Insufficient Information Summary
According to the 2008 Article IV Consultation by the International Monetary Fund (IMF), the progress made by the Bangladesh government in pushing ahead with key reforms, such as corporatization of the nationalized commercial banks, strengthening the regulatory and prudential framework, and enhancing the Bangladesh Bank's supervisory capacity, is commendable. A 2007 IMF report also commended Bangladesh for implementing many recommendations of the (unpublished) 2002 Financial Sector Assessment Program (FSAP), but found that more needed to be done to bring Bangladesh closer to international regulatory standards. It also warned of underlying weaknesses in the banking system due to the undervaluation of capital inadequacy in individual banks. The report therefore called for a stronger monitoring framework and improved enforcement to improve financial sector risk management and promote banking sector soundness, especially in the climate of rapid credit growth. The 2007 IMF report welcomed the proposed amendments to the Banking Companies Act that, when enacted, would enable the Bangladesh Bank to tighten loan classification standards and increase minimum capital requirements for banks. The Bangladesh Bank, according to the 2008 IMF report, is conducting a self-assessment of its implementation of the 2002 FSAP recommendations and has delayed requesting the IMF/World Bank mission for an FSAP update until its completion. The Bangladeshi authorities have requested technical assistance from the IMF in order to improve their stress testing, according to the 2008 report. However, there is insufficient information publicly available as to Bangladesh's overall compliance with the Basel Core Principles for Effective Banking Supervision.
General Overview
The Bangladesh Bank website discloses that, as the central bank of Bangladesh, it has the legal authority to supervise and regulate all banks in the country. The Bangladesh Bank's regulatory role encompasses prudential regulations, including minimum capital requirements, insider borrowing, loan concentration and asset classification. The Bangladesh Bank can enforce its authority through penalties for non-compliance and intervention in the management of problem banks. As the 2007-2008 annual report of the Bangladesh Bank reveals, the Bank is making preparations to implement Basel II by 2009. It is adopting a consultative approach to its implementation and has established a National Steering Committee, a Coordination Committee, and a Basel II Implementation Cell to carry out all required activities. It has also published an action plan/road map in Bank Regulation and Policy Division (BRPD) Circular No. 14 of 2007 in the aftermath of two studies that concluded that the banking sector in Bangladesh is ready for Basel II implementation. A self audit on the Basel Core Principles revealed that the Bangladesh Bank has operational independence; a standard methodology for bank supervision; and guidelines on core-risk management. The Bangladesh Bank also uses CAMELS (a risk assessment system that grades banks on the basis of their capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk) and EWS (early warning systems) to supervise banks. The audit further showed that banks were practicing know-your-customer methods and credit risk grading for credit risk assessment. In addition, a quantitative impact study was also conducted to assess banks' readiness for Basel II. It revealed that banks were aware of their core risks and could identify, measure and mitigate those risks. However, they required adequate guidelines and capacity building. In preparation for Basel II, the Bangladesh Bank is also in the process of recognizing two credit rating agencies, and promulgating guidelines on revised risk based capital regulation that will be in line with Basel II.
According to the 2007 Article IV consultation report by the International Monetary Fund (IMF), the transitional government in Bangladesh is pushing forward with key reforms, particularly by approving the corporatization of the nationalized commercial banks (NCB). Further, the Bangladesh Bank has also strengthened its supervisory capacity of banks, especially the NCBs. Other reforms by the Bangladesh Bank to deepen financial markets include the strengthening of the regulatory framework, with enhanced off-site and on-site supervision; and steps towards restructuring, corporatizing and privatizing the large NCBs. The IMF commends Bangladesh for implementing many recommendations of the (unpublished) 2002 Financial Sector Assessment Program (FSAP). The 2008 IMF Article IV consultation report observes that the above reforms are important ingredients for financial development in the country. However, the IMF observes that "Bangladesh [is] still behind its comparators [sic]" (2008, p. 11) and that "much more remains to be done to bring regulatory standards in line with international norms" (2007, p. 13). The 2007 Asian Development Bank (ADB) report titled, "Asian Development Outlook 2007: Bangladesh" notes that "despite some progress, Bangladesh is yet to establish a healthy and efficient financial system" (p. 166). The 2007 IMF report finds that "while capital standards and risk weights are broadly consistent with the Basel framework, lenient classification rules and noncompliance means that some banks are underprovisioned and undercapitalized" (p. 13). It warns of underlying weaknesses in the banking system due to the undervaluation of capital inadequacy in individual banks. The IMF therefore calls for a stronger monitoring framework to improve financial sector risk management, and "more vigilance in implementing the NCB restructuring and divestment program to help promote banking sector soundness" (p. 13). Further, a comprehensive vision is required with the Bangladesh Bank leading the way to strengthen the financial sector and encourage market development. The 2007 IMF report welcomes the proposed amendments to the Banking Companies Act that, when enacted, will enable Bangladesh Bank to tighten loan classification standards and increase minimum capital requirements for banks. It also finds that the Bangladesh Bank is conducting a self-assessment of its implementation of the 2002 FSAP recommendations and that it has asked an IMF/World Bank mission to assess its conclusions and conduct an FSAP update. In this regard, the 2008 IMF report mentions that Bangladesh wants to delay requesting the update "pending further work on their own self-assessment" (p. 11). In addition to the reforms in the regulatory framework, the IMF also asks Bangladesh to improve enforcement for more accurate assessment of the soundness of the financial system, especially in the climate of rapid credit growth. The 2007 ADB report calls for a strengthening of the continuing banking sector restructuring process.
The 2007 ADB report finds that Bangladesh continues to make progress in strengthening the regulatory and supervisory framework in the financial and banking sector in 2006, albeit at a slower pace than anticipated. Net non-performing loans (NPLs) of banks declined from 21 percent in 2002 to 8 percent in 2006, evidencing sounder health of the banking sector, though a break up of statistics reveals that the NCBs still have very high NPLs - 25 percent - compared with 6 percent for private commercial banks. The NCBs also showed "large capital shortfalls with a risk-weighted capital asset ratio of just 0.5% in June 2006 (as against the required 9%), compared with 10% for the private banks" (p. 161). Per the 2008 IMF report, the NCBs "still undermine the efficiency of the financial system" (p. 11). They still hold 30 percent of the total banking sector assets, although their market share is rapidly declining. They have negative capital and their NPLs have now reached 30 percent. The IMF advises Bangladesh to strengthen the financial positions of the NCBs and to accelerate the pace of divestment of the NCBs. The Bangladesh authorities have divulged their plans to strengthen the Boards as well as the monitoring of these banks. In this regard, the 2007-2008 annual report mentions that the government has completed the corporatization process of three NCBs, Agrani Bank, Janata Bank, and Sonali Bank by signing the Vendor's Agreement to "transfer/vest the entire assets, liabilities and capital of the [NCBs] to the new banks" (p. 50). The government still owns the banks; however, day-to-day running of the banks will no longer be its responsibility, and the banks will now be accountable to the Bangladesh Bank instead of to the government. With corporatization, these banks will come under the uniform regulatory framework of the Bangladesh Bank, observe all prudential regulations, operate on a prudent and commercial basis, and appoint/retain their Boards/senior managers approved by the Bangladesh Bank and meeting prudential criteria.
According to a 2005 Article IV Consultation, in continued efforts towards strengthening oversight of the banking sector, the Bangladesh Bank has issued risk management guidelines for commercial banks, mandated banks to conduct systems audits, and placed restrictions on the number and tenure of directors at banks. The Bangladesh Bank also promised to "further improve its on-site and offsite supervisory capacity and strictly enforce the data reporting requirements of commercial banks" (p. 14). In light of these developments, the IMF recommended the Bangladesh Bank to ensure that prudential regulations, especially with regard to foreign currency exposure, are met by the supervised banks.
A 2003 analytical report edited by Sobhan and Werner informs that banking companies operate under the provisions of the 1991 Banking Companies Act and the 1994 Companies Act. The latter lays down the regulatory role of the Bangladesh Bank, including licensing powers and ongoing supervisory authority. The report mentions that although the Bangladesh Bank is regulated by the Ministry of Finance (MoF), it enjoys a high degree of autonomy, and this has been further bolstered by the Bangladesh Bank (Amendment) Act of 2003. As a result, the Bangladesh Bank is accountable to a parliamentary standing committee instead of the MoF.
Banks dominate the Bangladeshi financial system and private banks are rapidly capturing larger parts of the market, remarks the 2008 IMF report. They are expanding their loan portfolios, raising their capital, and overall, strengthening their financial soundness to become compliant with Basel II in 2009. The Bangladesh Bank website states that the financial system in Bangladesh comprises, besides the Bangladesh Bank, four NCBs, five government owned specialized banks, thirty domestic private banks, ten foreign banks and 28 non-bank financial institutions, in addition to insurance companies, stock exchanges and co-operative banks. Overall banking sector assets, as noted by the 2007 IMF report, amount to 2.6 trillion taka (Bangladeshi currency), almost 60 percent of the GDP. The 2005-2006 annual report of the Bangladesh Bank details the gradual growth of Islamic banking in Bangladesh since 1983, with the establishment of first Islamic bank, the Islami Bank Bangladesh Limited. The report attributes it to high acceptance of Islamic principles of interest-free banking by consumers, and notes that some of the popular products are Marahaba, Bia-Muazzal and Ijarah, covering both consumer credit and long-term investment financing. The Bangladesh Bank, in its 2005-2006 annual report, notes that in response, it has been training its inspection and supervisory staff to regulate and monitor Islamic banks.
The 2007 IMF report notes that financial deepening in Bangladesh compares poorly with most Asian countries. However, banking sector performance has improved due to tightened supervision and greater competition that has replaced concentration of assets in select NCBs and specialized development banks (SDBs). Nevertheless, NCBs still dominate the financial system, with 90 percent of its assets. Further, asset quality has shown improvement - although it may be overestimated due to rapid credit growth - but provisioning remains low.
The Principles
II1. (1) Clear responsibilities and objectives for each supervisory agency.
According to the 2004 Bangladesh Bank annual report, the Bangladesh Bank is charged with the primary responsibility of regulating and supervising the banks and financial institutions of the country. The 2003 analytical report edited by Sobhan and Werner adds that the 1994 Companies Act lays down the regulatory role of the Bangladesh Bank, including licensing powers and ongoing supervisory authority. The report also mentions that, although the Bangladesh Bank is regulated by the Ministry of Finance (MoF), it enjoys a high degree of autonomy. This has been further bolstered by the Bangladesh Bank (Amendment) Act of 2003. As a result, the Bangladesh Bank is accountable to a parliamentary standing committee instead of the MoF. The supervisory and on-site inspection capacity of the Bangladesh Bank has also increased under the Financial Sector Reform Program, with more enhancements in the offing. The report also observes increased activism by the Bangladesh Bank in the areas of removal of directors, chairpersons, and other high officials of banks, selection of auditors, accounting standards, and corrective action. However, there is little further information publicly available as to Bangladesh's compliance with this principle.
II1.(2) Operational independence and adequate resources.
A 2003 analytical report edited by Sobhan and Werner mentions that though the Bangladesh Bank is regulated by the MoF, it enjoys a high degree of autonomy, and this has been further bolstered by the Bangladesh Bank (Amendment) Act of 2003. As a result, the Bangladesh Bank is accountable to a parliamentary standing committee instead of the MoF. The 2003 letter by the Government of Bangladesh to the IMF titled "Letter of Intent, Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding" states that the amendment of the Bangladesh Bank Order gave greater operational autonomy to the Bangladesh Bank. The 2007 ADB report notes that for Bangladesh to derive more benefits from the reform environment, the Bangladesh Bank needs to be accorded more operational autonomy. However, to derive greater benefit from the Monetary Policy Statement (MPS), the government needs to allow Bangladesh Bank greater operational autonomy (p. 160). However, a self-audit conducted by the Bangladesh Bank in 2007, as reported in its 2007-2008 annual report, concluded that the Bank has operational independence. Nonetheless, there is little further information publicly available as to Bangladesh's compliance with this principle.
II1.(3) A suitable legal framework for authorization and ongoing supervision.
The Bangladesh Bank website mentions that under the 1991 Banking Companies Act, the Bangladesh Bank has the authority to issue licenses to carry out banking business in Bangladesh. Pursuant to section 31 of the Act, before granting a license the Bangladesh Bank needs to ascertain that several conditions are fulfilled. The company must demonstrate that is it or will be able to pay its depositors claims in full, as they accrue. Its affairs must not be conducted to the detriment of its depositors' interests. If the company is incorporated outside Bangladesh, the incorporating country's government or laws must provide facilities equivalent to those provided by Bangladesh to outside-incorporated firms, and such companies must comply with the 1991 Bank Companies Act. Further, the Bangladesh Bank can also revoke licenses in the event of non-compliance with these requirements or cessation of banking activity in Bangladesh. According to the 2005-2006 Bangladesh Bank annual report, the Bangladesh Bank also monitors approvals of large loans by banks on a monthly basis to "detect the irregularities" (p. 37). The 2007 ADB report notes that the Bangladesh Bank monitors the performance of the four NCBs under the terms of memoranda of understanding (MoUs) signed by each of them with the Bangladesh Bank, particularly on the issues of prudential norms and lending limits. However, the report finds that the efficacy of these MoUs has been mixed due to political interference. The government of Bangladesh is also taking steps to privatize and corporatize the NCBs, while keeping them under the regulatory ambit of the Bangladesh Bank. However, there is little further information publicly available as to Bangladesh's compliance with this principle.
II1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.
The analytical report edited by Sobhan and Werner finds that "a primary problem in improving the functioning of the banking system is the legal framework for pursuing defaulters, enforcing security interests, and declaring bankruptcy" (p. 46). Artha Rin Adalat (Money Loan Courts), have been established since 1990 for debt recovery by banks and financial institutions, but staff crunch and appeals against their decisions have rendered them ineffective. Nonetheless, there is insufficient information publicly available as to Bangladesh's compliance with this principle.
II1.(5) Legal protection for supervisors.
There is insufficient information publicly available as to Bangladesh's compliance with this principle.
II1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.
There is insufficient information publicly available regarding Bangladesh's compliance with this principle.
II2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.
There is insufficient information publicly available with regard to Bangladesh's compliance with this principle.
II3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.
The 2005-2006 annual report of the Bangladesh Bank informs that the Bangladesh Bank has taken steps to protect depositors and foster professional, transparent management of banks by setting up corporate governance in banks. Banks have been issued guidelines pertaining to the qualifications, salaries, and allowances of chief executives of banks and financial institutions. The analytical report edited by Sobhan and Werner observes increased activism by the Bangladesh Bank in the areas of removal of directors, chairpersons, and other high officials of banks, selection of auditors, accounting standards, and corrective action. The Bangladesh Bank has also proposed a limit on the number of directors to eleven and the appointment of two independent directors representing depositors to each bank board, and these proposals are awaiting consideration by the Parliament in 2003. Despite the above information, there is little information publicly available as to Bangladesh's compliance with this principle. The Bangladesh Bank website mentions that under the 1991 Banking Companies Act, the Bangladesh Bank has the authority to issue licenses to carry out banking business in Bangladesh. Pursuant to section 31 of the Act, before granting a license the Bangladesh Bank needs to ascertain that several conditions are fulfilled. The company must demonstrate that it is or will be able to pay its depositors claims in full, as they accrue. Its affairs must not be conducted to the detriment of its depositors' interests. If the company is incorporated outside Bangladesh, the incorporating country's government or laws must provide facilities equivalent to those provided by Bangladesh to outside-incorporated firms, and such companies must comply with the 1991 Bank Companies Act. Further, the Bangladesh Bank can also revoke licenses in the event of non-compliance with these requirements or cessation of banking activity in Bangladesh.
II4. Authority to review and reject transfer of ownership.
There is insufficient information publicly available with regard to Bangladesh's compliance with this principle.
II5. Authority to review major acquisitions and investments.
There is insufficient information publicly available as to Bangladesh's compliance with this principle.
II6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).
The Bangladesh Bank website mentions that the Bangladesh Bank has had a policy on Capital Adequacy on the lines of the Basel Committee's recommendations since January 1996. Per the policy, scheduled banks were required to maintain "at least 9% of off-balance sheet risk and risk in different types of assets as capital." The 2007 Article IV report by the IMF mentions in this regard that to further solidify prudential regulations the Bangladesh Bank raised the capital adequacy ratio for banks from 9 to 10 percent of risk-weighted assets effective end 2007. The 2007-2008 annual report of the Bangladesh Bank announces the intent of Bangladesh to adopt the Basel II framework in 2009, and that the Bangladesh Bank has also mapped a plan for implementation of the new capital adequacy framework through consultation with banks, establishment of Steering Committees and a Basel II Implementation cell, quantitative impact studies, issuance of guidelines for managing core risks, and institution capacity building. The 2007 ADB report bolsters this claim with the information that the Bangladesh Bank "has completed a comprehensive plan to switch over to the new international standard framework for assessing banks' capital adequacy under Basel II, which the Government intends to implement from early 2009" (p. 161). The Bangladesh Bank's website elaborates that apart from the 5 percent core capital requirement, banks are also mandated to ensure Taka 2 billion as paid up capital and statutory reserve per the Bank Company (Amendment) Act of 2007. Half of the shortfall is required to be met by June 2008, and the remaining half by June 2009. Despite the above information, there is little information publicly available as to Bangladesh's compliance with this principle.
II7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.
The 2003 analytical report edited by Sobhan and Werner found that the Lending Risk Analysis (LRA) procedure for loans introduced by the Bangladesh Bank lacked effectiveness as it did not require mandatory credit assessments for smaller loans. The Credit Information Bureau (CIB), which was established to create a centralized information databank on borrowers, had also proved weak due to delays in information updates and tardy disclosure leading to delays in loan approvals. However, the 2007-2008 annual report of the Bangladesh Bank notes that "the achievement of Credit Information Bureau in fulfilling its objectives of bringing down the extent of default loan has been found quite remarkable" (p. 56). Backing this claim with numbers, the report states that classified loans have decreased from 34.9 percent of the total loans in December 2000 to 11.93 percent in June 2008. This number was reached despite the fact that "written-off" loans were excluded from the definition of classified or outstanding loans beginning June 2004. Per the report, the CIB is taking further steps to enhance its efficiency and "in order to ensure prompt collection of credit data from the sources as well as instantaneous delivery of credit report to the users by applying latest computer technology, the CIB started diagnostic analysis of the customer and the central bank with effect from 13 July 2007 under DFID [the UK's Department for International Development] financial assistance program aimed at implementing on-line services between the Bureau and the lending institutions" (p. 56-57). The CIB is expected to be connected on-line with all banks and financial institutions by June 2009. Apart from this information; there is little information publicly available as to Bangladesh's compliance with this principle.
II8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.
The Bangladesh Bank website informs that in 1989, the Bangladesh Bank introduced new accounting policies pertaining to loan classification and provisioning with the aim of gradually achieving international standards. In 1999, the Bangladesh Bank introduced a revised policy for loan classification and provisioning which follows objective criteria for assessing and classifying loans. Further, in 2006 the Bangladesh Bank issued another circular on loan classification and provisioning to "strengthen credit discipline and bring classification and provisioning regulation in line with international standard" (Bangladesh Bank website). Under the circular, each loan is independently evaluated on the basis of objective and qualitative criteria. However, there is little information publicly available as to Bangladesh's compliance with this principle.
The 2005-2006 Bangladesh Bank annual report states that from 1998 to 2005, banks have been consistently falling short of their loan-loss provisioning requirements in an environment of huge non-performing loans (NPL), which makes them vulnerable to a great degree of credit risk. The large build up of NPLs is attributed to poor appraisal, inadequate follow-up and loan supervision, as well as loan advancement for considerations other than market factors. There have been signs of improvement, per the report, due mainly to internal restructuring of banks and better loan recovery and write-off measures taken by them. The report also informs that the Bangladesh Bank is taking steps to come closer to international best practices with respect to handling NPLs. It details that "appropriate provisioning against unclassified loans like 'Special Mention Account' has been enforced and the banks are required to make General Provision @ 5% on the outstanding amount of loans kept in the 'Special Mention Account' after netting off the amount of Interest Suspense effective from 31 December 2005. There has been more concentration on Short term Microcredit by enhancing its limit from Taka 10,000/- (ten thousand) to Taka 25,000/-(twenty five thousand). Banks having Offshore Banking Unit (OBU) have been brought under the purview of loan classification and provisioning with a view to transparency of OBU transactions of EPZ (Export Processing Zone) enterprises and thereby reporting to BRPD [Bank Regulation and Policy Division] and CIB of Bangladesh Bank for cross information purposes" (p. 39).
II9. Prudential limits and management information system on concentration of exposure.
There is little information publicly available as to Bangladesh's compliance with this principle.
II10. Arm's length rule and monitoring for connected lending.
The 2003 analytical report edited by Sobhan and Werner observes that investigations by the Bangladesh Bank into the transactions and affairs of commercial banks have resulted in actions against erring officials, but are perceived to be politically motivated. Junior staff is punished, while senior decision making personnel go free. Nonetheless, there is little information publicly available as to Bangladesh's compliance with this principle.
II11. Policies and procedures for country risk and transfer risk.
The 2007 Article IV report by the IMF notes that foreign exchange risk to banks is limited since they remain within the Bangladesh Bank's range of open net positions, and offer only trade related credits in foreign currency. Nonetheless, there is little information publicly available as to Bangladesh's compliance with this principle.
The 2005-2006 annual report of the Bangladesh Bank states that the Bangladesh Bank attaches primary importance to effective risk management to promote good governance in banking. The Bangladesh Bank issued the Guideline for Managing Core Risk to all banks in Bangladesh in October 2003. The 2004 annual report of the Bangladesh Bank adds that one of the five core risks in the guidelines is Foreign Exchange Risk. The Bangladesh Bank instructed the banks to establish an effective risk management system by June 2004, and also monitors the progress of implementation on a regular basis.
II12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.
The 2003 analytical report edited by Sobhan and Werner finds that the Credit Information Bureau (CIB), which was established to create a centralized information databank on borrowers, has proved weak due to delays in information updates and tardy disclosure leading to delays in loan approvals. Apart from this, there is little information publicly available as to Bangladesh's compliance with this principle.
II13. Comprehensive risk management processes.
The 2005-2006 annual report of the Bangladesh Bank states that the Bangladesh Bank attaches primary importance to effective risk management to promote good governance in banking. In pursuance of this objective, the Bangladesh Bank issued the Guideline for Managing Core Risk to all banks in Bangladesh. It also introduced the Credit Risk Grading System to help banks grade loans under eight categories: Superior, Good, Acceptable, Marginal/Watch list, Special Mention Account, Substandard, Doubtful, and Loss. Nonetheless, there is little information publicly available as to Bangladesh's compliance with this principle.
II14. Adequate internal controls.
According to the Bangladesh Bank's Internal Control Guidelines, the banks are instructed to establish Audit Committees to monitor the performance of their internal control mechanisms. The audit reports are to be submitted to the Board of Directors without management intervention and periodic review meetings with the management are to be held to ensure that internal control recommendations by the auditors are implemented. Besides this, there is little information publicly available as to Bangladesh's compliance with this principle.
II15. Strict "know-your-customer" rules and high ethical and professional standards.
According to a 2009 report by the U.S. Department of State (DoS), the 2008 Money Laundering Prevention Ordinance requires banks and other financial institutions to identify their customers and retain their identification information and transaction records for at least five years after termination of relationship. They are also obligated to provide this information to the Bangladesh Bank on demand, as well as reports of any suspicious transactions. However, the 2009 U.S. DoS report points out that Bangladesh only began in mid-2007 to develop a national identity card (in the form of a voter registration card) and a large number of Bangladeshis do not possess a passport. Therefore, there are difficulties in enforcing customer identification requirements. Also, in most cases, banking records are maintained manually. In the 2007 Article IV report by the IMF, the appended Statement by the IMF Staff Representative points out that "in recognition of positive steps taken to strengthen its surveillance institutions" (p. 2), the Egmont Group of financial intelligence units invited Bangladesh to be its member. Apart from the aforementioned information, there is little information publicly available as to Bangladesh's compliance with this principle.
II16. Effective supervisory system consisting of on-site and off-site supervision.
Per the 2007-2008 annual report of the Bangladesh Bank, Article 7A(f) of the Bangladesh Bank Order of 1972 and Section 44 of 1991 Bank Company Act 1991 authorize the Bangladesh Bank to inspect banking companies. The Bangladesh Bank has three departments -- the Department of Banking Inspection-1, the Department of Banking Inspection-2, and the Foreign Exchange and Vigilance Department -- to conduct inspection of NCBs, specialized banks, private commercial banks (including Islamic banks), foreign banks and other institutions like the Investment Corporation of Bangladesh (ICB) and Money Changers. Inspections fall under two categories: (1) comprehensive inspection, evaluating the overall health and performance of banks in accordance with the Annual Inspection Program (AIP) prepared by the Inspection Departments, as well as implementation of the recommendations of past inspection reports; and (2) special inspection, for investigation of specific issues or depositor/public complaint. The Departments also conduct systems inspection to assess risk management practices of banks and their implementation of risk management guidelines. Banks are inspected on the basis of their CAMELS rating. The annual report adds that the Bangladesh Bank conducts off-site supervision through its Department of Off-site Supervision. Further, to reduce lags between off-site and on-site supervision and to enhance the effectiveness of on-site inspections, the Bangladesh Bank now conducts inspections on the basis of four reference dates: December 31, March 31, June 30, and September 30. Nonetheless, there is little information publicly available as to Bangladesh's compliance with this principle.
II17. Regular contact with bank management and understanding of bank's operations.
There is insufficient publicly available information as to Bangladesh's compliance with this principle.
II18. Analytical reports and statistical returns on solo and consolidated basis.
According to the 2005 IMF Article IV assessment report, the Bangladesh Bank "has agreed to strictly enforce the data reporting requirements of commercial banks" (p. 14). Nonetheless, there is insufficient publicly available information as to Bangladesh's compliance with this principle.
II19. Independent validation of supervisory information through on-site examination or external auditors.
According to the Bangladesh Bank's Internal Control Guidelines, the banks are instructed to establish Audit Committees to monitor the performance of their internal control mechanisms. The audit reports are to be submitted to the Board of Directors without management intervention and periodic review meetings with the management are to be held to ensure that internal control recommendations by the auditors are implemented. The 2003 report by Sobhan and Werner observes an increase in the Bangladesh Bank's activism in the area of selection of auditors. In 1998 it required a change of bank auditors every three years "to serve as a check on auditors' performance" (p. 44). Nonetheless, there is insufficient publicly available information as to Bangladesh's compliance with this principle.
II20. Ability to supervise on a consolidated basis.
There is insufficient publicly available information as to Bangladesh's compliance with this principle.
ID21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.
The Bangladesh Bank, empowered by the Companies Act and the Bank Companies Act of 1991, sets accounting and auditing requirements for the banking sector. According to the IAS Plus website, "the Bank Company Act of 1991 mandates reporting formats and disclosure based on BAS 30, which is similar to IAS 30." However, IAS 30 was replaced by IFRS 7 in 2005 and the latter was adopted in Bangladesh in July 2008. The World Bank also pointed out that "the banking regulator has no mechanism to monitor and enforce accounting and financial reporting requirements" (p. 7). In terms of Bangladesh’s adoption of international accounting standards, a 2003 World Bank review of the accounting and auditing environment in Bangladesh noted that national practices were not in line with internationally acceptable standards and suffered from "institutional weaknesses in regulation, compliance, and enforcement of standards and rules." The World Bank therefore recommended improving the accounting and auditing framework by adopting International Financial Reporting Standards (IFRSs) without any modifications and setting up an independent oversight body for enforcing international standards. As part of its efforts towards convergence, per Deloitte IAS Plus website, as of 2007 the Institute of Chartered Accountants of Bangladesh (ICAB) adopted 31 IFRSs as Bangladesh Accounting Standards. These standards, however, are based on an older version of IFRSs. In 2008, according to the ICAB website, Bangladesh adopted additional four new IFRSs. The national standards are mandatory for all listed companies, including banks. In a 2009 Action Plan, the ICAB reiterates its commitment to convergence and makes clear that it will be adopting international standards on an ongoing basis.
II22. Adequate supervisory measures to ensure timely corrective action.
The 2005-2006 annual report of the Bangladesh Bank mentions that, in view of ineffective management of the NCBs which resulted in low earning, large classified loans and sharp provisioning and capital shortfalls, the Bangladesh Bank imposed restrictions on them, including requiring them to sign MoUs with the Bangladesh Bank to improve their performance. There is little further information publicly available as to Bangladesh's compliance with this principle.
II23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.
There is insufficient information publicly available regarding Bangladesh's compliance with this principle.
II24. International exchange of information with other supervisors.
There is insufficient information publicly available as to Bangladesh's compliance with this principle.
II25. Supervision of local operation of foreign banks and information sharing with home country supervisors.
There is insufficient information publicly available with respect to Bangladesh's compliance with this principle.
