GOVERNANCE

IN
FINANCIAL INSTITUTION(GFI)
GOUTAM KUMAR GHOSH
Additional Director
BANGLADESH BANK
 • Module F
• Subsidiary and other business Governance
 Overview
• Brokerage Firms (Stock brokers)
• Merchant Banking
• Custodial Services
• Offshore Banking Unit (OBU)
• Islamic Banking Windows
• Mobile Financial Services (MFS)
• Agent Banking
 Brokerage Firms
• The Company who trade shares/stocks/other securities
on behalf of clients/customers are called Brokerage
firms.
• Should obtain license from Bangladesh Securities and
Exchange Commission (BSEC)
• Banks make investment in the capital market in two
ways, direct and indirect investment.
• In indirect investment banks create a subsidiary and
provides capital and loan for investment in capital
market.
• Conflict between banks and the central bank, Central
bank are worried about potential losses to depositors.
Both should consider risk-return trade off.
 Brokerage Firms
For doing brokerage business banks have to purchase
brokerage license from stock exchanges and to become
a member of the exchanges.
Brokerage house operates the business activities by
following ways.
• Brokerage Service: The Company trade shares on
behalf of clients in exchange of trade commission as
set by BSEC. There are two types of account:
o 1. Non Margin Account &
o 2. Margin Account
• Stock Dealer Service: The Company itself can trade
shares for its own portfolio to earn capital gain and
dividend.
 Merchant Banking
• Organization who performs all activities related to
Fund Management, Portfolio Management, Issue
Management, Underwriting and Advisory services
on behalf of clients.
• Merchant Bank acts as a medium between small
investors and companies.
• Bangladesh Securities and Exchange Commission
issues license for merchant Banking operation.
• The operation is guided by the Securities and
Exchange Commission (Merchant Banker and
Portfolio Manager) Rules, 1996 se (2) (1).
 Merchant Banking
• Merchant Banks mainly provide the following services:
 1.Issue Management Services: Preparing prospectus,
correspondence with SEC regarding IPO, IPO related activities
including refund distribution.
 2.Underwriting Services: If the issue is under-subscribed,
Merchant Bank will purchase the unsubscribed shares at a
predetermined price.
 3.Portfolio Management Services: The Portfolio Manager acts
as the custodian of shares of the clients, provides them
information and helps them constricting a portfolio that
minimizes risk and maximizes return.
 4.Structured finance Issue Management Services: Structured
finance is typically indicated for borrowers—mostly extensive
corporations—who have highly specified needs that a simple
loan or another conventional financial instrument will not
satisfy. There are many other products of structured financing,
like CDO (Collateralized Debt Obligation) and CBO
(Collateralized Bond obligation)
 Custodial Services
• Settlement, safekeeping and reporting of customers‘
marketable securities and cash services are usually provided
by Bank Custodian.
• Relationship is contractual, and the services performed for a
customer differs.
• Custody services to a variety of customers, including mutual
funds and investment managers, bank fiduciary, retirement
plans, and agency accounts, bank commercial security
accounts, insurance companies, corporation, endowments and
foundations, and private banking clients.
• In Bangladesh only locker services are available. The stock or
securities custodial services are provided by an organization
named Central Depository Bangladesh Ltd. which performs the
custodial service only share of the investors.
 Offshore Banking Unit (OBU)
• The domestic banking unit provides banking services to the residents
of the country, while the offshore banking unit often provides services
to residents or the non-residents in foreign currency.
• OBUs also operate with lesser cost due to low overhead expenses and
government incentives, thus they can provide competitive rates of
interest.
• As per Bangladesh Bank policy (BRPD Circular No: 02, 25 February
2019) there is no restriction on the physical location of the OBUs. They
may be located either in the Export Processing Zones/Private Export
Processing Zone/Economic Zones, or any other convenient location in
Bangladesh.
• Authorization of Bangladesh Export Processing Zones Authority
(BEPZA)/ Bangladesh Private Export Processing Zones Authority
(PEPZA)/ Bangladesh Economic Zones Authority (BEZA)/other similar
designated authority is a prerequisite before approaching to
Bangladesh Bank.
 Offshore Banking Unit (OBU)
• OBU must have well-established correspondent relationship with reputed
banks/financial institutions abroad and links with important international financial
centers.
• Operation/transactions of OBU can be done with
• (i) enterprises in EPZs, PEPZs, EZs and Hi-tech Parks,
• (ii) fully foreign-owned enterprises in EPZs, PEPZs, EZs and Hi-tech Parks only by
accepting deposits, making short term loans/advances and investments etc.
However, prior permission needed before making any medium and long term
financing facility to the said enterprises.
• (iii) Enterprises other than fully foreign-owned with prior permission from the
Foreign Exchange Investment Department of Bangladesh Bank,
• (iv) juristic persons not resident in Bangladesh provided that the full amount of
loan/advance is covered by (a) guarantee/letter of, and/or (b) foreign exchange
brought in from abroad and deposited,
• (v) Natural persons not resident in Bangladesh including Bangladeshi nationals
working abroad (NRBs) by nothing other than accepting deposits,
• (vi) Persons residents in Bangladesh by discounting accepted bills of ADs in
Bangladesh against import L/Cs opened on deferred/usance.
 Islamic Banking Windows
• Islamic Banking window means branch or office of a conventional
bank that operates under shariah law to handle Islamic finance.
• An Islamic banking window is consolidated into the financial accounts
of its parent bank, but separate information on the Islamic financial
activity are kept.
• Shariah rules restrict financing to Shariah-compliant activities only and
forbid any kinds of conventional banking activities like holding
interest-bearing accounts.
• Shariah-compliant funds must not be intermixed with conventional
bank funds, and risk and profit sharing between the bank and
depositor/ investors requires detailed calculations of gains and losses.
• Liquidity support differs for the parent bank and Islamic banking
window.
• The Islamic banking window of a conventional banking branch needs
to have separate counter for the shariah compliant.
 Mobile Financial Services (MFS)
• Mobile Financial Services (MFS) is a technique of
delivering monetary services that combines banking
with mobile wireless networks, enabling customers
to conduct banking and other financial transactions
using their cell-phones.
• Accounts can be operated by users by Unstructured
Supplementary Service Data, SMS, or particular apps
on the smart phone.
• Mobile financial services include both mobile
banking and mobile payments.
 Mobile Financial Services (MFS)
• Mobile banking: Mobile banking is a type of electronic
banking, or e-banking, which includes a broad array of
electronic banking instruments and channels like the
internet, POS terminals, and ATMs. The use of a mobile
phone to access banking services and execute financial
transactions. The term “mobile banking” is often used
to refer only to customers with bank accounts.
• Mobile money: A mobile-based transactional service
that can be transferred electronically using mobile
networks. A mobile money issuer may, depending on
local law and the business model, be an MNO or a third
party such as a bank. Often used synonymously with
“mobile financial services‘.
 Product of MFS
• Bangladesh Bank vide PSD Circular No: 04 dated 15 February, 2022 has
given a detailed guidelines on MFS.
• Products of MFS
BB permits Bank/FI/ Government Entity-led MFS providers as PSP to deliver
the following broad categories of payment services in Bangladesh:
I. 'Cash-in' to and 'Cash-out’;
II. Person to Business payments like utility bill payments, fees payment,
merchant payments, mobile top up etc
III. Business to Person payments like salary disbursements, dividend/refund
warrant/ discount payments etc.
IV. Person to Person payments
V. Business to Business payments
VI. Online and e-commerce payments
VII. Government to Person payments
VIII. Person to Government
IX. Disbursement of inward foreign remittances
X. Loan disbursements to borrowers, vendor payments etc
XI. Other payments approved by the Bangladesh Bank.
 Model of MFS
• Permissible model for MFS providers
MFS providers in Bangladesh will be led by scheduled commercial banks or
financial institutions licensed by Bangladesh Bank or Government Entity.
 To provide MFS in Bangladesh, scheduled commercial banks that are
already in MFS operation are permitted to continue with the existing
license or may form a subsidiary.
 In case of new applicants, scheduled commercial bank(s) or financial
institution(s) or Government Entity shall have to form a subsidiary. They
shall focus entirely on providing mobile financial services.
• In case of a subsidiary following models are permitted:
I. Should have at least 51% of the equity.
II. Subsidiary alone or may take equity partners from the following business
entities:
(a) Bank(s), financial institution(s) and Government Entity;
(b) NGOs, investment and fintech companies (local and foreign incorporated
III. MFS provider will act as the primary driver of the products and services,
IV. However, any entity whether it is a bank/FI/Government Entity or a non
bank entity, can hold equity in only one MFS providing subsidiary.
 Model of MFS
Other conditions:
The minimum paid-up capital requirement is Taka
Forty five Crore.
A further cushion of capital reserve equal to the
amount of paid up capital will have to be built up
from retained earnings
Loss incurring MFS providers must be required to
inject additional capital to maintain the minimum
paid up capital requirement
Bangladesh Bank may determine additional
capital requirement for an existing or new MFSP
depending on the scale of its operation and risk.
 Agent Banking
• Agent banking is a way of providing limited-scale, formal
banking service to the doorsteps of the underserved
population. For banks, it works as a substitute for branch
expansion in rural areas.
• Banks serve people by appointing agents under a valid
agency agreement, rather than a teller/cashier.
• High overhead costs, maintenance, and operational cost of
a new branch made banks reluctant to open new branches.
A large portion of the population from rural areas remained
unbanked and out of the scope of financial inclusion. That’s
why agent banking.
• Brazil is considered the pioneer of agent banking in the
world. Other developing countries including Columbia,
Peru, Malaysia, Kenya, India, Pakistan, and the Philippines
brought a revolution in agent banking.
• Bangladesh Bank (BB) issued an initial guideline for agent
banking in 2013.
 Services under Agent Banking
 Collection of small value cash deposits and cash withdrawals;
 Inward foreign remittance disbursement;
 Facilitating small value loan disbursement and recovery of loans, installments;
 Facilitating utility bill payment ;
 Cash payment under social safety net programme of the Government ;
 Facilitating fund;
 Balance inquiry;
 Collection and processing of forms/documents;
 Post sanction monitoring of loans and advances;
 Receiving of clearing cheque.
 Other functions like collection of insurance premium including micro‐ insurance etc
B. Prohibited services:
I. Giving final approval of opening of bank accounts and issuance of bank cards/
cheques;
II. Dealing with loan/ financial appraisal
III. Encashment of cheques and
IV. Dealing in Foreign currency
 Agent Banking Model
I. The written agreement between bank and the agent should be
carefully defined and legally vetted. Full financial disclosure,
transparency and accountability of the agent must be ensured.
II. The bank shall assign one of its branches/offices to be responsible for
the agent operating in the designated area of the branch.
III. The agents are to be equipped with IT device like point of sale (POS)
with biometric features capturing and reading facilities. Clients may
use magnetic stripe bank card or mobile phone to access their bank
account
IV. Identification of customers shall be done through a PIN/ biometrics.
V. In the customer end the transaction should be operating through ICT
devices that are continuously and uninterruptedly integrated. The
figures of the transactions must be reflected in “Core Banking
Solution‘ (CBS) of the bank
VI. The agent of the concerned bank should deposit a fixed amount of
money or should have a credit limit with the bank.
 Selection of Agent
• Issues to be taken into consideration:
1.Competence to implement and support the proposed
activities;
2.Financial soundness and cash handling capability;
3.Ability to meet commitments under adverse
conditions;
4. Business reputation;
5. Ability to offer technology based financial services;
6.Security and internal control, audit coverage,
reporting and monitoring capacity .
7.Loan defaulter or the convicted person can not apply
for agency ship.
 Customer Protection
I. The agents should not introduce any financial product or service at
their discretion.
II. There should be clear identification/logo and name of the bank
with contact address/telephone number on the premises.
III. The bank shall take necessary steps to ensure that the agents/retail
agents/sub agents are known to the public in a specific area.
IV. The fees/charges for offering the services shall be published and be
available in the outlets of the agents.
V. The bank shall take necessary steps for creating awareness among
the customers.
VI. The bank shall have a business continuity plan.
VII. When a contract between bank and agent is terminated, bank shall
issue a notice of the termination to be published.
VIII. Customers may lodge complaints regarding agent banking to
Customers‘ Interests Protection Centre (CIPC) of Bangladesh Bank.
 Questions
• Describe the importance of Agent Banking.
Why it is so popular? Elaborate its importance
on economy.
• Impact of Mobile finance Services to
implement digital agenda of Bangladesh.
• Elaborate the following terms:
Custodial Services
Merchant Banking
Islamic Banking Windows
Offshore Banking Unit