Fin Int Term Paper

8/6/2019 Fin Int Term Paper

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Financial institution:

In financial economics, a financial institution is an institution that provides financialservices for its clients or members. Probably the most important financial service

provided by financial institutions is acting as financial intermediaries. Most financialinstitutions are highly regulatedby government bodies.

There are many different types of financial institutions that offer the various cashmanagement alternatives that we have just discussed. The distinction between whichservices are offered by traditional banks and which services are reserved for non-bankfinancial institutions is blurring.

There are two major types of financial institutions: 1) banks (i.e., deposit-type financialinstitutions) and 2)nonbanks (i.e., non-deposit-type financial institutions). Deposit-typefinancial institutions mainly fall under four classifications: commercial banks, savings

and loan associations, credit unions, and the newer Internet banks.

Commercial banks generally compete by offering the widest variety of services; however,they generally do not offer the highest interest rates on deposits or thelowest interest rates on loans.

Savings and loan associations have slightly different ownership arrangements than banks,but they are similar to commercial banks. Savings and loan associations may offerslightly higher rates than commercial banks on deposits and somewhat lower rates thancommercial banks on loans.

Credit unions are similar to savings and loan associations, but they are not-for-profitorganizations and are owned by their members. They can sometimes offer higher rates onsavings accounts and lower rates on loans because they are not driven to provide a profitto shareholders.

Internet banks are electronic banks that do not have traditional brick-and-mortarbranches. Because they have fewer branches, employees, and capital expenditures thantraditional banks, they can generally pay higher interest rates on deposits and charge lessfor loans than traditional banks do.

Nonbank financial institutions consist of two main kinds: mutual fund companies and

brokerage firms.

Mutual fund companies have broken into the banking arena. With many mutual fundcompanies, you can now write checks against your mutual fund account.Brokeragefirms have also gotten into the act. Many brokerage firms now allow you to write checks,issue credit cards and ATM cards, and make loans. Brokerage firms offer these and manyother account features that were once reserved for traditional banks.

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http://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Institutionhttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Financial_intermediarieshttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Governmenthttp://personalfinance.byu.edu/?q=glossary/term/79http://personalfinance.byu.edu/?q=glossary/term/78http://personalfinance.byu.edu/?q=glossary/term/91http://en.wikipedia.org/wiki/Financial_economicshttp://en.wikipedia.org/wiki/Institutionhttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Financial_intermediarieshttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Governmenthttp://personalfinance.byu.edu/?q=glossary/term/79http://personalfinance.byu.edu/?q=glossary/term/78http://personalfinance.byu.edu/?q=glossary/term/91


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Both banks and nonbanks offer online financial services; these services allow you toaccess bank balances and other resources twenty-four hours a day. With the blurring ofroles between deposit and nondeposit institutions, banks can nowofferinvestment services and non-banks can offer check-writing privileges, credit cards,and savings accounts.

Functions of Financial Institutions:

Some of the financial institutions function as mediators in share markets and debtsecurity markets. There the principal function of financial institutions is to collect fundsfrom the investors and direct the funds to various financial services providers in searchfor those funds. Financial institutions deal with various financial activities associatedwith bonds, debentures, stocks, loans, risk diversification, insurance, hedging, retirementplanning, investment, portfolio management, and many other types of related functions.With the help of their functions, the financial institutions transfer money or funds tovarious tiers of economy and thus play a significant role in acting upon the domestic and

the international economic scenario.

For carrying out their business operations, financial institutions implement different typesof economic models. They assist their clients and investors to maximize their profits byrendering appropriate guidances. Financial institutions also impart a wide range ofeducational programs to educate the investors on the fundamentals of investment and alsoregarding the valuation of stock, bonds, assets, foreign exchanges, and commodities.

Financial institutions can be both private or public in nature. The most common forms offinancial institutions can be categorized into the following types:

Business finance company

Mortgage finance company

Car finance company

Personal finance company

Personal loan finance company

Home finance company

Corporate finance company

Thus, it can be concluded that a financial institution is that type of an institution, whichperforms the collection of funds from private investors and public investors and utilizesthose funds in financial assets. The functions of financial institutions are not limited to a

particular country, instead they have also become popular in abroad due to the growingimpact of globalization.

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Financial Institutions of Bangladesh:

The financial system of Bangladesh consists of Bangladesh Bank (BB) as the centralbank, 4 State Owned Commercial Banks (SCB), 5 government owned specialized banks,30 domestic private banks, 9 foreign banks and 29 non-bank financial institutions.Moreover, MRA has given license to 298 Micro-credit Organizations. The financialsystem also embraces insurance companies, stock exchanges and co-operative banks.

Central Bank

Bank & FIs

Capital Market

InsuranceMicrofinance Institutions (MFIs)

Central Bank and its policies

Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulateall banks and non-bank financial institutions. It performs the traditional central bankingroles of note issuance and of being the banker to the government and banks. Given somebroad policy goals and objectives, it formulates and implements monetary policy,manages foreign exchange reserves and lays down prudential regulations and conductmonitoring thereof as they apply to the entire banking system. Its prudential regulationsinclude, among others: minimum capital requirements, limits on loan concentration andinsider borrowing and guidelines for asset classification and income recognition. TheBangladesh Bank has the power to impose penalties for non-compliance and also tointervene in the management of a bank if serious problem arise. It also has the delegatedauthority of issuing policy directives regarding the foreign exchange regime.

Interest Rate Policy

Under the Financial sector reform program, banks are free to charge/fix their deposit(Bank /Financial Institutes) and Lending (Bank /Financial Institutes) rates other than

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Export Credit. At present, Loans at reduced rates (7%) are provided for all sorts of exportcredit since January 2004. With a view to controlling the price hike and ensuringadequate supply of essential commodities, the rate of interest on loan for import financingof rice, wheat, sugar, edible oil (crude and refined), chickpeas, beans, lentils, onions,spices , dates and powder milk has been temporarily fixed to a maximum of 12%.

Now, banks can differentiate interest rate up to 3% considering comparative riskelements involved among borrowers in same lending category. With progressivederegulation of interest rates, banks have been advised to announce the mid-rate of thelimit (if any) for different sectors and the banks may change interest 1.5% more or lessthan the announced mid-rate on the basis of the comparative credit risk.

Recently Banks have been advised to upload their deposit and lending interest rate intheir respective website.

Capital Adequacy of the Banks

With a view to strengthening the capital base of banks and making them prepare for theimplementation of Basel-II Accord, banks are required to maintain Capital to Risk-Weighted Assets ratio 10% at the minimum with core capital not less than 5% effectivefrom December 31, 2007. However, minimum capital requirement (paid up capital andstatutory reserve) for all banks will be Tk.200 crore as per Bank Company (Amendment)Ordinance, 2007. Banks having capital shortfall will have to meet at least 50% of theshortfall by June, 2008 and the rest by June, 2009.

Revaluation reserves of held to maturity (HTM) securities (up to 50% of the revaluationreserves) has been added to the components of supplementary capital. Besides, 'Hedgingthe price risk of commodity transactions' has been included in Short-term self liquidating

trade related contingencies.

Loan Classification and Provisioning

In order to strengthen credit discipline and bring classification and provisioningregulation in line with international standard, Bangladesh Bank issued a master circularon loan classification and provisioning through BRPD circular no 5 dated June 5, 2006.The revised policy covers an independent assessment of each loan on the basis ofobjective criteria and qualitative factors which is appended below :

Any Continuous Loan/Demand Loan if not repaid/renewed within the fixed expiry datefor repayment will be treated as past due/overdue from the following day of the expirydate. A Continuous Loan/Demand loan/Term Loan which will remain overdue for aperiod of 90 days or more, will be put into the "Special Mention Account(SMA)".Interest accrued on "Special Mention Account (SMA)" will be credited to InterestSuspense Account, instead of crediting the same to Income Account.

A Continuous Loan/Demand loan is classified as 'Sub-standard' if it is past due/overdue for 6 months or beyond but less than 9 months, classified as `Doubtful' if it is pastdue/over due for 9 months or beyond but less than 12 months and classified

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as `Bad/Loss' if it is past due/over due for 12 months or beyond.

If any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid withinthe due date, the amount of unpaid installment(s) will be termed as `defaultedinstallment'. In case ofFixed Term Loans, which are repayable within maximum five

years of time- If the amount of'defaulted installment' is equal to or more than theamount of installment(s) due within 6 (six) months, the entire loan will be classifiedas "Sub-standard", if the amount is equal to or more than the amount of installment(s)due within 12 (twelve) months, the entire loan will be classified as "Doubtful" and if theamount is equal to or more than the amount of installment(s) due within 18 (eighteen)months, the entire loan will be classified as "Bad/Loss".

In case ofFixed Term Loans, which are repayable in more than five years of time andif the amount of 'defaulted installment' is equal to or more than the amount ofinstallment(s) due within 12 (twelve) months, the entire loan will be classified as "Sub-standard". If the amount is due within 18 (eighteen) months, the entire loan will be

classified as "Doubtful" and if the amount is due within 24 (twenty four) months, theentire loan will be classified as "Bad/Loss".

The Short-term Agricultural and Micro-Credit will be considered irregular if notrepaid within the due date as stipulated in the loan agreement. If the said irregular statuscontinues, the credit will be classified as 'Substandard ' after a period of 12 months, as'Doubtful' after a period of 36 months and as 'Bad/Loss' after a period of 60 months fromthe stipulated due date as per loan agreement.

Besides, if any situational changes occur in the stipulations in terms of which the loanwas extended or if the capital of the borrower is impaired due to adverse conditions or if

the value of the securities decreases or if the recovery of the loan becomes uncertain dueto any other unfavourable situation, the loan will have to be classified on the basis ofqualitative judgement.

As regards the provision, banks are required to maintain General Provision against allcategories of loans along with off-balance sheet items in the following manner:

Particulars Short

Term

Agri.Credit

and

micro

credit

Consumer Financing Small

Enterprise

Financing

All

other

Credit

Other than

HousingFinance &Loans forProfessionalsto set upbusiness

Housing

Finance

Loans for

Professionalsto set upbusiness

UC Standard 5% 5% 2% 2% 1% 1%

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SMA - 5% 5% 5% 5% 5%

Classified

SS 5% 20% 20% 20% 20% 20%

DF 5% 50% 50% 50% 50% 50%

B/L 100% 100% 100% 100% 100% 100%

Besides, banks are required to maintain general provision against Off-balance sheetexposures in the following manner:

(i)@ 0.5% provision effective from December 31, 2007 and

(ii)@ 1% provision effective from December 31, 2008 .

Other instructions such as Eligible securities in determining base for provision along witha revised format for submitting the report on classification of loans and advances are alsoprovided in the respective circulars.

Foreign Exchange System

On March 24, 1994 Bangladesh Taka (domestic currency) was declared convertible forcurrent transactions in terms of Article VIII of the IMF Articles of Agreement.

Consequent to this, current external settlements for trade in goods and services and foramortization payments on foreign borrowings can be made through banks authorized todeal in foreign exchange, without prior central bank authorization. However, becauseresident owned capital is not freely transferable abroad (Taka is not yet convertible oncapital account), some current settlements beyond certain indicative limits are subject tobonafides checks.

Direct investments of non-residents in the industrial sector and portfolio investments ofnon-residents through stock exchanges are repatriable abroad, as also are capital gains

and profits/dividends thereon. Investment abroad of resident-owned capital is subject toprior Bangladesh Bank approval, which is allowed only sparingly.

Exchange Rate Policy

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The exchange rate policy of Bangladesh Bank aims at maintaining the competitiveness ofBangladeshi products in the international markets, encouraging inflow of wage earners'remittances, maintaining internal price stability, and maintaining a viable externalaccount position. Prior to the inception of floating exchange rate regime, adjustments inexchange rates were made while keeping in view the trends of Real Effective Exchange

Rate (REER) index based on a trade weighted basket of currencies of major tradingpartners of Bangladesh and the trends of other important internal and external sectorindicators. Under the existing floating exchange rate regime (that started from31/05/2003), the interbank foreign exchange market sets the exchange rates for customertransactions and interbank transactions based on demand-supply interplay; while theexchange rates for the Bangladesh Bank's spot purchase and sales transactions of USDollars with ADs is decided on a case to case basis. Bangladesh Bank does not undertakeany forward transaction with ADs. The ADs are free to quote their own spot and forwardexchange rates for interbank transactions and for transactions with non-bank customers.However, along with intervention in the taka money market, the US dollar purchase orsale transactions take place by the Bangladesh Bank as needed, to maintain orderly

market conditions.

Financial System

The commercial banking system dominates Bangladesh's financial sector. BangladeshBank is the Central Bank of Bangladesh and the chief regulatory authority in the sector.The banking system is composed of four state-owned commercial banks, five specializeddevelopment banks, thirty private commercial Banks and nine foreign commercial banks.The Nobel-prize winning Grameen Bank is a specialized micro-finance institution, which

revolutionized the concept of micro-credit and contributed greatly towards povertyreduction and the empowerment of women in Bangladesh.

Bank LicensingBank Company Act, 1991, empowers BB to issue licenses to carry out banking businessin Bangladesh. Pursuant to section 31 of the Act, before granting a license, BB needs tobe satisfied that the following conditions are fulfilled: "that the company is or will be ina position to pay its present or future depositors in full as their claims accrue; that theaffairs of the company are not being or are not likely to be conducted in a mannerdetrimental to the interest of its present and future depositors; that, in the case of acompany incorporated outside Bangladesh, the Government or law of the country in

which it is incorporated Bangladesh as the Government or law of Bangladesh grants tobanking companies incorporated outside Bangladesh and that the company complies withall applicable provisions of Bank Companies Act, 1991."

Licenses may be cancelled if the bank fails to comply with above provisions or ceases tocarry on banking business in Bangladesh.

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Commercial BanksThe commercial banking system dominates the financial sector with limited role of Non-Bank Financial Institutions and the capital market. The Banking sector alone accounts fora substantial share of assets of the financial system. The banking system is dominated bythe 4 State Owned Commercial Banks, which together controle more than 30% of

deposits and operates 3383 branches (50% of the total) as of June 30, 2008.

State-owned Commercial Banks

The nationalized commercial banks are:

Specialised Bank of Bangladesh:

Karmosangesthan Bank

Bangladesh Krishi Bank

Sonali Bank Janata Bank

Agrani Bank

Rupali Bank

Private Commercial Banks

Private banks are the highest growth sector due to the dismal performances ofgovernment banks (above). They tend to offer better service and products.

AB Bank Ltd

BRAC Bank Limited

Eastern Bank Limited

Dutch Bangla Bank Limited

Dhaka Bank Limited

Islami Bank Bangladesh Ltd

Pubali Bank Limited

Uttara Bank Limited

IFIC Bank Limited

National Bank Limited

The City Bank Limited

United Commercial Bank Limited NCC Bank Limited

Prime Bank Limited

SouthEast Bank Limited

Al-Arafah Islami Bank Limited

Social Islami Bank Limited

Standard Bank Limited

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http://en.wikipedia.org/w/index.php?title=Specialised_Bank_of_Bangladesh:&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Karmosangesthan_Bank&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bangladesh_Krishi_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Sonali_Bankhttp://en.wikipedia.org/wiki/Janata_Bankhttp://en.wikipedia.org/wiki/Agrani_Bankhttp://en.wikipedia.org/wiki/Rupali_Bankhttp://en.wikipedia.org/w/index.php?title=AB_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Brac_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/wiki/Eastern_Bank_Ltdhttp://en.wikipedia.org/wiki/Dutch_Bangla_Bankhttp://en.wikipedia.org/wiki/Dhaka_Bank_Limitedhttp://en.wikipedia.org/w/index.php?title=Islami_Bank_Bangladesh_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Pubali_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Uttara_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/IFIC_Bank_Limitedhttp://en.wikipedia.org/wiki/National_Bank_(Bangladesh)http://en.wikipedia.org/w/index.php?title=The_City_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=United_Commercial_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=NCC_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/Prime_Bank_Limitedhttp://en.wikipedia.org/w/index.php?title=SouthEast_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Al-Arafah_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Social_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Standard_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Specialised_Bank_of_Bangladesh:&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Karmosangesthan_Bank&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bangladesh_Krishi_Bank&action=edit&redlink=1http://en.wikipedia.org/wiki/Sonali_Bankhttp://en.wikipedia.org/wiki/Janata_Bankhttp://en.wikipedia.org/wiki/Agrani_Bankhttp://en.wikipedia.org/wiki/Rupali_Bankhttp://en.wikipedia.org/w/index.php?title=AB_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Brac_Bank_Ltd&action=edit&redlink=1http://en.wikipedia.org/wiki/Eastern_Bank_Ltdhttp://en.wikipedia.org/wiki/Dutch_Bangla_Bankhttp://en.wikipedia.org/wiki/Dhaka_Bank_Limitedhttp://en.wikipedia.org/w/index.php?title=Islami_Bank_Bangladesh_Ltd&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Pubali_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Uttara_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/IFIC_Bank_Limitedhttp://en.wikipedia.org/wiki/National_Bank_(Bangladesh)http://en.wikipedia.org/w/index.php?title=The_City_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=United_Commercial_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=NCC_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/Prime_Bank_Limitedhttp://en.wikipedia.org/w/index.php?title=SouthEast_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Al-Arafah_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Social_Islami_Bank_Limited&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Standard_Bank_Limited&action=edit&redlink=1


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One Bank Limited

Exim Bank Limited

Mercantile Bank Limited

Bangladesh Commerce Bank Limited

Mutual Trust Bank Limited

First Security Islami Bank Limited The Premier Bank Limited

Bank Asia Limited

Trust Bank Limited

Shahjalal Islami Bank Limited

Jamuna Bank Limited

ICB Islami Bank

Moon Bank Limited

United Bank Limited

Foreign Commercial Banks

Citibank na

HSBC

Standard Chartered Bank

Commercial Bank of Ceylon

State Bank of India

Habib Bank

National Bank of Pakistan

Wo Bank

Bank Alfalah

Specialized Development Banks

Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi UnnayanBank) were created to meet the credit needs of the agricultural sector while the other two( Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) are forextending term loans to the industrial sector[1]. The Specialized banks are:

Grameen Bank

Bangladesh Krishi Bank

Bangladesh Development Bank Ltd Rajshahi Krishi Unnayan Bank

Basic Bank Ltd (Bank of Small Industries and Commerce)

Bangladesh Somobay Bank Limited(Cooperative Bank)

Ansar VDP Unnyan Bank

Financial Institutions (FIs)

Twenty-nine financial institutions are now operating in Bangladesh. Of these

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institutions, 1(one) is govt. owned, 15 (fifteen) are local (private) and the other13(thirteen) are established under joint venture with foreign participation. The totalamount of loan & lease of these institutions is Tk.99,091.80 million as on 31 December,2007. Bangladesh Bank has introduced a policy for loan & lease classification andprovisioning for FIs from December 2000 on half-yearly basis. To enable the financial

institutions to mobilize medium and long-term resources, Government of Bangladesh(GOB) signed a project loan with IDA, and a project known as ``Financial InstitutionsDevelopment Project (FIDP)`` has started its operation from February 2000. BangladeshBank is administering the project. The project has established ``Credit, Bridge andStandby Facility (CBSF)`` to implement the financing program with a cost of US$ 57.00million.

Financial System

The Capital market, an important ingredient of the financial system, plays a significantrole in the economy of the country.

1.Regulatory Bodies

The Securities and Exchange Commission exercises powers under the Securities andExchange Commission Act 1993. It regulates institutions engaged in capital marketactivities. Bangladesh Bank exercises powers under the Financial Institutions Act 1993and regulates institutions engaged in financing activities including leasing companies andventure capital companies.

2. Participants in the Capital Market

The SEC has issued licences to 27 institutions to act in the capital market. Of these, 19institutions are Merchant Banker & Portfolio Manager while 7 are Issue Managers and1(one) acts as Issue Manager and Underwriter.

i) Stock Exchanges

There are two stock exchanges ( the Dhaka Stock Exchange (DSE) and the ChittagongStock Exchange (CSE) ) which deal in the secondary capital market. DSE wasestablished as a public Limited Company in April 1954 while CSE in April 1995. As of30 June 2000 the total number of enlisted securities with DSE and CSE were 239 and 169respectively. Out of 239 listed securities with the DSE, 219 were listed companies, 10mutual funds and 10 debentures.

a) Dhaka Stock Exchange:

Dhaka Stock Exchange(DSE) is the major and earliest stock

exchange of Bangladesh, which is situated at the main area of the Dhaka city.

On 28th April 1954, DSE was formed. A 24 members council is managed and

operated the function of DSE.

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Among 24 members, 12 are chosen DSE members and the remaining 12 are

chosen from the following position:

Bangladesh Bank

Commerce Ministry

Finance Ministry Law Ministry

Industries ministry

President of Institute of Chartered Accounts of Bangladesh

President of Supreme Court Bar Association

President of Bankers and Insurance Society

President of Metropolitan Chambers of Commerce and Industries

President of Federation of Bangladesh Chambers of Commerce and Industries

Chairman of Economics/Finance Department of Dhaka University

History and Origin of DSE

Founded on 28th April 1954, DSE formerly known as East Pakistan Stock Exchange

Ltd. Which began its formal trading in 1956 and on 23rd June 1962 it was

called as East Pakistan Stock Exchange.On 13th May 1964, its name was

changed again and it became known as Dacca Stock Exchange Ltd. In 1971-

post the Liberation War, the trading was stopped temporarily for five years

which started again in 1976. DSE All Share Price Index was began on 16th

September 1986 and on 1st November 1993, accordant with IFC the formula of

calculating DSE All Share Price Index was changed. On 10th August 1998, the

automatic trading was launched in DSE. On 1st January 2001, DSE 20 Index

and on 24th January 2004 Central Depository System were initiated.

FormationDSE is a public company which established and supervised under Company Act 1994,

Security and Exchange Commission Act 1993, Security and Exchange Commission

Regulation 1994, Security Exchange (Inside Trading) Regulation 1994. Presently, DSE

has 195 members.

b) Chittagong Stock Exchange (CSE):

The Chittagong Stock Exchange (CSE) began its journey in 10thOctober of 1995 from Chittagong City through the cry-out trading system with thepromise to create a state-of-the art bourse in the country.

Founder members of the proposed Chittagong Stock Exchange approached theBangladesh Government in January 1995 and obtained the permission of the Securitiesand Exchange Commission on February 12, 1995 for establishing the country's secondstock exchange. The Exchange comprised of twelve Board members, presided by Mr.

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Amir Khosru Mahmud Chowdhury (MP) and run by an independent secretariat from thevery first day of its inception. CSE was formally opened by then Hon'ble Prime Ministerof Bangladesh on November 4, 1995.

The Chittagong Stock Exchange believes that a dynamic, automated, transparent stock

exchange is needed in Bangladesh. It works towards an effective, efficient andtransparent market of international standard to serve and invest in Bangladesh in order tofacilitate the competent entrepreneurs to raise capital and accelerate industrial growth foroverall benefit of the economy and keep pace with the global advancements.

LEGAL BASIS OF CSE:

As legal entity CSE is a not-for-profit public limited company. All of its 129 membersare corporate bodies. It has a separate secretariat independent of policymaking Board.The Board comprises of brokers and non-brokers directors with equal proportion toensure the transparency.The Board constituted Committees to delegate such functions and authority as it maydeem fit. There is an independent secretariat headed by a full time Chief ExecutiveOfficer. CSE activities are regulated by its own regulations and bye laws along with therules, orders and notification of the SEC.

REGULATORY STRUCTURE OVERVIEW

ORGANISATION STRUCTURE

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ii) Investment Corporation of Bangladesh (ICB)

The Investment Corporation of Bangladesh was established in 1976 with the objective ofencouraging and broadening the base of industrial investment. ICB underwrites issues ofsecurities, provides substantial bridge financing programmes, and maintains investmentaccounts, floats and manages closed-end & open-end mutual funds & closed-end unitfunds to ensure supply of securities as well as generate demand for securities. ICB alsooperates in the DSE and CSE as dealers.

Initially, the activities of ICB were limited to underwriting public issue of shares, bridgefinancing, debenture financing and opening/maintaining investors' accounts (Investors'Scheme). ICB had largely expanded its areas and scope of activities and now providesvarious types of investment and banking services. Added activities include providingdebenture loans to companies and loans to investors on margin trading basis, providingadvances against ICB unit certificates, leasing of industrial equipment, managing unitfund and mutual funds, and participating inSTOCKEXCHANGE for trading securities.

Initially, the authorised and paid up capital of the corporation was Tk 200 million dividedinto 2 million shares of Tk 100 each, subscribed by the government of Bangladesh(27%),BANGLADESHBANK(12%),BANGLADESHSHILPABANK(6%),BANGLADESHSHILPARINSANGSTHA(6%), Nationalised Commercial Banks (15%),SADHARANBIMACORPORATION(9%)and the general public (25%). The authorised and paid up capital of ICB was increased in1999-2000 to Tk 1,000 million and Tk 466 million respectively. ICB is a listed companyin both Dhaka and Chittagong Stock Exchanges. The reserve fund of the corporation wasTk 425.08 million on 30 June 2000 and the types of reserves were general reserves,building reserves and dividend equalisation reserves.

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Total fund of ICB during the year 1999-2000 was Tk 6,784.84 million which comprisedshareholders' equity i.e., share capital, reserves and retained profits (Tk 894.97 million),long-term debts Tk 1,153.81 million, deferred interest (Tk 292.72 million), deferredliabilities (Tk 18.81 million), lease deposits (Tk 0.66 million), and other liabilities (Tk4,423.83 million).

On 30 June 2000, the total value of assets of ICB were valued at Tk 6,784.84 millioncomprising marketable securities (Tk 2,391.52 million), secured margin loans (Tk1,503.40 million), unit advance account (Tk 19.60 million), bridging loan (Tk 339.44million), debenture loans (Tk 4.40 million), leased equipment (Tk 7.95 million), and cashin hand and at banks, interest receivables and the premises and equipment under its ownuse.

Since its inception up to 30 June 2000, ICB committed to provide a total of Tk 2,496.8million in loans to 353 projects and it disbursed Tk 1,141.2 million to 307 of them. Itacted as the trustee to the debenture issue for 12 companies and as manager to the issue

for 39 companies. Advances Against Unit Certificate Scheme (introduced 1998) were Tk43 million, cumulative amount ofLEASEFINANCINGamounted to Tk 73.9 million involving14 companies, and total net underwriting cum bridging loan commitment was Tk1,164.80 million to 306 companies. ICB committed to provide net assistance in the formof direct underwriting of shares of Tk 702.6 million of 37 projects and debentures of Tk120 million of 5 projects.

As on 30 June 2000, the total gross outstanding loans of ICB stood at Tk 4,775.1 millionand it recovered Tk 1,315.70 million. Up to the date, ICB floated 8 closed-end MutualFunds with total paid up capital of Tk 175 million. The dates of issue of these MutualFunds were 25 April 1980, 17 June 1984, 19 May 1985, 6 June 1986, 8 June 1987, 16

May 1988, 30 June 1995, and 23 July 1996. As on 30 June 2000, the cumulative net saleof units amounted to Tk 5,280.8 million for 42,985,690 units. The ICB unit certificatesearned a net income of Tk 528 million during the year 1999-2000. The total number ofunit holders on 30 June 2000 was 43,433 of which 58% were salaried employees ofgovernment and private organisations.

The corporation introduced its Investors' Scheme in 1977.Under the scheme, it receiveda total deposit of Tk 22,177.5 million up to June 2000, while loans sanctioned andinvestments made amounted to Tk 3,715.2 million and Tk 4,410.6 million respectively.During the year 1999-2000, the corporation invested Tk 978.9 million in securities andon 30 June 2000, the market value of its portfolio stood at Tk 1,945.9 million. During thefiscal year 1999-2000, the corporation earned a net profit of Tk 59.4 million

Besides its head office and the local office inDHAKA, ICB has 6 branch offices, one eachatCHITTAGONG,RAJSHAHI,KHULNA,BARISAL,SYLHETandBOGRA. The head office has 4 broaddivisions/wings and 31 departments under them. In 2001, ICB had 394 employeesincluding 242 officers and 152 other staff. The managing director is the chief executiveofficer of the corporation and an 11-member board of directors is its top policy makingbody.

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With the enactment of the Investment Corporation of Bangladesh (Amendment) Act,2000, ICB became empowered to create and operate subsidiaries. ICB has a plan to formthree separate subsidiary companies - ICB Capital Management Ltd, ICB SecuritiesTrading Company, and ICB Asset Management Company Ltd. ICB is represented in thegoverning board of the South Asian Development Fund established in June, 1996 through

the Dhaka Declaration of a meeting of the SAARC member countries. ICB is alsoassociated with South Asian Regional Fund (SARF).

iii) Specialized Banks

Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), BASIC BankLtd., some Foreign Banks and NCBs are engaged in long term industrial financing.

Financial System

The insurance Sector is regulated by the Insurance Act, 1938 with regulatory oversightprovided by the controller of Insurance on authority under the ministry of commerce.General insurance is provided by 21 companies and life insurance is provided by 6

companies. The industry is dominated by the two large, state-owned companies--SBC forgeneral insurance and JBC for life insurance--which together command most of the totalassets of the insurance sector.

Origin of insurance in Bangladesh

Resistance against colonial or autocratic regimes in the third world has often been led byeducated intelligentsia inspired by western ideas of nationalism and democracy hasplayed a dominant role. Most victorious nationalist movements have been in later yearsreneged from their earlier commitments and few developing countries to day arenationalist, socialist or democratic. But that is a different story.

When the Awami League cane to power in Bangladesh and the peoples party in Pakistanin 1972.It was inevitable that nationalization a wide scale would take place, for bothparties had flaunted socialism as part of their political rhetoric. In Pakistan theadministrative mechanism for nationalization of banking, insurance and some industrieswas carefully worked out by the bureaucracy under political leadership, and the takeoverin a feel swoop passed of smoothly. Heads of insurance companies, for instance, whereinvited to tea at a Karachi Hotel. Where they told that while they were having teas the

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head offices of their companies were being sealed and Government appointedadministrators were being put in charge. This was done to ensure that the assets of thecompanies remained intact and no tempering with accounts, records and documents waspossible.

In Bangladesh an effective government machinery did no exist in the chaotic conditionsobtaining an independence following a bitter and brutal war industries was taken overwithout any inventory, and erstwhile owners ,who were being dispossessed, were allowedto administer their mills and factories till statutory corporations were established.

Historical Background of insurance Industry in Bangladesh

Insurance is not new business in Bangladesh. Almost a century back, during British rulein India, some insurance companies started transacting business, both life and general, inBangal. Insurance business gained momentum in East Pakistan during 1947-1971, when49 insurance companies transacted both life and general insurance schemes. These

companies were of various origins like British, Australian, Indian, West Pakistan andlocal. Ten insurance companies had their head offices in East Pakistan, 27 in WestPakistan, and rest elsewhere in the world. These were mostly limited liability companies.Some of these companies were specialized on dealing in a particular class of business,while others were composite companies that dealt in more than one class of business.

The Government of Bangladesh nationalized insurance industry in 1972 by theBangladesh Insurance (Nationalization) Order 1972.By virtue of this order, saves andexcept postal life insurance and foreign life insurance companies, all 49insurance

companies and organizations transacting insurance business in the country were placed inthe sector under fie operations. These operations were :the Jatiya Bima Corporation, TistaBima Corporation, Karnafuli Bima Corporation, Rupsa Jibon Bima Corporation andSurma Jibon Bima Corporation. The Jatiya Bima Corporation was an apex corporationonly to supervise and control the activities of the other insurance corporations whichwere responsible for underwriting. Tista and Karnafuli Bima Corporation were forgeneral insurance and Rupsa and Surma for life insuance. The specialist life insurancecompanies or for a life portion of a composite company joined the Rupsa and Surmacorporations while specialist general insurance companies or the general portion of acomposite company joined The Tista and Karnafuli corporations.

The basic idea behind the formation of four underwriting corporations, two in each mainbranch of life and general, was to encourage competition even under a nationalizedsystem. But the burden of administrative expenses incurred in maintaining twocorporations in each front of life and general and an apex institution at the topoutweighed the advantages of limited competition. consequently, on 14 May 1973,arestructuring was made under the Insurance Corporations Act 1973. Following the Act, inplace of five corporations the government formed two: the SADHARAN BIMA

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CORPORATION for general business, and JIBAN BIMA CORPORATION for lifebusiness.

The postal life insurance business and the life insurance business by foreign companieswere still allowed to continue as before .In reality, however, only the AMERICAN LIFE

INSURANCE COMPANY continued to operate in the life sector for both new businessand servicing, while three other foreign life insurance continued to operate only forservicing their old policies issued during Pakistan days. Postal life maintained itsbusiness as before.

After1973, general insurance business became the sole responsibility of the SadharanBima Corporation. Life insurance business was carried out by the Jibon BimaCorporation, the American Life insurance Company, and the Postal Life InsuranceDepartment until 1994, when a change was made in the structure arrangement to keepplace with the new economic trend of liberalization.

The insurance corporations Act1973 were amended in 1984 to allow insurancecompanies in the private sector to operate side by with Sadharan Bima Corporation andJiban Bima Corporation. The Insurance Corporations Amendment Act 1984 allowedfloating of insurance companies, both life and general, in the private sector subject tocertain restrictions regarding business operations and reinsurance. Under the new act, allgeneral insurance business emanating from the public sector were reserved for the stateowned Sadharan Bima Corporation, which could also underwrite insurance businessemanating from the private sector. The Act of 1984 made it a requirement for the privatesector insurance companies o obtain 100% reinsurance protection from the SadharanBima Corporation.This virtually turned Sadharan Bima Corporation into a reinsuranceorganization, in addition to its usual activities as direct insurer.Sadharan Bima

Corporation itself had the right to reinsure its surplus elsewhere outside the country outafter exhausting the retention capacity of the domestic market. Such restrictions aimed atpreventing outflow of foreign exchange in the shape of reinsurance premium anddeveloping are insurance market within Bangladesh. The restriction regarding businessplacement affected the interests of the private insurance companies in many ways. Therestrictions were considered not congenial to the development of private sector businessin insurance. Two strong arguments were put forward to articulate feelings:

Since the public sector accounted for about 80% of the total premium volume ofthe country, there was little premium left for the insurance companies in the privatesector to survive. In this context, Sadharan Bima Corporation should not have beenallowed to compute with the private sector insurance companies for the meager premium(20%) emanating from the private sector;

Being a competitor in the insurance market, Sadharan Bima Corporation washardly acceptable as an agency to protect the interest of the private sector insurancecompanies and should not have retained the exclusive right to reinsure policies of thesecompanies. The arrangement was in fact, against the principle of laissez faire.

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Private sector insurance companies demanded withdrawal of the above restrictions so thatthey could:

Underwrite both public and private sector insurance business in competition withthe Sadharan Bima Corporation, and

The government modified the system through promulgation of the InsuranceCorporation (Amendment) Act1990.The changes allowed private sector insurancecompanies to underwrite 50% of the insurance business emanating from the public sectorand to place up to 50% of their reinsurance with any reinsure of their choice, at home oraboard, keeping the remaining for placement with the Sadharan Bima corporation.

INSURANCE COMPANIES BANGLADESH

Meghna Life Insurance Company Ltd.

Meghna Life Insurance Co. Ltd. is one of the leading Life Insurance Companies inBangladesh. It has a very dignified management having magnificent professionalIdentity, illustrious educational background and honesty.

Green Delta Insurance Company Ltd.

Green Delta is proud to be a company that helps people in time of trouble. A companythat can and does pull all steps when needed. Like the country we are young and haveblended our youthful vigor with specialized knowledge and experience. Our Board of

Directors include veterans of insurance, trade & industry, doctors, chartered accountant,business professionals. Our management team comprises of qualified professionalstrained from UK, Switzerland, Germany and many other advanced countries. Thecompany is headed by Mr. Nasir A. Choudhury who is prominent person in Bangladeshinsurance Industry.

United Insurance Company Ltd.

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http://www.meghnalife.com/http://www.green-delta.com/http://www.unitedinsurance.com.bd/http://www.meghnalife.com/http://www.green-delta.com/http://www.unitedinsurance.com.bd/


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United Insurance Company Ltd. (UICL) is a Public Limited General Insurance Company(Non-Life) maintaining the traditional values of insurance business since commencementin 1985. The Company transact a wide range of General Insurance business inBangladesh including Health Plan Scheme and has gradually developed goodwill andexpertise in the field with sound and stable financial position.

Delta Life Insurance Company Ltd.

Delta Life Insurance Co. Ltd. established mainly through the initiative of a group ofBangladeshi professionals then working abroad along with a few enthusiastic localentrepreneurs, started its operation in December, 1986 after the Government ofBangladesh allowed the private sector to operate in the insurance sector in 1984 to carryon the business of insurance in the Private Sector.

Pioneer Insurance Company Ltd.

Being the fast growing insurance company of Bangladesh, our aim is to foster theindustrial and economic growth of the country by providing maximum insuranceprotection at the most competitive price in a highly efficient manner.

Progressive Life Insurance Company Ltd

Progressive Life Insurance Company Limited is a Insurance Company under private

sector established within the ambit of Insurance Act 1938 and was incorporated as aPublic Limited Company under Companies Act, 1994 on 6 th January 2000. TheCompany started commercial operation after obtaining license from Chief Controller ofInsurance, Government of the Peoples Republic of Bangladesh under the Insurance Act1938 and Rules 1958 on 27 th February, 2000. The Company is engaged in all kind ofLife Insurance business whether individual or group including pension, superannuation,health care scheme etc. It also operates in micro life insurance business under the namesof Sujan Bima and Progressive Deposit Pension Scheme.

Prime Islami Life Insurance Company Ltd.

Prime Islami Life Insurance Ltd.was incorporated as Prime Islami Life InsuranceCompany Ltd. in July 200. Witha view to running the company as per ideology andprinciple of Shariah.It converted to the Prime Islami Life Insurance Ltd. in April 2002. Ina reltivley very short spain of time Prime Islami Life Insurance Ltd. has achieved anexecllent progress in business and product develpoment.

Pragati Life Insurance Ltd.

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http://www.deltalife-bd.com/index.htmhttp://www.pioneerinsurancebd.com/http://www.progressivelifebd.com/index.htmlhttp://www.primeislamilifebd.com/http://www.pragatilife.com/http://www.deltalife-bd.com/index.htmhttp://www.pioneerinsurancebd.com/http://www.progressivelifebd.com/index.htmlhttp://www.primeislamilifebd.com/http://www.pragatilife.com/


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It is estimated that after considering the overlapping problem, which is expected to beover 40%, the effective coverage would be around 18.05 million borrowers. Out of 18.05million borrowers covered by microcredit program, about 62% are below poverty lineand so over 11.19 million poor borrowers are covered by microcredit program by 2006.

Microcredit programs of NGOs (known as NGO-Microfinance Institutions or NGO-MFIs) and Grameen Bank play dominant role in this financial market, NGO-MFIs servemore than 61 percent and Grameen Bank alone serves 24 percent of the total borrowers.Among NGO-MFIs more than 80 percent of the outstanding loan disbursed by the top 20NGOs, three of them are very large and have coverage all over the country. Servicecharge on credit varies from 10% to 20% at flat method of collection, all partners of PalliKarma-Sahayak Foundation (PKSF) charge 12.5%. Average interest offered by NGO-MFIs on savings to the members is 5%. Near about 90% of the clients of this sector arefemale. Loan recovery rate is generally very high compare to the banking sector, which isover 90%. Average loan size of NGO-MFIs was found around Taka 4,000.

Microcredit Regulatory Authority

Microfinance is now a nation-wide activity in Bangladesh. The issue of a regulatoryframework has come to the forefront because NGO-MFIs, the major provider of thisservice, are providing financial services to the poor outside the formal banking system.The government of Bangladesh enacted 'Microcredit Regulatory Authority Act 2006'(actnumber 32 of the year 2006) on July 16, 2006 with effect from August 27, 2006 with aview to ensuring transparency and accountability of microcredit activities of theMicrofinance Institutions (MFIs) in the country. Microcredit Regulatory Authority(MRA) has been established under the act which is now empowered and responsible toimplement the said act and to bring the microcredit sector of the country under a full-

fledged regulatory framework. According to the Act, no MFI can carry out microcreditactivities without obtaining licence from MRA. Section 15(2) of 'Microcredit RegulatoryAuthority Act 2006' has made it mandatory for MFIs who had microcredit activitiesbefore the effective date (August 27,2006) of the act to apply for licence to MRA withinsix months (February 26, 2007) from the effective date of the act.

Accordingly 4236 NGO-MFIs have applied to MRA for licence by February 26, 2007. Itwas decided by the Authority that among these organizations, only those organizationswill be considered for licence who can fulfill minimum criteria (have equal to or morethan 1000 borrowers or equal to or more than taka 40 lakhs loan outstanding). Rest of theorganizations already applied to the Authority will be allowed time till June 2009 to reachthe above mentioned minimum criteria. If they are unable to meet those criteria withinspecified time they will have to close their microcredit operation after that given time.Accordingly applications from 705 institutions are being considered for license. Afterevaluating their application and real operations at field level they are being consideredfinally as eligible to get license. Upto May 20, 2008 the authority has issued 250 licenceto different NGO-MFIs and licensing procedure of other selected NGO-MFIs are underprocess.

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MRA is also working to prepare details rules and policies to monitor and superviselicensed NGO-MFIs that will cover governance issues, financial transparency, mode ofoperations and other related issues to ensure transparency and accountability in operation.

Fin Int Term Paper

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