Accountant July September 2015

July-September 2015
IDEN T IF Y
A N A LYZ E
BUSIN ESS
RISK
M A N AG E M E N T
CO N T RO L
ACT ION
MO N I TO R
CONTENTS
EDITORIAL BOARD
Chairman
Md Abdus Salam FCA, FCS
Editor
Harun Mahmud FCA
Members
A F Nesaruddin FCA
Akhtar Sohel Kasem FCA
Nasir Uddin Ahmed FCA
Md. Shahadat Hossain FCA
Gopal Chandra Ghosh FCA
Amanullah Khan FCA
Dr. Jamshed Sanyiath Ahmed Choudhury FCA
Md. Liaquat Hossain Chowdhury FCA
Md. Rokonuzzaman FCA
Sabbir Ahmed FCA
Md. Sayeed Ahmed FCA
Mahmudul Hasan Khusru FCA
Snehasish Barua FCA
Muhammad Aminul Hoque ACA
Abdullah-Al-Mamun ACA
Zareen Mahmud Hosein ACA
Muraheb Malik Chowdhury ACA
Abu Haider Mohammed Kibria ACA
SK. Md. Tariqul Islam ACA
Shah Md. Jubaer ACA
Dipok Kumar Roy ACA
Abuzer Ghaffari ACA
Mohammad Mosttafa Shazzad Hasan ACA
Bidhan Chandra Mandal ACA
Md. Yasin Miah FCA, Chairman-DRC
Mohammad Saif Uddin FCA, Chairman-CRC
Member Secretary
Mohammed Emdadul Haque FCA
Technical Adviser-ICAB
ISSN 1993-3649
Editorial
Presidents Desk
2
4
Fraud Risk Management in Banking Industries:

Strategy and Schema for Grappling the Challenges
ARTICLES
- M Jalal Hussain FCA
Implementing the Cash-Basis IPSAS:

The First Step in the Journey
- Doctor Wayne Bartlett CPA
Defaulted Loans and Risk Management in Banking Sector 13
- M. Idris Ali FCA
Monetary Policy Needs Consistency with other Economic Policies 18
- Md. Shahadat Hossain FCA
Risk Management in Public Financial Sector
20
Managing Business Risks
28
Operational Risk Role of Accountants in Managing

Operational Risk in Commercial Banks
32
- Dr Muhammad Abdul Mazid
- Ashish Kumar Paul FCA

- Nigar Sultana
Bangladesh Economy: Performance, Problems & Prospects 41

- Masih Malik Chowdhury FCA
Corporate Governance and Accountants
47
Risks and Risk Management in Banks
52
Making it with ICT for Emerging Entrepreneurs
57
Effective Risk Management in Business
59
A Study on the Compliance of Bangladesh Banks

Policy Guidelines for Green Banking
65
Liquidity Position of Private Commercial Banks (PCBs)

in Bangladesh: An Empirical Overview
78
Business Risk Management
86
Risk Management by Bangladesh Bank: New Steps
94
Enterprise Risk Management
98
- Dr. Rukshana Begum
- Md Abdus Salam FCA, FCS
- K Atique-e-Rabbani FCA
- Md. Hafizur Rahman ACA
- 1Md. Ahasan uddin | - 2Sabuj Chandra Bhowmik
- 1Sujan Chandra Paul ACA | - 2Abdul Alim Baser ACMA

- 3Mohammad Rakibul Islam
- Muhammed Omar Faruk Ripon ACA
- Raihan M Chowdhury
- Aisha Siddiqua ACA
Imposition of Income Tax on Employee Tax Payers on

Medical Aid Vis-a-Vis Justice and our Constitution
104
Evolving Business Risk Management
106
Managing Risk in Banking
110
Micro Finance Business & Its Risk Management
117
- Md. Asaddar Ali FCA
- Md. Ziaur Rahman ACA
- Md. Ashraful Azim FCA

- Naznin Sultana ACA
Published by the Editorial Board of the Council
The Institute of Chartered Accountants of Bangladesh (ICAB)
CA Bhaban, 100 Kazi Nazrul Islam Avenue, Dhaka 1215
Tel : 9117521, 9112672, 9115340, 9137847
Email : secretary@icab.org.bd
Website : www.icab.org.bd
10
In Remembrance of Jamaluddin Ahmed and Rezaur Rahman 123

- M. Matiul Islam FCA
DISCLAIMER
"The opinions expressed in this publication are those of the
respective authors themselves and do not necessarily reflect the
views of the Editorial Board of the Institute of Chartered
Accountants of Bangladesh (ICAB) or the ICAB itself."
EDIT ORIAL
New technologies in
business call for highly
risk-sensitive approach
The changing nature of the
business environment calls for a

highly risk-sensitive approach in
corporate entities. In the last
decade, Bangladesh has recorded
remarkable economic progress,
having accelerated GDP (gross
domestic product) growth to 6.0
per cent. However, it is observed
that it has done a little against the
odds, given the occurrence of
frequent natural disasters,
political unrest, financial frauds,
loan defaults and money
laundering. The new Information
and Communication
Technologies help to bring new
dimension in trade and business,
no doubt. However, the more the
business encompasses with new
technologies, the risk prowls at
every turn; new innovations
threaten the viability of old
products or services, new players
in the market create adverse
trends in the commodity prices,
inflation and deflation in currency
& interest rates influences the
monetary transactions. The
various means of doing so may
define different professions, e.g. a
doctor manages medical risk, a
civil engineer manages risk of
structural failure, etc.
02
Risk Management is particularly

vital for entrepreneurs because
some common types of
lossessuch as fire, flood, legal
liability, injury, or disability,
financial fraudscan destroy in a
few minutes what may have taken
years to build. Even such losses
and liabilities can affect day to day
operations, reduce profits, and
cause financial hardship. Many
large companies employ a full time
risk manager to identify risks and
way forward to protect the
organizations against odds.
In fact, at present while the
political unrest has now eased, the
World Bank estimates that
Bangladesh lost about 1.0 per cent
of its GDP in the first quarter of
2015 - totaling about USD 2.2
billion. As such, Bangladesh's
potential growth has been
dampened, constrained not only
by the uncertain political climate,
but also on account of internal
infrastructure problems. Economic
growth typically refers to the
growth of potential output, i.e.,
production at full employment,
sustained economic development,
concerted actions; promote the
standard of living and economic
health of a nation. How the
July - September 2015
growth threatened the standard of

living, we may take into account
as evident in China. China is the
world's fastest growing major
economy with an average growth
rate of 10.0 per cent over the past
thirty years. Despite its
remarkable progress in economic
and social development and
poverty reduction, China still
faces challenges to reduce
residual poverty only because of
lacking of proper policies to face
the challenges. China's inaction
on environmental damage forced
children in Shang Hai to stay
indoors and wear masks to guard
against carbon emissions in the
air. We have a striking similarity
with China; the state of water
bodies like the Buriganga River is
no longer better one.
Industrialization in Bangladesh is
certainly increasing the rate of
economic growth, but only at the
cost of potential risks including
environmental and health
hazards.
In financial transactions,
corruption and capital flight have
been afflicting the economy for a
long time. While the Finance
Minister only recently admitted
that corruption eats up 2-3 per
The Bangladesh Accountant
cent of the national economy..

Finance Minister AMA Muhith, MP
deserves congratulations for
bringing the issue into the open for
all to discuss and create public
awareness against such a social
scourge. Also Financial Institutions
need a prudent approach to
identify the possibilities where
such crimes may happen and to
protect the organization from the
crimes. This issue of the
Bangladesh Accountant
(July-September 2015) deals with
such facts those affect the
economy in covertly and discussed
way forward to get rid from the

risks.
your feedback about the articles,

contents and any other matters
which may enrich our only CA
professional mouthpiece. Your
valuable suggestions and opinions
will highly be appreciated.
It is my privilege to communicate to
you, the distinguished Members of
this noble fraternity of accountancy
profession through this journal
Please accept our heartiest
covering some crucial economic
issues of the country. The honorable greetings on Eid-ul-Azha.
writers have come up with their
diversified thoughts regarding
business risk management in this
issue.
Chairman, Editorial Board and
Dear esteemed Members, we seek
your good self to kindly give us
Council Member & Past President-ICAB
03
PRESIDENTS DESK
Grooming up members
with recurrent
professional issues
This issue of the Bangladesh
Accountant would reach to your

hands in a critical juncture; the
Institute of Chartered Accountants
of Bangladesh has passed through
& entered into. As we are all
aware, recently Jatiya Sangsad (JS)
has enacted the Financial
Reporting Act (FRA). This has led
us in a new confronting situation.
The Council of ICAB had tried its
best to make the Law more
functional in our country
perspective. Sequentially the
Council had divested the time &
efforts to this end. Despite our
tremendous persuasion, the
Government has finally enacted
the Law. It ignored ICABs few
recommendations without
pondering our neighbouring
countries practices. We have to
search for ways & means to find
out a respite for us & the way
forward.
We need to observe how the
Financial Reporting Council under
this Law would serve the very
purpose with its composition.
Pertinently, Members do not have
working knowledge in accounting
profession especially Financial
Reporting. Apparently FRC would
be professionally dependent on
professional body like ICAB.
However, we are ready to extend
our adroit hands to it and the
Nation for betterment of the
country. We have to do everything
for the betterment of Chartered
Accountancy Profession as well by
sowing the seed of a stronger
04
relationship with the government

& the regulatory bodies. Now we
have to very closely observe the
entire formation process of
Financial Reporting Council (FRC).
We are still working to reaping out
optimum outcome from the FRC
under FRA.
Chartered Accountancy is a
globally acclaimed prestigious
profession. To bring more
dynamism in education, training
and workshop, we are giving
relentless efforts. The
brainstorming actions like training,
workshops, seminars, conference
were organized frequently for
Members so far of the year. CAs as
stakeholders always aspire in quest
of searching knowledge &
wisdom, which was manifested by
their large scale response to our
Training & CPD programmes. It is
widely believed that such capacity
building would benefit ICAB in
coming days. For major
operational challenges of ICAB,
new fronts are in the offing with
more dynamic operational people
in coming months.
ICAB has always been searching
for new front where from the
members of the Institute would be
benefited. On 26 July 2015 a
Memorandum of Understanding
(MoU) was signed between ICAB
and CPA Ireland in ICAB Council
Hall. Under this MoU, the two
Institutes will have a partnership
relating to the distribution of
uniquely designed online CPA
Certificate in IPSAS. This
agreement is aimed at building a

strategic partnership, which
includes mutual pathways to
Membership signed between the
two bodies way back in 2012
through a MRA- Mutual
Recognition Agreement.
Together with Finance Ministry,
ICAB is working to strengthen
Financial Reporting Framework for
Public Sector Entities under a
project of the World Bank. We
believe that if ICAB and the
Regulatory Bodies responsible for
auditing in public entities, work by
joining hands, the financial sectors
of the country will be stronger.
This would also ensure best use of
public revenue.
With the allocation from the ICT
Ministry, developing of
comprehensive ERP (Enterprise
Resource Planning) software is in
full swing. An integrated
information system in ICAB is
going on and the task would be
completed in five phases
envisaged in a roadmap. IBCS
Primax Software (Bangladesh) Ltd
will do the work. A steering
committee of ERP Project
Sub-Committee of ICT
Committee-ICAB has been
overseeing the proper
implementation of ERP System.
For the first time, ICPE organized a
day long workshop on "How to
Maintain Quality in Audit and
Assurance Services" for CA
Students on 18 August 2015. In
order to maintain world class
education environment, ICAB

refurbished its new rented campus
building. A private University
under ICAB has been approved by
Council ICAB is on cards for
seeking approval from the
government. We shall not leave
any stone unturned to draw
brighter & meritorious students
into this profession.
Training is a regular & routine
function of ICAB. This year ICAB
re-named its Training Centre as
ICAB Center for Professional
Excellence (ICPE). It will impart
training, workshops & seminars on
professional issues anew & afresh.
It will pick up recurrent
discussions with stakeholders &
regulators and at the same time
undertake need based schemes in
ICAB.
ICPE has organized the 3rd
consecutive yearly training
program on IFRS & IAS for
Bangladesh Bank Officials. It was
inaugurated by Deputy Governor,
Bangladesh Bank Mr. Abu Hena
Mohd. Razee Hassan on 2 August,
2015. Recently a two-day long
workshop on the IPSAS was
organized jointly by ICPE and CPA
Ireland with large participation
from the Members of the ICAB.
The workshop particularly focused
on IPSAS and its application in
Bangladesh. CPA Ireland public
financial management adviser Dr.
Wayne Bartlett conducted the
workshop as the resource person.

Under an MoU CPA Ireland and
ICAB would jointly conduct online
Certificate Courses on IPSAS for
the Members of ICAB.
Grooming up the Members with
recurrent professional issues ICAB
organized CPD seminars and
Members conferences. Members
conference on International
Public Sector Accounting
Standards (IPSAS) on 25 July was
made unique with Dr. Wayne
Bartlett, Specialist in Public Sector
Financial Management and
Eamonn Siggins, Chief Executive
Officer, the Institute of Certified
Public Accountants, Ireland as its
resource persons. Mr. Siggins
described their new learning
method and program on online
learning materials and modules of
IPSAS prepared by CPA Ireland.
ICAB Members can customize the
modules of IPSAS in the line of
practice & country perspective.
Our rigorous initiatives and efforts
are all for enrichment of our noble
profession. Just before enactment
of FRA, to disseminate ICABs
stand, the Financial Express on 13
August 2015 published my
interview over the issue with due
importance. In that interview, I
stressed for an effective
functioning of the proposed
Financial
Reporting
Council (FRC).
I reminded that
effective result
reaping out of FRC
would remain a far cry, if
the formation of the body
would not be need based.
"The FRA will fail to yield any
better results as it does not have
any provision for the professional
improvements and corporate
discipline, I also told the FE.
Finally we can say, FRA is the
outcome of wrong "Public
Perception". It will be proved in
future. Meanwhile we must to rise
against any shortcomings that we
have, amongst the professionals.
We must prove once again that we
are the best professionals who
bear a social as well as operational
responsibility in the economy of
the country.
My heartiest greetings remain to
all the Members of my fraternity
and Eid Mubarak.
Masih Malik Chowdhury FCA

President-ICAB
05
Fraud Risk Management in Banking

Industries: Strategy and Schema for
Grappling the Challenges
M Jalal Hussain FCA
Introduction
The sardonic occurrence of fraud has
taken place in recent times at the
globalized world. All types of business are
susceptible to fraud. Fraud is ubiquitous
within organizations and remains a staid
and costly problem for virtually every type
of organization in every part of the world.
The risks of fraud may has been on the
rise, as we see growing globalization,
more acrimonious markets, swift
developments in technology, and periods
of economic difculty. Banking sector
industries especially handle monetary
transactions of their customers located at
different countries around the world,
confront the greater risk of fraud by the
fraudsters. Spectacular financial and
banking sector corporate downfalls and
frequency of major frauds between the
years 2008 to 2014, have abruptly
focused the cognizance of the
stakeholders, directors and regulators the
extreme need to fathom, manage and
contain the fraud risk. Financial crime and
fraud have become prominent with the
rapid globalization of world and the
financial institutions like bank need to
launch comprehensive fraud prevention
and detection programs. Despite the
serious risk that fraud presents to banking
business, many banks still dont have
prescribed systems and procedures in
06
place to prevent, detect, delve and

respond to fraud. Frauds stand as bigger
threat to banking sector than ever before.
Various research and analyses show that
banking sector industries which vigorously
cope with their fraud risk gain, benet in
terms of plummeting the undesirable way
of frauds. Fraud risks in banking sector
industries have been considered as the
greatest challenge of the time.
What is Fraud?
Theres no universally accepted definition
of fraud. It fundamentally embroils using
fraudulent devices to gain personal
benefits at the cost of others. Frauds are
committed both internally and externally
by individuals or group of individuals.
Fraud embraces an eclectic range of
illegitimate practices and illegal actions
connecting deliberate dishonesty or
falsification. The International Professional
Practices Framework (IPPF), a Conceptual
Framework of Institute of Internal
Auditors, defines fraud as: any illegal act
characterized by deceit, concealment, or
violation of trust. These acts are not
dependent upon the threat of violence or
physical force. Frauds are perpetrated by
parties and organizations to obtain money,
property, or services; to avoid payment or
loss of services; or to secure personal or
business advantage.
Its highly essential to know

different types of fraud,
embezzlement, misappropriation
and misdeed that are happening off
and on in banking industries for
effective fraud risk management.
Different types of frauds are
prevalent in banking sector
industries. These are broadly
classified as (a) fraud by insiders
and (b) fraud by outsiders.
Fraud by Insiders
Rogue traders
Fraudulent loans
Wire fraud
Forged or fraudulent
documents
Uninsured deposits
Theft of identity
Demand draft fraud
Fraud by Outsiders
Forgery and altered cheques

Stolen cheques
Accounting fraud
Bill discounting fraud
Cheques kiting
Credit card fraud
Counterfeit credit cards are
known as white plastics.
Booster cheques
Stolen payment cards
Duplication or skimming of
card information
Impersonation and theft of
identity
Fraudulent loan applications
Phishing and Internet fraud
Money laundering
Forged currency notes
Hi-tech crime
International crime
No-scene crime
Faceless crime
strategies. Prevention is better than

a cure, the universal adage, has
been proved to be the most
effective strategy for fraud risk
management. Preventive controls,
measures and ways are designed to
help reduce fraud,
misappropriation and
embezzlement from occurring in
the first place. The following group
can play an important role in
disavowal of frauds in banking
industries:
Leadership and Governance
The Board of Directors of a
banking industry plays a significant
role in controlling dereliction by
the senior management that helps
prevent frauds and misconducts to
a great extent. The Board is
responsible for setting the standard
of control as the tone of the top
and ensure that institutional
support is established at the highest
level for ethical and accountable
business practices. Board of
Directors has special duty to
ensure that it has active policy and
planning to thwart and encounter
risk of frauds and wrong doings. It
should:
WAY TO PREVENT FRAUD

IN THE BUSINESS IS TO
CREATE A POSITIVE
WORK CULTURE. ITS
IMPORTANT THAT THE
BUSINESS OWNER AND
SENIOR MANAGEMENT
SERVE AS ROLE MODELS
OF HONESTY,
UPRIGHTNESS,
TRUTHINESS AND
Review and discuss the issues

relating to entitys fraud and
misconduct assessment with
the concerned departments;
INTEGRITY. SET CLEAR
Establish code of conducts and

related standards for the
managers of the entity;
POLICY FOR FRAUD.
Review and discuss with

internal and external auditors
and take actions on their
suggestion for anti-fraud
strategies.
Strategies for Prevention of

Frauds in Banking Industries
Senior Management
From the long time research on

fraud reduction strategies,
prevention and disavowal are
considered as one the best
Senior management to help ensure

fraud control remains effective in
line with international standard.
Fraud and risk management
AN EFFECTIVE
STANDARDS EXAMPLE
AND ZERO TOLERANCE
07
approach should be shared with

the managers and staff. The Chief
Executive Officer (CEO) is ideally
positioned to influence and guide
employee actions through his
executive leadership. CEO can
lead by example, allocate fund for
antifraud efforts and hold
management responsible for any
fraud occurrence. The CEO should
identify the weak and vulnerable to
fraud areas and take steps to
prevent frauds before happening.
Strategies to Detect Frauds

in Banking Industries
Employee & Third Party Due

Diligence
Fraud Delving in Real Time:

Fraud, whether less or more, is
dangerous for businesses. Even
anything less is a
hole-in-the-wall for the
criminals to get away. For
batch processes, the scoring
engine should evaluate the
transaction, and an
authorization or decline
decision should take place
prior to funds movement.
Analysis of Data: Proper

analytics is the only way to
actually detect fraudulent
patterns of behavior efficiently.
The output of the analysis
should contain a customer
score, which determines how
the activity corresponds to the
customers actual behavior. A
transaction fraud score, which
determines the fraudulent
nature of the transaction.
Understanding customer
performance is
indispensableit helps reduce
the impact on the customers
and the fraud operation by
reducing false positives.
Certain customers transact in
ways that may appear
fraudulent. Ultra-high-net
worth individuals are more
likely to spend at higher edges
and in more outlandish
international locations. Small
business owners may have
more unpredictable payment
activity and online banking
An important part of an effective

fraud risk prevention strategy is the
use of due diligence in firing,
hiring, retention and promotion of
employees, agents, vendors and
other third parties. Such diligence
may be especially important for
those employees having an
authority over financial reporting
process. Screening of vendors,
agents, consultants and temporary
employees who may have access
to confidential information and
data, may help prevent fraudulent
device.Screening applicants
thoroughly before hiring the right
employees is the best way to stop
fraud before it happens. Its a good
idea to perform background checks
on potential employees.
Implementing internal controls to
reduce fraud risk is one of the best
strategies.
Be a Role Model and Lead by
Example
An effective way to prevent fraud
in the business is to create a
positive work culture. Its
important that the business owner
and senior management serve as
role models of honesty,
uprightness, truthiness and
integrity. Set clear standards
example and zero tolerance policy
for fraud. Every banking industry
should establish a system that
08
makes it easy for employees,

vendors and customers to
anonymously report suspected
fraud activities.
Detecting controls are archetypes

to unearth fraud, misappropriation
and embezzlement in banking and
financial industries. The following
steps may help delve fraud and
corruption in banking industries:
activity that takes place at widely

varying times, not just during
normal business hours. There
are far too many nuanced
variables within the
customersand the criminals
behavior for verge rules to be
effective. Both good and bad
behavior changes
unpredictably over time.
Road Map for Fraud

Detection: A well planned
workflow is highly important
to solving challenges with
fraud resources. Financial
institutions have many studs to
work through to correct and
manage each customers fraud
issues. Specific actions, data
and processes are required to
manage each type of fraud
case and to use as evidence for
prosecution as per law.
Depending on the type of
payment swindled, there are
specific steps required to make
the customer whole, and every
step to back out the transaction
creates operational costs. A
cohesive and flexible
workflow engine allows
analysts to consolidate and, in
many cases, automate the
remediation process.
Effectual Rules Engine: The

rules engine links the analytic
scoring to an action based on
the currently available
information. Rules are
essential to react swiftly to shut
down fraud, and facilitating
management and
documentation of the
processes used to define and
refine the actions, in a
repeatable and auditable
manner.
Strategies to Retort Frauds

in Banking Industries
Retort controls are designed to take
corrective action and remedy the
loss and harm caused by fraud. The

following steps may help in to take
action on frauds spotted:
Investigation: When information
relating to potential or actual fraud
and corruption is uncovered,
management should be prepared
to conduct a comprehensive and
objective investigation. The
purpose of such an investigation to
gather facts leading to a
trustworthy assessment of the
suspected violation so that
management can decide an
all-encompassing and effective
course of action.
Develop a Risk Response Strategy
Once the risks have been identified
and assessed, strategies to deal
with each risk identified can be
developed by line management;
with guidance from risk
management group. Strategies for
responding to risk generally fall
into one of the following
categories:
Risk retention
Risk reduction
Risk transfer
The chosen strategy should be

assigned and conversed to those
responsible for execution.
Enforcement and Accountability
An unswerving and trustworthy
disciplinary system is a
fundamental control that can be
operative in daunting fraud and
corruption. By authorizing
meaningful sanctions, management
can send a signal to both internal
and external parties that the entity
considers managing fraud and
corruption risk a top most
anteriority. Senior managers,
manager and senior staff should be
held accountable for any fraud or
corruption on their part or on the

part of their subordinates.
Appropriate action is needed to be
taken as written warning,
suspension, pay-cut, transfer,
demotion or termination, legal
action, if necessary to realize any
amount embezzled.
the fraud, corruption, inefficiencies

of the management of the banking
institutions. Omnipresence of
effective fraud risk management
system would have prevented such
type of loan scam and would have
saved the banking institutions from
incurring massive loss.
Fraud Risk Management in

Banking Sector in Bangladesh
Conclusion
In the context of Bangladesh,

effective fraud risk management is
extremely essential. The increase
of non-performance-loans (NPL) in
both public and private sector
banking institutions, the alarming
loan scam, notably of Hall Mark
and Destiny Group and increase of
classified loans are really worrying.
A mammoth amount of bad loans
of Tk 15,667 crore was written off
during the last five years which
was almost half of such loans
erased by the banks from their
balance sheets since the system of
loan write-off was introduced in
2002. According to Bangladesh
Bank, loans of Tk 31,500 crore
have so far been written off as of
March 2014. Annual average
amount of write-off loans stood at
Tk 3,066 crore in the last five
years, while it was about Tk 1,583
crore till 2009.
Meanwhile, corrupt bankers are
funneling loans worth crores of
taka to businessmen backed by the
countrys corrupt leaders,
accepting mimic, forged and
fabricated documents and ignoring
the collateral security rules. In
August 2014 the central bank
unearthed a 36 billion taka loan
scam at one of the countrys largest
bank, where loans were granted to
a little-known business house
without the minimum collateral
required as security. The present
uneconomic and financially
undesirable situation in this sector
demands effective fraud risk
management that helps bring down
Fraudsters while committing frauds

never discriminate. Frauds and
misappropriation can happen in
large or small companies across
various industries and geographic
locations. Occupational fraud can
result in huge financial loss, legal
costs, and ruined reputation and
goodwill that can ultimately lead to
the downfall of an organization.
Having the proper plans in place
can significantly reduce fraudulent
activities from occurring or cut
losses if a fraud already occurred.
Making the company policy
known to everyone from top to
bottom, is one of the best ways to
deter fraudulent behavior.
Following thoroughly with the
policy and enforcing the noted
steps and consequences when
someone is caught is crucial to
preventing fraud. The cost of trying
to control and prevent fraud is less
expensive to a business than the
cost of the fraud that gets
committed. Banking sector
industries today face increasing
pressure to implement robust fraud
protection, prevention, and
response efforts with a strong
emphasis on maintaining the
institutions safety and soundness.
Legal and structural support from
the governments are sine qua non
for effective fraud risk management
in both developed and developing
countries.
The Author is the CFO of a
private group of companies and
a Fellow Member, ICAB
09
Implementing the Cash-Basis IPSAS:

The First Step in the Journey
Doctor Wayne Bartlett CPA
It is rather strange that for many years in
many countries it has appeared to have

been the case that lower standards of
financial reporting for the public as
opposed to the private sector have been
acceptable. Various reasons have been put
forward for this: lower accounting
capacity in the public sector, less resilient
financial systems and the fact that
somehow public servants do not see
public funds as their money.
All these factors may be present but when
you reflect on their existence it is
somewhat surprising and illogical. It
doesnt really make sense that sums of
money as large as those invested in the
public sector of pretty much every country
in the world are not looked after with
more care. There is a need to ensure that
not only are controls in place to ensure
that money is spent legally, in
accordance with the law of the land, but
that it is also spent effectively. Good
quality financial reporting, which reveals
large amounts of important information on
how much has been spent and what
outcomes have resulted, is a key way into
helping stakeholders hold public sector
bodies to account, not just against the
strict letter of the law but also in terms of
achieving results.
So the moves that Bangladesh is making
10
towards the effective implementation of

financial reporting based on the IPSAS
(International Public Sector Accounting
Standards) framework are welcome and
important. It is of course much easier to
adopt such Standards than to
implement them. But the steps that are
being taken should have significant
benefits for key stakeholders in
Bangladesh especially citizens though
they are just the first in a journey that
needs to be taken to enable the country to
benefit from fully comprehensive
accruals-based information in the medium
to longer term.
The IPSAS framework has been
developed under the auspices of IFAC, the
International Federation of Accountants.
Under the guidance and direction of the
IPSAS Board (IPSASB) a suite of
Accounting Standards have been
developed: at the latest count there were
37 of these using accruals accounting
principles, many of which are based on
equivalent IFRSs, and a Cash-Basis
Standard which deals with a cash as
opposed to an accruals accounting
environment. It is this Cash-Basis Standard
that Bangladesh is in the process of
implementing.
There are two key financial statements
required by the IPSAS Cash-Basis
Standard. The first of them is the
Statement of Cash Receipts and

Payments. This requires an entity
to present its cash receipts and
payments for the financial year as
well as its opening and closing
cash balances if it has any. Note
the terminology: we talk about
receipts rather than revenue or
income which is a term
associated with accruals rather
than cash accounting. And we do
not concern ourselves with any
assets other than cash or bank
balances. It is in effect a simplified
cash flow statement for the public
sector.
The second financial statement is
the Comparison of Budget to
Actual. This requires the
comparison on a consistent basis of
actual payments and receipts to the
original and final budget for the
year. It is if you like a simple form
of variance analysis enabling the
reader of the financial statements
to see how actual receipts and
spend compare to what was
planned.
We should not ignore the
disclosure requirements that are
part of the Cash-Basis Standard. All
of the IPSASs, accruals or
Cash-Basis, include a number of
requirements concerning
disclosure notes that add additional
information which enrich the
numbers that are included in the
financial statements. These are
crucial and every bit as important
as the numbers themselves. The
financial statements paint a picture
but it is somewhat abstract in
nature. The notes help the reader
to interpret that picture, to
appreciate its inner meaning. The
Cash-Basis Standard is no
exception. It has important
additional things to say that go
beyond the numbers. The
disclosures give the numbers true
meaning by explaining more about
their context.
The IPSAS Cash-Basis Standard is

in two parts. The first of them is
mandatory and defines what
should be included in the core
financial statements and the
disclosure notes that accompany
them. The second part is
non-mandatory and has a number
of encouraged additional
disclosures. These concern issues
such as assets (both short-term
receivables and longer-term
Property, Plant and Equipment for
example) and liabilities such as
payables and provisions.
IN THE LONGER
TERM WE AS
ACCOUNTANTS NEED TO
These additional disclosures are

substantially based on what we
might call accruals-type
information. They serve several
purposes. Most importantly
perhaps they provide crucial extra
insight into matters that are not
adequately covered by cash-based
information. In a cash accounting
regime once the initial expenditure
on an asset has been spent, the
asset gets effectively forgotten
about in accounting terms.
ENCOURAGE THE
This is again slightly strange. The

assets owned by the public sector
are, in terms of value, truly
enormous. They include buildings,
bridges, roads, machinery,
vehicles. It is difficult to accept that
in accounting terms these are items
that have no ongoing value to the
public sector and the citizens that
benefit from public services. But
adopting an accounting approach
based on the cash basis of
accounting means that this is
exactly what happens.
REALISTIC; IT TAKES
DECISION-MAKERS IN
THE PUBLIC SECTOR TO
ADOPT BETTER
INFORMED REPORTING
AS ENSHRINED IN
ACCRUALS
ACCOUNTING. OF
COURSE WE NEED TO BE
TIME TO COMPLETE A
JOURNEY OF THIS
MAGNITUDE. AND THE
MOVE TO CASH-BASED
ACCOUNTING BASED ON
THE IPSAS STANDARD IS
AN IMPORTANT FIRST
STEP.
Of course the move to

accruals-based accounting and
reporting within the IPSAS
framework will not be easy. It will
challenge both students and
educators. Research from many
countries suggests that a major
accounting transition on this scale
can stretch public sector educators
to the limit. In this context, it is
11
perhaps timely to remind ourselves

that ICAB have recently signed a
Memorandum of Understanding
with CPA Ireland regarding the
distribution of the latters on-line
IPSAS Academy materials. This is
a unique offering which enables
students to access comprehensive
interactive guidance on IPSAS in
an e-learning environment and use
the knowledge they have
assimilated to deal with a number
of simulated scenarios relating to
the subject matter. It has already
proved itself to be a popular and
valuable aid to students in
12
countries that have adopted IPSAS

accruals as their chosen accounting
and reporting framework.
In the longer term we as
accountants need to encourage the
decision-makers in the public
sector to adopt better informed
reporting as enshrined in accruals
accounting. Of course we need to
be realistic; it takes time to
complete a journey of this
magnitude. And the move to
cash-based accounting based on
the IPSAS Standard is an important
first step. But it should not be seen
as the final destination. There is a

difference between being
unrealistic and unambitious.
Without challenging targets, we
would have no planes, no cars, no
internet; all things that would once
have been considered impossible.
We expect inventors to challenge
the norm: why not accountants?
The Author is a Member of
CPA Ireland
Defaulted Loans and Risk

Management in Banking Sector
M. Idris Ali FCA
Banking sector plays a vital role in the
economy of a country. Banking system is

the custodian of all deposits of
Government, private sector, individuals
including foreigners, in other words the
entire nation. Banks lend out owners and
depositors money and earn interest on it
to meet the operational expenses and
make profit finally. If the borrowers do not
repay or fail to repay the lent out money
the defaulted loans make the bank a losing
concern. The accumulated losses hit
owners capital and depositors money
and ultimately the bank runs into
bankruptcy and if a bank becomes
bankrupt it affects the economy and image
of the country abroad. Here comes the
necessity of risk management in a bank.
The practice of risk management begins
while appraising a loan. Accurate and
professional appraisal must be done
before disbursement. If appraisal cannot
detect or ignores key points of risk of
recovery, then the loans are very likely to
be defaulted. Sometimes points of risks are
ignored willfully for personal benefits or
under pressure from high-powered
executives or the Board members who, on

the contrary might be pressurized by the
political leaders. Consequently defaulted
loan stems up as a cancerous element for
any bank. Because once defaulted, it
involves lots of persuasive
actions,correspondence, arbitration etc
failing which legal suits, shuttling between
the court and office and the process
continues for years. In Bangladesh in the
case of state-owned banks risk
management is very poorly or rarely
practised although private banks imposes
some importance on risk management. As
a result currently total defaulted loans in
the banking sector amount to Tk 54,657
crore out of which the state-owned banks
alone are rearing 30,071 crore Taka.
Privately-owned banks have Tk 22,747
defaulted loans out of disbursed loans of
Tk 3,77,000 giving percentage of 6.0%. A
chart of eighteen banks including nine
Government-owned banks having
defaulted loans is given below showing
disbursed loan, defaulted loans and
percentage:
13
Taka in crore
BANK
Disbursed loan
Defaulted loan
percentage
State-owned:
Basic
Sonali
Agrani
Janata
Rupali
Krishi
Rakab
BDBL
Commerce
8,964
29,045
21,663
29,907
12,470
16,308
4,450
1,409
1,541
5,080
8,323
4,116
3,888
1,247
5,373
1,441
603
495
56.67%
28.66%
19.0%
13.0%
10.0%
33.0%
32.39%
42.81%
32.14%
Private and Foreign:

ICB Islamic
NBP
St Bk of India
Habib Bk
Wori Bk
Std.Chartd
Al Falah
HSBC
City NA
920
1,563
416
388
233
10,516
677
6,264
1,000
713
828
100
87
24
573
37
153
21
77.49%
53%
24%
22.23%
10%
5.45%
5.45%
2.45%
2.13%
In the first part of this article I wish to

present some facts and incidences
how defaulted loans arose in the
state-owned banks and what is the
current status of those defaulted
loans. On taking over charge from
his predecessor the Present
Chairman of Basic Bank said in a
Managers meeting that It is not
irregularity, it is dacoity that has
taken place in our bank, but such
dacoity will no longer be allowed to
happen in future, now it is time to
turn the Bank into solvent one and to
regain the confidence of depositors
steps will have to be taken in all
phases. In fact compared to the
quantum and nature of irregularities
that have happened in Basic Bank,
the statement of the chairman was
not an exaggeration. But his
dissatisfaction, at the same time
assurance had indicated that a few
dacoits will be caught and punished,
but so far no visible action has been
noticed. This bank was in a far better
position in the past, had defaulted
loan of about 5% only and used to
pay dividend to Government. The
situation worsened just within a span
14
4 to 5 years during former

Chairmans tenure. This bank lent to
top 100 defaulters an amount of
4,085 crore Taka which was 89% of
total disbursed loans. As on 30th
June 2014, the bank had total
defaulted bad loans of Tk 4,591
crore. This amount was lent to
almost 1500 individuals and
companies/ entities most of which
are owned by one person in groups
and have no addresses. On closing
of the year 2014, the state-owned
bank kept aside an amount of Tk
2,999 crore in the Financial
statements on the plea that these
loans were disbursed during the
period of previous Board and the
borrowers are non-existent. In fact
total loan balance was shown at Tk
8,939 crore although it should have
been Tk 11, 939 crore and bad loans
were shown at Tk 5,109 crore
although it should have been Tk
8,108 crore. The difference of Tk
2,999 crore is hidden,in other words
might have been written off. It has to
be noted that Paid up capital of Basic
Bank has been contributed from the
tax payers money who are public in
RISK
MANAGEMENT IN A
BANK IS EVERYONES
RESPONSIBILITY, NOT
JUST THE RISK
DEPARTMENTS.
LEADERSHIP MUST
NOT ONLY ESPOUSE A
VISION BUT ALSO
BEHAVE IN A MANNER
CONSISTENT WITH IT
AND DEMONSTRATE
TO EMPLOYEES THAT
PRUDENT RISK
MANAGEMENT IS A
CORNERSTONE TO
SUCCESS.
general. If the Bank earns profit the

state or people will get dividend, if
it incurs loss the state or people
will lose. The defaulted loans
which will add to loss of the bank
could be used for development
work of the country. Due to bad
loans capital shortage or deficit of
the bank is now Tk 3,634 crore. In
the budget of 2015-2016 fiscal
year a lump sum allocation of Tk
5,000 crore has been made to bail
out the state-owned banks.
Obviously this money will be used
for making good the deficit. Thus
tax payers money will bail out the
sick state-owned banks
continuously for years wasting
public funds.
The largest state-owned bank,
Sonali has an amount of Tk 8,323
crore defaulted loans against
disbursed figure of Tk 29,000 crore
indicating a percentage of 28.7%.
Sonali Bank had a far better
position earlier about 2 years back
before happening of the Hallmark
scandal. Hallmark scandal was
unique and dangerous one
involving not only the executives
and officers of Sonali Bank, but
also involving those of other
state-owned and private banks.
This was a cunning forgery for the
entire banking practice. If the
accused persons are not punished
banking sector may face same type
or more clever forgeries in future.
Among the state-owned banks
Agrani Bank stands third in rank in
respect of defaulted loans showing
percentage of 19% of disbursed
loans which is not acceptable.
Janata bank s defaulted loans
indicate percentage of 13% of
disbursed loans which was mainly
due to Bismillah Groups default
recently. These five state-owned
banks have lost about ten thousand
crore Taka by way of defaulted
loans which are very unlikely to be
recovered. Except the M.D of
Hallmark Group, the defaulters are
at large,touring all over the world
and some of them have bought
houses, cars abroad which they are

enjoying. Some of the defaulters
seem to be so much powerful that
even the Govt. has failed to detain
and take action against them. In
some cases top officials and senior
executives of the banks are also
involved, but no action has been
taken against them. This fact is
clear from a recent (July) statement
of the honourable Minister of
Finance during his budget
submission that the defaulters
belong to Government party,
hence it is difficult to take action
against them. He has also
mentioned that due to corruption
GDP of the country goes down by
2 to 3 percent. The Minister must
be thanked for his honest and
sincere statement.
During the years from 2010 to
2014 a total amount of almost Tk
10,000 crore has become bad debt
or in other words it has been
misappropriated by those involved
in the deal. This has taken place in
the state-owned banks Sonali,
Janata,Basic and Agrani. Giving
loans to borrowers who have
names or fake names but no
existence, who have no addresses
or have fake addresses, who have
submitted no collateral documents
or have submitted fake documents
and so on, seem to be willful
offences. Most of those executives
or officers who have committed
these offences are yet to be
punished. If they are not brought to
legal punishment then this type or
more severe offences will continue
to be committed which may turn
the banking sector vulnerable and
may affect the economic growth of
the country. Bangladesh Bank
being the authority for control of
banks, have submitted their reports
after investigating the offences but
ACC (Dudak) has not yet imposed
any punishment except a few
cases. Ortho Rin Adalat has not
also punished any of the offenders
or recovered any loan as yet. It
may be said that there is an
anarchy going on in the

state-owned banks which is bad
indication. The banking sector as a
whole is therefore, suffering from
two sicknesses, firstly those which
have defaulted loans are facing
liquidity crisis and have no funds
for further disbursement unless
their capital deficit is made good.
Hence their operational losses are
accumulating day by day. On the
other hand, those which have
excess liquidity are unable to lend
out it,because businessmen are
either not investing in new
industries or factories or they are
waiting for further reduction of
interest rate. We must remember
that for the last 2 to 3 years,
banking system in Bangladesh has
been holding an excess liquidity of
Tk 1 lac to 1.3 lacs crore. This
excess liquid cash is adding to cost
of funds but not earning any
interest by way of loan leading to
overall increase of operational
expenses and reduction of
operational profit. This unhappy
situation has made some banks
desperate to apply unethical
procedures to maintain their profit
at minimum level or increase it.
They are misusing the instruction
of Bangladesh Bank. Firstly these
banks are not keeping adequate
provisions in the relevant year
against the defaulted loans but
spreading it over the rescheduled
period in respect of defaulted loans
which were rescheduled on the
plea of loss of business due to
political instability during the last
part of the year 2013. Not only that
Tk 5,000 crore interest was
exempted and Tk 11,000 crore
defaulted loan (principal) was
written off during four and half
years. Due to this practice banks
profits went down during the year
2013 and 2014 against those
during the previous years. The
same trend is still going on.
Consequently some banks are
playing with provisions. According
to an instruction of Bangladesh
Bank in case of loans sanctioned to
15
general entrepreneurs a provision

of 5% has to be maintained,but in
case of loans given to SME, only
0.25% provision is acceptable. In
order to increase their profits, some
banks are classifying general
customers loans as SME loans and
keeping 0.25% provision only.
This way banks unrealized profits
in cash are going away to
shareholders illegally. Bangladesh
Bank should detect this
malpractice soonest. Bangladesh
Bank should also be strict in
following up to ensure that its
instructions are complied.
Risk Management
Banks are invariably faced with
different types of risks that may
have a potentially negative effect
on their business. Risk
management in bank operations
includes risk identification,
measurement and assessment and
its objective is to minimize
negative effects risks can have on
the profitability, liquidity and
capital of a bank. Banks are,
therefore, required to maintain an
organizational unit in charge of risk
management. This unit will
prescribe procedures for risk
identification, measurement and
assessment and will carry out
procedures for prevention or
identification of risks.
The risks to which a bank is
particularly exposed in its
operations are: liquidity risk, credit
risk, market risks (interest rate risk,
foreign exchange risk and risk from
change in market price of
securities, financial derivatives and
commodities), exposure risks,
investment risks, risks relating to
the country of origin of the entity
to which a bank is exposed,
operational risk, legal risk,
reputational risk and strategic risk.
In Bangladesh total defaulted loans
as up to 31 December, 2014
amounted to Tk 51,000 crore out
16
of which according to Financial

Stability report of Bangladesh
Bank, 77.8% ie Tk 39,000 crore is
not recoverable. Compared to
2013 the defaulted loans have
increased by Tk 7,100 crore during
2014. And 53.60 % of these loans
are existing in 5 state-owned banks
which has affected the profitability
and liquidity of overall banking
business. If we analyze the
reasons, it can be straightway
opined that there was no practice
or even existence of risk
management in those banks. An
audit committee or an Internal
audit department may have been
in existence which carry out most
of the time post facto examination
or analysis after the loans are
disbursed. This department takes
the place of Risk Management
activities without producing
effective result. Consequently
identification, measurement and
assessment of risk remains
unearthed before sanction and
disbursement of the loans. In some
of the banks non professional or
inexperienced officers are given
the responsibility of appraisal,
examination of the audited
Financial Statements, genuineness
of collaterals,etc. Their reports
therefore, remain defective and
risky. At times reports prepared by
the Audit Committee or Internal
audit department are ignored by
the higher Management with ill
intention. Had the banks attended
to risk management, then there
would not have been the flood of
defaulted loans. The banks lost
sight of the requirement to manage
risk effectively and, in many cases,
it is questionable if the basics of
risk management were ever put in
place. Adhering to managing
risksnot ignoring them or
believing they can be passed
offis the cure for the ailment of
huge defaulted loans. Let us review
The Seven Tenets of Risk
Management to see its
fundamental features.
1. Establish one Language System

to Discuss and Categorize Risk
A risk manager is often overheard
at intra-departmental meeting: The
Basel II second pillar requires that
the Board of the bank fulfill their
obligations in all respect. At some
points many of the participants
have no idea what the risk
manager is talking about, but they
are too afraid to ask questions so
they nod their heads in polite
agreement and hope no one will
ask them for their personal
opinion. It is incumbent upon risk
experts to translate risk issues into
a language and terms that all
interested parties can understand,
and it is the responsibility of the
other functions to make the effort
to understand.
2. Develop a Big Picture View
of Risk Exposure and Focus on the
Most Important
Not all risks are created or end
equally. Banks need to be mindful
of credit, market, and operational
risks. Within the three main areas
of risk, further stratification is
embedded to allow for a
comprehensive overall view of
risk. Tools such as VaR (Value at
Risk), Monte Carlo simulations,
CFaR (Cash Flow at Risk), stress
testing, and others are applied to
judge the level of risk and
subsequently the actions required
to contain the risks
3. Centralize Ownership of
Process and Decentralize
Decision Making
The Head office of a bank prepares
policies,SOP, rules and
regulations, but the branches
should have the liberty to take their
decision as per policies and send
returns to Head Office. The Central
bank in Bangladesh has currently
decentralized its authorities so that
commercial banks can take their
own decision in accordance with
policies and send its returns

implying post facto control. Risk
management can be most effective
when it is applied consistently
across the banking organization
with policies and procedures
developed by risk experts who
have the training and experience
for their specific country, area, and
client mix. It is incumbent upon
front-line officers to use the tools
and processes to guide their daily
interactions with customers.
Interactions are clear. Answers are
given in a timely manner and the
responses leave no ambiguity
about what the bank is able to do
for its customer.
with the risk cannot be replaced

with promises of above-average
returns with no knowledge of the
potential downsides. Models of
applying risk management
fundamentals can be prepared
which would be applied by all
departments. On the other hand
even the most sophisticated
models will not make an
organization 100 percent foolproof
unless it is given due importance
and applied. Regardless, strong
and rigorous analytical capabilities
will lessen the chance of failure.
4. Drive the Process from the Top

and Clearly Define Roles and
Responsibilities
The value of IT appears to be

increasing over time to banking
organizations as the environment
grows ever more complexso
there is no change in this variable
in troubled times. In most countries
including Bangladesh the Central
Bank even controls the commercial
banks through online IT models
and formats. However, the IT value
will be realized only if IT systems
development is driven by user
needs and not vice versa. IT
systems, if properly developed and
used, can assist the bank in risk
management by providing control
and compliance monitoring
technology, databases, market and
industry research and analysis
tools, and communication tools.
These are all critical tools that assist
in the delivery of the required
information to decision makers in
the bank. This can happen if the IT
systems are developed with the
users needs in mind.
In Bangladesh the banks were

making unexpected profits during
the years 2010 and 2011 by
engaging in share business and
they piled up huge stock of shares
exceeding the legal limits. When
bubble in share market burst, the
banks started selling the shares at
cost prices and lower than cost
prices. So the profits started
diminishing. The situation was
worse due to defaulted loans, they
could not recover their low
profitability as up to now. Risk
management in a bank is
everyones responsibility, not just
the risk departments. Leadership
must not only espouse a vision but
also behave in a manner consistent
with it and demonstrate to
employees that prudent risk
management is a cornerstone to
success.
5. Quantify Risk Exposure and
Costs/ Benefits
Consistent and rigorous assessment
of risk and quantification of the net
benefits of appropriately dealing
6. Embed IT Systems to Facilitate

the Risk-Management Process
7. Embed a Risk-Management
Culture
If a bank is serious about risk
management, then it should be
serious from the top to bottom.
Leadership will espouse a culture
of responsible risk management
through its behaviors and through

the systems and programs it puts
into place. In Bangladesh risk
management culture and practice
has not grown up. It is high time
now that with a view to preventing
concurrent defaults the banks must
introduce risk management
expertise. A risk-management
culture can be embedded in the
bank through training,
communications and incentives.
Conclusion
The banking sector is now almost
over-burdened with defaulted
loans. It is high time the Top
Management of all banks must
realize the importance of risk
management. The role of audit
committee or Internal audit
Department has proved ineffective,
as such this Department should be
kept as supplementary to risk
management. The Central Bank
should also realize the vitality of a
risk management Unit and advise
every bank to establish it headed
by qualified experts and
experienced executives as soon as
possible. On 9th August 2015, in a
meeting of Chairmen and
Managing Directors of Sonali,
Rupali, Agrani and Janata Banks
the Governor of Bangladesh Bank
alerted the Top leaders of these
banks with firm warning that if
their banks do not make financial
progress by recovering defaulted
loans observers will be appointed
according to CAMELS rating and
the Government will no longer
allocate public funds to make good
their capital deficits. The Governor
deserves thanks for his concern,
but he could also advise banks to
open risk management units
simultenously.
The Author is a
Fellow Member, ICAB
17
Monetary Policy Needs Consistency

with other Economic Policies
Md. Shahadat Hossain FCA
Monetary policy is one of the important
issues of the economy of a country.

Monetary policy means a process by which
the monetary authority i.e. the central bank
of a country controls the supply of money
often targeting a rate of interest for the
purpose of promoting economic growth
and stability. The objective of monetary
policy is to ensure economic growth
through exchange stability, price, full
employment, credit control, reduction of
inequality and wealth etc. Every financial
year Bangladesh bank publishes monetary
policy for the period July to December and
January to June. Recently, for the first half
of the financial year 2016, Bangladesh
Bank has published monetary policy. Main
features of that monetary policy are to
support the 7 percent growth target and the
6.2 percent inflation target for the fiscal
year 2016. Reserved money is projected to
grow at 16 percent and broad money at
15.6 percent which are adequate to
support the growth and inflation targets.
Domestic credit is projected to grow at
16.5 percent at the end of the fiscal year
2016. Private sector credit has been
projected to grow at 15 percent and public
credit sector at 23.7 percent. It is
worthwhile to mention that whatever might
be the objective of the monetary policy, its
ultimate target should be the economic
development of the country. For economic
development of the country there must be
consistency among the various policies
such as monetary policy, fiscal policy,
18
export and import policy etc. But how far

there remains coordination among the
various policies of the country, is a serious
question. Because, to give an overview
about the objective in the monetary policy,
it has been mentioned The main objective
of Bangladesh Banks monetary policy is
moderation and stabilization of CPI
inflation alongside supporting output and
employment growth. But it is logical to
mention that inflation depends on various
issues such as supply of broad money,
supply of commodity, fluctuation of price
in international market, indirect tax,
government expenditure, growth of credit
etc. Bangladesh Bank as the monetary
authority can only control the supply of
broad money and growth of credit. Other
issues depend on fiscal policy of the
country and utilization of government
fund. For example- higher indirect taxes
can cause cost push inflation which can
lead to a rise in inflation, If we pay our
attention to the budget speech of the fiscal
2016, it may be observed that as regards to
the inflation it has rightly been pointed out
that average inflation rate gradually
declined and stood at 6.6 percent by the
end of April, 2015. Such declining trend
was supported by lower fuel prices in the
international market, supportive fiscal and
monetary policies, satisfactory agricultural
production and improved distribution
system. From the statement as mentioned
in the budget speech it appears that
lowering down the inflation rate was a
combined effort of all the sectors of

the economy. It was not the monetary
policy only to control the inflation.
The issues as described above, reveal
that the monetary policy as published
recently might have some
effect/impact on prevailing fiscal
policy and how the negative impact,
if any, of fiscal policy might be
addressed by the monetary policy.
One of the objectives of the monetary
policy is to maintain equilibrium in
the balance of payment. In the
monetary policy of the first half of the
FY-16, balance of payment has been
projected to reach USD 3.55 billion
deficit which will eventually reduce
the overall balance to USD 1.13 bill.
The jump in current account deficit
from USD 1.63 billion to USD 3.55
billion is mainly originating from an
augmenting trade deficit that is
expected to rise from USD 10.02
billion in the financial year 2015 to
USD 13.42 billion in the FY 16.
Negative growth of trade deficit is the
effect of 14 percent projected growth
of import as against 7.5 percent
projected growth of export. The
recently developed export policy,
which is effective from 1st July 2015,
is targeted to achieve the export by
2021 by the amount of USD 60
billion as against present export
amount is USD 31.20 billion. If we
like to achieve the target, the yearly
growth rate will have to be 12
percent instead of 7.5 percent as
considered in monetary policy. So,
the monetary policy which has been
published by the Bangladesh Bank is
not consistent with the export policy
of the government. Another important
element behind the decrement of the
overall balance one of the
components of balance of payment is
abnormal decreasing projection
under heading other investments.
During the financial year 2014-15,
overall balance has been estimated
USD 4.16 billion but in financial year
2015-16 overall balance has been
projected USD 1.33 billion. In the
financial year 2015-16, overall
balance has been reduced by the
amount of USD 3.03 billion. Main
reason behind such abnormal
reduction of overall balance is
abnormal less projection under

heading 'other investment'. During
the financial year 2014-15 other
investment was projected USD 2.67
billion but in the year 2015-16 such
investment was projected USD 1.33
billion i.e. 50 percent less than the
previous years estimation. But
nothing has been disclosed in the
monetary policy as regards to the
huge reduction of the foreign other
investment. Issues other than as
mentioned above may be pertinent to
bring into notice that despite being
one of the objectives of the monetary
policy no detailed information or
ways and means have been
mentioned in the recent published
monetary policy about full
employment. Likewise, one of the
instruments of achieving the objective
or goal of the monetary policy is the
bank rate policy. The bank rating is
the minimum lending rate of the
central bank at which it rediscounts
the first class bills of exchange and
government securities held by the
commercial banks.
When the central bank finds that
inflationary pressures have stored
emerging within the economy,
central bank uses various instruments
such as Bank rate policy, Open
Market Operation, changes in
Reserve Ratio and selective credit
control etc. The expansionary and
contraction impact of different
instruments in the economy is
different. So, it is very important to
disclose instrument wise policy to be
followed to increase the total supply
of money in the economy more
rapidly than usual under
expansionary policy and under
contraction policy to expand money
supply more slowly than usual or
even shrinks. Finally for betterment of
the national economy, the monetary
policy should be consistent with
other economic policies as well as
more detailed, informative, analytical
to make it transparent to all the
stakeholders.
IT IS
WORTHWHILE TO
MENTION THAT
WHATEVER MIGHT BE
THE OBJECTIVE OF THE
MONETARY POLICY, ITS
ULTIMATE TARGET
SHOULD BE THE
ECONOMIC
DEVELOPMENT OF THE
COUNTRY. FOR
ECONOMIC
DEVELOPMENT OF THE
COUNTRY THERE MUST
BE CONSISTENCY
AMONG THE VARIOUS
POLICIES SUCH AS
MONETARY POLICY,
FISCAL POLICY, EXPORT
AND IMPORT POLICY
ETC.
The Author is a
Council Member, ICAB
19
Risk Management in
Public Financial Sector
Dr Muhammad Abdul Mazid
Risk Management : The
regret and reward probabilities into an

expected value for that outcome.
Risk is a concept that denotes a potential

negative impact to an asset or some
characteristic of value that may arise from
some present process or future event. In
everyday usage, "risk" is often used
synonymously with the probability of a
known loss. Risk perception is an essential
factor in every human decision making.
Many definitions of risk depend on
specific application and situational
contexts. Generally, risk is related to the
expected losses which can be caused by a
risky event and to the probability of this
event. The harsher the loss and the more
likely the event, the greater the overall
risk. Measuring risk is often difficult; an
engineering definition of risk is: Risk=(
probability of an accident) X( losses per
accident)
In application risk management plan and

its impact analysis are important for any
private business or public financial plan or
activities. Through clear perception
potential risks of the financial sector and
finding ways to managing their impacts,
will help recover quickly if an incident
occurs. Types of risk vary from business to
business, private or public but preparing a
risk management plan involves a common
process. Any risk management plan
should detail the strategy for dealing with
risks specific to any financial
management. It's important to allocate
time, budget , research and resources for
preparing a risk management plan and its
impact analysis. This will help meet legal
obligations for providing a safe workplace
and can reduce the likelihood of an
incident negatively impacting on any
financial dealing.
Conceptual Frame Work
Financial risk is often defined as the

unexpected variability or volatility of
returns, and thus includes both potential
worse than expected as well as better than
expected returns. In statistics, risk is often
mapped to the probability of some event
which is seen as undesirable. Usually the
probability of that event and some
assessment of its expected harm must be
combined into a believable scenario (an
outcome) which combines the set of risk,
20
Identifying potential risks and

understanding the scope of possible risks
should help development of realistic,
cost-effective strategies for dealing with
them. It's important to think broadly when
considering types of risks for any business,
rather than just looking at obvious
concerns (e.g. fire, theft, market
competition). Before beginning the
identification of risks, the review of critical
Risk
Management
IDENTIFYING
POTENTIAL RISKS AND
Ris
k Se
Te Man lect
ch ag
niq em
ue en
s t
Monito
Results r
e
in t
am en
Ex gem s
l & na ue
ga a iq
Le sk M chn
Ri Te
tify &
Iden xposures
E
yze
Anal
UNDERSTANDING THE
SCOPE OF POSSIBLE
RISKS SHOULD HELP
DEVELOPMENT OF
REALISTIC,
Im
Tec pleme
hni nt
que
s
COST-EFFECTIVE
STRATEGIES FOR
DEALING WITH THEM.
business activities, including the key

services, resources and manpower ,
and things that could affect them,
such as power failures, natural
disaster and even public health
issues could be critical. Regular
review of business plan and
identifying what couldn't do without,
and what type of incidents could
impact on which area is very
cardinal point to ponder. Always
asking 'what if?' questions like lost of
power supply , having no access to
the internet, key documents are lost,
premises damaged, one of best staff
members quit, suppliers went out of
business, aid donors are not willing
to provide soft loans and grants ,
economy suffered from a natural
disaster, there is political chaos or
crisis etc.
Brainstorming with different people,
such as accountant, financial adviser,
staff, suppliers and other interested
parties in case of private business ,

with stakeholders, strategic
development partners as well will
help the public sector manager get
many different perspectives on risks
to the respective business. In this
respect, thinking or taking into
cognizance of other events that have,
or could have, affected the financial
management . What were the
outcomes of those events? Could
they happen again? Thinking about
what possible future events could
affect the business. Analyzing the
scenarios that might lead to an event
and what the outcome could be. This
will help identify risks that might be
external to the business. Assessing
the processes, considering the worst
case scenario etc. might help
identifying risks relating to the
financial management , analyzing
their likelihood and consequences
and then come up with options for
managing them.
IT'S IMPORTANT TO
THINK BROADLY WHEN
CONSIDERING TYPES
OF RISKS FOR ANY
BUSINESS, RATHER
THAN JUST LOOKING
AT OBVIOUS
CONCERNS.
21
Once identified, analysed and

evaluated the risks, it is needed to
rank them in order of priority.
Then the question of which
methods to use to treat
unacceptable risks. Treating risks
involves working through options
to deal with unacceptable risks
which range in severity; some risks
will require immediate treatment
while others can be monitored and
treated later. While developing a
plan for treating the risks,
consideration of: method of
treatment, people responsible for
treatment, costs involved, benefits
of treatment, likelihood of success,
ways to measure the success of
treatments.
A risk management plan is the
prevention step in the prevention,
preparedness, response and
recovery ( PPRR) model of business
continuity planning. Many
risk-management activities at the
enterprise level are influenced by
various types of pressure. Some are
external, such as compliance or
regulatory changes, for example.
Sometimes, unfortunate events in
ones own company or in the
industry prompt internal soul
searching regarding whether
existing risk-management
approaches are adequate. In more
and more cases, however, CEOs
and business leaders take a more
proactive stance, as their goal is to
further develop risk-management
capabilities (proactively based on
their strategic and economic
priorities and growing aspiration
levels) into a true competitive
advantageultimately improving
business decisions and increasing
the value of the company in a
risk-conscious way.
Systematic approach to
enterprise-risk-management (ERM)
capabilities focuses on five
dimensions, each of which is
substantiated with industry-specific
22
diagnostics, benchmarks, and

best-practice recommendations: (1)
Risk-return transparency and
insight (2) Risk ownership and
strategy (3) Risk-enabled decisions
and processes (4) Risk governance
and organization (5) Risk culture.
It's important to review the plan
regularly to take into account any
new risks associated with changes
in the business or improvements in
techniques for treating risks.
Different options for treating risks
might be either (1) Avoid the risk
or (2) Reduce the risk or (3)
Transfer the risk or (4) Accept the
risk. However, in any risk
management scheme there should
be adequate insurance coverage
for the loss of income or any risks
identified.
It is always essential to test,
evaluate and update the risk
management plan regularly as risks
can change as business, industry,
regulatory regime and the
environment change. Regular
review of risk management plan is
essential for identifying new risks
and monitoring the effectiveness of
risk treatment strategies.
Start by taking these actions like (1)
Research similar businesses (2)
Evaluate current market trends. (3)
Knowing the strengths and
preferences. (4) Examining the
family budget. (5) Knowing how
changes in the economy will affect
the business. (6) Writing a business
plan. (7) Assumption means
assuming the risk and the
accompanying financial burdens.
(8) Avoidance means removing the
cause of risk. (9) However, shifting
the risk and responsibility doesn't
necessarily shift the liability. (10)
Self-insurance entails setting aside
a specified amount of money into a
reserve fund each year to cover
any losses incurred. (11) These
methods can be used to offset
some of risks a business faces. (12)

Sound insurance planning requires
attention on all fronts.
Responsibility in managing risk
Everyone in an organization has
some responsibility in managing
risk across the organization, not
just the chief risk officer.
Shareholders, rating agencies, and
regulators and policy makers
request that companies involve
their top management and even
their boards. However, the right
structural and organizational
choices, the description of roles
and responsibilities, as well as the
appropriate definitions of
organizational units and reporting
lines, are critical to ensuring robust
and effective enterprise-risk
management. Mind-sets and
behaviors of individuals and
groups inside the
organizationand not only the risk
organizationplay a crucial role in
the execution of a companys
enterprise-risk-management
strategy. We have developed a
proprietary approach to risk culture
that, for the first time ever, allows
for the creation of a specific and
detailed description of the core
elements of a companys risk
culture, an analytical approach
toward measuring and profiling
that culture, overarching
industry-specific benchmarking,
and the identification of specific
levers for actively influencing and
developing risk culture.
To assess, benchmark, and
improve a clients
enterprise-risk-management (ERM)
capabilities, a combination of
proprietary data and unique tools,
including the following may be
used (1) ERM Diagnostic (2) Risk
Organization Diagnostic and
Benchmarking Tool (3)
Risk-Culture Survey ( 4)
Compliance Health Check (5) Cash
Flow at Risk (CFAR) Models .
Managing Risks in Public

sector
Six Principles
Principle One
An engaged Board focuses the
business on managing the things
that matter
In the estimation of the risks,

three or more steps are
involved, requiring the inputs
of different disciplines.
The first step, Hazard

Identification, aims to
determine the qualitative
nature of the potential adverse
consequences of the
contaminant (for example,
chemical, radiation, noise, etc.)
and the strength of the
evidence it can have that effect.
Principle Two
The response to risk is most
proportionate when the tolerance
of risk is clearly defined and
articulated
Principle Three
Risk management is most effective
when ownership of and
accountability for risks is clear
Principle Four
Effective decision-making is
underpinned by good quality
information
Principle Five
Decision-making is informed by a
considered and rigorous evaluation
and costing of risk
Principle Six
Future outcomes are improved by
implementing lessons learnt
Public Financial Risk Management
Risk assessment is a step in the

risk management process. Risk
assessment is measuring two
quantities of the risk R, the
magnitude of the potential loss
L, and the probability P that the
loss will occur.
Risk assessment may be the
most important step in the
financial risk management
process, and may also be the
most difficult and prone to
error.
Part of the difficulty of risk

management is that
measurement of both of the
quantities in which risk
assessment is concerned can be
very difficult itself. Uncertainty
in the measurement is often
large in both cases.
The second step for (chemical)

risk assessment is determining
the relationship between dose
and the probability or the
incidence of effect
(dose-response assessment).
misrepresentation. Measures
identified to mitigate this type
of risk are better governance
through incentive alignment
and the use of reference class
forecasting.
Risks in Physical Infrastructure
Investments in Bangladesh
Inherent Risks arising from the

complexity and magnitude of
construction contracts, nature
of activity
Administrative Control Risks

arising from administrative
structural or process
weaknesses
Political Control Risks arising

from non supportive of efforts
to address inherent and
administrative control risks
to make the risk management

effective in the selected
commercial banks operating in
Bangladesh, the major types of
risks, e.g., credit risk, market
risk, operational risk, interest
rate risk, foreign exchange risk,
equity risk, liquidity risk,
money laundering risk,
information technology risk,
marketing risk and human
resource risk need to be
emphasized by the concerned
bank authority.
The third step, Exposure

Quantification, aims to
determine the amount of a
contaminant (dose) that
individuals and populations
will receive.
Potential risks in Public Financial

Management
Actual costs of public projects

are typically higher than
estimated costs; costs and time
overruns are common, Actual
demand was often higher than
estimated or approved .
Due to such cost and demand
risks, cost benefit analysis of
public works projects have
proved to be highly uncertain.
The main causes of cost and
demand risks are found to be
optimism bias and strategic
World Bank Recommended Risks

Management Plan for Bangladesh
Using the management

information system effectively
Building financial management

and control administration in
the departments
Establishing reliable cost

estimates and standards
Enhancing transparency and

competitiveness of
procurement
23
Maintaining spending control

and creation maintenance fund
Establishing policy (like

transport policy) review process
Re establish professionalism
Establish public oversight of

physical infrastructure built up
projects
Strengthening the C&AG and

Public Accounts Committee
(PAC)
Establishing a formal
communications strategy to
develop and promote sectoral
reforms
Empirical Studies I
The British Experience
The British Comptroller and
Auditor General had a common
observation in its 2004 Report in
respect to public financial risk
management was that they found
the departments are often overly
optimistic in their assessment of
the risk to projects and
programmes, and the effectiveness
of the mitigating actions they take
24
to address risk. Management also

tends to consider project risk in
isolation, without considering how
risks in one project can affect other
business priorities.
With the requirement for
departments to achieve challenging
targets for structured cost reduction
whilst maintaining high quality
services, the need for effective risk
management should not be
underestimated. Changes to
organisational structures and
increased delivery at arms-length
from government adds to the
complexity in identifying and
managing risks.
Managing Risks to Improve Public
Services the 2004 Report identified
five areas which departments
needed to address to take risk
management forward. The C& AG
highlighted requirements for
(1) sufficient time, resources and
top level commitment;
(2) clarity over responsibility and
accountability backed by
scrutiny and robust challenge;
(3) reliable, timely and up to date
information;
(4) the application of risk

management throughout
departments delivery
networks; and
(5) the need for departments to
continue to develop their
understanding of the common risks
they share and to work together to
manage them.
The Culture Around Risk
Management
The C& AG revisited approaches to
risk management in departments
and some arms-length bodies in
order to understand the challenges
that they face in making the most
effective use of their risk
management. Their work focused
on: the culture around risk
management: who sets the appetite
for risk; who drives, encourages,
and promotes its use; and what
barriers might be in place to
effective risk management; value
for money in risk management:
where risk management is not just
a process but adds value to the
business and provides
management with assurance that
risks are being managed
effectively; and the benefits of
better risk management: where risk
management is not an end in itself

but contributes to performance
improvements in the delivery of
the organizations objectives.
Within the main body of this
report, they have included
summaries of the results for
departments as a whole against
each of the questions asked by our
audit teams. Their findings indicate
that there have been improvements
in the processes which underpin
risk management.
The C&AG observed that a large
number of departments and other
public sector bodies now have a
well developed risk management
process, and boards and
non-executives are focusing
increasingly on risk management
information as a tool with which to
challenge management. The results
are, however, less consistent when
considering the extent to which
risk management is a key driver in
decision-making, and the costing
and evaluative aspects of risk
management are under developed.
In particular, the information
which management receives to
support its risk management
processes is not integrated with
performance and financial
information. Whilst the risk
management process is well
developed in the majority of
departments, it is therefore difficult
for management to make the
connection between risk
management and its impact on the
efficient and effective delivery of
services. They have used their
findings and the examples of good
practice in risk management they
have identified, in both
government departments and the
private sector, to develop six key
principles which underpin and
support the use of risk
management to improve
decision-making integrated and
consistent approach to managing
risks in a dynamic environment
and, as such, approaches which
are tailored to their own

circumstances are likely to be the
most effective. Reorganizations to
Departmental Boards provide a
fresh opportunity for Board
members to reflect on the
adequacy of arrangements in place
in their departments, and those
bodies through which services are
delivered. The C&AG encouraged
Boards, and where appropriate
their sub-committees, to use this
report to challenge whether risk
management arrangements are
being used effectively to improve
service delivery outcomes.
bank as a result of movements in

market interest rates. Interest rates
risk is a major concern for banks
due to the nominal nature of their
assets and the asset-liability
maturity mismatch (Hasan and
Sarkar, 2002). Some researchers
emphasized that higher interest
rates had positive impact on banks
(Hanweck and Ryu, 2004; Hyde,
2007). It arises from potential
change in earnings resulted from
exchange rate fluctuations, adverse
exchange positioning or change in
the market prices managed by the
Treasury Division.
Empirical Studies II
Equity Risk
Risks Faced by Banks in

Bangladesh
It is the risk of loss due to adverse

change in market price of equities
held by the bank.
The commercial Banks in

Bangladesh usually face the
following risks:
Credit Risk
It is the potential loss arising from
the failure of a borrower to meet its
obligations in accordance with
agreed terms. Credit risk is one of
the oldest and most vital forms of
risk faced by Bangladeshi banks as
financial intermediaries.
Commercial banks are most likely
to make a loss due to credit risk.
Generally, the greater the credit
risk, the higher the credit
premiums to be charged by banks,
leading to an improvement in the
net interest margin.
Market Risk
The risk of loss from adverse
movement in financial market rates
(interest and exchange rate) and
bond, equity or commodity prices.
A banks market risk exposure is
determined by both the volatility of
underlying risk factors and the
sensitivity of the banks portfolio to
movements in those risk factors
(Hendricks and Hirtle, 1997). The
risk of changes in income of the
Operational Risk
The potential financial loss as a
result of a breakdown in day-to-day
operational processes. Operational
risk does not mean only failures in
the banks operations, but also the
causes of the failures, such as
terrorist attacks, management
failures, competitive actions and
natural disasters (King, 1998).
These caused are largely
uncontrollable and unpredictable.
Moreover, human or technological
errors, lack of control to prevent
unauthorized or inappropriate
(Alam & Masukujjaman: Risk
Management Practices: A Critical
Diagnosis ) transactions being
made, fraud and faulty reporting
may lead to further losses caused
by internal process, people and
operating system (Medova, 2001).
Money Laundering Risk
It arises from the practice of
disguising the origins of
illegally-obtained money (drug
dealing, corruption, accounting
fraud and other types of fraud, and
tax evasion, etc.) through banking
25
channel and the proceeds of crime

are made to appear legitimate .
Information Technology Risk
It is related to IT, such as network
failure, lack of skills, hacking, virus
attack and poor integration of
system.
Liquidity Risk
It generates from the failure or
inability to meet current and future
financial obligations by bank due
to shortfall of cash or cash
equivalent assets. Banks are
exposed to liquidity risk where the
more liquidity is generated, the
greater are the possibility and
severity of losses associated with
having to dispose of illiquid assets
to meet the liquidity demands of
depositor (Diamond 1999; Allen
and Jagtiani, 1996). However,
besides depositors, (Gatev, 2006)
revealed that banks that make
commitments to lend are exposed
to the risk of unexpected liquidity
demands from their borrowers.
Marketing Risk
This risk is related to the different
aspects of the promotion and
branding of the bank, including
image management, product
promotion and advertising.
Human Resource Risk
This type of risk is generated
within the bank from failure to
recruit the right people in the right
place, inappropriate means of
recruitment, failure to provide
feedback to the employees on
performance, over-reliance on key
personnel, inappropriate training
and development etc.
On the basis of sample bankers
opinions the following (statistically
significant) results were concluded:
26
i)
Of the various types of risks

faced by the selected banks,
credit risk, market risk and
operational risk are the major
risks to the bankers.
ii) Regarding risk management

oversight, it is seen that the
Board of Director performs the
responsibility of the main risk
oversight, the Executive
Committee monitors risk and
the Audit Committee oversees
all the activities of banking
operations.
iii) Regarding credit risk
management, it is revealed that
bank uses the updated credit
policy approved by the Board
of Director Credit risk
management division and
credit administration division
perform their activities
separately, law and recovery
team monitors the performance
of the loans. Internal control
and compliance division
directly reports to the
Board/Audit Committee about
the overall credit risk status.
iv) In terms of opinions as to
operational risk management, it
is found that operational risk is
monitored and controlled
within the bank through an
operational risk management
framework.
v) Regarding money laundering
risk management, it is noticed
that the Central Compliance
Unit looks after the overall
compliance with money
laundering regulations.
vi) Regarding equity risk
management, bank follows
marketto-market valuations of
the share investment portfolio
in measuring and identifying
risk.
vii) Regarding information
technology risk management, it is

reported that IT Audit Team
audits the divisions and
branches.
viii)Regarding managing the
liquidity risk, it is found that
bank maintains that customers
confidence is maintained in
ensuring liquidity.
ix) Regarding marketing risk
management, it is revealed that
bank adopts the appropriate
promotional activities to
preserve its image.
x) In human resource risk
management it is found that
bank complies with an effective
human resource policy.
xi) Regarding use of risk
management techniques, it is
found that internal rating
system and risk adjusted rate of
return on capital are important.
xii) In the use of Bangladesh Bank
guidelines for managing risks, it
is revealed that asset liability
management, investment risk
management Journal of
Business and Technology
(Dhaka) and foreign exchange
risk management are much
significant to the bankers. In
order to make the risk
management effective in the
selected commercial banks
operating in Bangladesh, the
major types of risks, e.g., credit
risk, market risk, operational
risk, interest rate risk , foreign
exchange risk, equity risk,
liquidity risk, money
laundering risk, information
technology risk, marketing risk
and human resource risk need
to be emphasized by the
concerned bank authority.
Moreover, the major
techniques of risk management
and significant guidelines for
managing risk given by
Bangladesh Bank demand special

care for the overall success of
risk management.
Resource and Risk

Management
Resource management can
improve both public service
delivery and efficiency, if Benefits,
Resource Management
Requirement Targets and
objectives are clearly defined and
underpin the way resources are
allocated. Resources can be used
flexibly and expenditure is not
constrained by short term annual
cycles. Full cost information on an
accruals basis is available and used
to monitor and review
performance and influence the
allocation of resources. Resource
allocation and management are
aligned throughout the service
delivery chain. Performance and
resource utilisation is regularly
reviewed at a senior level and
informs future resource allocation.
Resource can be directed at
achieving key outcomes such as
raising educational standards rather
than simply putting money into an

activity. Expenditure can be better
matched to service needs ensuring
more consistent delivery
throughout the year. Unspent
resources are not lost but available
to redeploy to other priorities. The
full cost of delivering a service is
known including its consumption
of assets. Costs can be assessed to
determine whether they are
reasonable for the level and quality
of outputs delivered. Information
on the consumption of assets can
inform future investment.
If all the key organisations
contributing to a service have
targets which are mutually
supportive and underpinned by
resources that are allocated on a
consistent basis the potential to
deliver higher quality services is
increased. Reliable performance
information allows shortfalls in
service quality to be identified
sufficiently early for remedial
action to be taken. Non core
activities can be identified
providing opportunities to shift
unproductive resources to front
line delivery. Risks associated with

the rush to spend all money at the
year end are reduced such as
nugatory expenditure and poor
value for money because of limited
time to confirm that expenditure is
justified and to determine the most
cost effective procurement
approach. Inefficient use of assets
can be more easily identified and
remedied. High cost, inefficient
processes and working practices
can be eliminated. Resources tied
up in unproductive and inefficient
activities can be more easily
identified and redeployed.
Supporting activities which involve
duplication or are delivered out of
sequence or late or are over or
under resourced can be identified
and addressed. Trends in the unit
costs and the overheads of
delivering services can be
monitored and where practicable
benchmarked to identify poor use
of resources.
The Author is a Former Secretary
to the Government and Former
Chairman, NBR. Currently Chairman,
Chittagong Stock Exchange
27
Managing Business Risks

Ashish Kumar Paul FCA
Definition of 'Business Risk'

There is a possibility that a company will
have lower than anticipated profits or it
will experience a loss rather than a profit.
Business risk is influenced by numerous
factors, including sales volume, per-unit
price, input costs, competition, overall
economic climate, and government
regulations. A company with a higher
business risk should choose a capital
structure that has a lower debt ratio to
ensure that it can meet its financial
obligations at all times.
The term Business Risk refers to the
possibility of inadequate profits or even
losses due to uncertainties e.g. changes in
tastes, preferences of consumers, strikes,
increased competition, change in
government policy, obsolescence, etc.
Every business organization contains
various risk elements while doing the
business. Business risks imply uncertainty
in profits or danger of loss, and the events
that could pose a risk due to some
unforeseen events in future which causes
business to fail.
For example, an owner of a business may
face different risks like in production risks
due to irregular supply of raw materials,
machinery breakdown, labor unrest, etc.
In marketing, risks may arise due to
28
different market price fluctuations,

changing trends and fashions, error in
sales forecasting, etc. In addition, there
may be loss of assets of the firm due to
fire, flood, earthquakes, riots or war, and
political unrest which may cause
unwanted interruptions in the business
operations. Thus, business risks may take
place in different forms depending upon
the nature and size of the business.
Business risks can be classified by the
influence of two major risks: internal risks
(risks arising from the events taking place
within the organization) and external risks
(risks arising from the events taking place
outside the organization).
Internal risks arise from factors
(endogenous variables, which can be
controlled) such as human factors (talent
management, strikes), technological
factors (emerging technologies), physical
factors (failure of machines, fire or theft),
operational factors (access to credit, cost
cutting, advertisement).
External risks arise from factors
(exogenous variables, which cannot be
controlled) such as economic factors
(market risks, pricing pressure), natural
factors (floods, earthquakes), and political
factors (compliance and regulations of
government).
BUSINESS RISK
ORIGINATES FROM
MANY DIFFERENT
AREASINTERNAL TO
THE BUSINESS AND
FROM EXTERNAL
Classification
The Business risk is classified into
different 6 main types:
1. Strategic Risk
A possible source of loss that might
arise from the pursuit of an
unsuccessful business plan. For
example, strategic risk might arise
from making poor business
decisions, from substandard
execution of decisions, from
inadequate resource allocation, or
from failure to respond well to
changes in the business
environment.
SOURCES. THE BEST
c. Investor Relations: Strategy for

communicating with individuals
who have invested in the
business.
RISK IS TO EVALUATE
2. Financial Risk
They are the risks associated with the

operations of that particular industry.
These kinds of risks arise from:
a. Business Environment:
Interaction of buyers and sellers
to buy and sell goods and
services, changes in supply and
demand, competitive structures,
and introduction of new
technologies.
b. Transaction: Assets relocation of

mergers and acquisitions,
spin-offs, alliances, and joint
ventures.
A possibility that shareholders will

lose money when they invest in a
company that has debt and the
company's cash flow proves
inadequate to meet its financial
obligations. When a company uses
debt financing, its creditors will be
repaid before its shareholders if the
company becomes insolvent.
WAYS FOR A
BUSINESS TO MANAGE
RISK FACTORS AND
MAKE CONTINGENCY
PLANS ON HOW TO
DEAL WITH THE RISK
WHEN AND IF IT
PRESENTS ITSELF.
Financial risk also refers to the

possibility of a corporation or
government defaulting on its bonds,
which would cause those
bondholders to lose money.
These are the risks associated with
the financial structure and
29
transactions of the particular

industry.
3. Operational Risk
A form of risk that summarizes the
risks of a company or firm
undertaken when it attempts to
operate within a given field or
industry. Operational risk is the
risk that is not inherent in financial,
systematic or market-wide risk. It is
the risk remaining after
determining financing and
systematic risk, and includes risks
resulting from breakdowns in
internal procedures, people and
systems.
These are the risks associated with
the operational and administrative
procedures of the particular
industry.
4. Compliance Risk (Legal Risk)
Compliance risk is exposure to
legal penalties, financial forfeiture
and material loss of an
organization, faced when it fails to
act in accordance with industry
laws and regulations, internal
policies, or prescribed best
practices.
These are risks associated with the
need to comply with the rules and
regulations of the government.
5. Reputational Risk
It is a threat or danger to the good
name or standing of a business or
entity. Reputational risk can occur
through a number of ways: directly
as the result of the actions of the
company itself; indirectly due to
the actions of an employee or
employees; or tangentially through
other peripheral parties such as
joint venture partners or suppliers.
In addition to having good
governance practices and
transparency, companies also need
to be socially responsible and
30
environmentally conscious to
avoid reputational risk.
6. Other risks
Other risks are more difficult to
categorize. They include risks from
the environment, such as natural
disasters. Difficulties in
maintaining a trained staff that has
up-to-date skills to operate your
business is sometimes called
employee risk management.
Health and safety risks not covered
by OSHA or state agencies fall into
this category as do political and
economic instability in countries
you import from or export to.
There would be different risks like
natural disaster (floods) and others,
depending upon the nature and
scale of the industry.
How to Manage a Business

Risk
Business risk originates from many
different areasinternal to the
business and from external
sources. The best ways for a
business to manage risk is to
evaluate risk factors and make

contingency plans on how to deal
with the risk when and if it
presents itself. Planning for these
risks is the main motive of
managing a business risk, but you
cannot plan for everything. So
managing risks also has a lot to do
with how you react when risks
arise.
Step 1
Write a business plan. The process
of writing and putting together a
business plan is a vital step to
assessing, evaluating, and planning
for the risks of running a business
from various standpoints of the
business. This includes operations,
finance, and marketing.
Step 2
Determine insurance needs and
obtain coverage. Most businesses
carry liability insurance or insure
the building and contents where
the business operates. Depending
on the business activities, you need
to determine the other types of
insurance and obtain the correct
coverage for your business. For
example, a tile installation business

should carry liability insurance in
case a worker is injured while
installing tiles. A real estate
business or legal business may
obtain an errors and omissions
insurance policy in case a client
sues for a professional wrongdoing.
Step 3
Write a risk management plan.
Separate from your business plan
and write a risk management plan
which lists all of the possible risks
that can affect the business. The
plan also lists the steps,
procedures, and ways in which the
business intends on dealing with
the risk as it arises. For example, if
your business is located in an area
of a country prone to hurricanes,
then you may have a hurricane
preparation plan on how you can
minimize the risks that are
associated with this type of
weather and your business.
Step 4
Train employees. Avoiding risks
and dealing with the risks, if it
occurs, can help the business avoid
further damage or exposing itself to
risk in the first place. For example,
if your business deals with a heavy
machine, such as forklifts, you may
want to have each employee earn
an OSHA certification for operating
the machinery as proper operation
of the forklifts to avoid injury and
damage risks.
Step 5
Update plans. Even the best of
planning efforts may fall short. So
when the business is exposed to a
risk, react accordingly and then put
a formal plan and procedure in
place in case the same risk
occurrence happens again.
Basic ways to Manage Risk

in a Business
Business owners take risks in the
form of capital investments, hiring
personnel and investing in new
products. While it can be almost
impossible to eliminate risk, you
can learn the basic ways to manage
risk in a business and try to avoid
the losses associated with risky
ventures. In order to be a
successful business owner, you
should work on ways to reduce
business risk.
1. Follow Your Plan
When you are starting and
developing your business, you
should create a business plan that
outlines all of the aspects of your
operation, from marketing to
revenue projections. While you
experience many differing points of
view as you run your business, you
can manage the potential risk of
your company by running your
company according to your
original business plan. Once a
quarter you should reevaluate your
business plan to incorporate any
significant changes that may have
occurred within your organization
or within your industry. A dynamic
but efficient business plan can help
manage the risk you may take to
run your business.
2. Purchase Insurance
Interacting with the public or
selling to businesses introduces
you and your company to risk
every day. Your product could
cause a serious accident that your
customer would hold you liable
for, or you could become involved
in a frivolous lawsuit that would
still cost you money. To defend
yourself and manage some of the
risks involved in business you
should purchase liability insurance

for your business. Liability
insurance can help protect your
personal assets from lawsuits
arising from product defects, as
well as personal injury or a
customer's loss of revenue. Discuss
liability insurance with your agent
before you start offering products
or services to your customers.
3. Monitor Your Business
According to the website Risk
Management Basics, in order to
manage risk you must take the
steps to determine when risk can
occur. Just as you take the time to
analyze a market and determine
your target audience, you should
also monitor your ongoing
business activities and try to
determine where you may
experience risk. This includes
monitoring your competition,
changes in the marketplace, trends
toward customer fraud or
deception, and shortcomings in
your company's procedures. You
may find that your quality-control
procedures are not comprehensive
enough and that is allowing defects
to make it to the marketplace.
These sorts of potential risks need
to be identified and dealt with to
help manage the overall risk of
your company.
Sources of Data
1. http://www.investopedia.com/terms/
b/businessrisk.asp
2. https://en.wikipedia.org/wiki/
Business_risks
3. http://smallbusiness.chron.com/
manage-business-risk
4. http://smallbusiness.chron.com/
basic-ways-manage-risk-business
The Author is a
Fellow Member, ICAB
31
Operational Risk Role of Accountants in
Managing Operational Risk in Commercial Banks

Nigar Sultana MBA, M. Phil.
Executive Summary
A commercial bank may incur operational
loss due to the occurrence of operational
risk events which may arise from the
failure of people, process, or technology
or the impact of negative external events.
The Basel III guidelines highlighted to
maintain regulatory capital for operational
risk. Operational risk mitigation is
imperative for banks to carry on the
business without taking capital charge for
operational risk as per Risk Based Capital
Adequacy (RBCA) Guidelines 2014 issued
by the Central Bank of Bangladesh to
conform Pillar II of Basel III. Operational
risk mitigation follows five steps starting
with risk policy and strategy, identification
of risk, risk assessment and acceptance,
risk recording and reporting and risk
management and monitoring. Assessment
of operational risk is performed through
an assessment matrix which is the
combination of the probability of the
happening of risk event and impacts in
financial and non-financial term. It is all
employees responsibility to manage
operational risk within the risk appetite of
the bank. Operational risk might be kept
under control through effective
implementation of embedded and
periodic controls. An accountant has key
role in the bank to strengthen the
embedded controls and ensure effective
32
execution of periodic controls, which

assist to identify operational risk of the
bank. Accountants may perform periodic
controls as a measure to check whether
embedded controls are working pleasingly
and identifying operational risk in case of
none functioning of embedded controls.
In this paper, I highlighted the probable
causes of operational risk and suggest
steps towards risk mitigation. Banks must
have a structure with learning culture to
manage operational risk. Controls Self
Testing (CST) and Key Risk Indicators (KRI)
might be used by the bank as tools of
periodic controls. CST is a qualitative
periodic test of embedded controls
whereas KRI is the mathematical
measurement of breach of the controls. A
formal operational risk management
structure will be effective to mitigate
operational risk of the bank to reduce
capital charges for doing business
efficiently.
Key Words: Operational Risk, Control
Self Testing (CST), Key Risk Indicators
(KRI), Escalation, Risk Control Owner,
Process Universe, Risk Appetite, Risk
Assessment Matrix.
Introduction
As experience shows, the sure way to
disaster is to consistently neglect existing
risks until everybody is convinced that
nothing will happen anyway

because nothing has ever happened
(which is practically never true) and
actually nothing should happen
(which is practically always true).
Due to such a lack of risk culture,
major hazard and loss potentials can
build up, unexpectedly materialize at
some point in time and escalate to
damage on a disastrous scale due to
the often quoted unlucky chain of
events. In the field of financial
services, too, operational risk is not a
negligible factor in overall terms; it is
far higher than market risk for most
banks and, thus, is the second
biggest risk category after credit risk.
In the banks intermediary function
as both borrower and lender, banks
have a central role to play in the
economy as a whole. Therefore, the
risk of mistakes, incompetence,
criminal tendencies, loss or
unavailability of employees, diverse
process mistakes (account entries,
settlement, valuation, etc.) or failures
of technical systems as well as the
dangers resulting from external
factors, such as credit card skimming
transactions or cheque frauds,
physical threats or natural disasters,
and legal risks also involve the
potential of corresponding effects.
This potential is even multiplied by
the increasing complexity of
banking, e.g. the ambivalent role of
information technologies in
Failure of process
overcoming old risks and creating

new ones, the expanding and
changing business activities of banks,
progressive globalization and
automation, as well as more and
more complex financial products.
Basel III has been promulgated and
Bangladesh Bank issued risk based
capital adequacy (RBCA) guidelines
to implement Basel III from January
2015with an ambition to full
compliance from January 2020
which covered capital charge for
operational risk.
Operational Risk And

Operational Risk Sub-Types
Operational risk in the bank
originates from the failure of people
in performing their duties in line
with the approved processes or
departmental process guide. It may
also arise from incorrect processing
(e.g. duplicate payments of invoice,
payments made to the wrong
beneficiaries, etc.) of customers
advice due to human error or
malfunctioning of the systems or
inadequacy of the system. In recent
times, cheque and credit card frauds
produce operational risk in
commercial bank which is very
much significant. Some examples of
events by operational risk drivers are
given for reference as follows:
Incorrect reconciliation procedures, double

payment, processing errors, Unsubstantiated
balancesgenerates risk.
System failure and

Inadequate system
System deficiencies, inadequate testing

performed for change of systems or
processes, etc. produced operational risk.
Externals Events
External Cheque Fraud, unauthorized credit

card transactions in overseas countries, etc.
produced operational risk.
OPERATIONAL
RISK IN THE BANK
ORIGINATES FROM THE
FAILURE OF PEOPLE IN
PERFORMING THEIR
DUTIES IN LINE WITH
THE APPROVED
PROCESSES OR
DEPARTMENTAL
PROCESS GUIDE. IT MAY
ALSO ARISE FROM
INCORRECT PROCESSING
(E.G. DUPLICATE
PAYMENTS OF INVOICE,
PAYMENTS MADE TO
THE WRONG
BENEFICIARIES, ETC.) OF
CUSTOMERS ADVICE
DUE TO HUMAN ERROR
OR MALFUNCTIONING OF
THE SYSTEMS OR
INADEQUACY OF THE
SYSTEM.
Figure -1: Operational Risk drivers
33
All operational risk must be categorized either of the following operational risk sub-types:
Operational Risk Sub-types
1. Safety & Security
Potential for loss or damage to health or
safety of sta, customers or third parties
arising from internal failures or the eects of
external events.
9. Legal enforceability
Potential for loss due to failure to
protect legally the Groups
interests or from diculty in
enforcing the Groups rights.
2. Internal crime or dishonesty

Potential for loss due to action by sta
which is intended to defraud,
misappropriate property or to
circumvent the law or company policy.
8. External Rules &

Regulations
Potential for actual or opportunity loss
due to failure to comply with laws or
regulations, or as a result of changes in
laws or regulations or in their
interpretation or application.
Operational Risk
Potential for loss
arising
from the failure of
people, process or
technology or the
impact of external
events.
7. Liability
Potential for loss or sanction due
to a legal claim against any part of
the company individuals within
the company
6. Damage to assets
Potential for loss or damage to
physical assets and other property
from natural disaster and other
events.
5. Model
Potential for loss due to a signicant
discrepancy between the output of
risk measurement models an actual
experience.
3. External crime
Potential for loss due to criminal
acts by external parties such as
fraud, theft and other criminal
activity including internet crime.
4. Processing failure
Potential for loss due to failure of an
established process or to a process
design weakness.
Figure 2: Operational Risk sub-types
Relationship Between Operational Risk and Loss
Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events. Loss is a direct (eg: Financial loss) or indirect (eg: reputational loss)
consequence resulting from a risk exposure. The concept of Operational Risk and Loss needs to be understood
within the framework of Exposure, Cause, Event and Effect detailed below:
Exposure
Cause
Event
Effect
Internal & External

factors that may impact
the bank
Reason for occurrence of

Operational events
People (eg: inadequate

training programs)
People (eg: High staff

turnover)
Process (eg: DOIs not

updated)
Process (eg: Lapse of

Maker-Checker control)
Execution & Process

Mgt (Transaction prg
error)
Systems (eg: Low

investment in upgrades)
Technology (eg: archaic

systems)
Business disruption &

System Failure
Reputational impact
External events (eg:

Acts of nature)
External event (eg:

Earthquake)
Damage to Physical
assets
Staff and Customer (eg:

Health & Safety issues)
Basel Event types (eg:)
Result or consequence
suffered by the bank
Internal Fraud
Financial Loss
Regulatory sanctions
Operational Risks and Losses should be reported in Phoenix
Figure -3: Relationship between Operational risk and loss

34
Operational Risk
Management
Operational risks arise from banks
internal activities and external
sources. A commercial bank takes
on additional operational risks
each time they originate new
transactions, take on new clients,
introduce new products, open up
new markets, hire new staff; and
new risks can also arise from a
variety of changes they make to
their processes, systems, vendors,
organisation structures, corporate
structures and so on. The
operational risk exposures can also
arise from changes in the external
environment.
Operational risk management
comprises with five key activities:
(i) formulation of operational risk
policy and strategy (ii)
Identification of risk (iii)
Assessment and acceptance of risk
(iv) Risk recording and reporting to
senior management, and (v) Risk
management and monitoring. The
diagram below provides a high
level summary of operational risk
management approach.
The activities of the bank are

segmented into a
comprehensive list of discrete
end-to-end processes. This
provides a common reference
for operational risk
management.
Figure 4: Operational Risk Management Environment
Steps of Operational Risk

Mitigation
Risk Policy And Strategy
The Board of Directors must
formulate policy and procedures
for managing operational risk and
define risk appetite of the bank. All
Gross Risk Assessments are informed

judgments of the realistic worst
outcomes arising from the risk
exposures inherent in a process. In
assessing gross risk bank does not take
any account of controls or other
mitigants. To ensure consistency the
Bank Operational Risk Assessment
Matrix is used.
The effectiveness of controls and

mitigants must be carefully and
objectively assessed. The
effectiveness of a control is
determined by the way the
process has been designed, the
way it is implemented and by the
discipline with which it is
executed.
the departments and employees of

the bank will abide by those
policies and procedures and
strategies regarding operational
risk.
Risk Identification
Identification of potential adverse
risk events is an essential first step
Unless formally accepted by an
authorised body, all processes
must be controlled such that all
residual risk exposures can be
rated Low on a bank
materiality basis. On occasion ,
higher risks may be accepted for
a short period while controls are
being enhanced
Ensuring that
senior
management
attention is
brought to
material risks.
Risk Identification, Assessment, Control and Acceptance
Process
Universe
Risk
Identification
Gross Risk
Assessment
Prioritisation of
Process
Universe
Control
Assessment
Residual Risk
Assessment
Risk
Acceptance
Risk and
Control
Monitoring
Risk Reporting
Control Enhancement
For each end-to-end process

Management identifies the types
of operational risk events arising
from the execution of that
process that can result in a
material loss or other adverse
impact on the bank.
The banks approach to risk

management relies on riskbased prioritisation. The
Operational Risk function only
takes specifi c second line
responsibility for ensuring the
effective operation of all Critical
Processes (ie. Gross Risk rated
Very High and High)
Residual risk exposure is

the net risk exposure after
taking gross risk and
offsetting the effects of
controls and mitigants. To
ensure consistency the
Banks Operational Risk
Assessment Matrix is used.
Controls must be enhanced

if not sufficiently effective in
reducing residual risk to
acceptable levels, (eg: due
to weakness in design or
execution). Control
enhancement may be a
condition of short-term
acceptance of material
residual risks
Risk exposures and the internal

and external environment are
monitored on an ongoing basis.
Leading Indicators provide
advanced warning of potential
problems. Key Control Indicators
(KCI) indicate if a control is
operating within acceptable
tolerance levels. Risk and control
monitoring informs ongoing gross
and residual risk assessments
Figure: 5 Operational risk management actions
35
in managing risks of any business.

Risk identification is a
forward-looking activity that
considers which types of adverse
event could happen in future. All
critical activities of the bank have
approved internal process guide to
deliver the financial services.
These activities/processes must
have a specific owner and each
control function has a specific
control owner called risk control
owner (RCO) who will broadly
review the breaches of process
controls and review appropriate
Internal fraud
External Fraud
Employment Practices
and Workplace Safety
Clients, Products and
Business practice
Damage to Physical
Assets
Business Disruption
and
System Failures
Execution, Delivery and
Process Management
36
action plan is taken to mitigate risk

in that process. Operational risk
might be identified through
following tools:
Change of business
New regulatory requirement
Internal / External Audit

findings
Exception to the CST review
Key Controls Indicator
New product / project
Claims from customers or

incidents
Scenario Analysis
Key Risk Indicator (KRI)

breaches
Identify an operational risks means

at the same time identify its root
cause. Few examples are given
below:
Losses due to acts of a type intended to defraud, misappropriate property or

circumvent regulations, the law or company policy, excluding
diversity/discrimination events, which involves at least one internal party
Losses due to acts of a type intended to defraud, misap propriate property or
circumvent the law, by a third party (theft, hacking damage, etc.)
Losses arising from acts inconsistent with employment, health or safety laws or
agreements, from payment of personal injury claims, or from diversity /
discrimination events diversity
Losses arising from an unintentional or negligent failure to meet a professional
obligation to specific clients (including fiduciary and suitability requirements),
or from the nature or design of a product.
Losses arising from loss or damage to physical assets from natural disaster or
other events (terrorism, vandalism).
Losses arising from disruption of business or system failures (hardware,
software, telecommunications)
Losses from failed transaction processing or process management, from
relations with trade counterparties and vendors (miscommunication, wrong
data entry/ handling, delivery failures, negligent loss of clients assets, etc.)
Risk Assessment
Likelihood of the crent
Operational Risk must be assessed

using an assessment matrix which
is the combination of probability of
happening the risky event and
impacts of that event in financial
and non-financial term. Once the
risk event is identified, the
assessment exercise must be done
carefully and objectively. Based on
the most unpleasant impact, each
risk event is rated and mapped to
Low, Medium, and High risk.
Gross risk and residual risk will be
assessed for each risky event:
Very High E
High
Medium
Low
High Risk
Low risk
Medium Risk
Reputational/damage on future earnings potentials
Risk Assessment
Very Low A
Output (Risk grade)
1
2
Financial <0.5% of budgeted >0.5% <1% of
Loss
income
budgeted income
Low
No adverse
Isolated adverse
national media
national media
Medium
coverage
coverage
High Risk
Isolated customer Increasing
complaints
customer
complaints where
No regulatory
management is
enforcement (or is involved in
nominal penalty)
mitigation plans
3
>1% <2% of
budgeted income
4
5
>2% <5% of
>5% of budgeted
budgeted income income
Short term adverse

national media
coverage
Sustained
adverse national
media coverage
Contained increase Significant

in customer attntion increase in
customer attntion
Formal private
regulatory wamings Public censure by
or censures or minor regulators
financial penalties.
No regulatory
Significant
enforcement other
suspension of
than
business or
administrative
license approvalsand/or regulatory
penalties
fine.
Sustained adverse
national media
coverage resulting
in government or
regulatory
intervention.
Very material
increase in
customer attntion.
Very significant
suspension of
business or license
approvals and/or
regulatory fine.
Suspension of
Adverse impact banking license
to the
formal regulatory Material criminal or
civil investigations
rating.
Criminal or civil
investigations or
proceedings
against the
bank/directors.
Figure 6: Suggested Operational Risk Assessment Matrix

37
(A) Gross Risk Assessment
(C) Control Assessment
Gross risk assessments are

informed judgements of the
realistic worst outcomes arising
from the risk exposures inherent in
a process. In assessing gross risk,
we consider the realistic worst
impact that could arise if the
process break down.
The effectiveness of process

controls and mitigants must be
carefully and objectively assessed.
The effectiveness of a control is
determined by the way the process
has been designed, by the way it
has been implemented, and by the
discipline with which it is being
executed. Where weaknesses have
been identified in the design or
execution of a control or other
process, that process must be
enhanced promptly. If those
enhancements cannot be
implemented promptly, the activity
may need to be stopped or the risk
may need to be subject to a
temporary risk acceptance for that
interim period.
(B) Prioritization of Process

Universe
Risk management attention is
directed to those risks that are most
significant to the Bank, taking
account of the balance between
the risk vs the cost of control.
Gross risk assessments form the
basis for prioritisation of processes.
They inform the relative priority of
different risks and hence where to
focus more detailed analysis and
ongoing monitoring of processes,
risks and controls. They also
inform the degree of management
attention, investment and resource
allocation.
offsetting the effects of controls and

mitigants. Residual risk exposures
are rated using an Operational Risk
Assessment Matrix. It is critical that
the residual risk rating is based on
reliable assessments of control
effectiveness. Assessments must
be reliably and objectively
informed by Key Control Indicators
(KCIs) and Control Sample Testing
(CST). Controls and other mitigants
can vary in whether they reduce
the impact or probability of an
event, or both. In order to ensure a
consistent standard in residual risk
ratings, the residual risk ratings of
all gross risks that are Medium, or
High must be proposed by the
responsible process owner (First
Line) and must be approved by an
authorised Operational Risk officer
or other Risk Control Owner, as
appropriate.
(D) Residual Risk Assessment

Every gross risk exposure rated
Medium or above must have a
residual risk assessment. Residual
risk exposure is the net risk
exposure after taking gross risk and
Risk Assesment
Risk Acceptance
Risk Recoding
Risk management and monitoring
Risk Identification
Controls in
place
Risk reporting till closer

CST Check
Failure of people,
process, or
technology or the
impact of external
events
KRI
Action plan
Risk mitigation
Pcriodic Controls
Gross Risk
All employees will follow
approved process with appropriate
control standards
Residual Risk
Operational Risk Life Cycle line
Figure 7: Operational risk life cycle
38
The Board of Directors and Senior

Management are timely and
soundly informed about material
risks and change of the actual risk
profile of the bank, covering
causes, potential early mitigation
measures, assessment and
recommendation, in order to take
the appropriate action. Benefit of
having in place a timely reporting
and escalation process as follows:
BoD - Senior
Management
Operational Risk Management
Function
Unit A
Unit B
Unit C
Enhance awareness of risk
More informed decisions

making
Clearly defined procedures for

action and remedial steps in
the event of material breaches
External View
Increase reputation versus

competitors
Reduce exposure to
reputational risk through timely
management of operational
incidents
analyzed to identify any

deteriorating trend. Risks arising
from KRI breaches and
deteriorating trends must be
identified.
Reporting should include updates

to responsible governance bodies
on any significant features or
changes in the internal or external
environment, risk exposures and
related controls, live or emerging
events and related management
responses, losses, near misses and
related insights, audit reviews,
regulatory reviews or other
independent findings.
Controls are monitored to ensure

that they are working as intended
and remain effective. Control
monitoring is designed to ensure
that if a key control activity stops
working, or operates outside its
normal operating conditions, it will
be quickly detected in the ordinary
course of line management.
Control monitoring can take
different forms.
Risk Management and Monitoring
Control sample testing (CST) must

be done by someone independent
of those directly charged with
executing the process. The
frequency and size of the sample
testing is driven by the scale of the
underlying gross risk and the
importance of the control in
mitigating it. Identified risk
treatment may be as follows:
Risk exposures and the internal

and external environment are
monitored on an ongoing basis, so
that we can manage and control
risks accordingly. Key Risk
Indicators (KRI) is the metrics
which provide advanced warning
of potential problems, giving
management an opportunity to
respond before processes break
down. KRIs monitor changes in
the internal and external
environment, such as (but not
limited to) unexpected staff
turnover, spikes in transaction
volumes, backlogs, capacity
utilisation or incidence of external
fraud. They provide early warning
that controls may come under
unusual pressure. KRIs must be
evaluated at least monthly.
Breaches against KRI triggers must
be identified. The KRI data must be
Internal View
Improve communication and

disclosure to external
stakeholders like Supervisors,
Auditors, Rating agencies,
Clients and Shareholders.
Risk Avoidance (strategy: not

taking every risk);
Risk mitigation
(strategy:intelligently passing
on risks in their development);
Risk sharing and transfer

(strategy: intelligently passing
on risks to third parties); and
Risk acceptance (strategy:

deliberately taking certain risks
in a targeted way).
High Severity / Low Frequency events

Insurance policies & Self Insurance
Derivatives hedging
H
AVOID
ACCEPT
MITIGATE
severity
TRANSFER
frequency
Limitation or stop of product project

Change investment type
High Frequency / Low Severity events

H
Enhancement of internal controls

Business Continuity Planning (systems, supplier, staff and workspace)
39
Role of Accountants in Managing Operational Risk

An accountant generally works in back office or support offices of the bank. In rare circumstance, they
work in the front office. However, an accountant might help in managing operational rook as follows:
First Line of defense
Who are they?
Second Line of defense

Who are they?
Third Line of defense

Who are they?
Managers have First Line

ownership of all processes
operated within their respective
function or business.
Head of Operational Risk and other

Operational Risk Control Owners,
supported by their respective
control functions.
The Third Line of defence

comprises the independent
assurance provided by the Bank
Internal Audit function, which
has no responsibilities for any
of the activities it examines.
What will they do?
What will they do?
What will they do?
In discharging this responsibility,

Internal audit provides
Risk Controls Owners (RCOs) must:
independent assurance of
the effectiveness of
Challenge and verify First Line
managements control of its
risk identification and
own business activities (the
assessments, in line with
First Line) and of the
changes in the internal and
processes maintained by
external environment
the
Risk Control Functions
Identify and report key risks
(the Second Line).
material to the bank
Maintain a good understanding
As a result, internal audit
of applicable laws and regulations
provides assurance that the
Design, implement and
overall system of control
maintain controls and mitigants
effectiveness is working as
for exposures material to the bank
required within the Risk
Ensure effective
Management Framework.
communication of policies and
The role of internal audit is
other control requirements
defined and overseen by
Define key control indicators
the Audit Committee of the
and control sample testing
bank.
requirements as appropriate
Monitor compliance with and
effectiveness of the risk control
References
environment
Basel III Accord: Enhanced Risk
Monitor live risk issues and
Management Dr. Simon Ashby
events material to bank and
(2010) The 2007-09 Financial
verify whether appropriate
Crisis: Learning the Risk
management action is being
Management Lessons
taken to mitigate their impact
Advise governance bodies on key
risks, the effectiveness of mitigants
The Author is a Senior Lecturer
and controls, and alignment of
in Accounting Department,
residual risks with appetite
Stamford University, Bangladesh
All individuals who have

management responsibility also
necessarily have First Line
responsibility for managing
operational risk.
40
Ensure all material risks are

identified, assessed,
mitigated, monitored and
reported
Ensure applicable external
laws and regulations and
internal policies, procedures,
limits and other risk control
requirements are
implemented and complied
with.
Propose control
enhancements to ensure that
known risks are controlled
within acceptable
boundaries and to consistent
standards.
Align business (or functional)
strategy with risk appetite
and seek to optimise the riskreturn profile of the bank.
Bangladesh Economy:
Performance, Problems & Prospects
Masih Malik Chowdhury FCA
Performance
Bangladesh is a developing country that is
classified as a Next Eleven emerging
market and one of the Frontier Five.
According to a recent opinion poll,
Bangladesh has the second most
pro-capitalist population in the developing
world.
Between 2004 and 2014, Bangladesh
averaged a GDP growth rate of 6%. The
economy is increasingly led by
export-oriented industrialization. The
Bangladesh textile industry is the
second-largest in the world. Other key
sectors include pharmaceuticals,
shipbuilding, ceramics, leather goods and
electronics. Being situated in one of the
most fertile regions on Earth, agriculture
plays a crucial role, with the principal
cash crops including rice, jute, tea, wheat,
cotton and sugarcane. Bangladesh ranks
fifth in the global production of fish and
seafood. Remittances from the
Bangladeshi Diaspora provide vital foreign
exchange.
The Bangladesh telecoms industry has
witnessed rapid growth over the years and
is dominated by foreign investors. The
government has emphasized the
development of software services and
hi-tech industries under the Digital
Bangladesh scheme. Bangladesh has

substantial reserves of natural gas and
coal; and many international oil
companies are involved in production and
exploration activities in the Bay of Bengal.
Regional neighbors are keen to use
Bangladeshi ports and railways for
transshipment. Located at the crossroads
of SAARC, the ASEAN+3, BIMSTEC, and
the Indian Ocean, Bangladesh has the
potential to emerge as a regional
economic and logistics hub.
In 2015, per-capita income stood at USD
1,314. While achieving significant
macroeconomic stability, Bangladesh
continues to face challenges such as
infrastructure deficits and energy
shortages.
The gross national product grew well
above average of developing countries,
said WB report. It started reckoning back
to early seventies, that Bangladesh has
beaten the odds of once called Basket
Case. Poverty got reduced by an
impressive 24.8% in FY 2015 from 56.7%
in FY 1992. The economy is now one of
the worlds 25 largest developing
countries. The progress in the economic
development has been applauded highly
notwithstanding global & national shocks,
persistent political infighting, poor
governance, rising costs of unplanned
urbanization etc,
41
The factors behind the achievements

are due to population control,
macroeconomic stability, rapid
development in financial sector with
openness in economy, universal
primary education at the door steps
and the private sector driven moves.
target before the stipulated time.
A critic of many things & governance

in Bangladesh country Director Ellen
Gold Stien commented Bangladesh
has demonstrated to the world that it
can adapt to the changing demands
of a rapidly globalizing economy
The savings for investment is very

meager in Bangladesh. The
achievement of 7 to 8 % growth
requires 33% investment of GDP for
which Bangladesh needs to drive
ahead. However, Financial sector
management needs bottom up
overhauling. This would control the
reckless increase in NPL especially
by NCB & others like BASIC Bank.
Fund out flows like Hall Mark &
Bismillah are persistent weak nesses
in public financial management of
the economy.
The growth accomplished by

Bangladesh as per the report has
been pro-poor as it came with
significant fall in number of absolute
poor. Income inequality although
remained high, consumption grew
alike for poor and the non-poor over
the past decade, Although
distribution of economic
opportunities has remained
inequitable, opportunities have
increased. The NGOs have
augmented the improvement of
human development indicator.
Migrant remittances have increased
radically from GDPs mere 4% in
fiscal 2001 to 7.13% in fiscal 2015.
The average GDP growth of 6+%
has become consistent. Indeed we
are in the 6% trap. But to get out of
this trap Bangladesh needs huge
investment. Government of
Bangladesh observed that to become
middle income country by 2021 the
instant vision-2021 Bangladesh
needs to accelerate its growth to a
minimum of 7 to 8%. The
Government of Bangladesh report
stated the average monthly wage of
Bangladesh to be 43$. This rate is
61$ in Cambodia, 87$ in India, it is
to 90$ in Vietnam while in China it
is between 150 to 250$.
On reduction of child mortality, the
under-five mortality rate was 151 per
1000 live births in 1990 which came
down to 41 per 1000 live births in
2013 and hence achieved the MDG
42
Likewise, the infant mortality rate

was 94 per 1000 live births in 1990,
which was reduced to 32 per 1000
live births in 2013. Hence, it is also
on the verge of getting to the goal.
In 2013-14' FY the export earnings

touched USD 30.5 billion. It was a
modest US$ 10.5 billion in FY
2005-2006. In the same period the
remittance earnings touched close to
USD $ 15 billion in FY 2013-2014
from only USD 4.8 billion way back
in FY 2005-2006. The remittance
happened with unskilled or
semi-skilled manpower. We can
imagine the effect on remittance if
skilled manpower could replace
currently employed expatriates it
effective !
The country rating, by Moodys the
globally acclaimed rating agency
reported that Bangladesh Credit
Stability has been shored up by the
momentum in reforms agenda.
They scored Ba3 for Bangladesh for
6 consecutive years to FY 2015. At
par with us were Egypt and
Philippines amongst 130 countries.
This score for Pakistan is B3, Srilanka
& India were B1 & Baa3/Ba1
respectively. Except for India &
Indonesia, Bangladesh scored
higher. Bangladesh as per further
report from the agency demonstrated
remarkable attainment in
macro-economic performance till FY
THE GROSS
NATIONAL PRODUCT
GREW WELL ABOVE
AVERAGE OF
DEVELOPING
COUNTRIES, SAID WB
REPORT. IT STARTED
RECKONING BACK TO
EARLY SEVENTIES,
THAT BANGLADESH
HAS BEATEN THE
ODDS OF ONCE
CALLED BASKET
CASE. POVERTY GOT
REDUCED BY AN
IMPRESSIVE 24.8% IN
FY 2015 FROM 56.7%
IN FY 1992. THE
ECONOMY IS NOW
ONE OF THE WORLDS
25 LARGEST
DEVELOPING
COUNTRIES.
2015. The FCY reserves reached $

27 billion already. Same
impressive score BB- has been
offered by S & P for those years.
Bangladesh RMG & Remittance
have performed tremendously
well. The overseas employments
have been instrumental in helping
Bangladesh sustain its micro
economic stability amidst global
economic crisis. The upcoming
avenues of Bangladesh economic
prospects are Electronics,
Shipbuildings, Pharmaceuticals, It
products & service sector. With
additional 3k MV electricity
generation, the accumulated
capacity is now 6.5 KMW. The
Government of Bangladesh has
been continually taking measures
to consistently increase the power
generation capacity. This is the
sine quo non amongst the
components of infrastructure
development of Bangladesh. Its
remittances inflow is currently
above 15 billion a year. It is going
to touch newer heights
consistently.
In line with the Millennium
Declaration, a framework of 8
goals, 18 targets and 48 indicators
were set to measure progress
towards the MDGs over the period
from 1990 to 2015. However, from
January 2008, twenty-one targets
were reset and 60 indicators used
to monitor the MDGs progress.
by Bangladesh. All these are

attended for earliest infrastructural
upliftment, whether in City or
Rural Areas. Agriculture has
performed very positively while
service sectors role in GDP in on
impressive increase.
Indeed, Bangladesh economy has
been taken due cares by the
Government of Bangladesh which
is nurturing it well. The per capita,
although not a very decent
yardstick is on an upward track.
Meanwhile, Bangladesh has
already achieved low MIC status
with per capita of US $ 1314.
Private sector has been performing
well despite Government lapses in
helping them by way of facilitating.
Had the parties from both
Government of Bangladesh and
opposition, been pro-development
our development efforts could
have been more visible &
manifested more easily than now
our accomplishments would have
been visualized better.
In 2015, Bangladesh was awarded
prestigious Women in Parliaments
Global Forum award, known as
WIP award, for its outstanding
success in closing the gender gap

in the political sphere. Bangladesh
ranks 10th out of 142 countries.
Between 1990 to 2015 life
expectancy rose to 7 from 59,
which is more than India, Indians
are however twice as reach over
us. Bangladesh performed supports
in Health and Education. Over
90% girls have enrolled in primacy
school in 2005. Almost equal was
the number for boys. Infant
mortality got more than halved.
Child mortality fell by 2/3rd with
maternal mortality falling by . In
1990 womens life expectancy was
1 year less than male. In 2015
females expectancy is 2 years
more than males. At PPP our GDP
per capita is at $3019. The growth
of GDP was below 4% upto 1990.
It currently sustains a growth of
6%. The fertility rate is now just
2.1 from 6.3 in 1975 and 3.4 in
1993. What a grand
accomplishment. Our population
now grows at just above
replacement level at 2.3%.
Bangladesh thus impressively
reaped the possible dividend for
development but yet could not
optimize it.
The eight MDGs were poverty and

hunger, primary education,
empower women, child mortality,
maternal health, HIV/AIDS and
other diseases, environmental
sustainability and partnership for
development.
Government of Bangladesh in now
keen on Regional Connectivity.
The R&H, Water ways, Railways &
all other connectivities are being
attended for immediate investment
43
Over 9 million people work

abroad, mainly in ME our HR
market needs a boost up by
facilitation form Government of
Bangladesh. This can be done by
imparting skill in them. Newly
recruited expatriates may be sent
by demand based skill imparting
on the basis of employment market
demand. Real wages between
2000 and 2015 in agriculture grew
very substantially.
Problems
It is very difficult, under a
centralized administrative system,
to achieve a 7% to 10% growth as
revealed by the Finance Minister
recently. This however has been
in many occasion echoed by few
other economists of eminence &
prominence.
Productivity growth rate
mismatches the reality. The
political stability and good
governance are lacking and not in
consonance for achieving high
growth rate. In 2015, Bangladesh
had over $1 billion as FDI which is
below 1% of GDP. Education work
force is 2.2 million. This is a
constraint to the technology driven
development. Bangladesh due to
pitfalls in governance & lack of
investment promotional fanfare is
lagging behind in attracting FDIs.
However, Bangladesh offers one of
the best fiscal, legal and
investment protection friendly
scheme & incentives regimes for
FDI. Yet FDI does not pour in
largely due to bureaucratic
procrastination, political
dogmatism, tormented & unstable
policy decisions with frequent
changes, repatriation problems of
outward dividends. Some fiscal
policy inconsistencies also
aggravate these adversities.
Investment needs in economy for
an accelerated growth could not be
44
properly addressed by
Government. Neither the private
sector led growth has been
supplemented by public sector
investment. However development
in infrastructure development has
been the key point offered by
Government for private investment
backups. On the contrary loss in
SOE has always been a deterrent to
the private sector expansion. BOI
has become an employment bank
for OSUs having had no role of
oversight on grossly
non-performing SOEs. BOI with
one exception has always been
manned with bureaucrats who are
attuned to compliance but not
challenges for investment needs.
However BOI & privatization
commission are now in the merger
phase, it has been reported. That
again needs to be manned by
Private Sector people of business
acumen.
For accomplishing all the MDG
targets Bangladesh needed
US$78.2 billion during 2011-2015.
But an annual average Official
Development Assistance (ODA)
receipt was only $1.74 billion
against its yearly requirement of
$3-5 billion.
High bank interest rates have been
a deterrent to investments. Again
income tax of 35% on private
sector in general is yet a hurdle.
Individual investors are to pay 25%
tax on dividend repatriation in the
form of profit. This is additional
after payment of corporate taxes.
The NBR attitudes to tax payers as
evaders rather than income
generators for the republic are a
great deterrent to resource
mobilization for development.
When NBR people as revenue
collectors has been found to be
widely corrupt, accountability of
them can be ensured first to honor
the tax payers. Whether in
customs, Income tax, Environment,
BOI, BEPZA, VAT or elsewhere,

the doing business scenarios are
against the comfort of investors.
Individual officers use chairs &
platforms for personal benefit at
the colossal cost of revenue loss for
the republic. Yet these are ongoing
with almost ineffective
accountability points even like
ACC. Despite these hurdles,
private sector is thriving fast due to
patriotism. FDI would only pour in
with projected profit & value
addition with assurance of
favorable doing business scenario.
Our doing business index does not
however offer a competitive edge.
Towards ensuring environmental
sustainability, at present there is
only 13.40 percent of land in
Bangladesh having tree cover with
density of 30 percent and above
and the area having tree cover is
much lower than the target set for
2015 (20 percent).
However, access to safe water for
all is a challenge, as arsenic and
salinity intrusion as a consequence
of climate change will exacerbate
the availability of safe water,
especially for the poor.
The domestic resource
mobilization has been utterly poor.
The development pace achieved so
far gives space for a better future
public financial management. One
may however argue that NBR
performance for tax payers has
been a failure in our mission to
autarky. Yet however, very densely
populated Bangladesh is talked
about despite being worse
governed. The government is
trying hard so far but with the
persistently failed governance
machinery, it could not perform up
to the investors or electorates
expectation. Reforms agenda of
political Government has not been
properly responded to by
bureaucracy. Bureaucracy here is
not attuned to accountability

which should have been readily
accountable & in transparency all
along.
The NPL of Banks, loss of SOE,
lack of accountability &
performance management of
bureaucracy are hard deterrents in
our growth. Application of law and
justice needs to be same for all.
Exception to this however prevails
in Bangladesh at large. The
financial cost of fund is too high.
Again the IPO prospects are bright.
But the long time taken by BSEC to
process IPO and give it green
signal is deterrents too. The stock
exchanges need cardiac care in
terms of management for
investment. The demutualization
alone would not suffice the
economys need. These exchange
and more so the BSEC need,
capacity building to meet the
increased need of economy.
Otherwise diversifying bank
finance & alternative dependence
on IPO would remain a far cry. For
the paradigm shift we are to attune
ourselves.
Prospects
At nominal index for FY 15
Bangladeshs GDP is $209 billion,
44th top economy in the world.
However with $572 billion GDP at
PPP it is the 33d top economy in
the world. FY 2016 shows a likely
growth of 7.2%. Its GDP per capita
is $1314 while at PPP it is $3019.
The components of GDP are
Agriculture 19% industry 30% &
services 5% (FY 13 estimated). The
gini coefficient is 32.1 &
unemployment is 4.5% (13). Our
imports were $40.69 billion in FY
15.
The WB in its report Bangladesh:
Towards Accelerated, Inclusive &
sustainable growth opportunities
and challenges, said that of
Bangladesh can increase its trade

by about 38% if the business
environment alone is improved to
half way to the level of India. It
advised Bangladesh to act soon
before the vacuum by China is
taken over by others.
It said GDP growth & remittances
would play vital role in getting the
middle income statures. Income
wise we are in low middle bracket
now. Export led growth of
Government Sector may not
sustain if labour productivity
growth does not match the pace
with competitors.
For growth to excel better rapid
investment in infrastructure,
making industrial land available,
fostering need based education &
skill development programms were
stressed. Additionally special
attentions are needed to labour
intensive agricultural sector for
attaining more inclusive growth.
Bangladesh had a market of about
$44 billion in 2012 for the middle
class alone. The lower income
strata are kept apart who have
different market need potentials.
The market of middle class in
Bangladesh is higher than GDP of
120 countries. It gives us a globally
advantageous position. Number of
job entrants is equal to jobs
available at 5.8 million can be
cited as one of the Government of
Bangladesh accomplishments.
For achieving better export results
Bangladesh needs targeted area
based approach to industrial
development. From 2009 to 2012
Indonesias export of footwear
fetched $ 1.7 billion to $3.3 billion
due to set target and policies can
be an example for sectoral
approach.
Bangladesh is also in its right way.
The debt servicing history of
Bangladesh is very favorable. Its

public debt is $36.2 billion
(Dec2012) while it is 22.8% of
GDP. Its F&Y reserves are $27
billion (FY-2015). An economy of
$ 160 billion, this is its one very
positive indication. Again funds for
investment needs are not
adequately available this is a
negative side.
About 103 countries of the globe
are having less than 10 million
population. Our population is
closed to 150 million as per last
census. Addition to labour market
for employment is 2.2 millions per
annum. 67% of people of
workable population is between 15
to 71 years of age. Unemployment
in this group of population is
around 25%.
Bangladesh may have 220 million
people in 2050. There will mainly
be young population who are
young, & educated. A country of
relatively small size, Bangladesh
can have world class infrastructure
with an outlay of $ 200 billion at
current price. The cost of climate
protection is also included here.
Trying with people for
employment overseas with skill
would enable them for increased
income in future years. This
increased income will mean an
increased, even double the
remittance only in 3/5 years. The
annual remittance of $ 15 billion is
not really a complacent figure. It is
a only because no skill imparting
scheme is in the offing now. The
prospect should be harnessed
urgently and is being taken due
cane by the Govt. Bravo!
With BRICS, the world had a new
dream. Brazil could not really
make it per anticipation. But in the
next 11 Bangladesh is quite well
placed. The preparations for new
challenges have been in this
45
Governments manifesto. It is
perceived that Bangladesh will
keep on track on a faster and stable
pace along its own development
path. Excellent performance
indicators are vividly presenting
the enormous economic prospects.
Bangladesh has entered into the
growth trap of 6% and is going
ahead to vision 2021. Its potentials
& prospects have become new
point of attention from countries &
investors of the globe.
The absence of poverty may not be
here with equitable distribution of
wealth. With all the issues
mentioned above being attended
the challenge of climate change
needs united and concerted efforts
from all countries across the globe.
In fact the west, irresponsibly acted
46
to the aggravating of climate

scenario but their concern on its
effects on other economies appear
to leave no room for them to
compensate for the East.
Bangladesh Government has been
pro-active in this concern and we
can feel complacent on this at the
least. We look forward to see the
results.
After performing well on 8 MDGs,
Bangladesh has earned laurels from
the world over. Bangladesh has
with its 7 FYP from July 2015
entered into the Sustainable
Development Goals (SDG) until
2030. With increased efficacy in
governance amidst more
transparency & accountability,
Bangladesh will be more
exemplary to the world. Annette
Dixon, WB Regional VP of South

Asia Region has righty expected
Bangladesh to be in MIC by all the
3 indices in this decade, 2020. The
vision 2021 appears to be a reality
even to the WB, we can see. We
hope to live until then. But if not
our posterity will benefit and
contribute to new Bangladesh.
Resources are always limited.
Optimum use of the resources with
good governance can reap best of
us. Major achievement of MDGs
by Bangladesh has demonstrated to
the world about our efficacy.
The author is the Founder Partner
Masih Muhith Haque & Co.
Chartered Accountants
and Economist
Corporate Governance
and Accountants
Dr. Rukshana Begum
Introduction
In the very recent times there have been
significant changes in the economic and
business scenario all over the world. Trade
barriers have been lifted, the world is
becoming a smaller market, and bottom
lines are taking precedence. They have,
increasingly, been facing competitive
environment both in terms of market for
products where quality is the key word to
survive and for sources of finance.
Subsequently, the separation of
management from the ownership
established under the statutory laws and
regulations require appointment of a
management team experienced in every
sphere of branch management functions
which is very essential for efficient and
smooth running of the corporate business
entities. Nowadays survival of a corporate
body, whether it is organized under public
or private sector, depends much upon the
efficiency of such management or
governance. The better the governance
the better is the prospect of the
organization. According to the latest
development process the management of
a corporate body must consider three Es,
i.e., Efficiency, Effectiveness and
Economy. The future dimension of an
organization depends upon the overall
outlook of the governing team and how
the management adopts these three Es. It
is, however, very tough to achieve these

three Es without an effective and efficient
governance of any corporate body. A
good management control comes out from
good corporate governance. The words
Corporate Governance, therefore, have
been becoming a popular concept in the
arena of business management almost all
over the glove. It covers the concepts,
theories and practices of the governing
boards and the activities of their directors
and top management, and the relationship
between boards and shareholders,
regulators, auditors and other
stakeholders. It can be interpreted as a
broad and somewhat vague term for a
range of corporate controls and
accountability mechanisms designed to
meet the corporate objectives. Recently in
the USA, in some Asian countries and in
other countries of the world many
corporate bodies collapsed due to absence
of good Corporate Governance in the
business organizations. Therefore, major
donor organizations and International
Financial Institutions have been
increasingly tying up their aids and loans
on the conditions of improvement of good
Corporate Governance.
Accounting profession has a significant
role to play both in public and private
sector management in view of the fact that
a corporate of the current and the next
47
century would be required to

operate in a competitive regulatory
environment where the various
levels of government do not feel
compelled to the generally
accepted norms of good Corporate
Governance.
Characteristics of Corporate
Governance
Participatory
Concept of Corporate
Governance
Accountability
Transparency in accounts and

reports
Consensus oriented
Responsive
Adherence to the rules of law
SIGNIFICANT ROLE TO
Efficient and effective and
PLAY BOTH IN PUBLIC
Equitable and inclusive
AND PRIVATE SECTOR
Business entities established under

statutory laws are called as
corporate body or corporation and
overall management of such
corporate bodies might be called
as Corporate Governance. It is the
whole system of managing and
controlling a company. Its structure
specifies the distribution of rights
and responsibilities among
companys different participants
such as board and their directors,
shareholders, management,
auditors and other stakeholders. As
we all know Corporate
Governance is management of
companies by the Board of
Directors. The concept of
Corporate Governance primarily
hinges on complete transparency,
integrity, and accountability of the
management. Transparency refers
mainly to disclosure of relevant,
reliable, and material information
in an appropriate and objective
manner while accountability refers
to broader company objectives to
manage efficiently and effectively
the social and economic resources
under its disposal.
In addition to that, there is a
growing realization that a good
Corporate Governance system
actively adds value in the long run.
Considering in this context,
Corporate Governance is the
enhancement of the long term
shareholders value while at the
same time protecting the interest of
other stakeholders.
48
Good corporate governance has

eight Characteristics:
It is not, however, necessary for a

good corporate governance to
have all these characteristics.
Principal characteristic of effective
corporate governance is:
Transparency - The disclosure of
relevant financial and operational
information and the internal
processes of management oversight
and control; protection and
enforceability of the rights and
prerogatives of all shareholders;
and directors capable of
independently approving the
corporations strategy and major
business plans and decisions and
of independently hiring
management, monitoring
managements performance, and
integrity and replacing
management when necessary.
Framework of Corporate
Governance
ACCOUNTING
PROFESSION HAS A
MANAGEMENT IN VIEW
OF THE FACT THAT A
CORPORATE OF THE
CURRENT AND THE NEXT
CENTURY WOULD BE
REQUIRED TO OPERATE
IN A COMPETITIVE
REGULATORY
ENVIRONMENT WHERE
THE VARIOUS LEVELS OF
GOVERNMENT DO NOT
FEEL COMPELLED TO THE
GENERALLY ACCEPTED
NORMS OF GOOD
CORPORATE
GOVERNANCE.
The Framework for Corporate

Governance deals mainly with
executive directors (Board
Directors are elected to direct the
company) and non-executive
directors (parts of management are
employed to implement the
strategy and decisions of the
Board), separation of CEO from

chairmanship, rights of all
shareholders including minority,
accountability towards
stakeholders, internal control to
deal with risks, directors
remuneration to deal with shirking
behavior, and statement of going
concern.
Need for Corporate

Governance
In the present globalization
scenario, the importance of
Corporate Governance is
unquestionably enormous.
Normally, capital flows into any
country or in a region or in a
company where rules and
regulations are fair, and are
practiced objectively in a
transparent and accountable
manner. Application of accounting
and auditing standard ensures
reliability and comparability of
financial information, thereby
increasing investors confidence.
So, Good Governance can attract
national and international investors
and make them confident enough
to invest capital.
The regulatory authorities have
realized the need to focus on
corporate performance in order to
integrate the economy with the
world market. There is also an
increasingly greater focus on
investors protection and public
interest. So, good Corporate
Governance serves not only the
company interest but also the
society in which it operates. The
key to good Corporate Governance
is the realization on the part of
Corporate Managers that they are
accountable for their
performances. There is also a
general feeling that there must be
much more value-addition from
mem-bers of the Board, particularly
the Non-executive Directors. The
responsibility for ensuring the
success of Corporate Governance
lies on the Board, the shareholders,

and the employees. Corporate
Governance is, therefore, is
basically a system of making
Directors accountable to the
shareholders for effective
management of the companies and
in the best interest of the
companies and also with adequate
concern for ethics and values.
Corporate Governance guarantees
divisions of labor which results
best benefit to the organization. It
has also a responsibility towards
consumers and the environment of
the businesses. There is also
awareness that while the
Non-executive Directors who
make useful contributions in their
capacity as Director in companies
would normally be reappointed,
they should not consider this as
automatic and a matter of right.
Fixed terms for Directors would
enable Chairman to make changes
of the Board team depending on
the challenges being faced by the
company from time to time, which
may require different types of

experience on the Board. Fixed
terms of appointment also provide
opportunities for appraisal of the
Non-executive Directors, like any
other employee, before deciding
on a fresh term. Nowadays, in
making decisions whether to invest
in a particular company or area,
capital providers are more intently
considering such factors as
adequacy of disclosure, minority
shareholders rights, board
structure and process as well
corruption, cronyism and bribery.
The Role of Accountants in

Corporate Governance
It has been noticed in the recent
past that the global corporate scene
is being undergone rapid changes
and transformations. Changes are
being happened in management
style and structure, competence,
competition and in technology. To
remain coping with these changes
each and every modern company
49
must follow the latest frame work

evolved in management aptitude,
knowledge and competence. There
are many other changes which
definitely and distinctly have
remarkable implications for the
professional accountants. To
protect their profits, the companies
have to primarily respond by
managing their costs,
re-engineering their processes and
downsizing their work forces. But
the rapid changes are throwing
companies into a state of confusion
regarding strategy.
Accountants have the potential of
making the transition smooth and
fruitful and so they must step-in.
The role of Professional
Accountants on the Board has
become very important in making
the process of Corporate
Governance more and more
effective. Since, all the Directors
have broadly equal legal
responsibilities, it is the
responsibilities of the accountants,
if he/she is a member of the Board
to play a contributory role in
Board's deliberations and decisions
or if he/she is not a member of the
Board to enable and ensure other
Directors to play the role in the
Board which is required for the
interest of the company. The
Accountants must also ensure and
maximize shareholders' value,
value to the customers and other
stakeholders by playing their due
role internally and externally.
Furthermore, the Accountants have
a great role to play as external
auditors as well.
It has been observed properly that
the Accountants have a great role
to play to achieve good corporate
governance should be confirmed
by:
All material information must

be disclosed
The information must be
50
prepared in accordance with

accounting standards and
should be audited following
acceptable auditing standards,
procedures and guidance
Annual audit should provide

an objective view on control
Information should be
provided on internal control
systems
Non-financial like
environment and other social
data also should be disclosed
Formation and composition of

audit committees, their
functions and responsibilities,
disclosure of audit fees,
rotation of auditors/audit
partners
Corporate Governance: The

Present Scenario in
Bangladesh
Both the public and private sector
organizations must have to follow
corporate governance rules in their
day-to-day operations and
functions. The corporations
internal and external factors set to
achieve the goals are influenced
and affected by the evolving
phenomenon of corporate
governance. In both the sectors in
Bangladesh, it is found that the
Board or the Management does not
try to understand that a good
disclosure on corporate
governance might bring good
result to the company in the long
run. Type and structure of
corporations, even when listed, is
mostly family based, are exposed
to limited transparency and
accountability towards other
coordinates, lack of sufficient
independent Non-Executive
directors and audit committee
members with experiences, and
technical skills and absence of
sufficient trained internal audit

personnel. Motivation instead of
compulsion is what is required for
both public and private sector
corporations in Bangladesh to
accept and adopt a good corporate
governance framework. Every
company should disclose a report
on such governance along with its
annual report on the performance
of the company. In Bangladesh, it
is found that the public sector
corporations have good board
structure other than private sector
but usually are not manned by
competent and proper
personalities. Weak regularity
framework characterized by
inefficient bureaucratic system also
is a great set back in public sector
companies in Bangladesh.
In the case of private sector, there
is a growing realization that good
Corporate Governance is a must
not only in order to gain credibility
and trust but also as a part of
strategic management for survival,
consolidation and growth. There is,
therefore, a demand for
simplification, greater
accountability and transparency,
necessitated by increasing investor
awareness and competitive market
forces. The primary force is the
effect of globalization which
compiles the corporate bodies to
have consequent realization that
`International Norms would have
to be applied and a company
cannot survive with its traditional
and family owned and managed
practices. Hence, realization has
grown more and more to practice a
good Corporate Governance in
running the day-to-day operations
of a company.
However, there may be some
troubles in the process like
corporate culture, absence of
transparency and accountability in
some areas, mismatch in banking
sector, scarcity of right personnel
to act as independent
Non-executive Directors and in

audit committees, and problems of
various law reforms.
Conclusion
The movement towards improved
Corporate Governance is to stay in
the business world. Organizations
and the business environment in
which they operate changes
rapidly with the changes brought
about by e-commerce,
globalization and instant
information. It is required that new
acknowledgments emerge in
developing countries and new
investors appear in the capital
market should take a closer look at
the corporate governance. The
Professional Accountants should
continue to enhance their role in
the strategic planning by helping in
developing the management and
implementing and operate a
strategic planning process that will
allow the company to optimize its
competitive advantages. Successful
organizations will remain
competitive because of the vision
and direction provided by the
strategic plan. Business has to be
successful to survive and grow

more. Governance, as one aspect
of business like any other, has to
be considered in the context of its
contribution to business success.
Good Corporate Governance will
help both large and smaller
companies of private and public
sector improve their performance
in relation to the interest of all the
stakeholders in their success, and
of course, improve thereby their
relationship with each of those
stakeholders. Financial audit,
therefore, might become a
measuring rod to judge the degree
of Good Corporate Governance
practiced in a company.
Ahmad, M.U and

Yusufi,M.(2005)Corporate
Governance for Bangladesh
Perspective, The Cost and
Management, Vol.33.N.6
Belal, A. Rahman (1999)Corporate
Social Disclosure in the
Bangladesh Annual
Reports,The Bangladesh
Accountant, January-March.
Dutta,S.(2000)Corporate
Governance: Role of Audit
Committee The
References
Management Accountant,
Vol.35.N.7.
Holland J (1996) Corporate

Governance and Financial
Institutions, Glasgow University.
ICAB,(2004) Draft Code of

Corporate Governance in
Bangladesh The
Ahmad, J.U and

Bari,M.A.(2000)Corporate
Governance for Transparency and
Bangladesh Accountant,
October-December. Vol.45.N.18.
Accountability, the Bangladesh

Accountant, April-June.
The Author is an Associate Professor,

Department of Accounting and
Information Systems, University
of Rajshahi
51
Risks and Risk Management in Banks

Introduction
The Banking sector has a pivotal role in
the economic growth of the country and
has a dynamic role to play in converting
the idle capital resources for their
optimum utilization so as to attain
maximum productivity.
In Bangladesh, the banking sector is
considerably strong at present but at the
same time, banking is considered to be a
very risky business. Financial institutions
must take risk, but they must do so
consciously. However, it should be borne
in mind that banks are very fragile
institutions which are built on customers
trust, brand reputation and above all
dangerous leverage. In case something
goes wrong, banks can collapse and
failure of one bank is sufficient to send
shock waves right through the economy.
bankers must see risk management as an
ongoing and valued activity with the
board setting the example. Unsound risk
management practices governing bank
lending often plays a central role in
financial turmoil.
Definition of Risk
A risk can be defined as an unplanned
event with financial consequences
52
resulting in loss or reduced earnings. An

activity which may give profits or result in
loss may be called a risky proposition due
to uncertainty or unpredictability of the
activity of trade in future. In other words,
it can be defined as the uncertainty of the
outcome. In short, risk is a quantifiable
uncertainty.
Risk in Banking Business

The banking sector has witnessed
tremendous competition not only from the
domestic banks but from foreign banks
alike. In fact, competition in the banking
sector has emerged due to
disintermediation and deregulation. The
liberalized economic scenario of the
country has opened various new avenues
for increasing revenues of banks. In order
to grab this opportunity, Bangladeshi
commercial banks have launched several
new and innovated products, introduced
facilities.
In the backdrop of all these developments
i.e., deregulation in the Bangladeshi
economy and product/ technological
innovation, risk exposure of banks has
also increased considerably. Thus, this has
forced banks to focus their attention to risk
management. In fact, the importance of
risk management of banks has been
elevated by technological developments,
the emergence of new financial
instruments, deregulation and

heightened capital market volatility.
Risk management framework

in banks
In short, the two most important

developments that have made it
imperative for Bangladeshi
commercial banks to give emphasize
on risk management are
An efficient and healthy banking

system is a prerequisite for
sustainable economic growth of a
country. In this context, effective risk
management practices enable the
banking industry to build public trust
and confidence in the institutions
which is necessary for mobilizing
private savings for investment to
facilitate economic growth. On the
flip side, inadequate risk
management practices in the
banking industry would result in
bank failures leading to erosion of
public confidence in the industry
having adverse implications for the
economic growth. Therefore, an
effective risk management
framework is a prerequisite for banks
to achieve their own business
objectives and also play their role in
the economic growth of the country.
Deregulation
The era of financial sector reforms
which started in early 1990s has
culminated in deregulation in a
phased manner. Deregulation has
given banks more autonomy in areas
like lending, investment, interest rate
structure etc. As a result of these
developments, banks are required to
manage their own business
themselves and at the same time
maintain liquidity and profitability.
This has made it imperative for
banks to pay more attention to risk
management.
Technological Innovation
Technological innovations have
provided a platform to the banks for
creating an environment for efficient
customer services as also for
designing new products. In fact, it is
technological innovation that has
helped banks to manage the assets
and liabilities in a better way,
providing various delivery channels,
reducing processing time of
transactions, reducing manual
intervention in back office functions
etc.
Banking companies in Bangladesh,
while conducting daytoday
operations, usually face the major
risks like credit risk (including
concentration risk, country risk,
transfer risk, and settlement risk),
market risk (including interest rate
risk in the banking book, foreign
exchange risk, and equity market
risk), liquidity risk, operational risk
and other risks (Compliance,
strategic, reputation and money
laundering risk).
Ideally, banks risk management

framework should strive to cover the
full spectrum of risks by analyzing
them from both business and
enterprise level perspectives. Each
banking institution should tailor its
risk management program to its need
and circumstances. The main
elements of a risk management
framework that apply to banking
institutions irrespective of their size
and complexity of business are:
IDEALLY, BANKS
RISK MANAGEMENT
FRAMEWORK SHOULD
STRIVE TO COVER THE
FULL SPECTRUM OF RISKS
BY ANALYZING THEM
FROM BOTH BUSINESS
AND ENTERPRISE LEVEL
PERSPECTIVES. EACH
BANKING INSTITUTION
SHOULD TAILOR ITS RISK
MANAGEMENT PROGRAM
TO ITS NEED AND
CIRCUMSTANCES.
First and foremost, effective risk

management framework demands
active involvement of the Board of
Directors (BoD) and senior
management in the formulation and
oversight of risk management
processes. Accordingly, they should
provide strategic direction and
approve the overall business
strategies and significant policies of
their institutions, including those
related to managing and taking risks,
and should also ensure that senior
management is fully capable of
managing the activities that their
institutions undertake.
53
Second, adequate Policies,

Procedures, and Limits need to be
defined by an institutions directors
and senior management to tailor
their risk management policies and
procedures to the types of risks that
arise from the activities the
institution conducts.
Third, adequate Risk Monitoring
and Management Information
Systems need to be developed for
effective risk monitoring and to
identify and measure all material
risk exposures. Consequently, risk
monitoring activities must be
supported by information systems
that provide senior managers and
directors with timely reports on the
financial condition, operating
performance, and risk exposure of
the institution.
Fourth, establishing and
maintaining an effective system of
controls, including the
enforcement of official lines of
authority and the appropriate
separation of duties such as
trading, custodial, and back-office
is one of managements more
important responsibilities. A
properly structured system of
internal controls promote effective
operations and reliable financial
and regulatory reporting,
safeguards assets, and helps to
ensure compliance with relevant
laws, regulations, and institutional
policies.
Fifth, the Risk Management
Function should be
institutionalized to supervise
overall risk management at the
bank. Ideally, overall risk
management function should be
independent from those who take
or accept risk on behalf of the
institution.
To ensure effective risk
management in banks, some of the
key lessons should not be
overlooked. Board of Directors
54
needs to be more actively engaged

and involved in risk policy setting
and governance, and spend more
focused, higher-quality time on risk
issues.
The responsibilities and influence
of Chief Risk Officers (CROs) need
to be elevated and strengthened
with CROs actively participating in
business strategy and planning as
opposed to having only veto
power over decisions that
adversely impact risk. The risk
function is not in place to manage
risk, but to make sure that risks are
managed. Banks need to align pay
to risk-adjusted performance. There
is a need to institutionalize an
appropriate risk culture throughout
the organization, where risk is
everyones business from the board
to the front line. Banks need to
improve the transparency, quality,
accuracy and timeliness of
information to support risk
management. The Institute
enterprise wide risk management
systems instead of managing the
risks in silos. Use both qualitative
and quantitative techniques with
varied assumptions instead of
blindly following the models.
changes in the legal and regulatory

framework. Most financial
institutions were able to cope with
these challenges, but a great many,
including some very large and
wellknown institutions, were not.
Spectacular failures occurred,
resulting in great cost to taxpayers
and surviving institutions and in a
general decline in customer
confidence in banks and consumer
confidence in the economy as a
whole.
In view of these, Bangladesh Bank
vide BRPD Circular No. 17 dated
07.10.2003 identified 5 (five) nos.
core risks for the Banks & Financial
Institutions and later on vide FID
Circular No. 10 dated 18.09.2005
added another core risk. These six
core risks areas are as under:
Credit (Investment) Risk
Asset Liability Risk
Foreign Exchange Risk
Internal Control & Compliance
Risk
Anti Money Laundering Risk
Initiatives of Bangladesh
Bank for Risk Management
Information Technology
Security Risk (2005)
The first decade of the 21st

century, 2001 through 2010, was
an extremely challenging decade
for the financial services industry
in many parts of the world.
Banks, securities firms, insurance
companies, money service
providers, foreign exchange
dealers, and other kinds of
financial institutions in many parts
of the world faced increasing
competition, natural and
manmade disasters, increased
volatility in interest rates,
exchange rates, and share prices,
asset price bubbles, deep
recessions, sudden deteriorations
in credit quality, and unpredictable
At the same time Bangladesh Bank

has issued separate guidelines for
managing each of the
aforementioned risks for the
scheduled Banks functioning in
Bangladesh. Bangladesh Bank has
also instructed to design effective
policy and procedures for
managing the risks effectively by
the Banks. They have also
instructed to follow-up, monitor
the risk management issues
accomplished by different Desks,
Divisions, Departments, Wings
closely. It is mentionable here that
all the core risks are associated
with the different functional organs
of Banks and these risks were
being managed and reviewed by

them.
In 1996, Bangladesh Bank adopted
the Basel-I propositions to
formulate the capital adequacy
regulations against risk weighted
assets vide BRPD Circular No.
01/1996. The key points of that
circular were to define capital
following Basel-I.
Minimum Capital Standards
Determination of
Risk-weighted Assets
Implementation Deadline
Reporting timeframe
In June 2004, BCBS issued a

revised framework of International
Convergence of Capital
Measurement and Capital
Standards (ICCMCS) introduced the
famous Three Pillar Concept of
Capital Adequacy for strengthening
the risk management practices of
the banking industry. Later, in June
2006, a comprehensive revision of
ICCMCS was in public by
incorporating Basel II Framework,
June 2004, the elements of the
1988 Accord that were not revised
during the Basel II process, the
1996 Amendment to the Capital
Accord to Incorporate Market
Risks, and the paper on the
Application of Basel II to Trading
Activities and the Treatment of
Double Default Effects, 2005. The
paper has been invariably termed
as Basel-II framework.
Parallel run of Basel-I and Basel-II
accord in 2009 and Full
implementation of Basel-II from
January 1, 2010.
As per Quantitative Impact Study
(QIS) conducted in April-May 2007
by Bangladesh Bank on
commercial banks, Bangladesh
Bank issues BRPD Circular No. 14
dated December 30, 2007 on

Action Plan/Road Map for
implementing Basel-II. The key
points of that guidelines/circular
were to define capital are
introductions and constituents of
capital, credit risk, market risk,
operational risk, supervisory
review process and market
discipline.
In the consequence of global
financial turmoil and lessons
learned from that to promote a
more resilient banking sector,
BCBS undertook the reform
initiatives for enhancing capital
and liquidity rules. The goal was to
develop a durable banking sector
that can sustain and absorb shocks
arising from financial and
economic stress. The outcome of
the initiatives was released on
December 2010 that was
comprised of three core documents
and known as Basel-III.
Bangladesh Bank has circulated
Basel-III implementation Roadmap
December 21, 2014.
Implementation phases of Basel
III during January 2015 to
December 2019.
The Basel-III propositions have
been formulated by incorporating
the theme points. These are to
strengthen the capital framework of
banks, uplifting the quality,
constancy & transparency of the
capital base, widening risk
coverage, supplementing the RBC
requirement with a leverage ratio,
shrinking pro-cyclicality and
supporting countercyclical buffers,
cyclicality of the minimum
requirement, forward looking
provisioning, capital conservation,
excess credit growth, addressing
systemic risk and
interconnectedness, to commence
a global liquidity standard,
liquidity coverage ratio (LCR) and
net stable funding ratio (NSFR),
The Major Concerns of the

Risk Management
Committees
a) Investment Risk Management
Committee
Supervises and monitors
investment concentration,
investment risk grading, corporate
clients rating, non performing
investment, residual risk against
investment, provision against
classified investment, investment
mix, asset quality etc.
b) Asset Liability Committee
(ALCO)
To look after the asset-liability risk,
liquidity risk, Investment Deposit
Ratio (IDR), deposit mix,
investment mix, gap analysis etc.
c) Foreign Exchange Risk
Management Committee
Oversees foreign exchange risk,
treasury, net open position, import
& export business, dealing room
operations and anti-money
laundering aspects in foreign
exchange transactions etc.
d) Internal Control and
Compliance Risk Management
Committee
To assess and mitigate the risk
related to compliance with
regulatory requirements, set rules
of the Bank, internal checking
system, lapses, fraud, forgeries,
violations of the set rules etc.
e) Money Laundering Risk
Management Committee
Looks after the money laundering
activities, STR, CTR, KYC and TP
related compliances. The
committee also supervises and
monitors the entire transactional
activities of the Bank including
money laundering aspects involved
with foreign exchange transactions.
55
f)
Information &
Communication Technology
Risk Management Committee
Monitors and supervises the risks

related to data security, physical
security, network security, disaster
recovery, fraud, forgery, system
failure and business continuity etc.
Bangladesh Bank vide Bangladesh
Bank vide their BRPD circular
No.20, dated 31 December, 2009
issued a detail guideline on Risk
Based Capital Adequacy (RBCA)
for Banks. A separate Supervisory
Review Process Guideline has also
been circulated to the scheduled
banks vide BRPD Circular No.13
dated 21 April, 2010 and
subsequent letter No. Letter No.
BRPD(BIC)661/14B(P)/2013-194
dated May 16.2013 of the Central
Bank. In addition, the Central Bank
vides DOS Circular 01 dated April
21, 2010 and subsequent DOS
Circular No. 01, dated February
23, 2011 has also issued
Guidelines on Stress Testing. In
order to ensure the aforesaid Basel
related guidelines, banks are asked
to form more 3 (three) separate
Committee which are (a) Basel
Implementation Committee, (b)
Stress Testing Committee and (c)
Supervisory Review Process Team.
Formation of Risk
Management Committee of
the Board
The Government of the Peoples
Republic of Bangladesh amended
the Bank Company Act 1991 on
the 22nd July, 2013 having the title
of the Act Bank Company
(Amendment) Act 2013 Act No.
27. Section 15 (Kha) has been
newly been incorporated after
section 15 (ka ka) of the Bank
Company Act 1991 which states:
Quote: 15 (Kha): Role of the Board(1) The Board of Directors shall be
liable for formulation of policy,
56
implementation, risk management,

internal control, internal audit and
compliance of the Company there
against.
v. Reputation Risk (1 particulars

& 7 sub category)
(2). Each Bank Company shall form

an Audit Committee comprising of
those directors from the Board who
are not the members of the
Executive Committee.
B. Capital Adequacy Statement

under Basel Regime
(3). Each Bank Company shall form

a Risk Management Committee
comprising of the members from
the Board.
In order to ensure good corporate
governance in the Banking
Industry, Bangladesh Bank in the
light of the above Act detailed the
structure and the responsibilities of
Board of Directors vide BRPD
Circular No. 11 dated 27 October,
2013. In this Circular, Bangladesh
Bank has given a detailed Terms of
Reference (ToR) of the newly
introduced Risk Management
Committee of the Board.
vi. Others Risk. ( 6 particulars)
Bangladesh Bank vide BRPD

and advised the Bank to submit the
Statement of Capital Adequacy to
the Bangladesh Bank on half yearly
basis. Later on Bangladesh Bank
29.12.2010 and advised the Bank
to submit the Statement of Capital
Adequacy to the Bangladesh Bank
on quarterly basis.
C. Stress Testing Report
Bangladesh Bank vide DOS
and advised the Bank to submit the
Stress Testing Report to the
Bangladesh Bank on quarterly
basis.
Regulatory Reporting of Risk

Management
D. Internal Capital Adequacy

Assessment Process (ICAAP)
A. Risk Management Paper
Bangladesh Bank vide letter no.

BRPD/(BIC)661/14B(P) 2014-2917
dated 21.05.2014 and advised the
Bank to submit the ICAAP report
along with Supervisory Review
Process (SRP) Document to the
Bangladesh Bank on yearly basis.
Bangladesh Bank introduced Risk

Management Paper (RMP) vide
their letter of 24-01-2013 and
advised the Bank to submit the
same to the Bangladesh Bank on
quarterly basis. This RMP contains
55 particulars parameters/subjects/
topics under the following risk
categories:
i.
Investment (Credit) Risk ( 26

particulars)
ii. Market Risk ( 5 particulars)

iii. Liquidity Risk ( 16 particulars)
iv. Operational Risk ( 1 particulars
& 7 sub category)
Conclusion
Managing risks is one of the most
complicated tasks today in the
financial industry. Thus, it is
essential to engage the appropriate
professionals. The accounting
professionals are the most
recognized and capable
professionals for managing risks
across the businesses.
The Author is Member Council &
the Past President, ICAB
Making it with ICT

for Emerging Entrepreneurs
K Atique - e - Rabbani FCA
Vast Universe of ICT
(Information and Communication

Technology)
ICT (Information and Communication

Technology) offers an ocean of
opportunity. One, however, needs to be
patient, do ones own study/ research to
be aware of this vast universe.
Entrepreneur must also identify his/her
chosen area to focus on. Any emerging
entrepreneur should also realize that any
window of opportunity is transient.
Nevertheless with right and sustained
determination and focus one can find
success along the way.
The universe of ICT comprises on a broad
brush of hardware and software.
Hardware manufacturing/ assembly is
generally capital intensive and it is the
domain of few big to mega corporations in
the world. Within Software, application
software (or apps on mobile phones) and
IT related services pose greater
opportunity for emerging entrepreneurs.
Application Software abound and one
must creatively find a particular
application area for which one wants to
provide a solution. IT related services
again have a very wide canvas and one
must choose carefully a niche to focus on.
One must also keep abreast of newer
areas of opportunity/ activity evolving
continually within the IT Universe. One
must be nimble and agile and re-strategize

often as market shifts. Existing popular
application software such as Facebook
social media software or SAP, a leading
ERP software always offer opportunities in
that improvements through add-ons to add
new features or enhance user experience
are always good business proposition.
Content creation by those suitably
qualified (knowledge, language and
expression wise) will continue to be in
demand. Web analytics (analyzing web
site traffic data, market research
information generated from sites), Social
media optimization (such as
designing/maintaining Facebook page for
corporate bodies) are also new areas for
emerging entrepreneurs. Couple of
suitably qualified friends armed with PCs,
Internet and some tools can start off an
Application Software or some IT Services
company from their own homes.
Software and ICT is taking over

the World
Software is taking over the world and
good programmers will be the super stars
of this universe. Software development
and marketing companies will proliferate.
Software companies are poised to take
over large swathes of the economy. Apple
in 2012 became the biggest company in
the world in market valuation surpassing
Exxon Mobil followed by Microsoft and
Google. More and more businesses and
57
industries are being run on

software and being delivered as
online services from movies to
banks to national defense. Software
has matured over years and now
can be said to work after four
decades since the invention of the
microprocessor and two decades
into the rise of internet. More and
more disruptions of traditional
industry by software will happen in
the coming days. Borders, a
traditional mega book store (started
by two brothers in 1971 in Ann
Arbor, Michigan, USA) filed for
bankruptcy while Amazon.com, an
online BVM (books, video and
music) outlet to start with (founded
about 20 years later in 1994 by Jeff
Bezos in Seattle, Washington,
USA) grows from strength to
strength. Amazon.com sells
everything online and has Kindle
digital book replacing physical
books. Books are now software
too. Amazon.com continues to
threaten Barnes & Noble, a Fortune
500 company and the largest retail
bookseller in US. The underlying
theme in all above is Amazon.com
and such companys ability to
remain agile and improve
customer experience almost on a
day to day basis. Customers will
expect nothing less and ruthlessly
reject slow movers. Thus for most
companies failure to acquire digital
agility will become an existential
threat. Acquiring digital agility
through heightened use of
Software and ICT is thus a strategic
necessity. Here lies rainbow of
opportunity for emerging ICT
entrepreneurs.
Barriers to Entry are Low

and Getting Lower but
Barrier to Success is Still
High
It is generally true that setting up to
be an ICT / Software entrepreneur
is easy. Development tools are
mostly free. Sales and Marketing
tools, customer support tools,
social media management tools
and tools in almost all product
58
category are free or next to free.

One can turn to blogs, mentoring
programs, meet-ups and other
educational opportunities that did
not quite exist in pre internet days.
One can ask StackOverflow if one
has a technical question. But
expectations from customers are
set by likes of Apple, Facebook,
Google. Unfortunately customers
expect the same from even the
small startups. Thus while entry
barriers may be low success is for
those with most determination and
focus.
Bangladesh Perspectives
Bangladesh is a fertile place for
emerging entrepreneurs in
Software and ICT field in general.
There are already estimated
250,000 technical people working
in this sector. BASIS (Bangladesh
Association of Software and
Information Services) formed in
1997 with 17 charter members in
Software and ITES industry (author
is one of the founder charter
members) now has over 800
members. There are also over
60,000 freelancers providing all
kinds of IT and non IT related
services using freelancing websites.
These individual freelancers have
also banded together to form ICT
companies. BASIS member
companies are involved amongst
others in Software Development,
Web Application Development,
Web Site designing and
maintenance, E Commerce,
Content Development, Graphics
Design, 3D Animation, Games
development, Mobile Apps
development and ICT Training.
ICT industry in Bangladesh has
grown over 20-30% consistently in
recent years. Favourable
demographic and macro economic
trends, high growth rate and a
relatively liberal investment
climate has convinced Goldman
Sachs and JP Morgan to identify
Bangladesh as one of the most
attractive emerging economies.
World Bank funded LICT

(Leveraging ICT for growth,
employment and Governance)
project of BCC (Bangladesh
Computer Council) under ICT
division launched in early 2014
aims to train 34000 male (70%)
and female (30%) graduates.
Training will be for 10,000
graduates in Top up IT specialized
training, for 20,000 graduates in
ITES Foundation training and for
4000 graduates in FTFL (Fast Track
Future Leaders) (3 months training
course) for employment in IT/ITES
industry. SME loans for Software
and IT Companies, introducing
PayPal in Bangladesh, increasing
limit of money repatriation for
Software companies, abolition of
obstacles in software import are
some of the areas where
Bangladesh Bank are working.
Fenox Venture Capital has already
invested in Bangladesh. Moreover,
AB Kinnevik of Switzerland, SNT
Classified, Rocket Internet of
Norway and many other renowned
companies of the world have
invested in the ICT sector of
Bangladesh. One of the worlds
largest Online Payment Gateway
Service (OPG) providers Payoneer
Inc., USA have opened shop in
Bangladesh. This has been a relief
for growing freelancers in
Bangladesh earning and bringing
lot of foreign currencies into the
country.
Above are indicative of a
Bangladesh that should be
brimming with activities in
Software an ICT field in the coming
days. These are signs of
opportunities knocking for
emerging Software and ICT
entrepreneurs in Bangladesh. They
must go and grab them, and in the
process do themselves and the
country proud.
The Author is the Managing Director,
The Computers Ltd. (TCL) and
Director, Dhaka Chamber of
Commerce and Industry
Effective Risk Management in Business

Md. Hafizur Rahman ACA
Introduction
Risk is the possibility of loss or injury.
Project risk is an uncertain event or
condition that, if it occurs, has an effect on
at least one project objective. Risk
management focuses on identifying and
assessing the risks to the project and
managing those risks to minimize the
impact on the project. There are no
risk-free projects because there are an
infinite number of events that can have a
negative effect on the project. Risk
management is not about eliminating risk
but about identifying, assessing, and
managing risk.
In business, risks prowl at every turn,
competitor innovations that threaten the
viability of your products or services, new
players in the market place, adverse trends
in commodity prices, currencies, interest
rates or the economy. Throw in potential
disruptions to supply chains that have
been stretched across thousands of miles
and country borders by globalization, and
the opportunity for something to go wrong
is, to say the least, worrisome.
Organizations who are tempted to short
change their risk management efforts will
find potential consequences can be
severe, from a loss of competitiveness to,
in the extreme, having to cease operations
altogether.
Risk Management
Risk management involves identifying,
analyzing, and taking steps to reduce or
eliminate the exposures to loss faced by
an organization or individual. The practice
of risk management utilizes many tools
and techniques, including insurance, to
manage a wide variety of risks. Every
business encounters risks, some of which
are predictable and under management's
control, and others which are
unpredictable and uncontrollable.
Risk management is particularly vital for
small businesses, since some common
types of lossessuch as theft, fire, flood,
legal liability, injury, or disabilitycan
destroy in a few minutes what may have
taken an entrepreneur years to build. Such
losses and liabilities can affect day to day
operations, reduce profits, and cause
financial hardship severe enough to
cripple or bankrupt a small business. But
while many large companies employ a full
time risk manager to identify risks and take
the necessary steps to protect the firm
against them, small companies rarely have
that luxury. Instead, the responsibility for
risk management is likely to fall on the
small business owner.
The term risk management is a relatively
recent (within the last 20 years) evolution
of the term "insurance management." The
59
concept of risk management

encompasses a much broader scope
of activities and responsibilities than
does insurance management. Risk
management is now a widely
accepted description of a discipline
within most large organizations.
enterprise risk management, which

was intended to implement risk
awareness and prevention programs
on a company wide basis.
"Enterprise risk management seeks to
identify, assess, and control
sometimes through insurance.
Basic risks such as fire, windstorm,

employee injuries, and automobile
accidents, as well as more
sophisticated exposures such as
product liability, environmental
impairment, and employment
practices, are the province of the risk
management department in a typical
corporation. Although risk
management has usually pertained to
property and casualty exposures to
loss, it has recently been expanded
to include financial risk
managementsuch as interest rates,
foreign exchange rates, and
derivativesas well as the unique
threats to businesses engaged in E
commerce. As the role of risk
management has increased, some
large companies have begun
implementing large scale,
organization wide programs known
as enterprise risk management.
The main focus of enterprise risk

management is to establish a culture
of risk management throughout a
company to handle the risks
associated with growth and a rapidly
changing business environment.
Writing in Best's Review, Tim
Tongson recommended that business
owners take the following steps in
implementing an enterprise wide risk
management program:

In the 1990s, the field of risk
management expanded to include
managing financial risks as well as
those associated with changing
technology and Internet commerce.
As of 2000, the role of risk
management had begun to expand
even further to protect entire
companies during periods of change
and growth. As businesses grow,
they experience rapid changes in
nearly every aspect of their
operations, including production,
marketing, distribution, and human
resources.
Such rapid change also exposes the
business to increased risk. In
response, risk management
professionals created the concept of
60
incorporate risk management

into the core values of the
company,
support those values with

actions,
conduct a risk analysis,
implement specific strategies to

reduce risk,
develop monitoring systems to

provide early warnings about
potential risks, and perform
periodic reviews of the program.
Finally, it is important that the small

business owner and top managers
show their support for employee
efforts at managing risk. To bring
together the various disciplines and
implement integrated risk
management, ensuring the buy in of
top level executives is vital. Luis
Ramiro Hernandez wrote in Risk
Management. "These executives can
institute the processes that enable
people and resources across the
company to participate in identifying
and assessing risks, and tracking the
actions taken to mitigate or eliminate
those risks."
ALTHOUGH RISK
MANAGEMENT HAS
USUALLY PERTAINED TO
PROPERTY AND
CASUALTY EXPOSURES
TO LOSS, IT HAS
RECENTLY BEEN
EXPANDED TO INCLUDE
FINANCIAL RISK
MANAGEMENTSUCH
AS INTEREST RATES,
FOREIGN EXCHANGE
RATES, AND
DERIVATIVESAS WELL
AS THE UNIQUE
THREATS TO
BUSINESSES ENGAGED
IN E COMMERCE.
Risk in Business
Means of measuring and assessing
risk vary widely across different
professions The various means of
doing so may define different
professions, e.g. a doctor manages
medical risk, a civil engineer
manages risk of structural failure,
etc. A professional code of ethics is
usually focused on risk assessment
and mitigation (by the professional
on behalf of client, public, society
or life in general).
Risk in Finance
Risk in finance has no one
definition, but some theorists,
notably Ron Dembo, have defined
quite general methods to assess
risk as an expected after the fact
level of regret. Such methods have
been uniquely successful in
limiting interest rate risk in
financial markets. Financial
markets are considered to be a
proving ground for general
methods of risk assessment.
However, these methods are also

hard to understand. The
mathematical difficulties interfere
with other social goods such as
disclosure, valuation and
transparency. In particular, it is
often difficult to tell if such
financial instruments are "hedging"
(decreasing measurable risk by
giving up certain windfall gains) or
"gambling" (increasing measurable
risk and exposing the investor to
catastrophic loss in pursuit of very
high windfalls that increase
expected value).
As regret measures rarely reflect
actual human risk aversion, it is
difficult to determine if the
outcomes of such transactions will
be satisfactory. Risk seeking
describes an individual who has a
positive second derivative of
his/her utility function. Such an
individual would willingly
(actually pay a premium to) assume
all risk in the economy and is
hence not likely to exist. In
financial markets one may need to

measure credit risk, information
timing and source risk, probability
model risk, and legal risk if there
are regulatory or civil actions taken
as a result of some "investor's
regret".
Every Business Faces the

Same 5 Key Risks
Development Risk
Can the original product or service

idea actually be created?
Manufacturing Risk
If the product can be developed,

can it actually be produced in
appropriate volume?
Marketing Risk
If the product can be made, can it

be sold effectively?
61
Financial Risk
loss may occur and being

prepared to pay the
consequences. Reducing risks,
or loss reduction, involves
taking steps to reduce the
probability or the severity of a
loss, for example by installing
fire sprinklers.
If the product can be sold

effectively, will the resulting
company be profitable and can the
profits actually be realized in a
form that allows investors to
receive cash
Growth Risk
If the company can achieve

operating profitability at one level,
can profitability be maintained as
the company grows and evolves?
Steps in the Risk

Management Process
According to C. Arthur Williams Jr.
and Richard M. Heins in their book
Risk Management and Insurance,
the risk management process
typically includes six steps.
These steps are:
determining the objectives of

the organization,
identifying exposures to loss,
measuring those same

exposures,
selecting alternatives,
implementing a solution, and
monitoring the results.
Businesses have several

alternatives for the management of
risk, including avoiding, assuming,
reducing, or transferring the risks.
Avoiding risks, or loss prevention,
involves taking steps to prevent a
loss from occurring, via such
methods as employee safety
training. As another example, a
pharmaceutical company may
decide not to market a drug
because of the potential liability.
62
Assuming risks simply means

accepting the possibility that a
Transferring risk refers to the

practice of placing
responsibility for a loss on
another party via a contract.
The most common example of
risk transference is insurance,
which allows a company to pay
a small monthly premium in
exchange for protection against
automobile accidents, theft or
destruction of property,
employee disability, or a
variety of other risks. Because
of its costs, the insurance
option is usually chosen when
the other options for managing
risk do not provide sufficient
protection. Awareness of, and
familiarity with, various types
of insurance policies is a
necessary part of the risk
management process. A final
risk management tool is self
retention of riskssometimes
referred to as "self insurance."
Companies that choose this
option set up a special account
or fund to be used in the event
of a loss.
Any combination of these risk

management tools may be applied
in the fifth step of the process,
implementation.
The final step, monitoring, involves
a regular review of the company's
risk management tools to
determine if they have obtained
the desired result or if they require
modification. Nation's Business
outlined some easy risk
management tools for small
businesses: maintain a high quality
of work, train employees well and
maintain equipment properly,

install strong locks, smoke
detectors, and fire extinguishers,
keep the office clean and free of
hazards, back up computer data
often, and store records securely
offsite.
As with so many business
initiatives, the success of a risk
management programme depends
on the active support of senior
management.
They are Inclusive
Effective risk management

programs do not rely on the work
and resources of any single person
or group within the organization.
While often led by a risk
management officer, the best
programs draw on the input and co
operation of every part of the
organization.
They are Transparent
Risk management programs work

best and companies reap the
greatest possible benefit from them
when their goals, processes and
results are shared with all the
companys stakeholders.
They are Holistic
The best risk management

programs not only address all the
risks to which modern corporations
are susceptible, they also consider
how these various risks can affect
the companys stakeholders and
operations.
They are Proactive
Effective risk management

programs do not merely insure
companies against downside risks,
they also include proactive systems
and processes to maximize the
opportunities the opportunities
presented by variable risks.
When will a Particular

Strategy for Managing
Country Risk be most
Appropriate?
The selection of an appropriate
strategy is likely to depend on
characteristics of the firm, its
industry and competitive
environment, the resources and
markets accessible in different
countries, the modes of entry that
are feasible to enter those
countries, and other factors.
While many of these factors are
idiosyncratic in nature, the relation
between strategies for managing
country risk and the size and/or
age of the firm is likely to be more
systematic, given that there are
predictable differences in the
ability, motivation, and awareness
of large, established firms versus
SMEs and young firms. Large,
established firms are likely to have
greater resources and more market
power, which will likely lead them
to pursue strategies such as
diversification and control to
manage country risk.
SMEs and newly established
ventures, on the other hand,
typically exhibit resource scarcity
but also maintain organic,
decentralized, and flexible
organizational structures, which
may give them an advantage in the
implementation of strategies that
require a willingness to change,
particularly when change is driven
by information acquired in
international operations, which are
generally peripheral to the
organization's core.
This means that SMEs and young
firms may be more likely to pursue
arbitrage/prediction, real options,
and adaptation strategies, though
large, established firms are not
necessarily precluded from
pursuing these strategies as well.
An overview of the eight strategies,
their objectives, and their scope is
presented in below :
Strategy
Objective
Avoidance
Minimization of
downside risk
Financial Hedging
Minimization of
downside risk
All
Transfer
Minimization of
downside risk
All
Diversification
Minimization of
downside risk
Exploitation of
upside risk
Exploitation of
upside risk
Exploitation of
upside risk
Exploitation of
upside risk
Established,
large firms
SMEs, young
firms
SMEs, young
firms
Established,
large firms
SMEs, young
firms
Arbitrage/
Prediction
Real Options
Control
Adaptation
Risk Management in the

Internet Age
Small businesses encounter a
number of risks when they use the
Internet to establish and maintain
relationships with their customers
or suppliers. Increased reliance on
the Internet demands that small
business owners decide how much
risk to accept and implement
security systems to manage the risk
associated with online business
activities. "The advent of the
Internet has provided for a totally
changed communications
landscape.
Conducting business online
exposes a company to a wide
range of potential risks, including
liability due to infringement on
copyrights, patents, or trademarks,
charges of defamation due to
statements made on a Web site or
via e mail, charges of invasion of
privacy due to unauthorized use of
personal information or excessive
monitoring of employee
communications, liability for
harassment due to employee
behavior online, and legal issues
due to accidental noncompliance
with foreign laws.
Firms most
likely to use
strategy
All
Strength, Weakness, or
Limitation in Scope
Opportunity risk (i.e., risk of
missing opportunities that
competitors exploit)
Markets for hedging
instruments are widespread,
but upside risk may decline.
SMEs use due to resource
scarcity.
Large firms use due to risk
aversion.
Requires deep resources.
Requires decentralized,
organic stucture.
Not feasible for inert. rigid
organizations.
Requires deep resources and
market power.
Requires ability to allow
peripheral activities to
change the firms core.
Conclusion
The importance of risk
management in projects can hardly
be overstated. Awareness of risk
has increased as we currently live
in a less stable economic and
political environment.
In pursuing this goal, companies,
now more than ever, would do
well to begin by identifying their
top drivers, then pinpointing the
top threats to those revenue
drivers, and distinguishing
between those that are
predominantly downside risks and
those that are predominantly
variable risks.
While both categories of risk
deserve attention, companies may
discover the effectiveness of their
risk management programs are
most effective if they devote more
of their attention to controlling risk
rather than transferring it to
insurance companies. And the risks
that can be most directly controlled
are downside risks, the very risks
that are most likely to threaten
companys top revenue drivers.
When downside risks are dealt
with first through prevention and
63
control, it enables senior

management to deal more
aggressively with variable risks. In
short they become more proactive
and strategic with their risk
management approach.
Because companies indicate that
they expect having trouble finding
the time, budget and people
necessary to implement or
maintain a strong risk management
program, senior management must
demonstrate leadership in
championing and funding this
initiative. The number one
consequence of poor risk
management is loss of
competitiveness.
By implementing an effective risk
management program, companies
protect their ability to compete.
Nothing is more fundamental to
business success.
64
References
National Association for Business

Economics, Volume 42, Number 1
Amram, M., & Kulatilaka, N. (1999):

Real options. Harvard Business School
Press.
Knight, F. H. (1921): Risk, Uncertainty,

and Profit. Houghton Mifflin Company.
Chapman, C., & Ward, S. (1997):

Project risk management. JOHN
WILEY & Sons.
Courtney, H., Kirkland, J., and
Viguerie, P. (1997): Strategy under
uncertainty. Harvard Business Review.
November/ December
Kagan, C. B. and Ford, D.N. (2002):
Using Options to Manage Dynamic
Uncertainty in Acquisition Projects.
Acquisition Review Quarterly Fall
2002
Barnett, M.L. (2005): Paying attention
to real options. R&D Management
Blackwell Publishing Ltd
Hausmann, R., Sturzenegger, F. (2007):
The Valuation of Hidden Assets in
Foreign Transactions: Why Dark
Matter Matters. The Journal of the
Peter Romilly, P. (2007): Business and

climate change risk: a regional
time series analysis. Journal of
International Business Studies.
Ephraim Clark, E., Marois, B. (1996):
Managing Risk in International
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Oetzel, J.M., Bettis, R.A. and Zenner,
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The Author is an Associate

Member, ICAB
A Study on the Compliance of Bangladesh

Banks Policy Guidelines for Green Banking
1
Md. Ahasan Uddin | 2Sabuj Chandra Bhowmik
Abstract
Environmental safety & sustainability is no
more a mere catchphrase for the people
of the planet. The human and corporate
citizens are working jointly towards
building the Earth as a safe abode for all of
us. In consequence, Green Banking has
evolved as the symbol of responsibility
and accountability that different banks
have towards the earth and its people.
Bangladesh has accepted the green
banking initiatives and practices cordially
and in line with that Bangladesh Bank has
issued a comprehensive guideline for
green banking. This study aims to analyze
the compliance of Bangladesh Banks
guideline by the private commercial banks
(PCBs) of Bangladesh. Further, the study is
targeted to justify whether the compliance
level is affected by any other factors. The
study has utilized the secondary data
available in annual reports, related
websites and research papers. The
findings of the study show the average
score of compliance by the PCBs is 12.96
(13 approximately) out of 24 disclosures
requirement. And most of the banks fall
between the ranges of 4 from 13 and it
also concludes that compliance level is
not significantly affected by the
considered factors (Paid-up Capital,
Investments, Loans & Advances, Profit
after Tax and CSR Cost) of this study. In
conclusion, the study recommends some
significant steps to be taken and sketches

the route for further study to be made on
same direction.
Keywords: Green Banking, Environmental
Sustainability, Bangladesh Bank,
Compliance Level, Private Commercial
Banks, Bangladesh Banks Policy
Guideline.
Introduction
Earth is the only known inhabitable planet
in our universe. But the earth is getting
endangered gradually by the human
activities. The environmentally destructive
activities of people are making our planet
less livable. It has now become a sacred
duty of every citizen to come forward and
to contribute in saving the world from the
environmental pollution and this is where
the concept of Green comes into picture.
The term Green actually refers the green
environment of our planet which has
made it habitable. Bank is one of the most
important corporate citizens as it
influences the industrialization and the
economic development of any country to
a large extent. Banks have the power to
affect the environment a lot through their
activities. So the banks should engage in
taking up the responsibility of
safeguarding the environment as well.
Green Banking is the way in which banks
can take part in the sustainable
development of the environment. Green
65
banking has become a very

important concept of todays world.
Many of the countries along with
Bangladesh have accepted the green
banking activities. Green Banking
mainly is an umbrella term referring
to the activities, practices and
guidelines that make the banks
sustainable in economic,
environment and social dimensions
(Green Banking Framework, IDRBT,
2013). Green Banking activities are
nothing different from the banks
normal activities, it only refers that
the activities of a bank are socially
responsible and are guided to ensure
the environmental sustainability.
Green banking activities includes
ensuring in-house green performance
and also promoting environmentally
safe (green) products, supporting
green activities and engaging in
green finance (investing in
environment-safe projects), thus
ensuring the external safeguard as
well. Green banking is not just a part
of banks CSR activities; making
customer aware of the banks
attitude towards environment will in
turn make a strong and loyal
customer base.
Bangladesh is one of the worst
sufferers of environmental
degradation. As a result, Bangladesh
has also accepted the green banking
activities whole-heartedly.
Bangladesh Bank is the first central
bank in the world which has taken
real initiatives and has issued a
comprehensive policy guideline for
green baking (Green Banking Report
of Bangladesh Bank,
2012).Bangladesh Bank issued a
policy guideline for green banking
(BRPD Circular No. 02) in February
2011 in which Bangladesh Bank has
set out some initiatives to be
maintained by all scheduled banks to
ensure the green banking activities.
There are many previous studies
conducted to depict the prospects of
green banking in Bangladesh or the
initiatives that have been taken by
particular bank. This study aims at
66
finding out the current situation of

the banks in complying Bangladesh
Banks guideline and also to assess
whether the level of compliance in
each bank is influenced by any other
factor. This study is conducted on
the scheduled private commercial
banks.
Literature Review
Global warming, Climate change
and Environmental degradation are
the biggest challenges the world is
facing today. The financial and
economic development of any
country is inextricably linked to the
extent of their environmental
vulnerability. Banks have an
undeniable duty towards the
environmental safety and to justify
that several researches have been
made on Green Banking. Alice
Mani (2011)has stated As Socially
Responsible Corporate Citizens
(SRCC), banks have a major role and
responsibility in supplementing
governmental efforts towards
substantial reduction in carbon
emission. Banks participation in
sustainable development takes the
form of Green Banking. Saleena
T.A. (2014) acknowledged the
reasons for going green in her paper.
Banks should not squeeze
investments and clamp down on
economic activities only; rather they
need to concentrate on sustainable
finance to cope with the changes in
the climate or in the environmental
condition (BB Green Banking Report,
2012). While presenting the paper
Green Banking Prospects in
Bangladesh; Rahman, Ahsan,
Hossain&Hoq (2013) has stated that
the banking sector is one of the
major sources for financing in
commercial projects such as; brick
field, steel, paper, cement, chemical,
power, textiles etc. which cause
maximum carbon emissions. Thus,
banking sector can contribute a lot in
the economic development and
environment protection by financing
DESPITE THE
FACT THAT
BANGLADESH IS
FAR-FLUNG FROM
ACHIEVING THE STATUS
OF A GREEN ECONOMY,
IF THE CITIZENS, HUMAN
AND CORPORATE BOTH,
REALIZE THEIR ROLE IN
CURBING THE
POLLUTION AND
ENVIRONMENTAL
DEGRADATION AND
WORK HAND-IN-HAND,
THE JOINT EFFORT CAN
SURELY SMOOTHEN THE
ROAD AND LEAD THE
WAY TO LEAVE A BETTER
WORLD FOR OUR
OFF-SPRINGS.
in green projects. It is suggested

that banks can be green through
bringing changes in six main
activities: Investment management,
Deposit Management,
Housekeeping, Human Resources,
CSR and increasing awareness
(Rahman, Ahsan, Hossain&Hoq,
2013).
Banks operate for profit. But the
profit should not be earned at the
cost of the dearest Earth and its
sustainability. Hossain&Kalince
(2014) showed that the green
banking activities has a positive
relation on banks profitability
which is further encouraging the
banks to expand their green
movements. Thus the concept of
green banking has evolved to
ensure profitability besides
environmental safety.
Masukujjaman & Serena (2013) has
shown in their paper that
Bangladesh lagged far behind from
other developed countries in
adopting green banking. But they
added that the picture of adoption

of green banking in Bangladesh is
consistently developing. As the
customers are getting well aware
about their sustainable
development, the level of
engagement in green activities by
any bank is becoming vital for their
growth as well. As a result, banks
are getting step-forwarded in
evaluating the factors essential for
their survival. Six main factors:
Economic Factor, Policy Guideline,
Loan Demand, Stakeholder
Pressure, Environmental Interest,
and Legal Factors are found to
have influence on the green
banking activities of a bank
(Ahmad, Zayed&Harun, 2013).
Green Finance has become the
major way in which banks are
contributing to environment safety.
Islam & Das (2013) stated green
finance as a branch of green
banking that makes significant role
to the transition to resource
efficient and low- carbon
industries. They also have

supported similar findings as
Masukujjaman & Serena (2013)
that the advancement of green
banking practices in Bangladesh
are not satisfactory till now. Apart
from the green financing activities
green products, green marketing,
online and mobile banking etc. are
the initiatives that are adding to the
green approach towards making a
green economy. Khan (2012) has
stated in his article that green
economy is the one whose growth
in income and employment is
driven by public and private
investments that reduce carbon
emissions and pollution, enhance
energy and resource efficiency,
prevent the loss of biodiversity and
ecosystem services.
Bangladesh is one of the worst
sufferers of environmental
pollution and has already taken
steps for green banking. Ullah
(2013) conducted a comparative
analysis of green banking activities
67
of State-Owned Commercial Banks

(SCBs), Specialized Development
Banks (SDBs), Private Commercial
Banks (PCBs) and Foreign
Commercial Banks (FCBs). He
concluded that the performance of
PCBs and FCBs in green banking is
remarkable, whereas SCBs and
SDBs have not shown any
noticeable progress.
Bangladesh Bank has already taken
real initiatives and approach for
green banking. It has published a
comprehensive policy guideline for
green banking in February, 2011
(BRPB Circular No. 02) in which it
guided banks to finance projects
like solar energy, bio-gas, ETP to
create individual climate risk funds
and to incorporate the
environmental risk rating in banks
core risk management. As green
banking concept is worth to delve
into and the banks of Bangladesh
are instructed to comply with the
guidelines of Bangladesh Bank, this
study is devoted to explore the
situation of compliance of
Bangladesh Banks Policy
Guidelines by private commercial
banks (PCBs) in Bangladesh.
Rationale of the Study

Green Baking is one of the tools
which ensure environmentally
sustainable activities performed by
a major group of stakeholders. The
banks in Bangladesh are also
responsible to follow the green
activities in their banking business.
Bangladesh Bank has made it
mandatory for all the scheduled
banks to accomplish a certain
green tasks within specified
deadlines. The banks have already
progressed a lot in performing
those green activities. But all the
banks have not fulfilled equal stage
of the specified guideline. Some
banks have accomplished all of the
requirements whereas some other
banks have not completed the first
phase yet. This study is targeted to
68
find out the level of compliance in

scheduled private commercial
banks. It will present the
compliance score individually for
each studied bank and will also
show the compliance list which
will help in finding out which bank
has not fulfilled which of the tasks
yet. The study further aims to find
out whether the compliance score
is affected by any other variable as
the compliance among banks
differs significantly. The findings of
the study will facilitate further
research and will be able to
contribute in the steps taken by the
policy makers. This study will as
well contribute in Bangladesh
Banks approach of encouraging
banks to take-up green banking
activities.
Objectives of the Study

The broad objective of the study is
to analyze the compliance of
Guidelines for Green Banking by
the scheduled private commercial
banks (PCBs). The specific
objectives of the study are to
provide an insight on the
Guidelines for Green Banking
(BRPD circular no. 02), to find out
the compliance score of green
banking requirements for each
studied bank. The study also aims
to evaluate the level of compliance
accomplished by studied PCBs and
analyze whether the compliance
score is influenced by any other
factors and finally, to draw a
conclusion on the analyzed data
and to justify the findings derived.
Methodology of the Study

One of the main objectives of the
study is to find out the compliance
score of green banking
requirements. For this purpose 25
scheduled private commercial
banks (PCBs) have been selected
purposively. 24 out of the 25
studied banks are listed in DSE

(Dhaka Stock Exchange). The other
6 banks which are listed in DSE
could not be selected due to their
unavailability of information
needed for this study (Selected 25
banks are disclosed in Appendix
1).The study is conducted during
2014-2015. As the data of 2014
were not available at the time of
this study and the data of 2013
were the latest, the data of 2013
have been used for the purpose of
the study. The study is entirely
based on secondary data. The
secondary data have been
collected from annual reports,
related research papers on
sustainability reporting, green
banking reporting and websites of
the respective banks. All of the
annual reports are collected from
respective banks websites.
Content Selection
A manual approach has been
followed to collect the contents of
this study. For preparing the
compliance checklist, a conclusive
set of 24 requirements (Appendix
1) have been developed from the
Guidelines for Green Banking.
Then, the compliance
checklist(Appendix 1) has been
prepared by examining those 24
requirements individually for each
of the 25 studied banks. For the
second part of the analysis, 5
important variables have been
chosen purposively to test their
relationships with the calculated
compliance score derived from
Appendix 1. The amounts of those
5 variables have been presented in
Appendix -2.
Calculation of the Total
Compliance Score
The total compliance score has
been calculated in a dichotomous
process. The compliance has been
indicated as 1 and
non-compliance as 0. The set of

compliance derived in this process
for 25 banks are disclosed in
Appendix 1. This un-weighted
approach has been followed by
assuming that each of the 24
requirements is equally important
for all of the banks. Thus, the total
compliance score is calculated as
follows.
Total Compliance Score:
Where, 1 = if the item xi is

complied with; 0 = if the item is
not complied with; n = number of
items.
Techniques used for Data Analysis
Some statistical techniques such asMean, Standard Deviation,
Standard Error and Correlation
have been used in this study.
STATA software version - 12 has
been used for analyzing the data.
Overview of Green Banking

Green banking is creating a buzz
in the financial world. It is a form
of banking taking into account the
social and environmental impacts
and its main motive is to protect
and preserve environment (Alice
Mani, 2012). Green bank is an
ethical bank or environmentally
sustainable bank that ensures the
environmental safety and its
concern towards the well being of
citizens through its internal and
external activities. Green banking
is the effort to make the industry go
green and restoring the natural
environment as well. This concept
is equally beneficial to the
industry, economy and the
environment.
Banks hold aunique position in an
economic system that can
influence production, distribution

and other economic activities
through their financing and thus
can pollute the environment to a
great extent. Thats why; energy
and water efficiency and waste
reduction are of vast concern for
the banks (BRPD Circular No. 02).
Green banking involves two main
approaches: firstly, green banking
refers the green transformation of
banks internal operations and
secondly, green banking involves
the environmentally responsible
financing, weighing up the
environment-risks related to a
project before financing for
it(Green Banking in Bangladesh,
Bangladesh Bank).
Summary of the Bangladesh

Banks Policy Guidelines for
Green Banking
Bangladesh Bank has issued a
policy guideline for green banking
(BRPD Circular No. 02) in
February, 2011. The guideline has
specified the requirements needed
to be fulfilled by the banks of
Bangladesh. Bangladesh Bank has
adopted a comprehensive green
banking policy in a formal and
structured manner to encourage
the green banking activities in
Bangladesh. The guideline is
divided into three phases and each
phase has a deadline within which
every bank needs to cover the
requirements specified in that
phase. The phases are briefly
described below:
Phase I (Foundation)
In Phase I, Banks are guided to
formulate their green banking
policy and show commitment
towards environment through the
initiation of in-house green
performance. This phase was
directed to be accomplished within
December 31, 2011.
The banks are guided to formulate

the policy and adopt broad
environmental strategy approved
by their Board of Directors. They
are also required to establish a
separate Green Banking Unit or
Cell which will watch over the
green banking issues of the bank.
Banks are further guided to
incorporate Environmental and
Climate Change Risk as a part of
their existing Credit Risk
Methodology (CRM) and to
conduct the EnvRR (Environment
Risk Rating) before financing for
any project. Initiating in-house
environment management is
another important specification of
the Phase I. It includes reducing
the energy, water and paper
consumption; circulating Green
Office Guide to every employee
of the organization and installing
solar panels at the bank premises.
Banks are encouraged to finance in
eco-friendly business activities and
energy- efficient industries. Green
Finance by banks is offered to get
extra benefits. Banks are directed
to create Climate Risk Fund as a
part of their CSR expenses and
encouraged to finance in economic
activities of the cyclone, drought,
and flood prone areas. Banks are
further guided to introduce Green
Marketing, which are marketing of
the products that are presumed to
be environmentally safe. It also
includes activities like product
modifications, changes in
production process and in
packaging as well as in the
advertising process. Engaging in
Online Banking and supporting
Employee Awareness and Training
Programs to encourage green
banking are parts of Phase I too.
And finally banks are ordered to
report their initiatives/ practices to
Bangladesh Bank and in their
respective websites. Following
figure shows the requirements of
Phase I collectively.
69
Figure 1: First Phase of Bangladesh Banks Green Banking Policy Guideline

Incorporation of Environmental
Risk in CRM
Policy Formulation and

Governance
Online Banking
Introducing Green Finance
Phase I
Time Limit: 31 December,
2011.
Creation of Climate Risk Fund

Introducing Green Marketing
Source: Bangladesh Bank, BRPD Circular No. 02, 2011
Phase II (Intensification)
For strengthening the initiatives
taken in Phase I, Phase II is
formulated with further advanced
steps. It is the intensification stage
where banks are guided to follow
other requirements after they have
fulfilled the requirements of Phase
I. The time lining for Phase II
was December 31, 2012.
Banks are directed to formulate
their Sector Specific Environmental
Policies as the first requirement of
Phase II. The sectors for which
Initiating In-House Environment

Management
banks are guided to formulate

environmental policies are the
sensitive sectors such as;
Agriculture, Tannery, Leather,
Textile, Engineering, Chemicals,
Ship breaking etc. Banks are
further directed to set their Green
Strategic Planning and a range of
achievable green targets and to
disclose them in their annual
reports and in the websites. Apart
from these, banks are required to
set up green branches under this
phase. The green branches of any
bank are entitled to display a
Supporting Employee Training,

Consumer Awareness
Reporting Green Banking
Practices
special logo approved by the

Bangladesh Bank. The banks are
also required to ensure the
improved in-house performance
and to carry out rigorous programs
to educate employees and clients.
Finally, banks under this phase are
directed to start publishing their
separate Green Banking and
Sustainability Report showing their
past performances, current
activities and future initiatives. The
following figure depicts the
requirements of Phase II
collectively.
Figure 2: Second Phase of Bangladesh Banks Green Banking Policy Guideline
Sector Specific Environmental Policies

Improved In-House Environment
Management
Disclosure & Reporting of Green
Banking Activities
Green Strategic Planning
Phase II
Time Limit: 31 December,
2012.
Setting up Green Branches

Formulation of Bank Specific
Environmental Risk
Management Plan & Guideline
Rigorous Programs to Educate
Clients
Phase III (Diversification)

The last phase of the guideline is
about diversifying the green
banking activities of a bank. It is
directed that a system of
Environmental Management
should be in place before the
initiation of the activities of Phase
III in a bank. Banks are expected
to address the whole eco-system
70
through their environment friendly

activities and to design and
introduce innovative green
products.
Banks are further directed to
publish independent Green
Annual Report following
internationally accepted format like
GRI (Global Reporting Initiatives)
and there must be an arrangement
for verification of these publications

by an independent third party.
Finally, banks are said to report
their green banking practices in a
quarterly basis to Bangladesh Bank
in the stated format and also
guided to keep their annual reports
and websites updated with the
disclosures of green banking
practices and initiatives.
Figure 3: Third Phase of Bangladesh Banks Green Banking Policy Guideline
Phase III
Time Limit: 31 December, 2013
Designing and Introducing

Innovative Products
Reporting in Standard Format

with External Verification
Reporting Green Banking

Practices on Quarterly Basis
12 13 13
12
10
20
18
16
15
11
Pubali Bank
Prime Bank
Premier Bank
One Bank
NCC Bank
Mutual Trust Bank
Mercantile Bank
Jamuna Bank
Islami Bank Bangladesh
IFIC Bank
Exim Bank
Eastern Bank
Dhaka Bank
Dutch-Bangla Bank
Total Compliance
Requirement :24
City Bank
BRAC Bank
Bank Asia
16
United Commercial
11
15 14
13
18
Standard Bank
19
18 17
AB Bank
20
18
16
14
12
10
8
6
4
2
0
Southeast Bank
Analysis of the Compliance Level

of Each Bank
Following chart (Chart-1)

represents the result which has
been derived from the compliance
score calculation sheet. Here, the
compliance score for each bank
has been disclosed on the top of
each bar. The chart delivers that
the maximum compliance score is
20 which is accomplished by Trust
Bank; whereas the minimum
compliance score is 6 which is
performed by two banks- One
bank and Southeast Bank. Other
22 banks have resulted between
the ranges of 6 to 20.
Trust Bank
The banks of Bangladesh are

guided to follow the requirements
of green banking specified by
Bangladesh Bank in their Policy
Guidelines for Green Banking
(BRPD Circular No. 02, 2011).
There are total 24 requirements
specified in that guideline. This
study is targeted to find out the
extent to which the private banks
have complied with that guideline.
The data related to the green
banking which has been gathered
from different sources such as the
annual reports, the website of
respective banks, green banking
disclosures, and from sustainability
reports is used in developing the
total compliance score for each
bank. The sections of those
disclosures have been thoroughly
read and thus the total compliance
score out of 24 for each bank has
Social Islami Bank
This study is targeted to analyze

the compliance level of green
banking activities of scheduled
private commercial banks. Further
the relation of the compliance
level with other variables has been
evaluated to find out whether the
level is affected by other factors or
not. Thus, the analysis of this study
is segregated into two sections: the
first section describes the analysis
of the compliance level of each
bank and the second section
describes the relation of
disclosures score with different
considered factors(variable) and
the rest conclude the analysis of
this study by presenting the
findings in summary.
been produced. The compliance is

indicated by 1 and the
non-compliance is indicated by 0
in the compliance score
calculation sheet. The sheet
presents requirement-wise
compliance; the total score along
with the percentage of compliance
for each bank has been attached in
the Appendix 1 of this paper.
Standard Chartered Bank
Presentation of the Compliance

Level
Shahjalal Islami Bank
Analysis and Findings
Chart 1: Individual Green Banking Compliance Score of Each Bank

71
Percentage of Compliance
After calculating the total
compliance score, the percentage
of compliance for each bank has
been derived. Percentage of
compliance is derived to sum-up
the performance in green banking
of all 25 banks in some definite
categories. So, the percentage of
Bank Asia, BRA

AC Bank,
DBBL, Exim Baank, IBBL,
NCC Bank, Prime Bank,
Stan-Chart Ban
nk, UCBL
compliance has been divided into

four categories: 1-30%, 31-60%,
61-80%, 81-100%. Following
pie-chart (Chart-2) shows the
number of banks in each category
and also specifies which bank
belongs to which category. The
chart delivers that the majority of
banks (11 banks here) have
complied 31-60% of the total
Trust Bank
green banking compliance

requirements. On the other hand,
only 1 bank belongs to the highest
range (81-100%) of compliance of
total requirements. And, the
minimum range (1-30%) has been
complied by 4 banks whereas
61-80% has been complied by
second major group (9 banks in
total).
Southeast B
Bank,
SIBL, SJIBL,
One Bank
4
1-30%
%
31-60%
%
61-80%
%
81-100%
11
AB Bank, City Bank, Dhaka Bank,
Eastern Bank, IFIC Bank,
Jamuna Bank, Mercantile Ban
nk,
Mutual Trust Bank,
Premier Ban
nk, Pubali Bankk,
Stand
dard Bank
Chart 2: Percentage of Compliance and No. of Banks in Each Category
72
Analysis of the Compliance Level of Banks
The policy guideline for green banking is mandatory for every bank to comply with. And the Chart 1 above
has showed us that the maximum rate of compliance is 20 and the minimum is 6 out of total 24
requirements. On average, banks have complied with 12.96 (13 approximately) requirements till date. And
most of the banks fall between the ranges of 4 from 13. Following table depicts the value of mean, standard
deviation, maximum and minimum rate of compliance accomplished by the studied banks.
Table 1: Average Compliance Score & Dispersion among Compliance Rates
Variable
Observation
Mean
Std. Dev
Maximum
Minimum
Compliance Score
25
12.96
4.247352
20
Source: Developed by Authors using STATA Software

Following table shows the standard error of the sample mean which is 0.85 (approximately). The standard
error helps predicting what the Population Mean would have been. The range of 95% confidence interval
which has been derived using the standard error depicts the range within which the population mean would
possibly lie. It is seen that the calculated sample mean 12.96 falls within the range and the range is close to
the sample mean score. So, it can be said with 95% confidence that the sample mean significantly represent
the population mean. Thus, the analysis which has been conducted to obtain the average compliance score is
significantly representative of all banks compliance performance.
Table 2: Analysis of the Sample Mean Compliance Score
Variable
Observation
Mean
Std. Error
[95% Confidence Interval]
Compliance Score
25
12.96
0.8494704
11.20678
14.71322
Source: Developed by Authorsusing STATA Software

Previouslyin Chart 1, the compliance score for each studied bank has been presented individually and in
Chart 2, the number of banks is being shown under four major percentage categories. Now, the following
table is aimed to present the percentage of banks under each compliance score. The table also shows the
ranges of 95% confidence interval for each compliance score. All of the sample percentages fall within the
range which delivers that the percentage of banks under each compliance score represents the populations
performance significantly.
Table 3: Percentage of Banks under Each Compliance Score
Compliance Score
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Proportion
0.08
0.08
0.04
0.04
0.04
0.08
0.08
0.12
0.04
0.08
0.08
0.04
0.12
0.04
0.04
Std. Error
0.0553775
0.0553775
0.04
0.04
0.04
0.0553775
0.0553775
0.0663325
0.04
0.0553775
0.0553775
0.04
0.0663325
0.04
0.04

[95% Confidence Interval]

-0.0342935
0.1942935
-0.0342935
0.1942935
-0.0425559
0.1225559
-0.0425559
0.1225559
-0.0425559
0.1225559
-0.0342935
0.1942935
-0.0342935
0.1942935
-0.0169035
0.20569035
-0.0425559
0.1225559
-0.0342935
0.1942935
-0.0342935
0.1942935
-0.0425559
0.1225559
-0.0169035
0.20569035
-0.0425559
0.1225559
-0.0425559
0.1225559
(Number of Observation: 25)
73
Analysis of the Relation of

Compliance Level with Other
Variables
After the analysis of the
compliance score of each bank for
green banking activities, it is now
time to test the relation of
compliance score with other
variables present in a banking
business. It has been seen that the
compliance score is different for
different banks and there must be
some reasons why some banks
have complied with more
requirements than other banks.
Green banking activities of a bank
is influenced by many factors. But
there are some factors which are
powerful contributor than other
factors. The six major factors have
been found out by Ahmad,
Zayed&Harun (2013). Those
factors are Economic Factor, Policy
Guideline, Loan Demand,
Stakeholder Pressure,
Environmental Interest, and Legal
Factors. They explained that there
are several factors under these six
major categories and those factors
can affect the green banking
activities of a bank.
This study is targeted to find out
the relation of compliance score of
green banking with some specific
factors. For this purpose, five
important variables have been
chosen. The variables are Paid-up
Capital, Investments, Loans &
Advances, Profit after Tax and CSR
(Corporate Social Responsibility)
Cost. There are particular reasons
to choose these five variables
purposively. The reasons are:
Paid-up capital can be an
important indicator of a banks
willingness to contribute to the
environment as stakeholders will
be more encouraged to invest in an
environmentally conscious
organization. On the other hand,
the Investments and the amount of
Loans & Advances can also give a
hint of a banks environment
friendly initiatives. Then, the Profit
74
after tax can illustrate an indication

of whether a more profitable
organization is more
environmentally aware or not. And
finally, as green banking activities
are also a part of an organizations
CSR activities, the CSR Cost of a
bank can also be a sign of their
willingness to comply with the
requirements.
The data required for the purpose
of constructing a model to test the
relation between compliance score
and the five selected variables have
been collected from the Annual
Reports of 2013 of each bank. The
amounts of Paid-up Capital (BDT),
Investments (BDT), Loans &
Advances (BDT), and Profit after
tax (BDT) have been assembled
from the financial statements of
2013 of individual banks. But the
CSR Cost has been calculated
separately for each bank as the
amount of CSR Cost here includes
some other variables. The CSR
Cost of a bank includes the total
disbursement in CSR activities, the
green budget, the total amount of
green financing, the climate risk
fund, expense in employee
training/awareness building and
other relevant cost made for green
banking purpose.
Analysis of the Relation
To test whether there is any
relationship present between the
selected variables and the

compliance score, it is important to
state the hypotheses in the first
place. The hypotheses which are
targeted to test are given below:
H0= There is no significant
compliance score and the selected
variables (paid-up capital,
investments, loans & advances,
profit after tax and CSR cost).
H1 = There is a significant
compliance score and the selected
variables (paid-up capital,
investments, loans & advances,
profit after tax and CSR cost).
Now to test the relationship among
these variables, the correlation
analysis has been conducted at a
5% significance level. The
correlation analysis has
demonstrated whether there are
any statistically significant
relationships present between
disclosures index in one hand and
the selected variables(paid-up
capital, investments, loans &
advances, profit after tax and CSR
cost) on the other hand. Apart from
the correlation value, the analysis
has estimated a p-value which is
used to determine whether the
relationship is significant or not.
Following table delivers the result
of the correlation analysis.
Table 5: Correlation Matrix of Different Pairs of Variables

Variables
Compliance
Score
Paid-up
Capital
Investm
ents
Loans &
Advances
Correlation of Compliance Score

p-value
Correlation of Paid-up Capital
p-value
Correlation of Investments
p-value
1.0000
0.1605
(0.9998)
0.2012
(0.9978)
1.0000
0.4779
(0.2110)
1.0000
-
Correlation of Loans & Advances
0.3585
0.7224*
0.6516*
1.0000
p-value
Correlation of Profit after Tax
p-value
Correlation of CSR Cost
p-value
(0.7062)
0.2045
(0.9974)
0.3134
(0.8881)
(0.0007)
0.1678
(0.9997)
0.5966*
(0.0309)
(0.0062)
0.5734*
(0.0402)
0.4554
(0.3194)
0.5113
(0.1268)
0.8346*
(0.0000)
Profit
after Tax
CSR
Cost
1.0000
0.3501
(0.7707)
1.0000
-

(*indicates significant at 5% level)
The Correlation matrix table above

shows the correlation coefficients
and the significance level for each
pair of variables. It is found that the
Compliance Score is positively
associated with all other variables
but the associations are not
statistically significant for any
variable. The Paid-up Capital is
positively associated with
disclosures index with a
correlation value 0.16 which
indicates a very low level of
association between variables. The
relationship of Loans & Advances
and CSR Cost with disclosures
index are not statistically
significant at 5% level with a
correlation value 0.36 and 0.31
respectively which indicates loan
and advance activities of the
company do not directed to the
green banking initiatives also CSR
cost does show that bank CSR cost
is not associated with
implementing green banking
initiatives provided by Bangladesh
bank. Investments have positive
association with disclosures index
with a correlation value of 0.20
also indicates a very low level of
association between these two
variables. Finally banks profit
response to green banking
initiatives is also dissatisfactory
suggested by the correlation value

0.20 that does not show any
statistically significant relationship.
Actually none of the variables
shows any statistically significant
relationship associated with
selected variables therefore, we
can accept our null hypothesis
other is no significant relationship
present between the compliance
score and the selected variables
(paid-up capital, investments, loans
& advances, profit after tax and
CSR cost).
Summary of the Findings
The findings which have been
derived through the analysis and
which have been discussed
thoroughly in the above sections
are presented here to overview at a
glance:
The total compliance score of
the studied banks are minimum
6 and maximum 20 (out of 24).
Majority of the studied banks
have completed 31-60% of the
guidelines till date.
The average score of
compliance among the studied
banks is 12.96 (13
approximately).
The average rate of compliance

drawn from the sample
significantly represents the
average rate of compliance that
would have been derived from
the population.
The proportion of studied
banks under each compliance
score has been derived
separately and analyzed herein.
The analyzed model does not
show any significant
relationship present between
the compliance score and the
selected independent variables
(paid-up capital, investments,
loans & advances, profit after
tax and CSR cost).
Recommendations of the
Study
The findings of the study has
shown the compliance level of
green requirements by the studied
banks and has also justified that
compliance level is not affected
significantly by the abundance of
other factors. This indicates that the
extent to which one bank is
involved in green banking depends
mainly on the level of their
dedication towards their social
75
responsibility. Therefore, the

following points are recommended
through this study:
Bangladesh Bank should take
additional steps to make the
banks and the general people
of the country more aware
about the Green Banking
concept and about its activities.
Bangladesh Bank should take
stern steps for those banks that
have not completed the first
phase yet and as well as reward
the banks which have
completed almost all of the
requirements.
It has been experienced while
performing this study that some
of the banks do not disclose
any information about their
green banking activities let
alone following the directed
framework for disclosure.
Bangladesh Bank should
identify these banks as early as
possible and should give them
a deadline to comply at least
with the minimum
requirements.
Banks need to be more
encouraged and guided to
publish their Separate
Sustainability & Green Banking
Report as it will help the
customers to choose the
environment-friendly banks.
Bangladesh Bank is suggested
to publish their Green Banking
Report on a regular basis as it
has not published the report of
2013 yet.
Limitations of the Study

The data on which the study is
prepared have been collected
carefully and meticulously. The
study is also conducted with due
diligence and perseverance.
However, the study may still be
subject to some limitations. The
76
limitations which may be present

in this study are as follows:
All the data of this study have
been collected from secondary
sources.
The study has been conducted
purposively on private
commercial banks (PCBs) only.
Only 25 PCBs are used as the
scope of this study.
The study has faced
unavailability of information in
case of some banks.
Variables that have been used
to justify the relation with the
compliance score were
selected randomly.
The study has been made
within a short span of time
which has limited the scope for
a broader study.
Direction to Further Study

This study has been conducted on
selected private commercial banks
(PCBs) only. There is a plenty of
scope to study further on same
direction. This study can be
conducted on the state-owned
commercial banks (SCBs) or
foreign commercial banks (FCBs).
Moreover, the study can also be
made in a conclusive approach by
taking the whole banking industry
of Bangladesh as the scope of this
study. Future study can also be
conducted when the latest
information will be available.
Besides, this study has considered
only five variables to justify the
relation of them with the
compliance level. Here remains a
lot more scope to find out whether
any relation actually exists with
any other variable. Further study
can be made by considering
several other important variables
and thus finding out whether those
variables affect the compliance
level. So, it is comprehensible that

this study is able to direct and help
future studies which will be made
on same direction.
Conclusion
Green Banking is a collective
approach to save our earth from
environmental degradation. It is
not a sole obligation of the
bankers; rather Green Banking
can be flourished only when
performed in cooperation with the
customers. Bangladesh Bank has
the legal power to monitor and
supervise the activities and
therefore is able to take a strong
stance against those banks that do
not comply with the guidelines of
Bangladesh Bank. This study has
justified that the compliance level
of banks do not show significant
relation with other organizational
variables. Only Loans and
Advances have shown some
influence over the compliance
level. Thus, it is understandable
that creating awareness and social
responsibility among banks can
make them acknowledge Green
Banking as a moral duty rather
than a burden on them. Despite
the fact that Bangladesh is far-flung
from achieving the status of a
Green Economy, if the citizens,
human and corporate both, realize
their role in curbing the pollution
and environmental degradation
and work hand-in-hand, the joint
effort can surely smoothen the road
and lead the way to leave a better
world for our off-springs.
References
Ahmad, F., Zayed, M.N. & Harun, A.
(2013),Factors behind the Adoption of
Green Banking by Bangladeshi
Commercial Banks, ASA University
Review, Vol. 7, No. 2,pp. 241255.
Alice, M. (2011),Green Banking
through Green Lending, available at:
http://www.ibmtedu.org/gvcg/Papers/I
C-140.pdf (accessed December 2014)
Alice, M. (2012),Major Banks should

lead the way towards Green Banking,
available at:
http://www.deccanherald.com/content/
296615/major-banks-should-lead-way.
html (accessed December 04, 2014)
Bangladesh Bank (2012), Bangladesh
Banks Initiatives and Banks Activities
- Green Banking Report, Bangladesh
Bank Coordination Cell for Green
Banking, Dhaka: Bangladesh Bank
Head Office.
Institute for Development and
Research in Banking Technology
(IDRBT) (2013),Green Banking for
Indian Banking Sector, Green Banking
Framework. India: IDRBT Publication.
Bangladesh Bank (2012),Green
Banking in Bangladesh: Fostering
Environmentally Sustainable Inclusive
Growth Process, Department of
Communications and Publications,
Dhaka: Bangladesh Bank Head Office.
Hossain, S. & Kalince, T.A.
(2014),Green Banking Nexus Banks
Performance, Swiss Journal of
Research in Business and Social
Sciences, Vol. 1, No. 3, pp. 0116.
Islam, S. & Das, C.P. (2013),Green

Banking Practices in Bangladesh,
IOSR Journal of Business &
Management (IOSR JBM), Vol. 8, No.
3, pp. 3944.
Saleena, T.A. (2014), Go Green:

Banking sectors perspective, Journal
of Research in Commerce &
Management, Vol. 3, No. 11,pp.
2635.
Jaman, M. & Akter, S. (2013),Green

Banking in Bangladesh: A
Commitment towards the Global
Initiatives, Journal of Business and
Technology (Dhaka), Vol. VIII No. 1 &
2, pp. 1740.
Sharma, N., Sarika, K. & Gopal, R.

(2013),A study on customers
awareness on Green Banking initiatives
in selected public and private sector
banks with special reference to
Mumbai, in Indian Education
Societys Management College and
Research Centre proceeding of the 7th
International Business Research
Conference in India, 2013, IOSR
Journal of Economics and Finance
(IOSR JEF),pp. 28 35.
Khan, T. A. (2012),Green Banking:

Go Green, Think Green, The Daily
Star, available at:
http://archive.thedailystar.net/supplime
nts/2012/environment/pg1.htm
(accessed June 5, 2014).
Bangladesh Bank(2011), Policy
Guidelines for Green Banking, BRPD
Circular No. 02,Banking Regulation &
Policy Department, Dhaka: Bangladesh
Bank Head Office.
Bangladesh Bank(2013), Quarterly
Review Report on Green Banking
Activities of Banks and Financial
Institutions, Green Banking & CSR
Department, Dhaka: Bangladesh Bank
Head Office.
Ullah, M. (2013),Green Banking in

Bangladesh: A Comparative Analysis,
World Review of Business Research,
Vol. 3, No. 4, pp. 74-83.
Wikipedia, Ethical Banking, available
at:
http://en.wikipedia.org/wiki/Ethical_ba
nking (accessed December, 2014).
The Authors are:

1
Lecturer, Dept. of Accounting & Information Systems, Faculty of Business Studies, University of Dhaka
2
Lecturer, Dept. of Accounting & Information Systems, Faculty of Business Administration,
Jatiya Kabi Kazi Nazrul Islam University
77
Liquidity Position of Private Commercial Banks

(PCBs) in Bangladesh: An Empirical Overview
1
78
Sujan Chandra Paul ACA | 2Abdul Alim Baser ACMA | 3Mohammad Rakibul Islam
Abstract
opportunities and economic growth of the

country.
This paper attempts to portray an

indicative picture of liquidity position of
Private Commercial Banks (PCBs) in
Bangladesh for the period of ten years
(2004 to 2013). The study employed the
liquidity measures of PCB, and on that
basis the performance in terms of liquidity
position was established. This paper
utilizes secondary data from Prime Bank
Limited (PBL), United Commercial Bank
Limited (UCBL), Southeast Bank Limited
(SEBL), AB Bank Limited (ABBL), Dutch
Bangla Bank Limited (DBBL), Bank Asia
Limited (BAL). The criteria used are: Core
deposit to total funding, Liquid asset to
demand liabilitiesand Gross loans to total
deposit for the period of ten years. A
hypothesis was developed to know
whether all these banks have same
liquidity positions or not. Finally the
hypothesis was tested toknow whether
there is a significant difference in terms of
liquidity position by using ANOVA test.
The findingsrevealed that the private
commercial banks under study have
strongest liquidity level although it varied
over years andthe last year of the sample
years has an excess liquidity which affects
the growth of private sector credit in
Bangladesh and leads to the drop of
overall investment in the country
significantly, hampers employment
Keywords: Liquidity; Core deposit, Total

assets, Liquid assets, Gross loans, Private
commercial banks.
Introduction
Liquidity creation is a one of the core
functions of banks and an economic
service of substantial importance to the
economy. Liquidity creation refers to the
fact that banks provide illiquid loans to
borrowers while giving depositors the
ability to withdraw funds at par value at a
moments notice (e.g., Bryant, 1980;
Diamond and Dybvig, 1983). In spite of
having importance of liquidity level for
the economy of a country, excess liquidity
is a burden for the economy.
There are 39 private commercial banks in
Bangladesh (As per Wikipedia The Free
Encyclopedia). Among these, 31 banks are
conventional banks and the remaining 8
banks are Islamic banks. Besides these,
among the 39 PCBs, 30 banks are listed in
DSE and CSE. Bangladesh Bank has issued
licenses to nine new banks to act as
commercial banks early in the first half of
2013. Rahman M. K. (2013) stated that
getting licenses for 9 new banks under the
turmoil condition of both questionable
banking practices and profitability decline
of most of the banks is really

observable. The author added that
many concerned persons and
institutions related to national
economy raised question and asked
for justification for new banks again
when even the existing banks are not
performing up to the mark.
Commercial banks in a country are
the major catalysts for industrial
growth and economic development
as well. The economy of the country
was suffering from series of
shutdowns and blockades since the
beginning of the year 2013. Strikes
and blockades have affected
manufacturing, services and trade
sectors, for which the demand for
money has declined substantially
and the sluggish demand for money
has been affecting banks business
and swelling their unutilized funds,
Bankers said. Rahman S. (2013)
stated thatthe banking sector of our
country had nearly Tk 83,000 crore
in excess liquidity at the end of
November 2013, according to
Bangladesh Bank data, reflecting a
slowing demand for money in the
market. The amount was Tk 80,000
crore in July 2013. The author added
that Disbursement of industrial
term-loan at Tk 8,880 crore for the
July-September period of 2013 is
also the lowest in the last five
quarters.
The excess liquidity affects the

growth of private sector credit in
Bangladesh. The rate of private
sector credit growth came down to
10.60 per cent in December 2013
from 10.95 per cent in November
2013 and the rate was 16.61 per
cent in December 2012. Since the
private sector credit growth shows
grim picture, the overall investment
in the country has also dropped
significantly hampering employment
opportunities and economic
growth.-Kabir H.
Literature Review
IN SPITE OF
HAVING IMPORTANCE
OF LIQUIDITY LEVEL
FOR THE ECONOMY OF
A COUNTRY, EXCESS
LIQUIDITY IS A
BURDEN FOR THE
ECONOMY.
Ibe, S.O. (2013) stated that liquidity

management is indeed a crucial
problem in the banking industryand
recommended that banksshould
engage competent and qualified
personnel in order to ensure that
right decisions are adoptedespecially
with the optimal level of liquidity
and still maximize profit.
Bank liquidity creation is important
for the macro economy (e.g,
Bernanke, 1983; Dell Ariccia,
Detragiache, and Rajan, 2009), and
becomes even more prominent
during financial crises (e.g., Acharya,
Shin, and Yorulmazer, 2009).
Vodava (2011) stated that bank
liquidity is positively related to
capital adequacy, interest rates on
79
loans, share of non-performing

loans and interest rate on interbank
transaction and negatively related
to inflation rate, business cycle and
financial crisis.
Akhter S. and Rahman S.N. (2013)
made a comparative analysis and
compared the liquidity position of
the leading banksin Bangladesh
from the period of 2007 to 2011.
They observed that in caseof
maintaining liquidity, Islamic
banks are in better position than
the conventionalbanks.
Barua A. (2001) reviewed the
liquidity position of commercial
banks that prevailed during late
80s and throughout the 90s
decade. Before 1995, almost ten
years, commercial banks in
Bangladesh had been experienced
excess liquidity; in late 1995 a
sudden acute liquidity shortage
and then from mid 1996 and
onward, a tight liquidity.
Bhatt & Ghosh (1992), observed
that the profitability of commercial
banks depend on several factors
some of them areendogenous and
some exogenous. The endogenous
factors represent control of
expenditure, expansion of
bankingbusiness, timely recovery
of loans and productivity. The
exogenous factors consist of direct
investments such as SLR(Statutory
Liquidity Ratio), CRR (Cash
Reserve Ratio) and directed credit
programs such as region wise,
populationwise guidelines on
lending to priority sectors.
Kabir M. R, Qayum M.A. et (2013)
observed that there is no significant
difference in current
depositmanagement and
investment to deposit ratio. Their
study also found that the IBBL
(Islami Bank Bangladesh Limited)
depositmanagement is more
efficient than that of the PBL
(Pubali Bank Limited).
80
Methodology of the Study

The study used panel secondary
data collected from the respective
commercial banks annual reports
and financial statements for the
period of 2004 to 2013. On the
basis of total assets of all listed
private commercial banks in 2012
(Annexure-1), they are ranked.
From these ranking, 6 banks are
selected randomly for sample from
first 15 banks. Islamic banks were
ignored for this study because
separate liquidity guidelines are
prescribed by Bangladesh Bank for
Islamic Shariah based banks. The
criteria used are core deposit to
total funding, liquid asset to
demand liabilities and Gross loans
to total deposit for the period of
ten years, and finally the
hypothesis was tested to know
whether there is a significant
difference in terms of liquidity
position by using ANOVA test.
Exploratory research design is
suitable for exploratory studies
whose main emphasis is to
formulate a problem for more
precise investigation or developing
a working hypothesis from an
operational point of view. In
descriptive research design, the
major emphasis is on determining
the frequency with which
something occurs or the extent to
which two variables differs.
Descriptive studies are also
concerned with specific
predictions, narrations of facts and
characteristics concerning
individuals, groups or situation.
The study employed a descriptive
type of design due to the fact that
there were empirical studies which
exist on liquidity evaluation of
different companies. The strategy
of the study was a cross-sectional,
meaning that it covered a certain
period of time and the use of time
series data. Liquidity was measured
using financial measurement.
Financial variables were computed
ratios which pin pointed the
liquidity of private commercial

banks. The secondary data
collected was processed by EXCEL
where all the required liquidity
measures were calculated.
Statistical analysis was employed
in order to test the validity of the
hypotheses.
Findings and Result

Analysis of Liquidity
Bank is the trader of money-the
most liquid asset. Very naturally
managing liquidity is of paramount
importance for its existence. This
article aims to analyze the liquidity
of Bangladesh Private Commercial
Banks by taking some first
category PCBs as sample. The
yardstick criteria for this analysis
are: Core deposit to total funding,
Liquid assets to demand liabilities
and Gross loans to total deposits definitely all are ratio measures.
Core Deposits to Total Funding
As shown by the Figure-1, this ratio
of the sample banks did not
behave in a uniform and consistent
manner, over the years started with
2004 and ends in 2013. The trend,
in case of ABBL, was apparently
inconsistent with a rise-fall mood
and severely declined in 2011 with
a figure of 71.96%, albeit in 2013
it gained momentum to reach to
80.55%. Obviously one of the
reasons was the political instability
that squeezed investment in other
sectors.
In the case of UCBL, the picture is
apparently consistent. But PBL,
showing an average ratio of more
than 80% over the years definitely
outperformed others in this regard.
Moreover a single money was
available against deposits of on an
average83.50% for SEBL and DBBL
whereas 79.53% for Bank Asia
Limited. Both SEBL and DBBL
could maintain a 80% of this
ratio. But Bank Asia Limiteds

performance in this regard is
mostly below 80% with a volatile
mood.
Clearly, for all banks, core deposits
in other word-- assets creating fund
-- is in a good condition with a
rising tendency. Credit in this
regard could be given to a steady
rate of economic growth an
average 6.24% a year for the past
one decade-- apart from
management excellence.
Liquid Assets to Demand Liabilities
This ratio measure can be termed
as the main yardstick of judgment
in analyzing banks liquidity
management scenario. ABBL
shows a very inconsistent picture
in this regard. From 2004 to 2007,
it was more or less consistent with
2 percentage point deviation,

having a compatible shoulder with
demand liabilities. But from 2010,
it resembles a declining trend
though picked it up in 2013 with a
standard figure of 100.29%. Very
naturally it can be concluded that
in the year 2010-2012, it faced
difficulty in meeting the demand of
depositors thanks to a liquidity
crisis.
For UCBL, fulfilling demand
liabilities were much easier in the
year 2004 to 2008, maintaining
more than required liquid assets.
Again from 2010 to 2012 it faced
liquidity crisis also. But liquidity
position beefed up in 2013 with a
figure of 110.80%.
The picture of PBL in this aspect is
completely reverse in comparison
to other banks. Over the last
decade, it maintained more than

100% liquid assets to demand
liabilities -- surely, a sign of
management
inefficiency-ultimately increasing
the effective cost of deposits.
Meeting up a single currency
demand liabilities as they become
due in case of SEBL, DBBL and
Bank Asia pose a different view,
with SEBL posed to threat from
year 2004 to 2010, but DBBL and
Bank Asia could maintain more
than a single currency liquid
against a single currency demand
liabilities up to 2009. Then,
obviously shows the same picture
of declining trend compatible with
other banks on sample.
Gross Loans to Total Deposits:
Gross loans to total deposits ratio
Figure :1. Comparative core deposits to total funding

Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
PBL
84.47%
86.74%
86.79%
89.86%
88.60%
79.70%
85.70%
81.49%
79.93%
76.87%
UCBL
76.38%
83.68%
85.24%
85.65%
84.29%
84.09%
85.91%
87.06%
82.59%
82.20%
SEBL
82.77%
88.37%
84.01%
86.18%
84.64%
85.79%
81.65%
80.54%
80.59%
80.47%
ABBL
82.68%
87.05%
82.75%
87.68%
83.99%
81.57%
77.72%
71.96%
75.93%
80.55%
DBBL
85.78%
84.39%
88.17%
85.29%
84.99%
82.88%
82.60%
81.98%
80.47%
78.48%
BAL
75.63%
79.13%
82.97%
78.08%
79.51%
79.86%
79.47%
80.68%
78.41%
81.51%
Figure :2. Comparative liquid assets to demand liabilities

Year
PBL
UCBL
2004
2005
2006
2007
2008
2009
2010
2011
2012
136.47%
147.71%
137.28%
136.49%
113.29%
103.12%
102.48%
115.78%
117.74%
106.55%
116.89%
103.31%
96.25%
114.82%
85.14%
86.69%
87.05%
80.48%
92.88%
100.46%
90.39%
84.20%
86.40%
84.01%
93.68%
114.58%
84.52%
100.02%
96.65%
101.72%
98.42%
105.63%
105.13%
89.53%
81.71%
77.05%
114.28%
127.35%
102.47%
103.83%
108.39%
99.47%
91.70%
98.60%
94.67%
97.94%
103.22%
113.60%
113.93%
99.56%
93.60%
97.52%
123.75%
93.48%
2013
110.61%
110.80%
91.56%
100.29%
100.42%
111.21%
SEBL
ABBL
DBBL
BAL
81
dictates the amount of assets

created from the deposit collected.
The ratio of ABBL as well as other
five is more or less consistent with
an increasing trend with an
exception to DBBL that is very
much volatile in this regard.
Obviously, PBL in this field
outperform others having an
average ratio of more than 84.84%
over the last decade, though a drop
to 76.07% is evident in 2013.
Another thing is clearly evident
that over the decade Bank Asias
gross loan to total deposit ratio was
much higher than the industry
average and obviously for more
than Bangladesh banks set cap of
85%. Arguably this is the sign of
aggressive banking or rise in NPL,
though a declining trend is visible
from 2011-2013.It is worth
mentioning that all the banks have
outweighed the industry (70.35%)
and definitely very close to the
ceiling by BB (85%).
Overall Commentary on the
Liquidity Analysis
Besides above findings some other
findings are very much integral and
inevitable to have a crystal clear
picture of liquidity scenario. All the
six banks have a declining trend
from the years 2010-2012 as to all
the three ratios taken for
justification. This could be the
cause of economic aftermath of the
economic recession of 2008. Other
reasons could be slowdown of
investment activities in the
country, sluggish remittance inflow
as well as fall in export earnings.
None-the-less, the increase in
Non-Performing Loans (NPLs),
buoyed by declining trend in credit
growth along with risk
management scenario also have a
stake to this scenario. The reason
of increasing liquid assets to
demand liabilities in 2013 for all
the banks can also be justified by
taking into cognizance that low
82
level of demand for credit by the

private sector has declined
severely in the last 2 quarters of
2013 from 2.21% in July
September to 1.98% in October to
December.
Hypothesis Testing
This manifested in excess liquidity

of banking sector reaching over Tk.
955.81 billion in December 2013
and tk. 830 billion at the end of
November 2013 whereas this was
tk. 800 billion in July 2013.
Definitely, this scenario poses the
poor condition of investment
which might drag down the current
growth of GDP.
ANOVA test
Moreover entrance of the new

banks did have impact on this
picture. They are virtually hunting
customers from the existing banks
with aggressive banking strategies.
Those banks average loan deposit
ratio is 54% which is much lower
than the industry average 70.35%
and the Bangladesh Bank ceiling of
85%, as of February 2014.
There is no significant difference

in the liquidity positions among
the private commercial banks in
Bangladesh.
H0: There was no significant

difference in liquidity positions
among the private commercial
banks in Bangladesh
H1: There was a significant
difference in liquidity positions
among the private commercial
banks in Bangladesh
Results of the test of significance at
95% Confidence interval (that is,
0.05 level of significance) for
liquidity indicated the following
results.
All the selected private commercial
banks have almost same ratio of
Figure :3. Comparative gross loans to total deposit

Year
PBL
UCBL
SEBL
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
82.72%
88.60%
82.25%
81.81%
85.38%
83.45%
89.28%
86.88%
88.38%
76.07%
73.36%
82.29%
79.08%
88.87%
81.57%
79.37%
82.66%
82.81%
79.79%
80.40%
78.77%
85.08%
89.34%
86.82%
87.73%
80.17%
85.82%
84.54%
83.21%
76.44%
ABBL
60.10%
78.16%
74.36%
76.66%
82.71%
85.31%
92.26%
81.48%
75.75%
86.58%
DBBL
BAL
54.26%
74.70%
70.62%
97.40%
55.01%
71.41%
80.80%
78.69%
73.03%
72.96%
88.05%
96.59%
88.00%
94.84%
94.20%
91.67%
95.10%
87.53%
84.87%
78.59%
Table 1: Core deposits to total funding
Between Groups
Within Groups
Total
Sum of
Squares
DF
Mean Square
F
(Calculated
Value)
F
(Table
Value)
Decision
0.0163
0.06355
0.07986
5
54
59
0.003261
0.001177
2.205094
2.386
H0
accepted
Table 2: Mean and standard deviation of Core deposits to total funding

Banks
Mean
84.0150
83.7090
83.5010
81.1880
83.5030
79.5250
82.5735
PBL
UCBL
SEBL
ABBL
DBBL
BA
Total
N
10
10
10
10
10
10
60
Standard deviation
4.29589
2.97979
2.75013
4.88090
2.81088
1.99767
3.67896
Table 3: Liquid assets to demand liabilities
Between Groups
Within Groups
Total
Sum of
Squares
DF
Mean Square
F
(Calculated
Value)
F
(Table
Value)
Decision
0.5565
0.7506
1.3070
5
54
59
0.111294
0.13899
4.598115
2.386
H1
accepted
83
Table 4: Mean and standard deviation of Liquid assets to demand liabilities

Banks
Mean
122.0970
98.7980
92.2680
95.6150
104.1180
104.7810
102.9462
PBL
UCBL
SEBL
ABBL
DBBL
BAL
Total
N
10
10
10
10
10
10
60
Standard Deviation
16.03346
13.42355
9.42268
9.73733
10.39893
10.24466
14.88391
Table 5: Gross loans to total deposit
Between Groups
Within Groups
Total
Sum of
Squares
DF
Mean Square
F
(Calculated
Value)
F
(Table
Value)
Decision
0.5565
0.2785
0.4420
5
54
59
0.111294
0.005158
4.598115
2.386
H1
accepted
Table 6: Mean and standard deviation of Gross loans to total deposit

Banks
Mean
84.4820
81.0200
83.7920
79.3370
72.8880
89.9440
81.9105
PBL
UCBL
SEBL
ABBL
DBBL
BAL
Total
N
10
10
10
10
10
10
60
Standard Deviation
4.06588
3.89431
4.14351
8.7392
12.35747
5.61417
8.65565
Table 7: Liquidity measure of Private Commercial Bank (PCB) in Bangladesh

Ratings
1
2
3
4
5
Explanation of
Rating
Strong
Very good
Good
Weak
Very Weak
core deposit to total funding but in

case of the liquid assets to demand
liabilities and gross loans to total
deposit, there are significant
differences between these
commercial banks.
When the concentration is focused
on the overall banking industry to
measure the liquidity position, it is
seen that the ratio of core deposit
to total funding is about 83%,
84
Core deposits to
total funding
Above 80%
60%-80%
40%-60%
20%-40%
Below 20%
Liquid assets to
demand liabilities
Above 90%
80%-90%
70%-80%
60%-70%
Below 60%
liquid assets to demand liabilities is

about 103% and gross loans to
total deposit is about 82%. If these
ratios are compared with Table 7,
it is found that ratios of core
deposit to total funding and liquid
assets to demand liabilities have
rating 1 which indicates strongest
position. On the other hand, ratio
of gross loans to total deposit has
rating 4 which signifies
comparatively weaker position.
Gross loans to total

deposit
Below 70%
70%-75%
75%-80%
80%-85%
Above 85%
Conclusion
This study intended to assess the
liquidity position of the private
commercial banks of Bangladesh
with special reference of ABBL,
PBL, SEBL, UCBL, DBBL and BAL.
The analysis was for ten years
started from 2004 to 2013.
Liquidity was evaluated in terms of
core deposit to total funding, liquid
asset to demand liabilities and
gross loans to total deposit.

Statistical analysis was done using
one way Analysis of Variance
(ANOVA) whereby the hypothesis
was tested. Analysis indicated that
the liquidity for the private
commercial banks is not uniform
as they change over years. On the
other hand, they show significant
improvement while the other years
are showing the decreasing trend
although not significant. Generally
the liquidity of private commercial
banks was strong enoughfor giving
a reasonable assurance of the
economic stability as well as threat
for non-utilization of excess
liquidity of all commercial banks.
The hypothesis tested was on the
significant differences in liquidity
positions for private commercial
banks. As two out of three
hypotheses reveal that there are
significant differences between the
liquidity positions in the private
commercial banks in Bangladesh, a
statement can be drawn from these
analysis that liquidity position in
private banks in Bangladesh differs
significantly from bank to bank.
References
1.
Ibe, S.O. (2013). The Impact of

Liquidity Management on the
Profitability of Banks in Nigeria.
Journal of Finance and Bank
Management 1(1); June 2013 pp.

37-48.
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4.
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8.
Bryant, J. (1980). A model of

reserves, bank runs, and deposit
insurance, Journal of Banking and
Finance 4: 335-344.
Bernanke, B. S. (1983).
Nonmonetary effects of the
financial crisis in propagation of
the Great Depression, American
Economic Review 73: 257276.
Acharya, V. V., H. S. Shin, and T.
Yorulmazer (2009). Endogenous
choice of bank liquidity: The role
of fire sales, Working Paper.
Vodova, P. (2011). Liquidity of
Czech commercial banks and its
determinant. International Journal
Mathematical Models and
Methods in Applied Science.
Akhter S. and Rahman S.N.
(2013). Comparative Analysis of
Liquidity Position of Banks: A
study on some selected
Conventional and Islamic banks in
Bangladesh. Daffodil International
University Journal of Business and
Economics, Vol. 7, No. 1 June,
2013.
Rahman M. K. (2013). Private
Commercial Banks: Threats or
Prospects. The Bangladesh
Accountant. July-September 2013.
Rahman S. (2013). Banks Excess
Liquidity Rises Further. Published in

The Daily Star (The English Daily
Newspaper in Bangladesh) in
December 15, 2013.
9.
Kabir H. Excess Liquidity In Banks

Slows Down Growth. Published
in Business Outlook (The English
Online News) in May 11, 2014.
10. Barua A. Liquidity Scenario in

Commercial Banks of Bangladesh:
Liquidity Shortage in 1995, Before
and After. Journal of Business
Research, vol. 3, 2001.
11. Bhatt, P. R., and Ghosh, R.
(1992). Profitability of
Commercial Banks in India. Indian
Journal of Economics, India.
12. Kabir M. R, Qayum M.A and Islam
M. R. (2013). Efficiency in Deposit
Management of Islami Bank
Bangladesh Ltd and Pubali Bank
Ltd: A Comparative Study. ASA
University Review, Vol. 7 No. 1,
JanuaryJune, 2013.
13. The Financial Express 22 March
2014
14. The Daily Star 4 April 2014
15. The Daily Star 16 April 2014
The Authors are: Lecturers,

Department of Accounting
and Information Systems,
University of Barisal
85

Muhammed Omar Faruk Ripon ACA
Preface
Running a business can be a dangerous
occupation with many different types of
risk. Some of these potential risks/hazards
can destroy a business, while others can
cause serious damage that can be costly
and time consuming to repair. Every
business encounters risks, some of which
are predictable and under management's
control, and others which are
unpredictable and uncontrollable.
In business, risks lie at every turn
competitor, innovation of products or
services, new players in the market place,
adverse trends in commodity prices,
currencies, interest rates, etc.
Despite the risks implicit in doing
business, CEO and/or risk management
officers can prepare for them if they know
what they are. If and when risk becomes
reality, a well-prepared business can
moderate the risk's impact. Money losses,
lost time and productivity and the negative
impact on customers can all be
minimized.
Risk - Formal Definition

Risk is often mapped to the probability of
some events which is seen as undesirable.
Risks are events, situations or
86
circumstances which lead to negative

consequences for business. Risk is distinct
from "threat." A threat is a very low
probability but serious event which some
analysts may be unable to assign a
probability in a risk assessment because it
has never occurred, and for which no
effective preventive measure is available.
Risk can be internal and external. Risk" is
a function of three variables 1) The probability that there's a threat
2) The probability that there are any
vulnerabilities
3) The potential impact.
If any of these variables approaches zero,
the overall risk approaches zero. If the risk
negligible, this is often called a residual
risk.
What is Business Risk? Risk =

Probability x Impact
Simply it means any risk associated with a
business. A risk, in a business context, is
anything that threatens an organization's
ability to generate profits at its target
levels. Most commonly used definition of
business risks - The possibility that a
company will have lower than anticipated
profits, or that it will experience a loss
MOST
CATEGORIES OF RISK
HAVE A FINANCIAL
IMPACT, IN TERMS OF
EXTRA COSTS OR LOST
REVENUE. BUT THE
rather than a profit due to
uncertainties e.g., changes in tastes,
preferences of consumers, strikes,
etc. There is always an inherent
business risk assumed by all parties
involved that often goes unspoken as
the eyes are always on the prize. In
financial term, business risk may be
defined as the probability that an
actual return on an investment will
be lower than the expected return.
Enterprise risks could be in terms of
risk related to resources, product and
services or the market environment
in which the enterprise operates.
practices, are the province of the risk
management department in a typical
corporation. Although risk
management has usually pertained
to property and casualty exposures
to loss, it has recently been
expanded to include financial risk
managementsuch as interest rates,

foreign exchange rates, and
derivativesas well as the unique
threats to businesses engaged in E
commerce. Most categories of risk
have a financial impact, in terms of
extra costs or lost revenue. But the
category of financial risk refers
specifically to the money flowing in
and out of business, and the
possibility of a sudden financial loss.
CATEGORY OF FINANCIAL
RISK REFERS
SPECIFICALLY TO THE
MONEY FLOWING IN
AND OUT OF BUSINESS,
AND THE POSSIBILITY OF
A SUDDEN FINANCIAL
LOSS.
Types of Business Risks

Risk is celebrated as the brave and
alluring basis for economic progress.
But risk has a dark side. As much as
taking a risk is celebrated, nobody
wants risks to be realized. Businesses
want to take the risks that are most
likely to achieve business objectives
and minimize non-essential risk. In
other words, businesses seek to
manage and control risk. The
following risk categories represent
the most common types of business
risks-
87
Main Category
Strategic Risks
Financial Risk is an
umbrella term for
multiple types of risk
associated with
financing, including
financial transactions
that include company
loans in risk of
default.
88
Sub-Category with Brief Discussion.

1) Corporate Governance Risk: Insiders (employees) won't act in the best interests of
owners (stockholders) and the community.
2) Competitive Risk: The general risk that you'll lose out to the competition.
3) Innovation Risk: The risk that the competition will out innovate you.
4) Intellectual Property Risk: Risk related to intellectual property.
5) Merger & Acquisition Risk: The risks related to integrating firms.
6) Business Risk: The risk that your overall business strategy and plan will be
ineffective (e.g. will fail to meet revenue targets).
7) Economic Risk: The risk that the economy will go into recession.
8) Technological Change: The risk that technology investments will become obsolete.
9) Change Management Risk: The risks associated with managing change.
10) Project Risk: The risk that projects will fail.
11) Ethics Risk: The risk that your guiding principles and ethics will be breached.
12) Reputational Risk: The risk of damage to your corporate image. Reputational risk can
reduce trust in your business and lead to destruction of value.
13) Sustainability Risk: The risk that you'll fail to meet sustainability objectives and
targets.
14) Profit Risk: The general risk that profits will fall.
15) Capital Availability: The risk that you won't be able to fund your business.
16) Asset Risk: Risks related to asset prices (e.g. real estate).
17) Interest Rate Risk: The risk that an investment's value will change as a result of a
change in interest rates.
18) Currency Risk: The risk of a change in exchange rates against your favor. Also called
foreign exchange risk.
19) Inflation Risk: The risk of price increases in critical inputs.
20) Investment Risk: The risk of a change in value of investments (e. g. Equity &
Commodity Market Risk).
21) Liquidity Risk: The risk that you won't be able to sell an asset efficiently (e.g. quickly
at a fair price).There is two types of liquidity risk: a) Asset liquidity and b) Funding
liquidity.
22) Systemic Risk: The risk that the entire global financial system or the financial system
of a country will collapse. It influences a large number of assets. It is virtually
impossible to protect against this type of risk.
23) Unsystematic Risk: sometimes referred to as "specific risk". It affects a very small
number of assets. An example is news that affects a specific stock such as a sudden
strike by employees.
24) Concentration Risk: The risk of over-lending to a small number of debtors or
investing in a narrow selection of assets.
25) Credit Risk: The risk that a borrower will default on a debt. Also called default risk.
26) Fraud Risk: The risk of fraud losses.
27) Accounting Risk: The risk of accounting errors.
28) Fiduciary Breach Risk: The risk that your firm will breach its fiduciary duties (e.g.
insider trading).
29) Counter Party Risk: The risk that other firms will break their contractual obligations
to you (e.g. an insurance company that goes bankrupt and can't pay you).
30) Tax Risk: The risk that your taxes will increase or an audit will reassess taxes of
previous years.
31) Foreign Investment Risk: Risk of rapid and extreme changes in value due to smaller
markets; differing accounting and auditing standards; confiscatory taxation;
economic conflict, political or diplomatic changes, regulatory issues, etc.
32) Country Risk: refers to the risk that a country won't be able to honor its financial
commitments. When a country defaults on its obligations, this can harm the
performance of all other financial instruments in that country as well as other
countries it has relations with. Country risk applies to stocks, bonds, mutual funds,
options and futures that are issued within a particular country.
Main Category
Sub-Category with Brief Discussion.

33) Revenue Shortfall Risk: The general risk that revenue will fall short.
Marketing & Sales
34) Demand Risk: Lower than expected demand for your products.
Risk is most familiar
35) Market Competition Risk: The risk that competitive forces will reduce revenue (e.g. a
of all risks. Also
price war).
referred to as
36) Sales Forecast Risk: The risk that sales forecasts will be inaccurate.
volatility.The four
37) New Product Development Risk: The risk that new products will fail on the market.
standard market risk
38) Customer Relationship Risk: The risk of damaged relationships with customers.
factors are equity risk,
39) Brand Value Risk: The risk of a decline in brand value.
interest rate risk,
40) Publicity Risk: The risk of bad publicity.
currency risk, and
41) Large Account Risk: The risk of losing a large customer.
commodity risk.
42) Location Risk: The risk of choosing a bad location (e.g. a retail location).
Operational Risk exists 43) Infrastructure Risk: Risks related to infrastructure (e.g. electricity outage).
44) Maintenance Risk: Risk of maintenance failure.
in every organization,
45) Product Failure Risk: The risk that your product or services will fail.
regardless of its size,
46) Product Liability Risk: Business may incur legal liability related to your products and
in any number of
services.
forms including
hurricanes, blackouts, 47) Operational Quality Risk: The general risk of operational failures (website goes
computer hacking,
down).
and organized fraud.
48) Production Shortfall Risk: You fail to meet production targets.
Managing those risks
49) Logistics Risk: The risk of logistics failure. For example, you fail to deliver goods to
is critical to an
your retail locations on time for customers.
organizations success 50) Procurement Risk: Risks related to procuring goods and services.
51) Architectural Risk: The risk that your architecture will fail to meet business
objectives.
52) Data Quality Risk: The risk of poor quality data.
Information
Technology related
53) Technology Quality Risk: The risk of software and hardware quality problems (e.g.
Risk
failures, usability issues).
54) Platform Risk: The risk of choosing a technology platform that's not fit for purpose.
55) Information Security Risk: The risk of information security incidents.
56) Workplace Safety Risk: The risk that accidents or poor environment impacts the
health of employees.
57) Employer Reputation Risk: The risk that you'll get a bad reputation as an employer
and find it difficult to recruit top talent.
58) Employer Liability Risk: The risk that you'll be sued for employment related
practices or incidents.
59) Employment Law Compliance Risk: The risk of non-compliance with employment
Human Resource
related Risk
related laws and regulations.
60) Talent Management Risk: The risk of losing top talent.
61) Compensation and Benefits Risk: The risk that compensation will be
misappropriated (e.g. a manager overpays her sister-in-law).
62) Hiring Risk: The risk that you will hire the wrong candidate or violate recruiting
ethics or law.
63) Employee Information Privacy Risk: The risk that you will leak personal information
about your employees.
64) Compliance Risk: The risk that you will fail to comply with laws and regulations.
Compliance & Legal
65) Mandatory Reporting Risk: The risk that you will fail to meet regulatory filing
Risk
requirements.
66) Liability Risk: The risk of lawsuits.
67) Force Majeure: Acts of nature, war and terrorism.
68) Political Risk: Risk associated with political change. It represents the financial risk
Catastrophic Risk
that a country's government will suddenly change its policies. This is a major reason
why developing countries lack foreign investment.
89
In another way, risks may be

classified as a) Direct v Indirect
Risk; b) Internal v External Risk; c)
Inherent v Incidental Risk; d)
Systematic v Unsystematic Risk; e)
Financial v Physical Risk; f)
Quantitative v Qualitative Risk; g)
Mitigated v Residual Risk; h)
Insurable v Uninsurable Risk [Top
5 Uninsurable Risks - Reputational
Risk; Regulatory Risk; Trade Secret
Risk; Political Risk and Pandemic
Risk]
Every Business Faces the

Same 5 Key Risks
1) Development Risk: Can the
original product or service idea
actually be created?
2) Manufacturing Risk: If the
product can be developed, can
it actually be produced in
appropriate volume?
3) Marketing Risk: If the product
can be made, can it be sold
effectively?
4) Financial Risk: If the product
can be sold effectively, will the
resulting company be
profitable and can the profits
actually be realized in a form
that allows investors to receive
cash?
5) Growth Risk: If the company
can achieve operating
profitability at one level, can
profitability be maintained as
the company grows and
evolves?
DIRECT & INDIRECT

RISK TO BUSINESS
People often make the
mistake of overlooking
things that don't directly
impact their business and
are therefore unprepared
to deal with change.
90
Direct Risks to Business:

Natural Disasters - floods,
storms, etc.
Pandemic - human influenza,
swine flu, etc.
Legal - insurance issues,
resolving disputes, contractual
breaches, non-compliance
with regulations, and liabilities
Global Events - pandemics and
interruptions to air traffic
Technology - computer
network failures and problems
associated with using outdated
equipment
Regulatory and Government
policy changes - water
restrictions, quarantine
restrictions, carbon emission
restrictions and tax
Environmental - climate
change, chemical spills and
pollution
Work Health and Safety accidents caused by materials,
equipment, or location of your
work
Property and Equipment damage from natural disasters,
burst water pipes, robbery and
vandalism
Security - theft, fraud, loss of
intellectual property, terrorism,
extortion and online security
and fraud
business or industry resulting in

failure or interruptions to the
supply chain of products or
raw materials
Market - changes in consumer
preference and increased
competition
Utilities and Services - failures
or interruptions to the delivery
of your power, water, transport
and telecommunications.
Indirect Risks to Business

While your business might not
bedirectly affected by a natural
disaster, you may still suffer, if it
affects your suppliers, customers or
general location.How these
scenarios could affect your
business, as instance
If your suppliers are affected,
you may run out of the
products you sell, or the
materials you need to make
products
If your customers are
personally affected their
priorities may change and you
could experience a reduced
demand for your products or
services.
Risk Management Plan

(RMP)
Economic and Financial global financial events, interest

rate increases, cash flow
shortages, customers not
paying, rapid growth and rising
costs
Staffing - industrial relations
issues, human error, conflict
management and difficulty
filling vacancies
Suppliers - issues within their
A risk management plan and a

business impact analysis are
important parts of business
continuity plan. By understanding
potential risks to business and
finding ways to minimize their

impacts, you will help your
business recover quickly if an
incident occurs.
situations when they arise and,

hopefully, head them off before
they arise. RMP includes several
steps to develop
Types of risk vary from business to

business, but preparing a risk
management plan involves a
common process. Risk
Management Plan should detail of
strategy for dealing with risks
specific to business.
Define the Business/Project

Get input from others
List all identified risk elements
Identify the consequences of
each risk
Eliminate irrelevant issues
It's important to allocate some

time, budget and resources for
preparing a risk management plan
and a business impact analysis.
This will help meeting legal
obligations for providing a safe
workplace and can reduce the
likelihood of an incident negatively
impacting on business.
A risk management plan includes
tools or methods of analysis that
allow minimizing, delay or avoid
potential risks. In a small business,
it is not possible to eliminate all of
the financial, material or physical
risks one might encounter in a
given project or initiative or
business, but it is possible to
minimize risk through proper
planning. A good risk management
plan helps to steer clear or
potential risks before they become
actual problems that can cost time
and money by causing delays in
manufacturing, distribution or sales
of products or services. Developing
an effective Risk Management Plan
can help keep small issues from
developing into emergencies.
Different types of Risk
Management Plans can deal with
calculating the probability of an
event, and how that event might
impact business, what the risks are
with certain ventures and how to
mitigate the problems associated
with those risks. Having a plan
may help dealing with adverse
Assign probability and impact

Determine risk for the
elements
Rank the risks
Develop mitigating strategies
Determine who will be
responsible for each area of
risk
Establish what person or
department can authorize
funds to be used to mitigate
any potential risks
Develop contingency plan
Analyze the effectiveness of
strategies
Compute effective risk
Monitoring
Plan an appropriate response
to each risk

(BRM)
Managing Risk/ Risk

Management
Every business encounters risks,
some of which are predictable and
under management's control, and
others which are unpredictable and
uncontrollable. Risk Management
is a structured approach to manage
uncertainty and includes actions
taken to Identify, Assess, Monitor
and Taking steps to reduce the
impact of risks to Business. A good
risk management plan with
appropriate risk management
strategies can minimize costly and
stressful problems, and may also
reduce insurance claims and
premiums.The practice of risk
management utilizes many tools
and techniques, including
insurance, to manage a wide
variety of risks.
Risk management is particularly
vital for small businesses, since
some common types of losses,
such as theft, fire, flood, legal
liability, injury, or disabilitycan
destroy in a few minutes what may
have taken entrepreneur years to
build. Such losses and liabilities
can affect day to day operations,
reduce profits, and cause financial
hardship severe enough to cripple
or bankrupt a small business. But
while many large companies
employ a full time risk manager to
identify risks and take the
necessary steps to protect the firm
against them, small companies
rarely have that luxury. Instead, the
responsibility for risk management
is likely to fall on the small
business owner.
The term risk management is a
relatively recent (within the last 20
years) evolution of the term
"insurance management." The
concept of risk management
encompasses a much broader
scope of activities and
responsibilities than does
91
insurance management. Risk

management is now a widely
accepted description of a discipline
within most large organizations.
practices, are the province of the
risk management department in a
typical corporation. Although risk
management has usually pertained
to property and casualty exposures
to loss, it has recently been
expanded to include financial risk
management. As the role of risk
management has increased, some
large companies have begun
implementing large scale,
organization wide programs
known as enterprise risk
management.
Be a systematic and structured

process
Be based on the best available
information
Be tailor-able
Take human factors into
account
Be transparent and inclusive
Be dynamic, iterative and
responsive to change
Be capable of continual
improvement and
enhancement
Be continually or periodically
re-assessed
Managing Risk
ISO 31000:2009 gives a list on
how to deal with risk -
The types of risk management

differ on the basis of the nature of
operations of a particular
organization and other factors like
its overall goals and performance.
All these types of risk management
processes and risk management
reports play a significant role
behind the growth of an
organization in the long run.
1. Avoiding risk by deciding not

to start or continue with the
activity that gives rise to risk.
Principles of Risk
Management
5. Changing the consequences.
The International Organization for

Standardization (ISO) identifies the
following principles of Risk
Management. Risk management
should Create value - gain should
exceed pain
Be an integral part of
organizational processes
Be part of decision making
process
Explicitly address uncertainty
and assumptions
92
2. Accepting or increasing the

risk in order to pursue an
opportunity.
3. Removing the risk source.
4. Changing the likelihood.
6. Sharing the risk with another

party or parties (including
contracts and risk nancing).
7. Retaining the risk by informed
decision.
Ways to Handle Risk (Only

one is bad)
There are four (04) ways an
organization can deal with
identified risk. As outlined below,
these decisions have a number of
impacts on time, money and
resources for an organization.
1) Accept(able): Accepting the

risk is a business decision that
is reflective on the level of
acceptable risk level, or the
willingness for organization to
assume the risk..
2) Avoid: Avoiding risk means
you are going to do nothing
with the identified risks. When
you accept the risk, you are
actually doing something; you
have chosen to accept the risk
and the impacts to that
decision.
3) Mitigate: While it may be cost
restrictive to reduce all risks,
certainly based on the level of
acceptable risk, the remaining
should be mitigated. Mitigating
risk means that you are
reducing risks by
implementing controls, fixes or
other countermeasures that
have a direct effect on the risks
identified. Residual Risk =
Identified Risk Mitigated
Risk.
4) Transfer: Many organizations
are turning towards transferring
risk as an alternative to the
options above. Transferring
risk can take various forms,
including cyber liability
insurance and outsourced
services.
Five (5) Characteristics of a

Strong Risk Management
Program:
1) Senior Management
Champions the Program:
Success of a risk management
program depends on the active
support of senior management.
2) They are Inclusive: Effective
risk management programs
largely rely on co-operation of
every part of the organization.
3) They are Transparent: Risk
management programs work
best and companies reap the
greatest possible benefit when their

goals, processes and results are
shared with all the companys
stakeholders.
4) They are Holistic: The best risk
management programs not
only address all the risks to
which modern corporations
are susceptible, they also
consider how these various
risks can affect the companys
stakeholders and operations.
5) They are Proactive: Effective
risk management programs
also include proactive systems
and processes to maximize the
opportunities.
Some Tools to Manage

Business Risks
Insurance
Preventive measures Employee Training, Safety
Checks and Maintenance
Hiring a Risk
ManagementConsultant [The
Institute of Risk Management
(IRM)is the leading
professional body for risk
management]
Employment of a full time Risk

Manager
Form a Risk Management
Committee with members
specific tasks who is to report
to the Risk Manager.
Several large auxiliary

generators can keep as back-up
system to provide electrical
energyuntil utility power is
restored.
Review Risk Management

Reports
Offline and online data

back-up systems should be
used to protect critical
documents.
Immediate resolve of any

identified problems
Conclusion
Diversification.
Prioritizing of identified
Risksbased on assessed
probability.
Make sure all employees know
the exact street address of the
building, know the location of
all exits.
Install fire alarms and smoke
detectors.
Double signature requirements
for checks and payablesto
prevent embezzlement and
fraud
A thorough background check
before hiring personnel
Business is about taking risks.

Nobody ever built a business by
hiding in a shell. Remember, not
all risks are known, there are
uncertainly in everything that we
do, thus when risks can be
quantified, it is extremely
important to take these seriously
and make the appropriate decision.
While business risks are abound,
and their consequences can be
destructive, there are ways and
means to insure against them, to
prevent them and to minimize
their damage if and when they
occur.
The Author is an Associate
Member, ICAB
93
Risk Management by
Bangladesh Bank: New Steps
Raihan M Chowdhury
The governments latest move to give full

autonomy to Bangladesh Bank's Financial
Intelligence Unit to deal with financial
crimes independently is no doubt a
welcome step. We believe such
empowerment will help a lot to reduce
the risks being surfaced in sync with the
growing businesses in Bangladesh.
The finance ministry has already sent a
proposal to the Cabinet Division which
includes some major changes in the
Money-Laundering Prevention Act-2012.
According to the proposed change in the
law, the government will appoint the chief
executive and deputy chief executive of
Bangladesh Financial Intelligence Unit
(BFIU) on a full-time basis. Officials of
Bangladesh Bank will work for the unit on
deputation.
The central bank governor now picks a BB
deputy governor and an executive director
for the posts of the chief executive and
deputy chief of BFIU. The two perform
their duties at the unit as additional duties.
They consult the BB governor before
making any important decisions.
The BFIU is responsible for analysing
suspicious transaction reports, and
information related to money laundering
received from reporting agencies and
94
other sources and disseminating

information/intelligence thereon to
relevant law enforcement agencies,
according to BB website.
Experts said Financial Action Task Force, a
global money-laundering watchdog, had
recommended that the government make
the BFIU stronger. Accordingly, the
finance ministry has made the move to
make the intelligence unit an independent
institution.
As per law, banks, financial institutions,
stock exchanges, and other organisations
involved in financial dealings send
information to the BFIU about any
suspicious transactions. Information about
transactions by ministers, lawmakers and
other high-profile people is also sent to the
BFIU.
The intelligence unit analyses the
information, take punitive action against
irregularities and in some cases, forward
transaction data to other organisations,
including the ACC.
The cabinet on August 10 approved an
amendment to the ACC law, giving back
the police the responsibility of
investigating fraud cases filed by private
citizens. The ACC has been doing the job
since 2013 despite manpower shortages.
However, the cases involving

government property, civil servants
or government bank employees
would be probed by the graft
watchdog.
assets concentration and operation

of newly established banks.
According to another proposed

change in the law,
money-laundering-related crimes
will be investigated by the police,
National Board of Revenue (NBR)
and other relevant organisations.
Presently, the Anti-Corruption
Commission is tasked with the job.
According to the Bangladesh Bank
Financial Stability Report 2014,
banks might face the challenges in
adopting new business model in
coming years. Mentioning loan
default as a matter of concern, the
Report emphasized on exerting
relentless effort in reducing the rate
of the defaulted loan. Various
advanced tools have been
introduced in identifying risk and
vulnerability in the banking sector.
So it is our expectation that
introduction of these tools will
contribute to maintaining stability in
the financial sector. He further
added that some new departments
have been created in Bangladesh
Bank to intensify oversight role of
Bangladesh Bank on internal control
and corporate governance in the
banks.
The business risks under the capital
market, insurance market and in
other areas must be handled through
proper implementation of the
existing rules and regulations.
Without establishing good corporate
governance, such risks cannot be
minimized. A strong commitment
from both the regulatory sides and
other stakeholders is urgently
needed to end such business risks.
The Bangladesh Bank Financial
Stability Report 2014 said
remarkable changes have taken
place in the financial system of
Bangladesh attributable to lower
It mentioned that the financial

system of Bangladesh was stable and
shock resilient in calendar year 2014
on an overall basis. Bangladesh
financial sector was able to stand on
strong base despite different
obstacles and achieved 6.1 percent
GDP growth on an average. Major
macroeconomic indicators
maintained steady growth due to
appropriate and timely policy
measures taken by the Government
and Bangladesh Bank. The foreign
exchange reserve has touched the
landmark of USD 25 billion which is
ranked second highest among the
SAARC countries and is also a record
in the history of Bangladesh. On the
other hand, Bangladesh has already
become a lower-middle income
country with per capita income of
USD 1314. Bangladesh Bank, like
the central banks of many other
developing countries, has
encouraged financing socially
responsible, inclusive and
environment friendly sustainable
sector for managing the risks from
instability and imbalance in financial
sector. This initiative is helping
reduce poverty rapidly. In the last
few years, remarkable changes also
took place in terms of regulation and
supervision of financial
intermediaries.
The report said, capital base of banks
has improved in last five years due
to transferring of a major portion of
banks profit into capital.
Re-capitalization and decline in
provision shortfall have strengthened
the base of financial sector.
THE BUSINESS
RISKS UNDER THE
CAPITAL MARKET,
INSURANCE MARKET
AND IN OTHER AREAS
MUST BE HANDLED
THROUGH PROPER
IMPLEMENTATION OF
THE EXISTING RULES
AND REGULATIONS.
WITHOUT ESTABLISHING
GOOD CORPORATE
GOVERNANCE, SUCH
RISKS CANNOT BE
MINIMIZED. A STRONG
COMMITMENT FROM
BOTH THE REGULATORY
SIDES AND OTHER
STAKEHOLDERS IS
URGENTLY NEEDED TO
END SUCH BUSINESS
RISKS.
The GDP growth rate remains stable

and the inflation rate remains at a
tolerable level. Foreign exchange
reserve reached the record level of
USD 25 billion. Balance of trade
decreased owing to increase in
export earning which is favourable
95
for macro-economy and the

banking sector as well.
The Bangladesh Bank Financial
Stability Report 2014 In Brief:
*
The growth of Real GDP in

Bangladesh continues to be
stable. The growth rate of GDP
increased to 6.1% in FY
2013-14 which was 6.0% in
FY 2012-13.
Monetary Policy of Bangladesh

Bank played crucial role in
keeping the inflation rate at
tolerable level.
Inflation rate declined from

7.4% in June 2014 to 7.0% in
December 2014. Notably,
both Food and Non-food
inflation declined during later
part of CY14.
96
points respectively from the ratios

of 2013 and reached to 0.7 &
8.1 percent respectively.
Increase in classified loans in a
state owned commercial bank
is one of the prime reasons of
it.
Foreign exchange reserve

stood at USD 22.3 billion
which was 23.3 percent higher
than that of end-December
2013 and was adequate to
meet more than six months
import payments.
Trade deficit narrowed due to
larger export earnings in
comparison with increase in
import payments.
Banking sector Capital

Adequacy Ratio (CAR) was
11.4 percent at end-December
2014 slightly higher than the
minimum requirement of 10.0
percent.
Banks having CARs within the
range of 10 to 16 percent
covers a large proportion of
banking sector assets (79.0
percent) which indicate
financial stability.
Banking sector profitability
declined in 2014. ROA & ROE
decreased by 20 & 260 basis
Liquidity stress remained at an

acceptable level in 2014 due
to stable call money rate and
desired level of
Advance-to-Deposit Ratio
(ADR) (70.98 percent). Call
money rate was within 6-8
percent range. However, ADR
recorded a notable increase in
the later part of the year
indicating an expected rise in
economic activities in the near
future.
The share of term deposits was
56.4 percent of total deposits
which shows banking sectors
greater reliance on term
deposits and contributes to the
stability of the financial
system. Almost half of the
deposits (51.7 percent) was
concentrated in 10 banks. This
concentration is expected to
be reduced gradually as 9
(nine) new banks commenced
business.
The capacity of the Deposit
Insurance Trust Fund (DITF) is
BDT 363.6 Crore which is
expected to reach over BDT
1000.0 Crore in 2019. The
current fund is capable to
reimburse the deposit claims
in 26 banks (lowest in
consideration of deposit).
The banking sector classified
loans increased slightly in
2014 and reached to 9.7
percent (8.9 percent in
December 2013). But, higher
maintained provision has
increased the loss absorbing
capacity of the banking sector.
It is mentionable that
adjustment of maintained provision

with the classified loans makes
the rate of net classified loan
4.2 percent which is less than
half of the gross classified loan.
New 9 (nine) banks classified

loan and profitability ratios are
lower than the banking sector,
however, capital adequacy
ratio (29.9 percent) is relatively
higher than that of the entire
banking sector. A higher
portion of safer investment in
liquid assets is one of the
prime reasons of it.
Banking Sector Risks
At end-December 2014, credit

risk appears to be most
significant, attributed 85.7
percent of the total Risk
Weighted Assets (RWA) of the
banking system. The risk was
mostly from on-balance sheet
items.
A stable credit rating and very

little downward migration of
rating of the rated entities in
2013-2014 confirm resiliency
of the financial system.
Stress Testing results reveal

that the individual banks and
the banking system, as a
whole, are resilient enough to
different level of stress
scenarios. Banks are resilient
for more than 5 business days
with severe liquidity stresses.
Non-Bank Financial
Institutions (NBFIs)
Asset quality of the non-bank

financial institutions improved
in 2014. Classified loans and
leases dropped by 30 basis
points and reached to 5.3
percent. On the other hand,
capital adequacy ratio (CAR)
increased 290 basis points and

reached to 21.2 percent. Stress
Testing results revealed that 23
(twenty three) out of 31 (thirty
one) NBFIs were resilient in
2014.
Foreign Exchange Market
Despite a little depreciation of

Real Effective Exchange Rate
(REER) from January 2013, the
nominal foreign exchange rate
movement was quite stable
and resilient during CY14.
Both the issuance and
settlement of Letter of Credit
increased. Export proceeds and
inward wage earners
remittance also increased.
banking sector). It does not pose

any immediate threat to the
stability of the financial
system. Besides the lower
NPLs (4.18% in MFIs)
compared with that of the
banking industry (9.7% in Dec
14) suggest presence of
effective check and balance
mechanism in the MFIs.
Size of Microfinance Institution

(MFI) sector is relatively small
compared to the banking
sector (asset size of the MFI
sector is only 5% of the
With the aim of ensuring and

maintaining financial stability
through strengthening policy
coordination among financial
regulators and to avoid
contradictions and
unnecessary duplications,
Bangladesh Bank has taken an
initiative to develop a
'Coordinated Supervision
Framework' for the financial
system.
Bank Health Index & Heat

Map for assessing banks
health and Early Warning
System for non-bank financial
institutions are in process of
implementation.
Developments in Financial
Infrastructure
Microfinance Institutions
and bringing mass population

under the umbrella of financial
inclusion.
In 2014 Bangladesh Bank

decided to commence
implementation of Basel III
framework from 2015 with a
view to strengthening the
capital base of the banking
sector and enhancing risk
resilience of the banks.
Bangladesh Bank took different
initiatives to bring under
banking services the unbanked
people through agent banking
and mobile financial services
The Author is Business Editor,

The Financial Express
97

Aisha Siddiqua ACA
Preface
Risk is a reality of doing business.
Whether large or small, public or private,
domestic or international, companies
today operate in a risk-filled world. In
many cases, risk is necessary for long-term
operational success; however, failure to
control risk effectively can often lead to
adverse outcomes, including damaged
reputation, loss of profits, disruption in
productivity, or in severe cases, the end of
the entity altogether. Therefore, Risk
management and Security have been
major concerns for all companies.
Nowadays, business leaders heavily invest
in security risk management, which aims
to remove guesswork and ensure that
operations run smoothly and efficiently.
Enterprise Risk Management (ERM)

definitions that drive the establishment of
risk management frameworks include:
The Institute of Internal Auditors (IIA)

defines ERM as a structured,
consistent and continuous process
across the whole organization for
identifying, assessing, and deciding on
responses to and reporting on
opportunities and threats that affect
the achievement of its objectives.
International Organization for

Standardization (ISO), April 2008
states that-Risk Management is a key
business process within both the
private and public sectors around the
world. Effective risk management and
the resulting controlled environment
are central to sound corporate
governance and for this reason, much
of the law that has been created in
response to corporate collapses and
scandals, now requires effective risk
management.
Risk Management
Risk management is a structured approach
to managing uncertainty and includes
actions taken to:
98
Identify
Assess
Monitor
Reduce the impact of risks to your

business

A risk management plan,
Describes the potential risks
Contains an analysis of the impact of

each risk
Identify Risks to Your Business
Includes risk strategies to help

the business reduce the
consequences if the event
occurs
The first step in preparing a risk

management plan is to identify
potential risks to your business.
Understanding the scope of possible
risks will help you develop realistic,
cost-effective strategies for dealing
with them.
A good risk management plan with

appropriate risk management
strategies can minimize costly and
stressful problems, and may also
reduce insurance claims and
premiums.
Preparing a Risk Management

Plan and Business Impact
Analysis
It is important that you think broadly

when considering types of risks for
your business, rather than just
looking at obvious concerns (e.g.
fire, theft, market competition).
Assessing Your Business
The process of identifying risks,

assessing risks, and developing
strategies to manage risks is known
as risk management. A risk
management plan and a business
impact analysis are important parts
to business continuity plan.
Understanding potential risks to
business and finding ways to
minimize their impacts will help
your business recover quickly if an
incident occurs.
Before you begin identifying risks,

you need to assess your business.
Think about your critical business
activities, including your key
services, resources and staff, and
things that could affect them, such as
power failures, natural disaster and
illness. Assessing your business will
help you work out which aspects
you couldn't operate without.
Types of risk vary from business to

business, but preparing a risk
management plan involves a
common process. Your risk
management plan should detail your
strategy for dealing with risks
specific to your business.
Once you have a clear picture of

your business, you can begin to
identify the risks. Review your
business plan and think about what
you could not do without, and what
type of incidents could impact on
these areas. Ask yourself:
It is important to allocate some time,

budget, and resources for preparing
a risk management plan and a
business impact analysis. This will
help you meet your legal obligations
for providing a safe workplace and
can reduce the likelihood of an
incident negatively impacting on
your business.
When, where, why and how are

risks likely to happen in your
business?
Are the risks internal or external?
Who might be involved or

affected if an incident happens?
Ways of Identifying Risk
The steps involved in preparing a

risk management plan and a
business impact analysis for business
are:
WHILE ONE
MAY BE ABLE TO
PREDICT AND DEAL
WITH A LARGE
NUMBER OF
POTENTIAL RISKS,
THERE WILL BE SOME
THAT ARE
UNEXPECTED OR
IMPOSSIBLE TO PLAN
FOR. PREPARING AN
INCIDENT RESPONSE
PLAN AND A
RECOVERY PLAN AS
PART OF ONES
OVERALL BUSINESS
CONTINUITY PLAN
CAN HELP DEALING
WITH THESE
SITUATIONS IF IT
HAPPENS.
The following are some useful

techniques for identifying risks.
Ask 'What if?' Questions
Thoroughly review your business
plan and ask as many 'what if?'
questions as you can. Ask yourself
what if:
99
You lost power supply?
You had no access to the

internet?
Key documents were

destroyed?
Your premises were damaged

or you were unable to access
it?
One of your best staff

members quit?
Your suppliers went out

business?
The area your business is in

suffered from a natural
disaster?
The services you need, such as

roads and communications,
were closed?
Brainstorm
Brainstorming with different
people, such as your accountant,
financial adviser, staff, suppliers
and other interested parties will
help you get many different
perspectives on risks to your
business.
Analyze Other Events
Think about other events that have,
or could have, affected your
business. What were the outcomes
of those events? Could they
happen again? Think about what
possible future events could affect
your business. Analyze the
scenarios that might lead to an
event and what the outcome could
be. This will help you identify risks
that might be external to your
business.
associated risks. Ask yourself what

could prevent each step from
happening and how that would
affect the rest of the process.
Consider the Worst Case Scenario
Thinking about the worst things
that could happen to your business
can help you deal with smaller
risks. The worst case scenario
could be the result of several risks
happening at once. For example,
someone running a restaurant
could lose power, which could
then cause the food to spoil. If the
restaurant owner was unaware of
the power outage or the chef
decided to serve the food anyway,
customers could get food
poisoning and the restaurant could
be liable and suffer from financial
losses and negative publicity.
Once you've identified risks
relating to your business, you'll
need to analyses their likelihood
and consequences and then come
up with options for managing
them.
Once you have identified the risks

to your business, you need to
assess the possible impact of those
risks. You need to separate minor
risks that may be acceptable from
major risks that must be managed
immediately.
Analyzing the Level of Risk
To analyze risks, you need to work
out the likelihood of it happening
(frequency or probability) and the
consequences it would have (the
impact) of the risks you have
identified. This is referred to as the
level of risk, and can be calculated
using this formula:
Level of Risk = Consequence *
Likelihood
Level of risk is often described as
low, medium, high or very high. It
should be analyzed in relation to
what you are currently doing to
control it. Keep in mind that
control measures decrease the
level of risk, but do not always
eliminate it.
A risk analysis can be documented in a matrix, such as the following:
Likelihood Scale Example

Level
Likelihood
Very likely
Likely
Unlikely
Happens every 10 years or more in this industry
Very
unlikely
Has only happened once in this industry
Description
Happens more than once a year in this industry
Happens about once a year in this industry
Consequences Scale Example

Level Consequence
Assess Your Processes
Severe
Use flow charts, checklists and

inspections to assess your work
processes. Identify each step in
your processes and think about the
High
Moderate
Low
100
Analyze and Evaluate the

Impact of Risks
Description
Financial losses greater than $50,000
Financial losses between $10,000 and $50,000
Financial losses between $1000 and $10,000
Financial losses less than $1000
Note: Ratings vary for different

types of businesses. The scales
above use 4 different levels;
however, you can use as many
levels as you need. Also use
descriptors that suit your purpose
(e.g. you might measure
consequences in terms of human
health, rather than dollar value).
Your risk evaluation should

consider:
following are different options for

treating risks.
The importance of the activity

to your business
Avoid the Risk
The amount of control you

have over the risk
Potential losses to your

business
Any benefits or opportunities

presented by the risk.
Evaluating Risks
Once you have established the
level of risk, you then need to
create a rating table for evaluating
the risk. Evaluating a risk means
making a decision about its
severity and ways to manage it.
For example, you may decide the
likelihood of a fire is 'unlikely' (a
score of 2) but the consequences
are 'severe' (a score of 4). Using
the tables and formula above, a fire
therefore has a risk rating of 8 (i.e.
2 *4=8).
Once you have identified,

analyzed, and evaluated your risks,
you need to rank them in order of
priority. You can then decide
which methods you will use to
treat unacceptable risks.
Severe
8-12
High
Needs corrective action within 1 month
4-8
Moderate
Needs corrective action within 3 months
1-4
Low
Reducing the likelihood of the

risk happening - for example,
through quality control
processes, auditing,
compliance with legislation,
staff training, regular
maintenance or a change in
procedures
Reducing the impact if the risk

occurs - for example, through
emergency procedures, off site
data backup, minimizing
exposure to sources of risk, or
using public relations.
Needs immediate corrective action
Does not currently require corrective action
unacceptable risks to your

business. Unacceptable risks range
in severity; some risks will require
immediate treatment while others
can be monitored and treated later.
Costs involved
Benefits of treatment
Likelihood of success
Risk analysis and Evaluation will

help you priorities the risks that
need to be treated. When you are
developing a plan for treating the
risks, consider:
Ways to measure the success

of treatments.
People responsible for

treatment
Action
12-16
You can reduce a risk by:
Treating risks involve working

through options to deal with
Risk rating Description
Method of treatment
Reduce the Risk
Treat Risks to Your Business
Risk Rating Table Example
If it is possible, you may decide not

to proceed with an activity that is
likely to generate risk.
Alternatively, you may think of
another way to reach the same
outcome that does not involve the
same risks. This could involve
changing your processes,
equipments, or materials.
How and why you have chosen to

treat risks should be outlined in
your risk management plan. It is
important to review your plan
regularly to take into account any
new risks associated with changes
in your business or improvements
in techniques for treating risks. The
Transfer the Risk

You may be able to shift some or
all of the responsibility for the risk
to another party through insurance,
outsourcing, joint ventures, or
partnerships. You may also be able
to transfer risk by:
Cross-training staff so that

more than one person knows
how to do a certain task and
you don't risk losing essential
skills or knowledge if
something happens to one of
your staff members
Identifying alternative suppliers

in case your usual supplier is
unable to deliver
101
operate in. Regularly reviewing

your risk management plan is
essential for identifying new risks
and monitoring the effectiveness of
your risk treatment strategies.
Strategies for Testing Your

Find out about strategies for
testing, evaluating, and updating
your risk management plan and
your business continuity plan.
Business Continuity
Keeping old equipment (after it

is replaced) and practicing
doing things manually in case
your computer networks or
other equipment cannot be
used
Make Sure You Have

Adequate Insurance
You should also check that you:
Have coverage for the loss of

income you could incur if
customers affected by the crisis
stop ordering your product or
service
Have appropriate insurance to

cover other related issues such
as on-site injuries to staff or
visitors, or for loss of your
customers' goods or materials
102
Have coverage in case your

supplier/s are affected by a
crisis and can't deliver
necessary supplies for your
business
Are meeting your workers

compensation obligations in
case any of your staff are
injured in a crisis. Find out
more about business
insurance.
Accept the Risk

You may accept a risk if it cannot
be avoided, reduced, or
transferred. Other risks may be
extremely unlikely and therefore
too impractical or expensive to
treat. However, you will need to
develop an incident response plan
and a recovery plan to help you
deal with the consequences of the
risk if it occurs.
Review and Update Your

You will need to test, evaluate, and
update your risk management plan
regularly as risks can change with
change in your business, your
industry and the environment you
Your risk management plan should

be part of a broader business
continuity plan that includes
strategies for responding to and
recovering from incidents if they
do happen. Making sure your
business continuity plan is reliable
and up to date will help you
resume operations quickly after an
incident and reduce the impact to
your business.
While one may be able to predict
and deal with a large number of
potential risks, there will be some
that are unexpected or impossible
to plan for. Preparing an incident
response plan and a recovery plan
as part of ones overall business
continuity plan can help dealing
with these situations if it happens.
A risk management plan is the
prevention step in the prevention,
preparedness, response and
recovery (PPRR) model of business
continuity planning.
Conduct a Business Impact

Analysis
Once you have developed a risk
management plan, you can
conduct a business impact analysis
to assess the likely impact of these
risks on your business operations.
This is the preparedness step in the
prevention, preparedness, response
and recovery (PPRR) model for
developing a business continuity

plan.
Critical Business Activities

A business impact analysis
identifies the activities in your
business operations that are key to
its survival. These are referred to as
critical business activities. You
should consider things such as:
The records and documents

you need everyday
The resources and equipment

you need to operate
The access you need to your

premises
The skills and knowledge your
staff have that you need to run
your business
recovery time objectives to each

activity to help determine your
basic recovery requirements. The
recovery time objective is the time
from when an incident happens to
the time that the critical business
activity must be fully operational in
order to avoid damage to your
business.
Your business impact analysis will
help you develop your recovery
plan, which will help you get your
business running again if an
incident does happen.
Key Questions in a Business

Impact Analysis
To conduct a business impact
analysis for your business, ask
yourself:
What are the daily activities

conducted in each area of my
business?
What are the long-term or

ongoing activities performed
by each area of my business?
External stakeholders you rely

on or who rely on you
The legal obligations you are

required to meet
The impact of ceasing to

perform critical business
activities
What are the potential losses if

these business activities could
not be provided?
How long your business can

survive without performing
these activities
How long could each business

activity be unavailable for
(either completely or partially)
before my business would
suffer?
As part of your business impact

analysis, you should assign
Do these activities depend on

any outside services or
products?
How important are the

activities to my business? For
example, on a scale of 1 to 5
(1 being the most important
and 5 being the least
important), where would each
activity fall in relation to the
rest of the business?
As the risks to the business change,

so will their potential impacts.
When you update your risk
management plan, you will also
need to conduct a new business
impact analysis.
Conclusion
While business risks are
abounding, and their
consequences can be destructive,
there are ways and means to insure
against them, to prevent them and
to minimize their damage if and
when they occur. Finally, hiring a
risk management consultant may
be a prudent step in the prevention
and management of risks.
The Author is an
Associate Member, ICAB
103
Imposition of Income Tax on Employee Tax Payers

on Medical Aid Vis-a-Vis Justice and our Constitution
Md. Asaddar Ali FCA
The Tax referred to the caption has been
made lawfully mandatory on certain

criterion as per amended Rule 33 I (CHA)
at Page 76 of Bangla Booklet titled
PAPRIPATRA-2014 (Income tax) published
by the Government for Changes in Income
Tax Rules in the Budget for 2014-2015
Financial Year.
I give here went to my thoughts for
perusal of any kind consideration by the
relevant authorities either in order to
replace it by the earlier legal provision
with more benefit to the employees in
general or retain it as a legalised and
enforced right of the Government in view
of the following facts.
Most of such employees are members of
modern single families (if joint families of
the past) and can't afford to bear medical
expenses with monthly salary income
only, except those having other sources of
income. Their employers are generally
entrepreneurs with limited financing
sources, but even then they are kind
enough to accord medical help to such
employees--mostly on humanitarian
grounds.
Under such circumstances, our state
extends medical aid to an employee
accorded by an employer on humanitarian
grounds instead of providing any state
104
welfare, benefit on genuine Human

Rights, although a democratic country
may not be a Welfare State as per
constitution. But even then, such a
country should not be blind to the Welfare
and the Human Right Benefits altogether.
In our country, many persons rightly enjoy
financial exemptions/benefits for their
personal contribution to the nation in their
relevant fields of politics, economy and
society.
Black Money Tax Payers also enjoy some
benefits with certain conditions for making
such white with reduced tax rate
compared to generally higher tax rate
applicable to genuine Tax Payers. But the
poor Employee Tax Payers can't even
think of such opportunities, rather they
represent the other side of the coin
(Thanks to the coin of our erstwhile British
Rules). Incentive to the Black Money
Holders encourages them to explore their
network for enlarging their group both
with fund and persons, if not on physical
contact, at least by the allurement paying
less tax on legalised rights of honour.
On the other hand, the constitution of our
country, in Article 15, states, "It shall be a
fundamental responsibility of the state to
attain, through planned economic growth,
a constant increase of productive forces
and a steady improvement in the material
and cultural standard of living of the
OUR STATE
EXTENDS MEDICAL AID
TO AN EMPLOYEE
ACCORDED BY AN
EMPLOYER ON
HUMANITARIAN
people, with a view to securing to its
citizens -(a) the provision of the basic
necessities of life, including
food, clothing, shelter,
education and medical care;
[(b) (c) and (d) - (not relevant in the
subject matter hereof)].
From the facts stated above, it is
apparent that it is a fundamental
responsibility of the State to secure
to the needy people much medical
care by rendering such services
through its different types of Hospital
all over the country. But how far it is
justified for the Government to share
Humanitarian Medical Aid
contributed some benevolent
employers to the poor Employee Tax
Payers; The Employers personally
see the Health and Financial Woes

of their needy Employees walk hand
in hand and so the Employers open
up their purse to render medical
help.
GROUNDS INSTEAD OF
Therefore, the concerned

Government Authorities may,
please, re-think the issue of
justification of sharing such medical
aid and may, please, take remedial
measures, if they are convinced
with.
RIGHTS.
PROVIDING ANY STATE

WELFARE, BENEFIT ON
GENUINE HUMAN
Begged to be excused if I have dealt

with any irrelevant matter for my
wrong understanding.
The Author is a
Fellow Member (deceased), ICAB
105
Evolving Business Risk Management

Md. Ziaur Rahman ACA
Executive Summary
Risk management teams are fighting to
keep pace with a range of new and
evolving risks that impose significant
threats to their business. The evolving risks
that have a financial impact on their
business were supply chain/infrastructure,
environmental, cyber and directors and
officers liability risks. The global financial
crisis has triggered risk management to
rise up the corporate program, but
evolving risks have not yet been
embedded in board level discussions on
wider risk management issues. The cause
is the lack of management attention as the
biggest barrier to effective risk
management, and this in turn hints to lack
of human resources and risk management
tools and processes to manage them.
Todays risk challenges demand a
cross-disciplinary approach, with the risk
function working closely alongside the
business to identify, assess and mitigate

key exposures. Compounding this
complexity is that fact that risks are often
interconnected: real world events do not
respect neatly delineated risk categories.
Evolving risks create a number of
obstacles to success, as they combine to
create a hugely challenging environment
not just for professional risk managers, but
also for all senior executives. Creating the
right framework for enterprise risk
management, and building the knowledge
and tools to track and mitigate all these
risks, is hugely challenging. If the
insurance industry is to meet expectations
of risk managers and senior executives it
will need to make a shift from product to
a service mentality, and clients will need
to shift from a transactional to a strategic
approach to their insurance partnerships.
Overview
The global financial crisis has
undoubtedly caused risk management to
rise up the corporate agenda and,
although the worst of the crisis may now
be behind us, its aftermath continues to be
felt in an ever more complex and dynamic
risk environment.
Some risks, such as cyber risk, are
relatively new. Others like environmental
and directors and officers (D&O) risks,
have been around for a long time, but
106
have taken on a new dimension due

to social, economic and regulatory
change. Indeed, the impact of
increased regulation can repeatedly
be seen in this survey. So too can the
impact of increasing globalization,
which is creating new exposures, as
companies expand internationally
via more complex, extended supply
chains.
Identifying and monitoring evolving

risks is far from straightforward. It
requires non-traditional approaches
and a willingness to listen to
dissenting voices that are willing to
challenge received wisdom.
Compounding this complexity for
risk managers is the fact that these
risks are often interconnected. Real
world events do not respect neat
categories. An environmental
incident affecting an important
supplier in Thailand can quickly
become a supply chain risk with a
severe financial impact for a
company on the other side of the
world. Understanding the
interdependencies between different
processes, operations and players in
the global supply chain is one the
most critical tasks an organization
can undertake in todays business
environment
Innovative Methodologies
Identifying and monitoring evolving
risks is far from straightforward. It
requires non-traditional approaches
and a willingness to listen to
dissenting voices that are willing to
challenge received wisdom.
However, the dynamic nature of
todays risk environment means that
it should be a growing priority for
companies to have the right
capabilities and processes to monitor
their evolving risks, as part of a
broader enterprise-wide approach to
risk management.
Similarly, identifying and managing
evolving risks cannot be an isolated
activity. Cyber risks cannot be the
responsibility of the IT function
alone, any more than supply chain
risks being the sole responsibility of
the operations team. Todays risk
challenges demand a
cross-disciplinary approach, with the
risk function working closely
alongside the business to identify,
assess and mitigate key exposures.
The risk management function plays
a vital role in this process. Perhaps
most important of all, this study also
suggests that many senior executive
teams could give more attention to
the discussion of evolving risk. By
setting the right tone from the top,
their businesses will be more likely
to ensure that they take a more
proactive approach towards their
management.
We must remember, however, that
the risks covered in this report are
often a corollary of the opportunities
that companies are rightly pursuing
in their quest for growth. By
understanding and responding to this
array of evolving threats and
challenges, risk managers can help
their organizations to put their
strategic plans on a sustainable
footing. And, by working with them
in a collaborative way and taking a
strategic approach to their client
relationships, insurance brokers and
CYBER RISKS
CANNOT BE THE
RESPONSIBILITY OF THE
IT FUNCTION ALONE,
ANY MORE THAN
SUPPLY CHAIN RISKS
BEING THE SOLE
RESPONSIBILITY OF THE
OPERATIONS TEAM.
TODAYS RISK
CHALLENGES DEMAND A
CROSS-DISCIPLINARY
APPROACH, WITH THE
RISK FUNCTION
WORKING CLOSELY
ALONGSIDE THE
BUSINESS TO IDENTIFY,
ASSESS AND MITIGATE
KEY EXPOSURES.
107
underwriters can ensure they

support economic growth and
recovery.
Environmental Risk
Evolving Risks
It is clear from our study that the
issues that most keep risk managers
awake at night right now are not
only the headline grabbers.
Exposures to terrorist threats or
confiscation of their assets in
far-flung places, important as these
are, do not supplant other equally
important risks. Instead, the
evolving risks have a financial
impact on their business are supply
chain/infrastructure,
environmental, cyber and D&O
liability. The embedded, systemic
nature of these risks makes them
difficult to isolate and complex to
manage and success will require
increasing corporate focus and
better quality dialogue between
risk managers.
The risk barometer research also

indicates the rising importance of
environmental risks, which are
second only to supply chain and
infrastructure in terms of financial
influence. With tougher
government regulation and more
vocal stakeholder concerns,
companies are being held
accountable for their
environmental impact as never
before.
Cyber Risk
Supply Chain and

Infrastructure
Of all the risks facing businesses

today, supply chain and
infrastructure risk is the one that
business leaders expect to have the
biggest financial impact. Todays
high-tech supply chains are the
backbone of business performance,
but they are also increasingly
vulnerable, particularly as
companies continue their drive to
cut costs. Failing to strike the right
balance between lean supply
chains and resilience can lead to
devastating risk events.
108
It is also no wonder that risk

managers are becoming
increasingly concerned about the
possibility of cyber risk. In recent
years, cyber risk has become
virtually unavoidable as companies
become increasingly dependent on
technology. Indeed, it was recently
identified in other research as the
top systemic threat facing global
financial markets and
infrastructures. But there are signs
that companies may still be
underestimating cyber risk.
years. Although hardly a new risk,

D&O liabilities are constantly
evolving against the backdrop of
the global financial crisis, changing
regulation and companies
international footprint. Business
executives are particularly
concerned about reporting errors
and exposures related to bribery,
fraud and corruption.
Impediments to Success
These risks combine to create a
hugely challenging environment
not just for professional risk
managers, but also for all senior
executives. Creating the right
frameworkfor enterprise risk
management, and building the
knowledge and tools to track and
mitigate all these risks, is hugely
challenging.
The obstacles to effective risk
management are two-fold. First,
companies are not making sure
that the right people are giving
attention to the right risks at the
right time. When asked what they
consider to be the biggest barriers
to the management of evolving
risks, respondents point to lack of
management attention as the
number one factor.
D&O Burden
Directors and officers risk has been
a key issue on the boardroom
agenda for the past decade.
Respondents place it joint third, in
terms of its likely financial impact
on their business over the next few
Managing evolving risks requires a

multidisciplinary effort, with all
functions working together, and
with external experts to augment
capabilities and address
challenges.
The Chief Risk Officer must lead
the corporate response to these
challenges, monitoring new threats
and pinpointing the right issues for
managements attention. But, most
important of all, managing
evolving risks requires a
multidisciplinary effort, with all
functions working together to
address these challenges
effectively, as well as working with
external experts to augment
capabilities. Ultimately as ever in
risk management, it is a question of
having the right culture in place,
backed by strong governance and
best practice processes.
The second biggest obstacle is a
lack of human resources and skills.
Resourcing is itself a major issue,
particularly against a backdrop of
ongoing cost-cutting and efficiency
drives. In other words, companies
are not yet investing in the
headcount or external support
needed to manage a highly
dynamic evolving risk
environment.
The Role of Insurance

Markets
Specific insurance market products
are evolving as risks become more
complex. The industry has an
opportunity to bring its wider
knowledge and expertise to bear in
ways that help its clients to
improve their risk management
approach.
But it is clear that the insurance
industry as a wholeincluding
underwriters, brokers, claims
managers and loss
adjustersneeds to communicate
more effectively with the risk
managers that we serve. The big
four risks that top our barometer
require a more consultative
approach.
Ultimately, if the insurance
industry is to meet expectations it
will need to make a shift from a
product to a service mentality
and clients will need to shift from a
transactional to a strategic
approach to their insurance
partnerships. This will allow
insurers to partner better with
companies on risk management as
well as risk transfer. Today's more
complex operating environment
and the era of 'big data' will also
require insurers, brokers and
clients to get into the habit of

sharing more and better quality
information with each other.
Conclusion
Evolving risks are such risks which

cant be treated as isolated rather
those should be treated as
interconnected with various
departments, geographical
locations etc.The evolving risks
may cast huge impact on the
businesss financial and
non-financial activities. The
ultimate success of the business
depends on the proper handling of
those risks. In this case
management should be proactive
rather than reactive. To survive in
the so highly competitive market
management should invest fund
and develop corporate culture to
turn the evolving risks into key
success factors of the business.
The Author is an
109
Managing Risk in Banking

Md. Ashraful Azim FCA
Risk
Risk is defined as the chance that an
investment's actual return will be different
than expected. This includes the
possibility of losing some or all of the
original investment.
Risks are uncertain future events that
could influence the achievement of the
Banks objectives as well as others,
including strategic, operational, and
financial and compliance objectives.
Uncertain Future Events Could Be:
Failure of a borrower to repay a

financing
Fluctuation of foreign exchange rates
Fraud, incomplete security

documentations, etc
Non-compliance with law and

principles
Other events that may result in a loss
to the Bank
Risk Management
Risk taking is an inherent element of the
banking business and indeed, profits are
in part the reward for successful taking in
110
business. On the other hand, excessive

and poorly managed risk can lead to
losses and thus endanger the safety of a
Banks depositors. Risk management
involves identification, measurement,
aggregation, evaluation, mitigation,
monitoring and controlling of risks to
ensure that:
a) The organizations risk exposure is
within the limits established by the
board;
b) Risk taking decisions are explicit and
clear;
c) Risk taking decisions are in line with
the business strategy and objectives set
by the board;
d) The expected payoffs compensate for
the risks taken; and
e) Sufficient capital as a buffer is
available to take risk.
Sound Risk Management Systems

Enable Managers to Take Risk
Knowingly
Sound risk management systems enable
managers of banking companies to take
risks knowingly, reduce risks where
appropriate and strive to prepare for a
future, which by its nature cannot be
predicted with absolute certainty.

Risk management is a discipline at
the core of every banking company
and encompasses all activities that
affect its risk profile. Risk
management is very important
especially when the banks are
dealing with multiple activities,
involving huge funds having both
local and international currency
exposure.
Core Risk in Banks

Banks are exposed to six (6) core
risks through their operation, which
are-Credit Risk Management (CRM),
Asset/Liability Management Risk
(ALM), Foreign Exchange (Forex.).
Risk, Internal Control & Compliance
Risk, and Anti Money Laundering
(AML) risk and Information and
Communication Technology risk.
Brief elaborations of all core risk in
banking are given below:
A. Policy Guidelines
Lending Guidelines
Credit Assessment and Risk

Grading
Approval Authority
Segregation of Duties
Internal Audit
Policy Guidelines-Lending
Industry and Business Segment

Focus
Types of Loan Facilities
Single Borrower/ Group Limits
Lending Caps
Discouraged Business Types
Loan Facility Parameters
Cross Border Risk
THE ESSENCE
OF RISK MANAGEMENT
Policy Guidelines -Credit

Assessment
IS NOT AVOIDING OR
Borrower Analysis
Industry Analysis
DECIDING WHICH
Risk is inherent in all aspects of a

commercial operation; however for
Banks and financial institutions,
credit risk is an essential factor that
needs to be managed. Credit risk is
the possibility that a borrower or
counter party will fail to meet its
obligations in accordance with
agreed terms. Credit risk, therefore,
arises from the banks dealings with
or lending to corporate, individuals,
and other banks or financial
institutions. Credit risk management
needs to be a robust process that
enables banks to proactively manage
loan portfolios in order to minimize
losses and earn an acceptable level
of return for shareholders.
Supplier/Buyer Analysis
Historical Financial Analysis
Projected Financial Performance
Account Conduct
INVESTORS AND
Adherence to Lending
Guidelines
OR HEDGE.
Credit Risk Management Should be

Organized in the Following Three
Major Sections
Credit Risk Management
A. Policy Guidelines
B. Preferred Organizational
Structure
C. Procedural Guidelines
Mitigating Factors
Loan Structure
Security
Name Lending
ELIMINATING RISK BUT

RISKS TO EXPLOIT,
WHICH ONES TO LET
PASS THROUGH TO
WHICH ONES TO AVOID
Policy Guidelines-Risk Grading
Superior-Low Risk
Good-Satisfactory Risk
Acceptance-Fair Risk
Marginal/Watch List-Above
Average Risk
Special Mention-Potential
weakness
Substandard-Weak Financial
Condition
111
Doubtful-Repayment Unlikely
(non-performance)
Bad and Loss-On the verge of

wind-up (non-performance)
Policy Guidelines-Approval
Authority
Credit approval authority must

be delegated in writing from
the MD/CEO & Board (as
appropriate) and it should be
reviewed annually by
MD/CEO/Board
The credit approval function
should be separate from the
marketing/relationship
management (RM) function and
approvals must be evidenced in
writing, or by electronic
signature. Approval records
must be kept of file with the
Credit Applications.
Policy Guidelines-Segregation of
Duties
Credit Approval/Risk
Management
Relationship
Management/Marketing
Credit Administration
Policy Guidelines-Internal Audit

Banks should have a segregated
internal audit/control department
to conduct audits of all
departments. Audits should be
carried out annually, and should
ensure compliance with regulatory
guidelines, internal procedures,
and Lending Guidelines and
Bangladesh Bank requirements.
C. Procedural Guideline
Approval Process
Investment (Credit)
Administration
Investment (Credit) Monitoring
Investment (Credit) Recovery
Procedural Guideline-Credit
Administration)
112
Disbursement
Custodial Duties
Compliance Requirements
Procedural Guideline-Credit
Monitoring)
To minimize credit losses,
monitoring procedures and Early
Alert Process should be in place
that provide in early inductions of
the deteriorating financial health of
a borrower.
Procedural Guideline -Credit
Recovery)
NPL Account Management
Account Transfer Procedures
NPL Monitoring
NPL Provisioning and Write

Off
Other Regulations of BB Relating

to Credit Risk
Policy on Loan classification
Policy on single Borrower

Exposure
Policy for Rescheduling of

Loans
Policy for loan write off
Guidelines on managing core

risk in Banking
Guidelines on Environmental
Risk Management
Restrictions on Lending to
Directors of Private Banks
Implementation of Credit Risk

Grading Manual
Prudential Guidelines for

Consumer Financing and Small
Enterprise Financing
Green Banking
Asset Liability Management

(ALM)
ALM means ensuring efficient and
effective use of available resources.
Therefore Asset Liability
Management (ALM) can be defined

as a well-planned, well-organized
and systematic process of
monitoring and maintaining assets
and liabilities of the Bank which
focuses on maximization of profit
through minimization of various
risks like liquidity risk, market risk,
rate of return risk etc. and
ultimately leads the Bank to a
healthy and stable growth.
Foreign Exchange Risk

The risks of an investment's value
changing due to changes in
currency exchange rates. The risks
that an investor will have to close
out a long or short position in a
foreign currency at a loss due to an
adverse movement in exchange
rates also known as "currency risk"
or "exchange-rate risk".
Internal Control &

Compliance Risk
Internal control is the process,
effected by a company's board of
directors, management and other
personnel, designed to provide
reasonable assurance regarding the
achievement of objectives in the
effectiveness and efficiency of
operations, the reliability of
financial reporting and compliance
with applicable laws, regulations,
and internal policies. Internal
controls are the policies and
procedures established and
implemented alone, or in concert
with other policies or procedures,
to manage and control a particular
risk or business activity, or
combination of risks or business
activities, to which the company is
exposed or in which it is engaged.
Anti Money Laundering Risk

Money laundering is the process of
making illegally-gained proceeds
(i.e. dirty money) appears legal
(i.e. "clean"). Typically, it involves
three steps: placement, layering
and integration. First, the
illegitimate funds are furtively

introduced into the legitimate
financial system. Then, the money
is moved around to create
confusion, sometimes by wiring or
transferring through numerous
accounts. Finally, it is integrated
into the financial system through
additional transactions until the
"dirty money" appears "clean.
Information &
Communication Technology
Risk
ICT risk management is the
application of risk management
methods to information technology
in order to manage ICT risk.
Security of information for a Bank
has gained much importance and it
is vital for us to ensure that the
risks are properly identified and
managed. Moreover, information
and information technology
systems are essential assets for the
Bank as well as for customers and
stakeholders. Banks must take the
responsibility of protecting the
information from unauthorized
access, modification, disclosure
and destruction. Bank must ensure
security of information and
information systems such as data
security including facility design,
physical security, network security,
disaster recovery and business
continuity planning, use of
hardware and software, data
disposal and protection of
copyrights and other intellectual
property rights.
Basel-III and Risk

Management
To strengthen global capital and
liquidity rules with the goal of
promoting a more resilient banking
sector, the Basel Committee on
Banking Supervision (BCBS) issued
Basel III: A global regulatory
framework for more resilient banks
and banking systems in
December 2010.
Basel-III
I.
BASEL III is a global regulatory

standard on bank capital
adequacy, stress testing and
market liquidity risk agreed
upon by the members of the
Basel Committee on Banking
Supervision in 2010-11.
II. Basel III is a comprehensive set

of reform measures, developed
by the Basel Committee on
Banking Supervision, to
strengthen the regulation,
supervision and risk
management of the banking
sector.
Necessary of this global standard
(Basel Accord)
Basel-III Accord or global standard
is vital for a healthy financial
system because:a) Basel III requires banks to
maintain higher levels of
capital with minimum common
equity Tier-1 holdings at banks
at least 4.5% of total Risk
Weighted Assets.
b) Basel-III has introduced a
capital conservation buffer
2.5% of RWA. Banks are
required to maintain a capital
conservation buffer of 2.5%,
comprised of Common Equity
Tier 1 capital, above the
regulatory minimum capital
requirement of 10%. Banks
should not distribute capital
(i.e. pay dividends or bonuses
in any form) in case capital
level falls within this range.
However, they will be able to
conduct business as normal
when their capital levels fall
into the conservation range as
they experience losses
c)
Instructions of Basel-III will be

adopted in a phased manner
starting from the January 2015,
with full implementation of
capital ratios from the
beginning of 2019, as per
Bangladesh Banks guidelines.

All banks will be required to
maintain the following ratios
on an ongoing basis:
I.
Common Equity Tier 1 of at

least 4.5% of the total RWA.
II. Tier-1 capital will be at least

6.0% of the total RWA.
III. Minimum CRAR of 10% of the
total RWA.
d) Basel-III has added a leverage
ratio as a backstop for the
risk-based capital approach, to
ensure banks do not become
unduly leveraged on a
non-risk-weighted basis and
standards for bank liquidity and
funding, designed to promote
the resilience of a banks
liquidity risk profile to both
short and longer-term
disruptions.
Three (3) pillars" Concept of
Basel-III Accord:
I.
Pillar-1: Minimum Capital

Requirements (MCR),
II. Pillar-2: Supervisory Review

Process (SRP) and,
III. Pillar-3: Market Discipline.
Pillar-1: Minimum Capital
Requirements:
The first pillar deals with
maintenance of regulatory capital
calculated for three major
components of risk that a bank
faces:
I.
Credit risk,
II. Market risk and,

III. Operational risk
1) The credit risk component can
be calculated in three different
ways of varying degree of
sophistication, namely
standardized approach,
Foundation IRB and Advanced
IRB
2) For operational risk, there are
113
three different approaches Basic Indicator Approach (BIA),

Standardized Approach (STA),
and the internal Measurement
Approach (AMA).
3) Market risk: Here equities
portfolio and foreign exchange
position are considered for
calculation of capital charge.
a) Capital charge for equity

position risk: The capital
charge for equities would apply
on their current market value in
banks trading book and capital
charge for both specific and the
general market risk will be @
minimum CRAR.
charge for foreign exchange

risk will be @ of the required
minimum capital adequacy
ratio of banks overall foreign
exchange exposure including
gold.
Example for Calculation of Risk
Weighted Assets (RWA):
b) Capital charges for foreign

exchange risk: The capital
Example for Calculation of Risk Weighted Assets (RWA):

Credit Risk: (For claims on corporate)
Clients
Exposure
(Tk. in Crore)
Credit rating
BBs equivalent rating
Risk Weight
100.00
AA
20%
50.00
BBB
100%
50.00
Unrated
Unrated
125%
Total
200.00
Total Credit Risk Weighted Assets
RWA
(Tk. in Crore)
100*20%=20.00
50*100%=50.00
50*125%=62.50
132.50
Market Risk:
RWA= Equities Exposures X Beta Factor (MCR)------------------ =25.00*10=250.00 crore

Net Long Position X Beta Factor------------------------=100.00*10%=10.00 crore
Operational Risk
SL
1
Operational Risk
Gross Income
year 1
500.00
Year 2
550.00
year 3
600.00
RWA
82.50 crore
Basic Indicator Approach: Capital Charge=(Year1+ year2+year3)/3*15%

Total RWA (Credit Risk+ Market Risk+ Operational Risk) =475.00 crore
Suppose the Regulatory Capital of ABC bank is BDT. 60.00 crore
1. Capital to Risk Weighted Assets Ratio (CRAR):
The Capital to Risk-weighted Asset Ratio (CRAR) is calculated by taking eligible regulatory capital as
numerator and total RWA as denominator. Such as:-
CRAR=
Total Regulatory Capital

Credit RWA+ Market RWA+ Operational RWA
So, CRAR= Total Eligible Capital/ Total RWA =60.00/475.00
114
=12.63%
Other Risks Related to

Banking Operation
Residual Risk
Concentration Risk
Interest Rate Risk
Liquidity Risk
Reputation Risk
Strategic Risk
Settlement Risk
Appraisal of Core Risk

Compliance
Environmental and Climate

Change Risk
Other Material Risk
Residual Risk
While banks use different
techniques to reduce their credit
risk, improper application of these
techniques give rise to additional
risks that may render the overall
risk management less effective.
Accordingly, these additional risks
(e.g. documentation risk, valuation
risk) are termed as Residual
Risks.In the context of Bangladesh
Bank, Bangladesh Bank has
observed that Residual Risk arises
mainly out of the situations from
Error in Documentation and Error
in valuation of collateral
Concentration Risk
Concentration risk arises when any
bank invests its most or all of the
assets to single or few individuals
or entities or sectors or
instruments. That means when any
bank fails to diversify its loan and
investment portfolios,
concentration risk emerges.
Profit (Interest) Rate Risk

Interest Rate Risk is the current or
potential risk to the interest rate
sensitive assets and liabilities of a

banks balance sheet items arising
out of adverse or volatile
movements in market interest rate.
Liquidity Risk
Liquidity risk is the risk that a given
security or asset cannot be traded
quickly enough in the market to
prevent a loss (or make the
required profit) or when a bank is
unable to fulfil its commitments in
time when payment falls due.
Reputation Risk
Reputation Risk is the current or
prospective risk to earnings and
capital that arise from decline in
the customer base, costly litigation
to adverse perception of the
stakeholders. It can originate from
the lack of compliance with
industry service standards or
regulation, failure to meet
commitments, inefficient and poor
quality customer service, lack of
fair market practices, unreasonably
high cost and inappropriate
business conduct.
Strategic Risk
Strategic risk means the current
prospective risk to earnings and
capital arising from imperfection in
business strategy formulation,
inefficiencies in implementing
business strategy,
non-adaptability/less adaptability
with the changes in the business
environment and business
decisions.
Settlement Risk
Settlement risk arises when an
executed transaction is not settled
as the standard settlement system
suggests or within predetermined
method.
Environmental and Climate

Change Risk
Environmental and climate change
risk refers to the uncertainty or
probability of losses that originates
from any adverse environmental or
climate change events (natural or
manmade) and/ or the
non-compliance of the prevailing
national environmental
regulations.
Other Material Risk

The risks which have not been
identified earlier but are material
for the institution is known as
material risk.
Operational Risk
Management
As per Basel-III, Operational Risk is
the Risk of loss resulting from
inadequate or failed internal
processes, people and systems or
from external events....
Types of Operational Risk:
Strategic or External Risk and
Internal Failure Risk
Strategic or External Risk

It refers to the risk of choosing
inappropriate strategy in response
to environmental factors, such as
Political, Regulation, taxation,
societal, competition etc. It is also
known as external operational risk.
Internal Failure Risk

It arises from the people, process
and technology used in pursuit of a
business strategy.
115
Operational Risk Cause Factors and Their Examples
Risk Cause Factors
Process
People
System
External
Explanation of risk cause factors

Inadequate/inappropriate Guidelines, Policies & Procedures,
failure of communication
Erroneous data entry
Inadequate reconciliation
Poor legal documentation
Inadequate security control
Breach of regulatory & statutory provisions requirements
Inadequate change management Process
Inadequate back up/ contingency plan
Breach of internal guidelines
Breach of delegated authority
Criminal acts (Internal)
Inadequate segregation of duties
Inexperienced staff
Unclear rules & responsibilities
High turnover
Inadequate hardware/network/server maintenance
Criminal acts
Vendor mis-performance
Manmade disaster
Natural disaster
Political/legislative/regulatory causes
Conclusions
The essence of risk management is
not avoiding or eliminating risk but
deciding which risks to exploit,
which ones to let pass through to
investors and which ones to avoid
or hedge. Risk management
prevents an organization from
suffering acceptable loss that can
cause failure or can materially
116
damage its competitive position.

Risk management should be a
continuous and developing process
which runs throughout the
organizations strategy and the
implementation of that strategy. It
should address as many of the risks
surrounding the organizations
activities past, present and in
particular, future, as possible. In
the case of a bank, functions of risk
management should actually be

bank specific dictated by the size
and quality of balance sheet,
complexity of functions, technical/
professional manpower and the
status of Management Information
System of the bank.
The Author is a Fellow Member, ICAB
and Vice President of a Private
Commercial Bank
Micro Finance Business &

Its Risk Management
Naznin Sultana ACA
Prologue
Microfinance is a general term to describe financial services to low-income individuals
or to those who do not have access to typical banking services. Microfinance is also the
idea that low-income individuals are capable of lifting themselves out of poverty if
given access to financial services.
Risk Factors
MFIs risk can be categorized into the following:
Risk Category
Subcategories
Credit
Financial risks
Market
Liquidity (internal)
Transaction (internal)
Fraud and Integrity (internal)
Technological (internal)
Operational risks
Human Resources (internal)
Legal and Compliance (internal)
Environmental (external)
Performance (internal)
External Business (external)
Reputational (external)
Strategic risks
Governance (internal)
Country (external)
Producer risks
Regulatoryrisk
Experience
Technology
Management Ability
Country lawsand regulation
Specific risks
Loan portfolio(internal)
Interest rate (internal or external)
Loan enforcement practices (internal)
Loan rescheduling and refinancing
practices (internal)
Prices (external)
Markets (external)
Exchange rate (currency) (external)
Value chain(external)
Cash flow management issues (internal)
Branch-level authority limits on lending
Information on and technology
Staff training Operational manuals
Operational audits, financial audits
Specific environmental impacts
Generating profits and returns on assets
and on equity to attract investors
New financial sector laws
Competitive pressures (existing, new
actors)
Changes in regulatory practices
(licensing and reporting requirements)
(external) Lack of board consistency and
direction on (internal)
Relationships with donors and
government programs (external)
Change in country laws and regulation.

117
Risk Minimization Strategy

Risk taking is an inherent element
and integral part of financial services
in general and of microfinance in
particular and, indeed, profits are in
part the reward for successful risk
taking in business. On the other
hand, excessive and poorly managed
risk can lead to losses and thus
endanger the safety and soundness
of microfinance institutions and
safety of microfinance institutions
depositors. Consequently,
microfinance institutions may fail to
meet its social and financial
objectives. This implies that
proactive risk management is
essential to the long term
sustainability of microfinance
institutions. Therefore, it is believed
that effective risk management
allows MFIs to capitalize on new
opportunities and to minimize
threats to their financial viability.
The process of risk management
should be commensurate with the
size and complexity of the
institution. While the types and
degree of risks in microfinance
institutions may vary upon a number
of factors such as size, complexity,
business activities, volume etc.
There is no single risk management
system that would fit for all
microfinance institutions. However,
risk management program should at
a minimum cover the following most
common risks:
a. Strategic risk
b. Credit risk
c. Liquidity risk
d. Interest rate risk
e. Operational risk
Risk Management Process

Risk management is a continual
process of systematically identifying,
118
measuring, monitoring and

managing risks in the organization.
Risk Management is a discipline at
the core of every institution and
encompasses all the activities that
affect its risk profile. Risk
management as commonly
perceived does not mean
minimizing risk; rather the goal of
risk management is to optimize
risk-reward trade-off. This can be
achieved through putting in place an
effective risk management
framework which can adequately
capture and manage all risks an
institution is exposed to. Risk
Management entails four key
processes. Regardless of the risk
management program, each risk
management program should
include the following:
a.
Risk Identification: The first step

in risk management is to identify
risk. Almost every product and
service offered by microfinance
institutions has a unique risk
profile composed of multiple
risks. For example, at least four
types of risks are usually present
in most lending activities: credit
risk, interest rate risk, liquidity
risk and operational risk. Risk
identification should be a
continuing process and risk
should be understood at both
the transaction and portfolio
levels.
b. Risk Measurement: Once the

risks associated with a particular
activity have been identified, the
next step is to measure the
significance of each risk. Risks
should be measured in order to
determine their impact on the
MFIs profitability and capital.
Each risk should be viewed in
terms of its three dimensions:
size, duration and probability of
adverse occurrences. Accurate
and timely measurement of risk
is essential to effective risk
management systems.
THE PROCESS
OF RISK MANAGEMENT
SHOULD BE
COMMENSURATE WITH
THE SIZE AND
COMPLEXITY OF THE
INSTITUTION. WHILE
THE TYPES AND
DEGREE OF RISKS IN
MICROFINANCE
INSTITUTIONS MAY
VARY UPON A NUMBER
OF FACTORS SUCH AS
SIZE, COMPLEXITY,
BUSINESS ACTIVITIES,
VOLUME ETC.
c.
Risk Control: Following risk

identification and
measurement, microfinance
institutions should control or
minimize risks. There are
basically three ways to control
significant risks, or at least
minimize their adverse
consequences: avoiding or
placing limits on certain
activities/risks, mitigating risks
and/or offsetting risks. It is a
primary management function
to balance expected rewards
against risks and the expenses
associated with controlling
risks. Microfinance institutions
should establish and
communicate risk control
mechanisms through policies,
standards and procedures that
define responsibility and
authority.
d. Risk Monitoring: Microfinance

institutions need to establish a
management information
system (MIS) that accurately
identifies and measures risks at
the inception of transactions
and activities. It is equally
important for management to
establish MIS to monitor
significant changes in risk
profiles. In general, monitoring
risks means developing
reporting systems that identify
adverse changes in the risk
profiles of significant products,
services and activities and
monitoring changes in controls
that have been put in place to
minimize adverse
consequences.
framework should be
comprehensive enough to capture
all risks an institution is exposed to
and have flexibility to
accommodate any change in
business activities. Sound risk
management system of each
microfinance institution should at
least contain the following key
elements of a sound risk
management system:
a)
Active board and senior

management oversight;
b) Adequate policies, procedures

and limits;
c)
Adequate risk measurement,

monitoring and management
information systems; and
d) Comprehensive internal
controls.
a) Active Board and Senior
Management Oversight:
Board: Rev
Reviewing and approving
policies of major activities
Boards of directors have
ultimate responsibility for the
level of risk taken by their
microfinance institutions.
Accordingly, they should
approve the overall business
strategies and significant
policies of their organizations,
including those related to
managing and taking risks.
Basic Elements of Risk

Management Framework
Ensuring that the microfinance

institution maintains the
various risks facing it at
prudent levels.
A risk management framework

encompasses the scope of risks to
be managed, the process/systems
and procedures to manage those
risks and the roles and
responsibilities of individuals
involved in risk management. The
Ensuring that senior

management as well as
individuals responsible for
managing individual risks
facing the microfinance
possess sound expertise and
knowledge to accomplish the
risk management function.
Ensuring that the microfinance

institutions implement sound
fundamental principles that
facilitate the identification,
measurement, monitoring and
control of all risks facing it.
Ensuring that appropriate plans
and procedures for managing
individual risk elements are in
place.
Obtaining reasonable
assurance that the institution is
in control on a regular basis
Senior Management Oversight:Senior management is responsible
for the implementation of risk
policies and procedures keeping in
view the strategic direction and
risk appetite & specified by the
board. For an effective
management of risks facing a
microfinance institution, senior
management should at the
minimum be responsible for:
The development and
implementation of procedures
and practices that translate the
board's goals, objectives, and
risk tolerances into operating
standards that are well
understood by microfinance
institution personnel.
Establishing lines of authority
and responsibility for
managing individual risk
elements in line with the
Boards overall direction.
Risk identification,
measurement, monitoring and
control procedures. d.
Establishing effective internal
controls over each risk
management process.
Ensuring that the MFIs risk
management processes are
properly documented and
adequate awareness about
same created amongst the
generality of staff so as to make
risk management a part of the
119
corporate culture of the

microfinance institution.
strength of the microfinance

institution;
b) Adequate Policies, Procedures

and Limits
policies should clearly

delineate accountability and
lines of authority across the
institution's activities; and
The board of directors and senior

management should tailor their risk
management policies and
procedures to the types of risks that
arise from the activities of the
microfinance institution. Once the
risks are properly identified, the
microfinance institutions policies
and procedures should provide
detailed guidance for the
day-to-day implementation of
broad business strategies and
should include limits designed to
shield the microfinance institution
from excessive and imprudent risks.
While all microfinance institutions
should have policies and
procedures that address their
significant activities and risks, the
coverage and level of details in
these documents will vary among
microfinance institutions
Management is expected to ensure
that policies and procedures
address material areas of risk to a
microfinance institution and that
they are modified when necessary
to respond to significant changes in
the activities or business conditions
of the microfinance institution.
To ensure that, an institution's
policies, procedures, and limits are
adequate, the same should at
minimum address the following:
policies, procedures, and limits
should provide for adequate
identification, measurement,
monitoring, and control of the
risks posed by its significant
activities;
policies, procedures, and limits
should be consistent with
complexity and size of the
business, the institution's
stated goals and objectives,
and the overall financial
120
policies should provide for the

review of activities new to the
institution to ensure that the
infrastructures necessary to
identify, monitor, and control
risks associated with an activity
are in place before the activity
is initiated.
c) Adequate Measurement,
Monitoring and Control:
Effective risk monitoring requires
microfinance institutions to identify
and measure all material risk
exposures. Consequently,
risk-monitoring activities must be
supported by information systems
that provide senior managers and
directors with timely and
accurately reports on the financial
condition, operating performance
and risk exposure of the
microfinance institution, as well as
with regular and sufficiently
detailed reports for line managers
engaged in the day to day
management of the institutions
activities.
The sophistication of risk
monitoring and MIS should be
consistent with the complexity and
diversity of the microfinance
institutions operations. Every
microfinance institution must have
a set of management and board
reports to support risk measuring
and monitoring activities.
Microfinance institutions are
expected to have risk monitoring
and management information
systems in place that provide
directors and senior management
with a clear understanding of the
microfinance institutions risk
exposures.
In order to ensure effective

measurement and monitoring of
risk and management information
systems, the following should be
observed:
the institution's risk monitoring
practices and reports address
all of its material risks;
key assumptions, data sources,
and procedures used in
measuring and monitoring risk
are appropriate and adequately
documented and tested for
reliability on an on-going
basis;
reports and other forms of
communication are consistent
with the institution's activities,
structured to monitor
exposures and compliance
with established limits, goals,
or objectives and, as
appropriate, compare actual
versus expected performance;
and
reports to management or to
the institution's directors are
accurate and timely and
contain sufficient information
for decision-makers to identify
any adverse trends and to
evaluate adequately the level
of risk faced by the institution.
d) Adequate Internal Controls
A microfinance institutions
internal control structure is critical
to the safe and sound functioning
of the microfinance institution, in
general and to its risk
management, in particular.
Establishing and maintaining an
effective system of controls,
including the enforcement of
official lines of authority and the
appropriate separation of duties is
one of managements more
important responsibilities.
Indeed, appropriately segregating
duties is a fundamental and
essential element of a sound risk
management and internal control
system. Failure to implement and

maintain an adequate separation of
duties can constitute an unsafe and
unsound practice and possibly lead
to serious losses or otherwise
compromise the financial integrity
of the microfinance institution.
Serious lapses or deficiencies in
internal controls including
inadequate segregation of duties
may warrant supervisory action,
including formal enforcement
action.
When properly structured, a
system of internal controls
promotes effective operations and
reliable financial and regulatory
reporting, safeguards assets and
helps to ensure compliance with
relevant laws, regulations and
institutional policies. Given the
importance of appropriate internal
controls to microfinance
institutions, the results of audits or
reviews, conducted by an internal
auditor or other persons, should be
adequately documented, as should
include managements responses
to them. In addition
communication channels should
exist that allows findings to be
reported directly to the boards
Audit Committee.
Major Challenges
Microfinance institutions face
several additional challenges that
are unique and relevant to the
microfinance industrys current
level of development. While every
MFI is unique, they share some
common challenges including
rapid growth and expansion,
management succession, and new
product development.
Rapid Growth and Expansion
A rapid growth requires more
careful monitoring and monthly
trend reporting on loan volumes
and portfolio quality to detect
problems early on. Internal audits
can be helpful in identifying fraud

and portfolio quality problems
before they result in significant
losses.
MFIs use several risk management
strategies when faced with rapid
growth:
Careful attention to staff

recruitment and training. The
MFI can reduce operational
risk by carefully growing staff
and ensuring that employees
interests are aligned with those
of the goals of the
organization.
Control growth to allow time

to develop internal systems
and prepare staff for changes
resulting from the expansion.
Carefully monitor loan growth

and portfolio quality to better
understand growth (e.g.,
number of loans per client,
average loan size, growth in
number of borrowers) and to
not let growth mask increases
in delinquency.
Good communication from

senior managers to reinforce
the MFIs culture and
commitment to quality service
and integrity. These efforts
should motivate new
employees, as well as existing
employees who are being
asked to do more.
Succession Planning
As a young industry, many MFIs
are just beginning to experience
the first management transition
from founder to successor. While
leadership change is part of growth
and evolution into a mature
industry, few MFIs have planned
for the inevitable succession of
senior management. MFIs should
not wait until key management
staff nears retirement, as the need
for a successor is not always
predictable. Senior management
may leave suddenly for another job
opportunity or become temporarily

or permanently incapable of
performing their duties following
an unforeseen event or tragedy.
Similar to the issues involved in
rapid growth, MFIs that do not plan
for management succession risk
having operations run by
inexperienced or under-qualified
managers, which increases the
operational risks resulting from
poor decision making and
ineffective leadership. In addition,
under-qualified managers can
seriously affect employee morale
and motivation, resulting in
productivity declines and increased
staff turnover, both of which result
in direct costs to the MFI. As these
leaders begin to leave their MFIs,
they will need to create strong
management structures to help
institutionalize those elements to
ensure the ongoing survival and
success of the institution. They will
need strong management, as well
as strong boards of directors to
provide oversight and continuity,
and well-established organizational
cultures that can maintain the core
competencies of the institution
going forward. Board and
management development will be
a key challenge for many MFIs in
the next few years.
New Product Development
New product risk is the potential
loss that can result from a product
that fails or causes unintended
harm to the MFI. Since many MFIs
are experimenting with new
product innovations, identifying
and managing this risk is
increasingly important. Key risks
for new products include:
Unintended consequences, in
which a great product idea can
result in unintentional harm to
the MFI, e.g. new savings
products that offer higher rates
might attract high demand but
also excessively increase the
MFIs cost of funds.
121
Reporting, in which the new

product is combined with the
total portfolio, can mask
delinquency patterns.
Not allocating all the unit costs

associated with a new product,
thereby distorting income
projections.
For example, rural microfinance

institutions that introduce
agricultural lending products
expose themselves to new risks.
The risk of natural disaster can
reduce crop production for several
borrowers simultaneously, which
increases credit and liquidity risks.
To minimize risks, agricultural
lenders avoid geographic
concentrations and diversify their
portfolios by lending to different
types of farmers. To reduce the risk
of introducing products that do
more harm to the MFI than good,
122
management should subject new

lines of business to a thorough
risk/reward analysis before
introducing the new product or
service.
Contingency Planning
Notwithstanding all the efforts that
may be made to identify measure,
monitor and control risk, it is
always possible that an event or
events may occur that were not
contemplated at the time a risk
management framework was
developed. Contingency planning
is therefore an essential component
of effective risk management. The
process starts with the assumption
that an unexpected event can
occur at any time and as
microfinance institutions develop
their various risk management
systems, they are expected to give
due consideration to the

occurrence of such an unexpected
event. Effective contingency
planning requires microfinance
institutions to have arrangements
in place that will allow them to
recover as soon as possible after
the occurrence of an event and be
in a position to resume acceptable
levels of service. Achieving these
objectives will minimize the
impact that the event will have on
the microfinance institutions
earnings, capital and reputation.
Contingency planning is relevant
to all of the risk but is most
important in the context of the
management of liquidity and
operational risk.
The Author is an
In Remembrance of Jamaluddin
Ahmed and Rezaur Rahman
M. Matiul Islam FCA
I recently lost two friends in quick
succession - Mr. Jamaluddin Ahmed and

Mr. Rezaur Rahman. All three of us were
graduates of Chittangong Commerce
College and all three of us were chartered
accountants. I did my chartered
accountancy from Pakistan while both of
them did theirs from the UK.
Rezaur Rahman returned to Dhaka from
London in the late 50s and took charge of
the office of the audit firm Price
Waterhouse Peat & Co. but launched his
own chartered accountancy firm in 1963
when former finance minister Saifur
Rahman resigned from Pakistan Oxygen
and joined Rezaur Rahman along with
Tashfin Huq to form Rahman Rahman
Huq, which soon became one of the most
prestigious audit and consultancy firms of
the country. At that time, having joined
the civil services of Pakistan, I was posted
as an Additional Secretary in the
Department of Finance under the
Government of East Pakistan (GoEP).
In 1966, Rezaur Rahman was selected as
a member of the Pakistan delegation to
the United Nations General Assembly in
New York where he met Peggy, fell in
love and married her. His Gulshan house
then became the venue for me and my
wife for brunch every Sunday. Jamaluddin
also returned to Dhaka in the early 60s,
joined an international oil marketing

company and got married. He was
initially posted in Chittagong.
I often expressed my intent to join the
profession but never had the courage to
take the decisive step, but very soon fate
took that step. I was forced to go into
retirement from the civil services by
martial law authorities in 1969 and had to
look for new job openings in the private
sector. Rezaur Rahman graciously offered
me the post of a partner in his firm and
asked me to take over their Karachi office.
A car was also purchased for my use. I
did go to Karachi but was inundated with
a number of good offers and thus, could
not join Rahman Rahman Huq.
After rejoining government services in
January 1972, I was posted in the World
Bank in Washington from 1974 to 1977.
On the way back home, I stayed in
London for some time and discovered
that Rezaur Rahman was also staying
there after taking a long leave from
Rahman Rahman Huq. Initially, he joined
Altaf Gauher in an outfit created by Aga
Hasan Abedi but soon started his own
business by taking up a costly office in
Piccadilly. This was a bold attempt to get
established in London. But he did
succeed through his hard work and
devotion. He also showed his business
123
acumen back home. He bid for and

acquired Messers Shaw Wallace, a
British shipping company, from the
Bangladesh government.
Rezaur Rahman offered me to join
Rahman Rahman Huq in Dhaka for
the second time when I expressed
my desire not to rejoin the
government. On my return to
Dhaka, I did join the company but
did not last there for more than two
months. Although, President Ziaur
Rahman agreed to my joining the
firm during my first meeting with
him, he soon changed his mind and
gave me an ultimatum to rejoin the
government as secretary of the
Ministry of Industries. Meanwhile,
Jamaluddin, who held a senior
position in an oil marketing
company, was inducted as the
Minister of Industries by the
president. I had no clue that
Jamaluddin was working behind the
scene to get me appointed as the
secretary in his own ministry.
During the next four years, the
Ministry of Industries became the
most productive ministry and this
was because Jamaluddin gave me a
free hand to operate and backed me
up on all important matters like the
formulation of new industrial
policies, incentive packages for
private sector, and the finalisation of
a new act for promotion and
protection of foreign investments.
The Board of Directors of Ashuganj
Fertilizer Company was
reconstituted with me as the
chairman and Mr. Muhith, Mr. Abul
Khair and Mr. Al Hussaini as
directors. Jamaluddin agreed to give
the board the powers of the
government on all matters
concerning the company. When
Haldor Topsoe came to Dhaka and
proposed the setting up of a fertilizer
company in the private sector,
Jamaluddin instantly approved my
approach and I had no problem in
taking it forward. The same story
was repeated for the creation of EPZ
124
in Chittagong and the Aga

Khan-sponsored IPDC, the first DFI
in the private sector in Bangladesh.
In recognition of his dynamism,
Jamaluddin was promoted as the
deputy prime minister, over a
number of his senior colleagues, in
1979. He was a terrific public orator
and was very important politically
for President Ziaur Rahman. In 1980,
when President Zia decided to allow
commercial banks in the private
sector, Jamaluddin was made the
chairman of the selection committee.
Being at the end of my contract with
the government, when I decided to
float a joint venture commercial
bank and sought a foreign partner for
that, Rezaur Rahman introduced me
to the Galadari brothers who owned
Dubai Bank and were willing to
invest in Bangladesh. Arab
Bangladesh Bank, with 60 percent
foreign shareholding with UCB and
National Bank, got quick approval.
As I was leaving the government to
join UNIDO in Vienna, Jamaluddin
advanced the date for a grand
opening of Ashuganj Fertilizer
Factory in recognition of my services
as its chairman.
AN
IRREPARABLE
LOSS TO THE
ACCOUNTING
PROFESSION.
Rezaur Rahman and Peggy regularly

visited Vienna, where I was posted
from 1982 to 1987. I was then
posted to Delhi where both Rezaur
Rahman and Jamaluddin were house
guests. I returned to Dhaka in 1993
and in 1996 decided to set up a
finance company, International
Leasing and Finance Company,
where both Rahman and Jamaluddin
invested. Jamaluddin was also a
director of ILFSL while I was its
chairman. Jamaluddin floated a
credit rating company, CRISL, of
which I became a promoter director.
When Peggy died of cancer in 1997,
my wife and I visited London where
she was buried. It was there that
Rezaur Rahman expressed his wish
to be buried next to his wife.
During this period, Rezaur Rahman

made a special request to help him
float a housing finance company.
Shaw Wallace was his first
promoter and finally, with 20
promoters, I applied to Bangladesh
Bank for a license. It took me two
years to get this proposal through
Bangladesh Bank and I finally got
the license in 1998. I had no
shareholding in National Housing
but gave two years of my life to
redeem my pledge to my friend.
On the relinquishment of my
directorship in ILFSL and
retirement from the chairmanship
of National Housing,
communication with Rezaur
Rehman and Jamaluddin became

few and far between. Age took its
toll on all of us. Rezaur Rahman
was showing first signs of
Alzheimer's. Jamaluddin also had
health problems which
deteriorated with age and he
breathed his last on January 3,
2015, after being bedridden for
most of 2014.
Rezaur Rahman did not have any
children. He created the Mujibur
Rahman Foundation, in the name
of his late father who was a
mathematical genius and was
nominated in the Indian Civil
Services. He donated Tk. 10 crore
to Dhaka University to build and
develop a separate building for the

Mathematics Department.
Rezaur Rahman's Alzheimer's
worsened over time and he had to
be under the care of a nursing
home in London, where he died
on June 1, 2015. He was laid to
rest next to his wife.
May their souls rest in peace.
The Author is a Fellow Member,
ICAB and was the First Finance
Secretary of Bangladesh Government
*The Article is reprinted from the Daily Star
125
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July-September 2015

Fraud Risk Management in Banking Industries:

Implementing the Cash-Basis IPSAS:

Defaulted Loans and Risk Management in Banking Sector 13

- M. Idris Ali FCA

Monetary Policy Needs Consistency with other Economic Policies 18

- Md. Shahadat Hossain FCA

Risk Management in Public Financial Sector

Managing Business Risks

Operational Risk Role of Accountants in Managing

- Dr Muhammad Abdul Mazid

- Ashish Kumar Paul FCA

Bangladesh Economy: Performance, Problems & Prospects 41

Corporate Governance and Accountants

Risks and Risk Management in Banks

Making it with ICT for Emerging Entrepreneurs

Effective Risk Management in Business

A Study on the Compliance of Bangladesh Banks

Liquidity Position of Private Commercial Banks (PCBs)

Business Risk Management

Risk Management by Bangladesh Bank: New Steps

Enterprise Risk Management

- Dr. Rukshana Begum

- Md Abdus Salam FCA, FCS

- Md. Hafizur Rahman ACA

- 1Md. Ahasan uddin | - 2Sabuj Chandra Bhowmik

- 1Sujan Chandra Paul ACA | - 2Abdul Alim Baser ACMA

- Aisha Siddiqua ACA

Imposition of Income Tax on Employee Tax Payers on

Evolving Business Risk Management

Managing Risk in Banking

Micro Finance Business & Its Risk Management

- Md. Asaddar Ali FCA

- Md. Ziaur Rahman ACA

- Md. Ashraful Azim FCA

In Remembrance of Jamaluddin Ahmed and Rezaur Rahman 123

business environment calls for a

Risk Management is particularly

July - September 2015

growth threatened the standard of

The Bangladesh Accountant

cent of the national economy..

The Bangladesh Accountant

way forward to get rid from the

your feedback about the articles,

July - September 2015

Council Member & Past President-ICAB

Accountant would reach to your

relationship with the government

agreement is aimed at building a

education environment, ICAB

workshop as the resource person.

Masih Malik Chowdhury FCA

Fraud Risk Management in Banking

place to prevent, detect, delve and

July - September 2015

The Bangladesh Accountant

Its highly essential to know

Forgery and altered cheques

strategies. Prevention is better than

WAY TO PREVENT FRAUD

Review and discuss the issues

INTEGRITY. SET CLEAR

Establish code of conducts and