Spain China 9 Japan Egypt
10 Turkey Syria
Sources: Huang, R. (2006), which is based on Bank Disclosure Index 2004 and only the top fifty largest banking
systems in the world
III. Disclosure Requirements of Banks in Bangladesh
Banks in Bangladesh are required to make disclosures in different media
(Appendix 3) under different laws, regulations, standards and circulars of different
organizations. The disclosure requirements under different laws, regulations, circulars
or guidelines are presented in the following paragraphs:
The Bank Companies Act, 1991 (BCA, 1991)
BCA, 1991 requires banking companies in Bangladesh to disclose their profit and
loss account, balance sheet, financial reports and the auditor‟s report of each financial
year within three months from the close of the concerned year. Banks must also
furnish the same to the Bangladesh Bank within the aforementioned time. It requires
banks to prepare the financial statements in accordance with the forms set out in the
First Schedule of the Act (Section 38 and 40). The amended first schedule of BCA,
1991 requires banks to preserve copies of financial statements including the Balance
Sheet in each of the bank branches so that the customers of the bank may readily use
those on request. Besides, the Financial Highlights and Balance Sheet should be
affixed in a visible place of each bank branch. The schedule also calls for publishing
financial statements in widely circulated one Bangla and one English daily newspaper
within one week of submission of the statements to Bangladesh Bank so that the
stakeholders of the bank including its depositors, shareholders and regulatory bodies
can get information about the bank easily. These should also be disclosed in the
bank‟s website (First Schedule after amendment through BRPD circular 14/2003).
Every banking company incorporated outside Bangladesh shall not later than the 1st
Monday in February of the year when it runs the business, display a copy of the last
balance sheet and profit and loss account in a conspicuous place in its principal office
and every branch office (Section 42).
82 Research Workshop Keynote Paper
The Companies Act, 1994 (CA, 1994)
BCA, 1991 states that the provisions of this Act will be in addition to and not in
derogation of the Companies Act,1994 (Section-2). So it is clear that a bank
company must also comply with the requirements of the Companies Act, 1994.
Directors‟ report must provide the state of affairs, the amount proposed by the board
of directors to carry to the reserve fund, the amount of dividend recommend by the
board of directors, material changes and commitments, change in the nature of
business, change in subsidiaries‟ business, change in the business in which company
has interest, statement and response to qualified auditors‟ report (Section 184 and
185). A holding company with its financial statements must also disclose the
financial statements, director‟s report, and the auditor‟s report of the subsidiaries
(Section 186). The Act also requires a banking company to make a statement every
year in a format given in Schedule XII. Audited balance sheet and the aforementioned
statement shall be displayed, until the display of the next year‟s statements, in a
conspicuous place in the registered office and in every branch office (Section-192).
Bangladesh Accounting Standard (BAS) and Bangladesh Financial Reporting Standard
(BFRS)
BASs are derived from the International Accounting Standards in Bangladesh.
BAS-30 is on the “Disclosures in the Financial Statements of Banks and Similar
Financial Institutions”. BRPD circular 14/2003 has given a comprehensive guideline
regarding disclosure requirement of banks keeping the requirements of BAS-30 in
view. The Institute of Chartered Accountants of Bangladesh superseded BAS 30 and
adopted BFRS 7. BFRSs are the adopted International Financial Reporting Standards
in Bangladesh. BFRS-7 is on “Financial Instruments: Disclosures”. BFRS-7 requires
banks to make a lot of disclosures regarding financial instruments it deals with. It has
greatly emphasized on the disclosure regarding risk management activities in banks.
For different types of risks it requires qualitative and quantitative disclosures. It has
already been adopted by ICAB and effective date of application is January1, 2010. A
disclosure checklist has been prepared on the basis of BFRS 7 (Appendix 6). As BB
did not make any circular incorporating BFRS 7 we excluded from the data collection
checklist of this paper.
Basel II
Basel II as adopted in Bangladesh requires disclosure under its Third Pillar called
“Market Discipline”. It requires banks to make both qualitative and quantitative
disclosures regarding scope of application, capital structure, capital adequacy, credit
risk, equities, interest rate risk in the banking book, market risk, and operational risk.
Such disclosures should be made annually with the annual report and also through the
bank‟s website having link in the front page (BRPD Circular 35, Dec 29, 2010).
Research Workshop Keynote Paper 83
The Securities and Exchange Ordinance, 1969 (SEO, 1969) and the Securities and
Exchange Rules, 1987 (SER, 1987)
An issuer of a listed security shall furnish to the Stock Exchange, to the security
holders and to the Commission an annual report of its affairs and such statements and
other reports as may be prescribed (Section 11, SEO-1969). It implies that the banks
listed in the stock exchanges must prepare an annual report and distribute it to the
stakeholders. Such annual report must include audited balance sheet, profit and loss
account, cash flow statement and notes to the accounts and it should be submitted to
the stock exchanges within 134 days of the end of the concerned year. Financial
statements for this purpose must be prepared in a format laid down in the schedule
(Rule 12, SER, 1987). In addition, banks being an issuer shall submit half yearly
financial statements to the Stock Exchange, to the security holders and to the
Commission within one month of the close of the half year.
Securities and Exchange Commission (Merchant Banker and Portfolio Manager) Rules,
1996
Merchant banks are bound to submit their Balance Sheet, Profit and Loss
Account, Cash Flow Statement, Auditor‟s Report and other reports for each financial
year to the Commission as per the demand of the commission (Rule 11). Besides,
unaudited quarterly financial statements must also be submitted to the commission
(Rule 13). In addition to the above, a portfolio manager must also provide statement
to his client at least after every six months containing information relating to portfolio
structure, value, number of securities, cash balance, date of transactions, interest,
dividend, bonus share, portfolio expense, possible risks of the portfolio etc (Rule 31).
Listing Regulations of DSE and CSE
A listed company is required to release material information immediately to the
public in a manner designed to obtain its fullest possible public dissemination. In case
of any rumor or report, the company is required to publicly clarify the rumor or
reports as promptly as possible. Regarding unusual market action, the company is
required to announce that there has been no material development in its business and
affairs and there is no reason to account for the unusual market action. A listed
company should refrain from promotional disclosure activity which exceeds what is
necessary to enable the public to make informed investment decisions. Buy/Sell of
Shares by Sponsors should be reported to DSE in a specified format at least four
working days before the scheduled date for disposal/ acquisition of the shares with
copy to the Securities and Exchange Commission (Regulation 43). Bank being an
issuer shall have website where latest financial statements including Balance Sheet,
Income Statement and Cash Flow Statement (annual and interim) should be
displayed. This website should be linked with DSE website. Issuer shall update its
website relating to annual and interim financial statements and all other price
sensitive information within stipulated time (DSE Notification on February 2010).
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Environmental Risk Management Guidelines (January 2011)
Banks are required to have a reporting system, with a view to intimating
management, shareholders, and other stakeholders on the use of Environmental Risk
Management Guidelines. This reporting should be done on an annual basis and
should form a part of their Annual Report.
Policy Guidelines for Green Banking (BRPD Circular No.02, February 27, 2011)
Policy guidelines on green banking require banks in the first phase to report on
the green banking initiatives to BB and disclose in their respective websites. In the
second phase, banks should start publishing independent Green Banking and
Sustainability reports showing past performances, current activities, and future
initiatives. Updated and detailed information about banks environmental activities
and performances of major clients should be disclosed. In the second phase banks
shall report their initiatives/activities under the said program to the Department of
Off-site Supervision of Bangladesh Bank on quarterly basis. Banks shall submit their
first quarterly report on June 30, 2011 basis within July 15, 2011 and similarly they
will be required to continue to submit reports on the subsequent quarters within the
next 15 days of the respective quarter end. Banks shall keep their annual report and
websites updated with the disclosures on green banking initiatives/activities.
BB Guidelines on Subordinated Debt (BRPD Circular No. 14/2009, October 14, 2009)
This guideline requires that the total amount of subordinated debt shall be
disclosed in the balance sheet under the head „subordinated debt‟ in the nature of long
term borrowings.
Bangladesh Payment and Settlement Systems Regulations, 2009
A Payment System Operator (PSO) or Payment Service Provider (PSP) licensed
by the Bangladesh Bank shall be required to publish annual reports with its audited
financial statements, information on its operations, its risk management and IT
practices including opinion of external audit on effectiveness of the risk management
practices; the annual report to be publicly available (e.g., by uploading to its website)
within three months from the close of its accounting year‟. In addition to annual
reports, a Payment System Operator or Payment Service Provider may be directed to
disclose such other information or data as deemed necessary in the public interest.
Prudential Regulations for Banks (Bank Charges)
Each bank will prepare its schedule of charges and commissions etc. and ensure
that these are publicly accessible at each branch.
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Prudential Regulations for Banks (Credit Rating)
Banks will disclose their credit rating prominently in their published annual &
half yearly financial statements.
IV. State of Disclosure of Banks in Bangladesh
As part of the study, an assessment of the state of compliance of the disclosure
requirements by banks has been done and the findings are presented in the following
paragraphs-
Compliance of Disclosure Requirements by Banks in the Annual Report
This section presents the status of banks in terms of the compliance of disclosure
requirements in their annual report. Compliance has been assessed on the basis of the
disclosure checklist prepared under this research. Table-5 represents the summary of
disclosure index of the sample banks. Out of 140 items, maximum disclosure is 118
items, which is 84.29%. Whereas, minimum disclosure score is 68 which represents
48.57% and average score is 94.28 i.e. 67.34%. It is noted that average disclosure of
Indian banks is about 87% (Hossain, 2008).
In the case of sub-group “Statements and Reports”, most of the sample banks
disclosed required statements in their annual reports. In this case maximum
presentation is 9 out of 10 whereas minimum is 7. It is also noted that there is an item
of disclosure in this group which will be made mandatory from the year 2011 (Report
on the implementation of environmental risk management guidelines). The Foreign
Bank does not present Board‟s Report and Audit Committee Report. For this reason
average score stands at 87.60%.
In case of the contents of Board‟s Report, there are 17 items of disclosure.
Although some of the items under this head are the requirement of SEC (for
protecting the interest of the shareholders), these are equally important for the
depositors and borrowers. Maximum score obtained under this sub-category is 13
(76.47%), minimum score is 5 (29.41%) and average score is 50.59%. It is important
to note that the level of disclosure under this category is much lower than expected. It
seems that banks are either unaware of or reluctant to disclose this type of
information in the director‟s report.
In the disclosure checklist there are 3 items under “Corporate Governance (CG)
and IAS Compliance Checklist”. One of these is required by Bangladesh Bank and
the rest are required by Securities and Exchange Commission. But these are also vital
for other users of information. In this category the maximum, minimum and average
score are 100%, 0% and 58.67% respectively.
Some of the banks disclose sufficient information under Pillar III of Basel II. At
the same time some of the banks do not disclose at all and some of the banks do not
86 Research Workshop Keynote Paper
follow the prescribed way. Out of 16 items maximum score is 16 whereas minimum
score is 0. The average score under this head is equivalent to 48.75%. Since it is
mandatory disclosure requirement for all banks, poor score is unexpected. They
should come forward to disclose required information under Pillar III of Basel II.
Maximum score under sub-group “Information Regarding Subsidiary” is 6 out of
7 whereas minimum score is 0 with average score 19.43%. Disclosure regarding
subsidiary is absent in some annual reports which may due to non-availability of
subsidiary. But it will remove confusion of the users if they mention that they have
no subsidiary.
Information on Financial Statements (FS) and Notes are mandatory for all types
of bank, e.g. listed and non-listed, state-owned and private commercial bank,
conventional and Islamic bank, local and foreign bank. There are 83 disclosure items
in the disclosure checklist. In this category maximum score obtained is 77, which is
92.77% whereas minimum obtained score is only 39, which represents 46.99%. So,
the average score is 74.80%. Disclosure of information under the head “Others” is
quite satisfactory. Most of the banks comply with the disclosure requirements (98%).
Table 6 presents the least disclosed items. Some of these items are report on the
implementation of environmental risk management guidelines, change in the nature
of business, change in the business in which company has interest, statement and
response to qualified auditors‟ report, restriction on the title to assets, change in
accounting policy, statement of the premises not used by the bank for its own etc.
These are the requirements of Bangladesh Bank or Companies Act, 1994. As per
section 38 of the Banking Companies Act, 1991, the provisions of Companies Act,
1994 shall be applicable to the extent they are consistent with the provisions of
Banking Companies Act 1991. Banks should provide clear statements regarding these
types of information.
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Table 5: Summary of Disclosure by Banks
Statements
and Reports
Board's
Reports
CG and IAS
Checklist
Pillar III
Disclosure
Subsidiary
Information FS and Notes Other TDS
No.
(10) %
No.
(17) %
No.
(3) %
No.
(16) %
No.
(7) %
No.
(83) %
No.
(4) %
No.
(140) %
B 01 9 90.00 7 41.18 3 100.00 14 87.50 4 57.14 77 92.77 4 100.00 118 84.29
B 02 9 90.00 12 70.59 3 100.00 14 87.50 4 57.14 70 84.34 4 100.00 116 82.86
B 03 9 90.00 10 58.82 2 66.67 15 93.75 1 14.29 73 87.95 4 100.00 114 81.43
B 04 9 90.00 8 47.06 1 33.33 15 93.75 6 85.71 68 81.93 4 100.00 111 79.29
B 05 9 90.00 13 76.47 3 100.00 6 37.50 4 57.14 72 86.75 4 100.00 111 79.29
B 06 9 90.00 13 76.47 2 66.67 14 87.50 4 57.14 65 78.31 4 100.00 111 79.29
B 07 9 90.00 9 52.94 2 66.67 10 62.50 0 0.00 73 87.95 4 100.00 107 76.43
B 08 9 90.00 10 58.82 2 66.67 4 25.00 5 71.43 66 79.52 4 100.00 100 71.43
B 09 9 90.00 8 47.06 2 66.67 4 25.00 0 0.00 72 86.75 4 100.00 99 70.71
B 10 8 80.00 5 29.41 2 66.67 16 100.00 0 0.00 64 77.11 4 100.00 99 70.71
B 11 9 90.00 8 47.06 1 33.33 12 75.00 0 0.00 64 77.11 4 100.00 98 70.00
B 12 9 90.00 7 41.18 2 66.67 13 81.25 0 0.00 62 74.70 4 100.00 97 69.29
B 13 9 90.00 9 52.94 2 66.67 14 87.50 3 42.86 54 65.06 4 100.00 95 67.86
B 14 9 90.00 11 64.71 1 33.33 0 0.00 0 0.00 68 81.93 4 100.00 93 66.43
(Continued)
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Table 5: (Continued)
Statements
and Reports
Board's
Reports
CG and IAS
Checklist
Pillar III
Disclosure
Subsidiary
Information FS and Notes Other TDS
No.
(10) %
No.
(17) %
No.
(3) %
No.
(16) %
No.
(7) %
No.
(83) %
No.
(4) %
No.
(140) %
B 15 9 90.00 7 41.18 3 100.00 0 0.00 0 0.00 70 84.34 4 100.00 93 66.43
B 16 7 70.00 8 47.06 1 33.33 10 62.50 0 0.00 58 69.88 3 75.00 87 62.14
B 17 9 90.00 9 52.94 3 100.00 10 62.50 0 0.00 52 62.65 4 100.00 87 62.14
B 18 9 90.00 8 47.06 1 33.33 15 93.75 0 0.00 51 61.45 3 75.00 87 62.14
B 19 8 80.00 8 47.06 2 66.67 0 0.00 3 42.86 60 72.29 4 100.00 85 60.71
B 20 9 90.00 7 41.18 1 33.33 0 0.00 0 0.00 59 71.08 4 100.00 80 57.14
B 21 9 90.00 9 52.94 2 66.67 0 0.00 0 0.00 54 65.06 4 100.00 78 55.71
B 22 9 90.00 9 52.94 1 33.33 0 0.00 0 0.00 55 66.27 4 100.00 78 55.71
B 23 8 80.00 5 29.41 1 33.33 0 0.00 0 0.00 56 67.47 4 100.00 74 52.86
B 24 9 90.00 7 41.18 1 33.33 0 0.00 0 0.00 50 60.24 4 100.00 71 50.71
B 25 8 80.00 8 47.06 0 0.00 9 56.25 0 0.00 39 46.99 4 100.00 68 48.57
Average 8.76 87.60 8.60 50.59 1.76 58.67 7.80 48.75 1.36 19.43 62.08 74.80 3.92 98.00 94.28 67.34
Source: Researchers‟ Analysis
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Table 6: Least Disclosure Items by less than or equal to 1 (≤1)
Item
No. Disclosure Item Nature of Items
*Requirement
of A 4 Report on the implementation of
environmental risk management
guidelines Statements and Reports
BB (2011b)
B 5 Change in the nature of business Board's Reports Information
CA, 1994 (Sec. 184)
B 6 Change in the business in which
company has interest Board's Reports
Information CA, 1994 (Sec. 184)
B 7 Statement and Response to qualified auditors‟ report
Board's Reports Information
CA, 1994 (Sec. 184)
E 4 Details of any material change of
the Subsidiary Information Regarding
Subsidiary CA, 1994
(Sec.186) E 5 Change in subsidiaries‟ business Information Regarding
Subsidiary CA, 1994 (Sec.184)
F 3 An explanation of where the
accounting standards that
underpin the policies can be found
Information on Financial
Statements and Notes SEC, 2008
F 5 A statement that explains in what
regard the standards and the reporting framework used differs
from IFRS
Information on Financial
Statements and Notes SEC, 2008; SEC, 2006
F 7 Any restriction on the title to
assets Information on Financial
Statements and Notes CA, 1994 (GI)
F 8 A change in accounting policy Information on Financial
Statements and Notes CA, 1994 (GI)
F 49 A statement of the premises not
used by the bank for its own Information on Financial
Statements and Notes BRPD#14/2003
F 83 Non-recurring transactions or
transaction of an exceptional
nature
Information on Financial
Statements and Notes CA, 1994 (GI)
*BB = Bangladesh Bank, CA = Companies Act, GI = General Instruction under Section 185 of Companies Act,
BRPD = Banking Regulation and Policy Department of Bangladesh Bank, SEC = Securities and Exchange
Commission
Compliance with Branch Level Disclosure Requirements
As per the laws of the country every bank branch, where banking business is
carried on, should display some information in a conspicuous place so that they are
visible to the stakeholders. These information include, the last audited balance sheet,
financial highlights, and schedule of charges. Table 7 presents the summary of
90 Research Workshop Keynote Paper
compliance with branch level disclosure requirements. About 40% of the sample
branches hanged latest audited balance sheet. Outdated balance sheet was found in
10% cases. Balance sheet was not found in the notice board in 50% cases. Financial
highlight was not found in 60% cases. Schedule of charges are disclosed on the notice
board by 60% of sample branches. Non compliance regarding schedule of charges
was found in 20% cases.
Table 7: Compliance with Branch Level Disclosure Requirements
Information required to display
in the branch notice board
Findings
Disclosed as
Required Not disclosed Outdated
Audited Balance Sheet 40% 50% 10%
Financial Highlights 40% 60% 0%
Schedule of Charges 60% 20% 20%
Source: Observation of bank branch notice board
Summary of Opinion Survey
As a part of the study, responses of the different stakeholders (Depositors,
Borrowers, Shareholders, Bank officials and Regulators) were collected through
opinion survey and series of interviews. Appendix 4 presents a summary of the
responses.
Response of Depositors
Depositors are the single largest group of stakeholders of a bank. About 80% of
the depositors opined that they want to be sure about the service quality of the bank
before starting depository relationship (Appendix 5). About 67% reported that they
want to make deposit in well reputed banks. Respondents also said that they consider
information (in-order of priority)like interest rate, branch location, products available,
bank rating, soundness, availability of online & ATM service, liquidity, relationship
etc. before making depository relationship. Regarding the sources of information
highest number of respondents (about 93%) said that they collect information directly
from the bank officials through branch visit. They also get information (in order of
their priority) from the word of mouth of the people, newspaper report, bank website,
bank marketing team, TV commercials, branch notice board, and bank annual report.
It is surprising to note that only 7% (lowest) of the respondents collect information
from branch notice board and annual report. Regarding the awareness of the
depositors about certain sources of information, about 80% reported that they are
Research Workshop Keynote Paper 91
aware about the bank website and they use it for collecting information. Again, it is
surprising to note that the depositors are less aware about the branch notice board
(27%) and annual report (33%) although these are emphasized by the laws of the
country. But the awareness about the news paper as a source of information is 67%.
Regarding how they want to get information in future, about 93% opined that they
want a common website containing comparable information on all banks. Besides,
they also want to get information from bank website, annual report, electronic display
board, and leaflet.
Response of Borrowers
Borrowers are the main customers of a bank. They need a lot of information from
a bank before making borrowing decision. About 87% of the borrowers opined that
they want to be sure about the service quality of the bank before starting borrower
relationship (Appendix 5). About 80% reported that they need interest rate
information of the loan products. Respondents also said that they consider
information (in order of priority) like products available, liquidity, availability of
online & ATM service, reputation, collateral, branch location, soundness, etc. before
choosing bank for borrowing. Regarding the sources of information highest number
of respondents (about 87%) said that they collect information directly from the bank
officials through branch visit. They also get information (in order of their priority)
from the word of mouth of the people, bank website, bank marketing team, phone call
to branch, bank annual report, TV commercials and news paper report. It is
interesting to note that sample borrowers do not use the branch notice board at all.
Regarding the awareness of the borrowers about certain sources of information, about
67% reported that they are aware about the bank website. It is surprising to note that
the borrowers, for some reason or other, rarely use the branch notice board (0%) and
annual report (7%) although it is required by the laws of the country. But the
awareness about the news paper as a source of information is 33%. Regarding how
they want to get information in future, about 87% opined that they want a common
website containing comparable information on all banks. Besides, they also want to
get information from bank website, Mobile SMS, electronic display board, and
newspaper report.
Response of Shareholders
Shareholders, being the owner of the banks, need a lot of information from a bank
before making investment decision. This is particularly true in case of publicly traded
banking companies. About 93% of the shareholders opined that they want to be sure
about the EPS, P/E and NAV of the bank before taking investment decision
(Appendix 5). About 73% reported that they need information regarding management
bank. Respondents also said that they consider information (in order of priority) like
reputation, rating, capital adequacy, service quality, asset quality, liquidity,
availability of online banking and ATM Network, number of branch, future prospect
92 Research Workshop Keynote Paper
etc. before choosing bank for investment. Regarding the sources of information
highest number of respondents (about 87%) said that they collect information from
the annual report of the bank. They also get information (in order of their priority)
from bank website, news paper report, DSE and CSE websites, and other
publications. Regarding the awareness of the shareholders about certain sources of
information, about 93% reported that they are aware about the bank website.
Shareholders are also aware about other sources of information. Regarding how they
want to get information in future, about 87% opined that they want a common
website containing comparable information on all banks. Besides, they also want to
get information from bank website, Mobile SMS, electronic display board, and
newspaper report.
Response of Bank Officials
In the interview conducted for this purpose, relevant bank officials opined that
they used all four media (Newspaper, Website, Annual Report and Branch Notice
Board) for disclosing information. About 70% of the officials believe that the website
is the cost effective and convenient media for disclosing information whereas notice
board is less effective and inconvenient media for disclosing information
(Appendix 5). This finding is also supported by the response of the depositors and
borrowers. Although website is claimed to be effective and convenient, banks are yet
to introduce a counting system of the website users. Only 20% of the respondents
claimed that they have a counting system or in the process of introducing a counting
system in the website. About 30% of the bank officials reported that they faced
problems in the process of complying with disclosure requirements. About 90% of
the bank officials appreciated the concept of harmonization of disclosure
requirements and common disclosure point. In response to the question, why do you
disclose information, bank officials said that it works in both ways: ensures
compliance with regulatory requirements in one hand and facilitates marketing on the
other hand.
Response of Regulators
At present disclosures are required by different departments (BRPD, DOS and
DBI) of Bangladesh Bank, SEC, DSE, CSE, and RJSCF. They require banks to
disclose different types of information to the public in different media (Widely
circulated daily newspaper: One Bengali and one English, Websites, Annual Report,
Display board at the head office and in branches). Harmonization is still absent in
terms of the disclosure requirements. Compliance is also monitored by the respective
departments and organizations. An integrated monitoring system for ensuring
compliance is still under process. Inspection data regarding disclosure is solely used
for the supervisory purpose and these are not published. In the background of
adopting IFRS by ICAB, BB is planning to issue a fresh circular like BRPD 14/2003
after consultation with different stakeholders and experts.
Research Workshop Keynote Paper 93
Test of Hypothesis
The descriptive statistics for the dependent and explanatory variables are
presented in Table 8. The descriptive statistics shows that the mean disclosure level
of the banks is 94.28 items with minimum disclosure 68 and maximum 118 items.
Minimum and maximum CAR are 6.30% and 16.18% respectively. Average
LAtoSTL is 68.60% with minimum 24.77% and maximum 130.96%. Average total
revenue of bans is Tk. 12568287572.22. Average ROA is 2.02 percent while average
CLtoTLA is 4.35%.
Table 8: Descriptive Statistics
Variable Minimum Maximum Mean Std. Deviation TDS 68 118 94.28 14.166
CAR 6.30 16.18 10.5217 2.12013 LAtoSTL 24.77 130.96 68.6017 26.24334 TREV 1981345757 39720147625 12568287572.22 8548909536.86 ROA .42 3.22 2.0183 .80808
CLtoTLA .07 23.88 4.3504 5.31471
Source: Researchers‟ own Analysis
Note: The descriptions of the variables are given in Table 2
The Multivariate Model
The model developed in this paper is as follows:
TDS = α + β1 Solvency + β2 Liquidity + β3 Size + β4 Profitability + β5 Assets quality + Ɛ
Where,
TDS = the total disclosure index
α = constant
βj = coefficient o the concern variables (j = 1 to 5)
Ɛ = the error term
A summary of the regression output is provided in Table 9. On OLS regression
model there are five explanatory variables. The regression results show R, R2 and
adjusted R2 are .639, .408 and .234 respectively where F value is 2.343 which is
significant at .086 level. Our results depict that LAtoSTL, TREV and CLtoTLA have
significant influence on disclosure levels whereas CAR and ROA do not have
significant influence on disclosure levels. Besides, CAR and ROA have unexpected
negative signs of their beta co-efficient (Table 10). Moreover, beta co-efficient of
TREV is insignificant. Thus, it can be stated that liquidity has a significant positive
relationship with the level of disclosure whereas and assets quality has a significant
negative relationship with the level of disclosure. On the other hand, solvency and
profitability have adverse relationship with the level of disclosure, but not statistically
significant. Size of banks is not found to be a good predictor of compliance with
mandatory disclosure as expected.
94 Research Workshop Keynote Paper
Table 9: Regression Results
Variable Unstandardized
Coefficients Standardized
Coefficients t Sig.
B Beta (Constant) 90.787 4.616 .000
CAR -1.021 -.153 -.711 .487
LAtoSTL .223 .413 1.835 .084
TREV 1.31E-009 .792 2.957 .009
ROA -3.706 -.211 -.766 .454
CLtoTLA -1.954 -.733 -2.420 .027
Model Summary R = .639 R
2 = .408
Adjusted R2 = .234
F = 2.343 Sig. = .086 N = 25
Source: Researchers‟ own Analysis
Note: The descriptions of the variables are given in Table 2.
Table 10: Summary of Regression Results
Variable Expected sign Results
TDS Index Index
CAR (+) Not Supported
LAtoSTL (+) Supported
TREV (+) Supported
ROA (+) Not Supported
CLtoTLA (-) Supported
Source: Researchers‟ own Analysis
Note: The descriptions of the variables are given in Table 2
V. Issues, Difficulties and Probable Solution
Based on the research, the following issues and difficulties have been identified
and discussed in the workshop and proposed the following –
One, from the examination of the annual reports of the sample banks, it has been
found that certain items (Table 6), although required by law, are either not disclosed
or rarely disclosed by the banks. For improving disclosure in the above mentioned
items, regulatory monitoring may be increased. Besides, the recognition of the best disclosure practices may encourage banks to make more disclosure.
Two, it has been observed from the opinion survey that stakeholders are less
aware of the disclosed information. It may act as a disincentive for the banks with
good disclosure. In this connection, it is really important to increase the awareness of
Research Workshop Keynote Paper 95
the depositors, shareholders and borrowers about the sources and nature of
information publicly disclosed by banks. Banks with good disclosure may encourage
depositors, shareholders and borrowers to use different public sources of information
and to make informed decision. In this way, other banks will also be motivated to make better disclosure.
Three, wide range of diversity is clear in terms of the nature of information,
timing, and media of disclosures required under different laws, regulations and
guidelines. This creates confusion among the reporting entities. In some cases, the
reporting entities are not even aware about specific requirement of laws, regulations
and circulars regarding disclosure. Besides, attempt to capture changes in the laws,
regulations and circulars regarding disclosure by individual banks are not always
effective to identify all requirements. If the responsibility of identifying disclosure
requirements and capturing changes in the laws, regulations and circulars regarding
disclosure can be assigned to a common organization that will compile the disclosure
requirements, update and disseminate the same to the banks for compliance, it would
be easy and cost effective for the entire banking sector. Such initiatives may be effectively undertaken by the different associations of banks.
Four, disclosure is a costly exercise in terms of time, money, and impact. So, it is
important to determine effectiveness and efficiency of disclosure. In the opinion
survey bank officials raised their concern on the increasing cost of hard copy
disclosures. Depositors and borrowers have also highlighted the importance of web-
based disclosure. In this regard, banks may be encouraged to disclose more and more
information in their respective websites. Similarly, banks may encourage their clients
to use web-based information. But only encouraging the clients will not be sufficient,
banks must also maintain and update their websites regularly and instantly. This way
the clients will get all the information from the web instantly and in a less costly way
which will ultimately reduce the cost of making hardcopy disclosure. Besides, if
permitted by regulatory authority, softcopy annual reports may be prepared and sent
via email. This will substantially reduce the cost of printing annual reports and it would be a national saving.
Five, in the opinion survey, most of the respondents highlighted the importance
of a common disclosure point containing comparable information of all banks. Such
common disclosure point will immensely benefit the users of disclosed information.
It will help the users to quickly absorb the information and to take informed decision
quickly. This type of initiatives may be effectively undertaken by the different associations of banks.
Six, from the examination of the annual reports of the banks it has been observed
that disclosures are not made in common format and in common sequence. It causes
inconvenience for the users to locate information in the annual report.
A comprehensive common disclosure checklist may help banks to disclose
96 Research Workshop Keynote Paper
information in a similar format which will ultimately help the users. Amended First
Schedule of BCA, 1991 (BRPD circular 14/2003) is an attempt in this regard. But it
needs to be updated in the background of IFRS being adopted by ICAB. Besides, it is
not comprehensive enough to include the requirements of SEC, DSE, CSE and
others. Any initiative in this connection will benefit the banks and the users of disclosed information.
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98 Research Workshop Keynote Paper
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Research Workshop Keynote Paper 99
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www.bangladesh-bank.org, website of BB
www.bix.org, website of Bank for International Settlement
www.cse.com.bd, website of CSE
www.dsebd.org, website of DSE
www.grobalreporting.org, website of Global Reporting Initiative (GRI)
www.icab.org.bd, website of ICAB
www.icmab.org.be, website of ICMAB
www.secbe.org, website of SEC
100 Research Workshop Keynote Paper
Appendix 1
List of Sample Banks
Name of the Banks Nature of the Bank
1. Agrani Bank Limited Non-listed State Owned Commercial Bank
2. United Commercial Bank Ltd. Listed Private Commercial Bank
3. Pubali Bank Limited Listed Private Commercial Bank
4. Prime Bank Limited Listed Private Commercial Bank
5. Dutch-Bangla Bank Limited Listed Private Commercial Bank
6. Standard Bank Limited Listed Private Commercial Bank
7. ONE Bank Limited Listed Private Commercial Bank
8. Bank Asia Limited Listed Private Commercial Bank
9. BRAC Bank Limited Listed Private Commercial Bank
10. Dhaka Bank Limited Listed Private Commercial Bank
11. The Premier Bank Limited Listed Private Commercial Bank
12. Islami Bank Bangladesh Limited Listed Private Commercial Islamic Bank
13. Shahjalal Islami Bank Limited Listed Private Commercial Islamic Bank
14. Commercial Bank of Ceylon PLC Foreign Commercial Bank
15. Eastern Bank Limited Listed Private Commercial Bank
16. Rupali Bank Limited Listed State Owned Commercial Bank
17. Sonali Bank Limited Non-listed State Owned Commercial Bank
18. Bangladesh Commerce Bank Limited
Non-listed Private Commercial Bank
19. IFIC Bank Limited Listed Private Commercial Bank
20. First Security Islami Bank Limited Listed Private Commercial Islamic Bank
21. ICB Islamic Bank Limited Listed Private Commercial Islamic Bank
22. National Credit and Commerce
Bank Limited
Listed Private Commercial Bank
23. Social Islami Bank Limited Listed Private Commercial Islamic Bank
24. Al-Arafah Islami Bank Limited Listed Private Commercial Islamic Bank
25. The Hongkong and Shanghai Banking Corporation Limited
Foreign Commercial Bank
Research Workshop Keynote Paper 101
Appendix 2
Disclosure Checklist
Item
No. Disclosure Items
A Statements and Reports
1 Directors‟ Report 2 Auditors‟ Report 3 Report of Audit Committee 4 Report on the Implementation of Environmental Risk Management Guidelines 5 Components of FS: Balance Sheet
6 Components of FS: Profit and Loss Account 7 Components of FS: Cash Flow Statement 8 Components of FS: Statement of Change in Equity 9 Components of FS: Liquidity Statement
10 Components of FS: Notes to the Financial Statement B Board's Reports Information
1 The state of the companies affairs 2 Amount carry to reserve 3 Amount of dividend or reason for not declaration of dividend 4 Material changes and commitments 5 Change in the nature of business 6 Change in the business in which company has interest 7 Statement and Response to qualified auditors‟ report 8 Board's analytical review regarding the success/failure in achieving the business 9 Directors‟ Statement on FS that they present fairly its state of affairs, the result
of its operations, cash flows and changes in equity. 10 Directors‟ Statement as proper books of accounts have been maintained 11 Directors‟ Statement as accounting policies are followed consistently 12 Directors‟ Statement as Internal control system is sound & implemented
13 Directors‟ Statement as there is no doubt of going concern 14 Directors‟ Statement on deviation from last year operating result 15 Key operating and Financial data of at least preceding 3 years 16 No. of board meeting with attendance
17 Pattern of Shareholding: Parent/Subsidiary, Directors/Others, Shareholding 10% or more
C Corporate Governance and IAS Compliance Checklist 1 Corporate Guidelines Checklist of SEC
2 Corporate Guidelines Checklist of Bangladesh Bank 3 IAS/IFRS/BAS/BFRS Checklist
(Continued)
102 Research Workshop Keynote Paper
Appendix 2 : (Continued)
D Disclosure under Pillar III of Basel II
1 Qualitative disclosure of Scope of Application 2 Quantitative disclosure of Scope of Application 3 Qualitative disclosure of Capital Structure 4 Quantitative disclosure of Capital Structure 5 Qualitative disclosure of Capital Adequacy 6 Quantitative disclosure of Capital Adequacy 7 Qualitative disclosure of Credit Risk
8 Quantitative disclosure of Credit Risk
9 Qualitative disclosure of Equities
10 Quantitative disclosure of Equities
11 Qualitative disclosure of IRRBB
12 Quantitative disclosure of IRRBB
13 Qualitative disclosure of Market Risk
14 Quantitative disclosure of Market Risk
15 Qualitative disclosure of Operational Risk 16 Quantitative disclosure of Operational Risk E Information Regarding Subsidiary
1 The extent of holding company‟s interest 2 A copy of Boards‟ Report of subsidiary 3 A copy of Auditors‟ Report of subsidiary 4 Details of any material change of the Subsidiary 5 Change in subsidiaries‟ business
6 A copy of B/S of subsidiary
7 A copy of P/L of subsidiary
F Information on Financial Statements and Notes 1 Significant aspects of accounting principles and procedures, which have been
followed 2 A clear statement of the company‟s accounting policies on all material
accounting areas 3 An explanation of where the accounting standards that underpin the policies can
be found 4 A statement that explains that the financial statements are in compliance with
IFRS 5 A statement that explains in what regard the standards and the reporting
framework used differs from IFRS 6 All Material information to make Balance Sheet clear & understandable 7 Any restriction on the title to assets
(Continued)
Research Workshop Keynote Paper 103
Appendix 2 : (Continued)
8 A change in accounting policy
9 Nature of Activities
10 Event after Balance Sheet date
11 The market prices of dealing securities and marketable investment securities 12 Concentration of assets, liabilities or off-balance sheet items 13 The aggregate amount of secured liabilities and the nature and carried amount
of the assets pledged as security
14 Calculation of EPS
15 The relationship and transactions between the bank and its related parties
16 Names of the Directors together with a list of entities in which they have
Interests 17 All contracts of significance to which the bank, its subsidiary or any fellow
subsidiary company was a party and wherein a director has interests subsisted at any time during the year or at the end of the year
18 Share options given to directors and executives 19 The nature of the related party relationship, the types of transactions and the
elements of transactions 20 The lending policy to related parties 21 Balances resulting from transactions with directors and their related concerns
together with an analysis as to the classified and unclassified advances. 22 Detailed information of any business other than the banking business with any
related concerns of the directors 23 Detailed information of the amount invested along with a list, in the securities
of the directors and their related concerns. 24 Names of the members of the audit committee 25 Educational Qualification of the members of Audit Committee 26 The number of meetings of the audit committee held 27 The nature and scope of audit reviews
28 The effectiveness of internal control system and compliance 29 Explanation regarding tax determination, provision 30 The procedure of conversion into local currency 31 Reconciliation of books of accounts_ inter-bank and inter-branch transactions
with explanations 32 Detailed information regarding financing and management of the fund raised
for staff pension 33 Information regarding credit rating in annual report 34 Assets in details
35 Details of Cash
36 Details of Balance with other banks and financial institutions
(Continued)
104 Research Workshop Keynote Paper
Appendix 2 : (Continued)
37 Money at call on short notice: Bank/financial institution-wise 38 Investments in Details
39 Maturity grouping of Loan and Advances
40 Loan and Advances: within Bangladesh and outside Bangladesh 41 Significant concentration of Loans and Advances 42 The loans and advances - Industry-wise 43 The loans and advances - Geographical location-wise 44 The loans and advances as unclassified and classified 45 Loans and Advances should also be categorized as Fully Secured, No Security,
No provision, to firms in which directors have interest, amount written off. etc.
(total 11 items) 46 Bills purchased and discounted payable in Bangladesh & outside Bangladesh 47 The bills discounted and purchased as per remaining maturity grouping 48 Fixed assets including premises (less accumulated depreciation 49 A statement of the premises not used by the bank for its own 50 Details of Other assets 51 Details of Non-banking assets 52 Borrowings from other banks, financial institutions and agents: In Bangladesh,
and Outside Bangladesh 53 Borrowings from other banks, financial institutions and agents: Secured (stating
the nature of securities) and unsecured borrowing 54 Borrowings from other banks, financial institutions and agents: Repayable on
demand or others 55 Deposits and other accounts - Inter-bank deposit & other deposits
56 Deposits and other accounts maturity grouping 57 Unclaimed deposits for 10 years or more held by the bank 58 Other liabilities in details 59 Paid up Capital with other Capital in details 60 Liabilities in Details
61 Capital surplus/deficit 62 The core capital and supplementary 63 Movement of Statutory Reserve 64 Other Reserve: Details movement 65 Capital reserve and revaluation reserve 66 Surplus in Profit and Loss A/C: Increase/decrease in details 67 Contingent liabilities in details 68 Total amount of subordinated debt 69 Gross Income derived from services rendered 70 Depreciation policy 71 Amount of Income tax or provision
(Continued)
Research Workshop Keynote Paper 105
Appendix 2 : (Continued)
72 Amount paid to Auditors 73 Remuneration of Managing Director
74 Interest Income in details 75 Interest Paid on Deposits & Borrowings in details 76 Commission, Exchange & Brokerage in details 77 Other operating income in details 78 Directors' fees in details 79 Provision for loan: For adversely classified loans and advances
80 Provision for unclassified loans and advances
81 Provision for diminution in value of investments in details
82 Other provisions: Provision kept against classified other asset
83 Non-recurring transactions or transaction of an exceptional nature
G Others 1 Boards‟ report must be signed
2 Authentication of Financial Statement 3 Financial Statements (FS) in Prescribed Format 4 Highlights of prescribed 22 items of the bank
Source: Based on Banking Companies Act, 1991; Companies Act, 1994; Banking Regulation and Policy
Department of Bangladesh Bank Circular; Securities and Exchange Commission Circular; Securities and Exchange
Ordinance, 1969; Securities and Exchange Rules, 1987; DSE, 1996; CSE, 1997.
106 Research Workshop Keynote Paper
Appendix 3
Media of Disclosure
Sl. Issues Reference*
1. Corporate Annual Report or Annual Financial
Statements BCA, 1991 (Sec.38, 40)
CA, 1994 (Sec. 183, 184, 185,
190, 191 & 192) SEO, 1969 (Sec. 11) SER, 1987 (Rule 12)
2. FS with Highlight should be preserved in each of the bank branches at a visible place.
BRPD # 14/2003 CA, 1994 (Sec. 192)
3. Schedule of charges and Commission etc
should be publicly accessible at each branch BB, Prudential Regulations for
Banks (Bank Charge)
4. Published of FS in widely circulated one Bangla and one English daily newspapers
BRPD # 14/2003
5. Publication of FS in the bank's website BRPD #14/2003 DSE notification Feb,2010
6. Updated annual F/Ss, interim F/Ss and Price Sensitive Information in the Website
DSE notification Feb,2010
7. Information regarding Green banking
initiatives in the bank‟s website BRPD #2/2011
* CA = Companies Act, BRPD = Banking Regulation and Policy Department of Bangladesh Bank Circular, BCA =
Banking Companies Act, SEC = Securities and Exchange Commission, SEO = Securities and Exchange Ordinance,
SER = Securities and Exchange Rules.
Research Workshop Keynote Paper 107
Appendix 4
Unstructured Questionnaire for Stakeholders
Set 1: Unstructured Questionnaire for Depositors
1. What information is required by the depositors before making deposit?
2. How the required information is obtained by the depositors?
3. Are the depositors aware of certain sources of information?
4. How the depositors want to get required information in future?
Set 2: Unstructured Questionnaire for Borrowers
1. What information is required by the borrowers?
2. How the required information is obtained by the borrowers?
3. Are the borrowers aware of certain sources of information?
4. How the borrowers want to get required information in future?
Set 3: Unstructured Questionnaire for Shareholders
1. What information is required by the shareholders before making
investment decision?
2. How the required information is obtained by the shareholders?
3. Are the shareholders aware of certain sources of information?
4. How the shareholders want to get required information in future?
Set 4: Unstructured Questionnaire for Bankers
1. What media do you use to make public disclosure?
2. Which is the most convenient medium for you?
3. Do you have any system in your website to count the user?
4. Do you face any problem to meet the disclosure requirement?
5. Do you think that harmonization is required?
6. Do you think that common disclosure point may have?
7. Why you disclose information?
Set 5: Unstructured Questionnaire for Bangladesh Bank and SEC
1. Do you satisfy with the present compliance with disclosure requirements?
2. What techniques you used to check disclosure compliance?
3. Do you think that harmonization is required?
4. Do you think that common disclosure point may have?
108 Research Workshop Keynote Paper
Appendix 5
Response of the Stakeholders
Response Set 1: Response of the Depositors
1. What information is required by the depositors before making deposit?
Information Needed Response (%)
Service Quality 80
Reputation 67
Interest Rate 60
Deposit Products available 47
No. of Branch and Branch Location 47
Availability of Online Banking, ATM Network 40
Rating of Bank 40
Strength and Soundness of Bank 40
Liquidity 27
Profitability 27
Relationship 7
2. How the required information is obtained by the depositors?
Sources Response (%)
Branch Visit and Conversation with officials 93
Word of Mouth 73
News Paper Report 60
Bank Website 40
Over Telephone 33
Bank Marketing team 20
TV commercials 13
Bank Annual Report 7
Branch Notice Board 7
3. Are the depositors aware of certain sources of information?
Sources Response (%)
Bank Website 80
News Paper 67
Bank Annual Report 33
Branch Notice Board 27
(Continued)
Research Workshop Keynote Paper 109
Appendix 5: (Continued)
4. How the depositors want to get required information in future?
Sources Response (%) Through a common website containing comparable information of all banks 93
Bank Website 53
Bank Annual Report 20
Electronic Display Board 13
Leaflet 7
Response Set 2: Response of the Borrowers
1. What information is required by the borrowers?
Information Needed Response (%)
Service Quality 87
Interest Rate 80
Loan Products available 73
Liquidity 47
Availability of Online Banking, ATM Network 40
Reputation 40
Collateral 33
No. of Branch and Branch Location 27
Strength and Soundness of Bank 13
Profitability 7
Rating of Bank 0
2. How the required information is obtained by the borrowers?
Information Needed Response (%)
Branch Visit and Conversation with officials 87
Word of Mouth 60
Bank Marketing team 47
Bank Website 47
Over Telephone 20
Bank Annual Report 13
News Paper Report 7
TV commercials 7
Branch Notice Board 0
(Continued)
110 Research Workshop Keynote Paper
Appendix 5: (Continued)
3. Are the borrowers aware of certain sources of information?
Sources Response (%)
Bank Website 67
News Paper 33
Bank Annual Report 7
Branch Notice Board 0
4. How the borrowers want to get required information in future?
Sources Response (%) Through a common website containing
comparable information of all banks 87
Bank Website 47
SMS 27
Electronic Display Board 20
News paper 7
Bank Annual Report 0
Response Set 3: Response of the Shareholders
1. What information is required by the shareholders before making investment
decision?
Information Needed Response (%)
EPS, P/E and NAV 93
Management 73
Reputation 67
Rating 53
Capital Adequacy 47
Service Quality 47
Asset Quality 40
Liquidity 33
Availability of Online Banking, ATM Network 20
No. of Branch 13
Future Prospect 7
(Continued)
Research Workshop Keynote Paper 111
Appendix 5: (Continued)
2. How the required information is obtained by the shareholders?
Information Needed Response (%)
Bank Annual Report 87
Bank Website 73
News Paper Report 73
DSE, CSE website 67
Other Monthly Publication 47
3. Are the shareholders aware of certain sources of information?
Sources Response (%)
Bank Website 93
News Paper Report 87
Bank Annual Report 67
Other Monthly Publication 53
Branch Notice Board 47
4. How the shareholders want to get required information in future?
Sources Response (%) Through a common website containing
comparable information of all banks 87
Bank Annual Report 73
Bank Website 53
Electronic Display Board 27
Quarterly publication for all banks 7
Response Set 4: Response of the bank officials
1. What media do you use to make public disclosure?
Media Response Total Response (%) Newspaper 10 100 Website 10 100 Annual Report 10 100 Branch Notice Board 10 100
2. Which is the most effective and convenient media for you?
Media Response Total Response (%) Newspaper 2 20 Website 7 70 Annual Report 1 10 Branch Notice Board 0 0
(Continued)
112 Research Workshop Keynote Paper
Appendix 5: (Continued)
3. Do you have any system in your website to count the user?
Response Response Total Response (%) Have a counting system 2 20 Have not counting system 8 80
4. Do you face any problem to meet the disclosure requirement?
Response Response Total Response (%) Face problem 3 30 Do not face problem 7 70
5. Do you think that harmonization is required?
Response Response Total Response (%) Required 9 90 Not Required 1 10
6. Do you think that common disclosure point may have?
Response Response Total Response (%) May have 9 90 May not have 1 10
7. Why you disclose information?
Response Response Total Response (%) Comply with Regulatory Requirements 10 100 As a Marketing Tool 10 100
Research Workshop Keynote Paper 113
Appendix 6
Disclosure Requirement as per BFRS 7
Sl. Issues Reference*
1. Financial instrument disclosure in group BFRS 7 (Para 6)
2. Information Regarding Financial Position BFRS 7 (Para 7)
3. Information Regarding Financial Performance BFRS 7 (Para 7)
Disclosure on the face of BS or in Notes
4. Financial Assets at fair value BFRS 7 (Para 8)
5. Held-to-maturity investment BFRS 7 (Para 8)
6. Loans and Receivables BFRS 7 (Para 8)
7. Available for sale financial assets BFRS 7 (Para 8)
8. Financial liabilities at fair value BFRS 7 (Para 8)
9. Financial liabilities measured at amortized cost BFRS 7 (Para 8)
10. The maximum exposure to credit risk without security BFRS 7 (Para 9)
11. Instruments mitigate that maximum exposure to credit risk BFRS 7 (Para 9)
12. Amount of change in its fair value of financial asset that
rise market risk (not for change in market condition) BFRS 7 (Para 9)
13. Amount of change in its fair value of financial asset for
using alternative method BFRS 7 (Para 9)
14. Amount change in fair value of derivatives BFRS 7 (Para 9)
15. Amount change in fair value of financial liability that rise market risk (not for change in market condition)
BFRS 7 (Para 10)
16. Amount of change in its fair value of financial liability for
using alternative method BFRS 7 (Para 10)
17. Difference between financial liability‟s carrying amount and amount to be paid
BFRS 7 (Para 10)
18. Method used to calculate amount of change fair value of
financial assets and liabilities BFRS 7 (Para 11)
19. If the disclosure change in fair value is not faithful then
reasons for that believe BFRS 7 (Para 11)
20. Amount of reclassification, if any BFRS 7 (Para 12)
21. In case of de-recognition_ the nature of the assets BFRS 7 (Para 13)
22. In case of de-recognition_the nature of the risk BFRS 7 (Para 13)
23. In case of de-recognition_the carrying amount of assets and associated liabilities
BFRS 7 (Para 13)
24. The carrying amount of financial assets it has pledged as
collateral for liabilities BFRS 7 (Para 14)
25. The terms and condition of financial assets that has pledged as collateral for liabilities
BFRS 7 (Para 14)
26. Fair value of collateral held BFRS 7 (Para 15)
(Continued)
114 Research Workshop Keynote Paper
Appendix 6: (Continued)
27. Fair value of any collateral sold BFRS 7 (Para 15)
28. Terms and conditions of collateral BFRS 7 (Para 15)
29. Allowance account for credit losses separately BFRS 7 (Para 16)
30. Financial instruments with multiple embedded derivatives
(e.g., callable convertible debt instrument) BFRS 7 (Para 17)
31. Details of any defaults during the period BFRS 7 (Para 18)
32. Details of breaches of loan agreement BFRS 7 (Para 18)
Disclosure on the face of IS or in Notes
33. Net gains or losses on financial assets and liabilities BFRS 7 (Para 20)
34. Net gains or losses on available for sale assets BFRS 7 (Para 20)
35. Net gains or losses on held-to-maturity investment BFRS 7 (Para 20)
36. Net gains or losses on loans or receivables BFRS 7 (Para 20)
37. Net gains or losses on financial liability measured at amortized cost
BFRS 3 (Para 20)
38. Total interest income BFRS 7 (Para 20)
39. Total interest expense BFRS 7 (Para 20)
40. Fee income and expense BFRS 7 (Para 20)
41. Interest income on impaired financial assets BFRS 7 (Para 20)
42. Amount of impairment loss BFRS 7 (Para 20)
Other Disclosure
43. Disclosure of accounting policies BFRS 7 (Para 21)
44. A description of each type of hedge BFRS 7 (Para 22)
45. A description of hedging instrument BFRS 7 (Para 22)
46. The nature of the risks being hedged BFRS 7 (Para 22)
47. Details regarding cash flow hedge BFRS 7 (Para 23)
48. Details regarding fair value hedge BFRS 7 (Para 24)
49. Fair value of financial instrument compare with carrying value BFRS 7 (Para 25)
50. In disclosing fair value financial assets and liabilities in group BFRS 7 (Para 26)
51. Methods and assumptions in determining fair value with details BFRS 7 (Para 27)
52. If market of financial instrument is not active then policy for determining fair value
BFRS 7 (Para 28)
53. Reasons and description of instrument whose fair value is
not disclosed BFRS 7 (Para 30)
54. Information to evaluate the nature and extent of risks BFRS 7 (Para 31)
55. Information regarding management of credit risk, liquidity
risk and market risk BFRS 7 (Para 32)
56. The exposure to risk and how they arise BFRS 7 (Para 33)
57. Objectives, policies and processes for managing risk and
methods used to measure risk BFRS 7 (Para 33)
(Continued)
Research Workshop Keynote Paper 115
Appendix 6: (Continued)
58. Any change of risk or methods to measure the risk BFRS 7 (Para 33)
59. Summary quantitative data about its exposure to that risk at
the of the reporting period BFRS 7 (Para 34)
60. Concentration of risk BFRS 7 (Para 34)
61. The amount that best represents it maximum exposure to
credit risk BFRS 7 (Para 36)
62. Description of collateral held as security for credit risk BFRS 7 (Para 36)
63. Information about credit quality that are neither past due
nor impaired BFRS 7 (Para 36)
64. Carrying amount asset whose terms have been renegotiated BFRS 7 (Para 36)
65. Analysis of assets that are past due but not impaired BFRS 7 (Para 37)
66. Analysis of assets that are to be impaired BFRS 7 (Para 37)
67. Description of collateral held for past due or impaired
assets BFRS 7 (Para 37)
68. The nature and carrying amount of the obtained as collateral
BFRS 7 (Para 38)
69. Policies for disposing of assets obtained as collateral BFRS 7 (Para 38)
70. Maturity analysis of financial liabilities and how it manages
BFRS 7 (Para 39)
71. A sensitivity analysis for each type of market risk BFRS 7 (Para 40)
72. Method and assumptions in sensitivity analysis BFRS 7 (Para 40)
73. Reasons for change of methods and assumption in
sensitivity analysis BFRS 7 (Para 40)
74. An explanation of methods used in sensitivity analysis BFRS 7 (Para 41)
75. Objectives and limitations of methods used in sensitivity
analysis BFRS 7 (Para 41)
76. Reasons and fact if sensitivity analyses are unrepresentative BFRS 7 (Para 42)
* BFRS=Bangladesh Financial Reporting Standard
116 Research Workshop Keynote Paper
Paper Four
Financing PPP Projects in Bangladesh: Bank’s Initiatives
Md. Ruhul Amin Lecturer, BIBM
Financing PPP Projects in Bangladesh: Bank’s Initiatives
I. Introduction
Physical infrastructures like power, telecom, ports, roads, railways, etc.
development is critical to accelerate economic growth as well as to achieve reduction
of poverty. Infrastructure plays a pivotal role in facilitating new investment (both
domestic and foreign), expanding production base, product diversification, increasing
productivity and reducing costs and most importantly enhancing quality of life. But in
the context of emerging market economies including Bangladesh, governments are
increasingly constrained in mobilizing the required financial and technical resources
and the executive capacity needed to cope with the rising demand for infrastructure
and other utilities. Developing countries are experiencing increasing pressure from
their citizens, civil society organizations, and the media to provide accessible and
affordable infrastructure and basic services. Not only for Bangladesh, but also for
countries in South Asia, bridging gaps in infrastructure is the key to achieving goals
for growth and poverty reduction. Over the years, the successive governments have
not invested adequately in infrastructure assets and especially in maintaining them.
While the infrastructure gap is rising, government budgetary resources are
increasingly found inadequate in financing this deficit. Since neither the public sector
nor the private sector can meet the financial requirements for infrastructure in
isolation, the Public-Private-Partnership (PPP) model can represent a logical, viable,
and necessary option for them to work together (Islam 2009).
The economic growth of Bangladesh is inhibited by inadequate provision of
roads, railways, telecom and most importantly power and ports. In order to achieve
the target of becoming a middle income country by 2021, it is needed to ensure a
more rapid, inclusive growth trajectory. According to the budget document for FY
2009-10, the country‟s target is to achieve 6%-8% GDP growth in the next five years
starting from FY 2010.1 For achieving the targeted GDP growth during the stipulated
period, the cumulative amount of required investment would be US$ 185.91 billion2
and the cumulative shortfall for the required investment will stand at US$28.06
billion3. It will be impossible for the government to generate the required amount of
funds from available domestic and foreign sources.
1 The target GDP growth rates are 6% in FY2010, 6.8% in FY2011, 7.5% in FY2012, and 8% in both FY2013 and
FY2014, respectively. 2 The country will need investments amounting to US$24.59 billion, US$30.63 billion, US$37.18 billion, US$43.82
billion, and US$49.69 billion in the respective fiscal years. 3 The investment shortfalls will be US$1.04 billion in FY2009-10, US$3.53 billion in FY2010-11, US$5.82 billion
in FY2011-12, US$8.27 billion in FY2012-13, and US$9.40 billion in FY2013-14
Research Workshop Keynote Paper 119
Obviously, the Government alone cannot meet the huge investment deficits
without taking help from external sources. But it may not be possible to get required
financing from external sources at affordable terms and conditions. One might easily
guess that the prospect of getting large foreign investments appears uncertain at the
moment and, moreover, huge involvement of foreign investors in long term projects
may create pressure on balance of payments because of repatriation of foreign
currency, as happened during the East Asian financial crisis in the past decade. It was
estimated that the country‟s stock market would supply BDT 200 billion in the next
five years, but past experiences in raising funds for Greenfield projects from the stock
market has not been much encouraging (Bhuyan 2009). The recent debacle in the
country‟s stock market has darkened the residual hope of raising fund for
infrastructure projects. Moreover, a lot of formalities are required to be completed,
particularly for new companies, before funds can be raised from the stock market.
In such a situation, Government may seek participation of multilateral and regional
development banks (viz., World Bank, Asian Development Bank etc.). Although
these banks offer concessional loans for longer maturities, but their involvement may
put pressures on government from multiple sources. Hence, it might be an ideal
strategy to attract investment from the private sector and utilize their expertise and
experience through PPP. As mentioned earlier, Bangladesh needs huge amount of
investments, especially for the development of power, energy and communication
infrastructures, Government has embarked on the PPP initiatives in the consecutive
last three years‟ budget to encourage the private sector in infrastructure development
alongside the Government. According to the budget document for FY2009-10, the
ratio of private and public sector investments in PPP projects is assumed to be 70:30,
i.e., 70% of the project‟s funding will be arranged by private parties and remaining
30% will be arranged by the public party (Bhuyan 2009). And, major portion of the
private sector funds is provided by different financial institutions of which
commercial banks assemble the lion share of funds. For example, as of December
2008, the banking sector of Bangladesh accounted for over 80% of the country's
financial assets (Ahmed 2010). So, financial institutions especially commercial banks
have ample opportunities to enlarge their business by allocating funds in
infrastructure projects through PPP and thus ensure some additional profits and
diversifying credit portfolio risks as well.
Financial institutions especially banks facilitate funds mobilization from surplus
economic units and deploy the same to deficit economic units through various deposit
and loan products. Besides offering various types of traditional deposit and loan
products, commercial banks are gradually expanding their businesses by offering
more customized financial solutions through diverse products/services such as
consumer and retail credits, SME credit, term lending i.e., project and infrastructure
lending, corporate lending, investment banking, offshore banking, modern
technology based services, structured and syndicated financing, and many more. By
doing so, they have gained enough expertise and experiences which would help them
120 Research Workshop Keynote Paper
to move towards new areas of businesses. Expansion of business in new areas
particularly in the infrastructure sector may help them (banks) to ensure long
sustainability by providing adequate profit and diversifying risks. It is noticeable that
commercial banks are increasingly getting involved in large projects financing
including infrastructure projects through syndicated lending. The syndicated lending
by banks started more than a decade ago and it (syndicate loan) is growing fast as
more banks are coming forward to lend different sectors through such mechanism.
The data from major market playing banks shows that whereas the total syndicated
lending of the banks was BDT3844.53 million in 2001, it grew to BDT33219.05
million in 2005, BDT49258.38 million in 2007 and BDT37432.58 million in 2010.
The average growth of the syndicated loan was about 55% during 2001-2010. Banks
provide syndicated loan to diverse sectors including infrastructure sectors. Some
examples of banks‟ syndicated lending include spinning sector4, health care sector5,
aviation (such as Bangladesh Biman6) sector, SME sector7, ICT sector8, ceramic
industry9, steel industry10, pharmaceutical sector11, power sector12 and so on.
4 Six commercial banks (Mercantile Bank as Lead Arranger, Uttara Bank, Exim Bank, EBL, BRAC Bank, and
Trust Bank) provided Tk 48 crore to Spinning Mills Ltd., a sister concern of Rising Group. (Source: The Daily
Independent, Nov 26, 2009, Dhaka).
5 Five commercial banks led by Agrani Bank disbursed Tk. 420 million to Green Life Hospital Ltd. Dhaka, under
syndicated loan facility. Other participating banks are Janata Bank , Pubali Bank , DBBL and NCCBL .
6 (i) EBL along with other 9 banks arranges US$114.49 million syndicated loan for Bangladesh Biman to purchase
two B777-300ERs in 2010. (Other banks are AB Bank, BRAC, Dhaka Bank, IFIC, Mutual Trust, NBL, Prime
Bank, The City Bank and Premier Bank). Report: The Daily Star, May 6, 2010. (ii) EBL has also arranged a
syndicated Term Loan facility of BDT 980 million for HG Aviation Limited to purchase two 50 seater DASH 8
Q300 Aircrafts in 2011. Other nine banks and NBFIs participated in the deal. (Source: The Daily Financial Express,
February 2, 2011, Dhaka).
7 Citibank, NA, arranges Tk 100 crore under syndicated loan facility for BURO Bangladesh, an NGO to facilitate
financing in SMEs especially in agriculture sector in 2009. (Other financing banks are Sonali Bank, Agrani Bank,
Pubali Bank, MTBL, Southeast Bank, UCBL, National Bank, Dhaka Bank and EBL). Source: The Daily Star, April
5, 2009, Dhaka.
8AB Bank arranges Tk. 191crore syndicated loan for BanglaLion Wimax in 2010. (Other co-financiers are Agrani
Bank, Bangladesh Commerce Bank, Janata Bank, Mercantile Bank, Sonali Bank, Standard Bank and UCBL). Report: The Daily Star, January 20, 2010.
9 Together with five commercial bnks (Namely IBBL, Exim Bank of Bangladesh Limited, SIBL, Southeast Bank
and Trust Bank Limited), Prime Bank Ltd. fianced Tk. 350 mil through syndicated Hire Purchase under Shirkatul Melk (HPSM) investment facility to X-Ceramics Limited, a ceramic wall tiles manufacturing plant in 2009. Report: The Daily Financial Express, June 10, 2009. 10
EBL has arranged a syndicated facility of Tk 300 million medium term loans for Magnum Steel Industries Limited (MSIL). (Other participating banks are Bangladesh Commerce Bank, Bank Al-Falah , People‟s Leasing and Financial Services Limited, SIBL and The City Bank Limited). Source:http://bangladesheconomy.wordpress.com /2008/07/20/ebl-arranges-tk-300m-syndicated-loan-facility-for-magnum-steel/) 11
EBL also arranged Tk. 650 mil syndicated term loan to General Pharmaceuticals Limited (GPL) Other participating banks are AB Bank, Bangladesh Commerce Bank, DBBL, NBL, One Bank, Pubali Bank, Standard Bank and Trust Bank Ltd. (Source: http://www.generalpharma.com/EBL%20Bank/ebl.php) 12
IIDFC raised Tk. Tk 395.5 crore through syndication of 18 banks and NBFIs to finance two power companies of Summit Group, to produce 110 megawatt (MW) of electricity in 2008. Report: The Daily Star, July 28, 2008.
Research Workshop Keynote Paper 121
Obviously, by dealing with syndicated loan and other structured finance products
banks have got enough maturity and adequate expertise to deal with large
infrastructure projects. Now, banks can easily use their gained experiences and
expertise of various structured finance deals in larger projects especially
infrastructure sectors i.e., roads, power, port etc. which are usually done through PPP
mechanism in different parts of the world and to contribute much to the economic
development of the country. For their likely move towards large scale financing in
infrastructure projects, the ideal strategy may be going through PPP mechanism.
If the banks can fix up their appropriate strategy and devote their expertise to
implement PPP projects, this will open up new windows for widening their
investment portfolio, reduce intense competitions among banks for investing in few
traditional businesses, provide sustainability, and minimize risks as well. But the
preconditions for successful PPP initiatives, appropriate policy and regulatory
environment, institutional framework, stimulatory incentives etc. are necessary. The
Government of Bangladesh (GoB) is keen to implement the PPP initiatives for
infrastructure development of the country. And, as part of its (GoB) initiatives,
government has already issued a complete PPP policy and strategy for ensuring legal
framework for PPP projects, allocated some funds for PPP through budgetary
provisions, declared some fiscal and special incentives for private sectors in the
policy and strategy paper. The Government has allocated BDT 2500 crore in FY
2009-10, BDT 3000 crore for both FY2010-11 and FY2011-12. The Government has
also established a number of organizations viz., Bangladesh Infrastructure Finance
Fund (BIFF), Infrastructure Development Company Ltd. (IDCOL), Infrastructure
Investment Facilitation Centre (IIFC) etc. to encourage private sector to implement
infrastructure projects under PPPs. Bangladesh Bank has also taken initiatives to
encourage private sector especially banks/financial institutions to participate in PPP
projects. For this purpose, it (BB) has created a separate cell (called IPFF cell) for
providing refinance facilities to banks/NBFIs for on-lending to PPP projects. Some
banks and NBFIs have already lent to seven power projects (list of these projects are
attached in Appendix, Table-3) through PPP mechanism by taking refinancing
facility from IPFF cell of BB. These projects are contributing 178MW electricity to
the national grid. Some new PPP projects are in pipeline to get finance from different
banks and NBFIs under IPFF cell. But this fund is not sufficient to meet the current
demand of infrastructure developments in the country. For ensuring widespread
infrastructure development in the country large scale investments are required at this
moment. In this regard, commercial banks‟ responses are crucial for positive
outcomes of these initiatives.
The issues discussed above raise some research questions: Is the policy and
regulatory framework good enough to promote PPP projects in Bangladesh? What is
the status of financing PPP projects by banks? Are the commercial banks using
refinance facilities of IPFF Project (BB)? What should be the appropriate role of
banks in PPP projects? What would be the PPP financing structure under banks
initiatives? Is/are there any problem(s) from financier‟s side to involve in PPP
122 Research Workshop Keynote Paper
projects? How can the potential challenges and issues related to PPP financing be
handled? It is needless to say that favourable legal framework, commensurate
incentives, effective coordination among stakeholders, adopting appropriate
techniques and strategies to manage projects and project parties are crucial for
achieving the desired goals in such a new area. In finding the answers of the research
questions, the study identified the following specific objectives: one, to discuss the
conceptual issues and reviewing literature on banks initiatives in PPP projects; two, to
examine the policy initiatives and regulatory environment for PPP financing by banks
in Bangladesh; three, to identify the status and techniques of financing PPP projects
in Bangladesh as well as global perspectives; four, to examine the initiatives taken by
banks in financing PPP projects in Bangladesh; and five, to find out the challenges
and issues relevant for financing PPP projects by commercial banks in Bangladesh.
The research workshop paper is prepared based on both primary and secondary
information. Secondary and published literature, research papers, published
documents of GoB/BB, newspaper reports, websites etc. have been reviewed to
understand conceptual issues and policy initiatives. Primary data, which have been
utilized to accomplish the basic objectives of the paper, are collected from
commercial banks. The research team interviewed bank officials of relevant desks of
20 selected commercial banks (covering 2 state-owned banks13, 14 local private
commercial banks,14 2 foreign commercial banks15 and 2 Islami banks16).
For collecting primary data, banks have been chosen on the basis of „purposive
sampling method‟. In selecting banks for the survey, primary emphasis has been
given to select those banks that have experiences of syndicated lending, as large
projects financing are usually done through syndication mechanism. For the selection
of local commercial banks, the norm so followed was to select all the banks which are
already enlisted with IPFF17 to avail refinancing facility for subsequently lending in
PPP projects and the remaining local commercial banks have been chosen on the
basis of their experiences and magnitude of syndicated lending over the years. Other
samples are selected based on their experiences and volume of large projects
financing which represent their respective category of banks. A questionnaire has
been used to gather primary information from the selected banks.
In order to accomplish the stated objectives, a key-note paper was prepared and
presented in a day-long workshop participated by a number of senior level bankers
from different banks which was followed by a group discussion by the participants.
Several issues were raised in the discussion and the final report has been prepared
after incorporating the valuable suggestions where it was thought appropriate.
13
Agrani Bank Ltd. and Janata Bank Ltd. 14
Mutual Trust Bank Ltd., Mercantile Bank Ltd., Trust Bank Ltd., Prime Bank Ltd., Dhaka Bank Ltd., NCC Bank
Ltd., BRAC Bank Ltd., Eastern Bank Ltd., Dutch-Bangla Bank Ltd., IFIC Bank Ltd., Bank Asia Ltd., United
Commercial Bank Ltd., AB Bank Ltd. and The City Bank Ltd. 15
Citi Bank N.A. and Standard Chartered Bank 16
Islami Bank Bangladesh Ltd. and Exim Bank Ltd. 17
Currently eleven (11) local commercial banks are listed with IPFF Cell of Bangladesh Bank.
Research Workshop Keynote Paper 123
The paper is organized into six sections. After stating the background, objectives
and methodological aspects in section I, section II attempts to discuss some
conceptual issues of PPP financing especially under bank‟s initiatives. Policy
initiatives and regulatory environment for PPP financing by banks in the context of
Bangladesh are discussed in section III. Section IV identifies the status and
techniques of financing PPP projects in Bangladesh along with cross country
experiences. The initiatives taken by banks in financing PPP projects in Bangladesh
are assessed in section V. Finally, a set of critical issues along with some
recommendations related to successful implementation of PPP initiatives in the
country are presented in section VI.
II. PPP Financing: Brief Literature Review and Bank’s Initiatives
Concepts and Issues
PPP has become widely accepted and popular term in public sector involvement
management. Now, PPP is considered as a favorite tool for providing public services
and developing society in both developed and developing countries. At the most
general level, PPP describes a government service or private business venture which
is funded and operated through a partnership of government and one or more private
sector companies. PPP involves a contract between a public-sector authority and a
private party, in which the private party provides a public service or project and
assumes substantial financial, technical and operational risks in the project. In most
PPP projects, capital investment is made by the private sector on the strength of a
contract with government to provide agreed services and the cost of providing the
service is borne wholly or in part by the government. Government‟s contribution to a
PPP may also be in kind. In projects that are aimed at creating public goods like in
the infrastructure sector, the government may provide a capital subsidy in the form of
a one-time grant, so as to make it more attractive to the private investors. In some
other cases, the government may support the project by providing revenue subsidies,
including tax breaks or by providing guaranteed annual revenues for a fixed period.
There is a wide range of PPPs with diverse features and involved in different
activities. However, very few people agree on what exactly a PPP mean and perhaps,
there is no precise and widely accepted definition of PPP and hence the concept of
PPP is still contested. According to Asian Development Bank Institute (ADBI 2000),
“Public Private Partnerships are collaborative activities among interested groups,
based on a mutual recognition of respective strengths and weaknesses, working
towards common agreed objectives developed through effective and timely
communication”. The World Bank‟s definition of PPPs is closely aligned to that of
the ADBI. The World Bank (1999) defined Public Private Partnerships as “joint
initiatives of the public sector in conjunction with the private, for profit and not-for-
profit sectors”, also referred to “as the government, business and civic sector”. In
these partnerships, each of the actors contributes resources (financial, human,
124 Research Workshop Keynote Paper
technical and intangibles viz., information or political support) and participates in the
decision making process. World Bank (2007) has also defined PPP as “a win-win
relationship between the government and various private sector players for the
purpose of delivering a project or service by sharing the risks and rewards of the
venture”. According to the Organization for Economic Cooperation and Development
(OECD), PPPs refer to any form of agreement or partnership between public and
private parties (OECD 2000). They should not be confused with privatization, where
the management and the ownership of infrastructure are transferred to the private
sector. In most cases, PPP allows private sector to venture into areas of business that
have been historically controlled by the government with respect to either
infrastructure or service delivery process or both.
In the Policy & Strategy for PPP (2010) of the GoB, the concept of PPP is
explained as follows: “Public-Private Partnership (PPP) projects normally cover
public good provisions characterized by indivisibility and non-excludability, natural
monopoly characterized by declining marginal cost (and associated average cost), and
lumpy investment characterized by long gestation period”. In most of the cases, PPP
allows private sector into areas of business, where the government holds control over
infrastructure or service before such partnership. The public sector retains a
significant role in the partnership, either as the sole purchaser of the services provided
or as the main enabler of the project. The private party commonly provides the
detailed design, construct, operation and financing for the PPP project, and is paid
according to the performance.
A PPP ideally integrates the public sector, the private sectors and all community
stakeholders and by pooling their resources and sharing responsibilities it (PPP)
accrues benefits to all stakeholders. This is done in order to develop and implement a
project that is technically sound, financially viable, environmentally acceptable and
affordable to all users. However, risk allocation is ceded to the party, either
government or private sector, which is best able to manage it. According to Thomson
(2005) and Savas (2000) PPPs can take many forms, depending upon the exact
allocation of risks and responsibilities. The most common PPP model includes Build-
Operate-Transfer (BOT) (Box-1 highlights some other PPP models). In general, the
financial arrangements of BOT are that the project is designed and financed by the
private sector, and run and maintained by the private sector for the concession period.
The private sector partner receives income from running the infrastructure (e.g. toll
road, electricity generation). After the expiry of the concession period, the legal
ownership of the project is transferred to the government. Campbell (2001) also
emphasizes on financial arrangements of PPP and concluded that „a PPP project
generally involves the design, construction, financing and maintenance and in some
cases operation of public infrastructure or a public facility by the private sector under
a long term contract‟. Collin (1998), after surveying 117 different public private
partnerships in Sweden, referred PPP as an arrangement between a municipality and
one or more private firms where all parties were involved in sharing risks, profit,
Research Workshop Keynote Paper 125
utilities and investments through joint ownership. The financial participation, based
on the particular PPP model, may be zero for the government or for the private sector,
or any combination of financial sharing. Financial participations by private parties in
PPP reduces pressure on government budgets and because of private sectors‟ finance
and efficiency the projects provide better value for money to the stakeholders.
Box 1: PPP Financing Models
Lease-Build-Operate (LBO): In this model, a private firm is given a long-term lease
to develop and operate an expanded facility using its own funds. It recovers its
investment, plus a reasonable return over the term of lease and pays a rental fee. The
facility remains publicly owned. Example includes Stewart Airport of USA which was
leased by the state to a British Company for a period of ninety-nine years.
Design-Build-Operate (DBO): Here the public authority entrusts the private sector
with the design, construction and operation of new facilities, for a fixed period of time,
however, they remain the property of the public authority. The private operator takes
responsibility for the risks linked to the design and management of the facility. It is
paid a fee by the public authority and commits to an overall cost for the facility‟s
construction and operation.
Build-Transfer-Operate (BTO): A private developer designs, finances, and builds
the infrastructure. Once completed, legal ownership is transferred to the sponsoring
government agency. The agency then leases the facility back to the developer under a
long-term lease. During this time the developer operates the facility and recovers his
investment, and earns a reasonable return from user charges and commercial activities.
Build-Operate-Transfer (BOT): A private developer is awarded the concession to
finance, build, own, and operate a facility. The developer collects the user fees for a
specified period, after which ownership of the facility reverts back to the public sector.
This is perhaps the most common form of PPP for building new infrastructure.
Build-Own-Operate-Transfer (BOOT): Same as BOT except that asset ownership is
with the operator and sold to the Government for either a nominal/ pre-agreed fixed
sum/ market value with a cap.
Built-Own-Operate (BOO): A private developer finances, builds, owns, and operates
a facility in perpetuity under a franchise, but is subject to regulatory constraints on
pricing and operations. The long-term property rights provide a significant financial
incentive for capital investment in the facility. Some examples of this model are the
private toll roads in Virginia and California; the toll road in China connecting Hong
Kong and Macao with Guangzhou; and the „Chunnel‟ under the English Channel.
Numerous power projects and ports in the Philippines and Indonesia are also made
though this model.
Buy-Build-Operate (BBO): An existing public facility is sold to a private partner who
renovates or expands it and operates it in perpetuity under a franchise. This is
equivalent to divesting a company, which then operates under a franchise.
(Continued)
126 Research Workshop Keynote Paper
Box 1: (Continued)
Source: Based on Nyagwachi (2008)
Private sector involvement in the public services is not a new phenomenon now-
a-days. PPPs have been using for over four decades, predating the contracting out
initiatives of 1970s in the USA. Initially focusing on economic infrastructure, PPPs
have evolved to include the procurement of social infrastructure assets and associated
non-core sendees. Gradually, PPPs have extended to housing, health, corrective
facilities, energy, water, and waste treatment etc. PPP policy has also evolved
globally as public sectors develop the necessary skill base to procure infrastructure by
way of PPP, including the capacity to create and maintain a regulatory framework.
The private sector has also become increasingly innovative in several experienced
countries, thereby adding significant value to public procurement. The UK has been a
modern instigator of this wave of private sector involvement. Almost all developed
and developing countries are using PPPs for producing public services now-a-days.
Among other countries India, Canada, Malaysia, Thailand, Cameroon and Chad are
also practicing PPP concept for their development. In Bangladesh, PPP initiative
started in the year 2004, after approving Private Sector Infrastructure Guidelines
(PSIG) and till date several projects have been completed through PPP mechanism.
Financing Techniques/Structure of PPP Projects
As PPP is a contract-driven relationship among the stakeholders, financial
arrangements/structures vary depending on the PPP model. Usually, the sponsor of a
project decides what proportion of equity (owned funds) and debt (borrowed funds)
would be used to finance the entire cost of the project. Sometimes, it may be
governed by the state policy or policy of the financier. Inevitably, the financing
structure depends on the nature & size of the project, capital intensity, promoters‟
capacity, importance of the project to the national economy. There is no prescribed
standard for financing pattern or debt / equity ratios under PPP. But one of the
important factors considered for fixing D/E ratio is the debt servicing ability of the
project. In the case of infrastructure projects, equity holders are primarily sponsors
and minority investors. Investment is done in the form of equity or preference shares.
In the case of availability of state subsidies, it is taken as capital. In some cases
Government injects some funds to promote investment in particular sector(s) in order
Wraparound Addition (WA): A private developer finances and constructs an
addition to an existing public facility and then operates the combined facility either
for a fixed period, or until costs are recovered and a reasonable return on the invested
capital is realized. The developer may own the addition. The objective of this
arrangement is to expand the facility, despite the government‟s lack of resources or
expertise.
Rehabilitate Operate Transfer (ROT): A private sector developer finances,
rehabilitates, maintains and operates a facility for a given period of time, before
transferring the facility back to the public entity at no cost.
Research Workshop Keynote Paper 127
to ensure financial viability of the projects. State subsidies are usually taken as capital
grants. Historically, it is observed that equity contribution in infrastructure projects is
15-30% and the remaining portion is supplied by lenders. The debt funds are
generally term loans which are usually termed as senior debt. Debt for major PPP
projects may be provided either by commercial banks (typically in the form of
syndication/consortium), international financial institutions or directly from the
capital markets18. Debt financing for PPP infrastructure projects is provided either
before or after a project's construction is completed. Construction phase financing
usually comes from local and international commercial banks. Except in Malaysia,
the role of local commercial banks in developing countries in financing Greenfield
private infrastructure projects has been very limited due to weaknesses in credit
appraisal and financing techniques. In addition to institutional weaknesses,
commercial banks in developing countries are usually unable to make long-term
loans because the profile of their liabilities is mostly short-term. This short-term
profile of bank liabilities (deposits) is largely the result of macroeconomic instability
in many countries, especially during the 1980s (Ferreira & Khatami 1996). Table-1
shows sources of financing for PPP projects.
Table 1: Financing Sources for PPP Projects
Sources of Finance Maturity
1. Domestic
Sources
a) Debt
Financing
Domestic Commercial banks
Domestic term lending institutions
Domestic bond markets
Specialized infrastructure financing institutions
3-5 years
7-10 years
7-10 years
b) Equity
Financing
Sponsors Fund
2. External
Sources
a) Debt
Financing
International commercial banks
Export credit agencies
International bond markets
7-10 years
7-10 years
10-30 years
b) Other
External
Financing
International developers (independently or
in collaboration with domestic developers)
Equipment suppliers (in collaboration with
domestic or international developers)
Dedicated infrastructure funds Other
international equity investors
Multilateral agencies (International finance
Corporation, Asian Development Bank)
Usually these
are long-term Financing
Source: Ahluwalia (2006)
18
For raising debt capital directly from the capital markets, project companies issue bonds which are taken up by
financial institutions such as pension or insurance companies which are looking for long term investments.
128 Research Workshop Keynote Paper
The debt form of financing requires interest & principal servicing at monthly /
quarterly intervals, subject to restrictive covenants / prudential norms. The financial
structure may also include other forms of junior debt (such as mezzanine debt which
ranks between senior debt and pure equity). Before financing an infrastructure
project, the lender must assess whether the proposed PPP contract is bankable19 and
whether the proposed financing is desirable. Box-2 focuses on some financing tools
in PPP/private infrastructure projects in some selected countries.
Box 2: Preliminary Financing Tools for Private Infrastructure/ PPP Projects in
Pakistan, Sri Lanka, and Jamaica
Pakistan: Pakistan's Private Sector Energy Development Fund was created in 1988
to support institution building and to provide subordinated debt financing for
limited recourse private power projects. The fund was initially capitalized with a
World Bank loan of $150 million co-financed with $150 million from the Export-
Import Bank of Japan (Jexim), as well as $99 million in loans provided by France,
Italy, and the United States for equipment to be sourced from these countries. The
fund, administered by the National Development Financing Corporation, was
replenished in January 1995 with a $250 million loan from the World Bank and a
$110 million Jexim loan (raised to $250 million in May 1996). France also
provided an additional $10 million loan toward purchases of French equipment.
The fund provides subordinated debt financing (with up to twenty-three years'
maturity with eight years of grace period) for up to 30 percent of the financing of
private energy projects. Project sponsors are expected to mobilize 20-30 percent of
project funds investments in infrastructure in equity and to raise the remaining
funding as senior debt. Although private power projects were the fund‟s initial
focus, it is now financing other private infrastructure, and was recently designated
as Pakistan's Long-Term Infrastructure Credit Facility. In 1997 a newly created
financial institution with a majority shareholding by the private sector will be
assigned to administer this facility. By 1998 the private sector will control about a
third of power generation capacity and supply nearly half of Pakistan's power.
Sri Lanka: The World Bank is helping the Sri Lankan government to promote
limited recourse project financing through a Private Sector Infrastructure
Development Company. This company, modeled after Pakistan's Private Sector
Energy Development Fund, has an all-debt capital structure that includes $70
million from the International Development Association (IDA) and $14 million
from Germany's KfW. Operations began after the IDA credit was approved in June
1996. A pipeline
(Continued)
19
A PPP project is considered bankable if lenders are willing to finance it (generally on a project finance basis).
Research Workshop Keynote Paper 129
Box 2: (Continued)
Source: Based on Ferreira & Khatami (1996)
Project Finance versus Corporate Finance
Usually, PPP projects are financed through project finance arrangements all over
the world. Project financing is generally used to refer to a non-recourse or limited
recourse financing stature in which debt, equity, and credit enhancement are
combined for construction and operation, or the refinancing of a particular facility in
a capital-intensive industry, in which lenders base credit appraisals on the projected
revenues from the operation of the facility rather than the general assets or the credit
of the sponsors of the facility, and rely on the assets of the facility, including any
revenue-producing contracts and other cash flow generated by the facility, as
collateral for the debt (Hoffman 2001).
The concept of project finance is very simple, as it involves a capital investment
on the merits of the asset‟s return. According to Finnerty (1996), project finance is
“the raising of funds to finance an economically separable capital investment project
in which the providers of the funds look primarily to the cash flow from the project as
of projects recommended for funding includes the 150 megawatt Kelanitissa
power plant, a container terminal, a wharf, and a 30-kilometer expressway. Loans
made in U.S. dollars to private sponsors will be at variable and fixed rates and
will have maturities of up to twenty-two years, including up to eight years' grace.
The company should give momentum to private financing of infrastructure in Sri
Lanka. The country's strong export potential in textiles is held back by
infrastructure bottlenecks, and 75 percent of industries and hotels produce their
own power. Independent power producers could easily satisfy this demand at
lower cost.
Jamaica: Jamaica's Private Sector Energy Fund was also designed to promote
limited recourse private investments in infrastructure. The World Bank and the
Inter-American Development Bank each provided $40.5 million loans to help set
up the fund. This money was used to provide a commitment to refinance the
commercial construction debt of the Rockfort private power project. The project
is slated to begin operations in August 1996. In 1998 the project can call a takeout
loan from the fund that will have a twelve-year maturity with no grace period and
a fixed rate equal to a thirty-year U.S. Treasury bond plus 300 basis points. This
arrangement does not prevent the project from testing the market for more
favorable takeout financing, however. The development of the Rockfort power
project and the accompanying changes in the policy and regulatory environment
for the private provision of power have had an important demonstration effect,
thereby improving the prospects for future private power projects in Jamaica.
130 Research Workshop Keynote Paper
the source of funds to service their loans and provide the return on their equity
invested in the project.” According to Nevitt & Fabozzi (2000), “A financing of a
particular economic unit in which a lender is satisfied to look initially to the cash
flow and earnings of that economic unit as the source of funds from which a loan will
be repaid and to the assets of the economic unit as collateral for the loan.” According
to Esty & Sesia (2005), “It involves the creation of a legally independent project
company financed with equity and non-recourse debt for the purpose of financing a
single purpose capital asset, usually with a limited life.” According to Standard &
Poor‟s Risk Solutions (2002), “A project company is a group of agreements and
contracts between lenders, projects sponsors, and other interested parties that create a
form of business organization that will issue a finite amount of debt on inception; will
operate in a focused line of business; and will ask that lenders look only to a specific
asset to generate cash flow as the sole source of principal and interest payments and
collateral.”
There are some basic characteristics of project finance technique which are
highlighted below:
(a) Creation of Separate Entity – Project financing involves a creation of a separate
entity popularly known as Special Purpose Vehicle (SPV). The SPV has a defined
objective and definite life.
(b) Equity Holding Pattern – The project financing structure or SPV is a highly
concentrated ownership structure. It is normally an outcome of partnership or
joint venture between three or four equity sponsors. This format is similar to the
venture-backed companies with the only exception that equity sponsors are not
the managers.
(c) Non-recourse Debt – The debt component provided by lenders is on non-
recourse nature and the lenders have no claim on the equity sponsors for the
repayment of debt service but fully rely on the project cash flows for the debt
service.
(d) Leverage – The project financing deals are highly leveraged deals typically
involving a leverage of 70% and at times going up to 80% or more.
Research Workshop Keynote Paper 131
A typical project finance structure applicable for PPPs is shown in figure-1:
Figure 1: Project Finance Structure
Source: Srivastava and Kumar (2010)
The project finance structure is opposite to corporate lending where lenders rely
on the strength of the borrower‟s balance sheet for their loans. Under traditional
corporate financing, the lenders provide the funds to the parent company (the
investing firm) and then the parent company is investing the funds in the project
assets. Figure-2 shows a traditional corporate finance structure:
Figure 2: Traditional Corporate Financing Structure
Source: Srivastava & Kumar (2010)
In the form of corporate financing, although the financing is done for the project,
but the lender looks at the cash flows and assets of the whole company in order to
service the debt and provide security (Pandey 2005). In case of default, the lenders
Project Investment
Debt Providers Parent Company
Returns Investment
Debt service
Full Recourse Loan
Project
Company/SPV
Contractor Operator &
Maintenance Purchasers
Escrow A/C Suppliers (raw
materials, fuel)
Lenders [ECAs; IFIs; Banks]
(Inter-credit Agreements)
Engineer 3rd party
guarantee Investors
Construction
Contract
O & M Contract
Sales
Contract
Revenues
Debt Service
Payments (2)
O & M
Payments (1)
Surplus (3) Loan
Agreements
Share Subscription Agreement
Dividends
Supply
Contract
132 Research Workshop Keynote Paper
have full claim on the total assets of the parent company including the new project
assets for which the new debt is being issued. In this way the lenders are having full
recourse on the parent company for the payment of debt service. This kind of lending
largely depends on the parent company and not on the project in which the amount
will be invested and the financial credibility and standing of the parent company
plays a major role in deciding the amount disbursed and the conditions and the
characteristics of the loan. The parent company is exposed to risk of the full amount
required for the investment. In other words, the existing shareholders are exposed to a
new additional risk by this act and the claim of the shareholders is further reduced
due to the additional financial risk.
The use of project finance is not a new phenomenon as considered by many.
It has been using since long ago for funding the capital expenditure projects. One of
the earliest recorded applications of project finance is in 1299, when the English
Crown enlisted a leading Florentine merchant bank to aid in the development of the
Devon silver mines. In the seventeenth and eighteenth centuries, the trading
expenditures were also financed by the project finance structures. In the 1970s,
project finance began to develop into its modern form. Now-a-days, project financing
has become a well established financing technique. Chen et al (1989) documented
more than US$23 billion worth of project financing between 1987 and 1989 and
identified 168 projects financed on this format including 102 projects for power
generation. In the early 1990s, privatization, deregulation and globalization have
spurred the use of project finance in both developed and developing countries. In
developing countries, because of limited public funds, the governments decided to
privatize the state-owned companies of infrastructure development. According to
World Bank (2004) study on Public Policy for Private Sector, Private infrastructure,
from 1990 to 2003, investment in infrastructure projects with private participation in
developing countries was US$890 billion. Project Finance loans are also practiced in
the Asia Pacific region. For example, in 2005 project finance loans was US$6.7
billion in this region (Vikas & Kumar 2010). The motivations for using project
financing structure in large scale projects are appropriate risk sharing among project
parties, reduced underinvestment problems, reduced costly agency conflicts,
structured risk mitigation, reduced overall project costs, availability of free cash flow
etc. which are absent in traditional corporate financing method.
As most of the PPP project structures (such as BOT, BOOST, BOLT etc.) are
complex in nature and have limited duration, a PPP company (called SPV) is usually
set up by the sponsors solely for the purpose of the implementation and operation of
the project. The reasons for creating an SPV by the sponsors are to derisk own
balance sheet from high project leverage, create an exit option for equity investors
and perhaps tax structuring. For lenders, it provides a legal and structural separation
(bankruptcy remoteness) of the project from the sponsors and the sponsor's cash
flows are ring fenced from the cash flows of the project as the SPV is a focused entity
Research Workshop Keynote Paper 133
with a limited purpose (cash flow protection). It also restricts additional debt
issuances. The SPV is formed under the Companies Act and is therefore, legally
independent from the parent company. The SPV is different from a subsidiary as
there may be two or three equity sponsors in the SPV and none of them will have
more than 51% stake in the SPV. Project sponsors take an equity stake in the SPV,
depending on project cost and sponsors‟ ability. Normally bankers insist on an equity
contribution of 15-30% of the project cost and is caged "Sponsors Contribution".
As some banks find it difficult to finance at such a high debt equity ratio, to increase
the bankability of projects, the Government is sought to come out with a "Viability
Gap Funding Mechanism". In the form of Viability Gap Funding, Government/
Government Agency gives the SPV an upfront equity support in the form of grant.
This grant can be either positive or negative depending on the importance and
magnitude of the projects. In the form of positive grant, Government contributes
some funds as equity to ensure economic viability of the project whereas SPV may
require to pay upfront money to the Government before bidding for a highly lucrative
project which is called negative grant.
Traditionally, project finance has been undertaken by the bankers using the
corporate finance structure wherein bankers lend to the sponsors and the sponsors put
money in the projects. Bankers are able to get the repayment from the sponsors who
capture the cash flows of the project. Bankers are connected to the project through the
sponsors and therefore, they have recourse on to the balance sheet of the sponsors,
which implies that if anything goes wrong then the sponsors will ultimately bear a
major chunk of the risk associated with the project. Now-a-days, this trend is
changing as the importance and magnitude of infrastructure project finance by
commercial banks are increasing. Banks are increasingly involving in infrastructure
PPP projects through syndicated/consortium form all over the world.
However, in Bangladesh financial institutions/banks still follow corporate finance
structure to finance large/infrastructure projects. Due to lack of commensurate
collateral and uncertainty of futures benefit, commercial banks do not show much
interest to extend fund in infrastructure projects. Moreover, banks carry short-term
liabilities but the infrastructure loans are long-term in nature, usually 10-12 years.
To avoid asset-liability mismatch, banks usually prefer short term finance e.g.,
working capital and trade finance rather than long-term loans which are preconditions
of project finance. However, few banks/ non-banking financial institutions are
financing PPP projects with the help of refinancing facility of IPFF. The financing
structure of IPFF is very distinctive (figure-3). The private sector promoter needs at
least 25% equity contribution to access IPFF loan, whereas PFIs need to finance at
least 15% of the project cost and the rest 60% may be financed by IPFF.
The maximum term of the loan repayment is 20 years with 3-10 years grace period.
The interest rate for PFI is weighted average yield of 1 year Treasury bill plus 30
basis points (if floating loan). Facility loan can also be made in dollar or other
currency with 30 basis points above the relevant interbank rate.
134 Research Workshop Keynote Paper
Figure 3: Financing structure/Fund Flow pattern of IPFF in PPP Projects
Source: IPFF Project Cell, BB
III. Review of Policy Initiatives and Regulatory Environment for PPP Financing
by Banks in Bangladesh
Early Legislations and Policy Issues
The Government of Bangladesh (GoB) has taken a series of measures to
promote PPP to develop infrastructure. In 1996, the government adopted a private
sector power generation policy to shore up private sector participation. In 1997,
under the administrative control of the Economic Relations Division, Infrastructure
Development Company Ltd. (IDCOL) was established in order to facilitate private
sector investments in infrastructure development. In early 2000, the government
established Infrastructure Investment Facilitation Center (IIFC) as an advisory body
of the government under the Economic Relations Division (ERD) of the Ministry of
Finance to promote and facilitate infrastructure projects in the country through PPP.
The objective of creating IIFC is to assist relevant ministries, divisions or agencies
in formulating and screening project proposals as well as providing technical
assistance. Later in 2004, “Bangladesh Private Sector Infrastructure Guidelines”
(PSIG) were issued by the government for rapidly developing country‟s
infrastructure with private sector financing, management and operation. To oversee
the implementation of PSIG, the Private Infrastructure Committee (PICOM) was
formed under the Board of Investment (BOI). PICOM is entrusted with several
responsibilities as promoting private sector participation in infrastructure projects.
In fact, PSIG forms the basis of the current PPP in Bangladesh. After the
introduction of PSIG, there have been some successes in private investments
IPFF, BB
Participating Financial
Institutions (PFI)
Private
Infrastructure Project
Other Financial Institutions
or Private Investors
Project Promoter
60% of project cost
(interest rate 364
days T-bill +30 bp)
60% Debt at Market rate
15% Debt or
Other funding
25%
Equity
Fund Ownership: Ministry of Finance
Implementing Agency: Bangladesh Bank
Research Workshop Keynote Paper 135
through PPP route in the power, gas and telecom sectors. The Government seeks
more investment in these and other sectors such as ports, roads, railway, water
supply, waste management, tourism, e-service delivery etc.
Introduction of PPP within the Budgetary Framework
Allocation of funds by the government in the national budget has encouraged
private sectors in many countries to participate in PPP projects. Over 30 countries
around the world have such initiatives in place, including a number of emerging
economies e.g., China, India, Brazil, South Africa, Chile etc. (Palmer, 2009). For the
first time in Bangladesh, the Government through its national budget for FY 2009-10,
introduced the concept of PPP budget. This is considered as a very strong statement
and commitment for the development of PPP in the country. In the budget for
FY2009-10, BDT2,500 crore (2.2% of the total budget) has been allocated for PPPs20.
In the next two budgets i.e., FY 2010-11 and FY 2011-12, GoB allocated BDT3000
crore for each year for the same purposes. The PPP budget aims to provide support
for upfront development of PPP projects, create a mechanism for targeted subsidies
and set long term financing of PPP projects. In addition, the Government issued a
position paper on PPP, titled; “Invigorating Investment Initiative through Public-
Private Partnership” in June 2009.
Formulation of Complete PPP Policy and Institutional Framework
As a part of the government‟s commitment to flourish PPPs in a large scale, the
Government has formulated the most essential ingredient to the PPP Endeavour, „The
Policy and Strategy for Public-Private Partnership, 2010‟ (on August 2, 2010). The
objectives of this Policy and Strategy are to spell out the principles of partnership
with private sector for undertaking various projects related to infrastructure as well as
public service delivery; to define an institutional framework, which is conductive and
efficient in handling the PPP projects as well as effective to protect public interest;
and to ensure balance between risk and reward for both the government and private
partners while aiming to keep the undertaking attractive for the private sector.
The Government has taken a two-pronged strategy for building PPPs: one is to
attract investment for projects, where building new infrastructure and expanding
existing infrastructure is the major component; the second is to attract innovation and
sustainability of public service delivery to the citizens. While the government is
committed to launch PPPs in a big scale, the essential ingredient to that Endeavour is
to set up a forward looking strategy and a framework for operationalisation of PPPs
as well as clear-cut procedural guidelines for the sake of ensuring transparency and
building confidence among the private sector players.
20
Of the total amount of BDT 2,500 allocated in the budget, BDT100 crore was allocated for Technical Assistance
(TA), BDT300 for Viability Gap Funding (VGF) as subsidy or speed money and the rest of the fund was allocated
for an infrastructure investment fund as loan and equity participation.
136 Research Workshop Keynote Paper
PPP policy of GoB includes a clear cut definition of PPP, applicability of PPP,
sectoral coverage of PPP21, eligibility criteria of private sector, classification
of projects by investment size22, type of financial participations23 of the government
in PPP projects, incentive structure for private investors and institutional framework
for PPP. And, for accelerating identification, formulation, appraisal, approval,
monitoring and financing of PPP projects, a simplified and dedicated institutional
framework has been created as per the provision of PPP policy. This institutional
framework is designed to streamline the approval process, to ensure a smooth and
linear process of approval of proposed projects.
Government has also created „a new window for infrastructure financing‟ called
Investment Promotion and Financing Facility (IPFF) as a separate cell of Bangladesh
Bank (BB) in 2006 as part of its (GoB) policy initiatives to funding and capacity
building facility for PPP projects. IPFF project is co-financed by GoB and the World
Bank (WB). Bangladesh Bank (BB) is implementing IPFF project on behalf of
Finance Division, Ministry of Finance with the objectives of supplementing the
resources of the Bangladesh financial markets to provide term finance for
infrastructure and other investment projects beyond the capacity of local financial
institutions; and promoting the role of private sector entrepreneurs in the
development of capital projects, especially infrastructure. Through IPFF, Bangladesh
Bank is responding to supplement the effort of Government of Bangladesh (GoB) by
encouraging the participation of the private sector through PPP to reduce the
investment deficit especially in power and energy, roads and highways, water supply
and port development. For implementing PPP initiatives, IPFF is mandated to work
with two main components (i) Credit or on-lending component and (ii) Technical
Assistance component. The IPFF project is also being implementing in two phases.
The duration of the first phase is January 2006-December 2011 (5 years) and the
duration of the second phase is January 2012-December 2014 (3 years). Under the
first phase of operation, World Bank has provided US$50 million and GoB provided
US$10 million.24
21
Priority sectors included in the PPP policy are (i) exploration of oil, gas and other mineral resources; (ii) power,
(iii) ports & terminal (airports, sea, river & land ports including deep sea ports), (iv) water supply & waste
management, (v) Highways & expressways, (vi) telecommunications and ICT, (vii) tourism industry, (viii)
economic zone, industrial estates & parts development, (ix) social infrastructure e.g., health, education
development, (x) e-service delivery, (xi) poverty reduction projects, etc. 22
In the „Policy and Strategy for PPP 2010‟, PPP projects are classified into three groups according to investment
size viz., Large Project [having total investment above BDT 2.5 billion (as identified in the pre-feasibility report)
excluding on-going capital for expansion]; Medium Project [having total investment between BDT 500 million and
2.5 billion (as identified in the pre-feasibility report), excluding on-going capital for expansion] and Small Project
[having total investment below BDT 500 million (as identified in the feasibility report), excluding on -going capital
for expansion]. 23
Depending on the nature and model of PPP projects, financial participations of the government may be in at least
3 forms, viz., Technical Assistance Financing, Viability Gap Financing and Infrastructure Financing.
24
Of the total US$60 million of IPFF fund, US$57.5 was sanctioned as Credit/On-lending Component and
remaining US$2.5 million was allocated as Technical Assistance Component in the first phase.
Research Workshop Keynote Paper 137
IV. Status of Financing PPP Projects in Bangladesh and Global Experiences
PPP initiatives started more than a decade ago in the country. Three government
organizations25 are involved in the project implementation by the private sector under
the PPP initiatives. Among the three government sponsored organizations, two
(IDCOL and IPFF) provide direct financial support to PPP projects and the rest one
(IIFC) is responsible for providing expert assistance to relevant ministries, divisions
or agencies regarding project development, project formulation, project design,
technical, engineering, implementation and monitoring related issues for projects
sanctioned by PPP initiative. So far, the direct assistance of these organizations has
enabled implementation of 27 projects (Position Paper on PPP 2009). Currently one
third of the country's power requirements are fulfilled by private sector.
Telecommunication sector has achieved a significant progress by PPP route. Private
mobile telecom operators have made more than billion dollar investment in the
country. There are also some PPP projects under Bangladesh Land Port Authority
(BLPA). Among thirteen land ports, twelve are considered to be operated by private
operators on BOT basis. Some (Sona Masjid and Teknaf) are under operation on
BOT basis and some are still waiting. Through the Government sponsored company
IDCOL, PPP project finance and financial intermediation are conducted. Till date,
BDT13 billion has been financed by IDCOL to 22 projects implemented under PPP
(details of the projects are shown in Appendix, Table-1). Under the auspices of the
IPFF project, 7 small power plants are now contributing 178MW to the national grid
(details in Appendix, Table-3). The total expenditure in the 7 aforementioned projects
is BDT 8.67 billion of which IPFF financed BDT 4.41billion (51% of total
expenditure), private investors financed BDT 2.51 billion (32% of total expenditure)
and participating banks financed BDT 1.46 billion (17% of total expenditure). Till
now, IIFC has been under contract to design 30 projects, provide technical support to
8 projects and consultancy support to 16 projects under PPP. Apart from these
initiatives, some commercial banks have financed BDT 47,094.61 million in PPP
projects (Survey findings, table-2, and page-31).
In the FY2009-10 and onward, the Government already placed six projects for
implementation under PPP, which, in total, would cost some US$13.85 billion or
BDT 951 billion. The projects are Dhaka-Chittagong Access Control Highway at an
estimated cost of US$3.02 billion on BOOT basis, Sky-Train encompassing the
Dhaka Metropolis (estimated cost: US$2.80 billion on BOOT basis), Dhaka City
Subway (estimated cost: US$3.1 billion on BOOT/BOT basis), Dhaka City Elevated
Expressway (estimated cost: US$1.23 billion on BOOT/BOT basis), Dhaka-
Narayanganj-Gazipur-Dhaka Elevated Expressway (estimated cost: US$1.90 billion
on BOOT/BOT basis), and four 450 megawatt gas- or coal-fired power stations at an
25
The government sponsored three organizations are: Infrastructure Development Company Limited (IDCOL)
established in 1997, Infrastructure Investment Facilitation Centre (IIFC) in 2000, and Investment Promotion and
Financing Facility (IPFF) in 2006.
138 Research Workshop Keynote Paper
estimated cost of US$1.80 billion on BOOT/BOT basis. Besides, the Government has
planned to construct smaller link and approach roads, bridges, flyovers, underpasses
and tunnels, university residential halls and hospitals under the PPP. Moreover,
government had earlier decided to construct the Sonadia Deep Sea Port (DSP) under
PPP outside the budget. The DSP project would cost approximately US$3 billion.
In addition, government has decided to build three small scale transportation projects
viz., Bus Rapid Transit (BRT) at an estimated cost of BDT 150 million, Articulated
Bus Service at the cost of BDT 50 million and Bus Route Franchise (BRF) at the cost
of BDT 50 million on BOO model. As the government is committed to accelerate
infrastructure development of the country, it (government) has enlisted some
infrastructure projects to be implemented under PPP. At present, 36 infrastructure
projects (28 power projects and 8 cross section projects) are either in implementation
stage or under consideration for implementations through PPP approach (details of
the projects are in Appendix, Table-2).
As stated earlier, to attract private investments through PPP, government has
introduced “PPP Budget” since FY2009-10 and allocated a lump sum of BDT.25
billion in the national budget. The purpose of allocating fund in the budget is to
ensure some form of financial participations in PPP projects along with the private
sectors. The financial participation of the government in the PPP projects may be in
at least 3 forms (viz., Technical Assistance Financing26, Viability Gap Financing27
and Infrastructure Financing28) depending on the nature of the projects and models of
PPP adopted for a particular type of project. Of the total amount of BDT 25 billion,
BDT.1 billion was earmarked for technical assistance, BDT 3 billion for Viability
Gap Funding (VGF) and BDT 21 billion for setting up an Infrastructure Development
Fund. Considering the importance of PPP, Government has created Bangladesh
Infrastructure Finance Fund (BIFF) which will commence its investment functions in
FY2011-12. Meantime, BDT 1600 crore from the budget allocation of the previous
years has been transferred to this fund and in FY2011-12 proposed allocation is BDT
2500 crore (Budget Speech for FY 2011-12, June 09, 2011).
26
Technical Assistance Financing is designed for the purposes of Pre-feasibility and Feasibility study for projects;
Preparation of RFQ and REP documents; Preparation of concession contracts ; PPP related capacity building in the
line Ministries/implementing agencies and other relevant agencies; PPP related awareness building such as road
show, exhibition etc. 27
Through Viability Gap Financing govt. provides funds to projects where financial viability is not ensured but
their economic and social viability is high. VGF could be in the form of capital grant or annuity payment or in both
forms. VGF in the form of capital grant shall be disbursed only after the private sector company has subscribed and
expended the equity contribution required for the project. The VGF is to be managed by the Finance Division and is
for disbursement to the PPP Project Company, upon request by the line Ministry/implementing agency, as per the
terms of the concession contract. 28
Infrastructure Financing is an arrangement for extending financing facilities for the PPP projects in the form of
debt or equity through specialized financial institutions such as Bangladesh Infrastructure Finance Fund (BIFF) and
Infrastructure Development Company Limited (IDCOL). The government may participate in such financing
arrangements through necessary budget provision.
Research Workshop Keynote Paper 139
Apart from coming forward with financing facilities from own funds (from
budgetary allocation), Government is trying to facilitate financing as well as technical
support to PPP projects in collaboration with multilateral financial institutions such as
World Bank, IFC, ADB etc. As part of the joint effort, Government has created the
IPFF project in collaboration with World Bank to make available partial debt
financing through private sector financial intermediaries for eligible, government-
endorsed infrastructure projects, to be developed by private sector. The IPFF project
seeks to assist the GoB in facilitating new infrastructure projects with potential for
private sector participation and in developing the capacity of the financial sector for
the ongoing provisions of infrastructure finance. So far, IPFF has successfully
completed first phase of its operation by disbursing 100% of its credit line (on-
lending) component amounting US$ 57.5 million (US$47.5 m IDA+US$10 m GoB
fund) equivalent to BDT 422.33 crore to seven small power plants through different
banks and financial institutions (details of the implemented projects are in Appendix,
Table-3). Around 30% of the TA budget of the first phase of IPFF project has been
utilized for capacity building of the PPP stakeholders by arranging a series of PPP
trainings and workshops both at home and abroad29. After being satisfied at the first
phase operation, IDA has sanctioned another US$257 million (US$7 for TA) and
GoB has sanctioned US$ 50 million for the implementation of PPP projects under the
second phase. Under second phase of IPFF, a total of BDT 2100 crore (US$ 300
million) is available for financing eligible PPP projects. Under second phase of the
IPFF project, several projects in different sectors i.e., water treatment plant, inland
container terminal, express ways etc., have already approached to IPFF for funding in
PPP projects. Funding to some of these projects are under process and others are
under evaluation (Appendix, Table-4 details some of the proposed projects).
Although GoB adopted wholehearted initiatives for ensuring sufficient
infrastructure facilities to mass people, the implementation status of PPP projects are
not that much satisfactory compared to those in the developed and developing
countries of the world. Many developed countries have adopted the PPP framework
to facilitate and manage large infrastructure investments. PPP financing technique is
being widely used in the UK, Australia, Canada, and countries across Continental
Europe. For example, the Australian government has successfully used PPPs to
deliver several social infrastructure projects (box-3 shows an example of PPP finance
project in Australia); Ireland has used them for transport and education infrastructure
(box-4 highlights the financing of a bank in school PPP projects); Netherlands have
experienced considerable success in social housing and urban regeneration programs
delivered through PPP; India is investing heavily in highways through PPPs; Japan
29
Till January 2011, 7 local workshops were arranged for awareness creation about PPP where 232 participants
from different FIs, ministries and executing agencies attended; 9 intensive training courses were arranged to train
264 officials of both public and private sectors and 12 foreign training programs were arranged in different
renowned PPP training institutions of USA, Canada, UK, Korea, Philippine and India where 49 officials from
relevant ministries, planning commission, Bangladesh Bank and FIs took participation. (Source: IPFF Project Cell,
Bangladesh Bank).
140 Research Workshop Keynote Paper
has around 20 new PPPs in the pipeline; in Canada, 20% of new infrastructure is
designed, built and operated by the private sector; USA is a pioneer with contracting
out and have started experimenting with other forms of PPPs; emerging democracies
from central Europe are also doing good. In this regard, the former Prime Minister of
Czech Republic, Jiri Paroublek, rightly mentioned that "just like any other market
economy, we are trying to multiply our economic potential and implement projects
for which the public sector alone has neither the strength nor the resources". In recent
years, the Czech Republic has achieved significant progress in PPPs.
Box 3: An Example of Financing Structure and Technique of PPP Project in Australia
Hills M2 Motorway Australia
Hills M2 is a 21 km, four-lane motorway that links the lower north shore and the northwest
regions of Sydney, Australia. This $644m toll road opened to traffic in May 1997 and is
now a key part of the Sydney motorway network.
In Hills M2 Motorway, the sponsors and institutional financiers have provided equity
through a combination of shares in the Australian Stock Exchange, infrastructure bonds
and a 15-year syndicated bank loan. Two economic entities were established for the
development of the project: Hills Motorway Limited (HML) and Hills Motorway Trust
(HMT). HML is a listed company, which was granted a concession (the project deed) and
was responsible for the implementation of the project. HMT is a listed unit trust, which
was the sole borrower for the construction and project loan facilities provided by the
lenders, and the issuer of the CPI bonds. HMT issued CPI indexed bonds in two tranches of
A$100m each in December 1994 and June 1996, with terms of 27 and 25.5 years
respectively and also borrowed a traditional bank debt facility of around A$120m. Then the
proceeds of bonds and debt facility were lent to HML for the construction of Hills M2
Motorway. Upon completion of the construction phase the project sponsors will jointly
invest A$30m in equity. HML entered into a turnkey contract with a contractor for the
construction of the motorway and an operation contract with an operator for the operation
of the motorway. This dual corporate structure was developed to meet the different needs
of the debt and equity providers.
In this dual-corporate structure, there is a trap for unwary lenders. If the trust allows its
funds to be linked to the project company without any security, debt security will suffer. In
Hills M2 Motorway, the trust-and-company structure hid the investable inevitable losses by
allowing the trust funds to be linked to the company without any security. While the
company and trust are distinct legal entities, those entities must effectively be controlled by
people at the board level.
Source: Based on Akintoye & Beck (2009)
Research Workshop Keynote Paper 141
Box 4: Bank of Ireland Finances School PPP Projects
The Irish Government is keen to promote the domestic PPP market for social infrastructure
development in the country and it (the Government) encourages private sector including
financial institutions to implement the agenda. The Government has made the country‟s
PPP market very much „open for business‟ for international bidders and funders. Bank of
Ireland is fully committed to supporting current and future Irish infrastructure projects
being promoted by Government Departments and State Agencies. As part of its continuing
effort for PPPs, the bank has arranged a debt financing package of €100m for the
construction and maintenance of six schools over a period of 25 years under the
Department of Education and Skills' Schools Public Private Partnership (PPP) Programme.
As the lead arranger, Bank of Ireland has raised the fund along with NIBC Financing NV
and the European Investment Bank (EIB). The project will be developed by a consortium
comprising Macquarie Partnerships for Ireland, Pierse Contracting and John Sisk & Son
Ltd. Pierse and Sisk will construct the schools. The construction of the five secondary
schools and one primary school will result in up to 1,000 jobs and, when complete, will
create approximately 4,500 new school places. The schools are in counties Cork, Limerick,
Wicklow, Kildare and Meath.
Bank of Ireland is also a lead funder of the recently opened M7/M8 Motorway PPP. The
first Schools PPP project and the State's first Motorway Service Areas project, both of
which were funded by Bank of Ireland, will be open 2010. The bank is also supporting
bidders across a range of other sectors and projects including education, rail and road PPPs
Source: Based on Bank of Ireland‟s Press Room Report (2010)
(http://www.bankofireland.com/about-boi-group/press-room/press-releases/item/36/bank-of-ireland-finances-
schools-ppp-projects/ )
In the developing world, PPP is being increasingly used in India, China, and a
number of countries in Southeast Asia and the Middle East. In particular, PPP
investments have witnessed spectacular progress in India, Bangladesh‟s closest
neighbour, since that country took the initiative a decade ago. India has currently $27
billion worth of PPP projects under implementation and has plans to implement
another $500 billion in the next five years. As far as current status of projects is
concerned, there have been 758 PPP projects in different sectors that are either
operational, have reached construction stage, or at least construction/implementation
is imminent. The total cost of these projects is estimated to be about Rs.383,332.1
crore (PPP Database of India, 2011)30. Besides, more than 900 projects are in
pipeline across the states which would be implemented by 2015 (Box-5 shows an
example of PPP Finance Project in India). Sri Lanka is also moving forward to PPP
initiatives for accelerating infrastructure development especially in electricity and
port sectors. Since 1995, the Sri Lankan Government has actively sought private
sector participation in the development of port infrastructure through partnerships in
the form of either Build-Own-Operate (BOO) or BOT transactions. A major
milestone was reached in 1999 when the Government took necessary steps to
30
Public-Private Partnerships in India, Ministry of Finance, Government of India, 2011
(http://www.pppinindia.com/database.php)
142 Research Workshop Keynote Paper
modernize and increase the facilities of the Colombo port through a PPP mechanism.
The expansion and modernization of the port completed in 2003 and since then the
port is meeting the increased demand of the regions with quality services. Today the
Colombo port is rated as one of the top 35 ports in the world. By realizing the
continuing role of PPPs, the Government established a separate PPP Unit within the
Board of Investment (BOI) in 2006 to facilitate PPP projects in the country. The
investment in PPP projects over the last fifteen years in Sri Lanka amounts to 15
projects with total investments of US $1651.9 million31. Some African nations are
also adopting PPP for infrastructure development. For example, in Africa, between
1990 and 2004, approximately 14% of public sector infrastructure was provided
through a PPP, the most common sectors being water, energy and transport (Deloitte
2006). It is observed that increasing number of local authorities is engaging in PPP
arrangements to produce much needed services. Instances of successful PPP efforts
can be cited from other parts of the world as well, from which lessons can be drawn
for Bangladesh.
Box 5: An example of Financing PPP Project in Indian Transportation Sector
Delhi Gurgaon Expressway
The Delhi Gurgaon Expressway is one of the successful PPP projects in India
which has converted the existing 4 lanes of the NH-8 into 8/6 lanes access
controlled expressway for connecting Delhi and Gurgaon. The purpose of the
expressway is to augmenting the capacity of the National Highways (NH)
connecting the four metros (Delhi-Jaipur-Ahmedabad-Mumbai) under the
prestigious Golden Quadrilateral project to ensure safe and efficient movement of
vehicles by avoiding traffic congestion. The expressway consists of 9 flyovers, 4
underpasses and 2 foot-over bridges and 3 toll-plazas. The project has been
implemented by forming an SVP called Delhi Gurgaon Super Connectivity Ltd. on
Build-Operate-Transfer (BOT) basis. The total cost of the project was Rs. 1,175
crore and concession period is 20 years. The Financial Structure of the project
includes debt of Rs. 383.3 crore and equity of Rs. 164.2 crore (including Rs. 61
crore of grants from National Highways Authority of India which acts as public
body here). Of the debt, Rs. 200 crore was provided by Housing and Urban
Development Corporation Limited (HUDCO), Rs. 100 crore was extended by four
commercial banks and the rest of the amount was raised by the SPV by issuing
convertible debentures. Equity was provided by the two sponsors at the ratio of
51% by Jaiprakash Industries and 49% by DS Constructions. Project cost overrun
was arranged by the sponsors. The fund providers will get revenues from the tolls
paid by the users of the expressway.
(Continued)
31
Source: Central Bank of Sri Lanka Annual Report-2005, (www.riunt.com)
Research Workshop Keynote Paper 143
Box 5: (Continued)
Source: Based on PPP Toolkit (Case studies) (2010)
(http://toolkit.pppinindia.com/water-sanitation/module3-rocs-dge1.php?links=dge1http://toolkit.pppinindia.Com/
water-sanitation/module3-rocs-intro.php?links=rocs1)
V. Initiatives of Banks in Financing PPP Projects in Bangladesh: Survey
Observations
Banks Response to PPP Policy
For encouraging PPPs to accelerate infrastructure development of the country, the
Government has already enacted „The Policy and Strategy for PPP‟ in 2010 for
operationalisation of PPP and also has introduced clear-cut procedural guidelines for
PPP projects for the sake of ensuring transparency and building confidence among
the private sector players. Successful application of PPP concept through this “Policy
and Strategy” document is likely to open up the doors for increased flow of
investment from both local and foreign investors. The policy and guideline for PPP
has already been circulated for mass awareness and concerns. As a vital organ of the
country‟s economic and financial system, banking industry is already familiar with
the policy. It is evident from the survey that all banks are well aware of the „Policy
and Strategy for PPP 2010‟ circulated by Government. In response to the question of
whether the „PPP policy is good enough to encourage PPP initiatives‟, it was
observed that majority of the bankers (78%) think that the policy, as whole, is
sufficient to enhance infrastructure development through PPP model if proper steps
are taken to materialize the objectives. But 39% of the respondents claimed that the
policy has some limitations. They think that the policy did not elaborate on how
banks would be involved in PPP projects. According to their opinion, the existence of
some gaps to address the financiers may fail to attract the banking sector to
participate in financing PPP projects.
Some of the respondents said that the project selection, feasibility and approval
process detailed in the PPP policy for each project and contract is extensive, requiring
inputs and approvals from various authorities and external parties. As per the policy,
the timeframe between project identification and negotiation and contract award
requires approximately 26-52 weeks for large projects, 22-42 weeks for medium
projects and 14-28 weeks for small projects, the timeline of which may be relaxed
under special circumstances. In order to be more attractive to private sector investors,
the process should be shortened. Critical dependencies on approvals in the process
may also be revisited to the extent possible to make the exercise more time-efficient.
The expressway is fully operational and is handling a significant traffic volume
of more than 180,000 PCUs (Passenger Car Units) per day (as compared to
estimated 13,000 to 15,000 PCUs per day), growing at 9% year-on-year. The
expressway has reduced the travel time from 65 minutes to 25 minutes between
Delhi and Gurgaon by increasing average travel speed from 25.65Km/Hr to
66 Km/Hr.
144 Research Workshop Keynote Paper
To attract private sector investors to PPP projects, the Government will need to
provide an incentive package at least in the early stage of development of such
initiatives. This is because private investors generally are interested in investing in
only those projects from which they can earn good return in the short run, but many
infrastructure projects may not be commercially viable or may not offer the best
return in the short run. There are, in fact, projects where economic benefits are more
substantial than immediate financial gains. In order to attract the private sector to this
type of projects, Government will need to provide financial subsidies and some other
types of support, including guarantees against political risk and protection against
certain events of force majeure.
In the PPP Policy, there are provisions of some incentives such as fiscal
incentives (e.g., tax exemption, reduced tax) and special incentives for the private
sectors to participate in PPP projects. But, on an average, 50% of the bankers feel that
the incentives are not sufficient to attract the private sector initiating and financing
PPP projects, whereas 44% of them believe that the incentives are sufficient. Some
of the respondents pointed out the facts that fiscal and special incentives are not
clearly detailed in the PPP policy. Under fiscal incentives, further detailing the extent
and tenor of the proposed tax exemptions/reductions would provide more clarity to
private sector investors in making their investment decisions. In addition, as further
incentives to private sector investors, the policy may consider reductions or
exemptions in tax on interest/returns received on investment.
According to the survey findings, 67% of the respondents claimed that there is a
serious lack of coordination between Participating Financial Institutions (PFIs) and
implementing agencies/line ministries regarding providing relevant information about
PPP projects, bidding process, project feasibility study etc. In this regard, some of the
bankers believe that to minimize the potential gaps between PFIs and implementing
agencies, the potential private investor input and opinions may be considered during
the selection of consultants for the Detailed Feasibility Study (DFS) by the Office for
PPP to ensure transparency and avoid information asymmetry. The policy may also
consider a basic set of universal pre-qualifications to supplement the Request for
Qualification (RFQ) process and eliminate the need to evaluate investors who do not
meet the qualification criteria upfront.
It should be remembered that the major partner in the PPP framework is the
private sector. The public sector‟s participation in PPP should mainly be as a
facilitator. Hence, in order to make the PPP concept meaningful and effective, rules
and regulations governing the PPP mechanism should be framed in line with that
same partnership spirit so that there is an equitable sharing of profits/losses between
the two partners. To attract the private sectors to participate in PPP projects and
hence taking full advantages of the PPP initiatives for accelerating economic growth,
the public sector has to play the dominant role without being biased. Majority of the
respondents put their opinion by emphasizing that the Implementing Agencies, Line
Research Workshop Keynote Paper 145
Ministries and Office for PPP should ensure complete information transparency with
regard to the DFS, implementation/monitoring reports, utilization of funds and
ongoing developments during the implementation process. The relevant parties
should also minimize decision making time in case of unforeseen circumstances and
delays to prioritize project completion in as timely a manner as possible. Some of the
respondents believe that relaxation of single borrower exposure limit, treating PPP
investment as bank‟s CSR activities, role of public party as a facilitator and one stop
service provider (who would take care of all necessary government approvals,
information etc.) would stimulate the private financiers to engage in PPP projects.
PPP Financing by Banks
The banking and financial sectors have indeed come of age and are capable of
affording huge financial arrangement through syndicated term loans32. Now, banks
are planning to finance big infrastructure projects under PPP programs and already
some of them have financed a few projects completed under PPP framework (some
examples of PPP projects financed by banks are in Appendix, Table-3). The survey
results show that 60% (12 banks out of 20 banks selected for the study) of the banks
have exposure in PPP projects and some of the rest of the banks are yet to finance
PPP projects. The following table (table-2) shows the amount of loans extended to
PPP projects by banks in different sectors.
Table 2: Amount of Loans to PPP Projects by different Banks
Name of Banks Amount of Loans (Tk. in millions) Prime 3,900 DBBL 1343.3 NCC 2230 Dhaka 1075 BRAC 30 EBL 775 UCBL 6300 Mercantile 200 IFIC 110 Janata 28,901.31 IBBL 2230 Total 47,094.61
Source: Survey findings
32
Bangladesh Bank Governor Dr. Atiur Rahman commented on the proven capacity of Banking and Financial
sectors to arrange large amount of syndicated term loans at the closing ceremony of the deal of US$114.49m
syndicated loan for Biman's two B777-300ERs purchase. EBL has arranged the loan along with other 9 banks.
Report: The Daily Star, May 6, 2010.
146 Research Workshop Keynote Paper
From the survey it is observed that majority of the banks prefer to finance the
power sector. The reason behind their preferences in power sector is the certainty of
revenue/cash flow as Government purchases the output and they feel secured
financing here. According to the survey, 56% of the banks‟ investment goes to
power sector and land ports and water treatment plants captured 22% each of the
funds equally.
Refinancing Facility availed by Banks from IPFF in Financing PPP Projects
Some of the banks involved in PPP financing have availed of refinancing facility
from IPFF Cell of Bangladesh Bank for on-lending in PPP projects. IPFF is a project
co-financed by the World Bank and the Government of Bangladesh and mandated to
extend financing facilities to infrastructure projects undertaken through PPP. It
provides fund to PPP projects through Participating Financial Institutions (PFIs) as
refinancing scheme. For enjoying refinancing facilities from IPFF, a bank/FI needs to
be enlisted with IPFF as a PFI33. From the survey, it is found that 55% of the banks
are listed with IPFF as PFI, 35% are not listed. Surprisingly, 10% of the surveyed
banks are not interested to be enlisted with IPFF. The banks which are not interested
to be enlisted with IPFF are Islami Shariah based banks. Being Islami Shariah based
bank they, in principle, cannot take refinancing from any bank/FI/source at
conventional mode of interest bearing rate and condition. Among the 11 commercial
banks enlisted as PFI with IPFF, 4 banks have already availed of refinancing facility
to finance seven power projects being implemented under PPP model, four banks did
not enjoy the facility and one bank is yet to get the refinancing facility. Table-3
shows the amount of refinancing facility availed of by four banks for subsequently
lending in PPP power projects.
Table 3: Amount of Refinancing Facility Enjoyed by Different Banks to
Finance in PPP Projects
Name of Banks Amount of Refinancing (Tk. in millions)
DBBL 1074
NCC 1780
Dhaka 670
EBL 620
Total 4,144
Source: Survey findings
33
As on January 2012 a total of 18 banks and financial institutions are listed with IPFF as PFIs. Of them, 11 are
commercial banks (DBBB, Dhaka Bank, EBL, NCCBL, Prime Bank, BRAC Bank, Trust bank, MTBL, The City
Bank, AB Bank and UCBL) and remaining 7 are NBFIs (IDLC, ILFSL, Prime Finance & Investment, ULC, Uttara
Finance & Investment, IIDFC and GSP Finance Company).
Research Workshop Keynote Paper 147
IPFF provides loans to PFIs for supporting PPP projects according to its
Operational Directives (OD) and some terms and conditions. Specifically, IPFF cell
provides loans to a PFI upon request of private investor to the PFI for such loan. PFI,
upon receiving request from the private investor makes an application to IPFF cell for
funding. IPFF cell considers the application based on the operational directives of the
facility and disburses the fund to PFI, and PFI then extends the same to the private
investor. Thus, the financing by IPFF cell often involves a lengthy process and time
to reach PFI and then subsequently to the promoter. IPFF follows specific financial
model/norms while providing loan to PPP projects. According to IPFF financial
model, the private sector promoter needs at least 25% equity contribution to access
IPFF loan, whereas PFIs need to finance at least 15% of the project cost and the
remaining 60% may be financed by IPFF. The maximum term of the loan repayment
is 20 years with 3-10 years grace period. The interest rate for PFI is weighted average
yield of 1 year Treasury bill plus 30 basis points (if floating loan). Facility loan can
also be made in dollar or other currency with 30 basis points above the relevant
interbank rate.
Figure 4: IPFF Fund Flows to PPP Projects
Source: IPFF Project Cell, Bangladesh Bank
Although IPFF follows stringent terms and conditions in extending loan to PFIs
for on- lending to PPP projects and the PFIs need to undergo a rigorous operational
procedure, most of them feel comfortable to work with IPFF and see the refinancing
scheme as stimulatory for enhancing PPP initiatives in the country. It is found from
GoB & WB
IPFF Project (BB)
Private Investor
PPP Infrastructure Projects
Participating Financial
Institution (PFI)
IPFF Loan
Request for
No Objection
from WB
IPFF Loan
PFI‟s Loan & IPFF Loan
Facility Loan, other FIs Loans & Investors Equity
Request for
Fund
Request for
Fund
148 Research Workshop Keynote Paper
the survey that 72% of the PFIs feel comfortable at the operational procedures and
17% has claimed that operational procedure is lengthy and complex. In terms of
assuming credit risk of PPP projects under such financing modalities, IPFF/WB is
absolutely reluctant. Under the stipulated refinancing terms and conditions, PFIs
have to bear 100% credit risk arising from the default by the project sponsors. The
PFIs have to give repayment guarantee of the entire loan to IPFF if project sponsor
fails to meet obligations. Because of absolute credit risk, many banks are not
interested to be enlisted as a PFI with IPFF for getting refinancing for subsequent
lending in PPP projects.
“The commercial banks may invest in infrastructure sectors through syndication
loans along with the Government”34. PPP can be an ideal strategy to finance
infrastructure projects as an alternative to industrial lending. In an opinion survey
conducted by the author on the top management executives of different banks, it was
found that banks are willing to finance roads, railways, mega power plants, ports and
bridges. Even banks are interested to finance PPP projects without taking support
from any external sources. According to the survey results, it was found that 60% of
the banks are interested to extend loans to PPP projects without taking refinancing
facility from IPFF, but 33% of the banks are not willing to finance PPP projects with
their own fund. „Asset-Liability Mismatch‟ and „Single Borrower Exposure Limit‟
have been pointed out as the two major limitations for banks to provide loans in PPP
projects. As banking is the business of running short, i.e., banks do bulk of the
borrowing for short-term and lend for medium and long-term and thus make profit.
As a result, banks always face risk arising from asset-liability mismatch. And, as
financing tenors in PPP projects are usually medium to long-term, asset-liability
mismatch risk would be more severe in such cases. Moreover, banks have single
borrower exposure limits which may be violated in case of financing PPP projects.
Although single borrower exposure limit may a potential problem for banks in
financing PPP projects, they can solve this problem by way of lending in syndicated
mechanism. According to survey observations, only 11% of the banks assume that
„single borrower exposure limit‟ may be a problem in financing PPP projects,
whereas 78% of the banks feel that „asset-liability mismatch‟ would be a major threat
in financing PPP projects. As banks are eager to extend financing in infrastructure
projects through PPP modalities, they can raise medium to long-term funds from
different sources. According to the survey observations, it was found that banks are
interested to borrow from NBFIs (such as IDCOL), insurance companies, pension
funds that usually have the capacity to lend for long-term. They have also identified
some other sources of long-term fund. For example, they want to issue different types
of financial instruments such as bonds/debentures to raise funds for PPP projects if
regulatory authorities allow them.
34
Bangladesh Bank Governor Dr. Atiur Rahman emphasized on banks investment in infrastructure projects in
partnership with government while speaking at a discussion meeting. Report: The Financial Express: Vol. 18,
No. 221 Dhaka, April 30, 2010.
Research Workshop Keynote Paper 149
Preparedness of Banks to Finance PPP Projects
PPP financing involves complex contractual arrangements as well as risk
management strategies and techniques. This requires special knowledge in legal and
contractual aspects, expertise in project feasibility study and financial modeling, risk
mitigation techniques etc. For handling PPP projects, banks need expert and
dedicated manpower along with appropriate organizational set up. At this moment,
majority of the banks have required but not sufficient manpower to handle PPP
projects. The survey shows that 67% of the banks have preparation with required
organizational set up to deal with PPP project financing and remaining 33% of the
banks are not prepared to undertake PPP projects. Although 67% of the sample banks
has claimed that they are capable to handle PPP projects with their existing
organizational set up and manpower, 95% of the banks do not have separate unit/cell
for handling PPP projects/infrastructure projects.35 As previously mentioned, 11
banks have investment in PPP projects (Table-2) but they did not follow/formulate
any policy for PPP financing. They have disbursed loan to PPP projects according to
their existing credit policy. According to survey information, no bank has formulated
any PPP financing policy within the bank yet. But 39% of the banks have started
policy level discussion/meeting internally to formulate separate policy/guidelines for
financing PPP projects. This indicates that banks are planning to participate in PPP
projects in future.
As PPP is relatively new in Bangladesh and it calls for special organizational set
up and expert manpower to accomplish success, bank executives require training on
PPP policy issues, PPP theme, project evaluation process and feasibility study,
financial structuring, legal aspects, project documentation, risk management
strategies etc. According to survey observations, 40% of the banks have already
arranged different training programs on PPP financings for their employees.
Problems faced by Banks in Financing PPP Projects
PPP Initiative will be successful only if there is a high level political support
behind it. Large infrastructure projects need a relatively longer period for their
implementation. Governments may, however, change in the regular election cycle
during the implementation phase of the project, and with that, their attitude to PPP
investments may also change, as has often been the culture in many developing
countries. Hence, in order to ensure policy continuity over time irrespective of any
change in the political power regime, the Government should make strong efforts to
build consensus among, and obtain support of, all political parties and representative
civil society groups about the needs and imperatives for large PPP projects for the
country‟s economic development. A broad national consensus on the concept of PPP
will also boost the trust and confidence of investors. It will also generate interest
among overseas entrepreneurs to invest in the PPP projects and enhance opportunities
for getting more foreign direct investment in the country.
35
As on November 30, 2011, only one commercial bank (NCCBL) has separate unit/cell for handling PPP and
infrastructure projects financing.
150 Research Workshop Keynote Paper
Banks that have already financed PPP projects have pointed out some problems.
The major hindrances as identified by banks are lack of proper policy direction to
banks, how banks will participate in PPP projects, specification of incentives and
their extents, lack of political stability, lack of their expertise to ascertain cash flows
from the projects etc. According to survey information, it is found that 56% of the
banks feel less confident in financing PPP projects due to their fear of political
stability in the country, 39% of the respondents claimed that the „PPP Policy &
Strategy 2010‟ has not clearly mentioned how the private sector will arrange the
required financing for the PPP projects and what will be the financing role of banks,
44% mentioned that they have lack of expertise to handle PPP projects and 27% feel
that they faced some sort of uncertainty of future cash flows generation. Of the
respondents, 22% pointed out some additional problems viz., fund constraints, delay
in execution of PPP policy & guidelines, lack of cooperation of the implementing
agencies/line ministries, etc. (figure-5)
Figure 5: Problems faced by Banks in Financing PPP Projects
Opinions and Suggestions by Banks for Enhancing PPP initiatives in Bangladesh
PPP is operationalized through a bilateral relationship between a public body and
a private sector company and successful project implementation entails a win-win
situation for all. So, for fruitfully implementing PPP initiatives for infrastructure
development and hence accelerating desired economic and GDP growth, both public
and private sectors have to work side by side. At the initial stage of adopting new
financial avenues i.e., PPP for accelerating infrastructure development of the country,
it is expected that the public sector has to play a proactive role. From the survey
conducted on the banks, it is observed that they also demand proactive role from the
public sector in PPP initiatives. The survey results show that 90% of the banks expect
better coordination between public and private parties which is currently lacking.
22%
56%
27%
44%
39%
Other problems
Problem faced due to lack of political stability
Problem faced due to Uncertainty about CFsprojections
Problem faced due to Lack of Expertise tohandle PPP
Problem faced due to lack of legal ®ulatory support
Problems faced by Banks in Financing PPP Projects
Lack of Legal & Regulatory Support
Lack of Expertise to Handle PPP
Uncertainty about CFs Projections
Lack of Political Stability
Other Problems
Research Workshop Keynote Paper 151
Among the respondents, 85% emphasizes on the execution of institutional framework
for PPP (main focus on starting operations of the „Office for PPP‟), 72% expects that
the concession granting authority will ensure transparency in project awarding and
implementation, 65% of the respondents desire proactive role from the public body
i.e., public party would explore new projects to be implemented through PPP and
invite the private parties to implement the projects, 57% focuses on creating
awareness among the stakeholders about PPP. Of the respondents, 40% wants the
refinance granting authority (here IPFF/WB) to share part of the credit risk likely to
arise from nonpayment of loan by the project sponsors which is absent in current
refinancing terms and conditions. And, 35% of the bankers prefer equity
participations of the Government in PPP projects. Figure-6 summarizes the opinions
provided by banks in this regard.
Figure 6: Opinions and Suggestions by Banks to enhance PPP Initiatives
VI. Observations and Recommendations
The PPP is a major policy initiative by the Government and, if properly
implemented, it would help mobilize required resources for financing large and costly
but much demanded infrastructure projects. The success of the initiative would,
however, depend on a number of factors, as the experiences of many developed and
developing economies indicate. The following issues and recommendations can be
placed here for meeting the challenges of the PPP initiatives and adopting the new
financing technique for accelerating infrastructure development of Bangladesh.
One, it is necessary to have an appropriate legal and institutional framework
to govern the PPP mechanism. The legal framework would lay down the obligations
of the private sector partners, allow provisions for cost recovery and address
35%
65%
90%
85%
57%
72%
40%
Equity Participation by Govt.
Proactive role of Govt. to implement PPP…
Better Coordination between Public &…
Execution of Institutional Framework for…
Building Awareness among Stakeholders…
Ensure Transparency in Project Awarding…
Credit Risk Sharing by IPFF/WB and PFIs in…
Opinion to Enhance Banks Initiatives in PPP Financing
152 Research Workshop Keynote Paper
compensation and redress mechanisms. Global experience suggests that the most
successful PPP projects are those that are managed under a legal/ regulatory
framework, not under executive guidelines. The GoB has already enacted a complete
PPP Policy and Strategy for governing the PPP mechanism. But the policy did not
elaborate on how banks/FIs would be involved in PPP projects, what would be their
appropriate role in PPPs etc. The policy may be revisited or a separate manual under
„The Policy & Strategy for PPP 2010‟ may be issued by mentioning the specific role
to be played by the financiers in PPP projects. In addition, various guidelines
directing VGF and TA components of PPP projects, PPP screening manual etc. may
be published as soon as possible for better understanding of the stakeholders.
Moreover, as the regulator of commercial banks, Bangladesh Bank may formulate a
uniform guideline for the scheduled banks regarding the participation modalities of
the banks in PPP projects.
Two, the policy may consider standardizing a subset of Key Performance
Indicators (KPI) to effectively monitor project implementation and contractual
obligations, as well as standardize processes and procedures in case of breaches, as
opposed to case-by-case situations based on each signed contract. In addition, the
policy may consider adding the requirement for the technical expertise of a third
party to contribute to the implementation phase of the Periodic Progress Report
prepared by the Office for PPP and/or the reports prepared by the respective line
ministries. Project and legal documentations should also be standardized so that
vetting from government agency can be avoided. This may ensure transparency and
accountability of the public party as well as encourage the private parties towards the
PPP deals.
Three, in order to strengthen PPP efforts, implement the PPP budget and
coordinate the project‟s stakeholders, a dedicated and fully operational PPP Cell is
necessary. The PPP cell would work as a one stop service provider (i.e., it would take
care of all necessary government approvals, information, coordination among
stakeholders etc.). Under the current PPP Policy and Strategy, an Office for PPP has
been established as a separate entity under the Prime Minister‟s Office for the
promotion and efficient handling of PPP projects. The Office for PPP has been formed
as an autonomous unit having significant independence on administrative and financial
matters in discharging its mandated functions. The PPP office is supposed to efficiently
carry out the diverse tasks of choosing between alternative modes of project
implementation, completion of projects on an expeditious basis, project supervision,
and providing inducements to potential private sector entrepreneurs to participate in
PPP projects. The office would also carry out the tasks of project identification,
conducting feasibility studies, inviting bids, expediting the project approval process,
issuing work orders, evaluating financial and economic viability of PPP projects,
maintaining coordination among various committees etc. The PPP Office will therefore
need to be staffed with technically skilled and experienced personnel with specific
Research Workshop Keynote Paper 153
knowledge on the technicality of these implementation methods, and the design,
financing and management of the projects. Unfortunately, still now the PPP Office is
not fully equipped with necessary resources and manpower and has not started its
function yet. For accelerating the PPP initiatives from the Government‟s side, the PPP
Office should be fully operationalized as soon as possible.
Four, it has been observed from the field survey that there exists a coordination
gap among private sponsors, participatory financing institutions (PFI) and
implementing agencies/line ministries which are creating some sort of barrier for
promoting PPP financing in Bangladesh. In this regard, implementing agency/line
ministry should be proactive with respect to providing adequate information to all the
concerned parties about the status of the projects. If required, inputs and opinions of
potential private investor may be considered during the selection of consultants for
the Detailed Feasibility Study (DFS) by the Office for PPP for ensuring transparency
and avoid information asymmetry. The policy may also consider a basic set of
universal pre-qualifications to supplement the RFQ process and eliminate the need to
evaluate investors who do not meet the qualification criteria upfront. In fact,
elimination of gap regarding project screening, approval, implementation,
management etc. may encourage the private parties including banks towards PPP
projects and ensure transparency as well.
Five, as PPP projects are large in size and the implementation of those is very
much challenging, the selection of private sector partners must be done strictly on the
basis of their financial and technical capacity. Project awarding should be transparent
and unbiased. In this regard, instead of direct negotiation, the choice of private sector
partners shall need to be made through a transparent and competitive bidding process
following international standard. This would ensure creditworthiness of PPP projects.
The selection criteria of private sponsors done by line ministry/implementing agency
should also meet the criteria desired by the financiers (lenders).
Six, one of the critical factors of the success of PPP initiatives will be the
capacity of the private sector partners to raise resources for the project. As stated
earlier, the ratio of private and public sector investments in PPP projects is assumed
to be 70:30, i.e., 70% of the project‟s funding will be arranged by private parties and
remaining 30% will be arranged by the public party. However, the capacity of the
domestic private sector to raise long-term finance for large infrastructure projects is
rather limited. It may not be possible to attract large foreign investments at this
moment due to unfavourable investment environment in the country and, moreover,
huge foreign investment as well as their involvement in PPP projects may create
pressure on balance of payments as foreign currency would be repatriated in future.
Government may search for financial and technical participation of multilateral and
regional developments banks (i.e., World Bank, and ADB) for PPP projects, but the
terms and conditions of getting funds from these organizations are not satisfactory at
154 Research Workshop Keynote Paper
times. Moreover, there are lots of uncertainties of getting funds from them as we
experienced the phenomenon from some recent events (like funding uncertainty for
proposed Padma Bridge). In this context, it may be expected that domestic financial
institutions, especially commercial banks, can mobilise a major portion of funds to
PPP projects. But commercial banks that usually deal with short-term credits are
unlikely to be willing to provide infrastructure loans for longer terms of 10-15 years
or more. Because of asset-liability mismatch, they will face liquidity risk. Single-
borrower exposure limit will also be a problem for the banks. However, if banks are
allowed to issue bonds for raising funds for PPP projects and they get some sort of
guarantee either from Government or Bangladesh Bank, they would be able to
mobilize funds for PPP projects. Actually, banks may play a role primarily as an
intermediary for channeling funds to the projects and, if possible, they would lend to
these projects from their own funds.
Seven, to attract private sector investors to the PPP projects, the Government will
need to offer a lucrative incentive package at least at the initial stage of the
development of such initiatives. The reason is that private investors generally are
interested to invest in only those projects from which they can earn a good return, but
many infrastructure projects may not be commercially viable or may not give the best
return in the short run. In fact, there are projects where economic benefits are more
substantial than direct financial gains. So, in order to attract the private sector to this
type of projects, Government will need to provide financial subsidies and some other
types of support, including guarantees against political risk as well as protection
against certain events of „force majeure or act of God‟. Although, in the PPP Policy
there are provisions of some incentives such as fiscal incentives (e.g., tax exemption,
reduced tax) and special incentives for the private sector to participate in PPP projects
but the incentives are not clearly detailed in the PPP policy. Further detailing of the
extent and tenor of the proposed tax exemptions/reductions would provide more
clarity to private sector investors in making their investment decisions.
Eight, for making PPP initiative successful, a very high level of political support
and commitment is required. Large infrastructure projects usually need a relatively
longer period for their implementation. During the implementation phase of the PPP
projects, change of political regime/power should not affect the projects anyway.
Government should make strong efforts to build consensus among, and obtain
support of all political parties and representative of civil society groups to ensure the
policy continuity over the life of the project. Only then may PPP initiatives ensure
desired infrastructure development of the country. In this regard, a broad national
consensus on the concept and benefit of PPP will also boost the confidence and trust
of investors. It will also generate interest among entrepreneurs both from home and
overseas to invest in the PPP projects and hence open up the opportunities for getting
more foreign direct investment in the country.
Research Workshop Keynote Paper 155
Nine, in the current refinancing facility of IPFF project of Bangladesh Bank for
PPP projects, PFIs bear absolute credit risk that may arise by the default of the
project sponsor. That is, if the project sponsor fails to pay the installment to PFIs,
they (PFIs) are bound to repay the IPFF loan with full guarantee. Although, IPFF as
an agent of WB and GoB provide loan to PPP projects through PFIs, they do not
assume any credit risk under current terms and conditions. This may discourage the
PFIs to avail of the refinancing facility for on-lending to the PPP projects. There
should be a mechanism for sharing credit and other operational risks of the project by
all parties/co-investors. In this regard, IPFF should share of the implementation risk
of the project alongwith credit/liquidity risk.
Ten, IPFF follows specific financial structure/norm and imposes stringent terms and
conditions while providing loan to PPP projects through PFIs. The financing by IPFF cell
often involves a lengthy process as it disburses funds to PPP projects after getting final
approval and clearance from World Bank which is the main sponsor of this fund.
Whether a project will get IPFF fund or not absolutely depends on the decision of the
World Bank. Therefore, there is a chance that all efforts given by private parties
including PFIs to prepare and implement a project under PPP may go in vain if the
project is finally rejected by the World Bank. It will not only waste time, energy and
money but also will discourage the prospective private sponsors and PFIs to initiate such
projects. There are a few instances of PPP projects in the country which were rejected by
WB at the last stage of approval of fund from IPFF. So, the operational procedure of
IPFF should be simplified and WB approval should be made more flexible.
Eleven, as PPP is a relatively new concept in Bangladesh, awareness building
programs should be taken at government as well as private levels. PPP related
training, workshop, seminar may be arranged for capacity building regarding PPP
concepts, techniques, legal issue etc. for line ministries/implementing agencies,
private sponsors and other stakeholders. In this regard, there may be arrangement for
knowledge and expertise transfer from developed economies.
Twelve, every bank should set up a separate and dedicated PPP unit for dealing
with PPP projects. Banks should formulate separate PPP guideline. Moreover,
adequate manpower with sufficient expertise would be required to handle such
projects. For increasing expertise and building up capacity, bank executives may
require training on PPP policy and legal issues, PPP theme, feasibility study and
project evaluation process, financial modeling, legal aspects, project documentation,
risk management techniques etc.
Thirteen, it should be remembered that the major partner in the PPP process is
the private sector. The public sector‟s participation in it should mainly be as a
facilitator. Hence, in order to make the PPP concept meaningful and effective, rules
and regulations governing the PPP mechanism should be framed and executed in
156 Research Workshop Keynote Paper
line with a partnership spirit so that there is equitable sharing of risk and reward
between public and private parties. Inevitably, Government should take such
initiatives to build confidence of the private sector including financiers for
sustainability of the initiative.
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Research Workshop Keynote Paper 159
Appendix
Table 1: List of PPP Projects Financed by IDCOL and Other Financial
Institutions
Sector Sl. Project Name PPP Model Investment (Tk. mil)
Power and Energy
1 Meghnaghat 45 MW Power Plant BOO 21,000.0 2 Summit Power 33 MW Power Plant BOO 1250.0 3 Summit Uttaranchal Power Company
44 MW Power Plant BOO
1970.0
4 Summit Purbanchal Power Company 66
MW Power Plant BOO
3000.0
5 VERL 34 MW Power Plant at Bhola BOO 1200.0 6 BEDL 51 MW Power Plant at Sylhet BOO 1830.0 7 34 MW Malancha Holdings Power
Plant at Dhaka EPZ BOO
1650.0
8 Shah Cement 11.6 MW Power Plants Captive Power Plant
590.0
9 Thermax Trade Limited CNG Refueling
Station Under License
from
Petrobangla
55.0
Renewable
Energy
10 IDCOL Solar Energy Program
Implemented by
NGO and
Private Sector
20060.0
11 National Domestic Biogas and Manure
Program
2150.0
12 250KW Bimas gasification Based
Power Plant Under a
License from BTRC
25.0
13 50 KW Biogas Based Power Plant Under a
License from
Government
5.0
Port
and Comm
unicati
on
14 Panama Hilli Land Port BOT
180.0 15 Panama Sonamasjid Land Port 200.0
(Continued)
160 Research Workshop Keynote Paper
Appendix Table 1: (Continued)
Teleco
mmunication
Techno
logy
16 Grameen Phone Network Expansion
Project
Under a
License from BTRC
45340.0
17 Pacific Telecom Network Expansion
Project 21560.0
18 Ranks Tel PSTN Project 2300.0 19 DNS Satcomm Satellite Earth Station
Project 160.0
20 BanglaTrac International Communication Gateway Project
670.0
21 M & H Telecom Interconnection
Exchange Project 660.0
ICT 22 Shoanchalok ICT Program
Implemented
by some Banks
and Financial
Institutions
500.0
Source: Invigorating Investment Initiative through Public Private Partnership, A Position Paper Published in 2009
by Finance Division, Ministry of Finance. Government of the Peoples' Republic of Bangladesh
Table 2: PPP Projects in Pipeline (Till April, 2011)
PPP Projects under IPPs
Sl. Name of
Projects
Project
Term
(yrs)
Executing
Agency Date of
PQ Notice
PQ
Statement
Submission
Date
Current Status
1 Bibiyana
300-450
MW (Phase-I)
22 Power Cell 3-May-10 30-Sep-10 In the month of
October 2010
Summit Power Limited was
awarded for the
project.
2 Meghnag
hat 300-450 MW
IPP Cell,
BPDB 21-Jan-10 15-Apr-10 Summit Power
Limited of Bangladesh has been
awarded for the
project.
(Continued)
Research Workshop Keynote Paper 161
Appendix Table 2: (Continued) 3 Bibiyana
300-450
MW
(Phase-II)
22 IPP Cell,
BPDB 1-Mar-10 2-May-10 Summit Power
Limited of
Bangladesh has been
awarded for the project.
4 Bhola
150-225
MW
22 IPP Cell,
BPDB 1-Mar-10 2-May-10 Ranhill Berhad of
Malaysia has been
awarded for the
project.
5 Keraniga
nganj 150-225
MW
22 IPP Cell,
BPDB 5-Apr-10 6-Jun-10 Pre-bid meeting held
on 19 September 2010 and BPDB
issued RFP to the
PQ bidders.(deadline
not found) 6 Madanga
nj 150-225 MW
22 IPP Cell,
BPDB 5-Apr-10 6-Jun-10 Pre-bid meeting held
on 19 September 2010 and BPDB
issued RFP to the
PQ bidders.(deadline
not found) 7 Sayedpur,
Nilphamary
100±10%
MW
15 IPP Cell,
BPDB 1-Mar-10 2-May-10 BPDB received PQ
Statements from nine (9) bidders.
Selection of Pre-
qualified bidders is under process.
8 Katakhali
, Rajshahi
50±10%
15 IPP Cell,
BPDB 1-Mar-10 2-May-10 BPDB received PQ
Statements from
eleven (11) bidders. Selection of Pre-
qualified bidders is
under process. 9 Chapaina
babganj
100±10%
MW
15 IPP Cell, BPDB
28-Mar-10 30-May-10 PQ evaluation under process
(Continued)
162 Research Workshop Keynote Paper
Appendix Table 2: (Continued) 10 Khulna
100±10%
MW
15 IPP Cell,
BPDB 28-Mar-10 30-May-10 PQ evaluation under
process
11 Jangalia, Comilla
50±10%
15 IPP Cell, BPDB
28-Mar-10 30-May-10 PQ evaluation under process
12 Jamalpur 100±10%
MW
15 IPP Cell, BPDB
5-Apr-10 6-Jun-10 PQ evaluation under process
13 Chittagong
100-200 MW Wind
Power Plant
25 BPDB 12-Apr-10 21-Jun-10 PQ evaluation under
process
14 Sharishabari
, Jamalpur 3 MW Solar
15 BPDB 7-Apr-10 23-May-10 PQ evaluation under
process
15 Sirajganj
300-450 MW
22 Power Cell 7-Jul-10 30-Sep-10 Floated PQ notice
on 7 July 2010
PPP projects under BPDB
16 Dhaka 100 + 10% MW,
BOO basis.
15 BPDB 7-Oct-10 15-Nov-10 Under Tendering Process
17 Dhaka 50 + 10% MW,
BOO basis.
15 BPDB 7-Oct-10 15-Nov-10 Do
18 Chittagong
100 + 10% MW, BOO
basis.
15 BPDB 7-Oct-10 15-Nov-10 Do
19 Chittagong
50 + 10% MW, BOO
basis.
15 BPDB 7-Oct-10 15-Nov-10 Do
20 Rajshahi 100 + 10%
MW, BOO
basis.
15 BPDB 7-Oct-10 15-Nov-10 Do
21 Rajshahi 50 + 10% MW,
BOO basis.
15 BPDB 7-Oct-10 15-Nov-10 Do
(Continued)
Research Workshop Keynote Paper 163
Appendix Table 2: (Continued) 22 Khulna 100
+ 10% MW,
BOO basis.
15 BPDB 7-Oct-10 15-Nov-10 Do
23 Barisal 50 + 10% MW,
BOO basis.
15 BPDB 7-Oct-10 15-Nov-10 Do
Recent PPP under BPDB 24 Khulna 150-
300 MW
Coal Fired
Power Plant
25 BPDB 3-Nov-10 31-Jan-11 Under Tendering Process
25 Chittagong
150-300
MW Coal
Fired Power Plant
25 BPDB 3-Nov-10 31-Jan-11 Do
26 Maowa,
Munshiganj 300-650
MW Coal
Fired Power
Plant
25 BPDB 3-Nov-10 31-Jan-11 Do
27 Chittagong
300-650
MW Coal Fired Power
Plant
25 BPDB 3-Nov-10 31-Jan-11 Do
28 Kaliakoir
Hitech Park, Gazipur
100-150
MW Plant
15 BPDB 28-Nov-10 27-Jan-11 Do
Cross Sector PPP Projects
29 Ashulia Flyover on
PPP
Bangladesh Bridge
Authority
Feasibility is under process
30 Second
round Land
Ports on PPP
Bangladesh
Land Port
Authority
Under Tendering
Process
(Continued)
164 Research Workshop Keynote Paper
Appendix Table 2: (Continued) 31 New
Mooring
Container
Terminal
Chittagong
Port
Authority
PQ completed
32 Metro Rail
under PPP Project is Identified
33 Appointment of
Investor-
cum-
operator for Chittagong
Dry dock
Ltd
Chittagong Dry Dock
Ltd
Engagement of Transaction Advisor
is under process
34 New
Airport
through PPP
Ministry of
Civil
Aviation
Pre-Feasibility is
under Process
35 Sattelite
Cities
through PPP
RAJUK
Project is not
defined yet
36 Second
Padma
Bridge
through PPP
Bangladesh
Bridge
Authority
Project is not
defined yet
Source: IPFF Project Cell of Bangladesh Bank
Table 3: Successful PPP Projects financed under IPFF Project
Sl
No. Name of Projects Nature &
Capacity of the
Projects
Project
Duration Costs
(Tk. Mil) Financing
Structure Name of
Financiers
1 Doreen Power
Generations and
Systems ltd.at Feni
22 MW Gas
fired power
plant
15 years 1150.00 Debt-70% &
Equity-30% NCCBL &
IPFF
2
Doreen Power Generations and
Systems ltd.
Tangail
22 MW Gas fired power
plant
15 years 1150.00 Debt-70% & Equity-30%
NCCBL & IPFF
3
Doreen Power
Generations and
Systems ltd. At
Narsingdi
22MW Gas
fired power
plant
15 years 1130.00 Debt-70% &
Equity-30% NCCBL &
IPFF
(Continued)
Research Workshop Keynote Paper 165
Appendix Table 3: (Continued)
4
Doreen Power
House and
Technologies Ltd.
at Fei
11 MW Gas
fired power
plant
15 years 564.60 Debt-65.40%
&
Equity-
34.60%
Note*
5 Regent Power Ltd.
at Barabkunda,
Chittahong
22 MW Gas
fired power
plant
15 years 1108.17 Debt-57% &
Equity-43% Note**
6
United Power
Generation &
Distribution Ltd.
(Power Plant at CEPZ)
44 MW Gas
fired power
plant
30 years 1919.00 Debt-70% &
Equity-30% Note***
7
United Power
Generation & Distribution Ltd.
(Power Plant at
DEPZ)
35 MW Gas
fired power plant
30 years 1649.00 Debt-70% &
Equity-30% Note****
Total 178 MW
Source: IPFF Project Cell of Bangladesh Bank
* Dhaka Bank Limited, International Leasing, IIDFC, SABINCO and IFIC Bank
** Eastern Bank Limited, Uttara Finance and Investment Ltd, IDLC Finance ltd., Bangladesh Commerce Bank Ltd,
Trust Bank Ltd. and State Bank of India
*** AB Bank Ltd., The City Bank Ltd., Prime Bank Ltd., IDLC Finance Ltd. and Shahjalal Isami Bank Ltd.
**** Mercantile Bank Limited, Mutual Trust Bank Limited, Standard Chartered Bank, Standard Bank Ltd., Uttara
Bank Ltd., IFIC Bank Ltd., Infrastructure Development Co. Ltd. and Saudi-Bangladesh Industrial and
Agricultural Investment Co. Ltd
Table 4: PPP Projects in Pipeline under IPFF Financing
(March 2011-December 2012)
Sl. Project Name Location Estimated
IPFF
Investment
Status
1 Summit Bibiyana phase
I & II Power Plants
( Gas fired plants
having generation
capacity of 341MW
each)
Bibiyana,
Sylhet
US$115.00
mil
The Power Cell has issued the
Letter of Intent to Summit.
2 D-Water C ETP
Ecosystem (Bd.) Ltd.
Dhaka
EPZ
BDT 100 .00
BEPZA awarded a contract to
D-Water C ETP Ecosystem (BD)
Limited to install a central ETP
plant in Dhaka EPZ. The loan
proposal is now under
consideration of the World Bank
for approval/NOC
(Continued)
166 Research Workshop Keynote Paper
Appendix Table 4: (Continued)
3 D-Water Tech Ltd. (a
water treatment plant
in CEPZ with capacity
of 30 lac gallon per
day)
Chittagong
EPZ
BDT 100.00
BEPZA awarded a contract to a
local firm D Water Tech Ltd to
install a central water treatment
plant in Chittagong EPZ. The loan
application for fund from IPFF is
under consideration of the World
Bank for approval/NOC
4 Desh Cambridge
Kumargaon Power
Company Limited
(DCKPL) for 10MW
Natural Gas Generated
Power Plant
Sylhet
BDT 280.00
DCKPL, a BOO basis rental power
plant, went in to commercial
operation on 18th March 2009,
applied to IPFF on 2009, the loan
sanctioning is under process.
5 River Container
Terminal (RCT) &
Container and Freight
Station (CFS)
Rupganj
US$19.14
CEMCOR, a proposed inland
container river terminal, is a
subsidiary of Summit Alliance
Port Limited (SAPL) and will
receive LOI from BIWTA soon.
6 Dhaka Elevated
Expressway
Dhaka US$100.00
Italian- Thai Development Public
Company Ltd. (ITD) has won the
bid and concession agreement has
been signed with the GoB on 19th
January, 2011 to implement a four-
lane dual Elevated Expressway of
25.50 km
7 New Mooring
Container Terminal
Chittagong
Port
-
Expected Total IPPF
funding
- BDT 2100
crore
Source: IPFF Project Cell of Bangladesh Bank
Research Workshop Keynote Paper 167
List of Abbreviation
ADB Asian Development Bank
BBO Buy-Build-Operate
BIFF Bangladesh Infrastructure Finance Fund
BLPA Bangladesh Land Port Authority
BOI Board of Investment
BOLT Build-Own-Lease and Transfer
BOO Built-Own-Operate
BOOST Build-Own-Operate-Share -Transfer
BOOT Build-Own-Operate-Transfer
BOT Build- Operate-Transfer
BTO Build-Transfer-Operate
DBO Design-Build-Operate
DFS Detailed Feasibility Study
FI Financial Institutions
GoB Government of Bangladesh
GDP Gross Domestic Products
IDA International Development Agency
IDCOL Infrastructure Development Company Limited
IFC International Finance Corporation
IIFC Infrastructure Investment Facilitation Centre
IPFF Investment Promotion and Financing Facility
LBO Lease-Build-Operate
NBFI Non-Bank Financial Institutions
NOC No Objection Certificate
OD Operational Directives
PFI Participatory Financial Institutions
PICOM Private Infrastructure Committee
PSIG Private Sector Infrastructure Guidelines
PPP Public Private Partnership
REP Request for Proposal
RFQ Request for Qualification
ROT Rehabilitate Operate Transfer
SPV Special Purpose Vehicle
TA Technical Assistance
VGF Viability Gap Funding
WA Wraparound Addition
168 Research Workshop Keynote Paper
Paper Five
An Assessment of the Operations of Trade Payment
Methods in Bangladesh
Mahmood-ur-Rahman
Lecturer, BIBM
Antara Zareen Lecturer, BIBM
An Assessment of the Operations of Trade Payment
Methods in Bangladesh
I. Introduction
The spree of economic integration process has inflated the trade volumes
dramatically during the last few decades. And here an enhanced volume of
international trade consequently demonstrates the extent of globalization with
increased spatial interdependencies amongst the participants of the global economy
and their level of integration. The volume of exchanged goods and services between
the nations is taking a growing share in generating wealth, mainly by offering
economic growth opportunities in new regions and by reducing the costs of
procurement for a wide array of tradebales. The initiatives under the rubric of
multilateralism by the WTO, the bilateral as well the regional agreements popularly
known as the PTAs, gargantuan efforts undertaken by the ICC to simplify the trade
procedures and practices, tremendous emphasis on external sector liberalization
proposed by the think tanks and business community compelling the policy makers
across the globe to go for opening up-all these worked as the pertinent catalysts for
huge surge in trade volumes. Now, the international trade continues to grow every
year as nations expand their global trade and new nations are joining in.
In these ever-increasing trade transactions, trade payment is particularly very
important. In international transactions, securing payment might be affected by a
number of factors such as the relative strength of the counterparties, credibility of the
traders as well as the domestic regulatory requirements. Most important among these
are the potential risks and costs which the exporters and the importers are willing to
share between them. To succeed in today‟s global marketplace, exporters must offer
their customers attractive sales terms supported by the appropriate payment method
to win over the foreign competitors. The risks and costs of today‟s global payment
system, associated in international trade transactions have been exerting pressure on
the trade volumes. It calls for an assessment of the various aspects of international
trade payment methods based upon which the trade payment related financial services
have developed and expanded by banks to support the expansion of world trade.
Traders commonly believe that the major banks are the primary providers of these
services.
There are four primary methods of payment for international transactions-Cash in
Advance or Prepayment; Open Account or sale on credit; Documentary Collection;
and Documentary Credit. Cash in Advance or prepayments, under which payment is
expected by the exporter, in full or part, prior to goods, are being shipped. It is the
most secured method of payment for exporters and consequently the least attractive
Research Workshop Keynote Paper 171
for buyers. On the other extreme, Open Account is the least secured method of
payment for the exporters, but the most attractive to buyers. Documentary Collection
is more secured for an exporter than Open Account trading, as the exporter‟s
documents are sent from the exporter‟s bank to the buyer's bank, and the process is
governed by a set of rules of ICC called "Uniform Rules for Collections" publication
number 522 (URC522). However, of all these modes, Documentary Credit distributes
risks in the most balanced way in which both exporters and importers are almost
equally protected. Moreover, Documentary Credit process is governed by a very
popular and widely recognized guiding framework of ICC known as „Uniform
Customs and Practice for Documentary Credit‟ publication number 600 (UCPDC
600, the current version).
The trade payment is well affected by the considerable changes in international
trade transactions and practices due to ongoing globalization process. The new and
emerging electronic payment forms, tendencies of switching to International
Factoring and Forfeiting as a means of moving to Open Account trading, threats
posed up by the digitization of trade documents for the Documentary Credit which
requires presentation of paper documents - these are quite a few challenges for the
existing trade payment modalities which we could identify.
In the context of Bangladesh, the information on the practices of international
payment methods is not readily available due to absence of research activities in the
area. With that end in view, BIBM conducted a comprehensive study few years back
to gauge out the nitty-gritty of trade payment modalities in Bangladesh which has
earned a lot of appreciation from the trade service experts covering the practitioners,
academicians and the policy makers. This proposed study is basically an upgradation
of that earlier conducted study again simply to evaluate the existing scenario as well
as to identify interim dynamism along with the trends regarding the trade payment
modalities.
The recent cost effective competition is shifting the demand for Documentary
Credit to Open Account trading. Because importers in many developed as well as
developing countries are now demanding more favorable payment terms. Greater
involvement of costs in Documentary Credit operation (as compared to the other
modes such as Open Account or Cash in Advance) is believed to be one of the main
reasons of switching to other modes of payment. However, declining reliance on
Documentary Credit over the period may raise payment related risks and may result
in accentuated payment related difficulties and higher number of cases of non-
payment. One crucial question in this regard might be–how this cost-risk trade-off
could be handled?
Resembling the findings of the previous study we have detected that,
Documentary Credit had been widely used as a method of trade payment in the
country for both exports and imports, which is followed up Documentary Collection
and the other two modalities are the least used ones. It is a vital question whether the
172 Research Workshop Keynote Paper
involved traders as well as the bankers have got the adequate knowledge (regarding
both domestic and international guidelines) required to deal with this most popular
payment modality i.e. Documentary Credit as well as if the traders are well aware of
the costs and risks associated in other trade payment methods.
This study is basically an attempt of assessing international trade payment
methods practiced in the country. To find out the answers of research questions, the
study identified the following objects-one, to identify the existing practices of trade
payment methods in Bangladesh for both export and import and examine the trends
regarding the use of payment methods; two, To analyze the regulatory framework
for trade payment methods and deviations experienced in practice; three, To
identify the concerning issues related with trade payment practices to be discussed
in the workshop.
The research workshop paper is based on both primary and secondary data to
support the existing objectives. Secondary data is collected from different
publications. The sources are primarily related to international trade payment
practices, ICC documents and domestic rules, regulations and provisions connected
with trade payment methods of the country. Mainly, the secondary data sources are
related to ICC publications, different articles, domestic laws and regulations related
to the trade transactions.
Regarding primary data collection, a questionnaire survey has been conducted.
Both open ended and closed ended questions were incorporated in the questionnaire
for the survey. The survey area (AD branches of commercial banks) has been
determined purposively based on three considerations: one, trade payment practices
of banks of the country should be brought under the survey; two, AD branches that
are involved in all types and large volumes of trade payment transactions should be
covered by the study; and three, the study should also reflect the practices of
different administrative divisions of the country. Four sets of questionnaires have
been prepared for conducting the survey. These are designed for the selected bank
branches, heads/dealing officers of the selected bank branches, importers and
exporters (bank clients). And the data has been gathered by classifying the
scheduled banks in three major broad groups – SCBs, PCBs and FCBs. To
comment on the different payment methods used for international trade during
2010, information from 30 AD branches of 23 banks covering 5 SCBs, 16 PCBs
and 2 FCBs have been gathered. For collecting primary data we have also talked to
the officials of the regulator i.e. the Bangladesh Bank. Besides, banking financial
institutions other relevant parties involved in the international trade transactions
most importantly the traders (exporters, importers), officials from the customs and
the port authorities have been considered and questioned to have a grasp on the
issues from their point of view.
Research Workshop Keynote Paper 173
This paper has identified some issues and difficulties relating to trade payment
practices based on a survey. The list of issues is definitely not exhaustible. Those
issues have been placed in a forum, comprising up of veteran bankers for discussion,
who also unearthed and discussed on several new concerns. The paper has
incorporated some probable solutions based upon that fruitful interaction.
The paper is organized under four sections; after an introductory section with the
objectives and methodological issues, section two deals with the procedures and legal
frameworks of international trade payment methods, used in Bangladesh. Section
three entails the most vital aspect- assessment of different international trade payment
methods used in Bangladesh. The survey observations in regard to the formalities and
requirements related to trade payments in the context of Bangladesh are also
compiled in this section. The final section summarizes the observations, issues and
difficulties relating to trade payment methods. It also puts forward the
recommendations and concluding remarks.
II. International Trade Payment Methods: Modes and Regulatory Framework
One may come across a number of methods of payment which are being used for
receiving and making international trade payments. The ICC Guide to Documentary
Credit operation (Busto, 1994) divides international trade payment methods into four
categories: cash in advance, open account, collection method (documentary
collection) and documentary credit.
Cash-in-Advance
The most secured method of trading for exporters and, consequently the least
attractive for buyers. Payment is expected by the exporter, in full, prior to goods
being shipped. With cash-in-advance payment terms, the exporter can avoid credit
risk because payment is received before the ownership of the goods is transferred. So
if the exporter is not sure about the buyer's creditworthiness, a last resort is to ask for
cash in advance. This may be acceptable to a first-time buyer who trusts seller to
deliver the goods. Wire transfers and credit cards are the most commonly used cash-
in-advance options available to exporters. However, requiring payment in advance is
the least attractive option for the buyer, because it creates cash-flow problems.
Open Account
An open account transaction is a sale where the goods are shipped and delivered
before payment is due. Open account is the reverse of cash in advance. Obviously,
this option is the most advantageous option to the importer in terms of cash flow and
cost, but it is consequently the most risky option for an exporter. Because of intense
competition in export markets, foreign buyers often press exporters for open account
terms since the extension of credit by the seller to the buyer is more common abroad.
However, the exporter can offer competitive open account terms while substantially
174 Research Workshop Keynote Paper
mitigating the risk of non-payment by using of one or more of the appropriate trade
finance techniques, such as export credit insurance. Though the seller can avoid a lot
of banking charges and other costs, but he has no security that he will be receiving
payment in due course. For this reason, the exporter may not be willing to accept this
sort of mode of payment.
Documentary Collections
Documentary Collection is a process, where the seller instructs his bank to
forward documents related to the export of goods to the buyer's bank with a request to
present these documents to the buyer for payment, indicating when and on what
conditions these documents can be released to the buyer. The Uniform Rules for
Collections, ICC Publication No. 522, which describes the conditions governing
collections (including those for the presentation, payment and acceptance terms), is
issued by the International Chamber of Commerce (ICC) in Paris, France. The buyer
may obtain possession of goods and clear them through customs, if the buyer has the
shipping documents (original bill of lading, certificate of origin, etc.). The
documents, however, are only released to the buyer after payment has been made
("Documents against Payment") or payment undertaking has been given - the buyer
has accepted a bill of exchange issued by the seller and payable at a certain date in
the future ("Documents against Acceptance"). Under documentary collection, after
the importer and the exporter have established a sales contract and agreed on
documentary collection as the method of payment, the exporter ships the goods. In a
documentary collection, the importer is known as the “drawee” and the exporter is the
“drawer”. After the goods are shipped, documents originating with the exporter (e.g.
commercial invoice) and the transport document (e.g. bill of lading) are delivered to a
bank, called the remitting bank for collection. The role of the remitting bank is to
send these documents, accompanied by a collection instruction giving complete and
precise instructions to a bank in the importer‟s country, referred to as the collecting/
presenting bank. The collecting/ presenting bank acts in accordance with the
instructions given in the collection instruction and releases the documents to the
importer against payment or acceptance, according to the remitting bank‟s collection
instructions. The exporter‟s bank and the remitting bank need not be the same. Also,
the collecting bank and presenting bank need not be the same. Each task could be
performed by a different bank. Payment is forwarded to the remitting bank for the
exporter‟s account and the importer can now present the transport document to the
carrier in exchange for the goods. Documentary collections facilitate import/export
operations. However, they do not provide the same level of security as letters of
credit, but, here, the costs are lower. Unlike the letters of credit, for a documentary
collection the bank acts as a channel for the documents but does not issue any
payment covenants (does not guarantee payment). So here payment is not that much
secured like documentary credit. In this circumstance the risk in payment under
documentary collection can be reduced by introducing the contract of sale.
Research Workshop Keynote Paper 175
The United Nations Convention on Contracts for the International Sale of Goods
(CISG) is the main convention for international sale of goods. Established by
UNCITRAL, the Convention governs the conclusion of the sale contract; obligations
of the buyer and seller. It is neither concerned with the validity or provisions of the
contract nor its effect on the property sold. The importance of CISG is its
interpretation. International context, uniformity and observance of good faith must be
regarded when interpreting the Convention. Matters not expressly settled by CISG
are to be determined according to the general principles of CISG; or in such absence,
according to rules of private international law. The UNIDROIT Principles on
International Commercial Contracts also provide a „gap-filling‟ role to supplement
CISG, so long as it supports a principle deduced from the Convention.
Documentary Credit
Documentary Credits, more commonly known as letters of credit are a widely
used method to effect payments in domestic and international trade. It is basically a
mechanism, which allows importers/buyers to offer secured terms of payment to
exporters/sellers in which a bank (or more than one bank) gets involved. A written
undertaking is issued by a bank (usually referred to as the issuing bank) on the
instructions of the buyer of goods to the seller. The payment is made under conditions
stated in the undertaking. The Uniform Customs & Practices for Documentary Credit
(UCPDC) published by International Chamber of Commerce (2007) Revision,
Publication No. 600 defines Documentary Credit: “Credit means any arrangement,
however named or described, that is irrevocable and thereby constitutes a definite
undertaking of the issuing bank to honor a complying presentation.”
The specified bank makes the payment upon the successful presentation of the
required documents by the seller within the specified time frame. Note that the bank
scrutinizes the 'documents' and not the 'goods' for making payment. Thus the process
works both in favor of the buyer and the seller. The seller gets assured that if
documents are presented on time and in the way that they have been requested on the
LC, the payment will be made. A seller may ask for a documentary credit when the
counterparty is unknown or financially weak, the goods are specifically designed or
seasonal or the country is politically unstable or financially weak. On the other hand
LC makes the buyer assured that the bank will thoroughly examine these presented
documents and only when they meet the terms and conditions stipulated in the LC,
the payment will be honored.
The idea in an international trade transaction is to shift the risk from the actual
buyer to a bank. Thus a LC (as it is commonly referred to) is a payment undertaking
given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer.
The Buyer is the Applicant and the Seller is the Beneficiary. The Bank that issues the
LC is referred to as the Issuing Bank which is generally in the country of the Buyer
and the seller's bank (advising/confirming bank, which is generally in the country of
176 Research Workshop Keynote Paper
the Seller, informs the seller that the L/C has been issued and perhaps adds its
confirmation to the L/C (in other words, guarantees the payment if the seller wants to
be sure the issuing bank will not default). Though legally beneficiary (exporter) and
issuing bank or in case of confirmed credit also confirming bank are the main parties.
To accommodate the diverse needs of the various business sectors, different types of
documentary credits have evolved. Under UCP 600 all documentary credits are
irrevocable. Before that the credit was divided into two categories: Revocable Credit
and Irrevocable credit.
Generally speaking, banks provide documentary credit services on a commission
basis, worked out as a percentage of the credit amount or drawing on the credit.
Usually these commissions are payable by the credit applicant since it is his
responsibility to provide the seller with the price agreed in the sales contract. The
buyer and the seller can agree on a different division of the costs between themselves.
However, in the absence of any agreement to the contrary, the banks will usually be
entitled to look for payment in the first instance to the customer giving the
instruction.
Regulatory Framework for International Trade Payments
Creation of appropriate institutional framework and supportive environment
facilitates the growth of external trade. Accommodation of trade payment laws is one
of the activities of the United Nations Commission for International Trade Law,
which has proposed a variety of rules for international adoption. World business, as
represented by ICC, holds firmly to the conviction that the rules-based multilateral
trading system, managed through the World Trade Organization (WTO), is one of the
central pillars of international economic cooperation, with an impressive record of
achievement. The ICC, through its headquarters in Paris and its national committees
in London, New York and in other jurisdictions, has developed, in consultation with
the commercial and legal communities a sophisticated system of rules for a wide
range of matters. The widely used and acceptable guidelines/rules formulated by ICC
include UCPDC (Uniform Customs and Practice for Documentary Credit; Publication
no-600) and its different revisions, URC (Uniform Rules for Collection; Publication no-
522), URR (Uniform Rules for Bank-to-Bank Reimbursement Arrangement; Publication
no-725), ISP-98 (International Standby Practice 1998), DOCDEX (Documentary
Instruments Dispute Resolution Expertise) Rules etc. ICC also offers trade terms
(Incoterms) that have been very useful for interpreting delivery terms. Some of the ICC
guidelines are summarized below.
Uniform Customs and Practices for Documentary Credit (UCP 600)
Terms and conditions governing the issuance and execution by banks of letters of
credit are laid down in what is known as the Uniform Custom and Practice for
Documentary Credits. UCP 600 is the latest version of the rules that govern letters of
Research Workshop Keynote Paper 177
credit transactions worldwide. UCP 600 is prepared by International Chamber of
Commerce‟s (ICC) Commission on Banking Technique and Practice. The rules have
been effective since 1st July 2007. This revision of the Uniform Customs and
Practice for Documentary Credits (commonly called as "UCP") is the sixth revision
of the rules since they were first promulgated in 1933. It was in the spirit that the
UCP were first introduced - to alleviate the confusion caused by individual countries'
promoting their own national rules on letter of credit practice. The objective, since
attained, was to create a set of contractual rules that would establish uniformity in
that practice, so that practitioners would not have to cope with a plethora of often
conflicting national regulations. The universal acceptance of the UCP by practitioners
in countries with widely divergent economic and judicial systems is a testament to the
rules' success. Here matters of particular interest to the commodity trade include the
basic responsibilities of banks when examining documents tendered for payment
under letters of credit governed by the UCP 600, and the requirements pertaining to
different types of documents that may be tendered under letters of credit. The major
advantage of incorporating UCP 600 in the sales contract for a is that, where the UCP
600 rules are incorporated, he will know in advance the criteria against which the
banks will examine the shipping documents in deciding whether or not to pay under
the credit. The major advantage for a buyer is that he will know in advance the
criteria against which the price for the goods will be paid against tender of
documents. So the stated goals of the current revision have been identical to previous
ones, i.e. taking into account the developments in banking, transportation and
insurance sectors and reviewing the wordings of the UCP to avoid differing
interpretations and applications. In a note to its members and the national committees
the ICC itself labeled the new revision as "the most comprehensive in the entire
history of the rules." Comprehensiveness however did not lead to substantive
changes. The ICC has shortened the number of articles from 49 to 39. This change is
mostly cosmetic however, since substantive changes are barely noticeable.
The UCP 600 are not divided into the same seven sections as the UCP 500 which
were lettered A to G and headed in turn: General Provisions and Definitions; Form
and Notification of Credits; Liabilities and Responsibilities; Documents;
Miscellaneous Provisions; Transferable Credit and finally Assignment of Proceeds.
Now the UCP 600 does not expressly follow this allocation of Articles by subject-
matter.
Uniform Rules for Collection (URC 522)
The ICC Uniform Rules for Collections are a practical set of Rules to aid bankers,
buyers, and sellers in the collections process. The Rules have been prepared to
resolve problems that practitioners have experienced in their everyday operations
since 1979. URC 522 underlines the need for the principal and/or the remitting bank
to attach a separate document, the collection instruction, to every collection subject to
the Rules - makes it very clear that banks will not examine documents, particularly
178 Research Workshop Keynote Paper
not to look for instructions - addresses problems banks experience in respect of
documents against acceptance (D/A) and documents against payment (D/P) - clearly
indicates that banks have no obligation to store and insure goods when instructed.
The latest version of the URC was drawn up in 1995. To get coverage under ICC
URC 522, in the operation of documentary collection, it is to be stated on the
collection instruction that the payment is as per Uniform Rules for Collection 522.
The URC has 26 articles that are divided under seven broad heads.
Uniform Rules for Bank-to-Bank Reimbursement (URR 725)
The Uniform Rules for Bank-to-Bank Reimbursements under Documentary
Credits (“rules”), ICC publication No 725, shall apply to any bank-to-bank
reimbursement when the text of the reimbursement authorization expressly indicates
that it is subject to these rules. ICC's Uniform Rules for Bank-to-Bank
Reimbursements under Documentary Credits (URR) have recently been revised.
URR 725 contains a number of technical changes from the previous version, URR
725, and will be used by most letter of credit practitioners around the world. This
revision was approved by the Commission on Banking Technique and Practice in
April 2008 and came into effect on 1 October 2008. They are binding on all parties
thereto, unless expressly modified or excluded by the reimbursement authorization.
International Standby Practices (ISP98)
International Standby Practices fills an important gap in the market place. Though
standby letters of credit have similarities with commercial letters of credit and other
financial instrument, there are significant differences in scope and practice. A new set
of Rules was therefore required for this workhorse of commerce and finance. ISP98
reflects a distillation of practices from a wide range of standby users: bankers,
merchants, rating agencies, corporate treasurers, credit managers, government
officials and banking regulators. Like the UCP for commercial credits, ISP98 is
destined to become the industry standard for the use of standbys in international
transactions. Another set of invaluable ICC rules, ISP98 offers a precise and detailed
framework for practitioners dealing with standby letters of credit.
Incoterms 2010
From the 1st January 2011, the ICC‟s Incoterms 2010 came into force. This is the
eighth revision of the Incoterms Rules, with the last revision dating back to 2000. The
introduction to the new 2010 rules stresses the need to use the terms appropriate to
the goods, to the chosen means of transport and to whether or not the parties intend to
impose additional obligations on the seller or buyer. In addition, there are Guidance
Notes (and a diagram) at the front of each Incoterms Rule containing information to
assist in making a choice on which Rule to use. The new Rules have been separated
into two classes: (i) Rules for use in relation to any mode or modes of transport,
Research Workshop Keynote Paper 179
which can be used where there is no maritime transport at all or where maritime
transport is used for only part of the carriage and (ii) Rules for sea and inland
waterway transport, where the point of delivery and the place to which the goods are
carried to the buyer are both ports. FAS, FOB, CFR and CIF belong to the second
class of Rules. In respect of FOB, CFR and CIF, reference to the “ship‟s rail” has
now been deleted and this has been replaced with the goods being delivered when
they are “on board” the vessel.
DOCDEX Rules and ICC Arbitration
DOCDEX Rules are about a service known as „Documentary Instrument Dispute
Expertise‟ that are provided in connection with any dispute related to ICC
regulations/guidelines and their applications that are made available by the ICC
through its International Centre for expertise. The purpose of the ICC DOCDEX
Rules is to provide parties with a specific dispute resolution procedure that leads to
an independent, impartial and prompt expert decision settling disputes involving the
UCP, URDG, URR and URC. First launched in 1997, the DOCDEX Rules were
originally aimed at providing an alternative dispute resolution system for parties
using ICC rules relating to letter of credit transactions. Over the years, DOCDEX has
evolved. Today, the DOCDEX Rules are of course applicable to the newest versions
of the ICC banking rules, especially the UCP 600 and the URDG 768, as well as to
all disputes relating to former versions of these rules.
Since the inception of DOCDEX, ICC expert panels have decided over a hundred
DOCDEX cases. The objective is to offer an independent, impartial and prompt
expert decision on how the dispute should be resolved based on the terms and
conditions of the documentary credit, the collection instructions, or demand
guarantees. The ICC Court is the leading international arbitration institution in the
world. The arbitration process starts with a written request for arbitration to the ICC
Court. ICC and Committee Maritime International (CMI) offer separate arbitration
rules to meet the special requirements of maritime users.
Laws of International Carriage of Goods
International carriage has also been the subject of much discussion over the years.
The world-wide nature of international trade and the necessity for efficient transport
have led to a series of rules, covering carriage by sea, by road, by rail and by air. The
Hague Rules of 1924, and The Hague-Visby Rules of 1968, together with the
Hamburg Rules 1978, now provide the basis for carriage of goods by sea. The Warsaw
Rules 1929 exist for air transport and there have been variations, most notably in
Montreal rules adopted in 1975. Since rail/road does not link the continents, as do sea
and air transport, it should not be surprising that rail/road transports lacks a global,
multilateral set of rules. Nonetheless, in Europe and in certain contiguous countries
linked to European rail network, rail transport is governed by the 1980 Convention
180 Research Workshop Keynote Paper
concerning International Carriage by Rail (COTIF), which entered into force in 1985
and applies in around 40 countries. Similar to the rail transport, a number of
countries-mostly European- have signed CMR 1956 convention on the Contract for
the International Carriage of Goods by Road. Other than these, UN Convention on
the International Multimodal Transport of Goods (1980) covers multimodal transport.
Domestic Regulations/Guidelines/ Policies
ICC guidelines are not the complete set of rules in regulating and guiding
international trade payment transactions. Since the payment guidelines do not provide
comprehensive and complete set of rules for international trade payment transactions,
national laws play an important role. Even in the ICC guidelines it is clearly stated
that in case of any ambiguity or dispute the local laws are going to be prioritized and
followed by the related parties. This is particularly true for the issues related with
operational procedure of documentary credit which are not addressed
comprehensively by the UCPDC intentionally. For example, the legal nature of the
credit itself and legal nature of the relationship between different parties (relationship
between issuing bank and applicant or rapport between nominated bank and
beneficiary) have not been addressed in the UCPDC. As well as the other ICC
frameworks like URC, governing documentary collection and most importantly the
other methods which are guided by the sales purchase contract have got that same
flaw embedded in their operations which impedes the smooth functioning. Moreover,
it has been a cause of concern and already has raised a whole lot of questions
amongst the bankers. For effective international trade payment operation, it is
required that domestic laws are capable of providing solutions to various unaddressed
issues of international trade payment procedure which have been demanding proper
attention for long. Foreign Exchange Regulation Act (FERA, 1947)
In Bangladesh, Foreign Exchange Regulation Act, 1947 (FERA, 1947) has been
the most important domestic regulation for international banking. Foreign exchange
regulation act, 1947, adopted in Bangladesh immediately after independence along
with its (Amendments) has empowered Bangladesh Bank to regulate certain
payments, dealings in foreign exchange and securities and the import and export of
currency and bullion. Empowered by the act, Bangladesh Bank issues Authorized
Dealers licenses to the selected bank branches for arranging trade payments and
conducting other international banking operations (such as remittance, financial
flows). The act has 27 sections and a number of sub sections which cover an array of
issue such as definitions of authorized dealers, foreign currency, foreign exchange,
foreign securities, special accounts, restrictions on dealing in foreign exchange,
receipts, payments and settlement as well as restrictions on agents and foreign
companies, government acquisition of foreign exchange and securities, and other
supplementary provisions (punitive measures for any contravention, legal procedure,
grant of immunity etc.). Most importantly it has given Bangladesh Bank the authority
Research Workshop Keynote Paper 181
to call for information, power to inspect and finally to draft rules based upon which,
Bangladesh Bank issues circulars/guidelines time to time to regulate trade payment
and international banking activities to be followed by the banks. The main objectives
of the act are to conserve the hard earned limited foreign currencies and to ensure that
the available foreign currencies are utilized only for priority requirements in the
economic and financial interests of Bangladesh. It also focused on the maintenance of
the proper accounting of foreign currency receipts and payments. Bangladesh Bank is
responsible for administration, supervision, monitoring as well as framing up
different guidelines governing all the transactions denominated in foreign currencies
under the act. Being empowered by the Foreign Exchange Regulation Act 1947 the
central bank issues general licenses to deal in foreign currencies. The authorized
dealers must maintain adequate and proper records for all foreign exchange
transactions and furnish such particulars in the prescribed formats in form of regular
monthly submission of returns to the Bangladesh Bank.
Guidelines for Foreign Exchange Transactions (GFET, 2009)
While dealing in international trade payment, other than FERA, 1947 and
Bangladesh Bank circulars compiled in Guidelines for Foreign Exchange
Transactions (GFET, 2009), banks are required to follow the trade policy directives
issued by the Chief Controller of the Ministry of Commerce of the country
empowered by the Imports and Exports (Control) Act, 1950. The existing trade
policies, prepared by the Ministry of Commerce are known as the Import Policy
Order 2009-12 and the Export Policy 2009-12 which do play a pivotal role in
governing the real flow in international trade whereas the flow of funds being taken
care of by the monetary regulator.
International trade encompasses two categories of flows-flow of tradeables (both
goods and services) and flow of funds. If we consider legal trade other than
smuggling in or out, then all the financial flows (import payments and receipts from
export proceeds) must be settled through the banking channel. As mentioned earlier,
Bangladesh Bank has got a set of drafted guidelines for directing the banks to
conduct international banking operations in form of GFET which has got two
volumes. The first volume, which has got nineteen chapters mainly, gives the
directives regarding the procedural modalities and the second one contains the details
of monthly reporting of FE transactions. From operational banking point view, the
importance of this GFET is imperative and the officials working at different desks of
foreign departments in AD branches must know these rules well. GFET vol-1 chap-9
in four sections has detailed out the pros and cons related with import business.
Section one covers issues like as import trade control, terms of imports, registration
of importers, LCAF, endorsement on LCAF, cancellation of LCAF endorsement
made mistakenly, amounts for which LC may be opened and remittances made under
LCAF, remittance in excess of the value of the LCAF, LCAF issued in the name of a
person/firm other than applicant imports under special arrangements, use of correct
HS Code, PSI, imports on FOB basis, remittance of proceeds of dishonored bills,
182 Research Workshop Keynote Paper
disposal of fully utilized or unutilized LCAF, import against LCAF without opening
LC, applicable exchange rate on retirement of import bill, remittance against goods
imported under penalty. Section two contains the aspects such as LC covering
imports, terms on which LCs may be opened, period for which LCs may be opened,
LCs based on only against firm contracts, credit report of the foreign suppliers,
approved methods of payment, remittance against discrepant documents/documents
received directly by the importers, advance remittance against imports, applications
for remittances against imports, forms on which applications for remittances should
be made, indication on IMP form for government imports, submission of the
authenticated copies of 'Bill of Entry' and 'Certified Invoices', extension of time limit
for submission of bill of entry etc., disposal of IMP Forms, loss of goods, LCs on
deferred payment basis, payment of import liability. Section three has dealt with the
provisions related with back to back LCs- opening of back to back import LC, inland
back to back LC, BTB import LC against inland BTB LC, payment settlement against
BTB LCs, retention of foreign currency in single pool for back to back import
payments under bonded warehouse system, payment of import bills (other than back
to back) from direct and deemed export earnings. Lastly, section four has described
the issues related with deposit of counterpart fund in respect of imports under non-
project commodity loans/grants/credits. Chapter-8 of GFET has got two sections,
where in the first one issues such as- export exempted from repatriation of export
proceeds, export trade control regulations, prescribed form for declaring exports,
method of receiving payments against exports, registration of exporters, certification
of EXP Forms by ADs, making out and delivery of shipping documents, endorsement
of shipping documents by the ADs, disposal of EXP forms, submission of export
documents to ADs, scrutiny of documents, exports subject to receipt of advance
payments or confirmed and irrevocable LC, deduction of commission, brokerage or
other trade charges, using appropriate incoterms, prescribed period within which
payment should be received, export of raw jute and jute goods on usance basis,
reporting of overdue cases, part drawings and advance remittances, partial receipt of
advance remittance, short shipments, shipments shutout entirely, shipments lost or
damaged in transit, receipts of advance remittances against exports, shipments on
FOB terms, export proceed realization certificate against direct and deemed exports,
export of software and data entry/processing services where export is undertaken in
physical form, where export is undertaken in nonphysical form, time limit for
repatriation of export earnings. Section two details out the principles and procedures
of various transactions of EPZs (repatriation of export proceeds from the EPZs,
disposal of export proceeds, sale of Bangladeshi goods to EPZ enterprises).
Trade Policies
Trade policy in a country refers to the set of policies, which govern external trade
sector of its economy. In a developing country like Bangladesh, trade policy is one of
the many economic instruments, which is used to suit the requirements of economic
growth. In recent years, Bangladesh‟s trade policies revolve around the instruments
Research Workshop Keynote Paper 183
and techniques of export promotion and import management. The trade policies
specifically prescribe the policies/rules of the government in regard to the export and
import transactions and procedure and operations of making and receiving trade
payments. The prime objective of the trade policy of Bangladesh is to maintain a
favorable balance of trade through adopting an export led development strategy.
Import Policy Order (2009-2012)
The existing Import Policy Order, 2009-2012, has been formulated, keeping in
mind the market economy ideology for making the easy availability of the
commodities to consumers at fair prices through removing the barriers to movement
of goods internationally. The recent import policy on 2009-12 is designed to support
the export promotion strategy of Bangladesh. For example, the import of capital
machinery and raw materials without any LC by RMG industries, import of
reconditioned generator and generating sets on commercial basis, crude soybean and
palm oil import by industries and import of telecommunications machinery for
private-sector operators have been allowed in the new import policy. At this moment,
the number of commodities kept under the restricted (for import) list is only more
than 20. The new import policy has allowed opening of LC for importing capital
machinery even without IRC and other flexible measures to keep up with the
momentum of rapid industrialization through ensuring required imports. The limit of
import without LC has been raised also. For enhancing easy availability of industrial
raw materials and consumer goods at fair prices, some commodities have been
declared importable as raw materials. The present version of the import policy order
has got nine chapters.
Export Policy Order (2009-2012)
The Export Policy primarily aims at making the economic activities more
dynamic and outward looking to help Bangladesh survive in the rapidly changing and
competitive global trading system. The government is facilitating expansion of trade
and taking necessary steps to modernize and simplify the country‟s trade policy in
accordance with WTO obligations and upholding country‟s interest. Recently,
pressure from the buyers is mounting for improvement of quality of products, export
of products free from any hazardous and toxic substances, along with fulfillment of
other standards and compliance-related conditions. Comprehensive efforts are being
made for increasing productivity and improving quality of products and fulfillment of
other compliance-related concerns. Efforts have been made to hone the skills of the
exporters on the rules and regulations of international trade. There is no denying the
fact that the present trading system, especially the export business is experiencing
increased use of modern technology and this, in turn, is helping the exporters become
more competitive. On the other hand, the objectives of reducing cost of doing
business alongside enhancement of the efficiency of exporters through increased use
of modern technology in the export sector could be attained. The government is
firmly committed to ensuring the maximum use of e-Commerce and modern
184 Research Workshop Keynote Paper
technology to accomplish this objective. In order to sustain the growth of exports in
Bangladesh as well as to enhance it the productive capacity of the domestic export
oriented industries should be increased along with ensuring quality of exportable
products and its market diversification. For this reason, all efforts should be taken for
converting our comparative advantage of human resources to competitive advantage.
In doing so, labor-intensive export-oriented industries have to be encouraged,
massive training programs have to be organized to enhance the skills of workers and
various incentives have to be rolled out to encourage and diversify exports. Besides,
loan facilities at reduced interests have to be arranged, infrastructural development
activities have to be geared up and establishment of backward and forward-linkage
industries have to be encouraged. Also, steps have to be taken to develop utility
services, to install state-of-the art laboratories for controlling the quality of exports, to
set up product-based industrial zones or clusters, to ensure easy availability of raw
materials for exports, to disseminate updated information to the producers on markets
and technology on a regular basis, and to ensure overall development of the
Chittagong and Mongla Ports including further simplification of procedures for
releasing goods. The current Export Policy of Bangladesh has underscored the
aforementioned needs for expanding export as well as increasing the productivity of
export-oriented industries and facilitating the overall development of the export
sector through capacity building of local export-oriented industries. Five Business
Promotion Councils are already in place under public-private partnership to enhance
the capacity and awareness of the exporters and mitigate the supply-side constrains
paving the way for enhanced uninterrupted supply of export products. The Export
Policy of 2009-2012 has considered software and ICT products, agro-products and
agro-processing products, light engineering products (including auto-parts &
bicycles), shoes and leather products, pharmaceuticals products, textile, shipbuilding,
toiletries products as the thrust sectors for our export development. In addition,
electronic products, handicrafts, herbal medicine and medicinal plants, production of
finished leather, frozen fish production and processing, natural flowers, jute products,
plastic products, ceramic products, service export, furniture, uncut diamond etc. have
been considered as special development sectors in the current export policy. The
current export policy has accommodated fiscal, financial and other incentives in line
with the requirements of globalization. III. Trade Procedure and Payment Practices: Bangladesh Scenario
As described earlier, sellers and buyers can choose any one from the above
mentioned four significantly different methods of payment in cross-border
transactions. Starting from the most favorable to the seller to the most favorable to
the buyer, the options include cash in advance or prepayment, open account or
supplier‟s credit requiring post-shipment payment, payment through documentary
collection and payment by letter of credit. To comment on the different payment
methods used for international trade during 2010, information from 30 AD branches
of 23 banks covering 5 SCBs, 16 PCBs and 2 FCBs have been gathered.
Research Workshop Keynote Paper 185
Methods of Payments used in Making Imports Payment from Bangladesh
The survey data reveals that, still for making import payments documentary letter
of credit is the mostly used mechanism with almost a 90% share in the total. In very
few cases, documentary collection (with a contribution in between 1% to 5% for
various banks) and cash in advance (contribution not exceeding 1%) have been used.
In the context of Bangladesh, documentary letter of credit is the most popular and
widely used for making import payments from Bangladesh. Practically exchange
control arrangements or guidelines in many developing countries ask to use
documentary credit for their imports. As the survey data indicates (table-1) about
90% (both in terms of number of cases and amount) import payments from the
country are made through letter of credit. The figure would be even over 95% if we
consider data for only domestic nationalized and private sector banks. However, it is
observed that a number of foreign bank clients (estimated to be around 20%) use
documentary collection in making import payments. The respondents of the survey
questionnaire (head of Trade Services Department/ Dealing Officer) have revealed
that some of the import payments are also made in the form of cash in advance.
Especially, exporters‟ retention quotas are sometimes utilized to import accessories
by making advance payment. But the open account payment method is totally absent
in case of imports. Absence of open account payment (i.e. sending goods before
receiving payments by the foreign exporters) in case of imports in Bangladesh does
not only indicate the superior bargaining power of the foreign exporters but also the
lack of credibility of our importers. But most importantly, stringent domestic
framework to preserve the country reputation would be the probable reason of this
absence due to the previous bitter experience of importing through open account.
Table 1: Use of Methods of Import Payment (in % of number) in 2010
Cash in Advance 3%
Open Account -
Documentary Collection 08.22%
Documentary Credit 88.88%
Source: Survey data
Table 2: Use of Methods of Import Payment (in % of volume) in 2010
Cash in Advance 4%
Open Account -
Documentary Collection 07.05%
Documentary Credit 88.95%
Source: Survey data
Greater use of letter of credit in Bangladesh as the main method of payment is
clearly attributed to the country‟s regulatory requirement. As per the Import Policy
(2009-12) of the country, unless specifically stated, import transactions can only be
186 Research Workshop Keynote Paper
made through irrevocable letter of credits. Some specific kinds of goods such as
easily perishable goods, journals, books, magazines, medicines etc. may be imported
upto certain limits through registered LCA (Letter of Credit Authorization) form
without opening letter of credit. However, under the same arrangements (registered
LCAF) capital machinery and industrial raw materials may be imported without any
limit. Other than this regulatory requirement, foreign exporters‟ preference of letter of
credit as the means of payment has been identified as the other responsible factor
according to the opinions of the respondents. Thus, it appears that, while importing
we are subjected to sellers market condition and thus follow sellers‟ terms and
conditions.
Import Procedure of Bangladesh
As mentioned earlier, import of goods into Bangladesh is regulated by the
Ministry of Commerce through the issuance of Import Policy Order time to time. For
governing the movement of the tradables (both goods and services) the Office of the
Chief Controller of Imports and Exports has been entrusted with. In Bangladesh,
generally the importers must obtain Import Registration Certificate (IRC) from the
Chief Controller. But for public sector importers and in some other special cases,
there are flexibilities. First of all, the importer has to contact the seller and make a
purchase and sale contract with the seller. But in our country the traders usually rely
on proforma invoices heavily which are not as comprehensive as the standard sales
purchase contracts; as they don‟t contain detailed provisions regarding settlement of
disputes and others. Then the question of mode of payment arises which is usually
stated in the proforma invoice. Import procedure differs with different modes of
payments. In most cases, import payments are made by the documentary letter of
credit in Bangladesh. Imports under documentary letter of credit must be irrevocable
and guided by the existing version of ICC guideline which is UCPDC 600.
Formalities and Margin Requirement while Opening LC
Import license is not always required for import in Bangladesh. However,
registration (LCAF) is a requirement to import into the country. Other than filling up
the LC application form, submission of the copy of proforma invoice (or
purchase/sale contract), insurance cover note along with LCAF to the bank is a
regulatory requirement. According to the BB Guidelines on Foreign Exchange
Transactions (2009), for opening LC, ADs should obtain confidential reports on
foreign exporters if the transaction amount is beyond the thrash hold level for
satisfying themselves regarding the performance capabilities of the foreign exporters.
Gathering such a credit report requires outflow of foreign currencies which can be
minimized through proper collaboration. Either in explicit or implicit form, issuing
bank does have an agreement with the applicant while opening a letter of credit on
his/her behalf. As per the agreement, if documents submitted by the exporter are in
order (as per LC conditions), then the issuing bank makes payment to the beneficiary
or beneficiary‟s bank (nominated/negotiating bank), and the importer (applicant)
makes reimbursement to the issuing bank. However, banks generally do not finance
Research Workshop Keynote Paper 187
the entire LC amount and ask for some margin that ranges between 0% to 100% and
varies from one client to another. Generally, the margin is determined by the head
office based on the banks‟ relationship with the clients. The survey data reveals that
the extreme cases of 0% or 100% are insignificant in number and most of the cases
fall between 1%-25% ranges. The opinion survey (Dealing Officers/head of Trade
Services) indicates that most LCs are opened at the range of 1%- 10% margin.
Forms of Letter of Credit in Use (in making import payment)
In Bangladesh all letters of credit opened are irrevocable in nature as required by
the import policy order of the country. Of the total credit, a significant number is
back-to-back letter of credit. This is because of the garment sector that imports raw
materials from abroad for meeting their export orders. The survey shows that 40% of
the total LCs are back-to-back (foreign) that amounted to 27% of the total amount for
which the sample banks have opened letter of credit during 2010 (table-3 and 4).
Against the general perception of the number and volume of confirmed letter of
credit, the survey reveals that only 3% of the total number of letter of credit required
confirmation (amounting up to 4% of total amount) during the period. There has not
been a single case of transferable, red clause, and revolving credit. Absence of
revolving and red clause LCs is due to the restriction prescribed in Bangladesh Bank
guidelines (BB Guidelines on Foreign Exchange Transactions, Vol-1). Imports
through deferred LCs are also found but the GFET has clearly discouraged the use of
deferred LCs for commercial imports.
Table 3: Forms of Import LC Opened (in % of number) During 2010
Confirmed 03% Back to back 40% Transferable 0% Red clause 0% Revolving 0% Irrevocable (other than the five mentioned above) 57%
Source: Survey data
Note: Number of back-to-back includes only foreign LC, all LCs are irrevocable
Table 4: Forms of Import LC Opened (in % of Amount) in 2010
Confirmed 04%
Back to back 27%
Transferable 0%
Red clause 0%
Revolving 0%
Irrevocable (other than the five mentioned above) 69%
Source: Survey data
Note: Number of back-to-back includes only foreign LC
188 Research Workshop Keynote Paper
No significant difference has been observed in terms of volume and number of
letters of credit opened by the different types of domestic banks (both government
and private). As expected, the branches having no apparel sector clients have not
opened a single back-to-back LC during 2010. Understandably, the foreign banks
have not opened any confirmed LC (as issuing bank). However, the proportion of
back-to-back letter of credit is less in the foreign banks as compared to the
domestic banks.
Advising, Confirmation, and Amendment of Credit
All banks advised letters of credit through another bank known as advising bank.
In most cases, issuing banks select their own advising banks. According to the
opinions of survey respondents (head of trade services/dealing officers), banks prefer
to select those banks as advising banks with whom they have correspondent
relationships. Some banks also try to accommodate exporters‟ choice. It has been
observed that a few banks are a bit rigid in selecting advising banks because of
maintaining their business relationship or commission sharing with the counter
parties. To accommodate exporters choice, banks also avail the services of second
advising banks. In such a case, additional cost burden falls on the trading parties.
Almost in all cases, confirming banks are selected by issuing banks, basically these
are the banks with which the credit lines exist. However, sometimes banks try to
accommodate exporters‟ choice if they have arrangement with the banks. For
amendment of letters of credit, generally importers approach to the issuing bank on
behalf of exporters. Though, some issuing banks ask for copies of letters, mails etc. to
ensure exporters consent in this connection, they hardly find amendment risky for
themselves. According to the observation of survey respondents (head of trade
services/dealing officers), most of these amendments are practically go in favour of
exporters (extension of expiry or shipment date), and so risks of either accepting or
rejecting is minimum.
Documentary Requirements (Import LC)
The survey results depict that, in case of all the letters of credit opened from the
country, issuing banks ask for transport documents (bill of lading, airway bill, truck
receipt etc.), commercial invoice and certificate of origin. In selecting documents,
generally banks‟ dealing officers play a dominating role (as revealed by the
respondents namely Head of Trade Services/ Dealing Officer and importer) through
offering consultancy services. Only in case of a few big firms, the applicants dictate
terms and select documents. As per UCP 600, transport documents (title documents),
commercial invoice (sellers‟ bills) and insurance documents are essential documents
and are expected to be asked as conditions for making payments. In Bangladesh,
insurance documents are rarely asked as according to the country‟s import policy,
insurance is to be covered by domestic importers (as a measure to restrict foreign
currency outflow and promoting domestic insurance companies). Importing goods
under CIF (cost, insurance and freight), CIP (Carriage Insurance Paid To) is subject
to the permission of Bangladesh Bank except imports by non-resident Bangladeshis
Research Workshop Keynote Paper 189
and foreign investors using their own foreign currency earned outside the country.
Submission of signed commercial invoice is another regulatory requirement. Under
UCP 600, commercial invoice may not be signed if it is not asked for. However,
according to BB Guidelines (on Foreign Exchange Transactions, volume-1), all LCs
must ask for submission of signed invoices.
Table 5: Documentary Requirement in LC Issued from Bangladesh
Documents asked under LC Frequency
Transport Document All
Insurance Document Very rarely
Commercial Invoice All
Certificate of origin All
Bill of Exchange Very Frequently
Packing List Very Frequently
Weight List Less Frequently
PSI Certificate Less Frequently
Source: Survey data
According to the Import Policy 2009-12, submission of „certificate of origin‟ to
the customs authority is a must while releasing goods except in cases of cottons,
readymade garments, and export oriented industries. Though a significant number of
clients of the banks (sample banks) are from readymade garments sector, not a single
case has been observed where certificate of origin has not been asked for. Other than
these, the documents that are very frequently asked for the letters of credit issued by
the domestic banks are „bill of exchange‟ and „packing list‟. Weight list and PSI
certificates are also asked though less frequently (table-6).
Table 6: Documentary Requirement: Transport Documents [Import LC]
Transport Document [types] Frequency
Ocean bill of lading 75%
Airway bill 11%
RRI 14%
Multimodal 0%
Others 0%
Source: Survey data
The most commonly used transportation mode that is in use for importing in the
country is ocean/sea way mode. Of the total number of transport documents 75%
cases (number of LCs) asked for ocean bill of lading. In a considerable number of
cases, truck receipts are asked for that comes under RRI (Road, Rail, and Inland
Waterway). While importing, use of multimodal transport documents, courier or
postal receipts have not been found in the sampled banks.
190 Research Workshop Keynote Paper
Availability of Credit (Making Payment- Import LC)
A letter of credit must point out whether the credit is available at sight, deferred,
acceptance, or negotiation basis. The issuing bank is also required to mention that
whether the payment will be made from the counter of the issuing bank or a
nominated bank (negotiating bank). In all cases banks offer scope for negotiation in
Bangladesh. In most cases (as the survey data indicates), the letter of credit issued
from the country are freely available which means any bank could be the negotiating
or nominated bank, at the counter of which documents can be submitted by the
foreign exporter/beneficiary for obtaining payment. In such a case, exporter can
submit documents at the counter of its own bank in the country of his/her domicile.
Some banks (mainly foreign and a few domestic private sector banks) however prefer
to restrict negotiation at the counter of certain banks as they maintain correspondence
relationship. The survey data indicates in most cases (69% of the total) payments is
designated on sight basis from the counter of negotiating bank. Another 20% cases
use acceptance basis payment and 11% deferred payment (table-7).
Table 7: Availability of Credit: Import Payment from Bangladesh
Credit Available Frequency
Sight 0%
Deferred 11%
Acceptance 20%
Negotiation 69%
Source: Survey data
Note: Sight means if payment is available only at the counter of issuing bank
In connection with the availability of credit, the survey data (table-7) of banks
may give a different picture of the practices of making payment to the foreign
exporters. As the survey respondents (Head of Trade Services/dealing officers) reveal
that in most cases foreign negotiating banks actually do not negotiate documents.
Either they make advance to the foreign exporters or make payment only after
receiving payments from issuing banks (by debiting issuing banks‟ nostro account or
receiving payments through reimbursing banks). This practice clearly indicates that
in most cases the exporters‟ banks do not negotiate documents and simply forward
documents to the counter of issuing bank or make payment only after ensuring receipt
of payment irrespective of the status of documents (in regard to discrepancy). In
most of the cases, it is found that, the issuing banks are quite prompt in making
reimbursement to the foreign counterparts under compliant presentation but in some cases few banks were to be found late in affecting payment without any valid reason.
Research Workshop Keynote Paper 191
Examination of Documents as Issuing Bank (Making Payment-Import LC)
In connection with examination of documents the provisions covered by the 39
articles of UCP 600 and the „International Standard Banking Practices‟ entailed in
ISBP 681 as well as the terms and conditions of the respective LC are the guidelines
(article 2 of UCP 600). Among domestic regulations, guidelines on foreign exchange
transactions (prescribed by Bangladesh Bank) along with FE circulars issued by
Bangladesh Bank (being empowered by FERA, 1947) and the import policy order of
the country are to be followed. According to article 14 of UCP 600, banks have
maximum five banking days following the day of receipt of documents to judge the
status of the documents if they are either compliant or discrepant. The survey data
shows that in 65% cases documents are examined within two banking days and in
35% cases within 3-5 banking days (table-8). Another interesting observation is that a
few banks have a practice of sending discrepancy notices within 2-3 days after
receiving documents either being pressurized by the applicant or simply to have
discrepancy charges. Banks consider this act as a protective measure on their part.
Charging of discrepancy fee appears to be an act of retaliation by the banks, as the
respondents of the opinion survey (head of trade services/ dealing officers) have
claimed that such practices are also very common in a number of foreign countries.
But these practices are frequently coming down.
Table 8: Time Required to Examine the Documents (as issuing bank)
Time Requirement Frequency (no of cases)
0-2 65%
3 to 5 35%
Source: Survey data
Table 9: Examination of Documents (as issuing bank): Common Discrepancies
Found (of the different types of discrepancies)
Discrepancies Frequency (no of cases)
Late Shipment 65%
Late Presentation 50%
LC Expired 20%
Missing words/dates 10%
Others (Wrong HS code, LC value overdrawn, Absence
of documents, Bill of exchange drawn on wrong party,
absence of the name of vessel in B/L) 15%
Source: Survey data
Note: In a number of instances, a single LC has more than one discrepancy.
In all cases, banks have been observed to approach importers to get their opinion
before rejecting documents. In regard to discrepancies, late shipment, late
presentation, expiry of the LC are very common. According to the survey
192 Research Workshop Keynote Paper
observations, of the total discrepant cases, 65% cases are of late shipment and 50% is
of late presentation of documents. Moreover, the survey data reveals, the cases of
non-payment due to discrepant documents are very insignificant although sometimes,
the applicants also try to miss utilize the provision of UCPDC 600 regarding
discrepancy notice in different ways (either to get concessions from the foreign
exporters or to check the consignment).
Methods of Payments used for Receiving Export Proceeds in Bangladesh
Regarding export proceeds, it has been found that again documentary letter of
credit is having almost 42% share (ranging between 40% to 70% bank wise). But
here, documentary collection is playing quite a big role with almost 50% proportion
(the share is ranging between 10% to 80%) and gaining popularity. Surprisingly,
advance T.T. did make quite a remarkable contribution in terms of export receipts
(with an average of 5%) last year. The remaining 3% is attributed to open account
trade where the proceeds are usually received within 120days. The survey data
indicates (table-10) in 42% (in terms of number of cases) cases of exports, LC
payment methods have been used during 2010 that amounted up to 50% of the total
export receipts received through the sampled banks. However, as compared to the
methods of import payments, use of documentary collection is much higher in case of
export receipts. According to the survey data (table-10), out of the total cases of
export receipts during 2010, in 50% cases collection method has been used. There are
also some cases (insignificant and accounted for only 4% of the total cases of export
receipt) where payments have been made in advance by the foreign importers during
the period.
Table 10: Use of Methods of payment in Export Receipts
(in % of number) in 2010
Cash in Advance 5%
Open Account 3%
Documentary Collection 50%
Documentary Credit 42%
Source: Survey data
Table 11: Use of Methods of payment in Export Receipts
(in % of Volume) in 2010
Cash in Advance 5%
Open Account 1%
Documentary Collection 54%
Documentary Credit 40%
Source: Survey data
Research Workshop Keynote Paper 193
Comparatively extremely limited use of open account (under which Bangladeshi
exporters may offer suppliers credit) payment method is mainly because of the
country‟s regulatory requirements. As per Bangladesh Bank requirement, export
receipts must be repatriated into the country within a period of 4 months from the
shipment date. Requirement of signing EXP form by the bankers imposes an equal
obligation of export repatriation on both exporters and bankers. As per the BB
Guidelines on Foreign Exchange Transactions (GFET, 2009), „ for delay in
repatriation or non-realization of export proceeds, the exporter as well as the
concerned AD and its officials certifying the EXP forms render themselves liable to
punitive action under FER Act.‟ Practically, such a requirement restricts the use of
open account under which it is very difficult to ensure repatriation of export receipt
within the stipulated time period by the banks. Some of the survey respondents of the
questionnaire for bank clients (exporters) are found to be interested in even sending
their goods to the foreign importers on credit; but could not do so because of the
regulatory bindings.
Export Procedure of Bangladesh
According to the Imports and Exports (control) Act, 1950, exporters likewise the
importers must get registration granted by the Chief Controller of Imports and
Exports. Under the Exports Policy of Bangladesh the exporter has to get the valid
Export Registration Certificate (ERC-which requires yearly renewal) from the chief
controller. After obtaining the ERC, the exporter may proceed to secure the export
order through signing a contract. Generally, exporters ask the buyer for Letter of
Credit clearly stating terms and conditions of exports and payments. Then the
exporters remain busy in procurement of raw material and in manufacturing. After
the shipment of the goods, the exporters submit documents and obtain payments
through banks. But recently, it has been observed that our export market is gradually
becoming buyer dominated which has raised the use of contract based payment
methods for exports more specifically documentary collection. The increasing use of
contract based payment method i.e. documentary collection in our country
underscores the tremendous significance of using comprehensive sales-purchase
contracts. Importers, exporters and indenters are required to be registered in
Bangladesh under Importers, Exporters and Indenters Registration Order 1981.
Moreover, Customs Act 1969, various SROs, gazette notifications issued by the
different government departments (NBR, Customs, and Port Authorities) involved in
international trade is also applicable to execute the trade transactions that deal with
levy and collection of customs duties and other allied matters such as handling of the
consignments.
Documentary Collection: Procedures and Formalities
Documentary collection is the second most popular method of payment used in
Bangladesh in receiving and making payment. The survey data reveals (table-1) that
of the total cases of import payment about 8% uses collection method where as of the
194 Research Workshop Keynote Paper
total cases of export payment about 50 %( table-10) uses collection method. It is
obvious that collection method (or what the bankers in Bangladesh call contract basis
payment) provides relatively less protection to the exporters. The survey data in this
regard indicates relatively less bargaining power of the country‟s traders revealing the
fact that our export market is buyer dominated. In regard to the collection instruction
or the use of the services of collecting banks, exporters generally rely on remitting
banks, the banks that are entrusted to collect payment on behalf of exporters.
Remitting banks generally select collecting banks of their own choice in the
importers‟ country. More precisely, the foreign correspondents/agents usually have
been entrusted by the local remitting banks to act as the collecting/presenting banks.
Both the modes of releasing documents i.e. D/P (Documents Against Payments) and
D/A (Documents Against Acceptance) are used by both domestic and foreign
exporters. It has been observed that in a number of instances bankers are unable to
distinguish between documentary collection and documentary credit while dealing
with documents submitted for collection by a domestic exporter. The common
documents that are submitted by an exporter to the remitting bank for collection
includes transport document, commercial invoice, bill of exchange, and packing list
which are almost similar to those submitted by an exporter at the counter of a
negotiating/nominated bank under LC. And thus, sometimes, the dealing officers,
deployed in export desks are found to be confused about the role of
negotiating/nominated bank and remitting bank in handling the documents under two
different payment methods. A bank‟s purchase and discount of export bills under
collection basically depends upon the banker-customer relationship. However, there
are a few instances where export bills have been purchased and discounted by the
remitting banks but subsequently have remained unpaid. Most of these occurrences
are because of the ignorance of the dealing officers/concerned offices in regard to the
liability of the foreign banks (collecting banks) and importers. In a lot of cases, the
concerned officers failed to differentiate between documents under collection and LC
and could not identify the risks involved in these transactions. In
purchasing/discounting export bills under collection, some banks are also observed to
use OD (sight) or Usance rate in place of TT Doc Rate.
Forms of Export Letter of Credit Received by Local Exporters
In Bangladesh all letters of credit received are irrevocable in nature as required by
the domestic regulation of the country. Out of the total export letters of credit, a
significant number is transferable letter of credit. Existence of a large number of
buying houses is one of the reasons for the dominance of transferable LCs. Buying
houses (of the garment products) are not the actual manufacturers and therefore, for
procuring the finished goods, they are required to transfer the LCs to the real
manufacturers. Moreover, the practice of subcontracting by the garment
manufacturers is also very common for which LC is transferred. In contrast to the
import LC, back-to-back letter of credit is completely absent in case of export LC
(table-12 and 13). The survey data reveals that though the number and volume is very
Research Workshop Keynote Paper 195
insignificant, Bangladeshi exporters also do receive confirmed letters of credit.
Of the total export letters of credit, 0.15% was confirmed LC during 2010. These
exporters are mainly clients of foreign banks and the credits were mostly issued from
African countries.
Table 12: Forms of Export LC Received (in % of number) in 2010
Confirmed 0.15%
Back to back 0%
Transferable 76.85%
Red clause 0%
Irrevocable (other than C,B, T& R) 23%
Source: Survey data
Note: Number of back-to-back includes only foreign LC; LCs considered for which banks are negotiating banks,
all LCs are irrevocable
Table 13: Forms of Export LC Received (in % of Amount) in 2010
Confirmed 0.20%
Back to back 0%
Transferable 72.25%
Red clause 0%
Irrevocable (other than C,B, T& R) 27.55%
Source: Survey data
Note: Number of back-to-back includes only foreign LC; LCs considered for which banks are negotiating banks, all
LCs are irrevocable
Documentary Requirements (Export LC)
It is detected from the survey data that, all the LCs received by the country‟s
exporters ask for transport documents (bill of lading, airway bill, truck receipt, etc.)
and commercial invoice. Generally in LC operations, transport documents (title
documents), commercial invoice (sellers bill), and insurance documents are regularly
asked as conditions for making payment. It can be observed from the survey data
(table-14) that insurance documents are less frequently asked in the LCs, which are
received by Bangladesh exporters (not very different from the LC opened by banks
located in Bangladesh for foreign exporters). Such practice points out the similarity
of regulatory requirement in the trading partners for promoting the domestic
insurance industry. Other than these, the documents that are very frequently asked
for in the letters of credit received from the foreign countries are certificate of origin,
bill of exchange, packing list. Weight list and PSI certificates are also asked though
less frequently (table-14).
196 Research Workshop Keynote Paper
Table 14: Documentary Requirement in LC Received in Bangladesh
Documents asked under Foreign LC Frequency
Transport Document All
Insurance Document Less Frequently
Commercial Invoice All
Certificate of origin Very Frequently
Bill of Exchange Very Frequently
Packing List Very Frequently
Weight List Less Frequently
PSI Certificate Less Frequently
Source: Survey data
Table 15: Documentary Requirement: Transport Documents (Export LC)
Transport Document [types] Frequency
Ocean bill of lading 84.5%
Airway bill 10%
RRI 4%
Multimodal 1.5%
Others 0%
Source: Survey data
Like imports, most commonly used transportation mode for exports from the
country is sea/ocean mode. The survey data indicates that of the total number of
transport documents, 84.5% is ocean bill of lading (table-15). In 10% of the total
number of cases airway mode is in use and 4% of the LCs ask for truck receipt (that
comes under RRI as per UCP 600). Though while importing, use of multimodal
transport document has not been found, however, 1.5% of the total exports under LCs ask for multimodal transport documents (table-15).
Availability of Credit (Receiving Payment-Export LC)
UCPDC 600 requires that LCs must indicate whether the credit/payment is
available at sight, deferred, acceptance, or negotiation basis. In all cases of
documentary credit received by Bangladeshi exporters offer the scope for negotiation.
In most cases (as the survey data indicate), the letters of credit received from outside
the country are freely available which means any bank can be the negotiating or
nominated bank at the counter of which documents are to be submitted by the
domestic exporter/beneficiary for obtaining payment. The survey data has found that,
in most cases (70% of the total) payments are designated on sight basis from the
counter of the negotiating/nominated bank. Of the total, 14% cases are of acceptance
basis payment and 16% is in deferred payment (table-16).
Research Workshop Keynote Paper 197
Table 16: Availability of Credit: Export Receipt into Bangladesh
Credit Available Frequency
Sight 0%
Deferred 16%
Acceptance 14%
Negotiation 70%
Source: Survey data
Note: Sight means if payment is available only at the counter of issuing bank
The survey respondents (Head of trade services/dealing officers) revealed that in
most cases domestic negotiating/nominated banks actually do not negotiate
documents. Generally, they forward the documents to the counter of the issuing bank
and make advance to the domestic exporters. Thus, in connection with the availability
of credit, the practices of local negotiating/nominated banks are not different from the
practices of foreign negotiating/nominated banks (in case of import LC). As it is
known, UCP 600 also does not impose any obligation on negotiating/nominated bank
in this regard. Therefore, in almost all cases payments are first of all, received from
the counter of the issuing banks and then made available to local beneficiaries.
The reason behind this sort of practices might be as in most of the cases, particularly
in the RMG sector the domestic banks usually go for substantial amount of pre-shipment financing where already they have tied up significant amount of fund.
Examination of Documents as Nominated Bank (Export LC)
While examining the documents, UCP 600, ISBP 681 guidelines on foreign
exchange transactions (prescribed by Bangladesh Bank) along with the FE circulars
issued by Bangladesh Bank, the export policy of the country and most importantly the
terms and conditions of the LC are to be followed. The survey data shows that in 87%
cases documents are examined within two banking days and in 13% cases 3-5 banking
days (table-17). As mentioned earlier, in most cases local negotiating/ nominated banks
are simply forwarding the documents to the counters of the foreign issuing banks.
Some respondents of the survey questionnaires (for head of trade services/dealing
officers) have claimed that in very few cases, they receive discrepancy notices within
2/3 days of sending documents to the foreign issuing banks where charging of
discrepancy fees appears to be the main reason of such practices .
Table 17: Time Required to Examine the Documents
(as negotiating/negotiating bank)
Time Requirement (Days) Frequency (no of cases)
0-2 87%
3 to 5 13%
Source: Survey data
198 Research Workshop Keynote Paper
Table 18: Examination of Documents (as negotiating/negotiating bank):
Common Discrepancies Found [of the different cases of discrepancies]
Discrepancies Frequency [no of cases]
Late Shipment 75%
Late Presentation 60%
LC Expired 20%
Missing words/dates 15%
Others [B/L Claused, B/L stale, Description of goods not as
per LC Contract, Absence of documents] 15%
Source: Survey data
Note: In a number of instances, a single LC has more than one discrepancy.
Regarding the nature of discrepancies, late shipment, late presentation, expiry of
LC are the most prevalent ones (also revealed in the survey questionnaires for head of
trade services/dealing officers). According to the survey observations, of the total
discrepant cases, 75% is of late shipment and 60% is of late presentation of
documents. The survey data unfolds that, the cases of non-payment due to discrepant
documents are very few.
Handling Problems/Difficulties in connection with Trade Payment
According to the survey respondents, whenever bankers face problem in regard to
giving decisions in making and receiving payments, they generally consult their own
colleagues, and go through ICC rules (mainly UCP 600) in this connection.
Table 18: Measures for Handling Payment Related Difficulties
Consult ICC Materials 90%
Consult with Colleagues 90%
Consult with External Experts 0%
Others Steps 0%
Source: Survey data
Some bankers individually keeps copies of ICC rules (like UCP, ISBP, URC and
URR), BB Guidelines, Export-Import Policies etc. with them and most of the AD branches are observed to keep such materials.
IV. Some Issues and Recommendations
The following issues along with recommendations have been identified and discussed
in the workshop.
Research Workshop Keynote Paper 199
One, in the chapter 7 of GFET, 2009 the directives for import on usance basis
have been entailed. A section therein captioned as „LC on deferred payment basis‟
has permitted that subject to the compliance with other conditions laid down by
Bangladesh Bank for import as well as the Import Policy Order 2009-12, LCs may
be opened on deferred payment/usance basis only for five categories of items such
as capital machinery, industrial raw materials, costal vessels (oil tankers, ocean
going vessels), agricultural implements and chemical fertilizers. Here the tenor
could range between 90 days to 360 days. Moreover, the domestic regulatory
framework has also discouraged commercial imports on usance basis. But
sometimes, different applicants approach banks for issuing deferred LCs for items
regarding which neither any clear cut direction is given in the local regulatory
framework nor the products could be easily categorized as both industrial nor
commercial items creating difficulties for the desk officials. Suppose, a trader may
approach a bank for issuing deferred LC to import electricity generating
equipments. The participating bankers opined that, the list containing items allowed
for import on deferred basis should be more specific and exhaustive.
Continuing with the same issue, it has been also found that, it is a common
practice that certain types of industrial raw materials and capital machineries are
regularly imported where 50% payment is affected based upon the presentation of
compliant documents (implying a sight LC) but remaining 50% is arranged later on
(deferred payment), based on the importer‟s certification regarding the performance
of the imported goods (after installment if the machineries have been performing up
to the desired level). Sometimes, importers of food items (powder milk) want to avail
this sort of facility i.e. sight payment followed by the payment of remaining portion
only after getting the green signal regarding the quality of the products (presence of
melamine) from the authorities such as Atomic Energy Commission, BCSIR etc. But
these provisions are not clearly specified in the local regulations.
Two, in the chapter 7 of GFET, 2009, there is a directive regarding the disposal of
the fully utilized, partly utilized and unutilized LCAFs (exchange control copies)
stating that even the partly utilized or fully unutilized LCAFs should also be
surrendered by the ADs to Bangladesh Bank after expiry of the validity period of the
remittance. It is difficult to justify the surrendering of the unutilized copies as the
banks did not send any copy of LCAFs to CCI&E. Regarding the disposal of
unutilized LCAFs the forum commented that, unutilized LCAFs should not be
reported to Bangladesh Bank.
Three, if we would like to discuss about the difficulties faced by the desk
officials facilitating imports then an obvious issue must be the Bill of Entry. In the
domestic guidelines, it has been stated that the concerned ADs related with import
trade must have the copy of the customs BoEs or certified invoices (in case of import
by post/courier) at their disposal within 120 days from the remittance date. Moreover,
200 Research Workshop Keynote Paper
due to the irregularities and fraudulent practices evolving the shipments through land
ports, the directives are more stringent. But surprisingly in some cases, the concerned
ADs didn‟t receive the BoEs. In spite of the penalty imposed by the Bangladesh Bank
on the importers with overdue BoEs, barring the ADs form opening fresh LCs on
their behalf, the concerned ADs do face tremendous difficulties in dealing the
inspection teams if they do not possess the BoEs in due time. So, there could be such
arrangements under which the ADs can straightway have online access to the BoEs
issued by the Customs. Moreover, if the ADs can have online access to BOEs,
payment settlement can be expedited, particularly in cases of waiver where there is a
time lag between the delivery of documents to the local importers and receipt of
BoEs. Sometimes, it takes 8 /10 days even. But in between the payments are not yet
being affected as without the BoEs the local issuing banks can not affect payments in
due to documentary discrepancies. The online access to the BoEs will also enhance
the country image through expediting payments.
Again it is written in our domestic regulations, that the issuing banks must have
the stamped embossed BoEs from the importers, evidencing the payment of import
tariffs. But the bankers have argued that it is not the responsibility of the banks to
oversee the payment of duties. Customs certified assessment copy of BOEs should be
sufficient for the banks for recording purpose and no further evidence of duty
payment is required. The banks should not bargain with the importers on that issue.
Only if there are problems in the description of commodities (material discrepancy of
BoEs) only then it should be considered.
Again, if there is an overdue BoE, the importer is going to be placed in the list of
defaulting importers prepared by Bangladesh Bank prohibiting him from further
imports. But there had been instances where, even after the collection of the overdue
BoE copy the importer was still enlisted. So, some mechanism should be devised
which will automatically remove such importers when they have duly submitted the
BoE copy. Online access of BoEs by banks is hugely important and BB, NBR and the
Customs should create platform through which BoEs could easily be collected by the
banks without hassle.
Four, in article 16 of UCPDC 600, it is clearly stated how to deal with the
discrepant documents as well as it has mentioned four scenarios regarding the
handling of the documents by the banks after lodging discrepancy notices. But in
practice, a lot of bankers have complained that the applicants are defiant of both the
UCPDC provisions as well as the local regulations regarding discrepant documents
and waiver. Cases have been found where, in spite of compliant documents the
applicants requested the banks to lodge discrepancy notices to halt the payments
momentarily on the grounds such as goods hadn‟t arrived. More interestingly, in few
cases it has been observed that in spite of the arrival of the consignment, the
applicants approached issuing banks to delay payment through issuing discrepancy
notices, clearly violating the norms, to get the documents from the banks, either for
Research Workshop Keynote Paper 201
inspecting the goods at the ports or for getting the goods cleared from the ports based
on the documents. Later on they waived to affect the payments and demanded
discount in some instances. If payment of sight LCs are delayed, banks should use
own judgment to gauge out the exchange rate fluctuation risk. In no way, they should
be bypassing the local laws and facilitate the local importers in fraudulent practice.
Five, late payment is quite a common phenomenon in our trade services
operations. In a lot of instances, it is observed that, in spite of receiving compliant
documents under sight LCs, the payments have been lingered. This practice is more
prevalent amongst the SCBs which not only harm their institutional reputation but
also taints the country image. And so, the confirmation charges are on the rise in
spite of a good country rating by institutions such as Moody, Standard & Poor etc.
It implies that we have failed to take the advantage of good country rating and high
confirmation charges are making our imports dearer. Even, this is not the end of the
story, sometimes the foreign counterparts retaliate through late payment
(Bangladeshi exports).
Six, for making the payments under local Back to Back LCs (denominated in
foreign currency) there are two alternatives for banks. Either they can use the Nostro
A/Cs (using swift MT 202) or they can use the FC Clearing Accounts mentioned with
Bangladesh Bank, which is also preferred by BB. It is observed that a lot of banks are
utilizing the services of foreign correspondents abroad as the payments are affected
through the Nostro Accounts which are maintained with them. Here, easily the
remittance could have been arranged between the local banks using the FC Clearing
Accounts with Bangladesh Bank more, which will have prevented foreign currency
outflow in form of charges. The reason behind these sorts of practice is simply to
gain in business with the correspondent agents resulting in higher revenue in form of
charges. So, the local banks should be compelled for using the FC Clearing Accounts.
Back to back letter of credit (local) payment settlement (through the BB Clearing
House) should not be done through POs or FDDs. BB must enforce the use of
BEFTN for faster settlement of back to back letter of credit payment. It will help in
faster settlement of back to back LC liabilities. Now it takes almost a week for
settlement through Pos or FDDs. It will also remove the chances of FDDs/POs being
lost. It will also reduce the cost of deemed exports. Again, delay in settling local LCs
should be strongly monitored by Bangladesh Bank on monthly basis (report of
payment). Based on that report, Bangladesh Bank can take initiative for making
payment by debiting the accounts of the banks maintained with them. It will allow
banks to go for other financing propositions.
For foreign back to back LCs, sometimes the banks face a lot of difficulties due
to either non-realization/late-realization of export proceeds or delay in disbursement
from the EDF. So, then the banks have to go for own financing. Bankers have asked
the Bangladesh Bank to chalk out tentative alternatives for this.
202 Research Workshop Keynote Paper
Seven, for verification of shipment under local LCs, sometimes peculiar terms
and conditions (signature of the official of the nominated bank on the back of the
delivery chalan) are asked for. Although, from money laundering point of view, it is
justified, but some bankers have been found to be unhappy about that as it simply
raises the onus of the bankers.
Eight, to handle discount claims on exports, in the guidelines it is given that, all
the cases of discounts claimed by the importers on account of different grounds
should be submitted to the FEPD, BB for recommendation or otherwise to the
Discount Committee, created for the purpose as per prescribed format and prior to
refereeing such cases to the Committee, ADs must be satisfied about the
genuineness and merit of the cases. Moreover, the ADs may remit export claims not
exceeding 10% of the repatriated export proceeds on the grounds such as short
weight claim, quality claim and part shipment. But nowadays, a lot of exports LCs
usually incorporate terms where it is mentioned that in case of discrepancies
(late shipment or others) the applicants will waive on the basis of discounting and
they also contain the amounts of discount. If there are discrepancies then simply the
foreign issuing banks communicate the local nominated/negotiating banks
regarding the discrepancies and also the applicable discount amounts as per the LC
terms (sometimes exceeding the limits mentioned in the guidelines) and ask to reply
within 48/72 hours with their standings. If the amounts are beyond the thrash hold
level, mentioned in the guidelines the cases are to be referred to the Discount
Committees, which usually take more than 48/72 hours to give their verdicts.
In between as punitive measures the discounts usually go further up. So, the
respective nominated/negotiating banks could be authorized with some prerogative
power in dealing with such cases of discount up to an extent/thrash hold level.
To cope up with the issue of discount on export value Bangladesh Bank may allow
post facto approval of discount value up-to 10% - 15% or more than that (a limit
beyond which approval from Discount Committee is required).
Again this particular issue adversely affects the overdue back to back obligations
with the OBUs of the nominated banks as well as the disbursed packing credits.
If there is a delay in receiving export proceeds, (due to the delay of the committee) at
least BB should permit the banks to settle the back to back liabilities for the
enhancement of the reputation.
Nine, in case of the foreign buying houses the transferring banks are located
outside Bangladesh. In most of these cases, the transfers of the LCs are done through
the SWIFT (MT 720 field) where the realization clauses are attached. It virtually
makes the transferred LCs very risky as there is no payment guarantee from the
transferring banks.
Research Workshop Keynote Paper 203
For domestically transferred transferable LCs, most of the local banks (SCBs, few
PCBs) transfer through endorsement on the back of the master LCs. It basically raises
the scopes for fraudulent practices and forgery. Most importantly, LCs are not
negotiable instruments which could be transferred through that process. All the local
banks must have established RMAs amongst themselves and they should use the
SWIFT (MT 720 field) for transferring for prompt settlement of back to back LCs.
Ten, in most cases, transferable LCs, received by the first beneficiaries are
transferred 100 percent to the second beneficiaries in Bangladesh. Incorporation of
sub-article 38 (k) in UCP 600 has created problems to our banking and trading
communities. For this specific issue, ICC Banking Commission in their opinion not
only has given the issuing bank the sole right to change/amend/modify the
transferable LC but also it has given the flexibility to the transferring bank for
exclusion of article 38(k) and subsequently communicating the issuing bank
regarding the 100% transfer as well as exclusion of article 38 (k). Currently, the
transferring bank informs second beneficiary/beneficiaries and issuing bank that the
documents can directly be sent to the counter of issuing bank. The practice is in line
with ICC opinion on UCPDC 600 38 (k). Still this issue of amendment procedure
remains debatable. Banks should follow conscious approach in this connection and
the transferring bank must be very agile in communicating the issuing bank regarding
exclusion of article 38 (k).
Article 38 of UCP has described, under which considerations (LC value,
shipment date, insurance coverage etc.), a transferable LC can be modified/amended.
Some bankers even raised questions like as such–if we are actually operating under
the framework of UCP for transferable LCs as there is no mentioning in article 38 of
UCP regarding the service charges and commissions of the buying houses, which are
typically reflected in our transferred LCs.
Eleven, article 2 of UCP contains the definition of banking day from which the
banking holiday could easily be distinguished. UCP provisions have barred the
operations (issuance, transmission, advice, amendment of LC, dispatch and receipt of
documents, issuing bank guarantee etc.) of trade services department on other than
regular banking days. But time to time, to facilitate the local trading communities
Bangladesh Bank asks the different AD branches in different locations to keep their
offices opened during specific national holidays through notifications. Although, it is
known that local regulations are prioritized over the international ones, but it creates
ambiguity amongst the bankers.
Twelve, there is no clear-cut time frame in UCP 600 for affecting payment under
sight LC. Only it has been said that any bank could have maximum five working days
for determining the compliance of the documents. There have been quite a few
complains that, some banks are miss utilizing that.
204 Research Workshop Keynote Paper
Thirteen, again, in UCP, there is not any precise directive for the nominated
banks for dispatching the documents to the issuing/confirming banks which are
submitted by the beneficiary. If under a sight LC, a nominated bank dispatches the
documents to the issuing bank long after the presentation made by the beneficiary
(although within the expiry period) then it is not evident who will compensate for the
loss of the beneficiary. UCP could be more precise in binding the
nominated/negotiating banks through fixing up a definite time line for disposal of the
documents.
Fourteen, according to the BB Guidelines on Foreign Exchange Transactions
(2009), for opening an LC, ADs should obtain confidential reports on foreign
exporters for satisfying themselves regarding the standing of the exporters through
consulting the existing books of reference issued by international credit agencies in
all cases where the amount exceeds BDT 5 lac against proforma invoices issued
directly by foreign suppliers and BDT 10 lac against indents issued by local agents of
suppliers. Gathering such a credit report requires spending foreign currencies of
around USD150 for each report. Credit report of the same suppliers collected for one
importer may be used for other importers during the validity period. In many cases
though a number of importers are importing from the same suppliers, credit reports
are collected separately, for each, spending the scarce foreign exchange of the
country. Another very crucial complain against D & B is that, sometimes, they are
quite late and sends the credit reports even after the LC has already been issued. So, if
the report shows that the credit standing of the foreign buyer is not satisfactory
enough then virtually it raises the risks of the LC issuing banks as well as eventually
the importer is in danger. This problem is particularly very acute for big LCs as well
where the international market price is quite volatile. Moreover, the ratings
sometimes do not match the practical experience (a poorly rated foreign supplier
performs very well and vice versa). It is proposed by the participating bankers, that a
Memorandum of Understanding amongst the banks may be helpful to have an
arrangement for sharing the credit reports to preserve the country‟s foreign exchange.
But possibly, D & B may not allow that to happen. A central database developed by
either Bangladesh Bank or any other organization such as FBCCI or BAB could play
a very vital role in this connection. It will be maintained upon yearly subscription
basis where the banks could take part in a collective manner. Here, the platform will
entail the entire data base of foreign buyers which could be easily available to the
banks at a reduced cost. But the problem is that, it will lead to business losses for D
& B for which it again won‟t be willing to make a deal for the platform. Alternatively
they won‟t be prepared to provide online access to the data base (already denied by D
& B in Bangladesh although they are providing it in other countries). For that,
arrangements should be made to reduce the monopoly market power of D & B
through tagging other rating agencies such as Ceydes.
Research Workshop Keynote Paper 205
Fifteen, for governing the transactions with the units of EPZ, there are a lot
directives incorporated within the domestic regulatory framework. But there are
opinions that these are not adequate. A comprehensive framework supporting both
the exports and imports of EPZs covering all the aspects of the various transactions is
required to be drafted.
Sixteen, recently, in quite a few instances it is found that to retain the clients in
this competitive market the banks are sometimes undertaking undue risks even by
passing the regulatory framework. Cases such as financing by the ADs to the
exporters through opening back to back LCs (deferred by 180 days) under open
account trade could be extremely risky if the foreign buyers default or don‟t make
payment. Although any default case has not been yet reported, but as the concerned
ADs are endorsing the transport documents (title to the goods) to the foreign buyers
directly, it can be commented that such practices are immensely risky as the ADs
have already financed also. It can be commented that through endorsing the transport
documents (title to the goods) to the foreign buyers directly, the ADs are undertaking
huge risk. So, the ADs should curb their risk appetite.
Seventeen, in various commercial transactions, there are different international
formats for contract. But unfortunately, in Bangladesh the use of sales and purchase
contract is not so prominent due to the intense use of documentary credit. But it is
well known that other three payment methods are guided by the purchase/sales
contract. In Bangladesh, exports proceeds are mainly received through documentary
collection under which contract is extremely crucial. In such a circumstance our
banking system needs a standard format for purchase/sale agreement, considering the
risks to preserve the interests of the clients in a better manner. Based on some
international standard format, the sales/purchase contracts should include the names
and the addresses of both exporter and importer. If there is involvement of agent then
the full address with name could be given. The information on description of the
good (which reflects the product name, product type, quantity/amount of the product
as well as the quality requirements), price of the product could be the major
components of the contract. The different trade terms like Incoterms, payment terms,
delivery terms etc are needed to be incorporated. Destination, freights, and different
fees are also needed to be in the contract. If any dispute arises on the transaction, the
dispute settlement procedure, default liabilities, penalties, indemnity, terms of
arbitration – these provisions should be cleared in the contract. These are the major
contents for a standard format but there are some other important issues which are
needed to be covered up in the contract. Moreover, the information requirement in the
contract format may vary from transaction to transaction depending upon the need of
the trading parties. It will make the international trade more protective. In the
workshop, there had been a contentious discussion to develop a standard format for
the sales purchase contract. As, now a days, the banks are facilitating the Bangladeshi
exporters under documentary collection more, (augmented by the survey findings)
206 Research Workshop Keynote Paper
which is guided by the contract, so we all emphasized on the importance of a
comprehensive contact to govern the trade deal. It is well perceived that, a complete
contact format with extensive provisions such as dispute settlement clauses will
protect the interests of the traders as well as the participating bankers. Regarding
settlement of disputes, all suggested that, incorporation of ICC rules in the contract
under documentary collection will be desirable as it is unbiased. So, we jolted down
the following provisions as to be included in the contact (for minimum coverage) for
safeguarding the related parties-
i. name and detailed addresses of the parties
ii. address of notifying party
iii. banks of both the trading parties
iv. method of payment
v. tenor of payment
vi. addresses of the participating banks
vii. incoterms
viii. mode of transportation
ix. ports/places of both loading/taking in charge and
delivery/dispatch/destination
x. endorsement of transport documents
xi. payment settlement process
xii. dispute settlement process (arbitration or litigation and the governing
laws)
xiii. insurance coverage
xiv. verification of contact
Although some bankers pointed that, from a banking point of view, judging the
authenticity of the contact will be risky but others argued that there is already an
existing process through which foreign buyers like HNM (Hong Kong) has given the
derogative power to some banks to authenticate the contracts executed by them.
Again there are thoughts that, in our country the remitting bank can engage the
foreign counterparts in that regard. But in many cases, as the contracts are replaced
by the LCs (which is done for mainly cost minimization) so the standardization of
contracts may not be required. Moreover, some argued that, different countries have
got different regulatory requirements which somewhat binds the traders to go for
different provisions, which may not be in line with the counterpart‟s country
requirements. Even the traders have got their own preferences as well as conservative
approaches. Again, there are sector wise diversified needs, so standardization of
contact format may not be as easy as said. Regarding the issue of sales purchase
contract, the bottom line is that, as the big MNCs and even the ICC have developed
different formats of contacts (there were suggestions for modification/up gradation of
ICC format), based upon those the banks in Bangladesh can go for drafting a standard
format of contacts (covering minimum provisions, as well as may vary depending
Research Workshop Keynote Paper 207
upon the specific requirements of the sectors) and make the traders aware of those.
The Bangladesh Bank or Bangladesh Association of Banks can have a decision that
these formats are binding upon the local banks for financing under contract. All these
will reduce the risks of the banks and also will assist the traders.
Eighteen, the participating bankers have mentioned about some malpractices
regarding endorsement of transport documents. As per the GFET (chapter 8 of
Guidelines for Foreign Exchange Transactions, 2009), other than the cases such as
Advance TT received by the domestic exporter or for EPZ exporters, the shipping
lines are not permitted to issue Straight B/Ls (directly consigned to the foreign
buyers) without the N.O.C. from the local A.D. (the nominated/ negotiating/
remitting bank). It is also a vital condition for the shipping lines to obtain license
from Bangladesh Bank. But quite a few banks have complained that some shipping
lines have violated that as well as there had been cases where although the copy of
the FCRs were issued in the name of local ADs but surprisingly the Original Master
B/Ls were directly endorsed in the favour of the foreign buyers. In these cases, the
ADs threatened the carriers of lodging complains to BB if they did not get cautious.
But these cases should be distinguished from the cases where the big shipping lines
such as APL, Mareskline, NYK usually issue straight B/Ls favouring the foreign
importers as they are the nominated agents of those foreign buyers. Practically, either
cases such as where significant amount of advance remittance has already been
received or cases such as where for advance remittance intimation of shipment is
required then these shipping lines usually fax the copy of original B/Ls to the
foreign buyers with an implicit payment guarantee to the local exporters. Although as
per the guidelines, these cases might appear to be very risky as well as violation, but
practically, these are not that much risky as substantial amount of proceeds would
ultimately be received before transferring the title to the consignment to the foreign
buyers. But for small shipping lines it should not be allowed as their risk undertaking
capacity is not as high as of the giant ones.
REFERENCES
Awasthi, G S (1997), Trade Payments, Paris: International Chamber of Commerce.
Bangladesh Bank (2009), Guidelines for Foreign exchange Transactions, Vol. 1 & 2, Dhaka: Bangladesh Bank.
Busto, Charles (1994), ICC Guide to Documentary Credit Operations, ICC Publication No. 515, Paris: International Chamber of Commerce.
Byrne, James E (2001), “Overview of Letter of Credit Law and Practice” in Ed.
Byrne, James E and Christopher S. Byrnes (2001) Annual Survey of Letter of Credit Law and Practice, USA: Institute of International Banking Law and Practice.
Byrne, James E (2000), ISP98 and UCP500 Compared, Institute of International Banking Law and Practice, USA.
208 Research Workshop Keynote Paper
Collyer, Gary and Ron Katz (2002), ICC Banking Commission Collected Opinion 1995-2001, International Chamber of Commerce, Paris.
Choudhury, Toufic A and Shah Md. Ahsan Habib (2006), „Moving into the New
UCP‟ keynote paper presented in the seminar organized by ICC, Bangladesh on January 05, 2006.
Clarke, Brain W (1995), “ Documentary Letters of Credit” in Clarke, Brain W (Ed.) Handbook of International Credit Management, Gower, USA.
Goode, Roy (1992), Guide to the ICC Uniform Rules for Demand Guarantee, Paris: International Chamber of Commerce.
Jimenez, Guillermo (1997), ICC Guide to Export and Import Basics ICC Publication No. 543, Paris: International Chamber of Commerce.
International Chamber of Commerce (2007), Uniform Customs and Practice for
Documentary Credit- UCP 600, Paris: International Chamber of Commerce.
International Chamber of Commerce (2007), International Standard Banking Practice
for the Examination of Documents under Documentary Credits, Publication no. 681, Paris: International Chamber of Commerce.
International Chamber of Commerce (1994), Guide to ICC Arbitration, International Court of Arbitration, Paris: International Chamber of Commerce.
Lardionis, Jacques (1995), “Documentary Collections” in Clarke, Brain W (Ed.) Handbook of International Credit Management, Gower, USA.
Mann, Ronald J (2001), “Role of Letter of Credit in Payment Transactions” in Byrne,
James E and Christopher S. Byrnes (Ed.) Annual Survey of Letter of Credit Law and Practice, USA: Institute of International Banking Law and Practice.
Ministry of Commerce (2010), Export Policy 2009-12, Government of Bangladesh, Dhaka.
Ministry of Commerce (2010), Import Policy Order 2009-12, Government of Bangladesh, Dhaka: Ministry of Commerce.
Rowe, Michael (1998), Trade and Project Finance in Emerging Markets, United Kingdom: Euromoney Publications.
Virdi, Surender Singh (1992), Documentary Letter of Credit and UCPDC, New Delhi: Tata McGraw-Hill Publishing Company Limited.
Watson, Alasdair (1988), Finance of International Trade, United Kingdom: The
Chartered Institute of Bankers.
Pierron, A. and S. Sankar (2008), International Trade & Trade Finance. Celent.
Research Workshop Keynote Paper 209
Paper Six
Mobile Banking in Bangladesh
Md. Mahbubur Rahman Alam Assistant Professor, BIBM
Md. Shihab Uddin Khan
Associate Professor, BIBM
Kaniz Rabbi Assistant Professor, BIBM
Mobile Banking in Bangladesh
I. Introduction
Mobile banking is a banking which provides financial services to un-banked
communities efficiently at affordable cost without branch network. Providing
banking and financial services, such as cash-in, cash out, merchant payment, utility
payment, salary disbursement, foreign remittance, government allowance
disbursement, ATM money withdrawal through mobile technology devices, i.e.
mobile phone, is called mobile banking.
Mobile banking enables mobile phone users to access basic financial services
even when they are miles away from their nearest branch or home computer. Mobile
banking is already flourishing in the Philippines, Brazil and Africa like other parts of
the world. In the United States, about 10 percent of consumers, i.e., 1.7 million
people currently use their cell phones to conduct bank transactions. That number was
expected to grow to 35 million by 2010 (www.cnbc.com).
The number of mobile phone users worldwide have already crossed five billion
recently. In Japan, nine out of 10 people have cell-phone accounts, and in countries
such as Italy, Norway, Sweden, United Kingdom, Saudi Arabia and Malaysia the
market penetration of mobile phones has already exceeded 100% (ITU ICT
Indicators, 2010).
Mobile banking is now a global phenomenon. Apart from the developed
countries, the developing countries are experiencing strong growth in the mobile
banking. The mobile banking market has grown significantly over the past several
years, particularly in the developed countries, where many financial institutions
now offer some form of mobile services for their customers. This trend contributes
towards the anticipated growth of mobile financial information services, funds
transfer, bill payment and presentation, account management and customer service
solutions.
Mobile banking is most often performed via SMS or the Mobile Internet. But it
can also use special programs called ‗clients downloaded‘ to the mobile device. The
standard package of activities that mobile banking covers are: mini-statements and
checking of account history; alerts on account activity or passing of set thresholds;
monitoring of term deposits; access to loan statements; access to card statements;
mutual funds/equity statements; insurance policy management; pension plan
management; status on cheque, stop payment on cheque; ordering check books;
balance checking in the account; recent transactions; due date of payment
Research Workshop Keynote Paper 213
(functionality for stop, change and deleting of payments); PIN provision, change of
PIN and reminder over the internet; blocking of (lost/stolen) cards; domestic and
international fund transfers; mobile recharging; commercial payment processing; bill
payment processing; withdrawal at banking agent; and deposit at banking agent.
Banks play a vital role in developing the economic and social conditions of a
country. The major share of the profit of banks generally comes from spread. But the
profitability of banks is under tremendous pressure because of continuous shrinking
of spread. It becomes important for banks to reduce the cost per transaction for
increasing spread that in turns will increase the profitability of banks. Using
technology in banks reduces the cost. Banks have realized that cost of transaction
drastically reduces from brick and mortar structure of the branch to electronic
delivery channels like ATM, POS Terminal, Mobile Phone, Internet, etc. Bank also
enjoys lower overheads, establishment, premises and maintenance costs, which
results in reduction of transaction cost. With the emergence of mobile telephony, the
concept of mobile banking is gaining momentum. Low transaction cost is one of the
main reasons why Mobile banking is getting popularity. According to Diniz (1998)
Internet banking provides the lowest transaction cost in USA of $0.01 whereas other
delivery channels like ATM and Phone banking cost $0.27 and $0.52 respectively. In
India transaction cost in an old generation bank is Rs. 256 while it is of Rs. 150 of a
new generation computerized bank. ATM transaction costs Rs. 27, Phone banking
have a cost of Rs. 15 whereas transaction costs through Internet is least at only of Rs.
11 (Bhasin, 2003). Bangladesh also shows a reduction of transaction cost as a result
of using computer technology. Here, transaction cost is $3.33 (Tk. 200.00) for a
manual branch, $2.5 (Tk. 150.00) in a computerized branch [Rahman 2003] and $ 0.6
(Tk. 40.00) for ATM (Shirin, 2010). On the other hand, in USA, transaction cost is
only $1.14 in a computerized branch of a bank (Diniz, 2003). Mobile Phone
transaction costs only $0.16 in USA.
Since Mobile banking offers some smart services benefiting both banks and
customers compared with traditional banking system, it has become imperative to
make necessary room for the scheduled banks to increase mobile banking. Among
others, attractiveness of mobile banking includes: it lowers transaction cost; provides
24-hour services; ensures increased security and control over transactions; reduces
fraud risk; performs higher volume of transactions at less time; increases number and
volume of value payment through banks; allows remote transactions facilities that
replace physical presence of a customer in a bank branch and increases transaction
speed and accuracy. On the other hand, traditional banking is time-consuming and
more costly and therefore, mobile banking is replacing traditional banking all over
the world. In Bangladesh, mobile banking facilities are yet to be fully developed
although some technology-driven products and services have been in operation over
the last few years.
214 Research Workshop Keynote Paper
Rahman (2003) provides statistics on the use of electronic devices in banking
activities of Bangladesh from which it is shown that the initial cost of mobile banking
may be high, but it can be recovered within a few years. This indicates that the
introduction of mobile banking is profitable for the banks. From the point of view of
profitability, the study supports the assertion that the adoption of mobile banking in
banking activities helps in generating higher profit.
The basic objectives of the study are as follows: One, to explore the various
facets of different mobile banking models including their merits, demerits and
security issues; Two, to share the mobile banking implementation status of selected
countries; Three, to explore the current mobile telecommunication infrastructure of
Bangladesh and understand the awareness and readiness of customers regarding
mobile banking; Four, to evaluate the current status and preparedness of banks to
facilitate mobile banking in Bangladesh; Five, to raise some issues which need to be
discussed for smooth operation and implementation of mobile banking in
Bangladesh.
This paper is based on both primary and secondary data. A good number of
literatures have been reviewed to sharpen the thought on mobile banking and its
different facets in the context of Bangladeshi banks. Data on various indicators
relating to the readiness of the mobile communication infrastructure of the country as
well as banks have been collected from different sources such as Bangladesh Bank
publications and reports; websites of different banks and BTRC (Bangladesh
Telecommunication Regulatory Commission). Information has also been collected
from several daily news papers, Wikipedia and other Internet resources. Various
policies and circulars of Bangladesh Bank related to mobile banking have also been
consulted for preparing this paper.
A total of nine banks permitted for offering mobile banking have been selected
for the study. The primary data has been collected by the authors through
questionnaire. In order to accomplish the stated objectives, a key-note paper was
prepared and presented in a day-long workshop participated by a number of senior
level bankers from different banks which was followed by a group discussion by the
participants. Several issues were raised in the discussion and the final report has been
prepared after incorporating the valuable suggestions where it is thought appropriate.
The paper is organized in eight sections. Section I describes the introduction,
objectives and methodology. It is followed by a theoretical framework of mobile
banking including different channels and models with comparison. Section III depicts
the different country experiences regarding mobile banking adoption. Section IV
describes the mobile telecommunication infrastructure of Bangladesh. Economic
benefits and customers‘ awareness are discussed in section V and VI, respectively.
Current implementation status of mobile banking in Bangladesh is outlined in section
Research Workshop Keynote Paper 215
VII. Finally section VIII comes up with some recommendations for effective
implementation of mobile banking in Bangladesh.
II. Mobile Banking Technology
Mobile Banking Business Models
A wide spectrum of mobile/branchless banking models is evolving. These models
differ primarily on the question that who will establish the relationship (account
opening, deposit taking, lending etc.) with the end customer, the Bank or the Non-
Bank/Telecommunication Company (Telco). Models of branchless banking can be
classified into three broad categories - Bank Focused, Bank-Led and Non Bank-Led.
Mobile Channel Platforms
In creating a mobile banking solution, financial institutions use a variety of mobile
media channels including IVR (Interactive Voice Response), Short Message Service
(SMS), Unstructured Supplementary Service Data (USSD), mobile web (WAP), and
mobile client applications. Each mobile media channel has its strengths and weaknesses,
and it is important to identify the delivery mode that is the most appropriate for each
banking service.
Potential Threats
Financial institutions should be aware of the types of potential threats that can affect
their mobile banking services. These include: Cloning, Hijacking, Malicious Code,
Malware, Man-in-the-Middle Attack, Phishing, Redirecting, SMiShing, Spoofing and
Vishing.
Mobile Banking Technology Models
Elements of the Mobile Channel
The use of mobile brings two new elements to the financial services equation:
The mobile device itself
The communications channels offered by mobile network operators.
Both vary considerably in their functionality, as described in turn below.
Mobile device
The handset consists of several layers of components as shown in Figure-1 below.
216 Research Workshop Keynote Paper
Figure 1: Elements of the mobile handset
Source: Bankable Frontier Associates
Standard handsets are devices that contain:
A mobile radio to communicate with the mobile network
The capability to send Voice, SMS, USSD, and DTMF over the radio interface
An operating system that ties all the elements on the handset together
Human interfaces for audio (speaker and microphone), a keyboard and a display
At the Application level the standard handset passes the SMS, USSD, DTMF and
voice ―directly‖ between the display, the keyboard and the audio human
interfaces and the bearer services.
A capability to interface via SIM toolkit to SIM based applications also exists.
The SIM Toolkit programmable application facility on the SIM is the way that
standard handsets can be made secure and be given additional menu based
‗application‗ functionality – such as mobile banking.
Standard handsets do not provide:
Facilities to secure or encrypt data before sending it to server based applications
at mFSPs.
Ability to run programs on the handset.
Research Workshop Keynote Paper 217
Where needed, data security can be added to the standard handset by providing
this on a new SIM through applications loaded into the SIM and accessed through
SIM Toolkit.
Advanced Handsets have all the functionality of standard handsets and in addition
can communicate using IP data (GPRS, EDGE, 3G HSDPA)
have the ability to run applications under the handset operating system (usually in
a J2ME/Java environment)
browse WAP and Internet sites – these are the ‗advanced‘ features.
Advanced handsets fall into two sub-types:
feature phones – handsets that have browsers and J2ME environments.
They are usually locked down, in that they do not have easily accessible
programming environments and often are MNO controlled in what software they may
run. Typically feature phones can be described as the high end mobile phones.
smart phones – handsets with programmable environments.
The environment on the handset resembles a small personal computer and on
most the user is free to choose and run whatever software they choose. The handsets
typically have large displays and can perform full function Internet browsing.
Examples of these phones are Apple iPhone and Nokia N95.
Advanced handsets provide facilities to secure data before sending it to server-
based applications at mFSPs. This security is provided by the browsers and J2ME
environments on the phones. Application based data security can also be provided on
the advanced handset using the SIM. Secure applications can be loaded into the SIM
and accessed through SIM Toolkit (Bankable Frontier Associates, 2008).
Communication Channels
The mobile network comprises the components which carry a data message to
and from the handset to the mFSP. The features of the mobile channels used to carry
those data messages are summarized in Table-1.
218 Research Workshop Keynote Paper
Table 1: Mobile Channel Features
Channel
Technology
Description Supported
on
Handsets
Security of
transaction
on handset
End-to-
end
Security
Supports
Multiple
MNOs
IVR
A call is made to (or from)
an automatic system and
the user receives pre-
recorded prompts and
responds by selecting keys
Standard
Handset
None No Yes
Structured
SMS
A SMS text message is
sent to the mFSP. The
message is interpreted and
acted upon and a response
SMS sent
None No Yes
USSD
A number is called from the
handset and a menu then
displayed on the handset
that the user navigates
through and selects
options and enters data
None No Yes *
SIM toolkit
(WIB / SAT /
Java / custom)
Implemented within the
SIM that is inserted in the
handset. The functionality
appears as a set of
additional menu/s on the
handset
Provided in
SIM Yes Possible **
J2ME Applications that can run
on the handset
Advanced
Handset
Provided
within the
application
Yes Yes
WAP
Internet Browsing using a
WAP protocol browser.
Same as browsing off a PC.
WAP provides optimised
(data usage and size of
screen presentation)
interaction for the mobile.
As provided
by the WAP
browser
Yes - SSL Yes
HTTPS -
Internet
browser
Standard Internet browsing
off the mobile to the bank's
web site. Mobile performs
the function of a PC
As provided by
the Internet
Browser Yes - SSL Yes
*Requires a common USSD short-code on every MNO
**Because of the need for access to the MNO SIM. Typically MNOs do not run common 3rd
party applications
Source: Bankable Frontier Associates
Research Workshop Keynote Paper 219
Technology-related Use Cases
Technology choices regarding handset and network define four main Use Cases
which have different risk characteristics. These Use Cases can be distinguished
according to:
the level of handset functionality required: Standard or Advanced; and
the degree of independence from a MNO or many MNOs.
Table-2 shows how the four Use Cases are derived from these two factors.
Table 2: Use Cases
Mobile Handset Capability
Standard (all) Advanced
Indep
enden
t o
f M
NO
Yes
Use Case 1:
Use what is there, existing
generic mobile bearer services
provided on all phones accessible
directly by user
Use Case 2:
Use mobile browsing services
that are provided on phones
Use Case 3:
Use advanced application
services provided on phones
No
Use Case 4:
Use a secure environment on
the mobile provided by the MNO
or MNOs
Use Case 4 prime:
Dedicated secure application
environment on a handset
Source: Bankable Frontier Associates
The technologies associated with each of these Use Cases, along with some of the
more general associated risks, are seen in the following table (Table-3).
Table 3: Main Use Cases Identified By Technology
Use Case Approach Technologies
available Associated Risk
Use Case 1
SMS
Voice/IVR USSD There is no encryption of information so the
channel from the mobile to the mFSP is open to monitoring, replay, modification
and impersonation
Use Case 2
HTTPS = normal web browsing
WAP phase 1
WAP phase 2
Same risks as for a PC on the Internet. Channel is less exposed than regular
Internet as much of it is within MNOs
(Continued)
220 Research Workshop Keynote Paper
Table 3: (Continued)
Use Case 3
J2ME Same as client side applications on PCs.
Mobiles less exposed to the Internet and the threats. However issues around the trust
(integrity and authenticity) of the applications
exist and need to be managed
Use Case 4
SIM Toolkit
WIB, S@T and
Java cards
The highest technical end-to-end security as
the application runs securely within the SIM
and the encryption keys are kept within the
SIM
Source: Bankable Frontier Associates
Under Use Case 1, the usual practice is to combine the available technologies.
An example is the use of structured SMS messages which are sent to the mFSP.
The mFSP then prompts the user using a USSD prompt to enter their PIN. Five
sub-use cases incorporating such combinations have been defined for Use Case 1.
They are outlined in Table-4 below.
Use Case 1A is the only Use Case where the transaction and PIN are sent at the
same time. All the other Use Case 1s interactively ask for the PIN which reduces a
number of risks and thus makes the Use Cases (1B to 1E) more secure and less risky.
Table 4: Sub-Use Cases of Use Case 1
1A. Structured SMS Send plaintext SMS with instruction mnemonic, value and
PIN to the mFSP number, the SMS content is processed and a
response sent back to the handset
1B. Structured SMS
with confirmation and PIN
authorisation via
IVR
Send plaintext SMS with instruction mnemonic and value to
the mFSP number, the SMS content is processed. IVR calls back asking for confirmation of transaction and PIN. PIN
entered as DTMF. A SMS response sent back to the
handset
1C. Structured SMS
with confirmation
and PIN
authorisation via USSD
Send plaintext SMS with instruction mnemonic and value to
the mFSP number, the SMS content is processed. USSD message sent back to handset requesting confirmation of
transaction and PIN. PIN entered in USSD menu. A SMS
response sent back to the handset
(Continued)
Research Workshop Keynote Paper 221
Table 4: (Continued)
1D. IVR call to
setup transaction and
IVR call- back
for PIN
authorisation
Call in to IVR to setup transaction via IVR voice prompts and DTMF responses. Transaction is processed and
checked. IVR calls back asking for confirmation of
transaction and PIN. PIN entered as DTMF
1E. USSD menu with
PIN login
USSD shortcode entered by user to initiate a USSD session,
prompt for PIN sent from USSD server, PIN entered and session opened and menu displayed. Follow menu to set up
transaction and then submit it for processing. USSD
transaction confirmation and thereafter a confirmatory SMS
Source: Bankable Frontier Associates
Security by Use Case: The differences in the path and security associated with data
messages can be distinguished by the Use Cases (Bankable Frontier Associates,
2008). These are summarized in successive figures below.
Use Case 1 - The mobile channel for SMS, USSD and IVR DTMF
In this Use Case, the intrinsic security available in the network is used.
This intrinsically available security is not end-to-end but is instead built up of the
security available at each of the individual elements that make up the path that the
transaction takes from the mobile handset through to the mFSP. Thus at insecure
elements the transaction can be copied, altered, resent (replayed) and or destroyed.
Figure 2: The Mobile Channel for SMS, USSD and IVR DTMF – Use Case 1
Source: Bankable Frontier Associates
Use Case 2 – The mobile channel for IP Data Browsing
In this Use Case, because it is possible to run an explicit security program on the
handset in the form of a browser with SSL it is possible to secure the data link
222 Research Workshop Keynote Paper
end-to-end from the handset to the WAP or HTTPS Web Servers. The handset
HTTPS browsing is the Internet banking from a mobile handset scenario.
Figure 3: The Mobile Channel for IP Data Browsing – Use Case 2
Source: Bankable Frontier Associates
Use Case 3 – The mobile channel for IP Data Applications
In this Use Case, because it is possible to run a custom made client program with
explicit security on the handset, in this case a J2ME application with a cryptographic
capability, it is possible to secure the data link end-to-end from the handset to the
Application Server. The custom program can take the form of a banking application
or a payment wallet.
Figure 4: The Mobile Channel for IP Data Applications – Use Case 3
Source: Bankable Frontier Associates
Use Case 4 – The mobile channel for SIM toolkit
In this Use Case an application is securely placed into the SIM. The handset
communicates with the SIM and thus the application using a set of commands called
SIM Toolkit. The communication allows the application on the SIM to appear as part
of the celphone‗s menu. The display and selection of menu items and the entry of
data is then possible.
Research Workshop Keynote Paper 223
Figure 5: The Mobile Channel for SIM Toolkit – Use Case 4
Source: Bankable Frontier Associates
Vulnerabilities of the mobile channel
There are a set of generic vulnerabilities (irrespective of Use Case/technology
choice) which are common to all m-FS applications: Use of weak user PINs, Reset
of PIN or password by fraudster, Linkage of imposter MSISDN against the bank
account, Issuing PIN to Imposter, Steal and use mobile device, Incorrect transaction
due to user error and Lack of user knowledge or experience. There are a set of
particular vulnerabilities of the mobile channel relating to handset, mobile channel,
mobile payments application and developing economy environments in particular
(Bankable Frontier Associates, 2008).
Risk Control Measures
As noted above, we have chosen to embed prudent risk countermeasures or
controls into each use case scenario in arriving at the risk evaluation. However, given
the importance of these measures, this section focuses on them separately.
Conventional risk control measures include:
Reject—by changing the model to avoid the risk
Accept—pricing for the risk
Transfer—by moving the risk to another party (e.g. buying insurance)
Mitigating the risk through control strategies to stop vulnerabilities being
exploited.
Model Selection
In general, in developing countries, the mass market for the foreseeable future
will have only standard handsets; hence m-FS models which seek wide reach are
likely to fall into Use Cases 1 or 4. These situations are more likely to be
―Transformational‖ because of the potential to extend financial services to people
who are without them. For applications in the upper end of developing markets or in
developed markets, Use Cases 2 or 3 are likely to apply. Use case 4 prime is not yet
widely available.
224 Research Workshop Keynote Paper
In general, Use Case 1, which is common in developing countries and can
provide ubiquitous access, presents higher inherent technology-related risks largely
because of the lack of end-to-end secure encryption of messages. This increased risk
may be mitigated by effective business process and or product design controls. While
Use Case 4 addresses the encryption risk by providing encryption within the SIM,
and provides the most security; its use and market may be limited by the need for
MNO cooperation and a SIM with SIM Toolkit capability. In Use Cases 2 and 3, the
risks (and services) increasingly converge with standard Internet banking risks.
The mobile technology options available today allow for a variety of choices
when implementing Mobile Financial Services. Options range from technologically
secure end-to-end implementations to less secure options that do not have full mobile
to banking system security.
It is possible to offset the increase in risk caused by using less secure mobile
technologies by introducing operational controls. The ubiquity of less secure mobile
technologies, namely Voice/DTMF/IVR, SMS and USSD on all mobile handsets and
the feasibility to offset the risks introduced by their use in mobile financial service
provision makes it possible to extend financial services to all mobile subscribers.
Given the lower levels of mobile handset technology prevalent in many
developing countries, transformational mobile banking can be accomplished by a
careful appraisal, introduction and management of operational controls (including
user education) necessary to offset the higher technical risks inherent in choosing
ubiquitous but less secure technologies. The following diagram (Figure 2.6) depicts
the security models that can be used and the relative tradeoffs between technical
security and operational controls that are discussed in this report. Moving to prudent
and adjusted security models requires a proportionate regulatory framework within
which to ensure on-going and active supervision of risk management.
Figure 6: Tradeoffs between Technical Security and Operational Controls
Source: Bankable Frontier Associates
Research Workshop Keynote Paper 225
In case of Bangladesh, with all respects, adjusted mobile security model will be
the best selection. But with the advancement of technology, increased customer
knowledge, availability of smart phones we can shift to Use Case1. Use Case 2,3 and
4 will be dream for us now and can be achieved at least five to ten years later.
III. Mobile Banking in Selected Countries
Mobile devices are now the centerpiece to consumer lifestyles. From e-mail
communication, social networking, banking, games, music and video, mobile devices
have forced a radical shift in the way in which organizations service their customers.
In a June 2010 report on Internet trends, Morgan Stanley predicted that by 2012 the
number of smart phones shipped will exceed the total number of desktop and
notebook PCs. And today, more than 80 percent of adults in Europe and the United
States own a mobile device.
Mobile Banking in USA
According to a Study by the Entrust USA (2010), some of the largest U.S. banks -
- Bank of America, Citibank, Wachovia, Washington Mutual, Wells Fargo, and ING
Direct – are providing mobile banking services that gives one access to his/her
accounts wherever he/she is. Like regular online banking, the mobile service allows
consumers to transfer funds, check balances, make bill payments, and look up branch
locations from their mobile devices. Though still in its infancy, banks are hoping the
mobile service will catch on with consumers. Mobile banking is an obvious extension
of online banking as cell phones get more powerful and begin to mimic computers.
Bank of America and Wachovia both offer a browser-based service, which is a
simplified version of the online site that fits within a cell phone and PDA screen. Any
customer that has Internet access on their cell phone can log on to their accounts by
typing the banks URL into their mobile browser.
The mobile banking services of Citibank is called ‗Citi Mobile‘. It is a
downloadable application. Customers need to log on to citi.com/citimobile on their
computers and download Citi Mobile to their cell phones. The application then
resides on the phone. A use can access his/her account anytime.
To generate interest in the mobile service, banks and wireless providers are
teaming up. Wachovia has partnered with AT&T and Firethorn to have the bank's
mobile service preinstalled in AT&T phones starting in the fourth quarter of 2007.
AT&T customers who don't have Wachovia Mobile installed in their devices will be
able to download the application from the Wachovia or AT&T website.
226 Research Workshop Keynote Paper
In USA, one drawback for mobile banking users is the fees. Even though banks
are not charging for their service, carriers do charge for accessing data through their
phone. Carriers typically charge by each kilobyte they use to access data. Customers
can select instead to pay a monthly fee to use an unlimited amount of data – a price
that varies depending on the carrier and type of phone you use. AT&T, for example,
charges $19.99 a month for unlimited data usage.
Some customers may also be hesitant to sign up for mobile banking because of
security concerns. The banks say that their mobile service will have the same strict
log ins and security available to their online banks. Mfoundry, the company that built
the Citi Mobile application, says that if a customer looses their cell phone they can
call Citibank and the entire application will be deleted from the phone. Firethorn said
their applications would have a similar function.
Banks are hoping to extend mobile banking as technology improves. In USA
Citibank has two ongoing cell phone trials. The first is a partnership with
MasterCard, AT&T, and Nokia that places chips in cell phones allowing Citi debit
and credit to make payments by waving the cell phone at a participating store‘s
register.
Citi‘s other pilot is with Obopay that lets debit and credit customers transfer
money between mobile phones. Analysts say even more revenue is possible in the
coming years when more functions are added to cell phones like international
transfers, and booking travel arrangements. While mobile banking is relatively new,
the service has shown some traction with customers. Citi Mobile says it had more
subscribers than expected while the service was being piloted around the country in
the spring. Wachovia Mobile says their service has been getting about 50,000 unique
visitors a week since its launch. Celent predicted that by the end of 2010, 35% of all
online banking households would be using mobile banking.
The mobile banking market has grown significantly over the past several years in
the United States, where many financial institutions now offer some form of mobile
services for their customers. Although more U.S. consumers currently use PCs rather
than mobile phones for banking, Figure-7 shows this gap narrowing. It is reasonable
to assume based on Figure-7, that the adoption rate of mobile banking in the U.S. will
follow the adoption rate of online banking. The following chart has been extrapolated
from an Online Banking Report (Entrust 2010) that compares the ramp-up period for
online banking to the estimated ramp-up for mobile banking. It took approximately
ten years (1996 -2006) to reach 40 million online banking users. According to the
report, it is expected to take 10 years to reach a similar penetration rate for mobile
banking.
Research Workshop Keynote Paper 227
Figure 7: Mobile Banking vs Online Banking Forecast
Source: Mobile Marketing Association
Financial institutions are no exception to the pressure to extend their services to
the mobile channel. A January 2011 Forrester Research study predicted that by 2015
mobile banking will reach one in five adults in the United States (Figure 3.4).
Figure 8: Forecast: US Mobile Banking Adoption, 2010 To 2015
Source: Forrester Research Mobile Banking Forecast, 2010 To 2015 (US)
228 Research Workshop Keynote Paper
Perhaps more significant in terms of the impact of mobile devices on banking,
Forrester Research Study predicted that 18 percent of adults in the United States who
have yet to adopt online banking will use their mobile device to access their accounts
by 2015. And for many customers, mobile banking will become the preferred channel
for basic banking transactions (e.g., checking account balance, transferring money
and paying bills). Today, 23 percent of smart phone users in the U.S. are checking
financial accounts.
Mobile Banking in Europe
In Europe, mobile penetration rates are around 80% and Germany is the largest
European mobile market with 50 million mobile users (Forrester, 2009). German
banks distribute their products via multi-channels (Bahadur, Desmet & v. Bommel).
According to Forrester‘s Research, 84 % of German consumers make use of
Automatic Teller Machines (ATM) - the most popular transaction channel. Banks
have recognised this trend and reacted with strategic alliances. For instance large
private banks such as Commerzbank, Deutsche Bank, Dresdner Bank,
Hypovereinsbank, and the Postbank have established an alliance called ―cashgroup‖.
This enables bank customers to withdraw money without paying extra fees at 7,000
ATM‘s throughout Germany (Cashgroup). Similar alliances have been made among
saving banks as well as co-operative banks.
In Europe, mobile banking trends are similar to those in the United States—as
many as 12 percent of Europeans who are online take advantage of some mobile
banking. However, adoption rates remain low and, at this time, it is predominantly
used for simple SMS (Short Message Service) text messages. A much smaller
number, only 4 percent, are actually accessing mobile banking (Hoehle, 2009).
While the convenience and immediacy offered by mobile banking is clearly the
primary driver for these users, particularly for simple transactions, there are still a
number of concerns that are holding back widespread adoption. In Europe, between
35 and 40 percent of adults currently banking online see no value in mobile banking.
And those accessing mobile banking websites are the typical early adopters, the vast
majority of whom are already banking online (Eusebio, 2009).
But the growth in mobile devices has also driven the incidence of fraud targeting
these devices. Whether simple rogue text messages, fictitious billing scams or more
malicious attacks using malware installed on the device, the number of attacks are
increasing at an alarming rate—mobile malware increased by more than 45 percent in
2010 compared to 2009. And with less education about mobile threats, users seem
more inclined to fall victim to them during mobile sessions. And for many, it‘s the
lack of security on these devices that is a major inhibitor to their adoption of mobile
banking. Twenty-two percent of adults banking online in Europe indicated that lack
of security was stopping them from using mobile banking (Eusebio, 2009).
Research Workshop Keynote Paper 229
Financial institutions are being urged to improve the mobile end-user experience
and develop new functionality in the mobile banking space to differentiate it from the
online experience. Mobile banking offers an immediacy and persistent ―always-on
communication‖ that is not available in other channels, including online banking.
This provides an opportunity for banks to differentiate offerings in the mobile space
from the more traditional channels.
Improved security will be a prerequisite to recognize the exponential growth in
mobile banking that is projected by leading analyst and research firms. And in the
mobile environment, where the expectation is for instant, unobtrusive
communication, end-user security and strong authentication needs to be simple, quick
and transparent.
Online banking is utilized by only 30 percent of consumers (Forrester, 2010). On
the other hand, 52 percent of them still rely on traditional physical branch services to
satisfy their banking needs – despite the fact that automated channels such as ATM‘s
or online banking offer lower transaction fees (Forrester, 2010).
In Germany, in order to access mobile banking services, customers should own a
mobile handset and subscribe to a MNO. There are four major MONs: T-mobile,
Vodafone, E-Plus, and O2. All German MNOs have recently introduced 3G/UMTS
services. The new data transmission rates appear to close the existing gap between
―wired‖ Internet access and mobile Internet. For instance E-Plus offers a ―flatrate‖ for
unlimited data transmission with transfer rates up to 384 Kbits/s (E-Plus, 2006).
Apart from general data/network usage none of these four network providers charges
customers for mobile banking services separately. All of the banks have websites that
can be viewed from any device, independently of the wireless service provider.
A research study (Solon 2009) on mobile banking services offered by the top 100
German banks found that surprisingly only 14 German financial institutions allow
their clients to interact via the mobile channel. Three out of these 14 offered very
simplistic SMS-notification services. Most banks do not charge customers extra fees
for SMS services.
Mobile Banking in South Korea
In terms of the evolution of services being offered on mobile applications, South
Korea is showing the way. The big push came when LG Telecom Ltd., the smallest
of Korea's three mobile service providers teamed up with the Kookmin bank to
launch the ‗Bank on' service. Under this scheme mobile users were able to use smart
chips embedded in cell phones for accessing all of the transaction and enquiry based
services. The chip-based service automated the authentication of users when they
accessed their bank's financial services to make the whole process much faster and
230 Research Workshop Keynote Paper
convenient. The icing on the cake came with the ability of these chip enabled cell
phones to be used simultaneously as cash cards. By October 2004 there were already
about 100,000 infrared readers adapted to take payment directly from mobile phone
handsets in Korea. Users can now use their cell phones to pay for everything, from
restaurant bills, travel tickets, merchandise and even haircuts (Infogile, 2007).
Mobile Banking in India
A study of Infogile (2010) found that when Reliance Infocomm, India rolled out
its CDMA network, (at the time the mobile market in India was still in its infancy,
and data services were almost never heard of) it made sure that all handsets supported
Java. The Reliance application platform, also known as R-World brought Java
compatibility even to the lower end phones.
Reliance used a novel way to overcome the memory limitations of lower-end
mobile phones, which hampered deploying of multiple standalone J2ME based
clients. Instead of storing applications statically on their cell phones, users access a
single menu based application called R-World, which connects them to the Reliance
servers. Using the menu based user interface, mobile users select the application,
which they want to run and download them over-the-air to their cell phones. These
applications are then executed locally on the mobiles. From mid-2004 Reliance tied
up with two of the popular private sector banks, HDFC and ICICI, to provide a host
of their enquiry and transaction based mobile banking services through its R-World
environment.
Reliance Communications (R Comm), an Anil Dhirubhai Ambani Group
company, has announced introduction of money transfer through mobile phones
across India with the help of ICICI bank as a joint venture partner. This new facility
for the subscribers of Reliance Communications is an easy to use alternative for
account-to account transfer of money which is normally associated with banks and
other agencies.
The money transfer market, according to R Comm, is more than $24 billion
annually including global transfers to India. This will help customers having accounts
with ICICI Bank to send and receive money anytime anywhere using Reliance mobile
phones. The service is made available to the masses on Reliance mobile world
enabled phones including the recently launched Reliance Classic range in the range of
Rs 777 and Rs 1,234. The customers will be charged a mobile transaction fee of Rs
10 and can transfer money up to Rs 5,000 with multiple transactions in a day.
ABN AMRO Bank brings to the convenience of mobile banking using an
application called MPOWER. It allows customers to access their account for inquiry
& transactions using simple SMS messages.
Research Workshop Keynote Paper 231
One can do the following using MPOWER:
Balance and Transaction Inquiry
Share Holdings in Demat Account
Funds Transfers to ABN AMRO and other banks
Bill Presentment and Payment
Cheque Inquiry and Stop Cheque
Online Fixed Deposit Opening
Request for Cheque Book and Statement
Request for new PIN and change PIN online
Others services provided by the Indian banks are given below (Table-5).
Table 5: M-Banking: The Services Bouquet
ICIC
I B
an
k
HD
FC
Ba
nk
IDB
I B
an
k
HS
BC
Ba
nk
of
Am
eric
a
Cit
iba
nk
AB
N A
mro
Balance enquiry √ √ √ √ √ √ √
Last few transactions √ √ √ √ √ √ √
Cheque payment status √ √ √ √ √
Stop payment of cheques √
Statement request √ √ √ √ √ √
Cheque book request √ √ √
Source: Infogile (2010)
IV. Mobile Telecommunication Infrastructure of Bangladesh
The proliferation of mobile telephony has brought dramatic changes in
Bangladesh. Mobile Teledensity, which stood at less than 1% ten years ago, has
surpassed 47% mark in May, 2011 (BTRC). Mobile penetration that reached the
remotest interiors across Bangladesh has united most of the unwired community. The
phenomenal growth triggered by deep mobile penetration has become the ultimate
choice of the Bangladeshi people to stay connected.
According to ITU (2010), position of Bangladesh in the World Mobile
Penetration index is 172 th, (46.17 per 100 inhabitants). Top position is carried by
Macao, China (206 per 100 inhabitants). Among the SAARC countries Bangladesh is
in 6th position, whereas Maldives and Nepal hold the first and eighth position
respectively. At the end of 2010, global cellular subscriptions crossed 5370 million
and 80 out of 100 inhabitants holds a mobile phone in the world (Figure-9).
232 Research Workshop Keynote Paper
Figure 9: Global Mobile Subscriber
Source: ITU World Telecommunication/ICT Indicators
Following figures (Figure-10 and Figur-11) also compare the mobile penetration
of Bangladesh compared to other SAARC and selected countries.
Figure 10: Mobile Penetration of SAARC Countries
Source: ITU, 2010.
0
1000
2000
3000
4000
5000
6000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Su
bsc
rip
tion
s (m
illio
n)
0
10
20
30
40
50
60
70
80
90
100
Pe
r 1
00
inh
ab
itan
ts
S ubs criptions (in m illions )
P er 100 inhabitants
S ource: ITU World Telecom m unication /IC T Indicators
G lobal mobile cellular s ubs criptions , total and
per 100 inhabitants , 2000-2010
Mobile Penetration of SAARC Countries
0
20
40
60
80
100
120
140
160
180
Mald
ives
Sri L
anka
India
Pakis
tan
Bhuta
n
Bangla
desh
Afg
hanis
tan
Nepal
Per
100 I
nh
ab
itan
ts
Research Workshop Keynote Paper 233
Figure 11: Mobile Penetration of some Selected Countries
Source: ITU, 2010.
The total number of Mobile Phone subscribers in Bangladesh has reached 75.484
million at the end of May, 2011. There has been large amount of investments from
domestic and foreign investors in the mobile technologies. Due to this, access to
telecommunications increased rapidly. The phenomenal growth has enabled the mass
unwired population of Bangladesh to stay connected. Multinational mobile phone
companies are providing private sector telecommunications infrastructure. Rising
teledensity is a major indicator of its contribution- in 2002 teledensity in Bangladesh
was only 0.54%; this increased to 53% in May, 2011 (PSTN and Mobile).
In Bangladesh, liberalization of the mobile phone sector led to large increases in
the accessibility of telecommunications to consumers due to low tariff costs. BTRC
has been able to fix call charges for all cellular phone operators and has been able to
bring all the companies under a uniform regulatory framework. The mobile operators'
call charges now range between a maximum of Tk 2 and minimum of Tk 0.25 per
minute. It is evident from the graph (Figure-12) that in 2001 the average call charge
was 11.7 Tk/minute, whereas in April, 2010 it has come down to 0.66 Tk/minute.
Mobile Penetration of some Selected Countries
0
20
40
60
80
100
120
140
160
180
200
Sa
ud
i A
rab
ia
Ru
ssia
Ma
ldiv
es
Sin
ga
po
re
Un
ite
d K
ing
do
m
Ma
laysia
Au
str
alia
Fra
nce
Ja
pa
n
Un
ite
d S
tate
s
Sri
La
nka
Ca
na
da
Ch
ina
Ind
ia
Pa
kis
tan
Bh
uta
n
Ba
ng
lad
esh
Afg
ha
nis
tan
Sie
rra
Le
on
e
Ne
pa
l
Ch
ad
Co
ng
o
Bu
run
di
Cu
ba
Eth
iop
ia
So
ma
lia
Mya
nm
ar
Pe
r 1
00
In
ha
bit
an
ts
234 Research Workshop Keynote Paper
Figure 12: Average Tariff 2001-2010
Source: BTRC
Market shares of mobile operators exhibit contrasting outcome of performance and
success. While the oldest mobile operator lags at the bottom of market dominances,
three operators who commenced their services almost at the same time do vary
significantly in their market positioning. Grameen Phone outperformed all other
operators and enjoys a clear lead in the race of securing market share (Figure-13).
Figure 13: Market Share of MNOs (Total 75.484 Million)
Source: BTRC, May 2011
Average Tariff
11.37
9.8
4.5
32.3
1.781.35
0.88 0.66
7.45
0
2
4
6
8
10
12
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Year
Taka/M
inu
te
Robi
14.35
Banglalink
20.047Grameen
Phone
33.261
Airtel
4.911Citycell
1.747
Teletalk
1.166
Research Workshop Keynote Paper 235
V. Economic Benefits of Mobile Banking
To know the economic benefits of mobile banking we shared the theoretical
knowledge with the practitioners, Chief Technical Officers (CTOs) of nine banks. All
of them said that if a large group of un-banked people can be covered by mobile
banking a huge amount of money can be collected as deposit for the banks that can be
mobilized for further business enhancement.
Around 33% of them think that mobile banking is a demand of time and
technology. About 22% agreed that without mobile banking it will be very difficult to
survive in this competitive era. 44% of them believe that it‘s a CSR that will help to
develop the country. But 88% of the CTOs dream is that it will help to diversify their
business as well as will increase business volume by including un-banked people.
Regarding benefits that will be received from mobile banking, all of them said
that it will increase revenue and will create new market for cross sell of products like
micro credit and micro finance through this channel. Micro saving schemes also can
be adopted to increase deposits of banks.
We also examined the indirect and direct strategic benefits of mobile banking for
DBBL, BRAC and Trust Bank (as they are the only provider of transactional mobile
banking in Bangladesh) whether such benefits are apparent in each of the banks.
Following Table-6 describes this.
Table 6: The Strategic Benefits of Bangladeshi Mobile Banking Services
DBBL BRAC Trust
Indirect benefits
Cross-selling √√ √√√ √
Cheaper customer acquisition
√ √ ×
Customer loyalty √ √ √
Direct benefits
Customer benefits √√ √√√ √
Cost reduction × × ×
× = no evidence; √ = low; √√ = medium; √√√ = high Source: BIBM Survey 2011
As Table-6 demonstrates, the main beneficiaries of mobile banking services in
Bangladesh are the customers. The data analyzed provide evidence that the
Bangladeshi banks generated benefits through cross selling but no evidence for
cheaper customer acquisition. There is also no evidence of cost reduction.
236 Research Workshop Keynote Paper
There is some indicative evidence that some of the banks have implemented a
mobile banking strategy to promote customer loyalty. By offering another banking
channel, the banks are making their services more accessible for their existing
customers.
The biggest advantage that mobile banking offers to banks is that it drastically
cuts down the costs of providing service to the customers. For example, in USA,
an average mobile transaction cost is about $0.18 each, whereas an electronic
transaction costs only about $1.14 each (Deniz 2010). Additionally, this new channel
gives the bank ability to cross-sell their other complex banking products and services
such as vehicle loans, credit cards, etc.
For service providers, mobile banking offers the next surest way to achieve
growth. Mobile banking is helping service providers increase revenues from the now
static subscriber base. Service providers are increasingly using the complexity of their
supported mobile banking services to attract new customers and retain old ones.
A very effective way of improving customer service could be to inform
customers better. Credit card fraud is one such area. A bank could, through the use of
mobile technology, inform owners each time purchases above a certain value have
been made on their card. This way the owner is always informed when their card is
used, and how much money was taken for each transaction. 77% of CTOs believe
that by this way card frauds will be reduced.
Similarly, the bank could remind customers of outstanding loan repayment dates,
dates for the payment of monthly installments or simply tell them that a bill has been
presented and is up for payment. The customers can then check their balance on the
phone and authorize the required amounts for payment. The customers can also
request for additional information. They can automatically view deposits and
withdrawals as they occur and also pre- schedule payments to be made or cheques to
be issued. Similarly, one could also request for services like stop cheque or issue of a
cheque book over one‘s mobile phone. This will reduce customer‘s hassles and save
time, all CTOs agreed.
There are a number of reasons that should persuade banks in favor of mobile
phones. They are set to become a crucial part of the total banking services experience
for the customers. Also, they have the potential to bring down costs for the bank
itself. Through mobile messaging and other such interfaces, banks provide value
added services to the customer at marginal costs. Such messages also bear the virtue
of being targeted and personal making the services offered more effective. They will
also carry better results on account of better customer profiling.
Research Workshop Keynote Paper 237
Yet another benefit is the anywhere/anytime characteristics of mobile services.
A mobile is almost always with the customer. As such it can be used over a vast
geographical area. The customer does not have to visit the bank ATM or a branch to
avail of the bank‘s services. Research indicates that the number of footfalls at a
bank‘s branch has fallen down drastically after the installation of ATMs. As such
with mobile services, a bank will need to hire even less employees as people will no
longer need to visit bank branches apart from certain occasions.
The banks add to this personalized communication through the process of
automation. For instance, if the customer asks for his account or card balance after
conducting a transaction, the installed software can send him an automated reply
informing of the same. These automated replies thus save the bank the need to hire
additional employees for servicing customer needs.
All CTOs believe that mobile banking will minimize usage of cash, its associated
cost and fake note circulation, which is one of the main objectives to implement
mobile banking in Bangladesh. But we have to have patience; it will take time, they
added. With a high hope 55% of the CTOs believe that mobile banking will be
profitable in the long run by reducing number of branches and employees, and
increasing business volume. But 33% of them are confused about the profitability.
Almost all CTOs said that Government, MNOs and third party agents will be
benefited highly in the long run. They also added that credit and deposit systems
could be developed through mobile banking, especially for un-banked people. A big
new job market will also be created in this regard. But about reduction of
administrative cost 66% of the CTOs replied positively, 22% of them negatively and
rest of the CTOs have no idea at all. They are confused.
Finally, we can say that, by using mobile banking banks will enjoy reduced
administrative cost. Certainly, this technology will increase banks revenue. Green
banking can‘t be thought without this technology. Moreover, customers can save their
time and money also. Transportation cost can be reduced if a customer gets banking
services at his/her door steps. Corruption regarding distribution of govt. subsidies and
allowances could be minimized. Hassle free tax payment to govt. through mobile
phone will help to increase total amount of tax collection by the govt. Govt. revenue
will be increased from different mobile banking services also. Mobile banking in
Bangladesh will also help to create a new job market where a number of
employments will be created. Thus the use of mobile technologies is in a win-win
proposition for the banks, MNOs, agents, bank‘s customers and government also.
238 Research Workshop Keynote Paper
VI. Customers’ Awareness and Readiness Status of Bangladesh
The un-banked people targeted for mobile banking are very much poor and
illiterate. Moreover, they have no high technical skill regarding mobile channels and
handset operations. But mobile booming in Bangladesh indicates that users have at
least minimum basic knowledge to operate the set. Initially, this basic knowledge can
be applied in mobile banking operations. At least understanding, sending and
receiving text message (SMS) and to read out menus (USSD) is a must in most cases.
Language may be a great barrier, as message and menu is totally based on English.
Though SMSs of mobile banking services will have a fixed format, we can assume
that within a very short period of time customer will be able to understand the
operational details with the help of mobile agents.
Regarding awareness of customers 50 users of mobile phone in three districts
were interviewed to know about their interest about mobile banking. A stratified
random sampling is used to interview customers. Table-7 below describes the
sampling method.
Table 7: Determination of Sample Size
MNO
Mar
ket
Shar
e
(%)
Cust
om
er
Inte
rvie
wed
Mal
e
Fem
ale
Hav
e A
ccount
Hav
e n
o B
ank
Acc
ount
Dhak
a
Sunam
gonj
Mym
ensi
ngh
Grameen Phone 43 16 10 6 3 13 4 8 4
Banglalink 27 12 8 4 1 11 3 5 3
Robi 19 8 5 3 1 7 2 4 2
Airtel 7 6 4 2 0 4 2 4 1
Citycell 2 4 3 1 1 3 2 1 1
Teletalk 2 4 2 2 0 4 2 1 1
Total 100 50 32 18 6 44 15 23 12
Several questions were asked to the users of mobile phone regarding mobile
banking. Following graph (Figure-14) summarizes the output.
Research Workshop Keynote Paper 239
Figure 14: Customers’ Awareness regarding Mobile Banking
Source: BIBM Survey 2011
From the graph it is clear that people have mixed reaction about mobile banking.
About 55% respondent said that they have no idea about mobile banking and its use.
Moreover, they are afraid of the security of their money. Around 62% respondents
believe that it will help to develop our country and corruption may be eliminated.
42% of the respondents said that they have no clear knowledge about the technology.
About 38% of them are not aware about the benefits also. Most of them said that yet
they haven‘t heard about this new banking technology. In this scenario, it‘s not
surprising that over 52% of the respondent think that it is complicated to use. While
interviewing, it was found that awareness about mobile banking services was higher
among urban people. While overall awareness remains very low, people are keen to
try out mobile banking. 15% of the respondents evinced interest in the services.
Given the convenience factor—the fact that mobile banking can be used from
anywhere in the country as long as one can send and receive SMS‘—15% were
interested and 32% thinks that it will increase savings habit.
VII. Current Status of Mobile Banking in Bangladesh
Bangladesh Bank permitted the following nine banks for mobile banking
operations: The Trust Bank Limited, DBBL, BRAC Bank Limited, Mercantile Bank
Limited, Eastern Bank Limited, Dhaka Bank Limited, AB Bank Limited, Premier
Bank Limited and Bank Asia Limited. Though there are many types of mobile
0% 10% 20% 30% 40% 50% 60% 70% 80%
I see no value in using it
I don't believe it is safe
I don't want to pay for it
I don't have enough knowledge about it
I don't know how much it would cost
I don't know whether my bank offer it
It is complicated to use
My bank does not offer it
I can't find enough information about it
I like to visit bank branch/ATM
My cell phone is not enough for banking
I dno't know what is mobile banking
I want to enjoy it
I think It will help to grow savings habit
I believe it will help to eliminate corruption
240 Research Workshop Keynote Paper
banking services that can be offered in Bangladesh by taking the permission from the
central bank of Bangladesh, only five banks got the permission for most of the
services; rest of the banks permitted only for inward foreign remittance transfer
(Bank Asia also permitted for P2P and cash-in/cash-out). Table-8 lists the mobile
banking services that are permitted by Bangladesh Bank to date.
Table 8: List of banks with mobile banking permissions
C
ash
in
/ C
ash
Ou
t
P2
B P
ay
men
ts
B2
P P
ay
men
ts
G2
P P
ay
men
ts
P2
G P
ay
men
ts
P2
P P
ay
men
ts
Oth
ers
(DP
S,
Insu
ran
ce,
Mic
rofi
na
nce
etc
.)
Inw
ard
F
ore
ign
Rem
itta
nce
s
TBL √ √ √ √ √ √ √ √
DBBL √ √ √ √ √ √
BRAC √ √ √ √ √ √ √
MBL √ √ √ √ √ √ √ √
EBL √ √ √ √ √ √ √ √
DBL √
ABBL √
PBL √
BAL √ √ √
Source: BIBM Survey 2011
Among nine banks only three banks, DBBL, BRAC Bank and Trust Bank
Limited have already started mobile banking with maximum features. Mercantile
Bank Ltd is yet to start this banking though it got the permission many months ago.
Rest of the banks mainly got the permission only for inward foreign remittance
transfer. Among the permitted banks only seven banks are in operations. This section
investigates transactional mobile banking services offered by the three banks, namely,
DBBL, The Trust Bank Ltd and BRAC bank Ltd.
DBBL Mobile Banking
DBBL offers Customer Registration, Cash-in (cash deposit), Cash-out (cash
withdrawal), Merchant Payment, Utility Payment, Salary Disbursement, Foreign
Remittance, Air-time Top-up and Fund Transfer facilities to their mobile banking
customers. Customer can register at any authorized agent point of DBBL – at present
these are the retailers of Citycell, Airtel & Banglalink throughout the country who
can display ‗DBBL Agent Certificate‘ and ‗DBBL Mobile Banking Banner‘.
Research Workshop Keynote Paper 241
PIN is the key for transaction of mobile banking in DBBL. Only correct match of
PIN & Mobile Number can access the Mobile Account. PIN is needed to verify the
A/C owner by the system. If a PIN is disclosed, respective account is at risk;
therefore, PIN should be handled very carefully. PIN is required to be inputted during
cash withdrawal from an Agent or DBBL ATM. PIN ensures security of user‘s
money and protects fraudulent transactions.
Moreover a check digit is also required for mobile banking with DBBL. Mobile
number is public and known to many people. Without knowing your check digit,
none will be able to deposit money at your account, thus it helps to keep your mobile
account confidential. On the other hand, a check digit eliminates typing error, thus
protecting sending or depositing money to a wrong account.
Customer having any mobile from any Mobile Operator can be registered for
DBBL at any agent point of Airtel, Banglalink and Citycell. All these Mobile
Account holders will be able to deposit and withdraw money from the Agents.
However the customers having mobile from operators other than Airtel, Banglalink
and Citycell will not be able to initiate many self-initiated services like Balance
checking, fund transfer, utility payment, Air-time top up, PIN Change etc. Customers
having mobile from Airtel, Banglalink and Citycell will be able to enjoy all the
services – agent-initiated as well as self-initiated.
Any type of mobile set can be used for DBBL mobile banking. And a customer
can open a DBBL Mobile Account with an initial deposit of Taka 10/- (taka ten)
only.
DBBL mobile banking is highly secured as it uses either USSD or SMS+IVR as
its communication channel. In case of USSD, both the instructions and PIN are
communicated using USSD while in case of SMS+IVR, instructions are sent via SMS
and PIN via IVR (voice channel) both the USSD and IVR are secured for
transmission of PIN. Customer‘s money is safe as none can withdraw his/her money
without taking possession of Mobile set, PIN and Check digit together. None will be
able to deposit unwanted money into a mobile banking Account without knowing the
check digit (although the mobile number is publicly known).
Customer can cash-out (withdraw) at any authorized agent of DBBL (at present
Airtel, Citycell & Banglalink agents, A2I and Sundorban Courier Service), DBBL
ATMs and DBBL Branch. Customer also can cash-in (deposit) at any authorized
agent of DBBL (at present Airtel, Citycell & Banglalink agents, A2I and Sundorban
Courier Service) or DBBL Branch.
There may be scarcity of cash at agent points. DBBL wants to serve as many
customers as possible from each agent points. On the other hand, it is required to
242 Research Workshop Keynote Paper
minimize fraudulent loss, if any. To arrest all the above, a transaction limit in terms
of frequency and amount have been set in the system. Current limit for the customers
are as under:
Cash-in frequency per day = 5 times
Cash-out frequency per day = 5 times
Cash-in / cash-out amount per transaction = 5,000/-
Cash-in frequency per month = 20 times
Cash-out frequency per month = 20 times
Moreover, Corporate Office can disburse the salary of their employees and
Government can disburse different allowances like elderly allowance, freedom fighter
allowance to the people within a few moment in a hassle free way.
DBBL also has a customer care/call center to serve any problem to the customers.
Customer care center is available for 24 hours. For any help, customer has to just dial
16216 from any phone, land or mobile.
DBBL started mobile banking by using different outlets of Airtel (59), Citycell
(485) and Baglalink (169) as pay points. Moreover, they have also selected Union
Information Service Centers (181) and Sundarban Courier Service (14) to work as
pay points. Total 908 pay points are working in 24 districts of Bangladesh. Total
number of customers registered up to October, 2011 is 35,855. The web site of DBBL
www.dbbl.org.bd provides necessary information to customers. Their target is 60
million customers within next ten years.
BRAC Bank (bKash)
BRAC bank offers its mobile banking services through an extension of BRAC
Bank, called bKash, a full-scale mobile phone-based payment switch. bKash Limited
is a joint venture between BRAC Bank Ltd., Bangladesh, and Money in Motion LLC,
USA. Ensuring access to a broader range of financial services for the people of
Bangladesh is the ultimate objective of bKash. It has a special focus to serve the low
income people of the country and promote sustainable micro-savings to achieve
broader financial inclusion by providing financial services that are convenient,
affordable and reliable.
The mission of bKash is to provide a complete mobile financial service solution
to increase access to a broader range of financial services for every citizen of
Bangladesh and promote sustainable savings to achieve the ultimate goal of financial
inclusion.
Research Workshop Keynote Paper 243
bKash with a vision wants to build a highly scalable mobile money platform,
allowing people of Bangladesh to safely store, transfer, and receive money via their
mobile phone. By providing financial services that are convenient, affordable, and
reliable, bKash aims to widen the net of financial inclusion.
bKash assumes that their mobile banking services will highly benefit the country
as 83% of the population lives under $2 a day and access to finance can help in
improving their economic situation. About 13% of Bangladeshis are connected to the
formal financial system whereas 47% of total population has mobile phones.
Providing financial services using this mean can make the service more accessible
and cost effective for the vast population of Bangladesh.
To provide the service bKash is working jointly with BRAC , BRAC bank, Bill &
Melinda Gates Foundation, Fundamo (the world's largest specialist provider of
enterprise mobile financial services software is the technology partner of mobile
financial service platform of bKash, situated in South Africa), Money in Motion
(Money in Motion, based in the USA, is in the business of developing banking
services for the unbanked, utilizing new information and communication
technologies, in particular mobile devices.), Robi and ShoreBank International
(ShoreBank International delivers a broad range of financial services to financial
institutions and their funders globally, dedicated to expanding access to capital for
small businesses, entrepreneurs and households.)
The following services are provided by bKash:
Cash In and Cash Out
Send Money
Token
o Create Token
o Redeem Token
Payment
My Wallet
o Check Balance
o Request Statement
o Change PIN
Registration is an easy one time process to become a customer of bKash. Once
you have done it, you can use the bKash wallet the way you want. At the moment,
Robi subscribers can register for bKash, very soon, subscribers from other operators
will also be able to use bKash Wallet.
bKash has started mobile banking operations along with 1968 pay points [BRAC
office (1500), Robi (400), A2I (68)] in all districts of Bangladesh. Total number of
customers registered up to October, 2011 is about 30000. The average amount per
transaction is Tk. 1100. The web site of bKash www.bkash.com provides necessary
information to customers. Their target is 100 million customers within next ten years.
244 Research Workshop Keynote Paper
Trust Bank Mobile Money
Trust Bank Ltd has introduced Trust Mobile Banking service. Trust Mobile
Money is a deposit prepaid account facilities for the banked and un-banked citizen of
Bangladesh where bank has its branches and accredited Pay-points to
open/registration prepaid account.
Customer will be able to transfer fund; deposit and withdraw money from the
accredited Pay-points by using Mobile/Card. Customers also will be able to send
remittance faster to the remote place of Bangladesh by availing this product.
Trust Mobile Money Features:
Account to Account Transfer (Intra and Inter Bank)
Local Remittance (Person to Person)
Transaction at POS
At partners Merchant Stores
o At partners service organizations (Gas station, Hospital, Cinema hall, etc.)
o Person to Business payments (Utility bill, Insurance Premium, Loan
installments, E-top-up for mobile phone, E-ticketing etc.)
Business to person payments
Government to person payments (Agricultural Subsidies, Widow Allowances,
Freedom Fighter Allowances etc.)
Person to Government payments.
Currently 240 pay points are working in 3 districts of Bangladesh for mobile
banking of Trust Bank Ltd. Up to October 2011, total number of customers registered
is 976, though it is the first Bangladeshi bank which got permission from the central
bank for mobile banking. Perhaps this bank is going very slow in this respect.
The web site, www.trustbd.org, of this bank does not provide necessary information
to customers. It targets 20 million customers by the next ten years.
Comparisons of Banks Providing Mobile Banking Services
It is found that 66% of the banks are using or planning to use SMS technology for
mobile banking. USSD is used by 33% banks, whereas IVR is also used by three of
the banks. One of the banks is also trying to use J2ME technology. Four banks are
using a combination of SMS, USSD, J2ME and IVR. CTOs of the banks express that
only one channel is not secured enough, a combination of two or more channels is
good to ensure security. Table-9 summarizes the opinion of respondents about the
various aspects of technology.
Research Workshop Keynote Paper 245
Almost all, except The Mercantile Bank, are going to implement transformational
model. For this reason, existing customers have to open a separate new account for
mobile banking. It may be a new hassle for the existing customers. Moreover, banks
have to set up new technologies (hardware, software, database, etc.) for this service
with a huge cost. But in additive model, existing set up is enough with a slide change
to implement these services. Mercantile bank is going to implement both additive and
transformational models.
Table 9: Current Status of Banks: Mobile Banking Technology
Banks
Transactional
Mode Multi
MNO
Multi
Bank SMS USSD IVR WEB
SIM
Toolkit J2ME
Trust Bank Transformational √ √ √
DBBL
Transformational √ √ √ √
BRAC Bank Transformational √ √
Mercantile
Bank
Additive &
Transformational
√ √ √ √
Eastern Bank
Transformational √
Premier
Bank
Transformational √
Dhaka Bank Transformational
Bank Asia Transformational √ √
AB Bank Tansformational √ √
Source: BIBM Survey 2011
Additive-extension of existing banking operation to mobile channel (account
exists, registration exists, mobile channel opened). Transformational-start of new
banking relationship with new customers (account created with mobile access, new
registration).
246 Research Workshop Keynote Paper
Table 10: Marketing Strategy of the Banks in Bangladesh for Mobile Banking
New
s P
ap
er A
dv
erti
sem
ent
Go
vt.
Ow
ned
Tel
evis
ion
Ch
an
nel
Pri
va
te T
elev
isio
n C
ha
nn
el
Go
vt.
Ow
ned
Ra
dio
Ch
an
nel
Pri
va
te R
ad
io C
ha
nn
el
Pri
nte
d B
roch
ure
s
E-m
ail
Web
site
Th
rou
gh
Em
plo
yee
s
Th
rou
gh
Mo
bil
e O
utl
ets
Th
rou
gh
Ex
isti
ng
Cu
stom
ers
Th
rou
gh
Mo
bil
e P
ho
nes
Th
rou
gh
Cu
sto
mer
Ca
re C
ente
r
Th
rou
gh
Th
ird
Pa
rty
Th
rou
gh
Sis
ter
Con
cern
Trust Bank √ √ √ √ √ √ √ √
DBBL
√ √ √ √ √ √ √ √ √ √ √
BRAC Bank √ √ √ √ √ √ √ √ √
Mercantile Bank √ √ √ √ √ √
Eastern Bank
√ √ √ √ √
Premier Bank
√ √ √ √ √
Dhaka Bank √ √ √ √ √ √
Bank Asia √ √ √ √ √ √ √ √ √
AB Bank √ √ √
Source: BIBM Survey 2011
Numbers of customers targeted by different banks are given in the table below
(Table-11). To achieve this target and increase the awareness of targeted customers,
banks are using various methods like counseling, advertising, campaigning, etc.
All CTOs explained their marketing strategies and understands that it is not an easy
task to achieve the target by means of these ways. More strategic ways must be
incorporated to full fill the target. Huge cost, time and manpower are required, they
claimed. Table-10 shows marketing strategies in details.
Research Workshop Keynote Paper 247
Table 11: Target and Achievements of the Banks (October 2011)
DBBL BRAC TB
Operation Started May, 2011 July, 2011 August, 2010
No. of Pay Points 908 1968 240
No. of Customers Registered 35855 30000 976
District Covered 24 64 3
Expected Customers
(within 2021)
60 million 100 million 20 million
Source: BIBM Survey 2011
The three banks started truly mobile banking services like cash-in, cash-out and
balance transfers since 2010. Figure-15 show the growth in customer inclusion of
DBBL from May 2011 to October 2011.
Figure 15: Customer Inclusion of DBBL
Source: BIBM Survey 2011
Though six mobile network operators (MNOs) has been working in Bangladesh,
different banks selected different MNOs for their operations. Though targeted groups
of customers use different MNOs, most of the banks selected more than one MNOs
for more coverage of the business. Table-12 holds details.
0
5000
10000
15000
20000
25000
30000
May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11
DBBL Mobile Accounts (May-Oct, 2011)
248 Research Workshop Keynote Paper
Table 12: Agreement with MNOs
DBBL BRAC TB BAL MBL EBL Premier DBL ABBL
Grameen
Phone √ √
Tele Talk √ Banglalink √ √ √ Airtel √ √ √ Robi √ √ Citicell √ √ √ √
Source: BIBM Survey 2011
Initially, it is found that transaction charge is very high for cash-in and cash-out
in this service due to higher carrier charges. For mobile banking transactions, carrier
charge is also very high compared to voice or SMS charges. It ranges from Tk. 5 to
Tk. 17 per transaction (Cash-in/Cash-out). All CTOs are afraid of this matter.
This issue may be the main barrier to the growth of mobile banking introduction in
Bangladesh. Moreover, carrier charges vary from bank to bank and carrier to carrier.
It is also mentionable that banks charge nothing for mobile account operations.
No opening charge also required to open a mobile banking account.
Regarding transaction process control to avoid risks, all of the banks
implemented a set of restrictions, controlling the maximum amount per transaction
and total number of transactions per day. They are in a wait and see status for further
control if required; as mobile banking is in the initial stage and they are actually
piloting the system. Table-13 carries out the information.
Table 13: Process Control for Mobile Banking Services
DBBL BRAC MTB
Cash-in frequency per day 5 5 5 Cash-out frequency per day 5 5 5 Cash-in / cash-out amount per transaction 5000 30000 10000 Cash-in frequency per month 20 150 30 Cash-out frequency per month 20 60 30 Money Transfer per day 20 5
Token per day 3 Money Transfer per month 600 150
Token per month 90
Source: BIBM Survey 2011
Research Workshop Keynote Paper 249
Most of the banks got the permission for operating mobile banking during 2010
and 2011. But except two banks namely DBBL and BRAC, adoption of mobile
banking is at very initial stage. In case of transferring inward foreign remittances
roles of two banks namely, Eastern Bank Ltd and Dhaka Bank Ltd are satisfactory.
Table-14 includes the information.
Table 14: Inward Foreign Remittance Transfer up to October, 2011.
Eastern Bank Dhaka Bank Premier Bank
MNO Banglalink Robi Banglalink Grameen
Phone Operations Started Sep, 2010 May, 2011 Apr, 2010 Sep, 2011 Total Transactions 14282 700 2143 100 Total Amount 4.5 Crore 20 lac 1.8 crore 22 lac
Source: BIBM Survey 2011
Most of the targeted clients residing in the rural areas of Bangladesh are poor
with low literacy level, especially with respect to technology. In addition, almost all
mobile handsets use English as a medium of instruction and operations. As banks
also offering services in English, it will not be easy for customers to handle the
service initially. A strong support will be required for this segment of customers.
A 24-hour call centre service will be needed in this regard. Moreover, to train up the
users, a strong workforce will also be required. But all of the CTOs believe that
language will not be a barrier in the long run, but initially strong support and care is
required. Agents those will work on behalf of banks may play a great role in this
regard. Surprisingly, 77% banks have no call centre as yet.
In answering questions titled ―How will you provide mobile banking services in
case of the failure of carrier services (MNOs) for any natural disaster; like power
outage, storm, earthquake and for any sudden interruption of the government to stop
the carrier services under any national emergency?‖ all CTOs answered, ―We don‘t
know. Currently there is no solution. We have to wait and see.‖ They also give the
same answer in regarding of question, ―What will happen if any fraud perpetrated on
the MNO side?‖
In responding to another question ―What solution will you provide to the
consumer (consumer protection) for any fraud/ wrong operations due to the fault of
carrier, bank or agent?‖ CTOs replied ―Consumer will communicate with our nearest
branch/customer care/call centre and we will try to solve it.‖ However, we found that
there are no clear solutions to the banks for consumer protection right now. ―But
consumer can register complaint with Bangladesh Bank to mediate the dispute‖-
Bangladesh Bank guidelines include.
250 Research Workshop Keynote Paper
About 77% banks verify KYC form by using the agents. And rest of the banks
directly verifies the KYC form before opening the account by their own employees.
It‘s an important factor. Banks should re-think about this matter and put more
emphasis on this. Because, it may create identification problem of the customers in
the long run and fraudulent transactions including money laundering may increase.
Most of the banks started mobile banking on a pilot basis. Currently, all districts
are not covered by different banks. But in case of transferring inward foreign
remittance all districts are covered. Banks are mainly using different mobile
operators‘ outlets as their pay points. Moreover, Union Information Service Centers,
Post Office, Courier Services are also in the list.
Of 9 banks, 7 banks have agreed that cash management will be a problem,
especially for mobile outlets because of their poor infrastructure. But with the
assumption that, cash-in and cash-out will be almost equal per day, it will not be an
issue. But cash transfer from pay points to banks and vice versa will be a challenge,
as the security of the rural areas is not good, they added.
For the development of mobile banking infrastructure, 77% of the CTOs said that
money is not a problem for them. But 33% of them added that though money is not a
problem, procedures of expenditure is not an easy task. Policies of the banks are not
so friendly; more time passes for purchasing technology. Sometimes, it becomes
impossible to purchase necessary instrument within the estimated time and budget.
Tender and retender procedures sometimes poses as the main obstacle. By this time,
new technology may come; it creates another problem for implementation. 11% of
the CTOs said management decision is a common problem for them. The proper
knowledge of management and their co-operation, including govt. rules and
regulations are also main challenges for them.
Regarding guidelines of Bangladesh Bank for mobile financial services, most of
the CTOs claimed that this is not the right time to make any comment. They
comment that it is at the initial stage and we have to see. But monitoring of
Bangladesh Bank must be very effective. One of the CTOs suggested that audit team
must be highly technical with latest effective technological skills. ―Monitoring should
be very tight regarding money laundering, risk mitigation, record retention and
complaints from customers‖ another added.
―SCBs have a great role in future to include mobile banking as they are behind
the implementation of online banking and they have the largest coverage in the
market with highest number of branches (in the rural and urban areas), customers and
employees. Govt. should come forward in this regard.‖-explained three CTOs.
―This technology is very appropriate for them.‖- one added.
Research Workshop Keynote Paper 251
―Govt. revenue can be collected and subsidies/ allowances can be distributed
through mobile banking channels. This will create an indirect pressure and encourage
the people to open and operate a mobile bank account.‖ –all CTOs agreed. ―As a
result corruption and hassles of govt. agencies will be eliminated in one way and
govt. taxes and revenues will be increased in another way.‖-they added.
Around 66% of the CTOs agreed that there is a need of a trusted central
organization to share known vulnerabilities and risk experience. 33% of them don‘t
like to share and disclose their experiences.
Regarding lacking of inter-bank transaction facility, 44% of the CTOs believe
that it will not hamper mobile banking implementation, if the market is captured by
one or two banks mainly. ―But if the customers are evenly distributed among all
players in the market, it will be a great problem for account to account transfer
between banks‖-rest of the CTOs explained. ―This may hamper the potential growth
of mobile banking‖-they added.
Approximately, 66% of the CTOs reported that their top level management and
policy makers are aware of this technology, implementation process and risks. 33%
respondents think that top level management have interest about mobile banking
but positive attitudes are still necessary to establish their interest. Only 11% of them
informed that management has no clear mission and vision regarding this issue
though they got the permission from Bangladesh Bank.
Regarding investment and return, though the initial cost is very high for mobile
banking implementation, all the banks are thinking about long term return.
The minimum and maximum investment (fixed cost) in introducing mobile banking
is reported as Tk. 20 million and Tk. 800 million, respectively. Moreover, average
variable cost is about 12% of fixed cost. Service charges and maintenance cost are
also 10% and 15% of the above, per year respectively.
The major challenges that banks have been facing related to mobile banking
adoption are: Software crisis within an affordable cost; lack of proper ICT
professionals, especially for mobile banking; weak policy and marketing strategies;
non co-operation of carrier services; more operational cost; non educated customers
and poor management support. One of the banks reported that bureaucracy and lack
of leadership including delay in policy decision are also great problems.
About the future of the mobile banking in Bangladesh, 33% of the CTOs
explained its bright future and agreed with the strong potential of it, 44% said that the
task is not as easy as the dream, 22% hoped that it would take long time and the rest
of the respondents claimed that they don‘t see any bright future. They started mobile
banking to increase their image in the market and would like to give latest
technological services to their valuable customers.
252 Research Workshop Keynote Paper
VIII. Recommendations and Conclusion
Based on the previous discussion and stakeholders observations the paper came up
with the following recommendations:
One, there are different types of model in mobile banking. Banks are largely free
to adopt any one. But security, operational control, available technology in user‘s
handsets must be consistent with the knowledge of customers in selecting the right
model. In this scenario, transformational mobile banking can be accomplished
through a careful appraisal, introduction and management of operational controls
(including user education) necessary to offset the higher technical risks inherent in
choosing ubiquitous but less secure technologies. In case of Bangladesh, considering
all these issues, adjusted mobile security model may be the best selection (SMS,
USSD and IVR). But with the advancement of technology, increased customer
knowledge, availability of smart phones we can shift to Use Case1. Use Case 2, 3 and
4 will be impractical for us now and can be achieved five to ten years later.
Regarding transaction process control to avoid risks, all the banks can implement a
set of restrictions, controlling the maximum amount per transaction and total number
of transactions per day. Banks can wait and see status for further control if required as
mobile banking is in the initial stage.
Two, revenue sharing is a great concern among MNOs, banks and agents. MNOs
are demanding higher rate per transaction that will increase the transaction cost and
hamper the mission of mobile banking. Bangladesh Bank along with BTRC, MNOs
and commercial banks can take initiatives to settle this problem. Though agents are
the key operator to increase the growth of mobile banking, they must be properly
benefited. Commercial banks should encourage them by giving reasonable portion of
revenue. Three, the unbanked people targeted for mobile banking are very much poor and
illiterate. Moreover, they don‘t have high technical skill regarding mobile channels
and handset operations. But mobile booming in Bangladesh indicates that users have
at least minimum basic knowledge to operate the set. Initially, this basic knowledge
can be applied in mobile banking operations. At the minimum, understanding,
sending and receiving text message (SMS) and to read out menus (USSD) is a must
in most cases. Language may be a great barrier, as message and menu is totally based
on English. Though SMS of mobile banking services will have a fixed format, we can
assume that within a very short period of time customers will be able to understand
the operational details with the help of mobile agents. But at this initial stage,
transaction related problems, dispute resolve and customer care is a great concern.
To face these challenges, commercial banks providing mobile banking services
should have a call center to provide 24-hour services to serve the targeted group, as
they are illiterate and have poor knowledge in technology. Proper training should be
given to the agents for better understanding and operations of mobile banking.
Research Workshop Keynote Paper 253
As a result, agents will be able to give proper support and guidelines to the
customers. To resolve any dispute, customers can get help from the call center of
respective bank. In case of any non-cooperation and harassment, customer can
directly communicate with Bangladesh Bank‘s help desk just dialing 16236 from any
mobile phone.
Four, regarding mobile banking, people have mixed reaction. About 55%
respondents said that they have no idea about mobile banking and its use. Moreover,
they are afraid of the security of their money. About 42% of the respondents said that
they have no clear knowledge about the technology and 38% of them are not aware
about the benefits also. Most of them said that they haven‘t yet heard about this new
banking technology. It is found that awareness about mobile banking services is
higher among urban people. While overall awareness remains very low, people are
keen to try out mobile banking. In this scenario, increase of customers‘ awareness
and marketing strategy is a great challenge to achieve the targeted customer.
The marketing channels currently being used are away from customers‘ reach.
To achieve the target, mobile banking agents can play a vital role. Since a large
number of mobile phone users meet the agents daily to recharge their mobile phone
accounts, the agents can easily motivate the customers. Various methods like
counseling, advertising, campaigning, etc. also can be applied through agents.
Advertising through BTV and Bangladesh Betar can help in this regard. MNOs can
also help by sending SMS regarding mobile banking to all its customers. Five, it is found that mobile banking transaction charge is very high for cash-in
and cash-out due to higher carrier charges by MNOs. Carrier charge ranges from
Tk. 5 to Tk. 17 per transaction (Cash-in/Cash-out). This issue may be one of the main
barriers for the growth of mobile banking operation in Bangladesh. Moreover, carrier
charges vary from bank to bank and carrier to carrier. It is also mentionable that
banks charge nothing for mobile account operations. No account opening charge is
required to open a mobile banking account. In our study, it is found that MNOs are
not properly helping banks to adopt mobile banking. In this regard Bangladesh Bank
can request BTRC, as a regulatory body of Bangladesh government to take initiatives
to solve this problem.
Six, with respect to technology adoption, the PCBs and FCBs have achieved
greater success as compared to other bank categories but their coverage is
concentrated mainly in urban and semi-urban areas. The rural parts of Bangladesh
still remain outside their services. SCBs and SBs can play a vital role to increase
mobile banking adoption rate since they have the largest coverage in the market with
highest number of branches (in the rural and urban areas), customers and employees.
But both groups of banks are far behind in implementing online banking. They have
also been facing different problems like shortage of power supply, absence of reliable
professionals and poor technical support. Government should come forward in this
regard. Government should take immediate initiatives and phase-wise plan to solve
254 Research Workshop Keynote Paper
these problems. Solar energy can be used as a source of power supply in remote and
rural areas. As IT professionals are highly paid, with the existing govt. salary
structure it is very hard to employ and retain in a government bank for long term.
After acquiring experiences even the existing professionals switch to private
banks. As a result, to encourage the IT professionals a special incentive
package/allowance/bonus can be given.
Seven, for the development of mobile banking infrastructure, 77% of the CTOs
opine that money is not a problem for them. But 33% of them add that though money
is not a problem, procedures of expenditure is not an easy task. Policies of the banks
are not so friendly; lot of time is required for purchasing technology. Sometimes, it
becomes impossible to purchase necessary instrument within the estimated time and
budget. Tender and retender procedures sometimes pose as the main obstacle. Due to
delay in procurement process, existing technology becomes obsolete and new tech
products arrive; it creates another problem for implementation. The proper
knowledge of management and their co-operation, including govt. rules and
regulations are also main challenges for them. Top level management has vital role to
implement mobile banking in banks for enhancing business. But in reality, there is a
gap between top level management and IT management in decision making and
planning processes. BB and BIBM can take initiatives to minimize the distance
between both parties. BB and BIBM can jointly conduct workshops, round table
discussions and seminars on IT and Banking business development for top level
executives of banking sector to motivate them in this respect.
Eight, inter-bank mobile banking transactions can play a vital role in enhancing
the use of mobile cash or digital cash instead of paper notes or plastic cards. For
smooth operation of mobile banking business, national payment gateway plays a
vital role. The payment gateway is a fast, secure and transparent payment vehicle. It
provides safeguard to the banks, service providers and customers against fraud,
embezzlement, money laundering, theft and cheating. It can play a vital role to
promote m-commerce and inter-bank transactions in Bangladesh. Under the control
of Bangladesh Bank, a central Mobile Payment Gateway may be built up to
interconnect all banks providing mobile banking services. Before implementing the
National Payment Gateway, new policies, rules and regulations need to be enacted
by the Bangladesh Bank. The task is now easier as we have the "Information and
Communication Technology Act" in our hand.
Nine, the growth of financial operation through mobile devices has also enhanced
the incidence of frauds. 22% of adults do online banking in Europe, and 35% in USA,
opined that lack of security was stopping them from using mobile banking. So
improved security is a prerequisite for reliable mobile banking operations. We should
take security measures/initiatives at the beginning stage of mobile banking operation
in our country. In this regard, a cell or trusted central organization can be established
with the joint collaboration of banking sector and government whose responsibility
Research Workshop Keynote Paper 255
will be to maintain and evaluate the known vulnerabilities, and to recommend
guidelines for security updates.
Ten, insurance of client‘s data, Data Center and Disaster Recovery Site is a
burning issue to ensure the high reliability of mobile banking services. The
insurance of IT equipments exists in our country but there is no example of data
insurance. In developed countries, banking authority provides insurance of client‘s
data, data center and DRS. Government, BB and scheduled banks may take
initiatives in this regard.
Eleven, although mobile banking has bright prospects, it involves some financial
risks as well. The major risk of mobile banking includes operational risks (e.g.
security risks, system design, implementation and maintenance risks); customer
misuse of products and services risks; legal risks (e.g. without proper legal support,
money laundering may be influenced); strategic risks; reputation risks (e.g. in case
the bank fails to provide secure and trouble free mobile banking services, this will
cause reputation risk); credit risks; market risks; and liquidity risks. Bank should
strictly follow the guidelines on Mobile Financial Services (MFS) circulated by BB.
Security and risk management issues of mobile banking should be added in the IT
Security guideline of BB. IT management should properly communicate and motivate
top level management to implement security measures. Banks may follow the Risk
Management Principles and Practices of Basel Committee of Banking Supervision.
Twelve, in order to achieve the mission of Digital Bangladesh within 2021, govt.
can take the initiatives to allow G2P and P2G payment services through mobile
banking channels. Govt. revenue can be collected and subsidies/ allowances can be
distributed through mobile banking channels. This will create an indirect pressure and
encourage the citizens to open and operate mobile banking accounts. As a result,
corruption and hassles of govt. agencies will be eliminated and govt. taxes and
revenues will be increased.
Mobile banking activities have been revolutionizing the banking industry all over
the world though it is a relatively new phenomenon in Bangladesh. Many countries in
the world are now in the state of performing most of their banking activities even
being at home through mobile phones while the banks‘ clients in Bangladesh mostly
stay in the long queue for performing their daily banking business.
In Bangladesh, mobile banking facilities are yet to be fully developed though it
has a bright future and strong potential. Only three banks started transactional mobile
banking with maximum features. The major challenges that banks have been facing
related to mobile banking adoption are: low mobile penetration; lack of awareness;
poor technical knowledge; availability of standard handset; inadequacy of reliable
and secure mobile communication infrastructure; sluggish ICT penetration in banking
sector; insufficient legal and regulatory support for adopting mobile –banking;
256 Research Workshop Keynote Paper
mobile banking software crisis within an affordable cost; lacking of proper skill in IT
project implementation; weak policy and marketing strategies; non co-operation of
carrier services; more operational cost; and poor management support. Bureaucracy
and lack of leadership including delay in policy decision are also great problems in
banks. In Bangladesh, cost of mobile phone and tariff are still beyond purchasing
capacity of unbanked people in the rural areas and huge investment requirement for
establishing mobile banking services are prime drawbacks.
In this backdrop, with high potential of mobile banking, Bangladesh Bank as the
regulator of banking and financial sector, government of Bangladesh, MNOs, agents
and the scheduled banks together need to come forward with necessary initiatives for
successful introduction of mobile banking in Bangladesh. Both individual and joint
efforts are needed to overcome the constraints in promoting mobile banking in the
country. Monitoring of Bangladesh Bank should be very effective. Audit team must
be highly technical with latest effective technological skills. Monitoring should be
very tight regarding money laundering, risk mitigation, record retention and
complaints from customers. In particular, the SCBs and SBs should take appropriate
actions for increasing their coverage in offering mobile banking services with a view
to increasing their performance and raising their market competitiveness.
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www.attevo.com
www.bankablefrontier.com
www.bb.org.bd
www.cnbc.com
www.entrust.com
www.mmaglobal.com
www.infogile.com
www.trai.gov.in
Research Workshop Keynote Paper 259
Appendix
Table 1: Current examples of each Use Case scenario
Mobile Handset Capability
Standard (all) Advanced
MN
O indep
end
ent
Yes
Use Case 1: G-Cash (Ph) Wizzit (SA) FNB (SA)
ABSA (SA)
Use Case 2:
Nedbank (SA)
FNB (SA) ABSA (SA)
Obopay (US) Use Case 3: J2ME
Obopay (US) Monitise (UK)
No
Use Case 4: G-Cash (Ph) Smart (Ph)
MTN Banking (SA)
M-Pesa (Ke)
Use Case 4 prime: Obopay (US)
Firethorn (US)
Note: No one Use Case may totally fit the situation of an existing or prospective mFSP. Additionally a mFSP
may use multiple technologies and offer mobile banking services under one or more of the Use Cases.
However, the Use Cases do represent the main technology related choices which affect the risk environment
of an mFSP.
Table 2: Vulnerabilities in specific Use Cases
Use Case I — SMS, IVR and DTMF End-to-end security
NOT available
Use Cases 2&3 — Browsing & Applications
End-to-end, security
available applications
Use Case 4 — SIM Toolkitt '
End-to-end security
available
1
Storage of sent SMSs in the handset Outbox is default on
handsets
Storage of cached data
in input fields and auto-
prompts
n/a
(Continued)
260 Research Workshop Keynote Paper
Appendix Table 2: (Continued)
2
Spoof USSD and/or SMS
to phish the user Spoof
SMS to phish the user, IVR confirmation spoof and
PIN request phish USSD confirmation spoof
and PIN request phish
e-mail, USSD and/or
SMS phishing or
Pharming of the user (identical to Internet
attack) WAP2 allows
for a push message from
a server which can launch the browser and
direct it to a phishing or
Pharming site
Spoof USSD and/or
SMS to phish the
user
3 SIM swap SIM swap SIM swap
4
Movement of
funds beyond
defined beneficiaries
Movement of funds
beyond defined
beneficiaries
Movement of
funds beyond
defined
beneficiaries
5 Replay of messages by
attacker Replay of messages by
attacker n/a
6
Messages between the handset to the bank that get
lost
Messages between the
handset to the bank that
get lost
Messages between
the handset to the
bank that get lost
7 Failure of the SMS and/or IVR and/or USSD Channel
to the bank Data Channel to the bank
fails
Failure of the SMS and/or Data
Channel to the
bank
8
The lack of protection of
the SMSC and/or IVR and/or USSD servers
The lack of protection of
the SMSC server
The lack of
protection of the
Wireless Gateway server
The lack of protection of the SMSC server
9 The lack of protection of the
interface between SMSC
and/or IVR and/or USSD servers to mFSP
The lack of protection of
the interface between
SMSC to the mFSP
The lack of
protection of the
interface between SMSC to the
mFSP
(Continued)
Research Workshop Keynote Paper 261
Appendix Table 2: (Continued)
10 Infection of handset by a virus -
Standard phones
n/a Infection of handset
by a virus - Standard
phones
11 Infection of handset by a virus
- Advanced (programmable) Feature and Smart phones
Infection of handset by a
virus, man in the middle, man in the browser and
keyboard loggers —
advanced
(programmable) phones
Infection of
handset by a virus, man in the middle,
man in the
browser and
keyboard loggers —advanced
(programmable)
phones
12 Injection of transactions into
the network purporting to come
from the User's MSISDN (spoofed originator ID)
n/a n/a
13 Capture of transaction
information during radio transmission over the air
n/a Capture of transaction
information during radio transmission
over the air
14 Message path insecurity (
insecure BTS/BSC, Abis and SS7 link traffic monitoring,
network element exposure,
false BTS)
n/a Message path
insecurity ( insecure BTS/BSC, Abis and
SS7 link traffic
monitoring, network
element exposure, false BTS)
15 n/a n/a Compromise of the
encryption key
scheme in the SIM and Hardware
Security Modules
262 Research Workshop Keynote Paper
Table 3: Examples of Fielded mFSP Implementations
mFSP Mode Country Multi
MNO Multi
Bank SMS
Alerts SMS USSD IVR WEB SIM
toolkit J2ME
ABSA Add South Africa Yes No √ √ √ √
Celpay Add Zambia Yes Yes √ √ √
First National
Bank Add South Africa Yes No √ √ √ √ √
eTranzact Add Nigeria, Zimbabwe Yes Yes √ √ √ √
GCash XFM Philippines No Yes √ √ √ LUUP XFM Norway EU Yes Yes √ Monitise Add UK and USA Yes Yes √ √ √ √ √ mPesa XFM Kenya No No √ √ MTN Banking XFM South Africa No No √ √ √ Nedbank Add South Africa Yes No √ √ √ Obopay Add/XFM USA Yes Yes √ √ √ √ √
Smart XFM Philippines 1 No √ √ √ Wizzit XFM South Africa Yes No √ √ √ √
Add = additive — extension of existing banking operation to mobile channel (account exists, registration exists, mobile channel opened)
XFM = transformational — start of new banking relationship with (account created with mobile access, new registration
Re
search
Wo
rksh
op
Ke
yn
ote
Pap
er 2
63
List of Abbreviations
Abbreviation Term
AT&T American Telephone and Telegraph Company
ATM Automated Teller Machine
B2P Business to Person
BSC Base Station Controller
BTRC Bangladesh Telecommunication Regulatory Commission
BTS Base Transceiver Station
. CDMA Code division multiple access
CSR Corporate Social Responsibility
CTO Chief Technical Officer
DPS Deposit Pension Scheme
DTMF Dual-tone multi- frequency signaling
EDGE Enhanced Data for Global Evolution
G2P Government to Person
GPRS General Packet Radio Service
GSM Global System for Mobile Communications
HLR Home Location Register
HSDPA High-Speed Downlink Packet Access
HSM Hardware Security Module
HTTPS Hyper Text Transfer Protocol Secured
ICT Information and Communication Technology
IP Internet Protocol
ITU International Telecommunication Union
IVR Interactive Voice Response
J2ME Java 2 Platform, Micro Edition
mFSP Mobile Financial Services Provider
MNO Mobile Network Operator
MSISDN Mobile Systems International Subscriber Identity Number
P2B Person to Business
P2G Person to Government
264 Research Workshop Keynote Paper
P2P Person to Person
PDA Personal Digital Assistant
PIN Personal Identification Number
POS Point-of-Sale
PSTN Public Switched Telephone Network
S@T SIM Alliance Toolkit
. SAARC South Asian Association for Regional Cooperation
SAT or STK SIM Toolkit
SIM Subscriber Identity Module
SMS Short Message Service
SMSC Short Message Service Centre
SS7 Signaling System 7
SSL Secure Sockets Layer
UMTS Universal Mobile Telecommunications System
USSD Unstructured Supplementary Service Data
WAP Wireless Application Protocol
WIB Wireless Internet Browser
Research Workshop Keynote Paper 265
Paper Seven
Risk Assessment of Banks’ Involvement in the Capital
Market: Bangladesh Perspective
Md. Alamgir
Assistant Professor, BIBM
Md. Zakir Hossain Lecturer, BIBM
Risk Assessment of Banks’ Involvement in the Capital
Market : Bangladesh Perspective
I. Introduction
Risk assessment of banks‟ involvement in the capital market has acquired a great
deal of attention from researchers, regulators and financial institutions in recent times
as the capital market of Bangladesh is highly volatile and this exposure can erode
capital of the bank. Since commercial banks compete against merchant banks for
corporate finance transactions, stock market movements affect the liquidity and
operating funds available to commercial banks. Commercial banks manage their
funds in part by investing in securities markets. If stock markets decline, the value of
outstanding shares may decrease resulting the potential losses of the bank fund. The
adoption of merchant banking functions means that commercial banks became
heavily reliant on borrowing liquidity in open financial markets.
Commercial banks mobilize funds by selling a number of deposit products to its
clients. Customers' liquidity and financial health are also affected by financial assets
held away from the bank. The amount of deposits maintained by the customers and
the repayment behaviour of loans by its customers affect the bank's profitability,
which severely penalizes liquidity and hence risk arises.
According to research performed by the University of Florida after passage of
Gramm-Leach-Bliley Act, unrealized or paper losses of a commercial bank have little
impact on its liquidity. However, when a commercial bank books losses to increase
liquidity during periods of declining securities values, the bank probably reports
lower earnings along with decreased capital levels. Some evidence suggests that
expanding bank activities into capital markets by allowing banks to hold equity
stakes in companies might generate efficiency gains. For example, Li and Masulius
(2004) find that, by holding stakes in a company‟s equity, underwriters reduce IPO
under pricing when they underwrite.
The drawbacks of Basel-II approach become clear during the global financial
crises, when many banks found that they did not have the financial strength to
withstand the losses on capital market investments that proved to be much riskier
than their models suggested. Consequently, the BCBS has started considering and
eventually finalized new international rules, popularly known as “Basel-III” for the
banks which have a lot of exposure in investments of capital market. Basel-III
measures will require about 4-fold increase in the capital market exposure capital
requirements for banks. As per Basel-II guidelines, the maximum allowable
investment in a single institution for a bank is 15% of the total capital of the bank and
Research Workshop Keynote Paper 269
the total amount of investment in the capital market for a bank should not exceed
60% of total capital. Apart from these, if a bank‟s investments exceed this limit, then
that bank should maintain additional capital which is equal to above-limit
investments in the capital market. At present in Bangladesh, banks‟ exposure in the
capital market should not go beyond 10% of their total liabilities. Currently central
bank is thinking to tag the total capital of the bank for capital market exposure instead
of liability. Volcker Rule which is named after Paul Volcker, former chairman of US
Federal Reserve, would bar banks from trading in the capital market for their own
profits. The rule is one specific part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. It was first proposed in 2009 when Volcker served as the
chair of President Obama‟s Economic Recovery Advisory Board. After nearly two
years of discussion between regulators and financial firms, an official draft of the
Volcker Rule proposal was published by the Federal Reserve, Federal Deposit
Insurance Corp. and the Office of the Comptroller of the Currency and later approved
by the Securities and Exchange Commission of USA.
Well-functioning capital markets including equity and corporate debt markets are
one of the most important factors needed to attract investors, both local and foreign.
Greater emphasis on generating competitive and strong capital markets would ensure
a sustainable flow of sufficient funds and efficient mechanisms for financing the
private sector. To say the least, the Bangladesh capital market till today is not broad
or deep enough. Issuers do not use the full potential of the market for raising equity
capital by issuing shares or for borrowing funds by issuing corporate bonds.
Moreover, savers feel uncomfortable in investing in Bangladesh capital market
instruments as it is highly volatile and risky. However, banks in Bangladesh are
entering in the capital market in the form of Treasury investment, merchant banking
operations and through forming of brokerage house. The exposures are different in
each case as the activity differs.
Therefore, the objectives of this paper are to assess the current position of banks
regarding their exposure in the capital market, and to identify the problems towards
banks‟ involvement in the capital market. Another objective is to assess the risks that
are involved for banks‟ participation in the capital market through the formation of
brokerage houses and merchant banking as subsidiaries. Finally a set of observations
and recommendations are to be formulated after the discussion with the participants
of the research workshop.
Both primary and secondary data have been procured for analyses to attain the
objectives of the research project. For the purpose of collecting secondary data,
annual reports, published financial statements, other publications of banks and their
subsidiaries have been consulted. In order to obtain the primary data, personal
interview and three sets of questionnaire (one for banks including central bank,
another one for merchant banks and last one for brokerage houses) have been used.
Both open-ended and close-ended response questionnaires have been administered.
270 Research Workshop Keynote Paper
After data collection necessary screening has been performed before tabulation and
graphical presentation. Statistical, financial and accounting tools and concepts have
been applied in the study where appropriate. A key note paper was presented in a
day-long workshop participated by a number of senior level bankers which was
followed by group discussion by the participants. Several issues were raised in the
discussion and the final report has been prepared after incorporating the suggestions
where it was thought appropriate.
The paper is organized into eight sections. The first section describes the background,
objectives, methodology. The introductory section is followed by the status of capital
market of Bangladesh. Third section depicts market volatility as measured by
coefficient of volatility. Section four portrays the position of banks‟ involvement in
the capital market of Bangladesh. Section five presents problems faced by banks for
their involvement in the capital market of Bangladesh. Section six exhibits the
functions and roles of merchant banks and brokerage houses as subsidiaries of banks.
Section seven displays the recent measures taken by SEC to rejuvenate the capital
market. Finally some observations and recommendations have been made in section
eight.
II. Status of Capital Market of Bangladesh
Bangladesh capital market is one of the smallest in Asia but the third largest in
the South Asia region. It has two full-fledged automated stock exchanges namely
Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) and an over-
the-counter exchange operated by CSE. It also consists of a dedicated regulator, the
Securities and Exchange Commission (SEC) and it implements rules and regulations,
monitors their implications to operate and develop the capital market. It consists of
Central Depository Bangladesh Limited (CDBL), the only Central Depository in
Bangladesh that provides facilities for the settlement of transactions of dematerialized
securities in CSE and DSE. Dhaka Stock Exchange was set up on 28th April, 1954
that started formal trading on early 1956. Post-independence government did not
promote a capital market during the first five years, and it was activated again in 1976
with 9 issues on board. In 1995, a second bourse, the Chittagong Stock Exchange,
was set up with sophisticated logistic support and modern management. After 1999,
the government took a number of strong measures to strengthen the capital market
including the implementation of the Capital Market Development Program (CMDP).
A significant development and growth of the stock market has been seen with rapidly
expanding investment intermediation, investor base, number of listed securities, and
increasing effort to protect the general investors from unwanted shocks and loss.
A very smooth and rapid growth of the stock index is backed by aggressively
increasing enthusiasm of new investors targeting abnormal profit taking
opportunities. But after the 5th December, 2010, the market started to collapse and
nosedived devastatingly.
Research Workshop Keynote Paper 271
III. Measuring Market Volatility
The volatility of stock market has attracted attention of the regulators,
government, investors, institutional investors and policy makers. There is a
perception that high volatility can lead to a general erosion of investor‟s confidence
and flow of capital away from the equity market. As a matter of fact, volatility is the
variability of the asset price changes over a particular period of time and it is very
hard to predict correctly and consistently (Kumar, 2006). However, in this study
market volatility has been measured by coefficient of variation (CV).
Table 1: Market volatility measured by CV
Year DSE20 DGEN
2001 5.58 5.51
2002 6.45 5.65
2003 7.23 5.81
2004 19.48 25.03
2005 9.36 7.12
2006 6.47 7.45
2007 19.20 20.90
2008 5.24 5.85
2009 7.97 18.77
2010 20.02 16.66
2011 9.87 9.60
Data Source: DSE Library and Authors‟ own calculation
During the last decade, it is observed that volatility is persistent in the stock
market in Bangladesh. The coefficient of variation of DSE20 has jumped to 20.02
percent in 2010 followed by 9.87 percent in 2011. In the year 2007 it recorded 19.20
percent which is slightly lower than the year 2004. Moderate volatility is observed in
the rest of the years. The DSE general index similarly jumped to 25.03 percent in
2004. All the other years the market seems to be volatile according to DGEN.
IV. Position of the Banks’ involvement in the Capital Market of Bangladesh
The current exposure of banks and their performance of trading portfolio
investment in the capital market as at July 31, 2011are shown in the following tables:
272 Research Workshop Keynote Paper
Table 2: Capital Market Exposure by Type of Banks
(As at July 31, 2011)
Types of Banks
Exposure Total Exposure
to total
Liabilities (%)
Own portfolio
(Tk. in crore)
Loan to
Subsidiaries
(Tk. in crore)
SCBs 3779 100 3.10%
PCBs 5613 3692 4.20%
Islamic PCBs 673 530 1.66%
FCBs 12.23 - 0.04%
BDBL 563 - 49.11%
Total 10640.23 4322 -
Source: Department of Off-site Supervision, BB
Table 3: Profit/Loss Made by Type of Banks from the Capital Market.
(Tk. in crore)
Types of Banks 2009 2010
SCBs 56.06 62.01
PCBs 221.21 267.04
Islamic PCBs 54.23 61.20
FCBs 2.03 2.76
Total 333.53 393.01
Source: Annual Reports of Various Banks
Table-2 shows that all the banks except BDBL have their exposure below 10% of
their total liabilities whereas BDBL alone has the exposure of around 49% of their
total liabilities in the capital market. Bank-wise exposures as a percentage of their
total liabilities are shown in the Figure-1.It is seen from the figure that though most
of the banks are well below the regulatory requirements yet a large number of banks
are well above the regulatory requirements. Table-3 shows that all the banks have
made profits by participating in the capital market through their trading portfolios.
Research Workshop Keynote Paper 273
Figure 1: % of Total Exposure to Total Liabilities of Various Banks
V. Problems faced by Banks for their Involvement in the Capital Market
Banks are facing the problems of frequent and relatively quick changes in
regulations for their participation in the capital market (Survey results). Initially there
was no rigid bar for banks‟ involvement in the capital market just like the NBFIs and
insurance companies. But when the barometer (usually measured by index) of the
capital market of Bangladesh was moving upward abnormally and reached nearly
9000 in the month of December, 2010, then Bangladesh Bank (the central Bank of
Bangladesh) formulated a regulation that no banks would be allowed to take their
position in the capital market beyond 10% of their total liabilities and this
adjustments must be made within shortest possible time. So all banks, at a time tried
to dispose of their holdings in the capital market with no consideration of their profit
or loss. BB was also contemplating to make a rule that Banks can take the equity
position in the capital market upto 10 % of their equity capital. If this regulation was
circulated in the banking system, then again banks would have been in hurry to
reduce their exposure in order to comply with the regulation. This would have hit the
volatility of the capital market of Bangladesh.
Thus all the banks in Bangladesh are having uncomfortable situation in their
exposure in the capital market due to frequent and quick change in regulatory
guidelines of the central bank as well as Securities and Exchange Commission. A few
days back Bangladesh Bank asked all the banks to adjust their respective single
borrower exposure limit given to the subsidiaries by December 31, 2011. As a result,
the stock market experienced the downward volatility. However, due to political and
market pressure, Bangladesh Bank is forced to extend the time limit of adjusting
single borrower limit up to December 31, 2012. The presence of institutional
investors is expected to ensure better valuation levels due to their specialised
274 Research Workshop Keynote Paper
analytical skills. But unfortunately most of the banks in Bangladesh do not possess
any such research cell as would help for making decision regarding buying or selling
or holding previously bought securities in the capital market (survey results). All the
merchant banks of various banks are facing the regulatory restrictions on the use of
omnibus accounts and they also face the frequent change of their margin loan
maintenance.
VI. Functions and Roles of Merchant Banks and Brokerage Houses as
subsidiaries of Banks
Merchant banking is an emerging sector in the capital market of Bangladesh.
According to Securities and Exchange Commission (Merchant Banker and Portfolio
Manager) Rules, 1996, merchant banker is defined as “… those who manage
portfolio on behalf of its clients or performs the business of underwriting or are
related to securities as underwriter or advisor or are providing corporate advisory
services on completion of all the activities relating to Issue Management.”
Generally the term merchant banking refers to a negotiated private equity
investment by financial institutions in the unregistered securities of either privately
or publicly held companies. Previously there was not much restriction about
Merchant Banking operation by the Commercial bank. They could operate without
license from the SEC.
But, early in the 1996 the SEC insisted that the commercial bank need
permission. The SEC regulation was that the Commercial bank may have a subsidiary
entity. The permission of forming subsidiary had to be obtained from the Bangladesh
Bank. The capital market regulators have decided to allow commercial banks to
operate as Merchant banks through separate wings. With this regulation in place,
Bangladesh Bank has made it mandatory for all commercial banks to form the
requisite subsidiaries in order to participate in the capital market actively. As per
Merchant Banking Regulations, a merchant bank can perform mainly three activities
which are:
Issue Management
Issue Management function of merchant Banking helps capital market to increase
the supply of securities. Being a Issue Manager the merchant banks provide
assistance to the Private Limited Companies intended to be converted into Public
Limited Companies by way of obtaining necessary permission from the relevant
authorities, preparing prospectus for public issue of shares and debentures, involving
itself in the collection of application money, scrutiny of applications, arranging for
lottery relating to allotment, if required, allotment of shares and debentures, refund of
application money, etc.
Research Workshop Keynote Paper 275
Underwriting
Underwriting Operation is one of the important functions of a Merchant Banker
by which it can increase the supply of stock/shares and debentures in the market and
can earn a substantial amount of commission as fee-based income. It is an
arrangement whereby the underwriter undertakes to subscribe the unsubscribed
portion of shares/debentures offered by any Public Limited Company.
This encourages the prospective issuers to offer shares/debentures to the public for
subscription and they can raise fund from the public for implementation of their
industrial undertakings.
Portfolio Investment Management Services
One of the most important functions of merchant banking is to provide Portfolio
Management service to the customer. In addition a merchant banker in Bangladesh
can also perform the activities of Project Counselling, Pre-Investment Studies,
Merger & Acquisitions, Factoring, Asset Securitization, etc.(Survey results)
One of the concerns of the paper is how the merchant banks and brokerage houses as
subsidiaries of the banks are performing in the capital market. Already 11 banks have
established both merchant banks and brokerage houses as their subsidiaries, 9 banks
have set up only brokerage houses and 6 banks have formed merchant banks as their
subsidiaries (Table-4). The table also displays that the merchant banks and other
subsidiaries have so far collected 99 to 100 per cent of their funds from their parent
companies.
Table 4: List of Merchant Banks, Brokerage Houses and their Capital Position
Name of
Banks Name of
Subsidiaries Date of
Commencement Bank’s
Subscription
(Tk. in crore)
Other’s
Capital
(Tk. in crore)
Janata Bank
Ltd.
Janata Capital &
Investment Ltd. 26/09/2010 10 0
Agrani Bank
Ltd.
Agrani Equity &
Investment Ltd. 16/03/2010 200 0
Sonali Bank
Ltd. Sonali Investment Ltd. 22/04/2010 100 0
AB Bank Ltd. AB Investment Ltd. 10/03/2010 499.48 0.01
AB Securities Ltd. 02/10/2010 19.942 0.058
Bank Asia
Ltd.
Bank Asia Securities
Ltd. 17/04/2011 44.9955 0.0045
BRAC Bank
Ltd.
BRAC EPL Investment Ltd.
18/04/2000 19.89 19.11
BRAC EPL Stock
Brokerage Ltd. 16/05/2000 5.1 4.9
(Continued)
276 Research Workshop Keynote Paper
Table 4: (Continued)
BCBL Commerce Bank securities & Invest. Ltd.
Under Process 20 0
The City Bank
Ltd.
City Brokerage Ltd. 15/11/2010 59.994 0.006
City Bank Capital
Resources Ltd. not started 9.999 0.001
Dhaka Bank
Ltd. DBL Securities Ltd. 02/13/2011 15 0
Eastern Bank
Ltd.
EBL Securities Ltd. 06/12/1997 0.75 0.5
EBL Investment Ltd. 30/12/2009 30 0
IFIC Bank
Ltd. IFIC Securities Ltd. 02/11/2010 79.9994 0.0006
Jamuna Bank
Ltd.
Jamuna Bank Capital
Management Ltd. 29/11/2010 25 0.00016
Jamuna Bank Securities Ltd.
Under Process 40 0
Mercantile
Bank Ltd. Mercantile Bank Ltd. 27/06/2010 60 5
Mutual Trust
Bank Ltd.
MTB Securities Ltd. 22/09/2010 99.99 0.001
MTB Capital Ltd. 18/04/2011 9.999 0.001
National Bank
Ltd. NBL Security Ltd. 10/03/2011 99.995 .005
NCC Bank
Ltd.
NCCB Securities & Financial Services Ltd.
07/03/2011 25 0
NCCB Capital Ltd. Under Process 25 0
Premier Bank
Ltd.
Premier Bank Securities
Ltd. Under Process 49.998 0.002
Prime Bank
Ltd.
Prime Bank Investment
Ltd. 28/04/2010 300 0
Prime Bank Securities 29/04/2010 71.25 3.75
Pubali Bank
Ltd. Pubali Bank Ltd. 01/02/2011 160 0
Standard
Bank Ltd.
SBL Capital
Management Ltd. 09/01/2011 149.995 0.005
Southeast
Bank Ltd.
Southeast Bank Capital Services Ltd.
01/12/2010 90 10
Trust Bank
Ltd.
Trust Bank Investment
Ltd. 14/11/2010 300 0
Al-Arafah
Islami Bank
Ltd.
AIBL Capital Market Services Ltd.
not started 207 193
(Continued)
Research Workshop Keynote Paper 277
Table 4: (Continued)
EXIM Bank
Ltd.
EXIM Islami Investment Ltd.
01/12/2010 99.99 0.01
IBBL
Ismali Bank Securities
Ltd. (IBSL) 22/03/2010 269.9946 .0054
Islami Bank Capital Management Ltd.
Under Process 30 0
SJIBL Shahjalal Islami Bank
Securities Ltd. Under Process 22.5 22.5
Source: Department of Off-Site Supervision, BB
Table-5 depicts that only 10% merchant banks are maintaining the discretionary
balance of more than Tk. 50 crore while 100% of merchant banks are maintaining
non-discretionary balance of Tk over 100 crore for their customers. The merchant
banks as a whole maintain the discretionary balance of Tk. 628.86 million and non-
discretionary balance of Tk.51341.28 million ( Source; SEC) . For the discretionary
accounts, the merchant banks have to keep the loss limit and that‟s why when the
market as a whole moves downward, then there is chance on the part of merchant
banks to sell the shares of the discretionary accounts in order to maintain the loss
limit. So, discretionary accounts are risky for the whole capital market.
Table 5: Portfolio Management Activities of the Merchant Banks
(Figure in „000)
Level of client accounts’
balance of Merchant Banks
( in ‘000)
Discretionary
(Closing Balance) Non-Discretionary (closing
Balance)
0 - 50,000 90% 0% 51,000 – 100,000 0% 0%
101,000 – 200,000 0% 0% 201,000 – 500,000 0% 0% 501,000 – 1000,000 10% 0%
More than 1000,000 0% 100% Source: SEC of Bangladesh
Table-6 & 7 shows that most of the merchant banks and brokerage houses are
maintaining the requisite research cell for evaluating the investment worthiness of the
securities to be invested. Around 60% of the merchant banks are the full depository
participant of the CDBL. As high as 80% of the merchant banks are full-fledged
merchant banks, i.e. they can provide all the merchant banking services
(Underwriting, issue management and portfolio management services) to their
existing and potential clients. Only 30% merchant banks are maintaining the KYC
(Know Your Customer) profile of their customers while the remaining 70% are not
maintaining KYC profile which is too risky for them as well as for their customers
also. More or less all the merchant banks and brokerage houses are maintaining the
margin accounts for their clients.
278 Research Workshop Keynote Paper
Table 6: Availability of Relevant Features of Sampled Merchant Banks
Availability of
relevant
features of
Merchant Banks
Research
cell Margin
A/cs KYC
profile
Full
depository
Participant
Full-fledged or
partial merchant
banking License
Available 70% 100% 30% 60% 80%
Not available 30% 0% 70% 40% 20%
Source: Survey results
Table 7: Availability of Relevant Features of Sampled Brokerage Houses
Availability of
relevant features of
Brokerage Houses
Research
cell Margin A/cs KYC profile
Full
depository
Participant Available 70% 100% 20% 60%
Not available 30% 0% 80% 40%
Source: Survey results
Since the profit/ loss and business volume of an organization can display its
performance, so the following tables show the amount of profit/loss of the sampled
merchant banks and brokerage houses. Table-8 shows that most of the merchant
banks have made a substantial amount of profit after commencing their businesses.
Survey results also show that the merchant banks which have started their business
earlier have made more profits than the late starter.
Table 8: Profit/Loss of Sampled Merchant Banks
Profit level of Merchant Banks
(Tk. in crore) 2010 2011 (upto June)
0.00- 5.00 70% 0% 6.00 – 10.00 0% 20% 11.00 – 15.00 10% 20% 16.00 -20.00 0% 10%
More than 20.00 20% 50%
Source: Survey results
Table-9 shows that most of the brokerage houses have made a handsome amount
of profit after commencing their businesses. Survey results also show that those
brokerage houses which have started their business earlier have made more profits
than the late starter. The study demonstrates that subsidiary forms of the merchant
banks and brokerage houses of the banks are performing better than their branch-form
or treasury-form capital market involvements.
Research Workshop Keynote Paper 279
Table 9: Profit/Loss of Sampled Brokerage Houses
Profit level of Brokerage Houses (Tk. in crore)
2010 2011 (upto June)
0.00- 5.00 60% 0% 6.00 – 10.00 0% 20%
11.00 – 15.00 20% 20% 16.00 -20.00 0% 20%
More than 20.00 20% 40%
Source: Survey Results
VII. Recent Measures to Rejuvenate the Capital Market
The regulatory authority of the capital market of Bangladesh recently announced
a short, medium and long-term rejuvenation package to revive the capital market. The
implementation of the short-term measures will start immediately, the medium- term
ones in three months and the long-term ones in six months. The ten short-term
measures include: 1) The loans provided by banks to their capital market subsidiaries,
will not be taken into account while estimating their 'exposure to stock market'; 2)
The long-term equity investment made by a bank in any company will not be
considered as 'capital market exposure 3) The repatriation of commission money,
which has to be paid to foreign brokerage firms in case of foreign investment, will be
made speedier, subject to submission of relevant documents; 4) The 10 per cent tax
imposed on the profits earned by investments by foreign institutional and non-
resident Bangladeshis will be withdrawn; 5) The central bank will consider the banks'
exposure limit to the stock market on a 'net-off' basis, instead of 'marking to market',
basis;6) The deadline for adjusting single-borrower exposure limit of banks has been
extended by another two years, up to December 31, 2013; 7) The commercial banks
will make more investment in the stock market 8) Insurance companies (life and non-
life) have agreed to inject their surplus funds in the stock market; 9) The sponsor-
directors of listed companies will have to own at least 30 per cent stakes of their
respective companies; and 10) the merchant banks and other subsidiary firms will be
allowed to mobilize 49 per cent of their funds from sources beyond their parent
companies. The mid-term measures are: 1) the securities regulator will take initiatives
to launch the 'Investment Advisory Service' to make the market an informed one. For
this, brokerage firms will have to employ professional and expert investment
managers; 2) The securities regulator will make available 'Equity Research
Publication' to ensure access to information by investors, academicians and policy
makers; 3) A corporate governance guideline will be formulated to ensure
transparency and accountability of the listed companies; and 4) The securities
regulator will immediately take measures to increase the capital of merchant banks
and other subsidiary firms. The long-term measures are: 1) Financial Reporting Act
(FRA) will be formulated in a bid to increase the quality accounting and auditing
disclosure by listed companies; 2) The present 'insider trading' rules will be upgraded
280 Research Workshop Keynote Paper
and made and made stricter. 3) The regulator will make the 'Small Investor
Protection' law more time- befitting; 4) The proposed demutualisation of the two
stock exchanges will be completed very soon to ensure their corporate governance; 5)
Necessary measures will be taken to strengthen the mutual funds and make those
more attractive to investors; and6) The securities regulator will further strengthen the
monitoring activities in the stock market by establishing improved surveillance
system. By studying the rejuvenation package, it is observed that the banks should
play a vital/main role to revive the capital market. Nearly Tk. 11, 105 crore is given
by the 53 merchant banks and brokerage houses as margin loan to the capital market.
These loans have been provided by their parent banks and financial institutions and
these banks and financial institutions are accounting their interest against these loans
in their income statement, though its recovery is not made from the capital market. As
a result, the capital market has become the loan market of the banks and financial
institutions. So the question is whether Bangladesh capital market is going to be
bank-based capital market or independent capital market. The rejuvenation packages
also indicate that the full concentration has been placed on banking system. But
capital market of any country should not be based on the banking system.
VIII. Observations and Recommendations
One, during the post global financial crisis, there is a demand all over the globe
that commercial banking and investment banking should be separated. In this regard,
Volcker Rule which states that commercial banks should be prevented from trading in
the capital market for their own profits has been drafted. It is true that regulation is
required to separate the commercial banking from investment banking in order to
ensure the interest of depositors. Commercial banks need certain return. But from the
stock market it is almost impossible to earn a certain return. Moreover, investment in
the stock market may increase the cost of fund for the banks.
Two, from the report of capital market investigation committee, it is observed that
there was gross manipulation in the pre-IPO stage of issuance of various companies‟
shares with the direct patronization and collaboration of SEC officials. To speak the
truth, an illegal kerb market was created under the umbrella of SEC in order to
transfer/trade those pre-IPO placement shares with the help of token instead of using
script or dematerialization of those shares. Though it is not possible to trade shares
without the requisite permission of SEC, yet shares were traded in real sense. These
pre-IPO placement shares were distributed among the top officials of SEC, DSE,
CSE and high-ups of civil and defence system in order to strengthen the whole
syndicate (Khaled, et.al 2011). So it is not possible to ensure stability of the capital
market of Bangladesh without the political commitment of the government as well as
the policy-makers of the country. In this regard, there should have a code of conduct
for SEC officials and third party supervisory body may act as watchdog of the
activities of SEC. Pre IPO process should be more transparent and it may be allotted
only to the institutional investors so that it cannot be used as a tool of manipulation.
Research Workshop Keynote Paper 281
Three, development of strong market risk capabilities can contribute to the
development of the capital markets. Moody's recent survey shows that the resilience
of the South African financial system during the current global financial crisis is due
to the depth of the country's capital markets. Capital market depth in Bangladesh has
increased tremendously over the last few years. In our opinion depth in capital market
does not help to stabilise the banking system. Though both are interlinked in their
operation, banking system should have separate regulation.
Four, it is said that key instruments in mitigating market risk in the trading
portfolio of banks and their subsidiary brokerage houses are the derivatives. The
introduction of derivative instrument in the market is feasible only when the regulator
can handle it and investors understand the full functioning of the instruments.
Five, merchant banks operation ultimately consolidates with banking operation
through group accounts and disbursement of profit is made up based on group profit.
Therefore, finance in merchant banks 99 to 100 per cent of funds from their parent
companies (Table-4) makes bank operation risky. Therefore, the merchant banks and
other subsidiary companies should mobilize 49 percent of their funds from sources
beyond their parent companies, and as a result the capital market will also boost up.
Six, bank can invest in shares of various companies in aggregate with the amount
of 10% of total liabilities of its own which is unrealistic. It should be linked to the
capital. Because capital is the fund which will ultimately absorb the losses to be
incurred by the banks.
Seven, in some neighbouring countries there is co-existence of commercial banks
and merchant banks as underwriters. This is in conflict with main function of
commercial bank. In our country separation of commercial banks from merchant
banks as underwriters is under process. In our opinion, underwriting activities should
be conducted through merchant bank entity.
Eight, demutualization is the process by which a customer-owned mutual
organization or co-operative changes its legal form to a joint stock company i.e.
absolute separation of management from ownership. The basic objective of
demutualization of stock exchanges is to keep away the brokers from the
management of the stock exchanges and to convert the exchanges into business
entities so that they are professionally managed. Once the bourses DSE and CSE are
transformed from a mutual to a demutualised structure, it will bring a change in the
ownership structure and legal and organizational forms. Therefore, the
demutualization process will enhance the stock market in terms of value, liquidity,
market perception, efficiency and independence considering the interests of all
stakeholders. It will also ensure transparency, resolve conflict of interest.
282 Research Workshop Keynote Paper
Nine, as per our survey results, there is margin loan amounting to TK. 9500
crore in the stock market of Bangladesh. The market which is developed by
depending on borrowed funds from the commercial banks, merchant banks or
brokerage houses becomes vulnerable. Again some of the listed companies have
memberships and they have merchant banking licenses. Ultimately this type of
interrelationship creates an environment of conflict of interest. Therefore, margin
loan facility should be restricted and loans should be given from merchant banks
own fund. The merchant banks should not have brokerage houses to resolve the
conflict of interest in this regard.
Ten, mutual funds in Bangladesh virtually have no control over the market.
Development of mutual funds is a necessary condition for a sound and balanced
development of a capital market, but the scenario in Bangladesh is quite different and
it reflects limited role of mutual funds and domination of other stakeholders in the
market. Not many investors are found interested to invest in mutual funds that are
considered safe investment tools worldwide. To make the mutual fund lucrative
investment destination, awareness should be built among the investors and we can
add some incentives on investments in mutual funds. Eleven, it is said that capital market of Bangladesh is too risky because of poor or
absence of governance in the market. Too few heads are very easy to manoeuvre.
Three members and a Chairman of the Securities and Exchange Commission are
solely responsible with inputs from executive directors and there is no code of
conduct for the employees of SEC. We think qualitative reform rather than radical
reform in terms of political affiliation free appointment, increase of manpower,
technological development and active supervisory board can contribute development
in the capital market.
Twelve, too much close relationship and too much co-ordination between the
SEC and the stock exchanges reflect powerful influence of stock exchanges. Too
close relationship between regulator and regulatee undermine regulations and allows
Exchanges to weaken the implementation of rules by SEC. In this case, the relation
between SEC and stock exchange should be consultative without injuries of
respective right and responsibility. The relation should not be restricted to providing
directives only.
Thirteen, the Bangladesh Association of Banks (BAB), an organisation of the
owners of the country's private commercial banks, has come up with a plan to float a
fund of Tk 50 billion, which it calls, market stabilisation fund (MSF) to help prop up
the flagging stock market. This is the second and the latest one of similar kind of
funds that the people who someway or other involved with the stock market have
proposed to float to 'stabilise' the market. The proposal about the floatation of the
second fund instead of creating the desired positive mood among the investors
triggered a free fall in stock prices. Such fund may not bring good result. Investors‟
confidence is the main issue in capital market.
Research Workshop Keynote Paper 283
Fourteen, demirguc-Kunt et al. (1996) suggest that an economy without a
well-functioning capital market may encounter three types of deficiencies: (i) limited
ways of risk diversification for investors and entrepreneurs (ii) firms cannot optimally
structure their financing decisions and (iii) lack information about the prospects of
firms thereby restricting their promotion of investments and its efficiency. Insider
trading should be restricted through formulating hard rule and there should be
application of the rule by providing punishment of the insiders.
Fifteen, brokerage houses and their branches should extend services beyond
metropolitan areas. They should invest adequately in quality research to provide
valuable information on listed companies, their industry and national economy. The
extension of services by brokerage houses can help the capital market to increase its
depth but there should have a research cell as well to guide the investors with
requisite suggestions and advisory services.
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286 Research Workshop Keynote Paper
Paper Eight
Implication of the Legal Framework Guiding Loan
Recovery
Syed Ahmed Khan Former Faculty Member, BIBM
Quazi Golam Morshed Farooqi
Faculty Member, BIBM
Implication of the Legal Framework Guiding
Loan Recovery
I. Introduction
Prior to the passing of The Money Loan Court Act, 1990 and The Bankruptcy
Act, 1997, it was observed and felt seriously that the existing laws in Bangladesh
were not adequate to solve the issues faced by banks and financial institutions
connected with poor loan recovery position. The banking sector in Bangladesh was
burdened with huge amount of non-performing loans. The poor recovery of loans
resulted in accumulation of large amount of non-performing loans. The issue of
recovery of loans still remains a major cause of concern for the central bank,
Government and policy makers of the country. With the implementation of Financial
Sector Reforms program, necessary laws were enacted and existing laws were
amended to improve the recovery position of bank loans. A series of amendments
were made to The Money Loan Court Act, 1990 and 2003. The main objective of the
subsequent amendments to this Act was to speed up the process of recovery of stuck
up loans of banking sector. Latest amendments to this Act were made on March 31,
2010. Continuous amendments of existing laws were aimed at improving the
recovery of non-performing assets of the banking sector. Besides, promulgation of
laws, amendment of existing laws and various non-legal measures were also
undertaken by Bangladesh Bank, Government and by concerned banks to address this
issue of loan recovery. In the meantime, nationalized banks were corporatized to
improve their overall financial performance. Despite all these attempts on different
fronts, recovery of bank loans still remains the main problem of the banking industry
in Bangladesh. Total classified loans stood at Tk. 233.79 billion or 8.67 percent of
total loans of Tk.2695.25 billion as on 30th June 2010. The paper identified the
following objectives: One, to discuss briefly the existing legal infrastructure
(including amendments) enacted so far for recovery of bank loans; Two, to identify
the efforts other than legal measures towards recovery of bank loans; Three, to
analyse & discuss the recovery status under The Money Loan Court Act, The
Bankruptcy Act., and The Public Demands Recovery Act; Four, to discuss and raise
issues relating to loan recovery problem under the present legal framework in
Bangladesh.
The study was undertaken through collection of information from secondary
sources. Mainly, bank officials of concerned desks in state owned banks and some
private sector banks were interviewed to bring out the actual dimension of poor loan
recovery. The banking system in Bangladesh has undergone a series of reforms
program including changes in laws, rules, process and operating systems of banking
institutions. But the problem of defaulted loans remains the major headache for
Research Workshop Keynote Paper 289
Government, Bangladesh Bank and policy makers. The study was organized into five
sections. Section I of the study provides introduction including objectives and
methodology of the study. Section II gives a literature review on the topic. Section III
briefly provides brief discussion on existing legal infrastructure of Bangladesh
towards loan recovery. Section IV presents some case studies relating to loan
recovery efforts by banks. Section V raises and discusses issues relating to loan
recovery problems under the existing legal framework.
II. Literature Review
Before the implementation of Financial Sector Reforms Program, legal
infrastructure for recovery of loans was almost absent in Bangladesh. The First
Mission under Commercial Bank Restructuring Project (CBRP) of the World Bank,
which started in May, 1997, stated, “The three pillars of banking-effective legal
system, good management and strong and effective central bank need to be rebuilt”.
They also pointed out, “In Bangladesh, the legal punishment is very low in case of
forgeries in Banks”. According to the Mission‟s view, in Bangladesh maximum fine
is US $ 500 only, and there is no example of punishment in Bangladesh in case of
forgeries in banks. Subsequently, under the Financial Sector Reforms Program, The
Artha Rin Adalat Ain 1990 and The Bankruptcy Act, 1997 were enacted and were
amended further with the objective of implementing bankers recourse laws for
recovery of stuck up loans of banking industry in Bangladesh. Our neighbouring
country, India promulgated Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 commonly known as Debt Recovery Tribunal (DRT) Act for
speedy recovery of bank loans. Three theoretical paradigms were used in quest for a
socio-political explanation of the bank loan default problem of Bangladesh: the
rational actor theory, the pluralist incrementalist theory and the organizational
bargaining theory. (Prof. Muzaffar Ahmed 1997). He rightly opines that unless the
major defaulters are brought to book and soundness of financial institutions are
ensured, the confidence of depositors and productive well-intentioned borrower in the
domestic financial system would be eroded (p.36). Bhattacharya (1998, p. 134) cites
the example of the explosive credit expansion in the decade of the 1990s as reasons
for loan default in Bangladesh. Bank loan default problem in Bangladesh is caused
primarily by the wilful defaulters, who have been thriving from the so-called, default
culture‟ engineered by diversion of bank loans to legal and illegal trading and other
pursuits at home and capital flight abroad. (A Search For a Theoretical Structure
Explaining Bank Loan Default In The Private Sector In Bangladesh)
III. Legal Measures
The preamble to The Money Loan Court Act says: “Whereas it is expedient to
further amend and consolidate the existing law relating to recovery of loan given by
the financial institutions. It is hereby enacted as follows:- ……”. Prior to the
enactment of this Act in 1990, it was felt that the existing laws were not adequate to
290 Research Workshop Keynote Paper
solve the default problems faced by banks. In addition, considerable manpower of
banks and financial institutions gets involved in the recovery process wasting their
other regular constructive assignments. In this background, the Act was first
promulgated in 1990. Since then the Act was in operation but expected recovery of
bank loans was not possible. In this situation, the banking industry in Bangladesh got
trapped in the situation of ever rising trend in classified loans, shortfall in
provisioning requirement, off and on liquidity crises, rise in the number of problem
banks etc. Under this Act, Exclusive Court was established to get rid of innumerable
pending suits in the Civil Court. Under the 2003 Money Loan Court Act, some
privileges were allowed to default borrowers viz. ex-parte decree may be set aside if
the defendant deposits an amount equivalent to 10% of the decreed money within 15
days of submission of application for setting aside the ex-parte decree. Besides, under
section 46 of the Act, default borrowers of Term Loan get time for one year more if
they deposit 10%, 15% and 25% of payable amount respectively after the
commencement of the repayment of the loan as per repayment schedule. Under the
Act, the default borrowers have the privilege of settlement of cases under Settlement
Conference (Section 21) and under Mediation (Section 22). Under Section 12 of this
Act, financial institutions have been empowered to sell mortgaged property of the
defendant to adjust the sale proceeds towards repayment of loans before filing of suits
in the Money Loan Court. For selling the mortgaged property of the borrower, Bank
shall publish sale notice (Section 33) in a widely circulated national Bengali daily
giving at least 15 days time. Under the Money Loan Court Act, 2003 (under Section
41 and 42), appeal and revision against a judgment or decree have been discouraged.
Appeal shall be admitted for action, if an amount equivalent to 50% of the decreed
money is deposited, in cash, in the decree holder financial institution. Revision
application will be accepted if 75% of decreed money is deposited. Civil
imprisonment under Section 34 of the Act upto 6 months is relaxable if the judgment
debtor, detained in civil prison, repays, in cash, an amount equivalent to 25% of the
outstanding amount and executes a bond to the effect that he shall repay the rest of
the amount within the next 90 days. The Court shall then release him from detention.
In view of the above circumstances, the default borrowers in many instances for fear
of losing property or honor in the society tend to communicate with banks for
settlement of suits.
Massive amendments were made on March 31, 2010 in the Money Loan Court
Act of 2003. Section 12, 22, 28, 30, 32, 33, 50 of Money Loan Court Act, 2003
were amended mainly to address the prevailing situation in banking industry
towards recovery of bank loans. Section 12(3) of Money Loan Court Act, 2003 was
amended deleting the words “Power of Attorney”. It indicates that financial
institutions shall have right to sell the mortgaged property towards adjustment of
default loan without having Power of Attorney from the side of borrowers. Section
21 of Money Loan Court Act 2003 has been abolished. Section 25 of Money Loan
Court has been amended. Under the amendment any suit above Tk. 5 crores claimed
Research Workshop Keynote Paper 291
by financial institutions to be settled under Alternate Dispute Settlement must be
approved by Chief Executive or Managing Director of the concerned financial
institution. Section 32 of Money Loan Court Act, 2003 has been amended. Under
the amendment while filing written objection against execution suit the defendant
shall submit security or bond equivalent to 10% of unrealized amount instead of
25% earlier. Section 33 of Money Loan Court Act, 2003 has been amended. Under
the amendment while executing any decree or order, the Court shall, in case of sale
of any property through auction, invite tender. Every bidder shall submit with the
tender as security through bank draft or pay order equivalent to 20% of quoted price
if bid amount is upto Tk 10 lakhs, 15% of quoted price if bid amount ranges
between Tk 10 lakhs and Tk 50 lakhs and 10% percent of quoted price if bid
amount exceeds Tk. 50 lakhs. New additions have been made under Section (33)
where under subsection (6K), 6(Kha), and 7(K) the decree holder shall
automatically get possession of property after six years on written application to the
Court by the decree holder. The above amendments were made in 2010 aiming
further at strengthening the recovery of bank loans.
IV. Loan Recovery Status under Existing Acts
Implications of implementation of these laws seem to be profound in the banking
industry not only for loan recovery but also for building awareness among concerned
parties. In this situation of high ratio of non-performing assets, banks set aside a
portion of income as loan loss reserve. It reduces banks loanable funds by stopping
recycling of funds. A high percentage of NPL leads ultimately to erosion of banks
capital. The growth of banks, thus, suffers immensely. As of 31st December, 2010 as
many as 75513 suits were settled (cumulative) under The Money Loan Court Act and
the amount of recovery (cumulative) stood at Tk. 5942.14 crores. But as on the same
date 35,835 suits were under trial and the amount claimed against these suits was Tk.
23218.72 crores. Thus it seems that there remains enough scope for further recovery
under MLC, Act. The amount of recovery under The Bankruptcy Act, 1997 was Tk.
315.76 (cumulative) against settled cases of 237 as on 31st December, 2010. The
amount of recovery under The PDR Act, 1913 stood at Tk. 688.59 crores
(cumulative) against settled suits of 572662 (Appendix-1). It may be mentioned that
with the implementation of Debt Recovery Tribunal (DRT) in India, classified loans
declined from 39 percent to 9 percent while in Bangladesh classified loans declined
from 34.9 percent in 2000 to 9.2 percent in June 2009. (Table-I). If the amount of
written –off loans and rescheduling amount were taken into consideration at the time
of calculation of NPL, the ratio would have been much higher than the figure
depicted below.
292 Research Workshop Keynote Paper
Table 1: Ratio of NPL to Total Loan by Type of Banks (Period end June)
Bank
Types 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
SCBs 38.6 37.0 33.7 29.0 25.3 21.4 22.9 29.9 25.4 21.4
DFIs 62.6 61.8 56.1 47.4 42.4 34.9 23.7 28.6 25.5 25.9 PCBs 22.0 17.0 16.4 12.4 8.5 5.6 5.5 5.0 4.4 3.9 FCBs 3.4 3.8 2.6 2.7 1.5 1.3 0.8 1.4 1.9 2.3 Total 34.9 31.5 28.0 22.1 17.6 13.6 13.2 13.2 10.8 9.2
Source: Annual Report, Bangladesh Bank, 2009-10
Writ Petition
Writ petitions filed by defendants may be one of the important causes of steep
rise in non-performing loans of banking industry in Bangladesh. A case is presented
below in this respect.
Case Study 1
Ref: 2010 BLD (HCD) 30
Nazmun Ara Sultana and Md. Ruhul Quddus, JJ
Fatema Begum
V.
The Artha Rin Adalat, Narayangonj and Others
The case in short is that Fatema Begum‟s father late Dudu Mian was the lawful
owner in possession of 8.04 decimals of land out of 20 decimals appertaining to
C.S. Khatian No. 278, Dag No 354 corresponding to S.A. Khatian No. 333, Dag No
490 and R.S. Khatian No. 459 under Mouza Dewbhoge of Police Station and
District Narayanganj. The petitioner (Fatema Begum), her brother and sisters
inherited the said property after the demise of their father Dudu Mian and have
been enjoying and possessing the same for more than twelve years without any
interruption. She (Petitioner) came to know from a reliable source on 18-2-2010
that their land would be auctioned in execution of a mortgage decree passed by the
Artha Rin Adalat, Narayanganj in Mortgage suit No. 72 of 1996. She rushed to
Court on 23-2-2010 and obtained an information slip, from which she specifically
learnt that respondent No.2 (IFIC Bank Ltd, B.B. Branch, Narayanganj) had
obtained a mortgage decree against respondent No 3 Alhaj Abul Hossain in
Mortgage Suit No. 72 of 1996 from the Artha Rin Adalat, Narayanganj in respect
of unspecified 7(seven) decimals of land from the same plot. The decree holder
bank put the decree in execution by filing Mortgage Decree Execution case No. 25
of 2001, which is still pending.
(Continued)
Research Workshop Keynote Paper 293
Case Study 1: (Continued)
In the guise of the above provision in the Constitution the default borrowers get
privilege to file writ petition. As a consequence of this Right, huge amount of default
loans of banking industry in Bangladesh remains stuck up. Not only the piling up of
default loans, a huge number of pending cases are under trial in the Court at different
stages. In view of the above situation, should banks go for pursuing cases for
indefinite period incurring huge amount of legal expenses or take other measures for
recovery of loan?
Directed Lending
Special Agricultural Credit Program (SACP) was launched in mid-February,
1977 with a target of Tk. 100 crore. SACP was introduced to increase the
participation of NCBs in agricultural financing and also to expand the credit
operations of BKB. Besides SACP, adequate finance was arranged from the banking
system to finance jute trade and jute mills during the decade of the 1970s and 1980s.
Under the above circumstances, the petitioner, her brother and sisters filed an
application for release of their property from the schedule of the mortgage suit as
well as Mortgage Decree execution case. The learned judge rejected the same by
impugned order dated 10-3-2010 on the ground that the petitioners did not deposit
25% of the decretal amount according to section 32(2) of the Artha Rin Adalat
Ain, 2003.
In deciding the writ petition filed by the petitioner (Fatema Begum) on the point of
controversy the learned judge mentioned sections 2(Ga), 6(5) and other provisions
of the Artha Rin Adalat Ain, 2003 which strongly suggest that the law is enacted
for recovery of loan from the defaulter loanee i,e., the borrower, guarantor,
mortgagor and the person placed in similar position. In the present case the
petioner is in no way connected with the loan, she does not claim the auctioned
land and there is no cause of realization against her. Such a person is not intended
by the law to bear extra financial burden of 25% of the decretal amount as a pre-
requisite to get relief.
In view of the above, we (the learned judge) find substance in the Rule.
Accordingly, the Rule is made absolute. The impugned order dated 10-3-2010
passed by the Artha Rin Adalat, Narayangainj summarily rejecting Miscellaneous
Case No. 3 of 2010 in Mortgage decree Execution Case No. 25 of 2001 is hereby
declared to have been passed without lawful authority and is of no legal effect.
“A person‟s right to property guaranteed under the Constitution can not be taken
away without giving him/her an opportunity to probe his/her claim” - The verdict
states.
294 Research Workshop Keynote Paper
Refinance facility was also allotted to the banks from Bangladesh Bank at bank rate
to finance the jute sector, sugar mills, textile mills, petroleum import, rural credit,
small loan, loans for weavers etc. during 1970s and 1980s. These financing facilities
produced adverse impact and most of these loans became bad loans. The trend of
directed lending still exists. Small enterprise financing without collateral, financing
for goat rearing etc. are examples of directed financing in recent years. As a result,
the percentage of bad loan constituted major share in total classified loan which is
shown in table II below.
Table 2: Major Share in Total Classified Loan
Year TCL*
as % of TL**
Sub-standard
Loans as % of
TCL
Doubtful
Loans as % of
TCL
Bad/ Loss
Loans as %
of TCL 1999 41.11 5.26 8.27 86.47 2005 13.55 8.66 6.96 84.37 2008 10.79 9.43 9.42 81.14 2010 8.67 13.17 7.76 79.04
*TCL= Total Classified Loan
**TL= Total Loan
Source: Financial Sector Review, Bangladesh Bank, January, 2009.
It is evident from the above table that in Bangladesh the share of Bad/ Loss loans
to total classified loans of scheduled banks was 86.47 percent in 1999, 81.14 percent
in 2008 and 79.04 percent in 2010. In India, the percentage of loss assets to total
advances of scheduled commercial banks was only 0.24 percent in 2010 (end March)
compared to 0.20 percent (end March) in 2009. In Bangladesh, bad/ loss loans as
percent of total loans outstanding stood at 6.85 percent as at end June, 2010. This
indicates a dismal picture of classified assets position in Bangladesh.
Banks in Bangladesh are burdened with heavy non-performing assets. Banks are
endeavoring hard to find out ways to recover non-performing loans. Out of total
cumulative cases of 111348 for an amount of Tk. 35486.67 crores (cumulative) as
at end December 2010 under The Money Loan Court Act only 75513 cases
(Cumulative) were settled. The amount of actual recovery under The Money Loan
Court Act, 2003 stood at Tk. 5942.14 crores upto 31st December 2010. Similarly, an
amount of Tk. 315.76 crore was recovered under The Bankruptcy Act, 1997 during
the same period. Under PDR Act an amount of Tk. 688.59 crores was recovered
against 572662 settled cases upto 31st December 2010. It is reliably learnt from
concerned divisions of banks that hearing of cases in the Money Loan Court are
being shifted for unknown reasons. Even in some instances shifting/ postponement
of dates of hearing have been changed keeping the concerned bank unaware. The
Court, in some instances, relieves guarantors from charges of guarantee. Section 17
of Artha Rin Adalat Ain is, thus, not being implemented under various pretexts.
A case is presented below highlighting the time taken to settle a case under Money
Loan Court Act, 2003.
Research Workshop Keynote Paper 295
Case Study 2
Star Bank Ltd. (not the actual name of the bank) sanctioned house-building loan
amounting to Tk. 10.00 lakhs to an individual customer. The bank filed suit against
the default borrower on 06-02-2005 for an amount of Tk. 39.22 lakhs. The bank got
decree in its favour. Under the process of auction the property was registered in the
name of a bidder on 27-02-2008. but the default borrower filed a Mis case against
the bank and the buyer of the auctioned property. In the meantime, the borrower
applied to Star Bank Ltd. to repay loan after some waiver of interest. Star Bank Ltd.
through official decision received an amount of Tk. 32.94 lakhs from the borrower
towards adjustment of the loan. The amount was transferred to the sundry deposit
account of the branch from where loan was disbursed. As per instruction of the
Head office, on 22-04-2010, a petition was filed to Court to withdraw Appeal Case
and the case is still pending as per Order of the Court.
In the above case, Star Bank Ltd. got back its claim but the Appeal case is still
pending.
Loan Without Security
In many instances, collateral securities against which banks/financial
institutions provided loans, are not in the possession of banks. If these securities
were in the possession of banks the implementation of the Act and subsequent
possession by banks would have been easy (case-III). In many instances thousands
of cases of banks and financial institutions remained unattended for lack of proper
attention and follow-up.
Case Study 3
Discontinuation of Execution Cases due to non-availability of borrower(s)/
guarantor(s) having no collateral and/or other securities against their loans
for realization of bank dues
Green Bank Ltd. (not the actual name of the bank) from its Motijheel branch
sanctioned cc (Pledge) loan limit of Tk. 20.00 lakhs to Lilac Paints and Chemicals Co.
Ltd. The loan became default and the bank filed a case against the borrower on 23-06-
1997 and got decree in favour of the bank. The bank filed execution case on 06-04-2002 for Tk. 132.67 lakhs. The bank had no security at its disposal and the borrower
is also not traceable. Total legal expense of the case stood at Tk. 1.27 lakh as on 31-
10-2008. It may be mentioned that the branch manager is no longer in the services of the bank and no disciplinary action was taken against him for disbursement of loans
without taking proper security. The account was referred to recovery agent and was
returned. The chance of recovery of the loan is bleak as the borrower is untraceable and no security was provided by the borrower. The Green Bank Ltd. referred 52 such
cases (loans given without security) to Bangladesh Bank for discontinuation of cases
against the concerned borrowers to get rid of further legal expenses. Bangladesh
Bank, in reply, advised Green Bank Ltd. to continue and pursue such cases.
296 Research Workshop Keynote Paper
Non-Legal Measures
In addition to legal measures, Bangladesh Bank provided necessary guidelines
towards recovery of bank loans. These are: Rescheduling of loans, write-off of loans,
appointment of Loan Realization Agent. Impositions of Restrictions on Loans to
Directors of banks, Restructuring of NCBs/ Distressed bank, Large Loan
Restructuring Scheme, to make mandatory of Credit Rating of banks by external
agencies, Single borrower exposure limit etc. Under write-off policy of Bangladesh
Bank, banks may, write-off loans classified as bad/loss. Loans remaining classified as
bad/loss for last 5 years and above and if 100% provisions were kept against these
bad loans, these loans may be written-off immediately. The total amount of yearly
written-off bad loan position is shown in Table-III. The extent of written-off bad
loans stood at Tk. 174.0 billion as on 30-6-2010. The question arises who should bear
the ultimate burden of this write-off amount? Banks are required to keep 100 percent
provision against the write-off bad loans. The position of profit of banks would have
been higher if provisions were not required to be kept. The general shareholders are,
thus, being deprived of getting due return from their investment.
Table 3: Write-off Bad Debts in Different Bank Categories
(Billion Taka)
Source: Annual Report, Bangladesh Bank, 2009-10
V. Issues and Problems to be Discussed
One, a total amount of Tk. 35486.67 crores were claimed by the banking community
in Bangladesh against 111348 cases (cumulative) upto 31st December, 2010 under
The Money Loan Court Act, 2003. Actual recovery (cumulative) stood at Tk.
5942.14 crores against 75513 settled cases. Similarly, under PDR Act, a cumulative
amount of Tk. 688.59 crores was recovered against 572662 settled cases. Thus, there
remains a large number of unsettled cases against which huge amount of Taka was
claimed by banks. Now the question arises, what are the possible means other than
existing means to dispose of pending cases lying with the Courts?
Two, the default borrowers get privileges to file writ petition against claim of the
bank under Section 12 of Money Loan Court Act, 2003. In some instances, the
borrowers file several writs against a particular case. The banks are not even
Bank
Types 30-06-04 30-06-05 30-06-06 30-06-07 30-06-08 30-06-09 30-06-09
SCBs 26.3 29.7 35.7 42.8 48.4 64.5 70.5
DFIs 17.4 27.6 28.6 30.4 31.0 31.8 31.8
PCBs 21.2 32.9 40.7 45.5 49.4 54.7 69.6
FCBs 0.9 1.1 1.5 1.6 1.7 2.0 2.1
Total 65.8 91.3 106.5 120.3 130.5 153.0 174.0
Research Workshop Keynote Paper 297
informed by the Court regarding the filing of Writ petitions by the default borrowers.
In this situation, should banks wait for indefinite period and incur huge amount of
legal expanses to get verdict?
Three, the banks in many instances do not have security at their disposal against
the loan they have provided. The default borrowers are also not traceable. The
Recovery Agent entrusted to do the job of loan recovery also failed. Some bank
referred such cases to Bangladesh Bank for discontinuation of such cases. Bangladesh
Bank, in reply, advised the concerned bank to continue and pursue such cases. What
should banks do in these circumstances?
Four, the detention order against the default borrowers passed by the Court does
not reach the concerned Police Station in due time and proper way. Even if it reaches
the concerned Police Station, there is lack of desired action by the concerned law
enforcing agencies. The law enforcing agency do not even inform the Court regarding
the position of default borrowers. In this process many cases remain stuck up. What
are the ways to get out of this situation?
Five, the percentage of bad/ loss loans in total classified loans is higher in
Bangladesh compared to our neighboring country, India. What are the possible ways
to come out of this situation? Bangladesh Bank provided guidelines to write-off bad
loans against keeping of 100 provisions. But ultimately who is going to bear the
burden of these written-off assets?
Six, it is evident that the recovery efforts made by banks through non-legal
measures and legal measures are not producing good results towards recovery of
loans. Then, what additional methods/ measures should banks undertake to speed up
the process of loan recovery?
Seven, it is understood that bank management under some political pressure
disburse directed loans. But the recovery positions of all directed credit in
Bangladesh is not at all satisfactory. What are the ways on the part of bank
management to realize these directed loans?
Eight, many sections of Money Loan Court Act, 2003 have been amended in
2010 with the prime objective of strengthening loan recovery. What are the possible
ways to implement these amendments towards better recovery of stuck up loans of
banks?
298 Research Workshop Keynote Paper
VI. Observations and Recommendations
One, it is a fact that large number of suits are being filed by banking companies
in The Money Loan Court to recover their default loans. But the disposal of suits is
very minimum. It is, thus suggested that number of Exclusive Courts as well as
number of Judges for trial of cases towards recovery of loans should be increased.
Two, writ petitions filed by default borrowers under section 102 of the
Constitution stand as a great barrier towards speedy disposal of cases under The
Money Loan Court Act, 2003. It is , thus, suggested not to allow or entertain writ
petitions by default borrowers by the High Court. At all if it is desired, separate
benches in the High Court may be established to trial such cases. There should be
some definite time limit in the disposal of writ-petition. It is further suggested that
some percentage of down payment system should be introduced while filing writ
petitions by the defaulters.
Three, there are lackings in the persuation of cases in the Court by the lawyers
appointed by banks. It is , thus, imperative to appoint competent advocates to persue
cases in The Court to derive benefit out of filing of cases under the Money Loan
Court Act, 2003. The remuneration of lawyers should be increased.
Four, employees entrusted with the responsibility of looking after the Legal
Section of banks should be run by persons with legal background. They should be
competent, honest and dedicated towards follow-up of cases filed by their banks.
Five, political pressure in the disbursement of bank loans ultimately leads to
default culture in Bangladesh. If arrangements are made to publish in the newspapers
the names of default borrowers along with their photographs, the number of
defaulters may decline in Bangladesh.
Six, Debt Recovery Tribunal like India may be established in Bangladesh headed
by Retired High Court Judges for those defaulters who are filing writ-petitions to
avail stay orders from the Court.
Seven, The success of the implementation of the filed cases under The Money
Loan Court Act, 2003 depends not only on the efficiency of employees of banks but
also on the Court, law enforcing agencies and political will of the government in
power. It is, thus suggested that concerned affords should be undertaken to get out
this problem of poor disposal of cases by The Money Loan Court. Necessary
amendments of The money Loan Court Act,2003 may be effected to make this law
suitable towards recovery of bank loans.
Research Workshop Keynote Paper 299
REFERENCES
Choudhury, Toufic, Ahmad and Kumar Adhikary Bishnu (2002), “Loan
Classification, Provisioning Requirement and Recovery Strategies: A comparative
Study on Bangladesh and India”, Bank Parikrama, Vol. XXVII, Nos 2 & 3, June &
September 2002.
Choudhury, Toufic, Ahmad, Md. Liakat Hossain Moral and Prashanta Kumer
Banerjee (1997), “Impact of New Loan Regulations on Loan Portfolio Management
in Banks”, Bank Parikrama, Vol. XXII, No. 2, June 1997.
Islam, Muinul and Mohiuddin Siddique (2010), A Profile of Bank Loan default in the
Private Sector in Bangladesh, Chapter 1 & 2.
Legal Aspects of Banking Operations, Indian Institute of Banking & Finance, Module
C(P377-78).
Moral, Md., Liakat, Hossain (2000), “Enforcement status of Laws Relating to Default
Bank Loans”, Bank Prikrama, Vol. XXV, Nos. 2 & 3, June & September 2000.
Ministry of Law, Justice and Perliamentary Affairs, Government of the Peoples
Republic of Bangladesh (2003), The Money Loan Court Act 2003, (Act No. VIII of
2003), Dhaka: Ministry of Law, Justice and Perliamentary Affairs.
National Assembly, Bangladesh (2010), The Money Loan Court Act 2010
(Amendment), 31st March, 2010, Dhaka: National Assembly.
Report on the Trend of Banking in India, 2009-10.
Seminar on „Recovery of Default Loan Through Private Initiative – Success Failures‟
organized by Peoples Development Services Corporation Ltd.
The Bankruptcy Act, 1997.
300 Research Workshop Keynote Paper
Appendix
Table 1: Suits Filed and Settled in the Artha Rin Adalat Ain / Bankruptcy Act / PDR Act
(Tk. in crores)
Category of
Banks
Period
Ended
Suits Field (Cumulative) Suits Settled Suits under trial
Number of
suits
Amount
claimed
Number
of suits
Amount
claimed
Actual
recovery
Number
of suits
Amount
claimed
Recovery
against
claim
SCBs 31-12-2007 60566 13482.11 35225 2363.67 2024.70 25341 11118.44 300.61
31-12-2010 63975 16499.25 43309 5036.13 3311.86 20666 11463.12 815.64
DFIs 31-12-2007 23663 3841.56 16742 1783.02 364.89 6921 2058.54 23.12
31-12-2010 26716 4406.61 19694 2394.09 630.09 7022 2012.52 229.33
PCBs 31-12-2007 17815 9037.37 9387 2361.02 955.84 8428 6676.35 943.35
31-12-2010 20313 14166.45 12264 4687.88 1907.96 8049 9527.19 1241.42
FCBs 31-12-2007 296 216.39 232 156.94 81.43 64 59.45 43.56
31-12-2010 344 414.36 246 198.47 92.23 98 215.90 5.68
Grand
Total
31-12-2007 102340 26577.43 61586 6664.65 3426.85 40754 19912.77 1310.64
31-12-2010 111348 35486.67 75513 12316.58 5942.14 35835 23218.72 2292.08
Re
search
Wo
rksh
op
Ke
yn
ote
Pap
er 3
01
Table 2: Bankruptcy Act, 1997
(Tk. in crore)
Category
of Banks
Period
Ended
Suits Field (Cumulative) Suits Settled Suits under trial
Number of
suits
Amount
claimed
Number of
suits
Amount
claimed
Actual
recovery
Number of
suits
Amount
claimed
Recovery
against claim
SCBs 31-12-2007 176 900.84 43 306.60 101.83 133 594.25 3.26
31-12-2010 179 900.85 57 395.40 174.85 122 505.45 1.70
DFIs 31-12-2007 107 881.75 41 277.71 0.43 66 604.04 1.23
31-12-2010 118 946.53 69 382.91 0.43 49 563.62 0.00
PCBs 31-12-2007 172 751.31 100 258.86 29.22 72 492.45 3.20
31-12-2010 182 786.83 109 312.32 140.38 73 474.51 4.87
FCBs 31-12-2007 1 0.09 1 0.9 0 0 0 0
31-12-2010 2 7.62 2 7.62 0.09 0 0.00 0.00
Grand
Total
31-12-2007 456 2533.99 185 843.27 131.48 271 1690.72 7.70
31-12-2010 481 2641.83 237 1098.25 315.75 244 1543.59 6.58
302 R
esea
rch W
ork
sho
p K
ey
no
te Pap
er
Table 3: PDR Act, 1913
(Tk. in crore)
Category
of Banks
Period
Ended
Suits Field (Cumulative) Suits Settled Suits under trial
Number of
suits
Amount
claimed
Number of
suits
Amount
claimed
Actual
recovery
Number
of suits
Amount
claimed
Recovery
against claim
SCBs 31-12-2007 439322 366.79 371603 225.40 229.96 67719 141.29 60.73
31-12-2010 468104 428.24 394798 289.76 289.96 67719 141.29 60.73
DFIs 31-12-2007 255410 73865.16 146947 49523.12 33398.52 108463 24342.04 1595.97
31-12-2010 285636 86085.70 177842 52763.60 39823.76 107794 33322.10 6554.76
PCBs 31-12-2007 618 241.66 21 56.67 85.54 597 184.99 4.44
31-12-2010 624 242.85 22 63.56 58.98 602 179.29 23
FCBs 31-12-2007 0 0 0 0 0 0 0 0
31-12-2010 0 0 0 0 0 0 0 0
Grand
Total
31-12-2007 695350 1107.86 518571 721.30 564.53 176779 386.56 76.73
31-12-2010 754364 1291.52 572662 818.04 688.59 181702 473.49 90.27
Source: Banking Regulation and Policy Department, Bangladesh Bank, H.O., Dhaka
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