The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4 nationalized commercial banks (NCB), 5 government owned specialized banks, 30 domestic private banks,  10 foreign banks and 28 non-bank financial institutions. The financial system also embraces insurance companies, stock exchanges and co-operative banks.

Central Bank and its policies
Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all the banks. It performs the traditional central banking roles of note issuance and of being banker to the government and banks. It formulates and implements monetary policy, manages foreign exchange reserves and supervises banks and non-bank financial institutions. Its prudential regulations include: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. BB has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problems arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime.

Interest Rate Policy
Under the new interest rate policy which became effective in January 1990, all deposit (Bank  /  Financial Institutes) rates are decontrolled. Lending (Bank  /  Financial Institutes) rates are all freely determined by the market, except for exports.

Capital Adequacy
In January 1996, BB announced a new policy on Capital Adequacy along the lines recommended by the Basle Committee on banking supervision. The Revised policy on capital adequacy requires scheduled banks to maintain at least 9% of off-balance sheet risk and risk in different types of assets as capital.

Loan Classification and Provisioning
Bangladesh Bank introduced new accounting policies with respect to loan classification, provisioning and interest suspense in 1989 with a view to attaining international standards over a period of time. A Revised policy for loan classification and provisioning was introduced from 1st January,1999.The Revised policy calls for an independent assessment of each loan on the basis of qualitative factors and objective criteria. Each loan is branded with the worst level of classification resulting from these independent assessments.

If a Continuous Credit or a Demand Loan remains non-performing for 6 months or more it is classified Sub-standard. It is classified as Doubtful if it remains non-performing for 9 months and classified as Loss if non-performing for 12 months or more.

In the case of a Term Loan, which is repayable within a maximum period of 5 years, if any installment is not repaid within the specified period and if the time-equivalent of such unadjusted balance is 6 months, it is classified Sub-standard. A Term loan is classified Doubtful and Loss if the time-equivalent of unadjusted balance is 12 months and 18 months respectively.

Agricultural Loan and Micro-Credit is classified Sub-standard if non-performing for 12 months, Doubtful if non-performing for 36 months and Loss if non-performing for more than 60 months.

Under the existing system scheduled banks are required to maintain provisions against unclassified and substandard loans in addition to doubtful and loss loans. They are allowed to book interest against classified loans only on cash basis.

Whether a credit is classified or not under the objective criteria, it is subjected to classification under qualitative judgement if any doubt arises regarding repayment of loan.

Foreign Exchange System
On March 24, 1994 Bangladesh Taka (domestic currency) was declared convertible for current 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 for amortization payments on foreign borrowings can be made through banks authorized to deal in foreign exchange, without prior central bank authorization. However, because resident owned capital is not freely transferable abroad (Taka is not yet convertible on capital account), some current settlements beyond certain indicative limits are subject to bonafides checks.

Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are repatriable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly.

Exchange Rate Policy
The exchange rate policy of Bangladesh Bank aims at maintaining the competitiveness of Bangladeshi products in the international markets, encouraging inflow of wage earners' remittances, maintaining internal price stability, and maintaining a viable external account position. Prior to the inception of floating exchange rate regime, adjustments in exchange 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 trading partners of Bangladesh and the trends of other important internal and external sector indicators. Under the existing floating exchange rate regime (that started from 31/05/2003), the interbank foreign exchange market sets the exchange rates for customer transactions and interbank transactions based on demand-supply interplay; while the exchange rates for the Bangladesh Bank's spot purchase and sales transactions of US Dollars with ADs is decided on a case to case basis. Bangladesh Bank does not undertake any forward transaction with ADs. The ADs are free to quote their own spot and forward exchange rates for interbank transactions and for transactions with non-bank customers. However, along with intervention in the taka money market, the US dollar purchase or sale transactions take place by the Bangladesh Bank as needed, to maintain orderly market conditions.

Bank Licensing
Bank Company Act, 1991, empowers BB to issue licenses to carry out banking business in Bangladesh. Pursuant to section 31 of the Act, before granting a license, BB needs to be satisfied that the following conditions are fulfilled: 

"that the company is or will be in a position to pay its present or future depositors in full as their claims accrue;  
that the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interest of its present and future depositors;  
that, in the case of a company incorporated outside Bangladesh, the Government or law of the country in which it is incorporated provides the same facilities to banking companies registered in Bangladesh as the Government or law of Bangladesh grants to banking companies incorporated outside Bangladesh and that the company complies with all applicable provisions of Bank Companies Act, 1991."

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

Commercial Banks
The commercial banking system dominates Bangladesh's financial sector with limited role of Non-Bank Financial Institutions and the capital market. The Banking sector alone accounts for a substantial share of assets of the financial system. The banking system is dominated by the 4 Nationalized Commercial Banks , which together controlled more than 54% of deposits and operated 3388 branches (54% of the total) as of December 31, 2004.

Specialized Banks
Out of the 5 specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) 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 for extending term loans to the industrial sector.

Financial Institutions (FIs)
Twenty-eight financial institutions are now operating in Bangladesh. Of these institutions, 1(one) is govt. owned, 15 (fifteen) are local (private) and the other 12(twelve) are established under joint venture with foreign participation. The total amount of loan & lease of these institutions is Tk.29,729 million as on 30 April, 2003. Bangladesh Bank has introduced a policy for loan & lease classification and provisioning 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 Institutions Development Project (FIDP)`` has started its operation from February 2000. Bangladesh Bank is administering the project. The project has established ``Credit, Bridge and Standby Facility (CBSF)`` to implement the financing program with a cost of US$ 57.00 million.

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

1.Regulatory Bodies  
The Securities and Exchange Commission exercises powers under the Securities and Exchange Commission Act 1993. It regulates institutions engaged in capital market activities. Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions engaged in financing activities including leasing companies and venture capital companies.

2. Participants in the Capital Market  
The SEC has issued licences to 27 institutions to act in the capital market. Of these, 19 institutions are Merchant Banker & Portfolio Manager while 7 are Issue Managers and 1(one) acts as Issue Manager and Underwriter.

i) Stock Exchanges  
There are two stock exchanges ( the  Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) ) which  deal in the secondary capital market. DSE was established as a public Limited Company in April 1954 while CSE in April 1995. As of 30 June 2000 the total number of enlisted securities with DSE and CSE were 239 and 169 respectively. Out of 239 listed securities with the DSE, 219 were listed companies, 10 mutual funds and 10 debentures.

ii) Investment Corporation of Bangladesh (ICB)  
The Investment Corporation of Bangladesh was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programmes, and maintains investment accounts, floats and manages closed-end & open-end mutual funds & closed-end unit funds to ensure supply of securities as well as generate demand for securities. ICB also operates in the DSE and CSE as dealers.

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

Insurance
The insurance Sector is regulated by the Insurance Act, 1938 with regulatory oversight provided 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 for general insurance and JBC for life insurance--which together command most of the total assets of the insurance sector.

Microfinance Institutions (MFIs)

The member-based Microfinance Institutions (MFIs) constitute a rapidly growing segment of the Rural financial Market (RFM) in Bangladesh. Microcredit programs (MCP) in Bangladesh are implemented by various formal financial institutions (nationalized commercial banks and specialized banks), specialized government organizations and semi-formal financial institutions (nearly 1000 NGO-MFIs). The growth in the MFI sector, in terms of the number of MFI as well as total membership, was phenomenal during the 1990s and continues till today. Over the period of June 2003 to December 2005 the growth rate was 69% in terms of horizontal expansion of microcredit borrower. The total coverage of MCP in Bangladesh is approximately 24.25 million borrowers. Table-1 gives the coverage of major institutions in the formal and semi-formal sectors.

It is estimated that after considering the overlapping problem, which is expected to be over 40%, the effective coverage would be around 17.32 million borrowers. Out of 17.32 million borrowers covered by microcredit program, about 62% are below poverty line and so about 10.74 million poor borrowers are covered by microcredit program at the end of December 2005.

Microcredit programs of NGOs and Grameen Bank play the dominant role in this market, NGO-MFIs serve more than 60 percent and Grameen Bank alone serves 20 percent of the total borrowers. Among NGO-MFIs more than 80 percent of the outstanding loan disbursed by the top 20 NGOs, three of them are very large and have coverage all over the country. Service charge on credit varies from 10% to 20%, all partners of Palli Karma-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 are female. Loan recovery rate is generally very high compare to the banking sector, which is over 90%. Average loan size of NGO-MFIs was found around Taka 4000.

Microcredit Regulatory Authority

Microfinance is now a nation-wide activity in Bangladesh. The issue of a regulatory framework has come to the forefront because MFIs are providing financial services to the poor outside the formal banking system. At present, Grameen Bank is the only formal financial institution established in 1983 under a special law. Before 27 August 2006 NGO-MFIs as financial institutions were remain outside any formal supervisory or monitoring system. The unique features of MFIs (especially NGO-MFIs) in the field of social and financial services with the core objectives of poverty alleviation differentiate the industry from the formal financial sector. However, that does not in any way downplay the importance of having some strategic monitoring measures that are compatible and appropriate to MFIs’ objectives, institutional operation and development culture.

The phenomenal growth of this sector after 1990 both in terms of outreach and product development encouraged the government to form a Unit "Microfinance Research and Reference Unit (MRRU)" in 2000 under the supervision of a National Steering Committee headed by the Governor of the Bangladesh Bank to formulate some guidelines and suggest a regulatory framework for this sector. Initially this Committee prepared a set of guidelines which were implemented by the Unit. Those guidelines helped the sector to get prepared for future regulatory environment that would be in place and to build up a friendly communication between the sector and the policy makers. At later stage, the Committee prepared a draft of a regulatory framework after consultation with the sector representatives and submitted that draft to the government for final approval. The government passed the law,'Microcredit Regulatory Authority Act 2006' in July 2006 (effective from 27 August 2006) on the basis of those suggestions given by the Committee. Under this law the government has established a separate Microcredit regulatory Authority and constituted its Board of Directors with the governor of the Bangladesh Bank as the chairperson.

According to this new law all active MFIs will have to apply for license from the Authority immediately (before 26 February 2007). No MFIs will be allowed to work within the country without getting license from the Authority. According to the Law all institutions who have microcredit operation should separate their financial operations from other development works and keep their accounts separate. The Authority has been given power to monitor and supervise all these MFIs who will get license from it. The Authority also has the power to prepare detail rules related to the operations of microcredit including conditions for spending any income, area of operations, guideline of internal and external audit of accounts, collection of deposits, and use of earned profit etc. The Authority has the mandate to take punitive measures if any institution does not comply with any of the provisions of law and rules. The former MRRU has been transformed into a Secretariat of the Microcredit Regulatory Authority which has started working separately as an independent body. Application form for license has already been collected by MFIs and they have been requested to apply for license. Those who already have microcredit operation should apply for license by 26 February, 2007. Preparation of other rules based on the law is under process.