The document discusses several problems facing Bangladesh's financial sector, including its money market, capital market, and insurance sector. Specifically: 1) The money market faces issues like high non-performing loans, lack of transparency and governance in banks, and inadequate risk management. Microcredit institutions struggle with over-lending and high interest rates. 2) Capital markets have problems like lack of effective regulation and surveillance, price manipulation, and delays in settlements. 3) The insurance sector faces centralization, political instability, lack of supervision, legal complexity, and lack of product diversification. 4) Recent scams include the 2016 Bangladesh Bank heist where hackers attempted to steal $1 billion but succeeded in

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1.0. Introduction
Financial system is most important part of any economy. This financial system comprises
banks and non-bank financial institutions (NBFIs). Both banks and financial institutions are
engaged in mobilizing fund from surplus unit to deficit unit of the economy. Financial
institutions are engaged in financial intermediation, exchanging financial assets on own
behalf and on customers behalf, assisting in creation of financial assets providing investment
advice and managing portfolio of participants (Fabozzi et. at. 2002).
The financial sector of Bangladesh is generally small and undeveloped. This sector consists
of a banking segment and an emerging but still promising capital market segment. The
banking segment in the country is relatively more developed than the equity market segment,
even though both are quite underdeveloped in international comparison. The root causes of
Bangladeshi financial sector problems are the lack of market discipline due to lack of
competition in the banking industry. Excessive government intervention and political
connection, economic and political corruptions, operational and managerial inefficiency and
ineffectiveness result in vicious circle that inhibits economic development, industrialization
and social progresses in poor and developing countries in general and in Bangladesh in
particular.
The financial sector is a vital part of an economy because of the role it plays in
intermediating savings of the private and public sector to productive activities including
investment. Bangladesh financial system is dominated by the banking sector, which
fundamentally depends on short-term and medium-term deposits for financing their lending
portfolios. This limits availability of funds that would be required for long-term investments
like infrastructure and housing. Bangladesh has a capital market, with its known difficulties,
and there is no vibrant secondary market for bonds, which limits the availability of resources
for infrastructure financing.

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2.0. Financial Sector:
The financial system of Bangladesh is comprised of three broad fragmented sectors, Formal
Sector, Semi-Formal Sector and the Informal Sector. The categorization is based on the
extent of regulation in the sectors.
The formal financial sector is comprised of money market (comprising operations of the
banking system, microcredit institutions, nonbank financial institutions, and interbank foreign
exchange market, the capital market (stock markets), bond market and the insurance market.
Operational activities of these institutions in the formal financial sector are governed by a
number of regulators such as Bangladesh Bank (banking system), Securities and Exchange
Commission of Bangladesh (regulating the stock market operations), Insurance Regulatory
Authority (for insurance institutions), and Microcredit Regulatory Authority (micro credit
institutions). Ministry of Finance also has some oversight role in certain aspects.
The semi-formal financial sector includes those institutions which are regulated otherwise
but do not fall under the jurisdiction of Central Bank, Insurance Authority, Securities and
Exchange Commission or any other enacted financial regulator. This sector is mainly
Formal Sector
Capital Market
Commercial
Bank
Nonbank
financial
institutions
Security
Segment
Non-security
Segment
Money Market
ICB Commercial
Bank
Secondary
market
BSB BSRS
Primary
Market
CSE DSE
Micro credit
institution

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represented by Specialized Financial Institutions like House Building Finance Corporation
(HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay (Cooperative) Bank, Grameen
Bank, and financial activities/programs (lending and deposit taking) of various Non-
Governmental Microcredit Organizations.
The informal financial sector includes private intermediaries which are completely
unregulated and sometimes engaged in financial transactions not legally permitted. The
formal financial market in Bangladesh comprises mainly of money market, stock market,
bond market, insurance market, foreign exchange market and micro-financial market.
3.0. Probems of financial sector in Bangladesh:
3.1. Problems of Money Market: Money market comprises the following sectors-
3.1.1. Banking sector: Banking sector faces different types of problem which is very much
detrimental to expansion of this sector as well as to the growth and development of the
country. Some of the problems are given below:
1. Low quality of asset: In our banking sector there are several problems related to the low
quality of assets which banks are using day by day. The reserve requirement for our banking
sector is 19.5% where Statutory Liquidity Ratio (SLR) is 19.5% including the Cash Reserve
Ratio (CRR) 6.5%. If any bank maintain more money than their required reserve it will be
known or stated as excess reserve. The adequacy of the required reserve of the bank is very
important for any country’s economy because if any bank holds any excess reserve, the
money that they are holding in their volts or other sectors it will be stated as idle money
which brings no return.
In our banking sector the rate of Non-Performing Loan or NPL is continuously increasing and
it has been reached to the amount of 567 Billion in the end of month of September, 2013. If
we see the data of the NPL of the year 2012 it will show us that from the end of month
December, 2012to from the end of month September, 2013 the amount of NPL has increased
over 33 percent during these few months.

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2. Lack of good governance, accountability and transparency:
The banking industry of our country has continuously made considerable progress but
despite this situation the foreign countries are considering our banking system or banking
industry activities as questionable. This occurs because recent news about bank directors and
chairmen’s involvement in political parties. “So there has been a possibility to unhand bank’s
important deals with using the bank’s goodwill which will question the factor that is our
banking industry and its’ operations are independent & reliable? Because of the lack of good
governance whatever the banks are publishing in their annual reports and regulatory
paperwork’s and the data they are putting in those papers are they reliable or actually correct?
Are those papers have been properly audited? In recent years the growth of credit is also
declining because of the consecutive monetary policy of Bangladesh Bank, political unrest,
uncertainty in our country and most of all lack of infrastructure facilities and lawlessness.
3. Inadequacy of effective risk management system
The risk management system is a combination of some terms which includes: asset quality,
capital adequacy, non-performing loan, expenditure income ratio, return on Asset (ROA), &
return on Equity (ROE). If we first talk about the capital adequacy we must have to say that
this is a cushion for a bank that prevents bank failure. Capital adequacy is measured by the
capital to Risk Weighted Asset. The regulation from the central bank is a commercial bank
has to maintain 10% of risk weighted asset (RWA) or tk.200 whichever is higher as the
banks minimum required capital.
If the banks cannot maintain or hold their required amount of capital then a situation came up
this is referred to as “Shortfall of Capital”.
Besides this banking sector faces the following severe problems-
1. Low credit growth
2. Increasing trend of non-performing loans resulting to higher provisioning
requirements
3. And surplus liquidity

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3.1.2. Microcredit institutions:
Microfinance is the provision of financial services (Loans, savings, insurance) to people on a
small scale, such as businesses with low or moderate incomes. Despite good intentions,
microfinance still has several hurdles to cross over:
1. Multiple borrowing or overlapping: Overlapping or multiple borrowing by an individual
borrower or household is considered as an alarming issue or problem, according to the
respondents.
2. Misuse of credit by borrowers: As in most of the cases MFIs do not review what is the
borrower doing with the money borrowed. Misuse or unproductive use of credit is a usual
practice.
3. Lack of innovation: From almost the beginning till today almost every MFIs follow
Grameen Model of micro financing.
4. Severe lack of training and education: The research and training capability of MRA is
poor. MFIs are facing many emerging issues to meet the present and future challenges.
5. Higher interest rate: High cost involved in small loan transactions for Microcredit
providers. Higher interest rate is a financial disadvantage of microfinance. Due to higher
interest rate charges, Grameen Bank has been criticized, as the interest rate is roughly 31%
(The New Nation, 2010), whilst the interest of conventional banking is 10-15% in
Bangladesh.
3.1.3. Nonbank financial institutions:
1. Mismanagement of mobilizing funds: Proper mobilization of fund is the main problem in
NSFI.
2. Lack of Human Resource: Skilled and trained human resource is considered as an
important component for the development of any institution. Due to the recent growth of
NBFIs, availability of experienced manpower is a challenge for this industry.
3. Competition with Banks: In our country, three are forty seven commercial banks and some
nine are under process of starting their operation. So there is a severe competition for selling
loan products. It becomes tougher when commercial banks engage in non-bank activities.

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4. Asset Liability Mismatch: NBFIs are in a great dilemma while managing the mismatch
between their asset and liability. The average weighted life of the company’s business
portfolio should be less than the average weighted life of its deposits and borrowing.
5. High Cost of fund: As most of the funds collected by NBFIs are from commercial banks,
their cost of fund is much higher than commercial banks. As per Bangladesh Bank,
department of statics, the weighted average interest rate for all banks is 8.47 percent on
deposit and 13.80 percent on lending in December 2012. On the other hand the deposit
interest rate of NBFIs ranges from 14 percent to 16 percent and lending interest rates ranges
from 21.5 percent to 18 percent. Thus the weighted average cost of fund for NBFIs would be
at least twice that of banks.
3.2.Problems of Capital Market:
Securities and Exchange Commission (SEC) and capital market participants are weak. The
problems of DSE, CSE may be summarized as under:
1. Inadequate Systems and Surveillance: Neither the SEC nor the exchanges have effective
automated surveillance systems that can detect, monitor, and prevent market abuses and
malpractices. This has affected market confidence, which has often been cited by investors as
the major constraint in the development of the capital market.
2. Price manipulation: It has been observed that the share values of some profitable
companies has been increased fictitiously some items that hampers the smooth operation of
Stock market.
3. Delays in Settlement: Financing procedures and delivery of securities sometimes take
an unusual long time for which the money is blocked from nothing.
4. Improper financial statement: Many companies do not focus real position of the
company as some audit firms involve incorruption while preparing financial statements. As a
result the shareholders as well as investors do not have any idea about position of that
company.
5. I regulations in Dividends: Some companies do not hold Annual General Meeting
(AGM) and eventually declare dividends that confused the shareholders about the financial
positions of the company

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3.3. Problems of insurance sectors:
The following problems of the insurance industry in Bangladesh are identified in the present
study:
Centralization Policy: Most of the insurance companies in our country are located in urban
areas and there are few branches in rural areas. They forget that the large number of our
population reside in rural areas. Thus this centralization policy acts as an obstruction to the
growth of insurance business in our country.
Political Instability: Political instability is a major problem in Bangladesh.
Political instability and inconsistency of political courses are a serious problem
for the insurance business. Moreover, Bangladesh government formulates national policy,
rules, and regulations on political consideration that, too, restrict the normal growth of
insurance in the country.
Lack of Supervision from the Government: Lack of surveillance from controlling agency
of government encourages many insurance companies to follow some unethical practices like
delay in claim settlement, harassment to policy holders and showing fake financial statement.
This is not only destroying the reputation of the insurance companies but also creates
negative impact in the mind of the people about insurance.
Legal Complexity: The current Insurance Act is lacking in several aspects of determining
margins of solvency, investment of funds, accounting standard, morality table and protection
of the interest of the insured. Therefore, the people are discouraged to take insurance policy
because they think that the complexities will create extra pressure on their mind, which may
hamper regular activities.
Absence of Business Ethics: In a competitive market, some insurance companies use some
business tactics that violate the business standard and the provision of insurance acts. Some
insurance companies create harassment to the policy holders when they want back their
money after death or maturity. Such kinds of illegal acts create bad reputation to the
insurance companies and hinder the development of the overall insurance business in the
country.
Lack of Information Technology: Insurance sector in Bangladesh is still conducting its
operations manually (or on conventional method). They do not use any web address, which is
essential for an insurance company. But still the operations of insurance companies are not

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automated. The clients of insurance sector are deprived of the convenient use of e-insurance,
online business, internet, Web and computerized system.
Lack of Product Diversifications: Insurance companies usually offer some common and
traditional products. Generally, customers always demand innovative products. The insurance
market demands new products to cover the risk arising from changing and growing needs of
society.
Tax Constraints: Insurance officials say that the high corporate tax restricts the growth of
the insurance sector. Now the insurance companies pay a corporate tax rate of 42.5 percent
which is higher than in other countries.
4.0. Recent scams of financial sectors in Bangladesh:
4.1. Bangladesh Bank Scam
In February 2016, instructions to steal US$951 million from Bangladesh Bank, the central
bank of Bangladesh, were issued via the SWIFT network. Five transactions issued by
hackers, worth $101 million and withdrawn from a Bangladesh Bank account at the Federal
Reserve Bank of New York, succeeded, with $20 million traced to Sri Lanka (since
recovered) and $81 million to the Philippines (about $18 million recovered). The Federal
Reserve Bank of NY blocked the remaining thirty transactions, amounting to $850 million, at
the request of Bangladesh Bank. Bangladesh Bank has around $28 billion in foreign currency
reserve. Nearly one third of the reserve is in the form of liquid assets with the Federal
Reserve Bank in the United States and the Bank of England. The rest is invested in bonds and
gold. [2]
What happened?
Hackers attempted to steal $1 billion from the Bangladesh central bank’s account with the
Federal Reserve Bank of New York between February 4-5 when Bangladesh Bank’s offices
were closed. The perpetrators managed to compromise Bangladesh Bank’s system and gained
access to the bank’s credentials for payment transfers, which they used to send about three
dozen requests to the Fed Bank to transfer funds to Sri Lanka and the Philippines. An $850-
870 million transfer was prevented by the banking system but four requests by the hackers
were granted; $81 million was transferred to the Philippines, entering the Southeast Asian

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country’s banking system in February 5, 2016. This money was later transferred to Hong
Kong. Another request to transfer $20 million to Sri Lanka was granted.
The $20 million fund to Sri Lanka, was intended by hackers to be transferred to Shalika
Foundation, a Sri Lanka-based nonprofit organization. The hackers misspelled “foundation”
in their request to transfer the funds, spelling the word as “fandation”. This spelling error
gained suspicion from Deutsche Bank, a routing bank which put a halt to the transaction in
question after seek clarifications from Bangladesh Bank. Shalika Foundation was not found
in the list of registered Sri Lankan nonprofit organizations.
Sri Lanka-based Pan Asia Bank initially took notice of the transaction, with one official
noting the transaction as too big for a country like Sri Lanka. Pan Asia Bank was the one
which referred the anomalous transaction to Deutsche Bank. The Sri Lankan funds have been
recovered by Bangladesh Bank.
According to the system, to pay another party from its Federal Reserve Bank of New York
(FRBNY) accounts, BB’s authorized officers, using their electronic signature/pass codes,
send an electronic advice to Deutsche Bank (correspondent bank of BB in New York), using
the Belgium-based secure messaging network, Society for Worldwide Interbank Financial
Telecommunication (SWIFT). It seems that the Deutsche Bank and the FRBNY were initially
executing the transfer requests without manual due diligence (identification, reconciliation
and confirmation). This means that the Deutsche Bank’s automated system mechanically and
instantaneously relayed the BB’s payment/debit requests to the FRBNY using the Fedwire
Funds Services (owned and operated by the Federal Reserve Banks), the payment order also
routed to the Clearing House Interbank Payments System (CHIPS), a clearance and
settlement system for large value international transactions of public and private
counterparties, owned and operated by some large banks in the US since the payees are
private individuals/NGOs. The CHIPS then automatically credited the funds of the banks of
the payees (Rizal Commercial Banking Corporation or RCBC, Philippines, and Pan Asia
Banking Corporation, Sri Lanka; possibly through their correspondent banks), and debited
that of FRBNY (in turn debiting BB’s account).
The money transferred to the Philippines was deposited in five separate accounts with the
Rizal Commercial Banking Corporation (RCBC), and later found to be deposited under
fictitious identities. The funds were then transferred to a foreign exchange broker to be
converted to Philippine pesos, returned to the RCBC and consolidated to an account of a

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Chinese-Filipino businessperson. The conversion was made from February 5 to 13, 2016. The
four U.S. dollar accounts involved were earlier opened with the RCBC in May 15, 2015,
which remained untouched until February 4, 2016.
In February 8, 2016, during the Chinese New Year, Bangladesh Bank through SWIFT
informed RCBC to stop the payment, refund the funds and to “freeze and put the funds on
hold. Chinese New Year is a non-working holiday in the Philippines, and a SWIFT message
from Bangladesh Bank containing similar information was received by RCBC a day later. By
this time, a withdrawal amounting to about $58.15 million was already processed by RCBC’s
Jupiter Street Branch.
The Governor of Bangladesh Bank requested Bangko Sentral ng Pilipinas assistance on
February 16 regarding the recovery of its $81 million funds saying that the SWIFT payment
instructions issued in favor of RCBC to be fraudulent.
Investigators in the Philippines found that computer hackers stole around $100 million, which
was brought into the country’s banking system. It was sold to a black market foreign
exchange broker, transferred to at least three large local casinos, sold back to the money
broker and moved out to overseas accounts—all in a few days. The National Bureau of
Investigation (NBI) of Philippines launched an investigation and looked into a Chinese-
Filipino who allegedly played a key role in the money laundering of the illicit funds. The
Anti-Money Laundering Council (AMLC) started its investigation on February 19, 2016 on
bank accounts linked to a junket operator. AMLC has filed a money laundering complaint
before the Department of Justice against a RCBC branch manager and 5 unknown persons
with fictitious names in connection with the case. A Philippine Senate hearing was held in
March 15, 2016, led by Senator Teofisto Guingona III, head of the Blue Ribbon Committee
and Congressional Oversight Committee on the Anti-Money Laundering Act. A closed door
hearing was later held on March 17. PAGCOR, has also launched its own investigation.
Officials allege the money was withdrawn from a bogus account set up under the name of a
local businessman, William So Go, who denies any involvement in the transfers. Agarrado
also accused Deguito of offering him a 5 million pesos ($107,000) bribe and of ignoring his
Feb. 9 recommendation to heed an email from the bank’s head office ordering a recall of the
funds.

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The bank’s internal investigation showed Deguito helped to set up an account under Go’s
name, with a forged signature, said Macel Fernandez-Estavillo, a director and in charge of
legal affairs at the Rizal Commercial Banking Corp. The stolen funds are thought to have
been consolidated into that account, converted into pesos and sent through a remittance
company to two casinos and to a person named Weikang Xu, according to the Philippine
Anti-Money Laundering Council executive director, Julia Bacay Abad. Xu runs casino
junkets, said Silverio Benny J. Tan, corporate secretary of Bloomberry Resorts Corp., which
runs Solaire Resorts and Casinos – one of the companies that allegedly received the funds.
Many details of the case remain murky, such as who was behind the heist and how the
hackers breached the Bangladesh Bank’s cyber security. No arrests have been announced so
far, though Deguito faces a criminal complaint that could result in charges against her.
4.2. The Hallmark-Sonali Bank Scam:
The Sonali Bank is not only the largest nationalized bank in Bangladesh, but also the biggest
commercial bank in this sector having the responsibility to perform the treasury function of
the central bank in places, where Bangladesh Bank does not have its branches. Since the
liberation of the country, Sonali Bank has been functioning with full confidence of the people
and the nation as a whole. The Hallmark scam has not only thrown the Sonali Bank in a
“blackhole”, but also ruined the trust and confidence of the people in the entire banking
sector.
May 2012, a report from the Bangladesh Bank revealed that the Ruposhi Bangla Hotel
Branch of the state-owned Sonali Bank, Bangladesh’s largest commercial bank, illegally
distributed Tk36.48 billion (US$460 million) in loans between 2010 and 2012. The largest
share, of Tk 26.86billion (US$340 million), went to the now infamous Hallmark Group.
The bank’s board approves writing off total loans of Tk2,086 crore provided to its 23 clients
The state-owned Sonali Bank has written off the loans embezzled by the Hallmark Group, as
there is no hope of getting the money back. The executive committee of Sonali Bank
approved a proposal to write off a Tk2,086 crore loan in favour of 23 clients, including the
scam-hit Hallmark. Apart from Hallmark, the committee has also written off the bad loans of
13 other clients from various branches of the bank. Of the loan amount, around
Tk1,700 crore has been written off against the loans of the Hallmark Group from the Ruposhi

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Bangla Hotel branch, and 13 other clients from other branches. The approval came at the 35th
EC meeting of Sonali Bank. The board made the decision at a time when the bank is running
with a capital shortfall of Tk394 crore.
Expressing concern over the large loan write off, Bangladesh Bank has undertaken a move to
check whether the required provisions were followed before writing off the loans.
Later on, Sonali Bank filed cases against Hallmark Group as it failed to get buyers for the
mortgaged assets of the company. The bank fell into capital shortfall, while the large loans,
taken through irregularities, went into default. Then, the government injected around
Tk2,000 crore in 2013, and Tk710 crore in 2014, for the survival of the bank. However,
despite large loans being written off, the bank showed high profits in 2014. In fact, the bank
bagged an operating profit of Tk855 crore and net profit of Tk492 crore. The actual profits of
the bank could be ascertained just after the visit of the Bangladesh Bank investigation team,
said a BB review report on Sonali Bank.
The bank also showed that capital shortfall was reduced to Tk394 crore last year, after the
recapitalisation of large amounts by the government, from Tk895 crore in 2013, but this
figure might be higher than the bank's claim after the investigation was carried out by the
central bank, said the BB report. Sonali Bank has written off loans worth Tk2,946 crore
during the last year and rescheduled loans of total Tk2,756 crore in 2013 and 2014.The bank's
default loan rate came down to 28.54% last December due to the rescheduling and writing off
of large loans. It could have even crossed 40% had there been no rescheduling and writing
off, said Bangladesh Bank in its review report.
The position of the state-owned bank slipped to five from its previous marginal level of four,
in its CAMELS rating during last year as the bank's financial health was considered
unsatisfactory.

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4.3. Bismillah Towels Group Scam:
The five local banks that lent Tk 1,100 crore to the fraudulent Bismillah Towels Group are
yet to recover a single penny three and a half years after the scam was detected.
Bismillah Group, which used to make terry towels for the export market, allegedly embezzled
the amount with the help of bank officials between June 2011 and July 2012. The banks --
Jamuna, Janata, Prime, Premier and Shahjalal Islami -- have invested both human and capital
resources to retrieve the loans, but their efforts were thwarted by the mastermind behind the
scam: Bismillah Group's Managing Director Khwaja Solaiman Anwar Chowdhury. For
instance, the five banks intended to sell the properties Bismillah Group had mortgaged with
them for the loans. They had even won a court order in their favour but Bismillah delayed the
mutation of the properties by filing a writ petition with the High Court, said Shafiqul Alam,
managing director of Jamuna Bank. Bismillah Group owes Jamuna around Tk 180 crore.
Jamuna filed a case nearly two years ago to recover the money by selling off the property --
worth Tk 100 crore -- that Bismillah attached with the loan. State-owned Janata Bank is the
biggest casualty of Bismallah's duplicitous ways, with its loans to the group amounting to
about Tk 400 crore. The bank claims that they have full security coverage against the loan.
Yet, it haunts the bank the most. “Bismillah's loan has become the bank's biggest headache,”
said Omar Farooque, deputy managing director of Janata Bank. A case was filed six months
ago to recover the amount but it is still awaiting a verdict, he said. Prime Bank's exposure to
the scam is Tk 300 crore, Shahjalal Tk 150 crore and Premier Tk 63 crore. Like the other
victim banks, Prime also filed a case to recover the loan by selling Bismillah's assets attached
to it. But Bismillah challenged the move, saying the lender cannot file the case. “Recently,
we have been cleared by the court that we can take legal actions against borrowers,” said
Ahmed Kamal Khan Chowdhury, managing director of Prime Bank. Of the five banks, only
Prime has made full provisioning against the loans as per the regulatory requirement set by
the central bank. The other banks are provisioning the loans gradually. After an investigation
into the loan scam, the Anti-Corruption Commission (ACC) in 2013 filed 12 cases against 53
people, including 13 officials of Bismillah Group and 40 bankers, on charges of swindling
over Tk 1,100 crore from five commercial banks.

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4.4. Stock market crash of Bangladesh in 2010-11:
Time of historical fall of the crash has been divided into two sections which are December
2010 and January 2011. December 2010 It has been stated by Bhuiyan (2011) that 5th
December, 2010 as the last glorious day of the year for the investors of Bangladesh stock
market. On this day DSE General Index (DGEN) gained its all-time highest 8, 918.51 point &
broke all old records of DSE turnover by Taka 32.50 billion. Security & Exchange
Commissions and Bangladesh Bank applied a lot of directives to keep the market under
control in 2010. But in December both BB & SEC changed many of their previous directives
and applied new more. On 6th December, 2010 SEC introduced a directive saying that buy
orders will be performed after encashment of Investor`s cheque. On the following day
another directive called “netting facilities” was applied. This indicates that no investor will be
able to purchase securities against the sale proceedings of any other securities during the
settlement & clearance period. But both directives of 6th & 7th December were cancelled on
8th December. The reason of cancelling these directives was a significant fall of share prices
on 8th December. (Bhuiyan, 2011) SEC changed directive of margin loan ratio by increasing
it from 1:0.5 to 1:1 on 13th December and later it was again hiked to 1:1.5 & 1:2 because of
free fall of share prices. (Bhuiyan, (2011) 32 Bangladesh Bank got a complaint that Banks are
investing money in the stock market from their reserve. On the 1st day of December BB sent
50 teams in different banks of Dhaka & Chittagong to investigate and found some banks in
such irregularities. (Raisa, 2011) Raisa (2011) discussed about the most important directives
initiated by BB in December 2010 are withdrawal of illegally invested industrial loans,
increasing SLR & CRR. On 15th December, BB increased CRR and SLR by 0.5 percent and
increased to 19 & 6 percent. Another important directive initiated by BB was withdrawal of
illegally invested industrial loans by December 31, 2010. As a lot of the reserved money was
invested in capital market, banks started selling shares and withdrawing that money from the
market. By the time investors became panicked. To handle the disastrous & assure the
panicked investors BB extended its deadline for submitting and adjusting loans. For the
merchant banks the deadline was January 15, 2011 and for the commercial bank February 15,
2011. Institutional investors including financial institutions started selling shares from the
beginning of December to show high return on investment at their balance sheet. As the
Institutions & banks started selling their shares from the beginning of December the turnover
of DSE was the highest ever in its history on 5th December. (Raisa, 2011) 19th December
was a historical day of the financial year 2010-11 in Bangladesh stock market. On this day

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DSE witnessed its biggest one day fall in 55 years history until the date with losing 551.76
points or 6.71 percent. The losing index was even higher than 284.78 points or 3.32 percent
of 12th December. Prices started to nosedive in an hour after the trading started and about 20
0 points were wiped off. In the middle of the session it recovered little bit and ended up the
session at 7654 point. To meet CRR & SLR requirements of BB by the deadline created
liquidity crisis in banking sector and call money rate made a new record of 180% by 20th
December. Investment Corporation of Bangladesh (ICB), state-owned commercial banks
(SCBs), regulators and government brought some kind of stability in the market after the big
fall of 19th December & liquidity crisis. As a result, share prices increased from 20th to until
30th December and index stood at 8290 point at the end of the financial year 2010-2011.
Figure 2: DSE daily DGEN index of December, 2010
Figure 3: CSE daily CASPI index of December, 2010

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January 2011
Share prices started to fall from 3rd January, 2011 as investor had the information of ongoing
liquidity crisis of financial & non-financial institutions that limiting margin loan. The down
slope of index is noticeable from January 2nd to 10th. As Chairman of probe committee Mr.
Ibrahim Khaled (2011) mentioned, “Due to trigger sale of shares from 2nd to 5th January,
market experienced its biggest decline in share prices and market crash from 6th to 10th
January.
On 9th January DSE General (DGEN) Index declined by 600 points and all indices declined
nearly 7.75 percent. On 10th January Dhaka Stock Exchange General (DGEN) Index lost by
660 points or 9 percent & Chittagong Stock Exchange Selective (CSE) Index declined by 914
points or 6.8 percent within 50 minutes of trading. CSE All Share Price Index (CASPI) stood
at 19212.34 losing by 1,396.21point, which is 6.77 percent. CSE Selective Categories Index
(CSCX) lost 914 points or 6.87 percent and CSE -30 Index also lost 1490.83 or 8.28 percent.
Figure 4: Daily DGEN index of January, 2011

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Figure 5: CSE daily CASPI index of January, 2011
It had broken all previous records of decreasing index. After that Security & Exchange
Commissions called for an emergency meeting with BB and stop trading at both Dhaka &
Chittagong Stock Exchanges. Investors came out in the street with processions and
demonstrated against free fall of Share index in both bourses as well as suspension of trading.
Investors from different parts of the country such as, Chittagong, Comilla, Narsingdi,
Narayanganj and Jessore brought out processions and clashed with law enforces in some
places as well. Index started to decline again on 18th January and market hits the lowest
turnover in nine months which is taka 8.49 billion. Because of free fall of share prices,
Investors came out in the street again and started protesting against free fall of share prices
and chanted slogans against market regulators. SEC asked DSE & CSE to halt trading for the
2nd time within 8 days. DSE General Index (DGEN) declined by 243 points or 3.29 percent
and CSE Selective Category Index 298 points after a trading of around 2.4 hours.
Main reason behind this scam: 1) Imbalance of demand and supply of shares in DSE & CSE;
2) Investors didn’t have idea about financial report of listed securities / unfair audit report; 4)
Buying shares based on rumor & without study; 5) Majority of general investors don’t have
knowledge about capital market; 5) Intervention of Bangladesh Bank (central bank); 6) Over
expectation of general investor; 7) Liquidity crisis 8) Over exposure of banks & financial
institutions; 9) Poormonitoring of regulators; 10) Corrupted employees of regulators, Margin
loan

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4.5. Basic Bank Scams:
Similar to Sonali Bank loan scam, the government-run BASIC Bank has also suffered a big
swindling of around Tk 4,500 crore over the past several years in yet another big banking
scandal as it become public in recent time.
The story is almost same. In BASIC Bank, its board of directors approved the money in
different loan cases to different vested interest groups or business houses in fictitious loans or
business accounts. The Board of Directors acted in complicity with dishonest business houses
which produced loan request under different projects or import financing bills and the money
was disbursed to parties accordingly.
The board approval was reportedly given to loan seekers ignoring the alert of the bank branch
officials and also bypassing the cautions against such loans by the central bank authorities.
The fake and fictitious loan cases were also discovered in central bank inspections and the
branch offices of the bank also informed the central bank of the complicities in approving the
loan by the board of directors. But no follow up action was taken and the loan scams
continued to such a huge extent. The swindling was taking place over the past few years. The
amount was Tk 3,500 crore last year and the Anti-Corruption Commission launched an
inquiry into the alleged embezzlement of that money
The 18 cases filed by the Anti-Corruption Commission (ACC) did not charge Sheikh Abdul
Hye Bacchu for the irregularities involving loans worth Tk 35 billion. At least 27 bankers,
who served the state-run-Basic Bank in different sectors and 56 organizations have been
found involved in the Bank's loan scam according to an audit report.
The ACC began investigating after the scam with regard to massive loans granted by the
state-owned bank’s Gulshan, Dilkusha, and Shantinagar branches between 2009 and 2012.
On July 14, 2014, Bangladesh Bank sent a report on the BASIC Bank scam to the ACC,
detailing how borrowers embezzled money from the bank through fake companies and
suspected accounts.
The report mentioned that Dilkusha branch doled out Tk 683 crore in loans to 16 borrowers,
all of whom took the money through illegal means. In Gulshan branch, 12 clients took out Tk
297 crore through pay orders or in cash.The report also contained a list of 40 pay orders that
were transferred from a number of loan accounts at Shantinagar branch to suspected accounts
in the same branch in 2012. Each pay order transferred funds between Tk 50 lakh and Tk 1
crore.

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4.7. Recent ATM Forgeries and Related Incidents:
4.7. The Destiny Multipurpose co-operative Society Ltd (DMSCL):
The alleged fraudulent activities of the multilevel marketing (MLM) company Destiny 2000 Limited
have stirred the whole nation recently. The Department of Cooperatives (DoC) had detected financial
irregularities of around Tk.1,450 crore in the operations of Destiny Multipurpose Cooperative Society
Ltd (DMCSL),a sister concern of the controversial Destiny 2000 Group. The irregularities unearthed
were-misuse of funds, unauthorized expenditures and investments, recruitment of
members, commission and overvaluation of assets -- through an investigation that took about four
months. The non-financial irregularities found by the DoC are: enrolment of fake members and
concealment of information about investments in other entities. The DMCSL had only 167 members
in 2006-07, but it rose to 0.64 million in 2010-11 and nearly 0.85 million in 2011-
12. DoC investigation also found that most of the entities where DMCSL invested exist only in paper.

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5.0. Recommendations
5.1. Banking sector:
The new banks should introduce new and innovative services and should scale up
their products for the sake of making the government decision meaningful.
There is no denying that the quality of the sponsors largely influences the quality of
operation of banks as such sponsors play an important role in the decision-making.
So, the central bank will have to closely examine the track records of the sponsors and
it must not give in to political pressure of any sort on this issue. The quality of the
bank directors should be maintained scrupulously.
The central bank may concentrate its attention on the colour of money of the proposed
directors who will be investing as the paid-up capital.
The central bank must have to play the role of a watchdog in case of shopping the
investment clients of new banks from existing banks by approving the higher limit
then the present outstanding.
The central bank must have to be vigilant in examining the proposed investment
clients of new banks, particularly those whose cases have to be rescheduled. Getting
rescheduled, the sick clients in the existing banks become very much performing in
new banks for the time being in the backdrop of opening new banks in the market.
The central bank needs to require to consider several other issues, prior to giving
effective permission to new banks, including ownership quality.
The vital issue that deserves priority attention of both central bank and the
government is better banking coverage of the hitherto neglected rural areas. The new
banks may be asked to serve the rural people extensively.
On the top of everything, both the central bank and the government will have to
ensure the entry of stronger players in the banking arena and keep close watch on the
effects of such an entry on the overall banking industry.

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The Bangladesh Bank and Bangladesh Institute of Bank Management (BIBM) have to
take preparation on structuring the banks by training up the bankers. Because market
will be oversaturated as soon as the new banks start operations. The precipitations of
banks may appear at the bottom of the banker of banks in Bangladesh. Time has
arrived; the possibility of merger of weak banks cannot be laughed away.
5.2. Recommendations for NBFIs:
Recommendations regarding the development of NBFIs have been made in various studies,
Ahmed and Chowdhury (2007), Datta (2014) and Financial Stability Report of Bangladesh
Bank (2014), some of which are listed as follows:
 At present, there is no deposit insurance coverage for the depositors of NBFIs and
it is recommended that the NBFI depositors be brought under the umbrella of
insurance coverage. The deposit insurance system should aim at minimizing the
risk of loss of depositors' funds with NBFIs.
 A more Investment friendly policy of Bangladesh Bank for NBFIs, more
coordination with Bank financial institution, easy and simplified procedures of
reporting to Bangladesh Bank etc. will help in the growth of NBFIs.
 The NBFIs need to streamline their loan disbursement methods with focus on low
risk industrial segments and adopt better monitoring mechanisms in order to
reduce risks associated with their assets.
 NBFIs are permitted to undertake a wide array of activities and should therefore
not confine themselves to a limited number of products only. Diversifying the
product range is a strategic challenge for NBFIs in order to become competitive in
the rapidly growing market.
 Active participation of merchant banks is essential to accelerate the capital market
activities which can expedite the economic growth of the country. The success of
merchant banking operations is largely linked to the development of the security
market. So NBFIs should concentrate more on their opportunities in the capital
market.
 As the tax treatment is totally different in leasing business, mixing up of lending
and leasing in the same business portfolio might create the possibility of tax

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evasion. It is advisable that the two different operations are not mixed, otherwise,
it might distort the basic financial norms.
5.3. Recommendations for MFIs to move forward:
Microfinance institutions have been viewed as an important tool in poverty alleviation. It is
an important sector which would improve the living conditions of the poor and lead to the
development of the country. Some of the issues are hinted below:
 Higher operational costs is the major reason for the higher interest rates of the MFIs.
The operational costs could be reduced by the use of technology.
 The microfinance institution should ensure that the loans are given for useful purpose
which would earn a living for the household and not for uneconomic purpose.
 Rate of interest should be decreased. The interest rate is high as compared to that of
commercial banks. NGOs charge such interest rate to cover operational cost with a
view to achieving sustainability and attracting huge commercial funds into
microfinance industry by improving the technology model used by microfinance
institutions.
 Central Data Base should be provided. NGOs must have a central data base covering
major data, which will ensure accountability and transparency in microfinance
operation.
 Multiple borrowing or overlapping should be restricted by the borrowers. Central data
base will remove the overlapping problems.
 Research and training program should be extended. To meet the present and the future
challenges it is necessary to strengthen research and training capability of NGOs.
5.4. Recommendation for capital market:
Role of government: Steps or actions for government that should adapt to prevent or
avoid and tackle same kind of crashes in future. Recommendations are given
following:
 Actions should be taken against those who were involved in this recent stock market
crash
 Improving security laws and penalty for breaking those
 Balancing of demand and supply of shares
 Follow-up the market and protect against any kind of manipulation

23. 23 | P a g e
 Government should announces incentives through SEC to attract companies to the
capital market
 Government should take long term actions for the market
Others: To introduce automated monitoring system that may control price manipulation,
malpractice’s and inside trading.
To introduce full computerized system for settlement of transactions.
To force the listed companies to publish their annual reports with actual and
proper information that can ensure the interests of investors.
 To control and abolish market form premises of stock market.
 To take remedial action against the issues of fake certificates.
 The composite Quotation system (CQS) should be introduced and implemented that
available the exchange specialist bid-ask quotes to the subscribers.
 The brokers should not be allowed to deal in the Scripps on their own accounts.
 The management of DSE and CSE should be vested with professionals and
should not in any way be linked with the ownership of stock exchange and other firms
 Regulators should perform their job honestly and sincerely
 SEC needs honest officials
 Insider trading should be prohibited
 Omnibus should be converted to BO account
5.5. Recommendations for Insurance:
As part of reforms for the Insurance Market, Asian Development Bank (ADB) has
recommended that the government implements a white paper to strengthen the insurance
sector by:
 Agreeing to a timetable for recapitalizing all the insurance companies in accordance
with Insurance Act 2010;
 Adopting investment regulations as required by Section 41 of the Insurance Act 2010
 Initiating implementation of this white paper
 Implementation of the following regulations: (a) management of IDRA Fund and (b)
CEO appointment. Even though the draft white paper has been formulated, it has not
been approved by the Cabinet as yet. However, implementation of the policy paper

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and insurance regulation with regard to CEO appointment and management of IDRA
Fund has already been initiated.
 Others: 1) Regain Popularity with Appropriate Marketing Strategy; 2) Product
Innovation; 3) Developing Professional code of Ethics; 4) Establishment of R&D
Cell; 5) Arrangement of Training Programs; 6) Legal Reforms; 7) proper monitoring,
8) appropriate Pricing Policy.
6.0. Conclusion:
A healthy and sound financial sector is needed for successful implementation of monetary
policy which ensure proper channeling of funds thus stimulate the growth of the economy.
But recent crisis in this sector is increasing the opacity of the financial system. Six financial
scams have taken place over the last seven years in the country. A total of almost Tk 30,000
crore was embezzled in the scams. A Padma Bridge could have been built with that amount.
Of late crisis in the banking sector has made the financial sector in Bangladesh worst among
the emerging Asian countries reflecting the poor risk management ability of Bangladesh
Bank. The running crisis in the banking sector mainly due to increase in default loan reflects
the institutional weakness of the financial system in the country. Recent consecutive heists in
banking sector again shake the financial system as well as the economy. Continuous default
loans, scams, and heist cause increased cost of fund and shortfall in capital in the banks.
Government recapitalizes the shortfall with taxpayer’s money instead of correcting the faults
of the institutions, which not only increases the burden on taxpayers but also causes a loss to
the economy.

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7.0. References:
http://print.thefinancialexpress-bd.com/old/more.php?news_id=127068&date=2012-04-19
http://print.thefinancialexpress-
bd.com/old/index.php?ref=MjBfMTFfMjFfMTJfMV85Ml8xNTA2OTY=
http://www.ejournalofbusiness.org/archive/vol2no6/vol2no6_2.pdf
https://www.scribd.com/doc/23789793/Problems-and-Prospects-of-Bangladesh-Stock-Market
http://www.academia.edu/19580582/Major_problems_of_the_banking_industry_and_strategi
es_to_overcome_them_A_study_on_Bangladesh
http://www.thedailystar.net/country/basic-bank-scam-acc-files-18-cases-146626
http://businessnews24bd.com/tk-4500-cr-loan-scam-in-basic-bank-alleged/
http://print.thefinancialexpress-bd.com/2015/09/09/107290
http://archive.dhakatribune.com/bangladesh/2016/feb/23/muhit-27-individuals-56-
organisations-involved-basic-bank-scam
http://print.thefinancialexpress-bd.com/old/more.php?news_id=127068&date=2012-04-19
http://www.academia.edu/19580582/Major_problems_of_the_banking_industry_and_strategi
es_to_overcome_them_A_study_on_Bangladesh
ASA University Review, Vol. 7 No. 2, July–December, 2013 Achievement and Problems of
Microfinance of Two Leading MFIs in Bangladesh: A Case Study of GB and ASA
http://bdnews24.com/bangladesh/2016/02/23/evidence-of-scam-found-against-basic-bank-ex-
chairman-bacchu-says-muhith
http://www.thedailystar.net/country/hallmark-loan-scam-chairman-md-indicted-2-cases-
573610
http://print.thefinancialexpressbd.com/old/index.php?ref=MjBfMTBfMTNfMTJfMF8yMl8x
NDY3MTY=&feature=c3BlY2lhbHNOZXdz&na=U0FUVVJEQVkgRkVBVFVSRQ==
http://archive.dhakatribune.com/banks/2015/feb/12/sonali-bank-writes-hallmarks-loans-
tk1700cr
http://bdnews24.com/bangladesh/2013/11/04/12-cases-against-bismillah-group
http://www.thedailystar.net/business/banking/banks-caught-bismillah-group-scam-are-yet-
retrieve-any-fund-157210
http://print.thefinancialexpress-bd.com/old/more.php?news_id=127068&date=2012-04-19