Sunday, March 8, 2020

The Financial System of Bangladesh

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

• Formal sector

• Semi-formal sector

• Informal sector

The sectors have been categorised in accordance with their degree of regulation. The formal sector includes all regulated institutions, such as banks, non-bank financial institutions (FIs), insurance companies, capital market intermediaries such as brokerage houses, merchant banks and micro finance institutions (MFIs).

The semi-formal sector includes those institutions which are regulated but do not fall under the jurisdiction of the Central Bank, Insurance Authority, Securities and Exchange Commission or any other enacted financial regulator. This sector is mainly represented by specialised financial institutions, such as House Building Finance Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank, Non-Governmental Organizations (NGOs) and discrete government programs.

The informal sector includes private intermediaries which are completely unregulated.

Capital markets

The Bangladesh Securities Exchange Commission (BSEC) is the primary regulator for all activities of the bourses and its members. The BSEC is a ‘Category A’ member of International Organisation of Securities Commission (IOSCO).

 With over 300 listed companies, the capital market of Bangladesh s considered to be one of the emerging markets in the context of the global financial system. The market has immense potential for the country’s industrialisation, development of infrastructure, in particular, and economic growth in general.

Bangladesh’s capital markets comprise the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE), incorporated in 1954 and 1995, respectively. Some of main features of the market are as follows:

• Both Dhaka and Chittagong Stock Exchanges are members of South Asian Federation of Exchanges (SAFE), a forum in South Asia to promote the development of securities markets in the region

• Automated trading facilities have been available at both bourses since 1998

• The Central Depository Bangladesh Limited (CDBL) introduced its first electronic book entry in 2004 • Market intermediaries include 250 Trading Right Entitlement Certificate (TREC) holders of Dhaka Stock Exchange (DSE), 135 TREC holders of Chittagong Stock Exchange (CSE), 55 registered merchant banks, 17 asset management companies, and 10 custodians

Banking system

The banking system of Bangladesh consists of Bangladesh Bank (BB) as the Central Bank, six state owned commercial banks (SCB), two specialised banks (SDBs), 39 private commercial banks (PCBs) of which 31 are commercial PCBs, eight Islamic Sharia-based PCBs, nine foreign commercial banks (FCBs) and four non-scheduled banks.

Bangladesh Bank, as the central bank, has legal authority to supervise and regulate all banks and non-bank financial institutions. It performs the traditional central banking roles of note issuance and of being the banker to the government and banks. Given some broad policy goals and objectives, it formulates and implements monetary policy, manages foreign exchange reserves and implements prudential regulations and conducts monitoring thereof as they are applied to the entire banking system. Its prudential regulations include, among others: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. Bangladesh Bank has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problems arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime.

Under the financial sector reform program, a flexible interest policy was formulated. According to that, banks are free to charge/fix their deposit and lending rates, other than those related to export credit. Banks can differentiate interest rates up to three per cent. With progressive deregulation of interest rates, banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may charge interest 1.5 per cent more or less than the announced mid-rate on the basis of the comparative credit risk. Banks upload their deposit and lending interest rate to their respective website.

Insurance industry  

The insurance sector is regulated by the Insurance Act, 2010. The Insurance Development and Regulatory Authority (IDRA) was instituted on 26 January 2011 as the regulator of the insurance industry being empowered by Insurance Development and Regulatory Act, 2010 by replacing its predecessor, Chief Controller of Insurance. General insurance is provided by 45 companies and life insurance is provided by 30 companies. The industry is dominated by the two large, state-owned companies: SBC for general insurance and JBC for life insurance, which together command most of the total assets of the insurance sector

Investment management industry

Bangladesh’s asset management industry is very immature. Nevertheless, a stable economic outlook, political stability and growing population have attracted a number of global fund managers. The primary regulator for the industry is the BSEC which has, so far, licensed 17 asset management companies in the country. The asset management companies manage approximately BDT50 billion, comprising less than three per cent of the total market capitalisation. Asset management companies are authorised to act as issue and portfolio managers of the mutual funds which are issued under the SEC (Mutual Fund) Rules 2001.

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