STATE OF GOVERNANCE IN THE

BANKING SECTOR OF
BANGLADESH
Course Title: - Central Bank and Commercial Bank Management

Course ID: FIN 742

Semester: Fall, 2015
EMBA Program
Course Instructor
Dr. Salehuddin Ahmed
Professor
BRAC Business School

Team Fellows ...

Shayma Rahman
ID:14374006

Mohammad Faysal Haque

ID:15374020

Shamsuzzaman
ID:12274050

A T M Rabiul Islam
ID:13174036

INTRODUCTION

Recent financial scams

Illegally Distributed Loan

Letter of Credit

Credit Card Scams

Increasing default loan

The current situation of large financial frauds and high nonperforming loans (NPL) of banks call for a close scrutiny of this sector
and necessitates taking required measures.

OBJECTIVES
The

current practice of corporate governance

in terms of accountability to its stakeholders.

How

far the current practice of corporate

governance passes the test of fairness.

Whether

corporate governance system in

Bangladesh is transparent for all stakeholders.

OVERVIEW OF THE BANKING SECTOR

Indicator

CY2009

CY2010

CY2011

CY2012

CY2013

CY2014(June)

11.6

9.3

11.4

10.5

11.5

10.7

Non-Performing Loan to Total

Loans (%)

1.7

1.3

0.7

4.4

2.0

3.9

Expenditure-Income Ratio(%)

72.6

70.8

68.6

74.0

77.8

77.8

Return on Asset (%)

1.4

1.8

1.5

0.6

0.9

0.6

Return on Equity (%)

21.7

21.0

17.0

8.2

11.0

8.4

Liquid Asset (%)

20.6

23.0

25.4

27.1

32.5

27.4

9.0

6.0

8.4

9.9

15.4

17.3

Capital to Risk Weighted

Asset (%)

Excess Liquidity (%)

OVERVIEW OF THE BANKING SECTOR

Soundness of Banking Sector Performance
FIG 1: Soundness of Banking Sector Performance
90
80
70
Capital to RWA (%)

60

NPL to Total Loans (%)

Expenditure-Income Ratio (%)

50

Return on Asset (%)

Return on Equity (%)

40

Liquid Asset (%)

Excess Liquidity (%)

30
20
10
0
2009

2010

2011

2012

2013

2014

LITERATURE REVIEW
Corporate Governance
Multifaceted
Eliminate

Subject

Principal Agent Problem

Corporate governance practices in Bangladesh

that most companies are family oriented

Corporate Governance - Best

Practices and Guidelines for
banking sector
1.

The responsibility of individual board

members

2.

The roles/functions of the board

3.

The composition of the board

4.

The committees of the board

5.

Preventing abusive related party transactions

6.

Preventing abusive related party transactions

Corporate Governance - Best Practices

and Guidelines for banking sector

7. Disclosure
8. Banks autonomy in relation to the state
9. Banks monitoring of the CG structure of
its corporate borrowers

Corporate Governance Disclosure

and Impact on Classified Loans

All the Bank must follow Corporate Governance.

credit policies Must be approved by the Board of Directors.

Top management and CFO formulate the credit policies .All

the associated officials must know the policies very well

Sonali bank and Rupali bank lagged behind from credit

policy.

Assigned people do not do their duty properly regarding

:making proposal, analysis of Loan applications, disburse
loans, supervise and monitor clients and recovering loans.

Corporate Governance Disclosure

and Impact on Classified Loans

conventional banks follow the Credit Risk Grading and the Islamic
Shariah based banks follow Investment Risk Grading

Collateral is very important for the banks for recovery purpose in case of
default loans.

Relationship dept. should separate from Investment Dept.

Proper Investigation of mortgaged property.

ICCD, Credit Policy, Political Pressure, Audit

Corporate Governance Disclosure and

Impact on Classified Loans
f I G 2 : C la s s i f i ed L o a ns A n d A dv a nces O f S o n a li Ba n k L td I n Yea r 2 0 1 0 , 2 0 1 1 & 2 0 1 2
Year

M illion Tk

140000
125975.3
120000

100000

80000
68314.85
61588.17
60000

40000

20000
2010
0

2011

2012

Corporate Governance Disclosure and

Impact on Classified Loans
FIG 3:Classified loans and advances of Janata Bank Ltd in year 2010, 2011 & 2012
60000
52405.89
50000

40000

30000

20000
14343
11192
10000
2010
0

1
Year

2011

2012

3
M illion Tk

Corporate Governance Disclosure and

Impact on Classified Loans
Fig 4:Classified loans and advances of Rupali Bank Ltd in year 2010, 2011 & 2012
2500
2262.79
2011

2010
2000

2012

1500

1000
789.88

454.66

500

2
Year

3
M illion Tk

Corporate Governance Disclosure and

Impact on Classified Loans
FIG 5:Classified loans and advances of Basic Bank Ltd in year 2010, 2011 & 2012

8000
7065.68
7000

6000

5000

4000

3000

2489.79

2239.96
2010
2000

2011

2012

1000

1
Year

M illion Tk

Corporate Governance Disclosure and

Impact on Classified Loans
FIG 6: Classified loans and advances of Shahjalal Islami Bank Ltd in year 2010, 2011 & 2012
3000

2842.27

2500

2010
2000

2011

2012

1522.5
1500
1173.12
1000

500

0
1

2
Year

3
M illion Tk

Corporate Governance Disclosure and

Impact on Classified Loans
FIG 7:Classified loans and advances of City Bank in year 2010, 2011 & 2012
7000
6250

6000

5000

4000

3000
2654.39

2407.44

2010
2000

2011

2012

1000

1
Year

M illion Tk

Inherent Weaknesses of the Banking Sector

1. Selection Criteria of Borrower

Right individuals or organizations for lending

Avoid selection of faulty borrower

Select physically & mentally Fit borrower

KYC

Inherent Weaknesses of the Banking Sector

2. Acute Political Pressure

BASIC Bank

Investment department sent proposal to Head Office as

negative but the higher authority made that positive .

Inherent Weaknesses of the Banking Sector

3.Bank Management Influence
Chairman,

board of directors, Managing

Director, and other high officials have an
important command on the lending
process.

Inherent Weaknesses of the Banking Sector

4. Bangladesh Bank Officials Involvement
Dishonest

officials of BB take bribe.

Inherent Weaknesses of the Banking Sector

5. Awareness on Bangladesh Bank Circulars
Bank

officials unaware of BB circulars.

Inherent Weaknesses of the Banking Sector

6. Sanction Advice Incompleteness
Credit

department sends proposal with

incomplete information of the borrower to the
Head Office.

Inherent Weaknesses of the Banking Sector

7. Margin Obligation in FEX
Obligation

of having minimum 10% margin of

the total Letter of Credit (LC) amount.

Inherent Weaknesses of the Banking Sector

8. Providing Extra Benefits to the Client
Prime

Bank Ltd was only 2% to 3% last year, but

for providing extra benefit to the client the
classified loan reached to 82% to 83% when
that client collapsed.

Inherent Weaknesses of the Banking Sector

9.Wrong Information Provided by Head Office
A clients

loan was classified by the branch

office but not by the HO.

Inherent Weaknesses of the Banking Sector

10. Insufficient Personal Guarantee
Personal

guarantee or collateral Required.

Inherent Weaknesses of the Banking Sector

11. Lack of Proper Information about Importer
and Exporter
Hallmark

and Bismillah Group financial scam

took place because the bank had not enough
and proper information about the importer and
exporter.

Inherent Weaknesses of the Banking Sector

12. Investment in Risky Project
Branch

Business Target and Mal competition.

Inherent Weaknesses of the Banking Sector

13. Monitoring and Supervising Borrower
Keep

monitoring Borrower By Bank.

Inherent Weaknesses of the Banking Sector

14. Fund Diversion
Conventional

banks disburse the money

directly to the clients account and the
clients can do anything with the money they
want.

Islamic

banks buy goods for the clients

rather disburse money to the clients
directly.

monitoring

and supervising is needed .

Inherent Weaknesses of the Banking Sector

15. Corrupted Bank Officials
Bankers

know the banking rules and

regulations very well and they find the way
to do fraud by showing their thumbs to the
bank.

linkage

with the clients and associated with

these fraudulent activities.

Inherent Weaknesses of the Banking Sector

16. Fake Mortgage
Mortgaged

property which is used to secure

the loan in case of default should be evaluated
properly.

Fake

Property.

Inherent Weaknesses of the Banking Sector

17.Lack of Proper Documentation

Proper documentation is a pre-requisite

shortage in documentation might causes problem

during the time of recovery

legal protection

Basic Bank provided loan against fixed deposit which

is 100% secured but in the meantime the client
withdrawn the fixed deposit from the bank without
settling the loan.

Inherent Weaknesses of the Banking Sector

18.Insufficient Audit
Proper
Audit

auditing .

process cannot be made properly for

various reasons.

Inherent Weaknesses of the Banking Sector

19. Absence of Risk Management Policy

comprehensive risk management policy .

core risks include the following: (i) Credit Risk

Management; (ii) Foreign Exchange Risk Management;
(iii) Asset-Liability Risk Management; (iv)Internal
Control and Compliance Risk Management; (v) Money
Laundering Prevention Risk Management; and (vi)
Guidelines on Information and Communication
Technology.

Inherent Weaknesses of the Banking Sector

20. Lack of Internal Control
ICCD

Weak in SCBs.

Inherent Weaknesses of the Banking Sector

21.Inappropriate Appointment of CEOs and
Senior Officials
The

scam has also exposed total failure of the

CEO and responsible senior managers of the
bank in discharging their duties.

Inherent Weaknesses of the Banking Sector

22. Shortcomings of Human Resource Policy
Human

resource (HR) development has been

a neglected issue in the SCBs

Inherent Weaknesses of the Banking Sector

23. Inertia for Automation and MIS
Inertia

of the SCBs in adopting IT-based

banking services and MIS

Due

to lack of MIS, scam was not detected in

time.

Inherent Weaknesses of the Banking Sector

24. Dualism in the Regulatory Mechanism and
Regulators Oversight

Strained

relationship between Bangladesh

Bank and the MoF over the supervisory and
regulatory role on SCBs.

Inherent Weaknesses of the Banking Sector

25. Requirement of Commission for the
Financial Sector
A commission

is required for Basel III

requirements which is scheduled to be
introduced from 2013 until 2018.

Recommendations

Selection of Right Borrower.

Avoid Acute Political Pressure

Commission For the Financial Sector Should be formed.

Sound Banking Management and Keep Enough Collateral.

Create Awareness.

Proper Information

Monitor and Supervise.

Proper Documentation.

Ensure Proper Documentation.

Maintain Comprehensive Risk

Conclusion

Banking sector portraits the whole economy

Slight instability in this sector would wreck long term havoc on the
countrys development.

Prudential regulations and supervision is inadequate

Lack quality credit analysis and asset management practices

Insufficient execution of creditors right raised the numbers of classified

as well as NPL

Strengthening the banking sector

THANK YOU