Bangladesh Bank

Banking System and Monetary

Policy

Presented by:
Nima Doma Sherpa

Pabitra Pandey
Padama Yogi

History of Bangladesh Bank

Prior to the birth of Bangladesh in 1971, functions of the State

Bank of Pakistan were performed through the Dhaka
Branch office.
After the liberation war, Dhaka branch office of State Bank of
Pakistan was recognized as the central bank of Bangladesh and
it was named Bangladesh Bank.
Bangladesh Bank was established under the Bangladesh Bank
Order, 1972 (Presidents Order No 127 of 1972) which took
effect on 16 December 1971. and the law includes the
establishment, incorporation, capital and management of
Bangladesh Bank.

Financial system of Bangladesh

4 state-owned commercial banks

4 government owned specialized

development banks
39 domestic private commercial banks
9 foreign commercial banks
4 Non-scheduled banks

31 non-bank financial institutions

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Financial system of Bangladesh

The financial system also embraces

Investment Corporation of Bangladesh,

Bangladesh House Building Finance Corporation,
2 stock exchanges,
62 insurance companies,
599 registered micro-credit organizations,
54 merchant banks (investment banks),
387 depository participants (stock dealers, brokers, etc.),
8 credit rating companies, and
119 registered co-operative banks.

Introduction

Bangladesh Bank is the central bank and monetary authority

of the country.

The entire operation of the former State Bank of Pakistan in

the eastern wing was transferred to Bangladesh Bank.

Introduction

The

powers

and

functions

of

Bangladesh

Bank

are

governed by various laws and acts including the

Banker's Books Evidence Act 1891,

Insolvency Act 1920,

Banking Companies Ordinance 1962,

Bangladesh Bank Order 1972,

Foreign Exchange (Regulation) Act 1986,

Money Loan Court Act1990, Banking Companies Act 1991,

Financial Institutions Act 1993 and Rules1994,

Companies Act 1994 and Bankruptcy Act 1997.

6

Objectives of Bangladesh Bank

As the central Bank of Bangladesh, the broad objectives of the
Bank are:
a.
To regulate currency issuance and to keep foreign
exchange reserves;
b.
To manage the monetary and credit system of Bangladesh
with a view to stabilizing domestic monetary value
c.
To preserve the par value of the Bangladesh Taka
d.
To promote and maintain a high level of production,
employment and real income in Bangladesh and to foster
growth and development of the country's productive
resources.
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Visions of Bangladesh Bank

The Bangladesh Bank (BB),

Through ensuring the quality of services and the
competence of its staff,
Shall operate as a modern, dynamic, effective, and forwardlooking central bank
To manage the countrys monetary and financial system
With a view to stabilizing the internal and external value of
Bangladesh Taka
Conducive to rapid growth and development of the economy.

Missions of Bangladesh Bank

Promote and maintain macroeconomic and price stability

Through

Formulating

and

implementing

appropriate

monetary policy consistent with the countrys national

development goals;

Pursuing prudent policies to ensure stable internal

and external value of Taka.

Missions of Bangladesh Bank

Identifying policy priorities for implementation by the

Government through

Assessing the transmission channels and

The interactions of monetary policy with fiscal, exchange
rate, and other macroeconomic policies and their impact on
the economy;
Proposing necessary legislative measures to attain the central
banks objectives and perform its functions including
strategies and
Promoting, regulating and ensuring a secure and efficient pay
ment system, including the issue of Bank Notes.

10

Functions of Bangladesh Bank

Regulation and supervision of banks and non-bank financial

institutions.
Management of the country's international reserves, countrys
foreign exchange and the gold reserve.
Exercises monopoly over the issue of currency and
the banknotes.
Regulation and supervision of the payment system.
Acting as banker to the government and the bankers bank, a
Lender of Last Resort.

11

Functions of Bangladesh Bank

Implementation of the Foreign exchange regulation Act.

Managing a Deposit Insurance Scheme .

Formulation and implementation of monetary and credit

policies.

Money Laundering Prevention.

Collection and furnishing of credit information.

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Supervision of Banks

With a view to promoting and maintaining soundness,

solvency and systematic stability of the financial
sector as well as to protecting interest of depositors,

BB carries out two types of supervision namely

(i) on-site inspection and

(ii) off-site monitoring

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On-site Inspection of Banks

As part of Bangladesh Bank's statutory function, currently six

departments of BB namely
Department of Banking Inspection-1 (DBI-1),
Department of Banking Inspection-2 (DBI-2),
Department of Banking Inspection-3 (DBI-3),
Department of Foreign Exchange Inspection (DFEI),
Financial Integrity and Customer Services Department
(FICSD), and
Bangladesh Financial Intelligence Unit (BFIU)

14

On-site Inspection of Banks

These departments conduct different types of inspection which

may be summarised in three major categories:

(i) comprehensive/ regular/ traditional inspection;
ii) risk based/ system check inspection, and
iii) special/ surprise inspection

15

Padama

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What is Monetary Policy ?

Monetary policy is a regulation of the money supply and

interest rates by a central bank, in order to control inflation and
stabilize currency.
By impacting the effective cost of money, the Bangladesh
Bank as a controller of monetary policy can affect the amount
of money that is spent by consumers and businesses
Monetary policy is the process by which the government,
central bank, or monetary authority of a country controls

The supply of money,

Availability of money, and

Cost of money or rate of interest.

17

Reasons of publishing Monetary

Policy Statement

To support the governments goal of faster inclusive economic

growth and poverty reduction, besides maintaining monetary
and price stability.
To anchor inflation expectation of the markets.
Achieving an inclusive economic growth by facilitating
productive sectors while keeping inflationary pressure under
control.
By fixing inflationary rate the authority trying to increase the
outcomes using the maximum infrastructure of the productive
sectors which will contribute in the national income.

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Frameworks of Bangladesh
Monetary Policy

The Policy Target

Inflation Target
Growth target
Updated assessment

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Previous Monetary Policy

(July,2013 of BB)

The July 2013 MPS explained that policy rates were being
kept unchanged due to the risks of inflationary pressures
stemming from wage increases and supply-side
disruptions.
The last MPS also aimed to contain reserve money growth
to 15.5% and broad money growth to 17.2% by December
2013.

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Current Monetary Policy

(January,2014 of BB)

The monetary stance in FY14 takes these recent economic and

financial sector developments into account.
Target a monetary growth path which aims to bring average
inflation down to 7%, while ensuring that credit growth is
sufficient to stimulate inclusive economic growth.
The persisting inflationary pressures over the past few months
with the risks ahead related to the inflation outlook imply that
achieving the FY14 inflation target will be challenging. As
such BB has decided to keep policy rates unchanged.

21

Monetary Policy Objective

Price stability
Full Employment

Exchange Stability
Economic Growth
Balance of Payment
Equilibrium
Neutrality of Money
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Monetary Policy Objective

Price stability:

Inflation distorts economic calculations and expectations

Deflation creates depression in the economy.
Price stability promotes business confidence, makes economic
calculation possible, controls business cycle and introduces
certainty in economic life.

Full employment:

In less developed countries, though full employment cannot be

achieved within a short period, the monetary policy should try
to achieve at least a near full employment situation.

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Monetary Policy Objective

Exchange stability:

It is essential condition for the creation of international

confidence and promotion of smooth international trade on the
largest scale possible.
A restrictive monetary policy tends to reduce a countrys
balance of payment defect.

Economic Growth

If refers to the growth of real income or output per capita.

Monetary policy can contribute to economic growth.

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Monetary Policy Objective

Balance of Payment Equilibrium

The existence of balance of payment deficit seriously reduces

the ability of an economy to attain other objectives.
Monetary policy must make into consideration the
international payment problem.

Neutrality of Money

Neutrality of money indicates a situation in which changes in

the quantity of money occurs.
Causes a proportionate change in the equilibrium prices
of commodities, and
The equilibrium rate of interest remains unchanged.
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Instruments of monetary policy:

Bank rate
Quantitative Open market policy
Methods Reserve
requirement

Qualitative
Methods

Moral persuasion
Publicity
Restriction of
purpose

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Instruments of monetary policy:

Open market operations:

A relatively fine tool that can be used to make small
adjustments. These adjustments can be daily and often
occur without much fanfare.
Targeted Interest Rates
A relatively blunt tool that can be used to make large
adjustments. In typical years, changes in targeted
interest rates a few times per year.
Reserve Ratio
A rather blunt tool that is only used when very large
adjustments are in order.

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Open Market Operations

Buying Treasury securities:

When the Central Bank purchases securities through
the government securities dealers,
The account balances of the dealers are credited with
the amount
The total amount of fund at the dealers bank increases
Increased money supply.
Securities
Central Bank
buys
securities

Central
bank

Reserves

Dealer
Dealers
bank
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Open Market Operations

Selling Treasury securities

When the Central Bank sells securities (obtained from
previous purchases) to the government securities
dealers,
The account balances of the dealers are debited with
the amount
The total amount of fund at the dealers bank reduces
by the market value of the securities
Reduced money supply growth.
Securities
Central Bank
buys
securities

Central
bank

Reserves

Dealer
Dealers
bank
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Types of Central Bank Open Market

Transactions
RP or Reverse RP Transaction
(temporary change in the level of reserves held by depository
institutions)
RP: Central Bank buys securities
temporarily

Securities
Central
bank

Reserves

Reverse RP: Central Bank sells

securities temporarily

Dealer
Dealers
bank

Later on:
Reserves
Securities returned

Central
bank

Securities

Dealer

Reserves

Dealers
bank

Later on:
Reserves
Securities returned
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Reserve Requirements

When a bank takes a deposit into an account on which a check

can be written, it must place a percentage of that deposit on
reserve at a Federal Reserve bank.
That percentage is called the reserve ratio.

RR
raised
RR
lowered

banks reduce
lending
banks increase
lending
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Reserve Requirements

An increase in deposit reserve requirements

decreases the deposit and money multipliers, slowing the
growth of money, deposits and loans
reduces the amount of excess legal reserves - institutions
deficient in required legal reserves will have to sell
securities, cut back on loans, or borrow reserves
increases interest rates, particularly in the money market,
as depository institutions scramble to cover any reserve
deficiencies.

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Pabitra

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The Discount Rate

The discount rate is the annual percentage interest charge

levied against those institutions choosing to borrow
reserves from the discount window of the Central Bank.

Frequent borrowing is discouraged and may be penalized

with a higher interest rate.

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Qualitative Methods
Moral persuasion

To make the banking system sound and efficient, central bank

sometimes requests the commercial banks to increase or
decrease credit.
As a guardians request, commercial banks follow it and thus
amount of credit is controlled in the economy.

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Qualitative Methods
Publicity

Sometimes central bank applies publicity as a weapon of credit

control.
Central bank publishes weekly, fortnightly or monthly
bulletins and annual reports where balance sheets and other
business
and
economic
condition
of
different
commercial banks are presented well.
As a result the commercial banks become more careful in the
line of their credit creation

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Qualitative Methods
Direct action

If it is proved by central bank that credit creation policy of any

commercial bank is not transparent,
Central bank can take punitive measures against that bank and
thus affects its credit creation.
These punitive measures may be of not rediscounting bills of
exchange, discounting bills of exchange at a rate higher than
the prevailing.

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Current money supply

Percentage Changes of
October, 2014 over
Components

October, September October

2014
, 2014
, 2013
September,
2014

October,
2013

1. Currency Outside banks

831087

872988

754409

-4.8

10.16

2. Deposits of Financial
Institutions with Bangladesh
Bank (except DMBs)

4269

4402

3356

-3.02

27.21

3. Demand Deposits with DMBs*

587203

620249

519254

-5.33

13.09

4. Time Deposits with DMBs*

5786879

5752394

5126154 0.6

12.89

5. Money Supply (M1) (1+2+3)

1422559

1497639

1277019 -5.01

11.4

6. Money Supply(M2) (4+5)

7209438

7250033

6403173 -0.56

12.59

Source : Statistics Department, Bangladesh Bank

Note: * Excludes Inter bank Deposits and Government Deposits.

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Global Context

Although global growth prospects for 2014 (3.6%) are higher

than the previous two years, the road to recovery in the

advanced economies is projected to remain uneven.

Key trading partners, the US and the EU, are projected to

grow faster in 2014 but private demand still remains very
sluggish in the Euro Area.

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Global Context

On the other hand, Emerging Market and Developing

Economies (EDEs) are experiencing a multi-speed recovery
process with growth projected at 4.9% in 2014 and 5.3% in
2015 which have both been revised marginally downwards
by about 0.2% points and 0.1% points since the January 2014
MPS (H2FY14).

While China is projected to grow at around 7.5% in 2014 and

7.3% in 2015, the Indian economy is projected to grow by
5.4%, with a projected pick-up to 6.4% in 2015.

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Recent economic developments

Domestic output growth:

The final GDP growth number for FY13 released

by BBS in May 2014, was 6.0% down from the
earlier 6.2% provisional estimate released a year
earlier.
BBS preliminary estimates for FY14 growth is
6.1% in line with its ten year average, and higher
than the average GDP growth in developing
countries of 4.9% in 2014.

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Recent economic developments

Domestic output growth:

Manufacturing sector growth was lower in FY14

compared with the previous year partly due to
disruptions during the national strikes.
However agricultural growth is higher in FY14
though the final output numbers for the boro rice
crop may affect the final growth figure.
The services sector, which is over half of GDP,
proved resilient in FY14 according to these
preliminary estimates by BBS.

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Inflation

Source: Bangladesh Bureau of Statistics (BBS)

43

Inflation

Point to point inflation data shows that food inflation has risen
steadily from 5.02% in January 2013 to 9.09% in May 2014.
Food inflation for June 2014 declined to 8.00% possibly
due to declining global and regional food prices.
On the other hand, point to point non-food inflation
steadily declined, from 9.09% in January 2013 to 5.16% in
May 2014.
This is due to the adherence to the monetary program as
well as a slowdown in credit growth and remittances

44

Current Account Balance (CAB)

The current account balance (CAB) recorded a surplus of USD

1543 million during July-May FY14 compared to a surplus of
USD 2346 million during the same period of the preceding
fiscal year.
Estimates for FY14 suggest that exports are likely to growth at
13% and cross the $30 billion mark.
Moreover import growth of 10% is lower than export growth,
narrowing the trade deficit.

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Remittance Growth

The overall decline in remittances for FY14 of around 2% was

largely due to the inflows in FY14 when the remittance decline
was -8.4%.
In FY14 remittance growth was 5.6%.
Monthly trend of number of worker moving abroad

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Others

Government borrowing (net) from the banking system was

significantly lower than projected in both the original and
revised FY14 Budget.

Government borrowing (net) from the banking system

amounted to 64.3 billion in FY14 against an original budget
provision of 260 billion for the whole of FY14 and a revised
Budget estimate of 300 billion.

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Limitation of Monetary Policy in

Developing Country

In under developing countries, and capital markets are narrow

and unorganized.
Similarly, in the situations, the instrument the reserve
requirement does not function properly.
The role of monetary policy is not compulsive but permissive.
This seriously limits the efficiency of monetary policy in
backward countries.
In under developed society where liquidity trap is in existence
monetary policy cannot work efficiently.
The lag between the decision about a particular policy and its
implementation also hinders the monetary policy in its success.
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Monetary policy stance for H1 FY15

The monetary stance in H1 FY15 takes the recent economic

and financial sector developments into account and will target
a monetary growth path which aims to bring average inflation
down to 6.5% by June 2015, while ensuring that credit growth
is sufficient to stimulate inclusive economic growth.

This would require a monetary program framework that limits

reserve money growth to 15.5% and broad money growth to
16% by December 2014.

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Thank You

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