Traditional and Non-Traditional Functions of Bangladesh Bank

Bangladesh Bank is the Central Bank of Bangladesh. As a central bank, it has many vital functions. So, here we describe the functions of the Bangladesh bank.

General information about Bangladesh Bank

It was established on 16th December 1971 under the Bangladesh Bank (Temporary) Order 1971 (subsequently substituted by the Presidential Order No. 127 of 1972).

The powers and functions of Bangladesh Bank are governed by Bangladesh Bank Order 1972 and Banking Companies Act., 1991. (Act 14 of 1991) to make provisions for streamlining the affairs of banking companies to suit the present-day socio-economic needs of the country.0

The functions of the bank may be classified into traditional and non-traditional. The traditional functions may be further classified into two categories: i) Central Banking functions and ii) General Banking functions. Non-traditional functions relate to developmental and promotional functions.

Functions of Bangladesh Bank

Traditional Functions of Bangladesh Bank

1. Bangladesh Bank is the sole authority for the issuance of banknotes in the country. This power enables the Bank to regulate and control the money supply in the country.

With the exception of one and two taka notes, taka coins, and subsidiary coins that are issued by the Government, the Bank is responsible for the issuance of currency notes including 5-taka coin.

The entire amount representing the notes issued has to be backed by assets of the value in the form of gold coins, gold bullion or approved foreign exchange and taka coins, Government of Bangladesh securities, and such bills of exchange and promissory notes as are eligible for purchase or re-discount by the Bank.

2. The Bank acts as the banker to the Government and mange the public debt; do custody and management of the country’s internal value of taka and acts as an adviser to the government in economic matters in general and financial problems in particular.

The Government is to deposit free of interest all its cash balance with the bank. The Bank accepts Government cheques and drafts and undertakes the collection of the cheques and drafts and undertakes the collection of the cheques and drafts drawn on other banks.

It transfers Government funds from one place to another as required by them.  The bank also sells Government  Treasury Bills on tap or tender, Prize Bonds and Sanchay Patra, etc.

The Bank makes advances to the Government which is repayable within a short period.

3. The Bank also functions as the banker’s bank. All commercial banks maintain their accounts with Bangladesh Bank. They borrow money from Bangladesh Bank when necessary. In case of difficulties, Bangladesh Bank acts as a lender of last resort to commercial banks.

At the same time, scheduled banks are allowed re-discounting facilities from Bangladesh Bank against Government securities and trade bills for the short term to enable them to meet their temporary requirements of the fund.

4. Bangladesh Bank formulates monetary and credit policies for attaining macro-economic objectives. These monetary and credit policies are primarily implemented through the banking system.

It has extensive powers for regulating credit as warranted by the exigencies of the changing economic situation. It exercises credit control through various traditional and non-traditional methods. It also enjoys comprehensive powers of Selective Credit Control.

It can regulate policies in respect of advances made by commercial banks in general or by and specific banks or banks in particular. The main instrument of selective credit control are

  • a) Minimum margins for lending against selected commodities,
  • b) Ceilings on the levels of credit, and
  • c) Charging of the minimum rate of interest on advances against specified commodities.

Apart from the selective credit control exercised by Bangladesh Bank, it also controls the volume of credit in a quantitative way so as to influence the total volume of bank credit in the following way:

5. Bank Rate

The Bank Rate is the rate of interest at which Bangladesh Bank re-discounts the first class bills of exchange from commercial banks. This is because, by a change in the bank rate, Bangladesh Bank seeks to influence the cost of bank credit.

6. Open Market Operations

Bangladesh Bank can influence the resources of commercial banks by buying or selling government securities in the open market. If Bangladesh Bank buys Government securities in the market from commercial banks, there is a transfer of cash from Bangladesh Bank to commercial banks and this increases the cash base of the commercial banks enabling them to expand credit and conversely if Bangladesh Bank sells Government Securities to the commercial banks, the commercial banks transfer cash to Bangladesh Bank and therefore, their cash base is reduced, thus adversely affecting the commercial banks to expand credit.

7. Variable Reserve Requirements

Commercial banks are required to keep a certain percentage to reserve with Bangladesh Bank. Bangladesh Bank is legally authorized to raise or lower the minimum reserves that the commercial banks must maintain against their total deposit.

The present minimum requirement is 4% of total demand and time liabilities. It has got the power to use the variable reserve requirements as an instrument of monetary control.

In addition to this, nationalized commercial banks are also required to maintain the Statutory Liquidity Ratio with Bangladesh Bank which is 16% at the moment calculated from cash-in-hand, balance in current account with Bangladesh Bank, and investment in Government Securities, Treasury bills, and also in other securities, etc.

Bangladesh Shilpa Bank, Bangladesh Krishi Bank, and Rajshahi Krishi Unnoyan Bank are required to maintain liquidity @ 4% and Islami Bank of Bangladesh Ltd., Al-Baraka Bank Bangladesh Ltd., Al-Arafa Islami Bank Ltd. and Shamil Bank of Bahrain E.C @ 10% and all other banks @ 20%.

Besides selective credit control and control in a quantitative way, moral persuasion is also used to influence the credit operations of the bank.

Credit cannot be extended to an unlimited extent because it would disturb price stability in the country and, therefore, it becomes necessary for Bangladesh Bank to control and supervise the activities of the commercial banks in the country.

8. Being responsible for maintaining the external value of taka, Bangladesh Bank also administers exchange control in the country. This task is two-fold. On the one hand, it ensures that all foreign exchange receipts are accounted for, and surrendered to the Authorized Dealers, on the other; it allocates and rations foreign exchange in line with set priorities.

Bangladesh Bank issues license to a number of bank branches as Authorized Dealers to deal in foreign exchange at authorized rates subject to its directions. Besides, Bangladesh Bank also authorizes certain establishments like hotels, selected shops, and other organizations visited by foreign tourists to change their foreign money.

These establishments known as money Changers are authorized only to buy and sell convertible foreign currency notes and other currency instruments and no other transactions.

Bangladesh Band also serves as a clearing agent for scheduled banks, providing clearing facilities to them through its branches.

Non-Traditional Functions of Bangladesh Bank

The role of a Central Bank in developing countries is different from that in developed countries. Developing countries like Bangladesh is mostly characterized by large rural sector and heavy dependence on agriculture, low industrialization, inadequate social infrastructure, low per capita income, social disparities, and high incidence of poverty.

In order to solve these problems, the Government has adopted development planning as a strategy for economic growth and social equity. To implement the task of economic growth as per guidelines and policies formulated by the Government, the range of functions of Bangladesh Bank has been enlarged.

They have been given the power to perform a variety of developmental and promotional functions which in the past were regarded as being outside the normal purview of central baking.

The bank’s responsibilities comprise building up and maintenance of a sound and adequate banking system for catering to the needs of agriculture, industry, and exports and making provision for banking facilities all over the country and thereby contributing to the overall growth in the national economy.

No bank can start functioning in the country and no existing bank can open a new branch in or outside the country without obtaining a license from Bangladesh Bank. Bangladesh Bank can also withdraw or cancel the license of a commercial bank in case it is found that the affairs of the bank are not managed properly.

Bangladesh Bank has evolved a system of supervision and control of the commercial banking sector and has taken important steps for strengthening and extension of banking structure and development of banking habits.

Its contribution to the growth of institutional credit in rural areas to finance agriculture and allied activates is significant.

Bangladesh Bank has special investigation and inspection cells to improve the present banking procedures and to minimize the chances of irregularities and corruption in banks.

Besides, they perform a number of promotional functions to widen and deepen the financial infrastructure, mobilize savings, and ensure the availability of credit for the growing needs of the economy.

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