CHAPTER ONE

1.1 Introduction of the studyThe prosperity of a country depends upon its economic activities. Like any

other sphere of modern socio-economic activities in Bangladesh, remittance is

one of the most important economic variables in recent times as it helps in

balancing balance of payments, increasing foreign exchange reserves,

enhancing national savings and increasing velocity of money. For about two

decades remittance has been contributing around 35% of export earnings.

Moreover, it is greater than foreign aid and thus helps in lessening dependence

on foreign aid remittance gets momentum in recent time in Bangladesh and is

the second largest sector of foreign exchange earnings after the garment; sector.

If cost of imported raw materials is deducted from the foreign exchange earning

of the garments sector, remittance becomes the sign: largest sector of foreign

exchange earning. Remittance earning ; increasing day by day but at a lower

rate than the increase in emigration from Bangladesh due to the increasing share

of unskilled or semi-skilled labors than the professionals in international

migration. The share o remittance in GNI (Gross National Income) is increasing

day by day. Remittance affects almost all the macro-economic indicators of a

country positively. Though there are also negative sides of remittance earning

e.g. brain drain, its overall contribution to Bangladesh economy is very much

effective.

1.2 Origin of the ReportThis report is prepared as per internship requirement of my Master of Business

Administration (MBA) program of the Premier University Chittagong. I worked

two month from 16th Feb- 16th April 2014 in Shahjalal Islami Bank Ltd.

Agrabad Branch, Chittagong. In Two months I have through various Banking

activities. This report is a brief overview of those daily activities I have done

during the internship period.

1.3 Objectives of the reportThe objective of the report is to evaluate the foreign currency reserve and its

effect on growth of economy. The specific objectives are:

To find out the volume of foreign currency reserve in Bangladesh during

last ten years.

To find out the source of foreign remittance, nature of foreign

remittance and their impact on balance of payment of Bangladesh.

To identify the major determinants of foreign remittance along with the

constraints and prospects.

To focus the socio-economic impact of foreign remittances on economic

advancement of Bangladesh.

To suggest for increasing foreign remittance and liberalize the

procedural difficulties and flaws.

1.4 Methodology of the Study The report was largely involved in accumulation of information from the

published materials and also from the website of data mining guide. This

prepared by using both primary and secondary data.

1.5 Sources of DataA. Primary sources:

1. Personal observation

2. Discussion with the employees

3. Work in different departments

B. Secondary sources:

1. Published Documents

2. Office circular

1.6 Scope of the Study This report provides emphasis on the performance of “Foreign Exchange”

service of Shahjalal Islami Bank Ltd. This report assist me to gain a robust and

prevailing information and Importer, Exporter & non residents satisfaction level

of Shahjalal Islami Bank Ltd. from its existing customers.

1.7 Limitation of the StudyToday’s world is an information village. All the information is being made

available within a click distance. Bangladesh is still lacking in this regard. In

preparing this report I have found that data are not available for people. As

being an intern, it also created some problems, due to the bank policy of

maintaining secrecy and also because I did not get the opportunity in all

departments. The employee of different section remains busy with their daily

work, it was difficult for them to find time for me to give briefs about banking

norms. But the employees have given me practical ideas whenever they were

free. Load of work place was also barrier to collect sufficient data and time of

internship is also not enough.

CHAPTER TWO

Theoretical Aspect

2.1 DefinitionIn a strict sense, foreign-exchange reserves should only include foreign

banknotes, foreign bank deposits, foreign treasury bills, and short and long-term

foreign government securities.[2] However, the term in popular usage commonly

also adds gold reserves, special drawing rights (SDRs), and International

Monetary Fund (IMF) reserve positions. This broader figure is more readily

available, but it is more accurately termed official international reserves or

international reserves.

Foreign-exchange reserves are called reserve assets in the balance of payments

and are located in the capital account. Hence, they are usually an important part

of the international investment position of a country. The reserves are labeled as

reserve assets under assets by functional category. In terms of financial assets

classifications, the reserve assets can be classified as Gold bullion, Unallocated

gold accounts, Special drawing rights, currency, Reserve position in the IMF,

interbank position, other transferable deposits, other deposits, debt securities,

loans, equity (listed and unlisted), investment fund shares and financial

derivatives, such as forward contracts and options. There is no counterpart for

reserve assets in liabilities of the International Investment Position. Usually,

when the monetary authority of a country has some kind of liability, this will be

included in other categories, such as Other Investments. In the Central Bank’s

Balance Sheet, foreign exchange reserves are assets, along with domestic credit.

2.2 Purpose

Official international reserves assets allow a central bank to purchase the

domestic currency, which is considered a liability for the central bank (since it

prints the money or fiat currency as IOUs). Thus, the quantity of foreign

exchange reserves can change as a central bank implements monetary policy,[4]

but this dynamic should be analyzed generally in the context of the level of

capital mobility, the exchange rate regime and other factors. This is known as

Trilemma or Impossible trinity. Hence, in a world of perfect capital mobility, a

country with fixed exchange rate would not be able to execute an independent

monetary policy.

A central bank that implements a fixed exchange rate policy may face a

situation where supply and demand would tend to push the value of the

currency lower or higher (an increase in demand for the currency would tend to

push its value higher, and a decrease lower) and thus the central bank would

have to use reserves to maintain its fixed exchange rate. Under perfect capital

mobility, the change in reserves is a temporary measure, since the fixed

exchange rate attaches the domestic monetary policy to that of the country of

the base currency. Hence, in the long term, the monetary policy has to be

adjusted in order to be compatible with that of the country of the base currency.

Without that, the country will experience outflows or inflows of capital. Fixed

pegs were usually used as a form of monetary policy, since attaching the

domestic currency to a currency of a country with lower levels of inflation

should usually assure convergence of prices.

In a pure flexible exchange rate regime or floating exchange rate regime, the

central bank does not intervene in the exchange rate dynamics; hence the

exchange rate is determined by the market. Theoretically, in this case reserves

are not necessary. Other instruments of monetary policy are generally used,

such as interest rates in the context of an inflation targeting regime. Milton

Friedman was a strong advocate of flexible exchange rates, since he considered

that independent monetary (and in some cases fiscal) policy and openness of the

capital account are more valuable than a fixed exchange rate. Also, he valued

the role of exchange rate as a price. As a matter of fact, he believed that

sometimes it could be less painful and thus desirable to adjust only one price

(the exchange rate) than the whole set of prices of goods and wages of the

economy, that are less flexible.

Mixed exchange rate regimes ('dirty floats', target bands or similar variations)

may require the use of foreign exchange operations to maintain the targeted

exchange rate within the prescribed limits, such as fixed exchange rate regimes.

As seen above, there is an intimate relation between exchange rate policy (and

hence reserves accumulation) and monetary policy. Foreign exchange

operations can be sterilized (have their effect on the money supply negated via

other financial transactions) or unsterilized.

Non-sterilization will cause an expansion or contraction in the amount of

domestic currency in circulation, and hence directly affect inflation and

monetary policy. For example, to maintain the same exchange rate if there is

increased demand, the central bank can issue more of the domestic currency and

purchase foreign currency, which will increase the sum of foreign reserves.

Since (if there is no sterilization) the domestic money supply is increasing

(money is being 'printed'), this may provoke domestic inflation. Also, some

central banks may let the exchange rate appreciate to control inflation, usually

by the channel of cheapening tradable goods.

Since the amount of foreign reserves available to defend a weak currency (a

currency in low demand) is limited, a currency crisis or devaluation could be the

end result. For a currency in very high and rising demand, foreign exchange

reserves can theoretically be continuously accumulated, if the intervention is

sterilized through open market operations to prevent inflation from rising. On

the other hand, this is costly, since the sterilization is usually done by public

debt instruments (in some countries Central Banks are not allowed to emit debt

by themselves). In practice, few central banks or currency regimes operate on

such a simplistic level, and numerous other factors (domestic demand,

production and productivity, imports and exports, relative prices of goods and

services, etc.) will affect the eventual outcome. Besides that, the hypothesis that

the world economy operates under perfect capital mobility is clearly flawed.

As a consequence, even those central banks that strictly limit foreign exchange

interventions often recognize that currency markets can be volatile and may

intervene to counter disruptive short-term movements (that may include

speculative attacks). Thus, intervention does not mean that they are defending a

specific exchange rate level. Hence, the higher the reserves, the higher is the

capacity of the central bank to smooth the volatility of the Balance of Payments

and assure consumption smoothing in the long term.

2.3 Reserve Accumulation

After the end of the Bretton Woods system in the early 1970s, many countries

adopted flexible exchange rates. In theory reserves are not needed under this

type of exchange rate arrangement; thus the expected trend should be a decline

in foreign exchange reserves. However, the opposite happened and foreign

reserves present a strong upward trend. Reserves grew more than gross

domestic product (GDP) and imports in many countries. The only ratio that is

relatively stable is foreign reserves over M2.[6] Below are some theories that can

explain this trend.

2.3.1 Theories

2.3.1.1 Signalling or Vulnerability Indicator

Ratios relating reserves to other external sector variables are popular among

credit risk agencies and international organizations to assess the external

vulnerability of a country. For example, the Article IV of 2013 uses total

external debt in percent of gross international reserves, gross international

reserves in months of prospective goods and nonfactor services imports, in

percent of broad money, in percent of short-term external debt and in percent of

short-term external debt on residual maturity basis plus current account deficit.

Therefore, countries with similar characteristics would accumulate reserves to

avoid negative assessment by the financial market, especially when compared to

members of a peer group.

2.3.1.2 Precautionary Aspect

The traditional use of reserves is as savings for potential times of crises,

especially balance of payments crises. As we will see below, originally those

fears were related to the current account, but this gradually changed to

include financial account needs as well. Originally, the creation of the IMF

was viewed as a response to the need of countries to accumulate reserves.

If a specific country is suffering from a balance of payments crisis, it would

be able to borrow from the IMF, as this would be a pool of resources, and so

the need to accumulate reserves would be lowered. However, the process

of obtaining resources from the Fund is not automatic, which can cause

problematic delays especially when markets are stressed. Hence, the fund

never fulfilled completely its role, serving more as provider of resources for

longer term adjustments. Another caveat of the project is the fact that when

the crisis is generalized, the resources of the IMF could prove insufficient.

After the 2008 crisis, the members of the Fund had to approve a capital

increase, since its resources were strained. Some critics point out that the

increase in reserves in Asian countries after the 1997 Asia crisis was a

consequence of disappointment of the countries of the region with the IMF.[10] During the 2008 crisis, the Federal Reserve instituted currency swap

lines with several countries, alleviating liquidity pressures in dollars, thus

reducing the need to use reserves.

2.3.1.2.1 External Trade

As most countries engage in international trade, reserves would be important to

assure that trade would not be interrupted in the event of a stop of the inflow of

foreign exchange to the country, what could happen during a financial crisis for

example. A rule of thumb usually followed by central banks is to at least hold

an amount of foreign currency equivalent to three months of imports. As

commercial openness increased in the last years (part of the process known as

globalization), this factor alone could be responsible for the increase of reserves

in the same period. As imports grew, reserves should grow as well to maintain

the ratio. Nonetheless, evidence suggests that reserve accumulation was faster

than what would be explained by trade, since the ratio has increased to several

months of imports. The external trade factor also explains why the ratio of

reserves in months of imports is closely watched by credit risk agencies.

2.3.1.2.2 Financial Openness

Besides external trade, the other important trend of the last decades is the

opening of the financial account of the balance of payments. Hence,

financial flows, such as direct investment and portfolio investment became

more important. Usually financial flows are more volatile, which enforces

the necessity of higher reserves. The rule of thumb for holding reserves as a

consequence of the increasing of financial flows is known as Guidotti–

Greenspan rule and it states that a country should hold liquid reserves

equal to their foreign liabilities coming due within a year. An example of

the importance of this ratio can be found in the aftermath of the crisis of

2008, when the Korean Won depreciated strongly. Because of the reliance

of Korean banks on international wholesale financing, the ratio of short-

term external debt to reserves was close to 100%, which exacerbated the

perception of vulnerability.

2.3.1.3 Exchange Rate Policy

Reserve accumulation can be an instrument to interfere with the exchange rate.

Since the first General Agreement on Tariffs and Trade (GATT) of 1948 to the

foundation of the World Trade Organization (WTO) in 1995, the regulation of

trade is a major concern for most countries throughout the world. Hence,

commercial distortions such as subsides and taxes are strongly discouraged.

However, there is no global framework to regulate financial flows. As an

example of regional framework, members of the European Union are prohibited

from introducing capital controls, except in an extraordinary situation. The

dynamics of China’s trade balance and reserve accumulation during the first

decade of the 2000 was one of the main reasons for the interest in this topic.

Some economists are trying to explain this behavior. Usually, the explanation is

based on a sophisticated variation of mercantilism, such as to protect the take-

off in the tradable sector of an economy, by avoiding the real exchange rate

appreciation that would naturally arise from this process. One attempt uses a

standard model of open economy intertemporal consumption to show that it is

possible to replicate a tariff on imports or a subsidy on exports by closing the

current account and accumulating reserves. Another is more related to the

economic growth literature. The argument is that the tradable sector of an

economy is more capital intense than the non-tradable sector. The private sector

invests too little in capital, since it fails to understand the social gains of a

higher capital ratio given by externalities (like improvements in human capital,

higher competition, technological spillovers and increasing returns to scale).

The government could improve the equilibrium by imposing subsidies and

tariffs, but the hypothesis is that the government is unable to distinguish

between good investment opportunities and rent seeking schemes. Thus,

reserves accumulation would correspond to a loan to foreigners to purchase a

quantity of tradable goods from the economy. In this case, the real exchange

rate would depreciate and the growth rate would increase. In some cases, this

could improve welfare, since the higher growth rate would compensate the loss

of the tradable goods that could be consumed or invested. In this context,

foreigners have the role to choose only the useful tradable goods sectors.

2.3.1.4 Intergenerational Savings

Reserve accumulation can be seen as a way of "forced savings". The

government, by closing the financial account, would force the private sector to

buy domestic debt in the lack of better alternatives. With these resources, the

government buys foreign assets. Thus, the government coordinates the savings

accumulation in the form of reserves. Sovereign wealth funds are examples of

governments that try to save the windfall of booming exports as long-term

assets to be used when the source of the windfall is extinguished.

2.3.2 Costs

There are costs in maintaining large currency reserves. Price fluctuations in

exchange markets result in gains and losses in the purchasing power of reserves.

In addition to fluctuations in exchange rates, the purchasing power of fiat

money decreases constantly due to devaluation through inflation. Therefore, a

central bank must continually increase the amount of its reserves to maintain the

same power to manipulate exchange rates. Reserves of foreign currency provide

a small return in interest. However, this may be less than the reduction in

purchasing power of that currency over the same period of time due to inflation,

effectively resulting in a negative return known as the "quasi-fiscal cost". In

addition, large currency reserves could have been invested in higher yielding

assets.

Several calculations have been attempted to measure the cost of reserves. The

traditional one is the spread between government debt and the yield on reserves.

The caveat is that higher reserves can decrease the perception of risk and thus

the government bond interest rate, so this measures can overstate the cost.

Alternatively, another measure compares the yield in reserves with the

alternative scenario of the resources being invested in capital stock to the

economy, which is hard to measure. One interesting measure tries to compare

the spread between short term foreign borrowing of the private sector and yields

on reserves, recognizing that reserves can correspond to a transfer between the

private and the public sectors. By this measure, the cost can reach 1% of GDP

to developing countries. While this is high, it should be viewed as an insurance

against a crisis that could easily cost 10% of GDP to a country. In the context of

theoretical economic models it is possible to simulate economies with different

policies (accumulate reserves or not) and directly compare the welfare in terms

of consumption. Results are mixed, since they depend on specific features of the

models.

2.4 History

The modern exchange market as tied to the prices of gold began during 1880.

Of this year the countries significant by size of reserves were Austria, Belgium,

Canada, Denmark, Finland, Germany and Sweden.

Official international reserves, the means of official international payments,

formerly consisted only of gold, and occasionally silver. But under the Bretton

Woods system, the US dollar functioned as a reserve currency, so it too became

part of a nation's official international reserve assets. From 1944–1968, the US

dollar was convertible into gold through the Federal Reserve System, but after

1968 only central banks could convert dollars into gold from official gold

reserves, and after 1973 no individual or institution could convert US dollars

into gold from official gold reserves. Since 1973, no major currencies have been

convertible into gold from official gold reserves. Individuals and institutions

must now buy gold in private markets, just like other commodities. Even though

US dollars and other currencies are no longer convertible into gold from official

gold reserves, they still can function as official international reserves.

2.5 Adequacy and Excess Reserves

The IMF proposed a new metric to assess reserves adequacy in 2011. The

metric was based on the careful analysis of sources of outflow during crisis.

Those liquidity needs are calculated taking in consideration the correlation

between various components of the balance of payments and the probability of

tail events. The higher the ratio of reserves to the developed metric, the lower is

the risk of a crisis and the drop in consumption during a crisis. Besides that, the

Fund does econometric analysis of several factors listed above and finds those

reserves ratios are generally adequate among emerging markets.

Reserves that are above the adequacy ratio can be used in other government

funds invested in more risky assets such as sovereign wealth funds or as

insurance to time of crisis, such as stabilization funds.

Chapter Three

An Economic Analysis of Bangladesh’s Foreign

Exchange Reserves

3.1 Introduction

In its latest monetary policy statement, the Bangladesh Bank, the central

monetary authority of Bangladesh, stated that “the country will be better off

with utilisation of the foreign exchange inflows in growth supportive

investments than with accretion of ever reserves”.2 The call has been made in

the wake of the country’s burgeoning foreign exchange (forex) reserves that

amounted to a record US$8.5 billion in August 2009. The central bank’s major

concern is the opportunity cost of reserves build-up.3 However, the Bangladesh

Bank has neither given any detailed account on the optimal level of reserves nor

any roadmap on how to utilise the country’s excess reserves, if any.

We noticed a similar euphoria in India, particularly after 2000 when it became

one of the major forex reserves holders. However, the reversal of short-term

capital flows and deterioration in its trade account following the financial crisis

resulted in concomitant decline in India’s forex reserves. Except for the

developed and a handful of odd-underdeveloped countries, the reserves build-up

has indeed become a norm in most emerging economies. For instance, China,

the world’s largest holder of forex reserves, has, by itself, accumulated over

US$2 trillion reserves since 1990, with the accumulation accelerating in recent

years.4

Open-economy macroeconomics has paid significant attention to this area in

recent years, particularly following the East Asian and petro-dollar countries’

massive reserves build-up which has added at least two interesting dimensions

to the rapidly changing global economy. First, it has created huge global

imbalances between the United States (US) and China.5 Second, some of the

reserves are being channelled to develop numerous Sovereign Wealth Funds

(SWFs) that have been seen as new financial power brokers.6

For Bangladesh’s economy, an unprecedented rise in remittances in recent years

has resulted in reserves accumulation. It is perhaps unique in the sense that the

trade balance of current account or capital flows components (including foreign

direct investments [FDI]) of capital and financial accounts generally lead to a

surplus in the balance of payments (BoP) which eventually end up in reserves

build-up, as can be noticed in East Asia and other emerging markets.

Nevertheless, the reserves accretion has both advantages and disadvantages. A

country has to maintain a certain amount of forex reserves to meet its import

bills and other short-term payments or debt obligations, inter alia. But reserves

accumulation in excess of optimal level comes with significant costs (both fiscal

and social). Furthermore, the alternative uses of reserves are not the panacea.

Such moves have faced a huge setback in recent times following the capital loss

of some of the key SWFs.7 Hence, surplus in the BoP account and the

consequent reserves build-up is a double-edged sword and poses a momentous

challenge to the central bankers in moulding monetary policies.

Research on the different aspects of reserves accumulation is vast but little has

been done in Bangladesh. Against this backdrop, the aim of the paper is to

provide a simple analysis of Bangladesh’s forex reserves, particularly focusing

on the country’s key macro variables including its external economy, and its

reserves position vis-à-vis some conventional reserves adequacy criteria. The

paper also attempts to evaluate the usefulness of these global benchmarks in the

local circumstances. The rest of the paper is organised as follows. In Section II,

we discuss the existing literature pertaining to reserves accumulation. The

recent dynamics of some of Bangladesh’s macro and financial variables,

particularly the trends in its savings, investments, balance of payments (BoP)

and exchange rate, that have direct association with reserves accumulation are

analysed in Section III. Based on a back-of-the-envelope calculation, the

reserves adequacy measure for Bangladesh is discussed in Section IV. In

Section V, we look at the costs and benefits of reserves accumulation in the

context of Bangladesh emphasising on its macroeconomic and financial sector

dynamics. The question of alternative uses of the country’s reserves, if any, will

be discussed in Section VI. The final section concludes the paper.

3.2 Reserves Accumulation: The Literature

The International Monetary Fund (IMF) defines an economy’s international

reserves as “those external assets that are readily available to and controlled by

monetary authorities for direct financing of payments imbalances through

intervention in exchange markets to affect the currency exchange, and/or for

other purposes.8 Before we examine whether Bangladesh is in a position to use

some of its forex reserves for infrastructure development or other productive

purposes, it is essential to explore the literature on this issue. The literature on

the various issues under this rubric is vast and burgeoning, so our discussion

should be seen as nothing more than a ‘helicopter tour’. We shall explore some

key issues pertaining to forex reserves. These include motivations behind

emerging markets and other developing countries’ reserves accumulation, the

optimal level of reserves, the opportunity costs of reserves build-up and their

alternative uses.

It is rather puzzling that developing economies with severe constraints of capital

have a tendency towards stock-piling low-yielding assets – foreign exchange

reserves. Several studies have attempted to understand the puzzle but the

general consensus is that countries accumulate reserves owing to two key

motives- mercantilist and self-insurance.9 Apparently, except for China, self-

insurance trumps mercantilist motives.

Some studies show that much of the reserves accumulation in Asia can be

attributed to an optimal insurance model that essentially means that reserves

provide a steady source of liquidity10 to mitigate the impact of a “sudden stop”

in capital flows.11 Indeed, the reserves have cushioned some Asian countries in

the wake of capital outflows and global risk aversion during the ongoing

financial crisis. However, Green and Torgerson (2007) found that the largest

reserves holders in emerging markets far exceed the required precautionary

levels and they are of the view that most reserves accumulation is an attempt to

limit exchange rate flexibility, or what is known as mercantilist exchange rate

policies. A recent IMF study, though, found that emerging Asia’s, other than

China, reserves build-up is not excessive.

However, the open-economy trilemma might break down under certain

conditions, particularly when the central banks target exchange rate with an

excess supply of foreign exchange.15 The massive reserves accumulation in

emerging markets indicate that countries can converge towards intermediate

levels of the trilemma, banking on a managed float exchange rates while

maintaining some degree of monetary autonomy and accelerating financial

openness. In other words, many countries have achieved the intermediate level

of this trilemma using forex reserves as a buffer.

It is widely believed (and empirically tested) that China’s reserves build-up is

the result of its mercantilist exchange rate policies as opposed to precautionary

motives.

Nevertheless, whatever the intentions, the forex reserves build-up in most

circumstances is a by-product of domestic currency undervaluation (or to resist

currency appreciation) vis-à-vis its major trading partners that ultimately makes

the concerned country’s tradables relatively competitive in the international

markets. However, a critical point here is that the success of this strategy

depends on how open or closed an economy is.13 In theory, a country cannot

maintain a fixed exchange rate, free capital movement and an independent

monetary policy, concurrently known as the “impossible trinity”, a fundamental

contribution of the Mundell-Fleming framework.

To sum up, irrespective of precautionary or mercantilist motives, reserves shield

developing economies form financial distress, particularly when countries face a

sudden stop in foreign capital flows or witness a reversal of flows. This is

particularly important for countries that have institutional bottlenecks. A

comfortable level of reserves minimises a country’s sovereign default risk.

Finally, a substantive stock of reserves could potentially lower the concerned

country’s borrowing costs. (2008) has calculated the social cost of reserves

accumulation for India. See Table 1 for the potential risk and cost, and

underlying factors of reserves accumulation.

Table 1: The Potential Cost or Risk of Reserves Accumulation

Potential Risk or Cost Underlying factors

Risks a) Conflicts between exchange

rate stability and inappropriate

easing of monetary conditions,

eventually resulting in inflation

and/or overinvestment and/or

bubbles.

b) Difficulties for central banks in

managing the money market and,

more generally, in implementing

monetary policy.

c) Segmentation of the public

debt market, thus impairing its

Unsuccessful sterilisation due, for example

to (i) underdeveloped financial markets and

shortage of sterilisation instruments; (ii)

snowball effects (that is, higher interest rates

produced by sterilisation coupled with

expectations of exchange rate appreciation

produce massive capital inflows, thus forcing

the central bank to intervene/sterilise even

more).

Excessive central bank dependence on

liquidity-absorbing transactions, whereas the

money market is more easily managed via

liquidity-providing operations.

Excessive sterilisation through issuance of

central bank liabilities instead of government

liquidity.

d) Market (that is, currency and

interest rate) risk, resulting in

potentially sizeable capital losses

on the balance sheet of the

moneytary authority.

paper.

Accumulation over time of a potential for

currency revaluation/appreciation, which

materialises when intervention ceases or is

no longer effective; interest rate risk.

Costs Sterilisation costs

Concerns about bank profitability

The yields paid on domestic sterilisation

instruments exceed those on foreign assets.

Particularly because of controls on lending,

the banking sector might have hardly any

alternatives to buying low-yield sterilisation

instruments.Source: The European Central Bank (2006).

Thus, reserves accumulation is a trade off between liquid assets (that reduces

the probability of financial distress, lessen sovereign default risk, lowers real

exchange rate volatility, etc. which in turn may induce potentially higher growth

rate) and opportunity cost (sterilisation cost, social cost and difficulties in

monetary policy operations, etc.).

The next question is what the optimal level of reserves is. There is no “one-size-

fits-all” rule to measure the optimal reserves for all countries but there are some

criteria that help gauge if a country has adequate reserves or holding an excess.

The conventional recommendation is that a country’s reserves should be ten

percent of its GDP. It is an indicative measure of the relative size of reserves

holding. The other conventional prescription is that reserves account for at least

three months worth of a country’s import bills, a widely accepted criterion

derived from a trade-related approach to the BoP and reserves requirements

which most countries follow when they calculate optimal reserves.

The Baumol-Tobin inventory model with fixed costs of depleting and

replenishing reserves had been the framework of reserve adequacy literature,

particularly in the 1960s and 1970s when current accounts were the major

focus. However, the rapid spread of financial globalisation, particularly free

flows of cross-border short-term capital, has been accompanied by contagions

as was noticed during the East Asian financial crisis in 1997-98 and the

numerous financial turmoils in Latin America, Eastern Europe or elsewhere in

the world. And in most cases, countries that had been affected by the crisis have

had large ratios of short-term foreign debt. Hence, if an economy has an open or

semi-open capital market or its government borrows extensively from foreign

sources, it needs to look at its capital account as well. Taking this development

into consideration, the Greenspan-Guidotti-Fischer rule recommends that a

country’s optimal reserves should be at least equal to its short-term debt. This

rule reflects the shifting focus from reserves adequacy measured in terms of

trade flows of goods to the flows of assets.

There are some other adequacy rules concerning optimal reserves, particularly

from countries that are exposed to short-term debt. The most notable one is that

adequacy of forex reserves should amount to 20 percent of money supply.27

The additional measures practiced by the Reserve Bank of India are a) 100

percent of total external debt, and b) share of volatile inflows (short-term debt

plus cumulative portfolio investment). However, it appears that these rules have

not gained much currency in practice.

Nevertheless, these rules are not beyond criticism and in many instances are

proven to not be a proper guide, particularly when countries face a “black swan”

type of unpredictable economic crisis. For instance, the IMF study calculated

that the cumulative output loss for six Asian economies most affected by the

1997-98 financial crisis was 19 percent of their GDP on average, and the GDP

loss for Indonesia and Thailand amounted to around 30 percent of their GDP.

An estimation by Caprio and Klingebiel (2003) has shown that the fiscal costs

of the banking crisis were as high as 55 percent of Indonesia’s GDP, and as low

as 16 percent of Malaysia’s GDP.

The next issue to look at is alternative uses of reserves. High opportunity cost of

reserves holding has prompted many countries to use a part of their reserves in

alternative vehicles. In other words, countries that have reserves in excess of the

optimal level are shifting them (or part of them) from the low-risk and low-yield

investments (mostly treasuries) to high-risk and high-yield assets. The petro-

dollar economies set the trend in the 1970s by investing a portion of their

reserves in the form of SWFs or similar vehicles following the oil-boom (and

the consequent surplus in their current accounts). Later, Singapore and some

other East Asian economies, notably China, joined the league when non-oil

trade generated the surpluses. A whopping US$3.22 trillion asset is now under

management by numerous SWFs. IMF projects that sovereign funds may hit the

US$6 trillion to US$10 trillion mark by 2013. The SWFs can be broadly

distinguished in five categories – stabilisation funds, savings funds for future

generations, reserve investment corporations, development funds and contingent

pension reserve funds. According to the IMF, these assets can be invested in a

broad range of asset classes – government bonds, agency and asset-backed

securities, corporate bonds, equities, real estate, infrastructure, derivatives

markets, alternative investments, and FDI.

The key issue here is whether such sovereign funds are developed based on

capital account or current account surpluses. The formation of SWFs with the

aid of speculative short-term capital flows that are largely drawn by their

macroeconomic fundamentals are liabilities for the recipient countries.

Alternative sources of the funds are largely generated through export boom32 or

commodity boom. SWFs based on capital account surplus are proven to be risky

while the funds based on current account surplus are relatively less perilous.

Nevertheless, SWFs are not evaluated merely based on economic costs and

benefits; these funds in some cases might have geo-strategic motivations.34

3.3 Major Findings

‘Foreign remittance’ means purchase and sale of freely convertible foreign

currencies as admissible under Exchange Control Regulations of the country.

Purchase of foreign currencies constitutes inward foreign remittance and sale of

foreign currencies constitutes outward foreign remittance. So we see that there

are two types of Foreign Remittance:

Foreign Inward Remittance

Foreign Outward Remittance

Banks in Bangladesh, for example, SIBL (Shajalal Islami Bank Ltd.) has

established remittance arrangements with a number of exchange houses to

facilitate wage earners to remit their money to Bangladesh. This bank has

already been in operation with UAE Exchange Centre LLC, Wall Street

Exchange LLC, Trust Exchange, Route Asia Exchange, Instant Cash and

Bangladesh Money Transfer. SIBL have obtained permission from Bangladesh

Bank to start operation with Al Saad Exchange, First Solution Exchange, Al

Ahalia Exchange Bureau and Federal Exchange. The bank maintains

correspondence with other 16 Exchange House which are Al Fadaral Exchange,

National Exchange, City Exchange, Future Exchange, Al Ghurair Exchange,

Habib Exchange, Al Ansari Exchange, Emirates India International Exchange,

Instant Exchange, Oman UAE Exchange, Modern Exchange, Purusuttam Kanji

Exchange, Musandam Exchange, Lasidas Tharia Exchange, Oman United

Exchange and ICICI Bank. The extensive branch network of these Exchange

Houses has been largely helping Bangladeshi expatriates working in the UAE,

UK, Qatar, and Oman to transfer their funds speedily and efficiently through

online network. SIBL’s total foreign remittance volume was Tk. 3,209 million

in 2014. SIBL is exploring further avenues of remittance from other countries

such as Saudi Arabia, Malaysia, USA and Italy in the near future. The Foreign

Remittance department of SIBL Dilkusha Branch is equipped with a number of

foreign remittance facilities. Following are the types of foreign

Issuance of Foreign Demand Draft (F.D.D)

Issuance of travelers Cheques (T.C)

Issuance of foreign T.T (Telegraphic Transfer)

Disbursement of the cash of incoming F.T.T.

Collection of F.D.D.

Table 1 :Trends of Major Macroeconomic Indicators

Indicators FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14

Exchange Rate 67.1 69 68.6 68.8 69.2 71.2 79.1 79.9 77.7

Per Capital GDP in Taka

3450

2

3877

3

4371

9

4835

9

5396

1

6119

8

6961

4

7800

9

8673

1

As percentage of GDP

Domestic Savings 21.4 20.8 19.2 20.3 20.8 20.6 21.2 22 23.4

Investment 26.1 26.2 26.2 26.2 26.3 27.4 28.3 28.4 28.7

Revenue Income 9.3 9 9.6 9.1 9.5 10.2 10.9 10.7 11.6

Reveneue Surplus/Deficit 2.1 1.3 1.3 0.4 1.1 1.9 2.4 2.1 3

Annual Development Program 4.5 3.9 3.6 2.8 3.2 3.6 3.6 4.1 4.4

(ADP)

Source: Bangladesh Bank Annual Report, 2013-14.

3.4 Remittance in Bangladesh

Remittance is the life line of Bangladesh economy. Some 4.5m non resident

Bangladeshis are working abroad, and sending home hard earned foreign

currencies. It is believed that the actual number of Bangladeshi migrants, both

legal and illegal, would be close to 7.5 million. In the first 10 months of FY

2006-07, number of manpower export stood at 0.42m, showing 83.14% rise,

compared to 0.25m in FY2004-05 . In FY2005-06, the number stood at 0.29m,

current year to year growth is around 16%. In addition to achieving higher

export earnings, the country witnessed a 44 percent growth in remittance

earnings during the first quarter of 2008-09 fiscal year compared to the same

period of the previous fiscal year. The other records of remittance earnings in a

single month are $820.71 million in July and $808.72 million in March of year

2008. A total of 9,81,102 Bangladeshi people went abroad in 2007-08 fiscal

year which is about 74 percent above the previous fiscal year figure,

Bangladesh Bank statistics show. According to the statistics, on monthly

average basis more than 81,000 Bangladeshis went abroad in 2007-08 fiscal

year. The figure was 46,000 in the in the Indicators previous fiscal year.

Medium Term Macroeconomic Framework: Key Indicators

Indicators

ActualEstimated

(Revised) BudgetProjected

FY 11

FY

12

FY

13 FY 14 FY 15 FY 16 FY 17

Total Revenue 11.7 12.4 12.4 13.3 13.6 14.2 14.6

Tax 10 10.4 10.4 11 11.6 12 13.4

Non-Tax 9.6 10 10 10.6 11.2 11.6 12

Domestic Borrowing 3.8 3.3 3.1 3.5 3.2 3.2 3.2

External Borrowing 0.6 0.6 1.2 1.6 1.8 1.8 1.8

Exports( % change) 39.2 6.2 10.7 15 15 14.5 14.5

Import(% change) 52.1 2.4 0.8 8 15 14.5 13

Remitances (US$ million) 11.5 12.8 14.5 14.6 16.1 18 20.5

Current account balance (% of

GDP) -1.5

-

0.04 1.9 1.3 0.5 0 0.02

50Source: Bangladesh Bank Annual Report, 2013-14.

Non-resident Bangladeshis (NRBs) sent $2.345 billion to Bangladesh between

July and September of 2008, according to the Bangladesh Bank statistics.

Meanwhile, private bank officials said the global economic slowdown, mainly

in the US and European countries, is yet to impact the remittance inflow. They,

however, apprehend that if the crisis continues it may have a negative impact on

the inflow. The remittance market of Bangladesh has been showing a steady

growth in terms of incoming remittance volume. Considering the current macro-

economic indicators: it seems that this growth run will continue in the coming

years. Central Bank predicts that our annual incoming foreign remittance will

touch $10 billion in the next 3 years. The reasons for such robust growth can be

summarized as:

Stable macro-economic indicators including GDP growth,

Steady growth in manpower export specially in the middle east

Substantial devaluation of the local currency

Rapid urbanization

Development of new remittance corridors in Australia and part of

Europe and Africa

Increased focus of Central Bank and the Government to channel funds

through formal channels

Increased competition among financial institution to grab market share

Aggressive marketing policy adopted by Banks to increase their share of

wallet

Expansion of branch network of various commercial banks

MFIs involvement in channeling remittance funds in remote areas

Participation in the UN peace keeping missions

Anti-Money Laundering rules and regulations came in force

However, the market is still far from perfection in terms of service quality, cost

structure, and transaction risk aspects. Among all, the biggest impediment is the

speed of transactions and cost of transaction. In cases, it takes more than a week

to send a foreign remittance to beneficiary. Average cost is 20 SAR for a

remittance from Saudia Arabia to Bangladesh.

3.5 Major Remittance Sending Countries

Overseas migration from Bangladesh may be divided into two categories.

Outflows of Bangladeshis to the Western World, mainly to UK, and more

recently to the USA and Canada have been going on for a long time. The

migrants tend to stay permanently and tend to be skilled and semi skilled

workers and professionals.

On the other hand the migration boom in the early eighties relates mostly to

temporary migration of mostly semi skilled and unskilled laborers to the Middle

East. In recent years Malaysia, Korea and Singapore have emerged as important

destinations for Bangladeshi migrant workers. Around 41 percent of the

migrants have gone to the Kingdom of Saudi Arabia alone, while the other Gulf

States namely, UAE, Oman, Qatar, Bahrain, Kuwait, Iraq and Iran have

cumulatively absorbed nearly 53 percent of the migrant workers from

Bangladesh. The employment of workers abroad is quite sensitive to the

prevailing socio-political environment of the recipient countries. The Gulf crisis

in the 1990s forced the return of some 56,000 workers back home and led to a

sudden decline in remittance inflows from Kuwait and Iraq.

Table 2: Country-wise Workers’ Remittances

Countries FY08 FY09 FY10 FY11 FY12 FY13 FY14

Saudi Arabia 2324 2859 3427 3290 3684.4 3830 3119

UAE 1135 1755 1890 2003 2404.8 2829 2685

UK 896.1 789.7 827.5 889.6 987.5 991.6 901.2

Kuwait 863.7 970.8 1019 1076 1190.1 1187 1107

USA 1380 1575 1452 1849 1498.5 1860 2323

Italy 214.5 186.9 182.2 215.6 244.8 233.2 269.6

Qatar 289.8 343.4 360.9 319.4 335.3 286.9 257.5

Oman 220.6 290.1 349.1 334.3 400.9 610.1 701.1

Singapore 130.1 165.1 193.5 202.3 311.5 498.8 429.1

Germany 26.9 19.3 16.5 25.6 35 25.8 26.94

Bahrain 138.2 157.4 170.1 185.9 298.5 361.7 459.4

Japan 16.3 14.1 14.7 15.2 22.2 21.2 17.06

Malaysia 92.4 282.2 587.1 703.7 847.5 997.4 1065

Other Countries 186.8 281.1 497.4 541.8 582.7 728.9 867.8

Total 7915 9689

1098

7 11650 12843 14461 14228

Source: Bangladesh Bank Annual Report, 2013-14.

3.6 Current Remittance Process

Currently the remittance process is mostly manual, partially automated.

Migrants use different methods in sending remittance involving both official

and unofficial channels. A major portion of remittance is being processed by

Hawala’s which is also known as ‘hundi’, which is an illegal process. And these

Hawalla’s are getting market due to lengthy process of remittance management

using banking channel.Legally bank and exchange house acts as main means for

remittance.

Exchange houses play a vital role as remitters touch point. Mostly, remittance

process initiates from exchange house .Exchange house acts as the contact point

for remitter, exchange house receives the payment instruction from remitter and

transfer the instruction to bank with which they have bilateral arrangement for

fund mobilization. The receiving bank receives the fund and routes the

remittance to actual beneficiary thro other banks or agents. Central bank acts as

clearing house for inter bank fund transfer. Officially, transfer of remittance

takes place through demand draft issued by a bank or an exchange house,

telegraphic transfer; postal order; account to account transfer. When remittances

are transferred directly from the foreign account of migrant worker to his own

account at home it is known as direct transfer. This can be through telegraphic

means or otherwise. Remittances are frequently sent through demand draft in

Taka issued by a bank or an exchange house in favor of a nominee of migrant.

Usually the draft is sent by post or in emergency by courier service. One can

send remittance through the postal authorities. In such case the remitted money

is handed over to the receiver by the local post-office. As there is no automated

system between exchange house to and bank to bank – the process takes weeks

to process a transaction in general.

Roadblocks in Current Remittance Process: The major roadblocks of a smooth

and efficient payment of foreign remittances are as follows:

Poor infrastructure in rural and semi-urban economy

Inadequate reach of private commercial banks within the country

Massive information asymmetry in the market

Active ‘Hundi’ market

Inefficiency of financial institutions

Poorly regulated exchange houses

Low literacy rate in the country

Uneven competition among financial institutions

Lack of investment in IT backbone development for market efficiency

Absence of a strong central payment gateway for ‘Straight Though

Processing (STP) of payment services. These above

imperfections/inefficiencies have resulted in abnormal share of ‘Hundi’

business in this sector. Today, it is estimated that the share of ‘Hundi’

business constitutes roughly 40% of total incoming foreign remittances.

3.7 Recent Macroeconomic and Monetary Developments in

Bangladesh Economy

How is this conventional wisdom of optimal reserves useful for Bangladesh,

and where do its forex reserves stand vis-à-vis the reserves yardsticks we have

discussed in the preceding section? Before we do a back-of-the-envelope

calculation of Bangladesh’s forex reserves, we need to look at some of its key

macro variables that have implications for reserves build-up. The Bangladesh

economy has demonstrated significant economic growth in the past one and a

half decades, owing to marked improvements in its key macro variables

including steady development in its external sectors. Its exports and imports are

growing steadily, aid flows are waning, and remittances are skyrocketing. As a

result, the country’s major macro variables are relatively better than compared

to that of a decade ago. But there are some pitfalls too.

As seen in Figure 1 (the left scale), there is a substantive gap between

Bangladesh’s gross domestic savings (GDS) and gross domestic investments

(GDI). Generally, imported savings that are reflected in gross national savings

(GNS) fill the gap. In the case of Bangladesh, the gap has been bridged

historically by GNS but since 2005-06 one can see a growing divergence

between GNS and GNI. From the macroeconomic perspective, this scenario is

seen either as a ‘savings glut’ (that one observes in China) or an ‘investment

drought’ (other emerging Asian economies). As evident from the slope of GNI,

Bangladesh falls into the latter group owing to its ‘investment drought’. This is

partly due to its underdeveloped financial systems,36 and partly due to other

structural problems in the economy – entailing difficulties in properly

channeling national savings to investments. This development has led to a

surplus in Bangladesh’s current account (BoP) that eventually ends up in

reserves accretion. The right scale of Figure 1 shows the trends in its forex

reserves. One gets a relatively better picture of Bangladesh’s forex reserves by

assessing its BoP position, particularly dynamics in its current account. It is

current account surpluses that led to the huge reserves accumulation in East

Asian countries.

Source: Based on International Financial Statistics, International Monetray

Fund.

The BoP position of Bangladesh (see Figure 2) shows that the country ran a

modest surplus in its capital and financial accounts until recently, whereas its

current account had been volatile until 2005-06. So, a consistent surplus in its

current account is a very recent development. The economy has been

experiencing a steady trade deficit (both exports and imports are on the rise with

import growths outpacing export growth) but the private transfer component of

the current account has witnessed a steady growth largely owing to workers’

remittances (see Table 2). Lately, Bangladesh has become one of the leading

remittance recipient countries. Despite leakages in the country’s capital and

financial accounts and trade account, remittances help maintain the overall

surplus in its BoP.

Empirical studies on Bangladesh’s equilibrium current account balance support

this analysis. Theoretically, current account is positively correlated with fiscal

balance, economic growth and private transfers and adversly with net foreign

assets. remittance inflows (private transfer).

Figure 3 illustrates Bangladesh’s current account norm along with the projected

medium-term current account which is based on medium-term projection values

for fiscal balance, GDP growth, private trasfers and NFA.

Figure 3: Bangladesh’s Equilibrium Current Account (% of GDP)

Source: IMF (2008).

Despite this positive scenario, one needs to assess Bangladesh’s current BoP

balances (thus forex reserves) with some caution. Bangladesh’s imports bills

were marginally lower in 2008-09 than the previous fiscal year, thanks partly to

a bust in global commodity prices, although exports witnessed a modest growth.

The excessive inflows of remittances could possibly be due to the repatriation of

savings by overseas Bangladeshis who lost their jobs in different parts of the

world during the financial crisis or their savings found limited investment

opportunities in overseas capital markets. These two developments could

slightly overstate the BoP positions of Bangladesh vis-à-vis its recent past.

The next point to address is Bangladesh’s monetary policy, particularly its

exchange rate that has wider implications for reserves build-up, as can be noted

in many East Asian economies, most noticeably in the case of China. The

detailed theoretical underpinnings of open-economy trilemma and other issues

related to reserves accumulation are discussed in the earlier section, and fairly

convincingly show that reserve accumulation is the result of intervention in the

forex market. The official position pertaining to Bangladesh’s exchange rate is

that the country’s “exchange rate is largely market-determined but the central

bank will intervene in the market, if needed”. This is what known as a

“managed float” exchange rate.

Nevertheless, one can test whether the Bangladesh Bank intervenes in the

foreign exchange market (sterilisation). If so, the degree of intervention can be

measured running a simple regression and plotting a sterilisation index

subsequently. The simple regression results (in line with IMF)shows that the

central bank of Bangladesh intervenes in the forex market substantially (see

Box 1). Moreover, one can get the same impression if we see the country’s

bilateral exchange rate that has virtually witnessed no volatility in recent years.

This is also another account (though loosely speaking) of intervention in its

forex market. The Bangladesh Bank’s recent monetary policy statement also

acknowledges that it purchased US$1.48 billion from the inter-bank market in

2008-09.

40 IMF (2007).

Box 1: Bangladesh’s Forex Market: The Degree of Sterilisation The

World Economic outlook (2007) of International Monetary Fund

suggested a measure of sterilisation given by:

=+ + ……....(1) mtiM,,2Δti,αti,δmtiNFA,,Δmtiu,,

Where, is the monthly changes in the country I money supply (defined as

M2), in year t and month m, is a constant and are the changes in the net

foreign assets of country I, at time t and month m, and is the error term. In

this case, a value of equal to 0 implies full monetary sterilisation, whereas

a value of 1 represents no sterilisation. mtiM,,2Δ ti,δ mtiNFA,,Δ mtiu,,δ

Following the above methodology (equation 1) we get the following OLS

results for Bangladesh over the period of M1:2002-M4:2009:

= 1.03 + 0.12 + ……….(2) 2MΔNFAΔ u

(7.07) (4.46)

The OLS is statistically significant and the sign are expected. Now we

substitute the parameter (0.12) in the data that gives us a picture of the

degree of sterilisation (see Figure 4). δNFAΔ

Figure 4: Bangladesh’s Sterilisation Index: M1:2002-M4:2009

Source: Author’s calculation

3.8 Reserves Adequacy Measure for Bangladesh

Having discussed the recent trends in Bangladesh’s BoP and its exchange rate

(and sterilisation) policies we now measure the different reserves adequacy

benchmarks for the country based on some international criteria. As discussed

in section II, adequacy of forex reserves is an important parameter in gauging an

economy’s ability to absorb external shocks. The natural starting point is the

reserves to GDP ratio. In Bangladesh’s case, the ratio shows that, since the

fiscal year 2005-06, there has been a significant rise of reserves to GDP, but it

still falls short, albeit marginally, of the standard 10 percent benchmark (see

Figure 5).

Figure 5: Bangladesh’s Forex Reserves to GDP Ratio: 1997-98 to 2008-09

Source: Based on Bangladesh Bank.

The other conventional measure is the reserves to import coverage ratio, which

is critical for countries like Bangladesh that have limited capital account

openness. As depicted in Figure 6, the country is now in a position to finance

approximately four and half months of import bills in the event of any unwanted

crisis. This fulfills the benchmark requirements.

In terms of reserves to money supply criteria, Bangladesh has the required level

of reserves. In recent years, the ratio has increased significantly and, of late, it

touched the benchmark 20 percent (see Figure 7). However, its reserves position

is faring well when it comes to reserves to short-term debt ratio which has

gained much currency in reserves literature, particularly countries with a

convertible capital account. Bangladesh’s short-term debt has fluctuated

between 25 to 30 percent in recent years which is much lower than the standard

yardstick of 100 percent (see Figure 8).

Figure 6: Bangladesh’s FX Reserves-Imports Coverage Ratio: 1997-98 to

2008-09

Source: Based on the Bangladesh Bank.

Figure 7: Bangladesh FX Reserves to Broad Money Ratio: 1997-98 to 2008-

09

Source: Based on the Bangladesh Bank

Figure 8: Bangladesh’s Shortterm Debt as Percentage of FX Reserves:

1997-2007

Source: Based on World Development Indicators, The World Bank.

Figure 9: Reserves Adequacy Measures for Bangladesh and Its Excess

Reserves

Source: Author’s calculation based on Bangladesh Bank and World

Development Indicators, The World Bank

.

Bangladesh’s forex reserves position vis-à-vis the aforementioned criteria are

summarised in Figure 9. It shows that the country’s reserves are higher than the

required level based on reserves to short-term debt and reserves to import

coverage ratio, and fall short as per as reserves to GDP ratio is concerned. Its

BoP position can be a guide in this regard. Bangladesh does not receive a

significant level of FDI or portfolio investment but trade and net transfers are

dominant parts of its BoP. Therefore, it is the current account-related factors of

reserves criteria that are largely relevant for Bangladesh, and based on reserves

to import bills, the country’s reserves level is marginally higher than what it

requires.

In summary, Bangladesh’s forex reserves are not substantially higher than

adequate if one considers all the reserves adequacy measures. Hence, based on

these reserves adequacy measures and its BoP position, there is little room to

conclude that Bangladesh’s reserves holding is much higher than adequate or

vice-versa. We will discuss the issue in a holistic framework in the next section.

3.9 The Cost and Benefits of Bangladesh’s Reserves

Accumulation

In this section, we discuss the costs and benefits of Bangladesh’s reserves

accumulation. The direct cost of reserves holding is the spread between one-

year US Treasury and Bangladesh Bank Treasury rates. The returns from

Treasury bonds in Bangladesh are much lower than the yields it receives from

forex reserves, (invested predominantly in the US Treasury), due to the interest

rate arbitrage. As can be seen from Figure 10, the collapse of interest rates in

the US, particularly following the financial crisis, augmented the gap between

the two treasury rates. In recent months, the interest rate on Bangladesh bank

Treasuries has also declined but the spread remained at four to five percentage

points. In crude economic measures, this gap is substantive. If we take

Bangladesh’s reserves to import coverage ratio as an example of the cost of

reserves build-up, it appears that the country has roughly US$3 billion reserves

(equivalent to over its -1.8 months imports bills) in excess, and its cost of

holding excess reserves is roughly US$150 million annually, based on the

interest rate arbitrage between Bangladesh and the US. In a similar fashion, the

total cost of its reserves build-up would be approximately US$400 to 450

million.

As discussed in section II, the central bank intervenes in the forex market and

buys foreign currency by releasing domestic currency that eventually sucked out

from market through treasury bonds.

Nevertheless, this cost has to be weighed with benefits of holding reserves.

First, sterilisation reduces prices and exchange rate volatilities. Second, sizeable

reserves reduce sovereign default risk, which is very crucial for Bangladesh

considering the fact that the country is poorly graded for its political

uncertainties. Third, all these factors may in turn induce potentially higher

economic growth. More importantly, reserves could possibly work as a form of

insurance when financially less-integrated economies (like Bangladesh)

expedite their financial sector reforms.

The other fundamental issue is Bangladesh’s exchange rate policy which is

applied to accumulate reserves. As can be observed in some East Asian

economies in 1960s and 1970s and now in China, virtually every instance of

sustained high growth has been accompanied by a significantly depreciated real

exchange rate.44 Rodrik (2007) perceived “undervaluation as a second-best

mechanism for alleviating institutional weakness and market failures that tax the

tradables.” However, to maintain the advantage of a competitive (undervalued)

currency, central banks need support from fiscal authorities.45 If one considers

all the benefits of holding adequate or reserves marginally in excess, the spread

between the two curves in Figure 10 will be substantially lower than it appears.

Figure 10: Trends in the one-year US Treasury and Bangladesh Bank

Treasury Rates: 2004-2009

Source: Based on the Federal Reserves Bank of St Louis and the Bangladesh

Bank.

3.10 The Question of Alternative Uses of Bangladesh’s Forex

Reserves

As discussed, Bangladesh’s reserves do not far exceed what it requires. Having

said this, it has two choices to make with these reserves. First, if one assumes

that Bangladesh’s financial sector will not undergo significant reform in years

to come, it could channel part of its reserves to alternative investments. Second,

the country can expedite its financial sector reform using reserves as insurance.

Its integration with the rest of the world in terms of trade is substantive but

financial integration remains very shallow. These two options bring us back to

the fundamental macro disequilibrium (savings > investment) we have explored

in Section III. The widening gap between GNS and GNI signals that

Bangladesh either needs to adopt institutional reforms so that its economy finds

a way to use the surplus savings or it must discover an alternative avenue to

utilise them.

Bangladesh’s saving-investment (S-I) gap (thus reserves accumulation)

experience largely coincides with emerging Asia (largely East Asian) which has

been a centre of focus for the last two decades. For instance, from 1996 to 2004,

part of the rise in emerging economies current account surplus was due to the

collapse in investment in Southeast Asia and partly because of the rise in

Chinese savings. The saving-investment gap owing to a drought in investment

in Southeast Asia is well crafted. However, the Chinese case where savings

were rising faster than its investment, remains an open debate as some analysts

think the rise in its savings is tied to the policies China adopted to support its

dollar peg but others highlight the weakness in China’s financial sector and the

lack of a modern social safety net.

46 Nevertheless, the difference between major emerging market economies and

Bangladesh is that the former comprises mostly middle income economies, and

marginal productivity of capital should ideally be higher in the latter, which is

still a low-income country.

Having said this, the first option would be the path that most countries have

adopted historically but it demands a long-term political commitment. Cross-

country experiences show that countries have achieved the intermediate level of

trilemma – staying in the mid-way of independent monetary policy and limiting

exchange rate flexibility, while at the same time facing large and growing

international capital flows – using forex reserves as a buffer, as discussed in

Section II. Bangladesh should follow the path by expediting its financial sector

and other institutional reforms.

The second option is the alternative use of its excess reserves. The question is

where to invest the funds. The yield from the US Treasury is likely to remain

low largely because of the rapid growth in reserves in China and elsewhere in

the world that were partly, if not largely, invested in the US government

securities market. This means that Bangladesh has to invest its surplus reserves

to high yield (and high risk) avenues. China and some other countries that have

huge reserves allow outward FDI and acquire overseas resources through SWFs

that help reduce the excessive pressure on their domestic currencies and price

levels. The development of a SWF to acquire foreign assets or similar purposes

is not a viable option for Bangladesh. The reason was not due to its size of

excess reserves. Instead, the country’s bureaucracy does not have adequate

managerial skills to manage such funds. However, it can liberalise the rules

concerning outward FDI, and allow some of its local companies to invest

overseas.

Among other alternatives, one option could possibly be the development of

infrastructure funds that should include private sector – either local or foreign –

stakeholders whereby the government provides funds and the private sectors

offer their technical knowhow. In a similar mechanism, some reserves can be

used to develop a manpower exports fund that deserves some attention

considering the fact that Bangladesh has a huge potential to be a leading

manpower-exporting country in the world. However, such initiatives should be

supported by further research, as the alternative uses of reserves are a tradeoff

between high risk and high return.

3.11 Bangladesh’s foreign exchange reserves top $25 billion

mark

The reserves touched $25.02 billion on Thursday, Bangladesh Bank General

Manager Kazi Saidur Rahman told bdnews24.com.

“The foreign exchange (reserves) is in a strong situation due to a stable growth

in export earnings and remittance”, said Rahman, who heads the central bank’s

Forex Reserve and Treasury Management Division.

The reserves were enough to pay import bills for seven months, he added.

According to Bangladesh Bank statistics, forex reserves were $21.32 billion on

June 24 last year.

 

For the first time in history, the reserves crossed the $23 billion mark on Feb 26

this year.

 

But, the figure dropped to $22 billion after the central bank cleared import bills

for January-February period amounting $1.01 billion to Asian Clearing Union

(ACU) in the first week of March.

 

The reserves again crossed $23 billion on Mar 30 and exceeded $24 billion on

Apr 29.

 

Rahman said $25 billion forex reserves would remain until the first week of

July, when the import bills for May-June period would be paid to ACU.

 

BB data shows Bangladeshi expatriates remitted some $970 million in the first

19 days of the month (from June 1 to June 19). 

 

The total remittance inflow in the first 11 months of the 2014-15 fiscal is around

$13.87 billion, 7.21 percent higher than the same period of the previous year.

 

According to Export Promotion Bureau (EPB), export earnings in the July-May

period of the current FY posted a 2.08 percent growth over the previous

corresponding period to reach $28.14 billion.

 

On Dec 10, 2009, the forex reserves were $10 billion before they crossed $15

billion in April 2013. 

Of late, there has been a growing interest in Bangladesh on the alternative uses

of its reserves. The country’s reserves are adequate if one considers all the

reserves adequacy measures but not markedly higher than what is required.

Nevertheless, some of the reserves adequacy measures may not be useful for

Bangladesh considering the fact that it does not receive a significant amount of

short-term capital flows, and it is not vulnerable to the “sudden stop” of

weakness in China’s financial sector and the lack of a modern social safety net.

Nevertheless, the difference between major emerging market economies and

Bangladesh is that the former comprises mostly middle income economies, and

marginal productivity of capital should ideally be higher in the latter, which is

still a low-income country.

Having said this, the first option would be the path that most countries have

adopted historically but it demands a long-term political commitment. Cross-

country experiences show that countries have achieved the intermediate level of

trilemma – staying in the mid-way of independent monetary policy and limiting

exchange rate flexibility, while at the same time facing large and growing

international capital flows – using forex reserves as a buffer, as discussed in

Section II. Bangladesh should follow the path by expediting its financial sector

and other institutional reforms.

The second option is the alternative use of its excess reserves. The question is

where to invest the funds. The yield from the US Treasury is likely to remain

low largely because of the rapid growth in reserves in China and elsewhere in

the world that were partly, if not largely, invested in the US government

securities market. This means that Bangladesh has to invest its surplus reserves

to high yield (and high risk) avenues. China and some other countries that have

huge reserves allow outward FDI and acquire overseas resources through SWFs

that help reduce the excessive pressure on their domestic currencies and price

levels. The development of a SWF to acquire foreign assets or similar purposes

is not a viable option for Bangladesh. The reason was not due to its size of

excess reserves. Instead, the country’s bureaucracy does not have adequate

managerial skills to manage such funds.48 However, it can liberalise the rules

concerning outward FDI, and allow some of its local companies to invest

overseas.

Among other alternatives, one option could possibly be the development of

infrastructure funds that should include private sector – either local or foreign –

stakeholders whereby the government provides funds and the private sectors

offer their technical knowhow. In a similar mechanism, some reserves can be

used to develop a manpower exports fund that deserves some attention

considering the fact that Bangladesh has a huge potential to be a leading

manpower-exporting country in the world. However, such initiatives should be

supported by further research, as the alternative uses of reserves are a tradeoff

between high risk and high return.

Chapter 4

Impact of Foreign Exchange and Remittances on

Bangladesh Development

4.1 Introduction

For any developing country, remittances can be a critical tool, assisting not only

with local, grass-roots development but also contributing significantly to a

country’s entire economic health. In part, remittances can build foreign currency

reserves, address balance of payments deficits, and enable investment in

projects involving infrastructure, health, sanitation, and education. Bangladesh

benefits tremendously from the support of its diaspora, particularly from its

rural population who have migrated in search of temporary employment in the

Middle East. Often equivalent to at least 50 percent of the recipient’s monthly

income, remittances improve quality of life, enhance health and nutrition, and

fund investment in local economies. Although remittances to Bangladesh bring

into question existing foreign exchange controls and create possible challenges

to the country’s existing anti–money laundering and countering the financing of

terrorism (AML/CFT) regime, these funds are undoubtedly positive for the

recipients and the Bangladesh economy.

Adequate foreign exchange reserves are an important factor of any well-

managed economy. These reserves help cushion the effects of economic shocks,

domestic or international. The significance of reserves can be demonstrated by

the manner in which countries such as Indonesia are currently dealing with the

impact of the U.S. Federal Reserve’s decision to reduce its bond-buying

program, used to support the U.S. economy during the recent financial crisis. By

building its foreign reserves when it had the opportunity, Indonesia is able to

provide vital support to its economy during this current period of stress. In the

view of the International Monetary Fund (IMF), Bangladesh’s foreign reserve

position is lower than it should be, with the country’s foreign exchange control

regime exacerbating this situation as reserves are drawn down to cover the

widening current account deficit.

4.2 Bangladesh’s Current Foreign Exchange Regime

Bangladesh achieved notable economic growth while under the leadership of

Prime Minister Shek Hasina, but its foreign exchange controls appear restrictive

in comparison to peer group countries. These controls may present the country

with complex challenges, such as a widening balance of payments deficit, a

shortage of foreign currency reserves, and moribund export growth as it seeks to

lead its economy toward “middle income” status consistent with the

government’s 2013 “Growth and Transformation Plan (GTP).”

Bangladesh maintains a number of foreign exchange restrictions on payments

and transfers that are not consistent with international standards, as determined

by the IMF. For example, the Bangladesh birr is not freely convertible because

the exchange rates are set by the government. Additionally, Bangladesh limits

foreign currency inflows and outflows and the amounts that local and foreign

individuals and corporations can hold. These restrictions result in foreign

exchange rate appreciation, leading to a widening of the current account deficit.

This deficit is further driven upward by the significant imbalance between

public capital inflows and moribund export growth, which has been stifled by

the strength of the local currency and underdevelopment of private sector

banking and manufacturing. In turn, this reduces real income for many workers,

with a resulting negative effect on consumer spending. Furthermore, domestic

production is suppressed as the strength of the birr allows for the cheap import

of substitute goods, reducing domestic production incentives. It would be unfair

to lay all these factors entirely at the door of the national foreign exchange

control regime, but this policy clearly does not help.

Furthermore, Bangladesh’s foreign exchange reserves have suffered before as a

result of the Central Bank of Bangladesh’s (BB) strategy of using the sale of

foreign reserves to withdraw excess liquidity from the domestic market. It

would generally seem more appropriate to achieve this goal via the issuance of

government securities rather than deplete an important resource for managing

the country’s foreign exchange rate in support of economic growth.

This lack of available foreign reserves is compounded by the government’s

rigorous control of foreign exchange movement into and out of the country. The

government is pursuing a policy that artificially inflates the value of the birr and

hinders investment, economic growth, and development. This is illustrated in

comments made in June 2013 by Donald Yamamoto, acting assistant secretary

of the U.S. Department of State’s Bureau of South Asian Affairs, when he noted

that a shortage of foreign exchange discourages U.S. firms and foreign investors

from contributing to the Bangladesh economy. Similarly, the IMF asserts that

exchange rate flexibility is essential to ensure competitiveness of traded goods,

which is critical in reaching the Bangladesh government’s GTP targets.

Another example of the adverse impact of foreign exchange controls on the

Bangladesh economy is the extent to which immigrant workers entering

Bangladesh from countries such as China are believed to bring foreign currency

with them in excess of NBE regulations. Their expenditures drive up the price

of goods and services. A more open foreign exchange regime would likely

translate into a reduced need for foreign currency to be smuggled into the

country. Regional inflation might also be less severe, although high-spending

immigrant workers will have an impact on prices in the areas where they live.

Foreign exchange controls may increase money laundering and terrorism

financing risks for Bangladesh when individuals, particularly immigrant

workers, and businesses seeking to operate internationally need to find

alternative means of managing their foreign exchange needs. These alternative

means are difficult for the authorities to monitor and track. At a more individual

level, foreign exchange controls limit the ability of a population to travel

overseas, an important component of international trade and business

development that is needed in order to boost a country’s exports and secure the

resulting foreign exchange, trade deficit reduction, and overall economic

benefits.

4.3 The Importance of Remittances to Bangladesh

Remittances are a significant contributor to the Bangladesh economy and can

help accelerate the country’s development. IMF data suggest that remittances

and official transfers represent more than percent of Bangladesh gross domestic

product, with estimates of remittance values ranging from $18 million to $30

billion. This range partly reflects the difficulty in measuring these flows due to

the significant use of informal remittance channels as a result of an

underdeveloped banking industry and, likely, the tight foreign exchange control

regime that the country imposes. It also highlights the size of the potential

AML/CFT risk stemming from the significant use of informal value transfer

systems.

BB data indicate that imports surged 87 percent between 2011/2012 and

2013/2014, with half of the required funding for these imports coming from

“Private Transfers,” including remittances, whereas less than 20 percent was

covered by export earnings. Thus, although these remittances have an important

personal value to the recipients, they play a critical role in Bangladesh

development.

Another important national aspect to remittance receipts is the positive

contribution they could make to the weak national foreign exchange reserve

position. The ability of remittances and other transfers into the country to

bolster the nation’s financial position

The country’s foreign exchange control regime risks hindering broad economic

development and is likely reducing the value of remittance flows because the

overvaluation of the birr corresponds to the undervaluation of foreign currency

remittances once they are converted into birr for use by the intended recipients.

One final point to highlight is the importance of data in assessing economic

development and the impact of various governmental actions. The collection

and analysis by governments of quality economic, demographic, and social data

are often key to development. Without reliable, regular, and consistent data

collection, it is very difficult for a government to judge the effectiveness of its

policies or determine its next actions.

4.4 AML/CFT Considerations

The BB applies customer due diligence standards across all banks and

supervises the financial sector’s compliance activities as required by law.

Bangladesh Financial Intelligence Centre (FIC) began receiving cash

transaction reports (CTRs) and suspicious transaction reports (STRs) from the

banking community in January 2012.With regular AML/CFT trainings being

led by the FIC, Bangladesh is taking important steps in improving compliance

with the recommendations established by the Financial Action Task Force

(FATF) with the goal of being removed from FATF’s list of jurisdictions

subject to on-going global AML/CFT compliance processes.

Bangladesh is also the subject of observation from the U.S. State Department.

Acknowledging in its 2013 narcotics control strategy report that Bangladesh is

not currently a regional financial center due to underdeveloped financial

systems and governmental controls such as the restrictive foreign exchange

regime, the State Department highlighted that Bangladesh’s central and

dominant position within the Horn of Asia means that it is vulnerable to

financial activities related to transnational crime, terrorism, and narcotics

trafficking. Bangladesh can benefit from the crossroads position it occupies, but

as the country becomes more open and continues its economic growth, it is

likely that crime related to illicit finance will rise. It is important that

Bangladesh prepares itself for the inevitable AML/CFT challenges that will

come.

The greatest AML/CFT risk facing Bangladesh is remittance flows, partially

encouraged by the structures of the country’s foreign exchange regime, entering

the country and the economy via unregulated routes that are difficult for the FIC

and other authorities to monitor and assess.14 In combination with a private

sector banking liberalization process, a less restrictive foreign exchange regime

is likely to encourage remittances to flow in greater volume through the

regulated financial sector, thus reducing AML/CFT risk.

At the same time, the FIC will need to ensure that the improved standards of

training and reporting that it is instilling in banks and their employees are

maintained and keep pace with the likely increase in financial volume. In

addition, the FIC will need to boost its own capacity to deal with the inevitable

rise in CTR and STR filings.

CHAPTER 5

Company profile

5.1 Introduction

Shahjalal Islami Bank Limited, a Shariah Based Commercial Bank in

Bangladesh was incorporated as a Public limited company on 1st April, 2001

under Companies Act 1994. The Bank commenced commercial operation on

10th May 2001 by opening its 1st branch, i.e. Dhaka Main Branch at 58,

Dilkusha, Dhaka obtaining the license from Bangladesh Bank, the Central Bank

of Bangladesh. Now its Head Office is situated at Uday Sanz, 2/B Gulshan

South Avenue, Gulshan-1, Dhaka1212, Bangladesh. Presently the total number

of branches stood at 93.

5.2 Background of SJIBL

Bangladesh is one of the largest Muslim countries in the world. The people of

this country are deeply committed to Islamic way of life as enshrined in the

Holy Qur’an and the Sunnah. Naturally, it remains a deep cry in their hearts to

fashion and design their economic lives in accordance with the precepts of

Islam.

The establishment of Shahjalal Islami Bank Limited (SJIBL) on 2001 is the true

reflection of this inner urge of its people, which started functioning with effect

from 10th May 2001. It commenced its commercial operation in accordance

with principle of Islamic Shariah on the 10th May 2001 under the Bank

Companies Act, 1991. It is committed to conduct all banking and investment

activities on the basis of interest-free profit-loss sharing system. In doing so, it

has unveiled a new horizon and ushered in a new silver lining of hope towards

materializing a long cherished dream of the people of Bangladesh for doing

their banking transactions in line with what is prescribed by Islam. With the

active co-operation and participation of Islamic Development Bank (IDB) and

some other Islamic banks, financial institutions, government bodies and eminent

personalities of the Middle East and the Gulf countries, Islami Bank Bangladesh

Limited has by now earned the unique position of a leading private commercial

bank in Bangladesh. Shahjalal Islami Bank Limited” offers the full range of

banking services for personal and corporate customers, covering all segments of

society within the framework of Banking Company Act and rules and

regulations laid down by our central bank. Diversification of products and

services include Corporate Banking, Retail Banking and Consumer Banking

right from industry to agriculture, real estate to software and is backed by the

latest technology.

The Bank is managed by a Team of professional Executives and Officials

having profound banking knowledge & expertise in different areas of

management and operation of Banks. During the short span of time, Shahjalal

Islami Bank so far introduced a good number of attractive deposit products to

broaden the resource base and also Investment products to deploy the deposit

resources so mobilized. Some more schemes covering the deposits, Investments

& Services will be introduced gradually in near future suiting to the taste and

requirement of the clients. The Bank has a strong Shariah Council consisting of

prominent Ulama, Fuquah & Economists who meet periodically to confer

decisions on different Shariah issues relating to Banking Operation & to address

them and to give necessary guidance to the management on Shariah Principle.

Since inception, Bank has been performing in all the sectors i.e. general

Banking, Remittance, Import, Export & Investment. All our branches are fully

computerized having on line Banking facility for the clients.

During last nine years SJIBL has diversified its service coverage by opening

new branches at different strategically important locations across the country

offering various service products both investment & deposit. Islamic Banking,

in essence, is not only INTEREST-FREE banking business, it carries deal wise

business product thereby generating real income and thus boosting GDP of the

economy. Board of Directors enjoys high credential in the business arena of the

country, Management Team is strong and supportive equipped with excellent

professional knowledge under leadership of a veteran Banker Mr. Farman R.

Chowdhury

5.3 Corporate Profile

Company Profile in Brief

Name Shahjalal Islami Bank Limited

Chairman                             A.K. Azad

Managing Director                Farman R. Chowdhury

Registered Office

2/B, Uday Sanz,, Gulshan South

Avenue,

Gulshan-1,Dhaka-1216

Auditors                               M/S. Syful Shamsul Alam & Co

Tax Advisor                         M/S K.M Hasan & Co.

Legal Advisor                        Hasan & Associates

Legal Status Public Limited Company.

Nature of BusinessCommercial, Corporate,

Investment & Retail Banking

First meeting of the promoters held on 4th September, 2000.

Date of Certificate of Incorporation 1st April, 2001.

Date of Certificate of Commencement

of Business1st April, 2001.

Banking License received on 18th April, 2001.

First Branch License received on 24th April, 2001

Inauguration held on 10th May, 2001.

Authorized Capital Tk.80.00 crore.

Paid up Capital Tk.20.50 crore.

Number of Branches (as on 20.06.2010) 52

Telephone No. 88-02-9570812, 7160591

Fax No.           88-02-9570809, 9553562

Website www.shahjalalbank.com.bd

5.4 Vision of Shajalal Islami Bank Limited

To be the unique modern Islami Bank in Bangladesh and to make significant

contribution to the national economy and enhance customers’ trust & wealth,

quality investment, employees’ value and rapid growth in shareholders’ equity.

5.5 Mission of Shajalal Islami Bank Limited

To expand Islamic banking through welfare oriented banking system, ensure

equity and justice in economic activities, extend financial assistance to poorer

section of the people and achieve balanced growth & equitable development.

To provide quality services to customers.

To set high standards of integrity.

To make quality investment.

To ensure sustainable growth in business.

To ensure maximization of Shareholders’ wealth.

To extend our customers innovative services acquiring state-of-the-art

technology blended with Islamic principles.

To ensure human resource development to meet the challenges of the

time.

5.6 Objectives of Shajalal Islami Bank Limited

From time immemorial Banks principally did the functions of moneylenders or

“Mohajans” but the functions and scope of modern banking are now-a-days

very wide and different. They accept deposits and lend money like their

ancestors, nevertheless, their role as catalytic agent of economic development

encompassing wide range of services is very important. Business commerce and

industries in modern times cannot go without banks. There are people interested

to abide by the injunctions of religions in all sphere of life including economic

activities. Human being is value oriented and social science is not value-neutral.

Shahjalal Islami Bank believes in moral and material development

simultaneously. “Interest” or “Usury” has not been appreciated and accepted by

“the Tawrat” of Prophet Moses, “the Bible” of Prophet Jesus and “the Quran” of

Hazrat Muhammad (sm).

Efforts are there to do banking without interest Shahjalal Islami Bank Limited

avoids “interest” in all its transactions and provides all available modern

banking services to its clients and want to contribute in both moral and material

development of human being. No sustainable material well being is possible

without spiritual development of mankind. Only material well-being should not

be the objective of development. Socio-economic justice and brotherhood can

be implemented better in a God-fearing society.

Other objectives of Shahjalal Islami Bank include:

To establish interest-free and welfare oriented banking system.

To help in poverty alleviation and employment generations.

To contribute in sustainable economic growth.

To remain one of the best banks in Bangladesh in terms of profitability

and assets quality.

To earn and maintain a ‘Strong’ CAMEL Rating

To ensure an adequate rate of return on investment.

To maintain adequate liquidity to meet maturing obligations and

commitments.

To play a vital role in human development and employment generation.

To develop and retain a quality work force through an effective Human

Resources Management System.

To pursue an effective system of management by ensuring compliance to

ethical norms, transparency and accountability at all levels

5.7 Feature of Shahjalal Islami Bank Ltd.

There are many reasons behind the better performance of Shahjalal

Islami Bank Ltd. then other newly established banks:

The inner environment of all branches is well decorated

The Bank provide loan to customers with easy and

flexible condition then the other do

L/C commissions and other charges are relatively low

then other banks

The bank has established correspondent relationship

with many foreign banks.

CHAPTER SIX

Foreign Trade Situation

6.1 Export

Total exports in Aggregate exports increased by 11.70 percent in FY14 to USD

30176.8 million from USD 27,027.4 million in FY13. Apparels (woven

garments and knitwear products) continued to occupy an overwhelming (above

four fifths) share of the export basket in FY14. Readymade garments (woven

and knitwear): Export earnings from woven and knitwear products, which

accounts for about 81.20 percent of total export earnings, registered as increase

from USD 21,515.80 million in FY13 to USD 24,491.90 million in FY14.

Woven and knitwear products showed the growth of 12.70 percent and 15.00

percent respectively in FY14 compared to FY13. Export earnings from leather

and leather products increased by 32.80 percent to USD 745.60 million in FY14

from USD 561.30 million in FY13.

6.2 Import

Import payments increased to USD 36,571.0 million in FY14 from USD

33,576.0 million in FY13 registering a growth of 8.90 percent. Except crude

petroleum and fertilizer, import bills of all other imports increased in FY14

compared to FY13. Import of food grain and other food items significantly grew

by 101.80 percent and 31.00 percent respectively. This was mainly due to rise in

wheat import. The import bill for food grains stood at USD 1,465 million in

FY14 compared to USD 726 million in FY13. The import bill for other food

items increased to 4,098 million in FY14 from USD 3,128 million in FY13.

Consumer and intermediate goods import increased by 11.40 percent to USD

1,8602 million in FY14 from USD 16,694 million in FY13. Import of capital

goods and others items registered a growth by 23.20 percent from USD 11,031

million in FY13 to USD 13,592 million in FY14. Imports by EPZ increased by

18.80 percent to USD 2,975 million in FY14 compared to USD 2,505 million in

FY13.

6.3 Remittances

Remittances recorded 1.56 percent decrease in FY14. The net outcome of all

these, is a fall in the current account balance from USD 2,388 million in FY13

to USD 1,346 million in FY14. Current account balance as a percentage of GDP

stood at 0.77 in FY14 compared to 1.59 in FY13. Decline in overall remittance

inflow was underwritten by a fall in remittances originating from the major

sources. Indeed, remittance inflow from six major Middle East countries, which

accounted for about two-thirds of total remittance inflow, declined by 16.2 per

cent compared to the previous year. During July-April period of FY14, the

decline in remittances inflow was higher in Taka terms (-) 7.9 per cent than in

USD terms (-) 4.8 per cent. High growth of remittances helped the per capita

GNI to grow faster than that of per capita GDP.

6.4 Balance of Payments

The balance of payments of the country, observed a favorable situation because

of stellar export performance. At the same time imports have also picked up

recording 10.70 per cent growth, corresponding to the enhanced export-related

import demand. The overall balance of payments registered a surplus of USD

5,483 million in FY14, implying a slight decline from the preceding year.

6.5 Broad Money

Broad Money (M2) grew by 16.10 percent in FY14 against the targeted growth

and 16.70 percent actual growth in FY13. The growth of broad money decline

due to mainly to the lower growth of net foreign assets and public sector credit

in FY14.

6.6 Domestic Credit

The growth in public sector credit stood at 8.8 percent against the target 22.9

percent growth and 11.1 percent actual growth in FY13. Credit to the public

sector declined due to higher non-bank borrowing of the government through

sale of national saving certificates which was Tk.117.07 billion in FY14

compared with Tk. 7.73 billion in FY13. Credit to the private sector recorded

12.30 percent growth against the target growth of 16.50 percent in FY14 but

remained marginally higher than the actual growth of 10.80 percent in FY13.

6.7 Monetary Policy

Monetary targets for FY14 are on track establishing the credibility of the stance

taken in the previous Monetary Policy Statements. At the end of FY13, due to

nationwide continuous seize and turmoil situation in politics FY14 had faced a

different set of challenges in economy. Robust foreign remittance and export

growth along with sluggish import growth led to a sharp growth of Net Foreign

Assets (NFA) which needed to be sterilized. Moreover declining inflation and

concerns over a slowdown in growth created space for a 50 basis point rate cut

by Bangladesh Bank in June 2014 influencing bank lending rates downwards.

At the same time the January 2014 MPS set out a monetary program consistent

with bringing average inflation down to the targeted 7.0% level and in June

2014 it reached 7.35%. Reserve money growth and growth of net domestic

assets of Bangladesh Bank remained within program targets. Foreign currency

reserve balance has been increased to 21.6 billion in June 2014 by 2.8 billion.

Broad money growth was also close to program targets. The introduction of

new foreign currency borrowing facilities by Bangladesh Bank partially

compensated to general investor as some consumers switched to lower cost

overseas financing with overall private sector credit growth, from both local and

foreign sources, amounting to 15.70% in May 2014.

6.8 Foreign Exchange Business of SIBL

Total Foreign Exchange Business handled during the year 2014 was Tk.

163,674 million as against Tk. 169,318 million of 2013, registering a decrease

of Tk. 5,644 million, i.e. 3.33% negative growth. The brief particulars of

Foreign Exchange Business are given below

Particular Amount in Million Taka Growth Composition

2014 2013 2014 2013 2014 2013

Import 83731 81926 2.20% 26.75% 51.16% 48.39%

Export 76734 84809 -9.52% 23.45% 46.88% 50.09%

Foreign Remittance 3209 2583 24.24% 11.75% 1.96% 1.53%

Total 163674 169318 -3.33% 24.93% 100.00% 100.00%

ImportExportForeign Remittance

Foreign Exchange Trade 2014

6.8.1 Foreign Exchange Risk indicator

Bank’s exposure to Foreign Exchange risk is managed by computing foreign

exchange transaction and translation risks and their impact to the income of the

Bank. The impact of the Foreign Exchange transaction risk is identified by

providing exchange rate shocks to the net open position of the Bank.

6.8.2 Foreign Exchange Risk

Foreign Exchange Risk is the current or prospective risk to earnings and

capital arising from adverse movements in currency exchange rates.

Foreign exchange risk may also arise as a result of exposures of banks to

profit rate risk arising from the maturity mismatches of foreign currency

positions.

The Bank has established Risk Tolerance limits for foreign exchange

exposure within the directives of Central Bank of Bangladesh in order to

ensure that any adverse exchange rate movements on the results of the

Bank due to

6.9 SJIBL Foundation

Corporate social responsibility (CSR) is a form of corporate self-regulation

integrated into a business model. CSR policy functions as a built-in, self-

regulating mechanism whereby business monitors and ensures its active

compliance with the spirit of the law, ethical standards, and international norms.

The goal of CSR is to embrace responsibility for the company’s actions and

encourage a positive impact through its activities on the environment,

consumers, employees, communities, stakeholders and all other members of the

public sphere. With a view to and also for the welfare of the community, to this

perspective, Bank has established “Shahjalal Islami Bank Foundation”.

The main objectives of SJIBL foundation are:

To provide health-care to poor and distressed people.

To provide education support to meritorious but poor students through

scholarship, award

To provide financial assistance to flood, cyclone ordisaster affected

people.

To support humanitarian.

To provide financial assistance to development ofculture, sports of the

country

To participate in social and environmental activities.

6.10 Corporate Social Responsibility

The foundation have also drawn up programs to lookafter the education, health

& Medicare requirementsof the people of rural areas. The Bank has

distributedscholarship in the year 2014 to poor but meritoriousstudents with

outstanding result in secondary schooland higher secondary examinations to

facilitate themfor pursuing their further studies without hindrance. Theprogram

of this education award will continue every year. Besides, during 2014 bank

distributed Blanket to cold striken people throughout the country. This year

bank also donated two affected families of BDR tragedy, as part of its

commitment.

The Bank is committed to undertake more welfare activities for the society and

people of Bangladesh in the days to come. Shahjalal Islami Bank Limited

Foundation has a planning to establish the following projects and programs:

Shahjalal Islami Bank Limited International School & College.

Shahjalal Islami Bank Limited Hospital

Chapter 7

SWOT Analysis

SOWT Analysis

A SWOT analysis is a modern analytical tool that can help analyze a business to

examine the interaction between the particular characteristics of your business

and the external marketplace in which you compete. The internal portion of a

SWOT analysis looks at the individual strengths and weaknesses of SJIBL. 

Similarly, the external analysis looks at the opportunities presented by the

marketplace and the threats that SJIBL face in market.

7.1  The Strength of this Branch

Full-functioning computerized accounts maintenance.

SWIFT is being used for foreign trade related operations like letter of

credit, fund transfer, guarantee, etc with optimum security.

Easy and prompt cash transaction by introducing Money counting

machine

Healthy working facility

SJIBL provide ATM debit card and nonstop banking facilities.

7. 2 The Weakness of this Branch

Excessive reliance on fixed deposits.

Very Limited number of branch network

Some officials dealing with retail products have not been as a

professional as a private bank does require.

Charges of statement or certificates are very high.

High  ATM transaction cost

7. 3 The Opportunity of this Branch

It has real time online banking.

New Product Innovation

More focus on SME and Agro based business to extend Loan facilities

Technical support to Small Industries to help them to run their business

successfully.

Credit card in dual currency

Establishment of new branches to enlarge the market

provide full range of commercial banking services

7.4 The Threats of this Branch

Increasing market competitors day by day

Restless political condition in Bangladesh

Competitive deposit market

Market pressure for narrow down spread

Unexpected fluctuation of stock market     

7.5 Findings

I observed that unskilled persons are available here. There are lacks of

good, efficient and knowledgeable person in the Shariah Council.

There are also limitations regarding memory and knowledge of

responding.

Limited space for customers demand. It has to refer to the head office.

This is one of the reasons for delay of customer service.

Customer service of Shahjalal Islami Bank Ltd. is not satisfied.

Employees of the SJIBL are not well trained.

A very much little manpower against the huge advance portfolio of

College Gate branch.

Due to day operational activities there is a little scope for proper

monitoring.

Sometimes it has become burden for the officers to maintain the rules and

regulations Imposed by the central bank.

Insufficient Internet connection.

Clients are not in favor of introducing system.

Some officers would not like to spread out some information’s because

these    were so much confidential for the bank.

According to some client’s opinion, introducer is one of the problems to

open an Account If a person who is new in the city wants to open an

account it is a problem for him/her to arrange for an introducer. Modern

technical equipment such as Fax machine is not sufficient in foreign

Exchange department. As a result the exchange process makes a delay

and it is also complicated.

Chapter 8

Recommendation & Conclusion

8.1 Recommendations

1. I think the requirement of importers to defered a sight LC should not go

ahead. Because it will hurts bank’s reputation as well as goodwill.

2. I recommend transfering the right to open an LTR credit facility to the

branch office with reduces the operation time.

3. To overcome the haressment of negotiating with clients for available

funds, the bank should set some plans.

4. I think the bank should be stricter as possible about giving payments

against discripent. Otherwise it hurts bank’s reputation.

5. A costomer is allowed to open a L/C with nil margins. I think that the

bank should asses the client’s credit worthiness time to time and

according to their worthiness bank should develop a new L/C for the

client.

6. SWIFT service cunnection of SJIBL must be increased.

7. The space of SJIBL, Agrabad branch, foreign exchange department

should be increased. So that, the clients are feel free, comford and secure

at the time of their business.

8.2 Conclusions

The Bangladesh leadership and government have delivered growth and progress

in recent years. To continue along this successful path, reach middle-income

status, and achieve the admirable goals established in the GTP, it must

reconsider its foreign exchange controls. This regime has eroded the country’s

international economic competitiveness by overvaluing the birr by as much as

20 percent. Without improving private sector access to borrowing capacity and

foreign exchange that would create a more favorable business environment,

growth will be restricted. The maintenance of strict foreign exchange controls

appears to be exacerbating Bangladesh’s current account deficit position, with

the birr continuing to be overvalued and with imports continuing to outstrip

exports as a result.

Bangladesh has made great strides on AML/CFT issues in developing standards

consistent with international guidelines and addressing FATF concerns.

Imposing foreign exchange controls, however, is almost certainly leading to the

growth of a parallel, unregulated market that has the potential to challenge or

reverse much of this notable progress. Together with the underdevelopment of

the private banking sector and the extensive flow of remittances into the

country, these controls create a potentially significant weakness in Bangladesh’s

AML/CFT defenses, something that FATF evaluations can be expected to study

closely.

Finally, it was a great pleasure for me to do my internship program in an

estemmed organization like SJIBL through my practical exposure in SJIBL,

Agrabad Branch, Chittagog, for just two months. It provides me wide range of

scope to observe the function of bank through the cordial assistance of its

members.I had the scope to observe the function of banking system specially

focoused on foreign exchange business.

Banking is a dinamic business. Today is best by momentous changes in vartuall

in every facet of industrial activities. By assessing the current possition of the

bank , any hindrances must be seen as challenge and not as treats. Any kinds

problem must be taclet wisely & couragiously. The bank should maintain a

well-structured communication from upper level to lower level. Each official

should be valued and treated as a part of the bank and they must have the

privilege to devote themselves for the betterment of services of the bank.

Overall, the bank must a positive attempt to be more outward looking in their

goals and aware of what is happening. They must also amphasize on the

domestic scenario more closely and analyze any certain trends and strategis of

their competitors. The bank must accept any failure and think of them as an

objective to pursue future goals instead of blaming such failures on other

factors. I hope, inspite of my all limitations, this experience of sharing works

with such working environment will help me a lot in my professional life.

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