The Bangladesh economy demonstrated considerable resilience in 2012. While advanced economies recorded a real GDP growth of only 1.5 percent in 2012, Bangladesh achieved a remarkable real GDP growth of 6.3 percent in FY2011-12 underpinned by robust banking sector, attributable to strong domestic demand and a notable growth of the infrastructural sector.In 2012, the domestic macroeconomic environment was favourable. The CPI inflation was though moderately higher in early 2012, the pressure however eased to a large extent during the latter half of CY12 and, by the time of this writing (end of June 2013) it had returned to a much more tolerable level.
The overall balance of payments recorded a mentionable surplus in CY12, in contrast to a deficit recorded in the previous fiscal year, although the trade deficit widened moderately due to a relatively larger expansion in import expenditure compared with the increase in export earnings.
Gross foreign exchange reserves, at end-December 2012, were US$12.8 billion, sufficient to
meet nearly five months’ import payments and thus contributing to maintaining stability of the
financial system by lessening the likelihood and impact of turbulence in the foreign exchange
market. Moreover, at end-June 2013, international reserves stood at an even more healthy level
of US$15.3 billion.
In spite of a slight deterioration in some financial soundness indicators and the appearance of a
number of scams, the banking system continued to demonstrate resilience in CY12. The
banking sector balance sheet size grew notably; the growth was broad-based as most of the
income-earning assets registered positive growth. Credit to the private sector recorded an
increase. Moreover, banking sector penetration was enhanced with an aim to help strengthen
the ongoing financial inclusion programmes, by bringing unbanked people into the banking
network and expanding branch networks.
Banks’ investment in government securities increased in 2012 compared to the previous year
indicating a high government borrowing from the scheduled banks. Nevertheless, money at
call as percentage of total assets decreased slightly at end-December 2012 compared to that of
end-December 2011, indicating an increase in availability of liquid funds of banks to meet
their immediate needs. Encouragingly, higher availability of funds brought down the ADR
ratios of many banks below the permissible level.
Among these financial soundness indicators, the banking sector non-performing loan ratio
recorded a moderate rise at end-December 2012 compared with end-December 2011,
attributable to new stricter loan classification and provisioning regulation of BB, the ongoing
global recession and inadequate infrastructure. There was also a downgrading of assets,
emanating to some extent from a number of financial crimes in the banking system,
examination of asset quality of banks by Bangladesh Bank (BB) before finalizing the banks’
accounts, and an increase in frequency of loans examination by BB. The banking sector
recorded a moderate level of provision shortfall as of end CY12 as opposed to a notable
surplus recorded in CY11. Of course, BB directed the banks having shortfalls to fulfill their
provision requirements.
In 2012, the banking sector deposit structure continued to show a great reliance on term
deposits. Besides, banking sector deposits were not heavily concentrated. The deposit
insurance coverage of deposits increased significantly, indicating a comprehensive safety net
for small depositors as well as a sign of resilience in the system.
Banking sector profitability indicators – return on assets (ROA) and return on equity (ROE)-
recorded some decline in CY12, partly due to creating additional provisions as a result of the
new stricter loan loss provision regulation adopted in 2012 by BB. The capital adequacy ratio
(CAR) of the banking industry also slightly deteriorated compared to the position of end-
December 2011, also largely attributable to the same reason. Nonetheless, as of end-December
2012, most of the banks were able to maintain their minimum required CAR of 10.0 percent in
line with the Basel II capital framework. Importantly, a quite substantial part of banking assets
belonged to banks compliant in CAR. However, in cross-country comparison, Bangladesh
banking sector still has a long way to go, as the industry CAR is still far below than that of
some South Asian countries namely India, Sri Lanka and Pakistan.
Banking sector interest rate spreads, have on average slightly decreased at end December
2012 from that at end January 2011, contributing to a slight decline in net interest margin. The
weighted average interest spread of the banking industry continued to decline and at end April
2013 stood at 4.99 percent.
In 2012, most of the banks were able to bring down their advance to deposit ratio (ADR)
within the limits set by Bangladesh Bank. The overall ADR arrived at a stable and acceptable
position at end-December 2012. On the other hand, the banking sector maintained a surplus in
the statutory liquidity requirement (SLR); the average SLR maintained by the banking sector
was nearly one fourth of total demand and time liabilities. These were both positive
developments in maintaining financial stability.
The banking sector risk structure, in line with Pillar 1 of the Basel II Accord, remained more
or less stable in CY12 with respect to that of the previous year. At end-December 2012, the
share of risk-weighted assets (RWA) assigned to credit, market and operational risks to total
RWA were 86 percent, 5 percent and 9 percent respectively. In this regard, it is mentionable
that from a credit rating point of view, in 2012, entities with higher rating (BB rating grades 1
and 2) in Bangladesh have retained their credit grading in most cases, but entities with a lower
grading (BB rating grade 3 and 4) experienced rating movements in both directions with
respect to their 2011 rating.
In a stress-testing exercise, the banking sector was found to be less resilient against credit
shocks as of end-December 2012, compared with the previous year. However, the industry was
found to be fairly resilient in the face of various market risk shocks as well as standard
liquidity stresses.
Islamic banks showed a remarkable growth in CY12 in terms of industry assets, liabilities,
deposits, and loans and advances (investments). The ROA of the Islamic banking industry was
moderately higher than that of the overall banking industry, indicating generally better quality
assets in the portfolios of Shariah banks. The ROE of the Islamic banking industry was also
significantly higher than that of the banking industry ROE in CY12, indicating better
investment management by the Islamic banks, and, if needed, perhaps a greater future access
to investors’ capital.
Islamic banks complied with the SLR requirements in CY12 applicable to them. The
Investment-Deposit Ratio (IDR) of full-fledged Islamic and conventional banks having Islamic
banking branches/windows recorded a decline at end-December 2012 with respect to the end
of the previous year, consistent with the trend observed at conventional banks.
Given the minimum capital adequacy requirement of 10.0 percent under the Basel-II
Accord/Framework for CY12, most of the Islamic banks’ CARs were significantly higher.
Moreover, Islamic banks’ classified investments to total investments ratio was notably lower
compared with that of the overall banking industry in CY12.
The Non-Bank Financial Institutions (NBFIs) sector also remained stable in CY12. Stress tests
on the NBFIs reveal that most of them are resilient against a number of plausible shocks. The
borrowings, deposits and capital of NBFIs recorded a moderate increase compared with data of
the previous year. NBFIs experienced deterioration in asset quality in CY12; the ratio of
classified loans and leases to total loans and leases recorded a minor increase. The sector
experienced a decline in profitability (ROA and ROE) as well, attributable to a decline in non-
interest income and fee income from capital market activities.
In 2012, a mixed and rather more favorable scenario was observed in the capital market, in
welcome contrast to the declining daily turnover coupled with substantial price correction and
traumatized general investors’ confidence in 2011. Stable growth in the issued capital
(including IPO), an improved Herfindal-Hirchman Index, and a stable price-earning ratio
brought some positivity in the market. However, the general price index, market capitalization,
and market turnover continued to decline slightly. It is noteworthy that BB, Bangladesh
Securities and Exchange Commission and other regulatory authorities signed a Memorandum
of Understanding (MOU) in 2012 to share their views and take coordinated efforts to promote
stability in the capital market as well as in the overall financial sector.
Bangladesh’s financial infrastructure experienced several upgrades in CY12 which are
contributing to the financial stability of Bangladesh. For instance, launching of a National
Payment Switch by BB in order to create a common platform for bank cards, internet banking,
and mobile based payments in Bangladesh; introduction of Electronic Fund Transfer (EFT) to
facilitate the banks in making high value payments instantly using less materials and
manpower; introduction of Mobile Financial Services (MFS); issuance of guidelines on
uniform accounting procedures for Repo transactions of government securities by BB;
introduction of online trading of government securities aiming to create a vibrant secondary
market; creation of a Financial Integrity and Customer Services Department at BB;
introduction of a ‘Large Loan Monitoring Software’ in its premises for closer monitoring of
large loans; procurement of ‘goAML’ software by BB aiming to combat international terrorist
financing and money laundering; and initiation of an “elevator reporting” system titled ‘Quick
Review Report (QRR)’ on a half-yearly basis with a view to analysing banks’ overall
condition, financial disclosure requirements and financial position.
BB in 2012 has put increased emphasis on macroprudential regulation, stringent on-site
supervision and off-site surveillance of financial intermediaries, close collaboration among
various regulators, together with increased risk awareness of the stakeholders of the financial
system with a view to letting them withstand and adapt to plausible shocks well ahead of their
potential materialization.
In a nutshell, the overall macroeconomic environment was favourable, and the financial
intermediation process demonstrated considerable resilience amid unfolding of some financial
scams in the banking industry. A series of efforts and policy actions by both BB and the
Government contributed to maintaining financial stability. Nevertheless, there is no scope to
remain complacent. Stakeholders of the financial system should remain aware of the potential
risks and vulnerabilities with a view to withstanding and adapting to those accordingly. – Source: Executive Summery of the Fianncial Stability Report released by Governor Atiar Rahman on Sunday, 15 September
