The Ministry of Finance (MoF) has agreed to a proposal of the International Monetary Fund (IMF) to give the Bangladesh Bank (BB) the authority to fire managing directors (MDs) of the state-owned banks (SoBs) -- both commercial and specialised ones -- found guilty of any wrongdoing.

But, the ministry still remains rigid on the issue of authorising the central bank to dismiss directors, chairmen or abolish the boards of the banks concerned, highly placed sources in the MoF and BB said.

The enhanced power would be delegated to the BB by amending the existing Bank Company Act (BCA), 2003. The final draft of a bill seeking to amend the said Act is almost ready for submission to the Cabinet Division for approval.

The partial acceptance of IMF suggestion has already been conveyed to the local office of the Fund, sources said.

Finance Minister AMA Muhith had at least two meetings with Eteri Kvintradze, IMF Resident Representative in Dhaka, in the current month to sort out differences over amendments to the BCA, 2003, particularly on BB and SoBs, it is learnt.

A finance ministry official said the IMF local office has accepted the latest stance of the government on empowering the BB in line with its suggestion, though partially.

He said the BB is yet to be competent enough to exercise absolute power to regulate state-owned banks as suggested by the IMF.

"We have retreated from our earlier position, at least. Any abrupt power transfer from finance ministry to BB for regulating the government-owned banks could prove to be too much because of the poor monitoring capacity of central bankers," a senior finance ministry official told the FE.

However, top BB officials said much would depend on the position of IMF's upcoming mission. The Extended Credit Facility (ECF) mission of the IMF is scheduled to arrive in Dhaka on November 27 next to review the development of reform measures in financial sector including the revenue issues.

Under the ECF programme, the multilateral lending agency asked the government to empower the BB to dismiss bank directors, managing directors and abolish boards of directors of all SoBs, if needed.

News: The Daily Financial Express/Bangladesh/20-Nov-12

Banks' exposure to the stockmarket is now well below the legal limit due to the downward trend of the market and a cautious policy adopted by the banks.

Banks' total exposure to the share market, as of September 30, stood at Tk 16,988 crore, which is 3.10 percent of their total liabilities, according to data from Bangladesh Bank.

Rules say banks can invest up to 10 percent of their liabilities in the stockmarket, but the highest exposure by any bank stood at 7 percent.

The four state-owned banks held 3.29 percent of their liabilities, or Tk 4,676 crore, in the capital market, while 23 of the private commercial banks had 3.94 percent of their liabilities, or Tk 10,299 crore.

Holdings of the six Islamic banks were even less: 1.53 percent of their liabilities, or Tk 1,500 crore.

Apparently, the government indirectly encouraged banks to invest in the share market, as per a senior official of Janata Bank preferring to remain unnamed.

But the banks were put off by the sluggish trend of the market. “Many banks suffered losses after investing in the stock market, which brought down their third quarter profits,” a banker said.

An official of Al-Arafah Islami Bank said the banks have taken on a measured approach after all the criticism they have received over their market exposure.

However, some banks are still investing considerably to recover their losses.

“Yet the stockmarket is not showing any bullish trend,” the Al-Arafah official said.

After the current government assumed power in 2009, the stockmarket showed a bullish trend, as a result of which many banks made invested beyond their limits.

In 2010, the share market, however, plunged into a bearish trend, and the banks' heavy exposure came under criticism from various quarters then.

A high official of the central bank said the banks' exposure in the share market in absolute terms is still Tk 1,000 crore more than the same period last fiscal year.

The banks' present investment in the stockmarket, in absolute amounts, is much higher than in many countries of the world.

The International Monetary Fund and the Asian Development Bank recommended to the government that the banks' investment in the capital market should be 25 percent of the bank's capital instead of its deposits (liabilities).

“All over the world banks' investment in the share market is related with capital, not deposit,” a BB official said.

The finance ministry official said the government is actively considering the IMF and the ADB recommendations, but they would like the investment threshold to be 40 percent, instead of 25 percent of capital.

News: The Daily Star/Bangladesh/20-Nov-12

the World Bank concluding a two-part summary of its latest report on Bangladesh titled 'Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth: Opportunities and Challenges'

It is important to ensure that growth is inclusive. Growth has been pro-poor in Bangladesh in the sense that it came with a significant reduction in the number of absolute poor. Income inequality remains high, but the good news is that consumption grew for poor and non-poor alike over the past decade. Similarly, the distribution of economic opportunities has remained inequitable, but opportunities have increased for all deciles over time.

Notwithstanding its achievements in poverty reduction, the size of Bangladesh's vulnerable non-poor remains very large. Simply moving from the national poverty line of US$1.09 per day to the international US$1.25 per day line increases the headcount ratio from 31.5 per cent to 43.25 per cent. The pace of poverty reduction in the last two decades slows considerably with the raising of the poverty line. Thus, while the 'Cost of Basic Needs'-based poverty headcount rate has declined rapidly in the past three decades, vulnerability has not. Large numbers of people are at the margin, indicating potential vulnerability to myriad idiosyncratic or covariate shocks to income and/or expenditures. Bangladesh has almost 81 million people in the US$1.09-US$2.00 per day range.

Vulnerability varies by region and household characteristics. Bangladesh can make growth much more inclusive by focusing on enhancing the human capacities of the poor and vulnerable and by strengthening social insurance mechanisms. Inclusion is also helped by an enabling environment for local economic development in small and medium-size cities by connecting them to markets and creating a level playing field in the provision of basic services.

Growth also needs to be sustainable. How can this accelerated growth be sustained given the challenges to growth posed by climate change and unplanned urbanisation? Both these issues are increasingly affecting growth and need to be on the forefront of the development agenda in Bangladesh.

As one of the most climate-vulnerable countries in the world, growth in Bangladesh is eroded through both ex-post and ex-ante channels. Ex-post macro effects include the direct effects of climate phenomena such as sea-level rise, changes in crop yields, and floods after they occur. Over the next decade, growth could be 2.0-6.0 percentage points lower, depending on the frequency of flooding. Ex-post impacts of climate change include depression of labour demand, with demand for low-skilled workers declining more than that of skilled workers. Most of the effects of climate change will be felt a few decades from now and these impacts on the economy are only likely to worsen. These national level estimates capture impacts of climate change after they occur.

But what about the ex-ante impacts of climate change before the shocks hit? Taking a micro view by looking at how households alter their behaviour in anticipation of a climate risk and how this affects productivity and growth, it can be said that by anticipating climate risks, households can diversify employment of its members to hedge against such risks. While this is good if diversification happens due to "pull" factors that attract people to higher productivity jobs, evidence suggests that climate-related "push factors" could lead to sub-optimal employment choices that lower productivity, welfare and growth under certain conditions. Adopting policies that encourage climate-resilient sectors as well as helping households cope with climate variability will help Bangladesh alleviate the impact of climate change on growth.

While further urbanisation offers opportunities to accelerate growth, it also comes with risks to sustainability if not managed properly. Based on salient features of urbanization in Bangladesh today, it is important to have an urban vision for a middle-income Bangladesh. Given its high urban population density and low economic density (GDP or value added per square km), it is argued that Bangladesh needs to substantially increase its economic density to become a middle-income country by 2021. This could happen if Bangladesh had taller "mountains" (higher value added per square kilometre) around its current growth centers in Dhaka and Chittagong and/or increased the number of "hills" (created alternate growth centers). Accelerated growth can be sustained only if the urban space is competitive i.e., well connected, livable, and innovative.

These three objectives could be achieved by a three-pronged policy approach that focuses on infrastructure, institutions, and incentives. Four strategic directions are provided that point to improving Dhaka's competitiveness, leveraging Chittagong's natural advantage as a port city, creating an enabling environment to foster local enterprise in smaller cities, and finally, locating Export Processing Zones (EPZs) strategically.

The reform agenda is vast for Bangladesh to become a middle income country (MIC) by 2021. Real gross domestic product (GDP) growth would have to accelerate by a couple of percentage points from its current level. Where would this come from? Would it be inclusive and sustainable? A comprehensive list of actions across several fronts is proposed for the purpose.

It is interesting to note that at least four policy actions are important across all the objectives of accelerating growth, making it inclusive, and ensuring that it is sustainable. To help prioritise, the focus here is on key reforms that cut across the three main themes, while recognising that bold actions across all fronts are necessary if Bangladesh is to reach its goals. These cross-cutting action areas are infrastructure, land, human development and the business regulatory environment:

News: The Daily Financial Express/Bangladesh/19-Nov-12

Lee, Soon Woo

Woori Bank chief due tomorrow

President & Chief Executive Officer of Woori Bank Korea Lee, Soon Woo arrives in Dhaka tomorrow ( November 20) on a two-day official visit in Bangladesh.

During his stay, he will meet Abul Hasan Mahmud Ali ,Minister for Disaster Management & Relief for donating 5000 pieces of T-Shirts as a part of 'Glocal CSR activities'.

Mr Woo will also meet Dr Atiur Rahman ,Governor of Bangladesh Bank and corporate customers of Woori Bank Bangladesh, visit Woori Bank Dhaka for CSR Programme, factories of Corporate Customer of Woori Bank Bangladesh located at Dhaka Export Processing Zone.

He will be accompanied by high officials of Woori Bank Korea.

News: The Daily Financial Express/Bangladesh/19-Nov-12

Md Abdus Salam in the third of his four-part article entitled 'Necessity of alternative financial system'

From the operational point of view, the Islamic banking system is based on prohibition of interest rates and sharing risks with the loan recipients and the investors. Conventional banks' capital intermediation activity is based on payment of an interest rate and is determined in the percentage of a stake set in the contract.

Islamic banking has shown a new conception of the relationship between economic activity and religion. Its "raw material" is not money but a new network of relations, collaborations and participations, not aimed at dividend maximisation but a new approach to the conduct of business, in which moral motivations and sustainable development could find a place.

Objectives of Islamic banking: In line with the principles of maqasid-al-shariah, Islamic banks pursue the following objectives in their operations:

n Support promotion of economic development with distributive justice.

n Optimum allocation of scarce resources by allocating financial resources in terms of profitability.

n Ensure equitable distribution of income and resources among the participating parties: the bank, the depositors and the entrepreneurs.

Strength and efficiency of Islamic banking: Islamic banking, essentially known as profit-loss-sharing banking, is conceived as more production-oriented and growth-promoting than conventional banking. This is because such a bank's earnings are directly linked to the earnings generated from the venture financed by it. Further, replacement of interest with the principle of profit-loss sharing increases the opportunity of investments in an economy. It also promotes efficient allocation of financial resources, ensures equitable distribution of income and promotes stability in the economy. Thus, Islamic banking is efficient by all macroeconomic efficiency considerations.

Investment decision in conventional banking: In conventional banking, the rate of return to the bank is fixed regardless of the profitability of the project it has financed. The case is opposite what happens with the Islamic banking.

Investment decision in Islamic banking: Under Islamic banking (technically known as the profit-loss sharing system of investment financing), the bank receives a variable rate of return as it shares a percentage of the profit earned by the entrepreneur. Thus, the profit-loss-sharing system of investment financing may be termed a Variable Return Mechanism (VRM). Since the Islamic banking system does not charge interest on any financing transaction, neither the bank nor the client receives or pays a fixed rate of return on an investment financed.

Efficient allocation of resources and Islamic banking: The Islamic banking system is very efficient in allocating resources in the economy. Allocation efficiency is concerned with the best possible utilisation of the community's scarce financial resources so as to attain the maximum benefit for the society. There are two broad ways to promote economic welfare in a world of scarcity: (a) prioritise the projects in order of social benefits and allocate the resources accordingly until the resources are exhausted, and (b) meet each obligation with the least possible amount of resources.

News: The Daily Financial Express/Bangladesh/19-Nov-12