bank of bangladesh

8/10/2019 Bank of Bangladesh

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Bangladesh BankBanking System and Monetary

Policy

Nima Doma Sherpa

Pabitra Pandey

Padama Yogi

Presented by:

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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 theestablishment, incorporation, capital and management of

Bangladesh Bank.

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Financial system of Bangladesh

4 state-owned commercial banks

4 government owned specializeddevelopment 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.

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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.

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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 forward-looking 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.

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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.

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Missions of Bangladesh Bank

Identifying policy priorities for implementation by theGovernment through

Assessing the transmission channels and

The interactions of monetary policy with fiscal, exchange

rate, and other macroeconomic policies and their impact onthe 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.

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Functions of Bangladesh Bank

Regulation and supervision of banks and non-bank financialinstitutions.

Management of the country's international reserves, countrys

foreign exchange and the gold reserve.

Exercises monopoly over the issue of currency andthe banknotes.

Regulation and supervision of the payment system.

Acting as banker to the government and the bankers bank, a

Lender of Last Resort.

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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.

Functions of Bangladesh Bank

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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 sixdepartments 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)

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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

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Padama

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What is Monetary Policy ?

Monetary policy is a regulation of the money supply andinterest 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 amountof 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.

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Reasons of publishing MonetaryPolicy Statement

To support the governmentsgoal 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 BangladeshMonetary 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 issufficient 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. Assuch BB has decided to keep policy rates unchanged.

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Monetary Policy Objective

Price stability

Full Employment

Exchange Stability

Economic Growth

Neutrality of Money

Balance of PaymentEquilibrium

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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 beachieved within a short period, the monetary policy should try

to achieve at least a near full employment situation.


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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 countrysbalance 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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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 pricesof commodities, and

The equilibrium rate of interest remains unchanged.


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Bank rate

Open market policy

Reserverequirement

QuantitativeMethods

Moral persuasion

Publicity

Restriction ofpurpose

Qualitative

Methods

Instruments of monetary policy:

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Instruments of monetary policy:

Open market operations:

A relatively fine tool that can be used to make smalladjustments. These adjustments can be daily and oftenoccur without much fanfare.

Targeted Interest RatesA relatively blunt tool that can be used to make largeadjustments. In typical years, changes in targetedinterest rates a few times per year.

Reserve RatioA rather blunt tool that is only used when very largeadjustments 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.

Centralbank

Central Bankbuyssecurities

Dealer

Dealersbank

Securities

Reserves

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Open Market Operations

Selling Treasury securities When the Central Bank sells securities (obtained from

previous purchases) to the government securitiesdealers,

The account balances of the dealers are debited withthe amount

The total amount of fund at the dealers bank reducesby the market value of the securities

Reduced money supply growth.

Centralbank

Central Bankbuyssecurities

Dealer

Dealersbank

Securities

Reserves

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T f C t l B k O M k t


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Types of Central Bank Open MarketTransactions

RP or Reverse RP Transaction(temporary change in the level of reserves held by depositoryinstitutions)

RP: Central Bank buys securitiestemporarily

Centralbank

Dealer

Dealers

bank

Securities

Reserves

Later on:

Reserves

Securities returned

Reverse RP: Central Bank sellssecurities temporarily

Centralbank

Dealer

Dealers

bank

Securities

Reserves

Later on:

Reserves

Securities returned

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Reserve Requirements

When a bank takes a deposit into an account on which a checkcan be written, it must place a percentage of that deposit onreserve at a Federal Reserve bank.

That percentage is called the reserve ratio.

banks reducelending

RRraised

banks increaselending

RRlowered

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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 sellsecurities, 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 chargelevied against those institutions choosing to borrow

reserves from the discount window of the Central Bank.

Frequent borrowing is discouraged and may be penalizedwith 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 guardiansrequest, commercial banks follow it and thus

amount of credit is controlled in the economy.

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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 otherbusiness 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

Qualitative Methods

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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.

Qualitative Methods

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Current money supply

ComponentsOctober,

2014

September

, 2014

October

, 2013

Percentage Changes of

October, 2014 over

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. 38

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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 DevelopingEconomies (EDEs) are experiencing a multi-speed recovery

process with growth projected at 4.9% in 2014 and 5.3% in

2015which 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 FY14though 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)

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Inflation

Point to point inflation data shows that food inflation has risensteadily 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 inflationsteadily 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

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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 at13% 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% waslargely 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 wassignificantly lower than projected in both the original and

revised FY14 Budget.

Government borrowing (net) from the banking systemamounted 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 inDeveloping 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 existencemonetary 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 targeta 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

bank of bangladesh

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