Financial Soundness Indicators for Financial Sector Stability in BAN Gladesh

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Fin ancial Soundness Indicators for Financial Sector Stability in BAD NGLA ESH

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Asian Development Bank. Financial soundness indicators for financial sector stability in Bangladesh Mandaluyong City, Philippines: Asian Development Bank, 2015.

1. Financial sector. 2. Financial soundness indicators. 3. Encouraged indicators. 4. Asia and the Pacific. 5. Investment climate. I. Asian Development Bank.

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Tables and Figures ...... iv Abbreviations ...... vi Foreword ...... vii Executive Summary...... ix

1. Introduction...... 1

2. The Economy and Financial System of Bangladesh ...... 2 2.1 Macroeconomic Environment...... 2 2.2 Financial Sector Structure and Trends...... 5

3. Financial Soundness Indicators in Bangladesh...... 9 3.1 Structure of the Banking System in Bangladesh...... 9 3.2 Trend in Core Indicators...... 10 3.3 Trend in Encouraged Indicators...... 19

4. Recent Developments in the Financial Sector of Bangladesh ...... 23

5. Conclusion and Further Development...... 26

Appendix: Availability of Financial Soundness Indicators of Bangladesh...... 27 1. Core Indicators...... 27 2. Encouraged Indicators...... 28

References...... 30

iii T ables and Figures

Tables Table 1: Percentage of Asset Holdings by Four Types of Banks...... 9 Table 2: Percentage of Deposit Holding by Four Types of Banks...... 10 Table 3: Regulatory Capital to Risk-Weighted Assets, BB data...... 10 Table 4: Regulatory Capital to Risk-Weighted Assets, IMF data...... 11 Table 5: Regulatory Tier 1 Capital to Risk-Weighted Assets ...... 11 Table 6: Nonperforming Loans Net of Provisions to Capital (%) ...... 11 Table 7: Nonperforming Loans to Total Loans by Types of Banks (%), BB data...... 12 Table 8: Nonperforming Loans to Total Loans by Types of Banks (%), IMF data...... 13 Table 9: Ratio of Net Nonperforming Loans to Net Total Loans by Types of Banks (%)...... 13 Table 10: Sector-Wise Distribution of Loans to Total Loans (%), BB data...... 14 Table 11: Sector-Wise Distribution of Loans to Total Loans (%), IMF data...... 14 Table 12: Return on Assets by Types of Banks (%), BB data...... 15 Table 13: Return on Assets by Types of Banks (%), IMF data...... 15 Table 14: Return on Equity by Types of Banks (%), BB data...... 16 Table 15: Return on Equity by Types of Banks (%), IMF data...... 17 Table 17: Net Interest Margin (%)...... 17 Table 16: Interest Margin to Gross Income (%) ...... 17 Table 18: Noninterest Expenses to Gross Income (%)...... 17 Table 19: Noninterest Income to Total Assets (%)...... 18 Table 20: Liquid Assets to Total Assets (Liquid Asset Ratio) (%)...... 18 Table 21: Liquid Assets to Short-Term Liabilities (Liquidity Ratio) by Types of Banks (%), 2000–2011...... 19 Table 22: Net Open Position in Foreign Exchange to Capital...... 19 Table 23: Bank Capital to Assets Ratio (%), 2000–2008...... 19 Table 24: Weighted Average Deposit and Lending Rates (%), 2000–2011...... 20 Table 25: Spread between Reference Lending Rate and Deposit Rate, World Development Indicators Data (%), 2000–2010...... 20 Table 26: Monthly Weighted Average Rate of Interest on Commercial Lending and Deposits (3 months to less than 6 months)...... 20 Table 27: Monthly Weighted Average Interest Rate Spread for Different Bank Groups...... 21 Table 28: Asset to Total Financial System Assets (%)...... 21 Table 29: Asset to Gross Domestic Product (%)...... 21

Table A1: Availability, Frequency and Coverage, Source, and Description of Core Financial Soundness Indicators...... 27 Table A2: Availability, Frequency and Coverage, Source, and Description of the Encouraged Financial Soundness Indicators...... 28 iv v

Figures Figure 1: Real GDP Growth Rate, 2001–2012 ...... 2 Figure 2: Export and Import (% of GDP), 2000–2011...... 2 Figure 3: Annual Growth Rate of Imports, 2002–2012...... 3 Figure 4: Annual Growth Rate of Exports, 2002–2012...... 3 Figure 5: Balance of Payments ($ million), 2001–2012...... 3 and Figures Tables Figure 6: Total Remittances ($ million)...... 4 Figure 7: Inflation Rate (%)...... 4 Figure 8: Exchange Rate of Taka vs US Dollar...... 5 Figure 9: Government Revenue and Expenditure (% of GDP)...... 5 A bbreviations

ADB – Asian Development Bank BB – Bank of Bangladesh DMC – developing member country FI – financial institutions FSI – financial soundness indicators GDP – gross domestic product IMF – International Monetary Fund MFI – microfinance institutions PCB – private commercial banks

vi Abbreviations Foreword

ince the outbreaks of the Asian financial crisis in the late 1990s and the global financial turmoil in 2007, assessing the strengths and weaknesses of a financial sector based on a set of financial Sindicators has increasingly become important. The assessment is needed to mainly identify any potential problems that may lead to vulnerability in the financial sector that can result in a financial crisis. It is expected that by doing so, a set of strategic policies and regulations, as well as actions, can be implemented to prevent the crisis.

Shortly after the Asian financial crisis in 1997, the Asian Development Bank (ADB) helped central banks of selected developing member countries (DMCs) to identify, compile, and analyze about 30 monetary and financial statistics and macroprudential indicators to identify potential problems in the financial sector to prevent another crisis. This was followed by an initiative on an early warning system, with a prototype developed to detect the region-wide economic and financial vulnerabilities among members of the Association of Southeast Asian Nations (ASEAN), the People’s Republic of China, Japan, and the Republic of Korea.

The development and analysis of a set of financial indicators should help policy makers to identify the strengths and vulnerabilities of a financial system so that they can take preventive actions to avert a crisis. The International Monetary Fund (IMF) has initiated a number of initiatives in this area. In 1999, it initiated the collection and assessment of financial stability indicators by the joint IMF–World Bank Financial Sector Assessment Program, which was mainly to monitor financial system fragility. Following broad consultations in 2000, the IMF, in collaboration with the International Accounting Standards Board (IASB), the Bank for International Settlements (BIS), the Basel Committee for Banking Supervision (BCBS), and other international and regional organizations, published a compilation guide on financial soundness indicators (FSIs), which were based on aggregate bank balance sheet and income statement information and aggregate indicators of financial statements of nonfinancial firms and nonbank financial markets.

The FSIs consist of two sets of indicators: core and encouraged indicators. The core indicators consist of 12 indicators to measure potential vulnerabilities of deposit-taking institutions, which cover capital adequacy, asset quality, earnings and profitability, liquidity, and sensitivity to market risks. The encouraged indicators are collected on a country-by-country basis to assess the soundness of other financial sectors such as other players (other financial corporations), borrowers (households and nonfinancial corporations), and related markets (securities and real estate). Currently, about 96 countries have reported regularly their FSIs to IMF, which maintains the database.

This report is the outcome of the regional technical assistance project, Strengthening Institutional Capacity to Compile and Analyze Financial Soundness Indicators for Investment Climate Assessment (RETA 7743), which is supported by the Investment Climate Facilitation vii viii

Fund under the Regional Cooperation and Integration Financing Facility. This report describes the development of FSIs for Bangladesh and analyzes FSIs to identify the key challenges faced by the

Foreword financial sector that must be addressed to support the financial sector stability in the country.

A large number of FSIs are not available yet for Bangladesh, notably for institutions outside the formal banking sector such as nonbank financial institutions, insurance companies, and microfinance institutions. The key core indicators of FSIs can be calculated regularly from the existing data but others are still not readily available, including for encouraged indicators. The systematic disclosure system of financial data from the existing financial institutions to the central bank and Ministry of Finance needs to be improved to ensure a smooth process of data processing and availability. The FSI system in Bangladesh requires further improvement in terms of coverage, frequency, timeliness, and quality to make the indicators more useful and widely available.

The results of this study can be used to strengthen the institutional and statistical capacities of Bangladesh to routinely collect, compile, analyze, and disseminate internationally comparable FSIs that will help improve the country’s financial surveillance, investment climate assessment, and policy- making process in the financial sector that is key for financial sector stability and performance.

The author of this report is Dr. Selim Raihan, Professor, Department of Economics, University of Dhaka, Bangladesh and the Executive Director, South Asian Network on Economic Modeling (SANEM). The insights contained in this report are also the results of the collaborative efforts of many. In particular, we would like to express our appreciation to the government and nongovernment institutions for their contributions and participations in various workshops and seminars held in Bangladesh conducted under the project.

Guntur Sugiyarto, as the project leader, edited the report with the help from Josef T. Yap and John West. Douglas Brooks, as the direct manager in preparing the report, provided insightful comments and suggestions throughout the various versions of the drafts. Eric Suan helped organize the day-to-day project implementation, as well as prepare this publication, while Modesta De Castro provided administrative assistance. To ensure the accuracy and consistency of the report, Teri Temple acted as the copy editor/proofreader. ADB’s Department of External Relations (DER) helped in publishing the report, while Joe Mark Ganaban did the design, layout, and typesetting of the publication.

Rana Hasan Director Development Economics and Indicators Division Economic Research and Regional Cooperation Department E xecutive Summary

his report describes the development of financial soundness indicators (FSIs) for Bangladesh and the analyzes how FSIs can be useful for identifying the key challenges to support financial Tsector stability in the country. During 2001–2012, Bangladesh maintained healthy GDP growth of 5.9% per annum. From 2000 to 2011, its trade orientation increased remarkably, with the import to GDP ratio rising from 19.2% to 31.6%, and the export to GDP ratio up from 14.0% to 22.9%, driven by spectacular growth in garment exports. Bangladesh is now the world’s second-largest garment exporter, after the People’s Republic of China. Bangladesh’s balance of payments also benefited from remittance inflows, as they rose from $2.5 to $12.8 billion from 2002 to 2012. Inflation, however, also picked up from less than 2.0% in 2001 to around 10.0% in 2012, and the exchange rate of the Bangladeshi taka moved up gradually over the same period.

The structure of Bangladesh’s banking system has changed significantly. In 2001, state- owned commercial banks (SCBs) accounted for 46.5% of bank deposits, while private commercial banks (PCBs) had only 34.8%. By 2010, the situation had swung around, with the PCBs advancing to 58.8% by capturing the market share of SCBs, whose share dropped to 28.5%. Under the Basel-II, Bangladesh’s banks were instructed to maintain the minimum capital requirement at 10.0% of the risk-weighted assets, and after the supervisory review process, the banks were directed to maintain an even higher level. The new Basel-III regulatory framework will be fully implemented in 2019, with a phase-in period beginning in 2013.

The overall trend over the last decade has shown that banks have become more capable of covering possible risks to protect depositors and creditors, but SCBs and state development banks have not been able to meet the adequate capital requirements. From 2007 to 2011, Tier 1 capital to risk-weighted assets showed an improvement and since 2000 the nonperforming loan ratio has also been declining for all banks. The share of bank loans to the private sector increased from 91.0% in 2002 to 96.0% in 2011, driven by loans to the manufacturing sector that corresponded with the declining loans to the public sector. The return on assets of banks increased gradually from 2000 to 2011, but the trends differed across types of bank, with the ratio of private banks higher than those of state banks. The return on equity ratio for all banks showed a fluctuating and inconsistent trend, but the ratio for private banks was mostly higher than other banks. The overall banking sector experienced a rise in interest margin to gross income ratio from 2007 to 2011, and an increase in the liquid assets to total assets ratio between 2000 to 2011. Private and foreign commercial banks showed consistently high liquidity ratios.

A large number of FSIs are not available yet for Bangladesh, notably outside the formal banking sector including nonbank financial institutions, insurance companies, and microfinance institutions. Recent developments in Bangladesh’s financial sector include some automation and ix x

technological development, but, looking ahead, a big challenge for Bangladesh will be to improve the coverage, frequency, timeliness, and quality of FSIs to make them more available to a wider audience. At the macro level, the country also needs to improve its investment climate condition, especially in the areas of infrastructure, telecommunication, electricity, transport, access to land, tax payment compliance, labor education, enforcement contracts, and macroeconomic stability.

Executive Summary Executive 1. Introduction

SIs are a set of indicators compiled to monitor the health and soundness of financial institutions and markets, and of their corporate and household counterparts. FSIs include Fboth aggregated information on financial institutions and indicators that are representative of markets in which financial institutions operate. The development of these indicators is coordinated by the International Monetary Fund (IMF), with the support of its member countries and other international organizations.

The main objective of developing the FSI system is to ensure the availability of internationally comparable data on the stability of financial systems for a large number of countries so that potential vulnerability can be detected and crisis can be avoided. FSIs of all participating countries are available on the home page of the IMF.

Against this backdrop, this paper reviews the available FSIs of Bangladesh and highlights the problems associated with it. The organization of the paper is as follows: section II provides a brief overview of the economy of Bangladesh; section III analyzes the trends in the available FSIs in Bangladesh; section IV discusses recent developments in the financial sector in Bangladesh; and finally, section V concludes. Appendix 1 presents a review on the availability of FSIs of Bangladesh.

1 2.T he Economy and Financial System of Bangladesh

2.1 Macroeconomic Environment

angladesh has been able to maintain healthy rates of growth in real GDP during 2000s (Figure 1). The average growth rate from 2001–2012 was 5.9%. Since 2005 (except for the Byears 2006 and 2010) the growth rates have been over 6.0%. Bangladesh has been considered as one of the high-growth countries in recent years.

Figure 1: Real GDP Growth Rate, 2001–2012

Growth Rate () Rate Growth Source Bangladesh Bank Annual Report

During the 2000s, Bangladesh’s trade orientation increased quite remarkably (Figure 2). In 2000, Bangladesh’s import to GDP ratio was 19.2%, which increased to 31.6% in 2011 indicating a 64.6% rise in that ratio during that time. Also the export to GDP ratio increased from 14.0% to 22.9%, indicating a 63.6% rise during the same period. Imports and exports as a percent of GDP only declined during 2008 and 2010 due to the global economic crisis. Bangladesh’s remarkable export performance has primarily been driven by the spectacular growth performance of the ready-made garment industry. In recent years, Bangladesh has turned into the second-largest exporter of wearing apparel in the world after the People’s Republic of China.

Figure 2: Export and Import (% of GDP), 2000–2011 of GDP of Export Import Source World Bank World Development Indicators (accessed on June ) 2 except in2002(Figure 5).Thishasbeenmainlydueto the highgrowth inexports andremittances. preceding 2years. experienced highgrowth, at 45.0%and38.0%respectively, partially dueto thelow growth inthe years, the growth rates of imports and exports have been very high. In 2012, both imports and exports Also, during the global economic crisis, the growth rates slowed down. However, except for those From 2001 to 2012, Bangladesh maintained surpluses in the balance of payments in all years Except for 2003,thegrowth rates of imports andexports have beenpositive (Figures 3and4).

()

Growth rate – – Source BangladeshBankMonthly Economic Trend various years Source BangladeshBankMonthly Economic Trend various years Source BangladeshBankAnnualReport Growth rate ()

Million US – –

Figure 5:Balance of Payments ($million),2001–2012 – Figure 3:AnnualGrowth Rate of Imports, 2002–2012 - Figure 4:AnnualGrowth Rate of Exports,2002–2012 –

The Economy and Financial System of Bangladesh 3 Financial Soundness Indicators for Financial Sector Stability in 4 Bangladesh increase andin2012,itstood at 81.8 taka perUSdollar. the highgrowth performances of exports andremittances. Since 2011,theexchange rate started to increased theexchange rate to 68–69,taka whichremained stable until 2010.Thiswas largely dueto However, the introduction ofat thefloating around exchange 57taka perUSdollar(Figure 8). rate 2000s. Before theintroduction of thefloating exchange rate in2003,theexchange rate remained point-to-point inflation rate. month average inflation rate stood at 10.6%. Asimilarpattern could beobserved inthe case of increased to 9.9%by 2008.It fell to 6.7%in2009andafter that started to rise.By 2012,the12- direction except theyear 2012.In 2001,the12-month average inflation rate was only1.9%,which (Figure 7). Thetwo measures of(point-to-point andmonthly inflation average) moved inthesame remittances inBangladesh(Raihan etal.,2009Raihan andUddin 2010). payments aswell asexchange rate stability. Studies indicate apositive poverty alleviation effect of 6).Thelarge inflow of remittances hasbeenhelpful inmaintaining astable balance of (Figure the remittance was only$2,501million,butby 2012ithadalready increased to $12,843.4 million Bangladesh experienced asharpriseintheinflow of remittances duringthe2000s. In 2002, Bangladesh hasingeneral beenableto maintain astable exchange rate againstthedollarduring The decade of the2000ssaw agradual riseintheinflation rate except the year 2009

Rate () Source BangladeshBankMonthly Economic Trend various years Note – Source BangladeshBankMonthly Economic Trend various years Million US

Figure 6:Total Remittances ($million) Figure 7:Inflation Rate (%) Point-to-point -Month average-Month from 14.5%in2001to 16.5%in2012. countries andSouthAsiancountries. Also,government expenditure aspercent of GDPincreased during the2000s,by 2012, theratio was only12.1%,muchlower thantheaverages for thedeveloping intermediaries that are completely unregulated. organizations (NGOs); anddiscrete government programs. Theinformal sector includesprivate Palli Karma Sahayak Foundation Samabay Bank,Grameen Bank,etc; nongovernment (PKSF), represented by specialized financialinstitutionslike House Building Finance Corporation (HBFC), Securities andExchange Commission, orany other enacted financial regulator. Thissector ismainly that are regulated but do not fall under the jurisdictionof the central bank, insurance authority, banks, etc., andmicrofinance institutions (MFIs). Thesemiformal sector includesthoseinstitutions institutions, insurance companies, capital market intermediaries like brokerage houses,merchant of regulation. The formal sector includes all regulated institutions like banks, nonbank financial semiformal, andinformal. Thesectors have beencategorized inaccordance withtheirdegree inancial Structure Sector and Trends 2.2

Bangladesh has a low government revenue to GDPratio (Figure 9). Despite some improvements F The financial system of Bangladesh is comprised of three broad fragmented sectors: formal,

TakaUS Source BangladeshBankAnnualReport of GDP Source BangladeshBankMonthly Economic Trend various years Figure 9:Government Revenue andExpenditure (%of GDP) Figure 8:Exchange Rate of Taka vs USDollar Government revenue Period average End period Government expenditure

The Economy and Financial System of Bangladesh 5 Financial Soundness Indicators for Financial Sector Stability in 6 Bangladesh of two types: significantly expandedwiththeentry of private banks.Currently, banksinBangladeshare primarily banks, two state-owned specialized banks,andthree foreign banks.In the1980s,bankingindustry (iii) (ii) (ii) (i) After independence, thebankingindustryinBangladeshstarted withsixstate commercialized (i) The financialmarket inBangladeshismainly of three types:

in Bangladeshisgoverned by theSecuritiesandExchange Commission (SEC). securities (shares), debentures, corporate bonds,andtreasury bonds.Thecapital market and theChittagong Stock Exchange. Theinstruments intheseexchanges are equity capital market isinstitutionalized by two stock exchanges—the Dhaka Stock Exchange and publicofferings of equityandbondinstruments. Thesecondary segment of the in Bangladeshisregulated by BankBangladesh,thecentral bankof Bangladesh. market, participated by the scheduled banks and financial institutions. The money market institutions) in Bangladesh. The only active secondary market is the overnight call money bills asinstruments. There are currently 15primarydealers (12banksand3financial and primarydealers asintermediaries; andsavings andlendinginstruments, andtreasury 1991 (amendedin2003);and currencies whenever itdeemsnecessary to maintain stability in the foreign exchange market. avoid any unusualvolatility inthe exchange rate, BBintervenes by buyingandsellingforeign free to buyandsellforeign currency onthespotandalsoinforward markets. However, to market demand and supply forces of the respective currencies. In the forex market, banks are domestic economy. Theexchange rate isbeingdetermined inthemarket onthebasisof for minimizingextreme swings intheexchange rate to avoid adverse repercussions onthe in thedetermination of theexchange rate, butimplements themonetary policyprudently the floating exchange rate regime on31May 2003.Under the regime, BBdoesnotinterfere capital issubjectto priorBBapproval, whichisallowed onlysparingly.Bangladeshadopted abroad, asalsoare capital gains,profits, anddividends.Investment abroad of resident-owned sector andportfolio investments of nonresidents through stock exchanges are repatriable investment inflows are permitted freely. Direct investments of nonresidents intheindustrial or disinvestment proceeds onnonresident foreign direct investment (FDI)andportfolio account, resident-owned capital isnotfreely transferable abroad. Repatriation of profits VIII of theIMFArticles of Agreement (1994). Asthetaka isnotconvertible inthecapital declared convertible incurrent account transactions (asof 24March 1994), basedonArticle of measures have beenadopted since the1990s.TheBangladeshicurrency, thetaka, was perform allthefunctionsof scheduledbanks. operate underthe actsthat are enacted for meeting thoseobjectives. Thesebankscannot F Capit Mone N Scheduled banks:bankstha oreign exchange market: Toward liberalization of foreign exchange transactions, anumber onscheduled banks: banks that are established for a special and definite objective and al market: Theprimarysegment of thecapital market isoperated through private y market: Theprimarymoney market iscomprised of banks,financialinstitutions, t getalicense to operate undertheBankCompany Actof registered significant growth in2010.Because of the slower pace of investment activities, reduced contribution to thecapital market. TheBangladesh capital market isgradually growing strong and Chittagong Stock DSE isthecountry’s Exchange Limited (CSE). primary bourse considering itsample distinct legislation, theGrameen BankOrdinance of 1983. programs. However, Grameen Bankisoutof thejurisdictionof theMRAasitisoperated undera have beenlicensed by theMicrocredit Regulatory Authority (MRA) to operate microcredit (v) seasonalloans,and(vi)loansfor disaster management. Asof 10October 2011,599institutions agricultural loans, microenterprisebased activities,(ii) loansfor loans,(iii) ultra-poor, (iv) be categorized into sixbroad groups: general (i) microcredit for self-employment- small-scale poor peoplehave directly benefited from microcredit programs. Credit services of thissector can poor peopleare engagingthemselves invarious income-generating activities andaround 30million and 81.0%of total outstanding loansof thesector. Through thefinancialservices of microcredit, programs, only10large MFIs andGrameen Bankrepresent 87.0%of total savings of thesector until today. Despite thefact that more thanathousandinstitutionsare operating microcredit the numberof MFIs aswell astotal membership, was phenomenalduringthe1990sandcontinues banks), specialized government organizations, andNGOs. Thegrowth intheMFIsector, interms of implemented by various formal financialinstitutions(nationalized commercial banksandspecialized of therural financialmarket (RFM) inBangladesh.Microcredit programs (MCP) inBangladeshare (v) Takaful Islamic insurance. following services: life (i) insurance, general (ii) insurance, reinsurance, (iii) microinsurance, (iv) and companies 1state-owned (including company). Insurance companies inBangladeshprovide the oneforeign(including company andonestate-owned company), and44are general insurance 62 companies are operating undertheInsurance Actof 2010.Ofthese,18are life insurance companies entry of private sector insurance companies andthefurther expansionof theindustry.At present, companies—one life andonegeneral—and oneforeign insurance company. Themid-1980ssaw the Act of 1991.Scheduledbanksare classified into the following types: BB, whichisempowered to dosothrough Bangladesh BankOrder of 1972andtheBankCompany There are two stock exchanges and inBangladesh—Dhaka Stock Exchange Limited (DSE) The member-basedmicrofinance institutions (MFIs) constitute a rapidly growing segment The insurance sector inBangladeshemerged after independence withtwo nationalized insurance (iv) (iii) (i) There are 52scheduledbanksinBangladesh that operate underfullcontrol andsupervisionof (ii)

F P Specializ S banks that are incorporated abroad. owned by private entities. owned by theGovernment of Bangladesh. objectives like agricultural orindustrialdevelopment. Thesebanksare alsofullyormajority owned by theGovernment of Bangladesh. oreign commercial banks(FCBs): Nine FCBs are operating inBangladeshasbranches of tate-owned commercial banks(SCBs): There are four SCBs whichare fullyormajority rivate commercial There banks(PCBs): are 30private commercial banks that are majority ed banks(SDBs): There are four specialized banksestablished for specific

The Economy and Financial System of Bangladesh 7 Financial Soundness Indicators for Financial Sector Stability in 8 Bangladesh or brokerage housesand1bankisintheprocess of doingso. not provide any marginal loan.Asof thiswriting,25bankshave established separate merchant banks brokerage houseorbothinorder to continue theirbrokerage ormerchant bankingactivities,and(ii) BB instructed bankstoestablish (i) separate subsidiariesinthe form of eitheramerchant bankor scheduled banks and nonbank financial institutions for stock market activities. As a regulatory stance, However,and Exchange Commission (SEC). BB,asaregulator of thebankingsector, regulates the a transparent andvibrant capital market. Theprimaryregulator of thestock market istheSecurities been strengthened and various steps have been taken to maintain market stability and to establish a situation of overheating iscreated, makingthemarket volatile. However, market monitoring has capital markets, alimited supplyof securities,andinvestors’ expectation for more profit, at times capital market was floodedwithhugeliquidity. Due to agrowing number of ordinary investors inthe interest rate on deposits and saving certificates, and increasing enthusiasm amongthepeople, 3. Financial Soundness Indicators in Bangladesh

3.1 Structure of the Banking System in Bangladesh

uring 2001 and 2010, the share of asset holdings by the SCBs and PCBs changed significantly (Table 1). During this period, the percent share of asset holdings by the SCBs declined by 38.7% Dwhile for PCBs, it increased by around 69.0%. Expansion of the private commercial banks reduced the role of the SCBs substantially. The SCBs lost market share due to (i) weak balance sheets that would not support rapid credit growth; (ii) slow growth of SCBs’ traditional borrowers and their high NPLs; and (iii) the SCBs’ unresponsive business processes (World Bank 2010). In general, loans and advances constituted the major portion of total assets and their growth played a major role in the corresponding asset holdings of the SCBs and PCBs (BB 2013). Rapid increases in traditional trade and working capital lending, increased term loans to industry, and lending to larger agricultural firms and small and medium enterprises (SMEs) were the main sources of private banks’ credit growth. In addition, SCB sector’s overall loan growth was limited administratively while one the SCB awaited privatization and the others participated in the restructuring program. The market shares of foreign banks and SDBs did not change that much during the period under consideration (World Bank 2010).

Table 1: Percentage of Asset Holdings by Four Types of Banks

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 SCBs 46.5 45.6 41.7 39.6 37.4 32.7 33.1 31.1 28.6 28.5 SDBs 11.8 11.4 10.2 9.7 9.7 7.8 7.3 6.7 6.6 6.1 PCBs 34.8 36.2 40.8 43.5 45.6 47.7 51.4 54.2 57.4 58.8 FCBs 6.9 6.8 7.3 7.2 7.3 11.8 8.2 8.0 7.4 6.6 All 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: SCBs = state-owned commercial banks, SDBs = specialized development banks, PCBs = private commercial banks, FCBs = foreign commercial banks. Source: Bangladesh Bank Annual Report, various years.

During 2001 and 2010, the percent share of deposit holdings by SCBs in total deposits decreased by 44.8%, while that for PCBs increased by 66.9% (Table 2). The main reason was market share of SCBs had been consistently captured by the PCBs during those years. The interest rate offered by the PCBs also remained significantly higher than that of the SCBs. On the other hand, deposit shares of SDBs and FCBs remained more or less the same even though FCBs paid the lowest interest rate to the depositors (Mujeri and Younus 2009).

9 Financial Soundness Indicators for Financial Sector Stability in 10 Bangladesh provisions to capital. weighted asset; regulatory (ii) Tier 1capital to risk-weighted asset; nonperforming and(iii) loansnetof climate changerisk,etc. There are three indicators of capital regulatory adequacy:(i) capital to risk- risk, interest rate risk,liquidityreputation risk,settlement risk,strategic risk,environmental and financial riskslike credit risk,market risk,operational risk, residual risk, core risk,credit concentration and othercreditors from potential shocksdueto losses that abankmight incur.It helpsabsorballpossible Appendix 1. to cover thepossible risksandprotect thedepositors andcreditors. Moving toward ahighcapital to the overall increasing trend of theratio over the 11 years proved that bankswere becoming more capable increased andmetthecondition of adequate capital ratio in2008.Despite a slight reduction in2010, (BB 2013).Between 2000and2011(June), theratio of capital to risk-weighted assets steadily higher thantheminimumrequired capital andsufficient to cover allpossible risksintheirbusinesses review process (SRP),bankswere directed to maintain alevel of “adequate” capital whichwas capital requirement (MCR) at 10.0%of therisk-weighted assets (RWA). Under thesupervisory to their balance sheets. Under Basel-II, banks in Bangladesh were instructed to maintain the minimum availability ultimately determine thedegree of robustness of financial institutions to withstand shocks either Basel-IorBasel-II.It measures thecapital adequacyof deposittakers. Capital adequacyand risk-weighted assets asthe denominator. Data are compiled inaccordance with theguidelinesof rend in Core Indicators 3.2 .1.1

T Capital adequacyfocuses onthetotal positionof banks’capital andtheprotection of depositors A.1 The following isthedescriptionof selected FSIs according to thelistof FSIs asdescribedin This indicator (Table 3)iscalculated usingtotal regulatory capital asthenumerator and A

l 0. 0. 0. 0. 0. 0. 0. 0. 0. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 All FCBs PCBs Ds57581...... 4.9 5.3 5.3 5.4 5.4 5.8 5.7 10.2 5.8 5.7 SDBs Cs5. 034. 284. 523. 972. 28.1 28.6 29.7 32.6 35.2 40.0 42.8 41.7 50.3 50.9 SCBs Source: BangladeshBank AnnualReport, various years. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs Source: BangladeshBankAnnualReport, various years. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs Cs4443414341–...... 11.7 –4.5 8.9 11.4 –7.3 9.0 9.3 0.4 6.9 11.6 –5.3 10.1 –5.5 7.9 9.6 –6.7 1.1 –7.5 6.7 9.1 –0.4 5.6 4.1 7.7 8.7 4.3 6.9 8.4 4.1 3.9 7.5 FCBs 4.3 3.2 PCBs 6.7 4.4 SDBs 6.7 SCBs Total Capital A R egulatory Capital to Risk-Weighted Assets 0020 0220 0420 0620 0820 002011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0999971. 0391981. 141. 0111.5 21.0 10.1 15.6 12.1 28.1 11.4 24.0 10.6 22.7 9.8 22.7 9.1 26.0 24.2 10.3 22.9 10.5 21.4 9.7 16.8 9.9 18.4 10.9 0120 0320 0520 0720 092010 2009 2008 2007 2006 2005 2004 2003 2002 2001 653. 084. 705. 355. 9160.9 59.1 56.6 53.5 51.3 47.0 44.3 40.8 36.9 36.5 ...... 6.1 7.0 8.4 8.5 8.1 7.2 7.2 7.3 7.0 6.9 Table 2:Percentage of Deposit Holding by Four Types of Banks Table 3:Regulatory CapitaltoRisk-Weighted Assets, BBdata dequacy

according to according to theIMFdata. estimates. For example,in2006,thisratio for theSCBs was 1.1%according to theBBdata but–2.1% presents thedata from theIMF.Apart from 2009and2010,there were variations inallother capital to risk-weighted assets (for allbanks)onlyreflects theimprovementPCBs and of FCBs. the highestduringperiodunderconsideration (BB2006a).Therefore, theoverall improvement of from 4.1%in2004 to –0.4%in2005.In contrast, FCBs maintained 28.1%CARin2009,whichwas capital to risk-weighted than 10.0%). Thecapital adequacyratio assets (greater (CAR) of SCBs declined from possible risks. In contrast, during these years, and FCBs PCBs maintained the adequate level of consideration. Therefore, thesebankswere notinasituation to protect theirdepositors andcreditors However, SCBs and SDBs could not meet the adequate capital requirement during the period under risk-weighted assets ratio meant the economy was moving toward a sounder financial environment. suggests that during2007and2011,thefinancial soundness of bankcapital to withstand losses from NPLs.Table 8 adequacy ratio andisanimportant indicator of thecapacity total regulatory capital can alsobe used.ThisFSIisacapital sectoral balance sheet; for cross-border consolidated data, Capital ismeasured astotal capital andreserves inthe provisions asthenumerator andcapital asthedenominator. of nonperforming loans(NPLs)less thevalue of specificloan increased to 8.8%(Table 5)(BB2011;BB2012a). during that time.In 2007,theratio was 7.8%,whichby 2011 suggested improvement of financialsoundness of thebanks (purest capital ratio) showed anincreasing trend, which During 2007and2011,Tier 1capital to risk-weighted assets of theBaselCommittee onBanking Supervision (BCBS). adequacy of deposit-takers basedonthecore capital concept guidelines of eitherBasel-IorBasel-II.It measures thecapital .1.3 .1.2 Meanwhile, there 4 are somediscrepancies between theBBdata andtheIMFdata. Table This indicator (Table 6)is calculated by taking thevalue This indicator iscompiled inaccordance withthe A A

akTp 0620 0820 2010 2009 Source: International Monetary Fund. 2012Financial Soundness Indicators. http://fsi.imf.org development =private banks,PCBs commercial banks,FCBs =foreign commercial banks. 2008 Note: IMF=International Monetary Fund, SCBs =state-owned commercial banks,SDBs =specialized 2007 2006 Bank Type oa uajse) . . 041. . . 11.3 9.7 9.3 11.7 10.4 9.3 5.6 SCBs Total (unadjusted) SDBs PCBs FCBs

R N egulatory Tier 1Capital to Risk-Weighted Assets onperforming LoansNet of Provisions to Capital Table 4:Regulatory CapitaltoRisk-Weighted Assets, IMFdata 452. 382. 561. 21.0 17.1 15.6 28.1 23.8 22.8 24.5 21737990899511.7 9.5 8.9 9.0 7.9 7.3 –2.1 45–. 3304–. 71–4.5 –7.1 –7.3 0.4 –3.3 –5.0 –4.5 . 041. 211. 0411.5 10.4 10.1 12.1 11.2 10.4 9.0 years. Source: BangladeshBankAnnualReport, various 2011 2010 2009 2008 2007 Year years. Source: BangladeshBank AnnualReport, various 2011 2010 2009 2008 2007 Year Table 6:Nonperforming Loans Net of (June) 2011 Table 5:Regulatory Tier 1Capital to Risk-Weighted Assets Provisions toCapital(%) (December) 2011 13.75 20.58 30.82 47.91 76.60 8.80 6.68 8.93 5.42 7.79 % % 11 Financial Soundness Indicators in Bangladesh Financial Soundness Indicators for Financial Sector Stability in 12 Bangladesh high as76.6%,whichcame down to 13.8%by 2011. improved quite dramatically. In 2007,thenonperforming loansnetof provisions to capital was as also large for those3years. which according to theIMFdata was muchlower (14.3%).In thecase of FCBs, thedifferences are the discrepancies are very large. For example,in2006,theBBdata showed avery highratio (33.7%), for this indicator from the IMF. Especially in the case of SDBs, for the years between 2006 and 2008, Bank 2010;BB2012b;2013). recovery mechanism,recovery drive andwrite-off measures helped to achieve(World this recovery reduction inthepressure of makingloans.Internal restructuring of thesebanksto strengthen theloan of theSCBs deteriorated gradually. Therecent reported reduction intheSCBs’ NPLsismainlydueto overall asset qualityof theSCBs was poorduringthisperiod.During 2006–2011, NPLto total loans canceling theaccumulated badloansbecause of thepoorqualityof underlyingcollateral. Therefore, loan provisioning for SCBs were predicaments. Moreover, thesebankswere nothistorically involved in payments by certain sectors (World Bank2010).Also,therecovery of problem loansandinadequate poor riskmanagement, andweak collections, butpressures to make loansandreduce debtservice suffered from large NPLs, reflecting notjust their ineffective procedures for identifying borrowers, assetspoor-quality that constituted amajorpart of theportfolio of thesebanks.In thepast,SCBs programs withoutproper supervisionandfollow-up. Thiseventually resulted in ahugebookingof the 1970sand1980s,SCBs andSDBs disbursed asignificant amount of loansunderdirected credit started to decline.Thishigherratio was mainlyattributable to large NPLsof SCBs andSDBs. During loans for allthebankshadbeendeclining(Table 7).Thisratio was highintheearly2000sandthen is intended to identify problems withasset qualityintheloanportfolio. balance sheet,notjusttheamount that isoverdue. ThisFSIisoften usedasaproxy for asset qualityand The loanamount recorded asnonperforming shouldbe thegross value of theloanasrecorded inthe loan portfolio NPLsbefore (including thedeductionof specificloan-loss provisions) asthedenominator. nonperforming(i) loansto total gross sectoral loansand(ii) distributionof loansto total loans. because of having significant portions of nonperforming assets. There are two indicators of asset quality: The highconcentration of loansandadvances indicates vulnerability of assets to credit risk,especially .2.1 A large NPL in a bank gives a bad signal about asset quality. Since 2000, the ratio of NPLs to total There are some discrepancies between theBB data andtheIMFdata. Table 8presents thedata This indicator iscalculated by usingthevalue of NPLsasthenumerator andthetotal value of the The asset composition of allcommercial banksshows theconcentration of loansandadvances. A.2 A

Source: BangladeshBankAnnualReport, various years. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs oa 493. 802. 761. 321. 0892736.1 7.3 9.2 10.8 13.2 13.2 13.6 17.6 22.1 28.0 31.5 34.9 Total Cs3. 703. 902. 142. 992. 141. 11.3 15.7 21.4 25.4 29.9 22.9 21.4 25.3 29.0 33.7 37.0 38.6 SCBs Ds6. 185. 744. 493. 862. 592. 24.6 24.2 25.9 25.5 28.6 33.7 34.9 42.9 47.4 56.1 61.8 62.6 SDBs PCBs FCBs A N sset Quality onperforming Loansto Total Gross Loans Table 7:Nonperforming Loans toTotal Loans by Types of Banks(%),BB data 0020 0220 0420 0620 0820 002011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 201. 641...... 2.9 3.2 3.9 4.4 5.0 5.5 5.6 8.5 12.4 16.4 17.0 22.0 ...... 2.9 3.0 2.3 1.9 1.4 0.8 1.3 1.5 2.7 2.6 3.3 3.4

their NPLs(BB2013). FCBs showed andPCBs asteep declineover theyears. Thisdeclinemeant excess provision against hadlowerPCBs nonperforming loanportfolios throughout theperiodof 2000to 2011.NNPLof suspense, whereas theSCBs hadexcess provision againsttheirNPLsin2011.Moreover, FCBs and but SDBs’ nonperforming portfolios were stillhighafter adjustment of actualprovision andinterest and interest expensein2005 respectively. Buttheirnonperforming portfolios were stillhighafter adjustment of actualprovision sharply during2000and2011.In 2005,theratios for SCBs andSDBs reached 13.2%and22.6%, NNPL to nettotal loans shows a drastic decline (Table 9). NNPL ratios of SCBs and SDBs was reduced Nonperforming loansnetof impairments iscalled thenetnonperforming loan(NNPL).Theratio of also suggests that industryandtrade accounted for more than70.0% of thedistributed loans. Statistics (BBS)andIMFdonotmatch because of thedifference inlevel of aggregation, the IMFdata distributed loans.Thesetwo sectors accounted for more than70.0%of thedistributed loans. manufacturing companies andcommerce andtrade dominated interms of larger share of thetotal the private sector accounted for a96.3%share of thetotal distributed loans.In theprivate sector, the publicsector in total loanshasdeclinedwhilethat of theprivate sector hasincreased. By 2011, loans to total loansfor theperiodbetween 2002and2011.Thissuggeststhat over timetheshare of an important vulnerability inthefinancial system. Table 10 presents thesector-wise distribution of nonresidents. Lackof sectoral diversification intheloanportfolio signalsthepotential existence of NPLsandbefore(including thededuction of specificloan-loss provisions) to resident sectors and to denominator. This FSI is an asset qualityindicator. It provides information on thedistributionof loans the sectoral balance sheet of the deposit-takers as the numerators and total gross loans as the .2.2 BB alsoprovides information ontheratio of netnonperforming loansto total loans. Table 11presents similar data from theIMF.Althoughdata of theBangladeshBureau of This indicator iscalculated usinglendingto eachof theinstitutionalsectors reported in A FCBs PCBs Ds1. 351. 412. 1824.6 21.8 24.1 24.1 11.7 13.5 14.3 SDBs Cs2. 902. 011. 4111.3 14.1 15.7 20.1 28.0 29.0 22.8 SCBs oa 281. 129073716.1 7.1 7.3 9.0 11.2 14.5 12.8 Total Source: BangladeshBankAnnualReport, various years. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs Source: International Monetary Fund -FSIOnline, 2012. development =private banks,PCBs commercial banks,FCBs =foreign commercial banks. Note: IMF=International Monetary Fund, SCBs =state-owned commercial banks,SDBs =specialized oa 882. 261...... 3131.3 2.0 13.5 10.0 1.3 1.9 18.3 1.73 1.9 17 2.8 5.9 19.0 5.1 23.6 12.9 7.1 22.6 14.5 23.0 13.2 7.2 38.3 17.6 9.8 48.0 28.3 FCBs 54.5 30.1 18.8 54.6 PCBs 32.8 22.6 34.1 SDBs 25.6 28.8 SCBs Total

Table 9:Ratio of Net Nonperforming Loans toNet Total Loans by Types of Banks(%) Sect Table 8:Nonperforming Loans toTotal Loans by Types of Banks(%),IMFdata oral Distribution of Loansto Total Loans 0020 0220 0420 0620 0820 002011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 551. 0583341818140904 . 0.2 0.0 0.45 0.9 1.4 1.8 1.8 3.4 8.3 10.5 10.5 15.5 01–. 0401–. 22–. 19–. 23–. –1.5 –1.7 –2.3 –2.0 –1.9 –2.6 –2.2 –1.5 0.1 –0.4 –0.3 –0.1 0620 0820 0021 2011 2011 2010 2009 2008 2007 2006 ...... 3.0 3.1 3.0 2.2 3.7 2.9 2.8 ...... 2.9 3.5 3.1 4.0 5.1 5.4 4.9 (BB 2006a).After 2005,NNPLof bothSCBs andSDBs declinedfurther 13 Financial Soundness Indicators in Bangladesh Financial Soundness Indicators for Financial Sector Stability in 14 Bangladesh income orassets (BB2013). supplemented interest by return margin, onequity(ROE), andratio of noninterest expensesto gross profitability, themost representative andwidelyusedindicator is return onassets (ROA), whichis and pay adequate dividendsto itsshareholders. Although there are various indicators of earningsand determines thecapacity to absorblosses by buildinganadequate capital base,finance itsexpansion, sound operation, absorb future contingent shocks,andstrengthen resilience. More specifically, this A strong earningsandprofitability profile ofabank reflectsitsability tosupport present andfuture A.3

Source: International Monetary Fund. 2012Financial Soundness Indicators. http://fsi.imf.org Note: IMF=International Monetary Fund. Other Households Construction Trade Forestry Agriculture Industry (other) Oil andgas Sector Source: BangladeshBureau of Statistics. Various years. Statistical Yearbook of Bangladesh.Dhaka. – =zero. 2.Private sector 1.Public sector Sector Financial institutions Others enterprises Nonfinancial public Others n.e.c employed persons Professional andself- profit organizations Private trustfundsandnon- Construction companies companies Transport andstorage Commerce andtrade Manufacturing companies professionals Agriculture and Local bodies Financial institutions autonomous bodies Autonomous andsemi- Government Earnings andP b) Others n.e.c corporations a) Nationalized sector Table 11:Sector-Wise Distribution of Loans toTotal Loans (%),IMFdata Table 10:Sector-Wise Distribution of Loans toTotal Loans (%),BBdata rofitability 00 .696 .391 .970 .161 6.40 6.19 29.15 29.07 6.61 270.02 41.48 27.8 40.65 7.09 42.43 26.95 27.30 41.33 7.79 28.70 41.19 96.29 28.26 39.00 9.12 96.16 27.75 37.30 95.95 26.63 39.17 9.23 96.43 35.40 9.62 95.44 32.69 94.22 9.86 93.84 95.6 10.05 92.20 90.93 0220 0420 0620 0820 002011 2010 2009 2008 2007 2006 2005 2004 2003 2002 .100 .500 – – – – 2.28 – 2.38 1.15 2.26 – 1.03 – 21.12 0.95 2.34 – 0.03 0.92 2.28 0.05 1.18 2.15 – 0.03 – 1.44 2.09 0.01 1.70 1.70 2.13 – 0.02 1.81 – 1.92 0.04 0.02 1.68 0.04 0.01 0.02 – 3.24 – 0.02 0.01 2.91 0.01 0.04 0.01 2.96 – 3.26 0.03 0.06 – 3.23 2.92 0.04 0.07 3.85 2.98 0.01 0.07 0.12 5.31 0.01 0.02 0.35 0.09 3.27 0.09 5.52 – 0.83 0.07 3.91 0.10 0.21 3.3 0.81 0.08 5.39 0.34 3.71 0.24 – 3.84 5.64 5.61 0.04 4.05 3.39 6.63 0.33 0.22 5.83 0.06 0.01 0.25 3.57 6.98 0.19 0.05 0.26 4.56 0.19 0.06 0.29 5.78 1.03 0.74 6.16 0.92 1.01 4.40 0.89 7.80 9.07 .531 .517 .117 .214 .80.90 0.88 2.17 1.44 2.42 12.77 13.55 1.74 1.62 13.50 13.51 1.73 2.05 12.34 15.15 1.91 1.92 10.89 10.35 1.73 2.19 11.20 2.35 8.87 2.11 3.12 1.66 2.95 1.24 0.85 0620 0820 2010 2009 2008 2007 2006 602. 251. 6.7 19.7 37.6 22.5 26.6 35.5 22.6 24.0 36.4 26.0 24.3 36.0 22.1 34.5 32.2 . . . . 6.8 7.0 0.0 4.7 5.7 3.6 0.7 0.5 4.8 6.9 3.3 1.6 1.8 4.7 6.8 3.4 0.9 2.1 3.3 7.7 4.1 0.8 2.4 8.2 1.8 the average value of capital over thesame period.Capital ismeasured astotal capital andreserves increasing numberof loss-making branches worsened thesituation (IMF2013). during that period.Thiscontributed significantly to weak growth in ROA of theSCBs. Moreover, the a weak trend during2006–2011(Table 13).Net interest margins for SCBs were always compressed data showed muchhigherlosses thanreported intheBBdata. TheROA of SCBs andSDBs showed presented inTable 13.Especiallyinthecase of SCBs andSDBs, for theyears 2006and2007,theIMF strong during2000and2011. consistent positive trend (BB2006a,2010a,2010b,2012b). TheROA of FCBs hadbeenconsistently hadaninconsistentand 2005,PCBs butsatisfactory trend, showed butduring2005–2011,PCBs a taxation (BB2013).The ROA of had beenhigherthanthoseof PCBs SCBs and SDBs. During 2000 2000 and2008.Thenegative earningof SDBs was found after adjustment of provision for baddebtand years, the ROA of the SCBs has increased. The ROA of SDBs was negative for most of the years during (BB 2006a).SCBs didnot have netincome after provision andtaxation (BB2007).However, inrecent to anegative figure in2005,andafter that it rose to 0%due to hugeprovisions andunderperformance of SCBs andSDBs showed afluctuating trend. During 2000and2005, ROA of theSCBs deteriorated 2000 and2011(Table 12).However, thetrend of ROA varied by typeof bank.For example,theROA takers’ efficiencyinusingtheir assets. Returnon assets foralltypes ofbanksincreased gradually during over thesameperiod.ThisFSIisanindicator of bankprofitability andisintended to measure deposit- (as recommended intheFSIGuide)by theaverage value of total assets (financialandnonfinancial) .3.2 .3.1 This indicator iscalculated by dividingnetincome before extraordinary items andtaxes by There are somediscrepancies between thedata of BBandIMF.TheIMFdata onROA are This indicator iscalculated by dividingnetincome before extraordinary items andtaxes A A

FCBs FCBs PCBs PCBs Ds–. 06–. 0602–. 0.0 –0.3 0.2 –0.6 –0.6 –0.6 –0.9 SDBs Ds–. . . . 02–. 02–. 0604020.1 0.2 0.4 –0.6 –0.3 –0.2 –0.1 –0.2 0.0 0.3 0.7 –3.7 SDBs Cs–. 03121011061.3 0.6 1.1 1.0 1.2 –0.3 –9.2 SCBs Cs01010101–. 0100000710111.3 1.1 1.0 0.7 0.0 0.0 –0.1 –0.1 0.1 0.1 0.1 0.1 SCBs Source: International Monetary Fund -FSIOnline, 2012. development =private banks, PCBs commercial banks,FCBs =foreign commercial banks. Note: IMF=International Monetary Fund, SCBs =state-owned commercial banks,SDBs =specialized oa –...... 1.5 1.3 1.8 1.4 1.6 1.1 –2.1 Total Source: BangladeshBankAnnualReport, various years. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs oa 00070505070608091214181.5 1.8 1.4 1.2 0.9 0.8 0.6 0.7 0.5 0.5 0.7 0.0 Total

R R eturn onEquity (ROE) eturn onAssets (ROA) 0020 0220 0420 0620 0820 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 ...... 3.2 2.9 3.2 2.9 3.1 2.2 3.1 3.2 2.6 2.4 2.8 2.7 ...... 1.6 2.1 1.5 1.4 1.3 1.1 1.1 1.2 0.7 0.8 1.1 0.8 0620 0820 2010 2009 2008 2007 2006 ...... 3.2 3.6 2.9 3.2 2.9 3.2 3.3 ...... 1.6 1.6 2.1 1.6 1.9 1.9 1.5 Table 13:Return onAssets by Types of Banks(%),IMFdata Table 12:Return onAssets by Types of Banks(%),BBdata (June) 2011 (December) (December) 2011 2011

15 Financial Soundness Indicators in Bangladesh Financial Soundness Indicators for Financial Sector Stability in 16 Bangladesh situation (IMF2013). squeezed netinterest margin. Moreover, the increasing number of loss-making branches worsened the for SCBs were always constrained duringthat period.Therefore, like ROA, ROE was alsoaffected by the 2006, ROE showed diverse andinconsistent figures, especially for SCBs andSDBs. Net interest margins Especially inthecase of SCBs, thefigures differ widely forthe years 2006and2007. During2000and presented inTable 15.Thediscrepancies are very prominent for theyears 2006,2007and2008. started to increase andreached astrong andhealthy figure in2010(BB2012b,2013). earning potential of started thePCBs to increase after 2004(BB2006b). TheROE of thePCBs began to show signsof maturity andchallengedthedominance of FCBs. Boththeefficiencyand to 17.0%in2010as two FCBs incurred netlosses (BB2012b,2013).After 2004,ROE of thePCBs decline dueto anincrease inequity.The ROE of the FCBs in2009stood at 22.4%,whichdeclined human resource quality(BB2007).Since 2009,ROE of theFCBs hadbeenshowing agradual FCBs probably due to their technological advantage, product differential capability, and/or high FCBs was 18.4%in2005,which increased to 21.5%in2006.Thisindicated better performance of huge profits andthisprofit gain continued atamoderate rate until 2004(BB2006b). The ROE for remained satisfactory. In theearly1990s,duringliberalization phase,FCBs earnedunusually Rajshahi Krishi Unnayan Bank(RAKUB) in2005(BB2006a).TheROE of andtheFCBs thePCBs 2005. Thiswas mainlydueto theoperating loss incurred by BangladeshKrishi Bank(BKB)and the SDBs. After 2002,theROE of SDBs further deteriorated andeventually declinedto –2.0%in of netprofit amounting to 1.0billion taka in2001againstanetloss of 5.2billion taka in2000 by intheirbooksofdebiting “loss” accounts. Thesharprisein2001was mainlyattributed to booking and 2002.Thehugeloss (–68.0%)of SDBs in2000was mainlydueto newprovisions addedby profit (BB 2012b). 2010, it dropped to 18.4% as owners’ equity increased at a comparatively higher rate than after-tax operating expenses(BB2006a).In 2006,itstarted to increase againandreached 26.1%in2009.In but declinedto –6.9%in2005.Themainreason was themassive loss of Agrani Bankdueto huge of theSCBs andSDBs hadamajoreffect onit.The ROE of SCBs increased during2000and2003 all banksshowed(Table a fluctuating andinconsistent trend 14). Negative and inconsistent ROE banks, bothby theregulators andtheequityholders (BB2007).In 2000–2011,theROE ratio for A low ROE represents lackof managerialefficiency and requires closemonitoring oftheactivities of efficiency inusingtheir capital. ROEmeansthebank’s ability to convert itsequity into netearnings. also beused. This FSIis a bankprofitability indicator and isintended to measure deposit-takers’ as reported inthesectoral balance sheet;for cross-border consolidated data, Tier 1capital can Again, there are some discrepancies between the BB data and the IMF data. The IMF data are The ROE of theSDBs worsened during2000–2011despite someimprovements in2001 FCB C 72. 361. 951. 521. 642. 0915.7 20.9 20.9 16.4 16.7 15.2 18.1 19.5 11.4 13.6 20.9 17 PCB D 6. 2358–. 21–. 20–. 69–7. 32–0.9 –3.2 –171.7 –6.9 –3.4 –2.0 –2.0 –2.1 –0.6 5.8 12.3 –68.0 SDB C . . . . 53–. . . 252. 8419.7 18.4 26.1 22.5 0.0 0.0 –6.9 –5.3 3.0 4.2 2.4 1.7 SCB oa 031. 16981 241. 381. 172. 17.0 21.0 21.7 15.6 13.8 14.1 12.4 13 9.8 11.6 15.9 0.3 Total Source: BangladeshBankAnnualReport, various years. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs 0020 0220 0420 0620 0820 002011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 733. 152. 251. 152. 782. 7016.6 17.0 22.4 17.8 20.4 21.5 18.4 22.5 20.4 21.5 32.4 27.3 Table 14:Return onEquity by Types of Banks(%),BBdata 21.5% in2011. 20.0–22.0%. In 2007,this ratio was 20.3%,whichincreased to of noninterest expensesto gross income fluctuated around resources. Table 18suggests that during 2007–2011, theratio that is,itmeasures theefficiency ofdeposit takers’ use of the size of administrative expenseswithingross income— categories of banksare notavailable since 2007. share of interest income ondeposit-takers’ gross (BB2006b,2007,2011,2012a).Data for different and FCBsother hand, both PCBs saw marginal declines for both in 2002–2006, suggesting a fall in the (Table 17). It rose to 3.0%in2011from 2.6%in2002,whichisfavorable for thewholesector. On the was 21.2%,whichincreased to 23.3%in2011. margin to gross income during 2007–2011.In 2007,theratio banking sector inBangladeshexperienced ariseininterest this FSIwilltend to behigher.Table 16 shows that theoverall within gross income. In thecase of bankswithlow leverage, interest interest earnings(i.e., earnedless interest expenses) a profitability ratio, whichmeasures the relative share of net as thenumerator andgross income asthedenominator. It is .3.4 .3.3 This indicator is a profitability ratio, which measures Net interest margin of all deposit-takers varied from 2.0% to 3.0% during 2002–2011 This indicator iscalculated by usingnetinterest income A A Source: BangladeshBankFinancial Sector Review andBangladeshBankFinancial Stability Report, various years. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs oa 26 .021 .918 . . 3 3.1 2.6 – – 1.84 2.19 2.17 2.70 2.65 Total Source: International Monetary Fund -FSIOnline, 2012 development =private banks,PCBs commercial banks,FCBs =foreign commercial banks. Note: IMF=International Monetary Fund, SCBs =state-owned commercial banks,SDBs =specialized Cs12 .710 .611 – – – – – 1.15 1.56 1.00 1.47 1.25 SCBs oa –401. 501. 101. 16.8 15.5 21.0 19.5 25.0 19.8 –64.0 Total Cs16. 943. 491. 0018.5 10.0 18.4 24.9 35.6 –9.4 1262.5 SCBs Ds2. 662. 1. 32–. –0.9 –5.1 –3.2 –19.9 21.0 16.6 24.7 SDBs PCBs Ds22 .811 .608 – – – – – 0.89 0.86 1.12 1.48 2.25 SDBs FCBs PCBs FCBs

I N nterest Margin to Gross Income oninterest Expensesto Gross Income .837 .725 .1––––– – – – – 2.21 2.58 3.27 3.71 3.88 .167 .447 .9––––– – – – – 2.89 4.74 3.84 6.76 7.11 0220 0420 0620 0820 002011 2010 2009 2008 2007 2006 2005 2004 2003 2002 0620 0820 2010 2009 2008 2007 2006 482. 431. 091. 15.7 15.6 20.9 18.9 24.3 26.7 24.8 152. 851. 702. 16.6 20.2 17.0 18.9 18.5 20.6 21.5 Table 15:Return onEquity by Types of Banks(%),IMFdata Table 17:Net Interest Margin (%) 2011 2010 2009 2008 2007 Year years. Source: BangladeshBankAnnualReport, various years. Source: BangladeshBankAnnualReport, various 2011 2010 2009 2008 2007 Year (June) 2011 Table 18:Noninterest Expenses Table 16:Interest Margin to Gross Income (%) to Gross Income (%) (December) 2011 23.30 23.73 21.24 21.86 21.19 21.5 21.9 20.8 19.4 20.3 % % 17 Financial Soundness Indicators in Bangladesh Financial Soundness Indicators for Financial Sector Stability in 18 Bangladesh fees). Noninterest income worked asamajorincome source for FCBs (BB2006b). despite theirlow asset–liability base,incase of noninterest income (e.g. bills,commission, brokerage earnings from noninterest sources was lower (BB2007).In contrast, FCBs raised themostrevenue, they were less exposed to opportunities for diversification of commercial activities.Thustheir rate of and FCBs were highercompared to that of SCBs andSDBs. Theratio was very low for SDBs because sources of income such as fees and commissions. Noninterest income to total assets for both PCBs (Table 19).Thisindicated that banksdiversified theirsources of income andemphasized nonfunded the ratio was 16.8%,whichincreased to 19.3%in2011. been ableto increase thisratio during2007–2011.In 2007, suggests that theoverall bankingsector inBangladeshhas sector to withstand shocksto theirbalance sheet.Table 20 The level of liquidity indicates the ability of the deposit-taking available to meetexpected andunexpected demandsfor cash. liquid asset ratio, whichprovides anindication of theliquidity broad measure of liquidassets asthenumerator. ThisFSIisa denominator. Theratio can alsobecalculated usingthe of liquidassets asthenumerator andtotal assets asthe liquidity ratio. was considered inefficient (Sayeed etal.2012).Since 2008, SCBs also have been facinghigh excess and FCBsPCBs have been facing persistent excess liquidity, the liability management by both banks of effective demand for credit at lower costs andmadethemoney market volatile (BB2013).As liquidity ratio, followed byThissituation of PCBs. constant surplusof liquidityjustified thecreation andFCBsPCBs showed consistently highliquidityratio (Table 21).Generally, FCBs hadthehighest meet theshort-term withdrawal of fundswithoutfacing liquidityproblems. Between 2000and2011, mismatch of assets andliabilities,provides anindication of theextent to whichdeposittakers can of liquidassets asthenumerator. ThisFSIisaliquidasset ratio andisintended to capture theliquidity short-term liabilitiesasthedenominator. Theratio can alsobecalculated by taking thebroad measure .4.2

Noninterest income in2005was 1.8%of total assets employed, whichincreased to 2.5%in2006 This indicator iscalculated by usingthecore measure A.4 This indicator iscalculated by usingthecore measure of liquidassets asthenumerator and A A

.4.1

Source: Bangladesh BankFinancial Sector Review andBangladesh Bank Financial Stability Report,various years. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs ak 0520 0720 0921 2011 2010 2009 2008 2007 2006 2005 Banks Ds–060808––– – – 2.87 – 3.4 – – 3.0 0.8 2.9 – 0.8 2.4 – 0.6 2.0 2.5 – – FCBs 1.8 PCBs SDBs SCBs Total

Liquidity Liquid As Liquid As sets to Short-Term Liabilities sets to Total Assets . . . – – – – – – 3.6 3.1 3.8 3.1 4.1 2.8 – – Table 19:Noninterest Income toTotal Assets (%) years. Source: BangladeshBankAnnualReport, various 2011 2010 2009 2008 2007 Year Table 20:LiquidAssets toTotal Assets (Liquid Asset Ratio) (%) 19.27 17.33 20.20 18.14 16.76 % from 3.5% in2000to 6.5% in2008(Table 23). fluctuating trend during 2000–2008. However, itincreased and issometimescalled theleverage ratio. Theratio had a agreed to by the BCBS. Also, it measures financial leverage capital adequacy ratios compiled based onthe methodology adequacy of the deposit-taking sector. It complements the by otherthantheirown fundsandisameasure of capital also beused.It indicates theextent to whichassets are funded sheet; for cross-border consolidated data, Tier 1 capital can total capital andreserves asreported inthesectoral balance without thelatter beingrisk-weighted. Capital ismeasured as 2011 from alow figure of 1.1%in2008. Table 22 shows that thisratio increased sharplyto 9.4%in to assess thevulnerability to exchange rate movements. mismatch of foreign currency asset andliabilitypositions exchange rate riskcompared with capital. It measures the risk, whichisintended to show deposit-takers’ exposure to concept. This FSI is an indicator of sensitivity to market as net open position in foreign exchange in a supervisory Capital shouldbetotal regulatory capital orTier 1 capital be calculated basedontherecommendation of theBBS. rend in Encouraged Indicators 3.3

T This indicator istheratio of capital to total assets, B.1 The netopenpositioninforeign exchange should A.5 A B.

.5.1 1.1

FCBs PCBs Ds99896958476238564971232.5 2.3 7.1 4.9 5.6 3.8 6.2 4.7 5.8 6.9 8.9 9.9 SDBs Cs65577384682021691. 768215.7 8.2 17.6 14.9 6.9 2.1 2.0 6.8 8.4 7.3 5.7 6.5 SCBs oa ...... 9.3 6.0 9.0 8.4 6.9 5.1 5.3 8.7 9.9 8.7 6.7 7.5 Total Excess Liquidity FCBs PCBs Ds1. 531. 201. 121. 421. . 1312.3 21.3 9.6 13.7 14.2 11.9 11.2 11.2 12.0 13.7 15.3 16.2 SDBs Cs2. 572. 442. 002. 493. 512. 34.7 27.2 25.1 32.9 24.9 20.1 20.0 22.8 24.4 27.3 25.7 26.5 SCBs oa 612. 722. 342. 152. 482. 3026.5 23.0 20.6 24.8 23.2 21.5 21.7 23.4 24.7 27.2 25.3 26.1 Total Liquid Asset Source: BangladeshBankAnnualReport, various years commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks, SDBs = specialized development = private banks,PCBs Deposit-Takers N Sensitivity toMark Bank Capit et OpenPosition inForeign Exchange to Capital 0020 0220 0420 0620 0820 002011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 481. 182. 192. 641. 332. 3211.8 13.2 21.8 13.3 11.2 16.4 23.6 21.9 21.9 21.8 14.3 14.8 473. 163. 784. 442. 133. 2130.5 32.1 31.8 31.3 29.2 34.4 42.5 37.8 37.8 41.6 34.1 34.7 482. 632. 312. 142. 071. 1523.9 21.5 18.2 20.7 22.2 21.4 21.0 23.1 24.4 26.3 24.2 24.8 Table 21:LiquidAssets toShort-Term Liabilities(LiquidityRatio) ...... 7.0 4.6 5.3 4.7 6.4 5.6 5.1 8.8 9.8 8.5 6.2 6.8 al to Assets et Risk by Types of Banks(%),2000–2011 version, accessed on15June 2014. Source: World Development Indicators, online 2008 2007 2006 2005 2004 2003 2002 2001 2000 Year years. Source: BangladeshBankAnnualReport, various 2011 2010 2009 2008 Year Table 22:Net Open Position inForeign Table 23:BankCapitaltoAssets Ratio Exchange toCapital (%), 2000–2008 9.38 0.33 0.84 1.06 6.5 4.6 3.3 4.7 4.3 3.2 4.1 3.5 3.5 % % 19 Financial Soundness Indicators in Bangladesh Financial Soundness Indicators for Financial Sector Stability in 20 Bangladesh is why theinterest rate spread of SDBs was higher thanthat deposit rates and charge higherlendingrates thanSCBs, which higher volatility than those of SDBs. However, SDBs offer higher of SDBs. Moreover, depositsof SCBs have higher volume and deposit orloanandadvances willbeaffected less thanthose by following the SCBs. If SCBs change their lending rate, their SDBs shouldnotmake abruptchangesinlendingordeposits less sensitive to interest changesthanthoseof SDBs. Therefore, Islam (2007)stated that depositandloanadvances of SCBs are stable about6.0%)(BB 2006b). path (i.e., Chowdhury and and SCBs(BB 2012a).BothPCBs followed arather similarand closer monitoring and actionsto further reduce thisspread double thanthat of theotherbanks.Thisnecessitates over thesameperiod.FCBs’ average spread was almost the spread for FCBs was thehighestamongallbankgroups the lowest spread amongallthebankcategories. Conversely, rate spreads for different categories of banks.SDBs showed 2000–2001, andincreased to 5.0%inFebruary 2011. than 6months), andthespread. Thespread was 3.8%in to less rates oncommercial lendinganddeposits(3 months deposit rates(Table differ from theBBdata 25). (BB 2008a). intermediation cost of banks, whichdeclinedslowly over theyears spread between lendinganddepositrates isthemeasure of the the last 11 years, from 13.7% in 2000 to 13.0% in 2011. The weighted average lending rate showed a gradual decline over some declineduring2000and2005.On theotherhand, between 5.0%–7.0%during2000–2011(Table 24),andshowed vulnerable to shocks(BB2006b). Theindicator hovered the intermediaries’ investment fundbaseandrendering them of adequate noninterest income, thereby putting pressure on too-low spreads are unlikely to besustainable intheabsence power on the part of financial intermediaries. Conversely, institutional inefficienciesora certain degree ofmonopoly spreads are unfavorable for theeconomy since theseindicate be usedasagauge of competitiveness withinthesector. High underlying profitability of thedeposit-taking sector. It can also between deposit takers. It isanindicator of earningsand average depositrate, excluding rates onloansanddeposits between theweighted average loanrate andtheweighted 1.8 Table 27 presents monthly weighted average interest Table 26 presents monthly weighted average interest The data from WDI on the spread between lending and This indicator isthedifference (expressed inbasispoints) B.

Spread bet ween Reference LendingandDeposit Rates

version accessed on15June 2014. Source: World Development Indicators, Online 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Year 091 .41.55.41 4.96 5.39 12.75 5.41 12.51 13.36 5.77 years. 12.63 7.34 5.29 Source: BangladeshBank AnnualReport, various 7.55 12.28 7.97 5.01 2010–11(Feb) 11.06 7.23 4.78 2009–10 10.52 6.51 4.73 2008–09 11.16 5.77 3.90 2007–08 12.24 5.51 3.77 2006–07 13.02 6.38 2005–06 12.62 7.51 2004–05 9.12 2003–04 8.85 2002–03 2001–02 2000–01 Year World Development Indicators Data (%), Table 24:Weighted Average Depositand 0175 29 5.47 5.12 5.11 12.99 5.00 11.19 5.98 11.44 7.52 5.93 years. 12.31 6.07 Source: BangladeshBankAnnualReport, various 5.68 12.75 6.33 2011 5.27 12.12 7.31 2010 6.11 11.24 6.77 2009 6.00 10.83 6.19 2008 6.67 12.36 5.56 2007 6.67 13.09 5.56 2006 13.42 6.25 2005 13.75 6.49 2004 6.75 2003 7.08 2002 2001 2000 Year Table 26:MonthlyWeighted Average Table 25:Spread between Reference (3 monthstoless than6months) Lending Rate and DepositRate, Rate of Interest onCommercial Lending Rates (%),2000–2011 Lending andDeposits Deposit Rate Deposit 2000–2010 Rate (%) Lending Commercial Rate Rate (%) Lending 5.85 6.39 6.72 6.82 6.22 5.91 7.64 8.17 7.83 7.34 6.94 % Spread Spread are important for(Rayhan thePCBs 2011). banks, while inflation, operating cost, market share of deposit,statutory reserve requirement, and taxes influenced by operating costs andclassified loans of state-owned commercial banksandspecialized rate spread. Theanalysis interms of bankgroups shows that theinterest rate spread issignificantly reserve requirement, andNational Savings Directorate (NSD) certificate interest rate affect the interest assets of banks, the lower the interest rate spread. Similarly, market share of a bank’s deposits, statutory of SCBs. Mujeri andYounus (2009)stated that thehighernoninterest income asaratio of total in 2011(Table 29). and 2011.In 2010,thisratio was 7.4%,whichdeclined to 3.5% to thesize of theeconomy. Data are onlyavailable for 2010 denominator. It measures theimportance of OFCs compared assets as the numerator and gross domestic product as the 4.7% in2011(Table 28). 2010 and 2011. In 2010, this ratio was 5.5%, which declined to within thedomesticfinancial system. Data are only available for central bank.ThisFSImeasures therelative importance of OFCs corporations, households,thegeneral government, andthe of financialassets owned by deposit takers, OFCs, nonfinancial financial system assets asthedenominator. Thelatter isthe total corporations’ (OFCs) financial assets as the numerator and total

1. The following encouraged indicators are unavailable: B.3 This indicator iscalculated usingOFCs’ financial This indicator iscalculated usingotherfinancial B.2 d. c. b. a.

B.2. B.2.2

F or deposit-takers Gr Gr Geo Lar 1

FCBs PCBs Source: BangladeshBank.2008.Financial Sector Review. 3(2).June. Dhaka. commercial banks,FCBs =foreign commercial banks. Note: SCBs =state-owned commercial banks,SDBs =specialized development =private banks,PCBs Ds36 .535 .633 .432 .829 .42.88 2.94 2.96 3.18 3.26 3.64 3.34 3.66 3.56 5.25 3.67 SDBs Cs48 .450 .152 .753 .357 .45.85 6.04 5.76 5.63 5.37 5.37 5.26 5.41 5.08 5.14 4.80 SCBs

Table 27:MonthlyWeighted Average Interest Rate Spread for Different BankGroups oss liabilityposition infinancialderivatives to capital oss asset positioninfinancial derivatives to capital ge exposures to capital As Other F N As graphical distributionof loansto total loans onfinancial Corporations Sector sets to Total Financial System Assets set to Gross Domestic Product -a -u -e -e -a -u -e -e -a -u 8-Mar 7-Jun 7-Mar 6-Dec 6-Sep 6-Jun 6-Mar 5-Dec 5-Sep 5-Jun 5-Mar .335 .478 .585 .581 .687 9.02 8.76 8.86 8.12 9.25 8.52 8.25 7.87 8.34 3.58 7.83 .079 .050 .250 .554 .257 5.36 5.70 5.52 5.44 4.55 5.05 5.22 5.07 5.10 7.93 5.30 inancial Corporations Reports 2010and2011.Dhaka. Sources: BangladeshBank.Financial Stability 2011 2010 Year Reports 2010and2011.Dhaka. Sources: BangladeshBank.Financial Stability 2011 2010 Year Table 28:Asset toTotal Financial Table 29:Asset toGross Domestic Product (%) System Assets (%) % 4.70 5.52 3.50 7.44 % 21 Financial Soundness Indicators in Bangladesh Financial Soundness Indicators for Financial Sector Stability in 22 Bangladesh 2. 4. 3. 5. i. h. g. e. j. f. b. a. a. e. d. c. b. b. a. b. a. d. c.

N Mark Households R N F Cust Spr P T H H N N Earnings t R T A A Commer R Commer R eal estate market onfinancial corporations oreign-currency-denominated loansto total loans otal debtto equity ersonal expensesto noninterest expenses rading income to total income eturn onequity esidential real estate prices esidential real estate loansto total loans verage dailyturnover ratio inthesecuritiesmarket verage spread bid–ask inthesecuritiesmarket ousehold debtservice andprincipalpayments to income ousehold debtto gross domesticproduct umber of applications for protection from creditors et openpositioninequitiesto capital et foreign exchange exposure to equity ead between highest andlowest interbank rates et liquidity omer depositsto total (noninterbank) loans cial real estate loansto total loans cial real estate prices o interest andprincipalexpenses 4. recent Developments in the Financial Sector of Bangladesh

ecent developments in the financial sector of Bangladesh include some automation and technological developments. The banking sector experienced remarkable progress with respect Rto automation in the last several years. For the proactive and forward-visioning approach of BB, several automation initiatives have been implemented in the banking sector. These initiatives include the following:

(i) To create a disciplined environment for borrowing, the automated Credit Information Bureau (CIB) service provides credit-related information for prospective and existing borrowers. With this improved and efficient system, risk management will be more effective. Banks and financial institutions may furnish credit information to the CIB database 24/7 around the year. They can access credit reports from the CIB online instantly.

(ii) The L/C Monitoring System has been introduced for preservation and use of all necessary information regarding L/Cs by the banks through the BB website. This system allows the authorized bank users to upload and download their L/C information.

(iii) In terms of article 36(3) of Bangladesh Bank Order 1972, all scheduled banks are required to submit a Weekly Statement of Position at the close of business every Thursday to the Department of Off-site Supervision. This statement is now submitted online using the web upload service of the BB website within 3 working days after the reporting date, which is much more time- and labor-efficient than the earlier manual system.

(iv) The e-Returns service has been introduced. It is an online portal service for scheduled banks to submit electronic returns using a predefined template for the purpose of macroeconomic analysis through related BB departments.

(v) The Online Export Monitoring System is used for monitoring the export of Bangladesh. Through this service, banks are able to issue export reports.

(vi) The Bangladesh Automated Clearing House (BACH) has replaced the outdated manual clearing system, and allows interbank checks and similar type of instruments to be settled in an instant manner.

(vii) Electronic fund transfer (EFT) has been introduced, which now facilitates banks in making bulk payments instantly with less paper and labor.

23 Financial Soundness Indicators for Financial Sector Stability in 24 Bangladesh over thelastfew years: redesigned infullandsomegoodresults have come after that. to regularize this industry. Authority (IDRA) was established in2011.In 1year, IDRAhastaken anumberof appreciable steps accountability andregulation. under supervision.Due to theproactive role of MRA,theMFIsector isnow ingoodshapeterms of in theinstitutionaldevelopment of BB: their reports to theregulator through theonlinereport submission tools for MFIs. significant advancement for capital markets in the lastseveral years. Microfinance institutions submit (i) Banking andfinancialinstitutionindustrieshave experienced some regulatory developments After the massive crash of local bourses in 2010–2011, the executive body of SEC was In order to regulate theinsurance industry,theInsurance Development andRegulatory (i) Through theCentral BankStrengthening Project, there have beenseveral notable achievements The Microcredit Regulatory Authority (MRA) was established in2006to bringNGO–MFIs (iii) (ii) Inauguration of inthecountry internet trading isthemost inbothof thebourses (DSE andCSE) (ix) (viii) (v) (iv)

The been ineffect inbothbankingandFIindustries. issues over thelastseveral years. BB hashost An in Bangladesh Bankno and supervisionwillusherinanewhorizon. whole bankingandFIindustryunderasinglenetwork through whichdata sharing, reporting, The automation of theoperational structure of BB. The implemen Full orpartial onlinebankingisnow beingpracticed by almostevery bank. banking faster and efficient. Usage of plasticmoney hasincreased indailylife transactions. Almost ev banking service to even themostremote corners of thecountry. banking. Through this system, franchises of banksthrough mobileoperators can provide F developed andisavailable to theofficers of BB. economic andfinancialinformation. ull implementation of theBasel-II (international accord capital adequacystandard) has establishment of an enterprise data warehouse, which is under process, will bring the initiation of mobile banking has been one of the most noteworthy advancements in ternal networking system withrequired onlinecommunication facilities hasbeen ery commercial bankisnow usingitsown core bankingsolutionthat hasmade ed anumberof international seminars ondifferent economic andfinancial tation of enterprise resource planning (ERP)hasbeenabigstep in w possesses aninformative andresourceful website regarding corporate governance issues. prohibiting malpractice intheindustryregarding insurance commission, agents, premiums, etc. and industry to abetter shape.Apart from that, several initiatives have beenundertaken by IDRAfor decision making.TheInsurance Actof 2010was formulated to meettherisingdemand of insurance of capital market research hasbeenupward, whichindicates thepotential of analyticinvestment permission from theSEC, whichhasincreased theparticipation of institutionalinvestors. Thetrend number of asset management companies (AMCs), merchant banks,andmutualfundshave gained SEC has updated Public Issue Rules, 2006 and Mutual Fund Rules, 2001. Apart from that, a (ix) (viii) (vii) (vi) (v) (iv) (iii) (ii)

and postal remittance have already beencirculated. financing of issues, guidelinesfor terrorism money changers, insurance (CFT) companies, T did notface any adversity duringtheglobalfinancialturmoilof 2007–2009. D S capital market operations of banksare now minutely monitored. Banks ha Banks ha A numbero Guidelines Guidelines onen responsibility (CSR). and intensive riskmanagement. the resilience of banksandFIs underdifferent adverse situations. been circulated. Policy guidelinesongreen bankinghave alsobeenissued. upervision hasbeenintensified to increase theparticipation of banksincorporate social o meetinternational standards onantimoney-laundering (AML) andcombating ue to theefficient andtimelyactionof BB,theforeign exchange reserves of Bangladesh ve beenasked to builduptheirseparate riskmanagement unitsfor comprehensive ve beeninstructed to create aseparate subsidiaryfor capital market operations; on stress testing for banks and FIs have been issued, which is aimed at assessing f policyinitiatives for financialinclusionhave beenundertaken. vironmental andclimate changeriskmanagement for banksandFIs have 25 Financial Soundness Indicators in Bangladesh 5.C onclusion and Further Development

here is still room for improving FSIs system in Bangladesh. Key core indicators can be calculated regularly but for many others, including encouraged indicators, some work still needs to be Tdone. This includes a systematic disclosure system of financial data from the existing financial institution to the Central Bank of Bangladesh and the Ministry of Finance of Bangladesh.

The new Basel-III regulatory framework, which represents a substantial change from the current framework, will be fully implemented in 2019, with a phase-in period beginning in 2013 (IMF 2012). Adoption of the Basel-III Accord will have an impact on the compilation of the current FSIs measuring capital adequacy, leverage, and liquidity. Under Basel-III, the existing definition of total regulatory capital has been tightened, particularly for Tier 1 capital. A new capital conservation buffer has been established above the regulatory minimum capital requirement, which will be introduced in 2016 and will increase annually until 2019. A new leverage ratio will supplement risk-based capital requirements. Two new internationally harmonized global liquidity standards have been introduced as a complement to capital requirements: liquidity coverage ratio and net stable funding ratio.

Bangladesh will have to adopt Basel-III at a certain point in time. However, Basel-II may still be in force for some institutions (e.g., small banks). Not all banks within an economy would adopt Basel-III so internal issues of aggregation may arise. Therefore, it is pertinent to examine how to address issues of data aggregation while implementing Basel-II and Basel-III simultaneously. There is also a need to study possible revisions to the FSI Guideline to adapt it to the Basel-III standards.

Frequency and timeliness of data should be improved. There is a need to move to a quarterly reporting basis. Cost issues must also be considered, as well as the trade-off between frequency and timeliness and accuracy. More frequent and timely data may be subject to revisions, especially those indicators based on national account statistics. A compromise may be the publication of preliminary data, with the metadata clearly indicating that they may be subject to revision. The possibility of reporting individual FSIs based on different consolidation approaches for different frequencies can be considered.

In the case of encouraged FSIs, there are concerns about the quality of such indicators and the difficulty in constructing them. Also, the frequency of these data is not reliable. Therefore, more work is needed before including these indicators in the FSI set.

26 27 A ppendix : Availability of Financial Soundness

Indicators of Bangladesh Appendix

1. Core Indicators

Table A1 presents the availability, frequency, source, and description of the core FSIs and comments on the quality of data and suggestions for improvement. All core FSIs are available. However, their frequency and coverage differ. BB and IMF are the two major sources of data for core FSIs.

Table A1: Availability, Frequency and Coverage, Source, and Description of Core Financial Soundness Indicators

Financial Soundness Frequency and Indicators Availability Coverage Source Description Comment A.1 Capital Adequacy A.1.1 Regulatory capital to Yes Annual BB Disaggregated by SCB, For the years between 2006 and 2008 there risk-weighted asset (2000–2011) SDB, PCB, and FCB are some small discrepancies between IMF Annual IMF Disaggregated by SCB, data and BB data (Table 5 and Table 6). (2006–2011) SDB, PCB, and FCB A.1.2 Regulatory Tier 1 Yes Annual BB Aggregated Published data not available before 2007 capital to risk- (2007–2011) (Table 7). BB should provide data by four weighted asset categories of banks. A.1.3 Nonperforming loans Yes Annual BB Aggregated Published data not available before 2007 net of provisions to (2007–2011) (Table 8). BB should provide data by four capital categories of banks. A.2 Asset Quality A.2.1 Nonperforming loans Yes Annual BB Disaggregated by SCB, For the years between 2006 and 2008 for to total gross loans (2000–2011) SDB, PCB, and FCB SDBs and FCBs, there are large discrepancies Annual IMF Disaggregated by SCB, between IMF data and BB data (Table 9 and (2006–2011) SDB, PCB, and FCB Table 10). A.2.2 Sectoral distribution Yes Annual (FY) BB Aggregated (Table 12) BB should provide data by four of loans to total loans (2001–2002 to categories of banks. 2010–2011) Annual IMF Aggregated Published data not available before 2006 (2006–2010) (Table 13). A.3 Earnings and Profitability A.3.1 Return on asset Yes Annual BB Disaggregated by SCB, For the years between 2000 and 2008, there (2000–2011) SDB, PCB, and FCB are some discrepancies between IMF data Annual IMF Disaggregated by SCB, and BB data—large discrepancies for SCBs (2006–2011) SDB, PCB, and FCB and slight discrepancies for SDB, PCB and FCB (Table 14 and Table 15). A.3.2 Return on equity Yes Annual BB Disaggregated by SCB, During 2006 and 2009, there are large (2000–2011) SDB, PCB, and FCB discrepancies between IMF and BB data. For Annual IMF Disaggregated by SCB, SCBs and SDBs, discrepancies are very large (2006–2011) SDB, PCB, and FCB (Table 16 and Table 17). A.3.3a Interest margin to Yes Annual BB Aggregated Published data not available before 2007 gross income (2007–2011) (Table 18). BB should provide data by four categories of banks. A.3.3b Net interest margin Yes Annual BB Disaggregated by SCB, Published data unavailable for 2007 and (2002–2011) SDB, PCB, and FCB up 2008 (Table 19). BB should provide data by to 2006; aggregated four categories of banks since 2007. data since 2009. A.3.4a Noninterest expenses Yes Annual BB Aggregated Published data not available before 2007 to gross income (2007–2011) (Table 20). BB should provide data by four categories of banks since 2007. A.3.4b Noninterest income to Yes Annual BB Disaggregated by SCB, Aggregated data available for the years 2006, total asset (2006–2011) SDB, PCB, and FCB 2009, 2010, and 2010. Disaggregated data is available for the years between 2006 and 2008 (Table 21). BB should provide data by four categories of banks since 2009. 28

Table A1: continued

Financial Soundness Frequency and Indicators Availability Coverage Source Description Comment

Appendix A.4 Liquidity A.4.1 Liquid assets to total Yes Annual BB Aggregated Published data not available before 2007 asset (2007–2011) (Table 22). BB should provide data by four categories of banks. A.4.2 Liquid assets to short- Yes Annual BB Disaggregated by SCB, See Table 23. term liabilities (2000–2011) SDB, PCB, and FCB A.5 Sensitivity to Market Risk A.5.1 Net open position in Yes Annual BB Aggregated Published data not available before 2008 foreign exchange to (2008–2011) (Table 24). BB should provide data by four capital categories of banks. Note: BB = Bangladesh Bank, SCB = state–owned commercial banks, SDB = specialized development banks, PCB = private commercial banks, and FCB = foreign commercial banks

2. Encouraged Indicators

Table A2 presents the availability, frequency, source, and description of the encouraged FSIs and relevant comments. Not all the encouraged FSIs are available. Out of the 27 encouraged FSIs, data are available for only 4 FSIs.

Table A2: Availability, Frequency and Coverage, Source, and Description of the Encouraged Financial Soundness Indicators

Financial Soundness Frequency and Indicators Availability Coverage Source Description Comment B.1 Deposit Takers B.1.1 Bank capital to assets Yes Annual WDI Aggregated Published data not available from BB (2000–2010) (Table 25). BB should provide data by four categories of banks. B.1.2 Large exposures to No None None None BB can compile this data by four categories capital of banks. B.1.3 Geographical No None None None BB can compile this data by four categories distribution of loans to of banks. total loans B.1.4 Gross asset position in No None None None BB can compile this data by four categories financial derivatives to of banks. capital B.1.5 Gross liability position No None None None BB can compile this data by four categories in financial derivatives of banks. to capital B.1.6 Trading income to total No None None None BB can compile this data by four categories income of banks. B.1.7 Personal expenses to No None None None BBS can collect this data through the noninterest expenses Household, Income and Expenditure Survey (HIES), which is currently not available. B.1.8a Spread between Yes Annual (2000– BB Aggregated There are discrepancies between WDI data reference lending and 2010) (weighted) and BB data (Table 26 and deposit rate Yes Annual WDI Aggregated Table 27). (2000–2008) B.1.8b Monthly weighted Yes Annual, financial BB Aggregated (monthly See Table 28. BB should provide data by four average rate of interest year (2000–01 to weighted) categories of banks. on commercial lending 2010–11) and deposits B.1.8c Monthly weighted Yes Monthly, for some BB Disaggregated by SCB, Published data not available for SCB, SDB, average interest rate months during 2005 SDB, PCB, and FCB PCB, and FCB for the years before 2005 and spread for different and 2008 after 2008 bank groups (Table 29). B.1.9 Spread between No None None None BB should provide data by four categories of highest and lowest banks. interbank rate B.1.10 Customer deposits to No None None None BB should provide data by four categories of total (noninterbank) banks. loans Table A2:continued .. Commercial real estate B.6.4 .. Residential real estate B.6.3 .. Commercial real estate B.6.2 .. Residential real estate Real Estate Market B.6.1 B.6 .. Average dailyturnover B.5.2 .. Average spread bid–ask Market Liquidity B.5.1 B.5 B.4.2 .. Household debtto Households B.4.1 B.4 .. Number of applications B.3.5 .. Net foreign exchange B.3.4 .. Earningsto interest and B.3.3 .. Return onequity B.3.2 .. Total debtto equity Nonfinancial Corporations Sector B.3.1 B.3 Assets to gross B.2.2 Assets to total financial OtherFinancial Corporations B.2.1 B.2 ..2Net openpositionin B.1.12 ..1Foreign currency B.1.11 FCB =foreign commercial banks Note: BB=BangladeshBank,SCBstate–owned commercial banks,SDB=specialized development =private banks,PCB commercial banks,and loans to total loans loans to total loans prices prices market ratio inthesecurities in thesecuritiesmarket to income and principalpayments Household debtservice gross domesticproduct creditors for protection from exposure to equity principal expenses domestic product system assets equities to capital total loans denominated loansto Financial Soundness niaosAvailability Indicators Yes Yes No No No No No No No No No No No No No No No None None None None None None None None None None None None None None 2010) Annual (2000– 2010) Annual (2000– None Frequency and oeaeSuc Description Source Coverage oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None oeNone None BAggregated BB Aggregated BB which iscurrently notavailable. BBS can collect thisdata through thesurvey, which iscurrently notavailable. BBS can collect thisdata through thesurvey, which iscurrently notavailable. BBS can collect thisdata through thesurvey, which iscurrently notavailable. BBS can collect thisdata through thesurvey, SEC can compile thisdata. SEC can compile thisdata. which iscurrently notavailable. BBS can collect thisdata through theHIES, which iscurrently notavailable. BBS can collect thisdata through theHIES, banks. BB shouldprovide data by four categories of banks. BB shouldprovide data by four categories of banks. BB shouldprovide data by four categories of banks. BB shouldprovide data by four categories of banks. BB shouldprovide data by four categories of banks. BB shouldprovide data by four categories of categories of banks. (Table 31).BBshouldprovide data by four Published data notavailable before 2010 Published data notavailable before 2010 banks. BB shouldprovide data by four categories of Comment 29 Bangladesh 30

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Financial soundness indicators (FSIs) are compiled to monitor the health and soundness of financial institutions and markets, and of their corporate and household counterparts. With support from the Investment Climate Facilitation Fund under the Regional Cooperation and Integration Financing Facility, this report describes the development of FSIs for Bangladesh and analyzes FSIs to identify key challenges to financial sector stability in the country. A large number of FSIs are not yet available for Bangladesh, notably outside the formal banking sector including nonbank financial institutions, insurance companies, and microfinance institutions. Another key challenge for Bangladesh is the improvement of coverage, frequency, timeliness, and quality of FSIs and to make them more available to a wider audience.

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