Central bank of bangkadesh123456781234567823456789.pptx
1. Central Bank:
The bank which governs banking system and money market is Central Bank. The primary
function of a central bank is to assist Government in formulating economic policy, in
controlling and conducting money-market and also controlling bank credit. A central bank is a
public institution that manages the currency of a country or group of countries and controls the
money supply – literally, the amount of money in circulation.
According to Kisch and Elkin, “ A central bank is a bank whose essential duty is to maintain
stability of the monetary standard.”
In the words of Decock, “ The central bank is a banking system in which a single bank has
either a complete or a residuary monopoly of note issue.”
Professor Hatley says, “Central Bank is the lender of the last resort.”
3. What characterises today’s central banks?
According to Ulrich Bindseil , characterstics of modern central banks are
1. Today’s central banks are the only issuer of banknotes in the jurisdiction;
2. They are, with few exceptions, publicly owned institutions (in 1900, still the
majority of central banks were owned privately, even if they were subject to tight
regulations);
3. They are normally given by law a clear public mandate (“achieve price stability”);
4. They can, in today’s paper standard, create legal tender (central bank money)
almost without constraints through credit operations or purchases of securities.
Their ability to create legal tender implies that they are not subject to liquidity risk,
they are never forced to default, and exposures to them in the domestic currency
will be considered credit risk free.
5. They deal only with other banks and with the government, i.e. they do not accept
themselves deposits from corporates and households (which they tended to do in the
19th century).
6. They often have a financial stability mandate.
4. Roles of central bank:
Central banks across the world have several big
responsibilities. The first and perhaps the most
literal responsibility is the issuance of money:
central banks print money, which then goes into
circulation in the economy and is used by people,
households and businesses to create transactions
and, essentially, track where spending is going.
In addition, central banks have to ensure stability
of the financial systems in their economy: this
means monitoring lending standards across the
economy very closely, as well as making sure that
there is easy access to credit when required. In
that case, they are also the lender of last resort to
commercial banks and the government. So when
the government requires money and there is no
other way or access to the necessary funds, the
central bank can be that lender of last resort.
5. Central banks also monitor and track economic data, which is one of their key functions that is used by economists
as a way to see what the key authority on the economic data will have to say. For example, the Bank of England
produces its quarterly inflation report which comes out with various details on GDP, growth forecasts, and
inflation forecasts, as well as commentary on specific macroeconomic themes at that time. The US central bank
(the Federal Reserve) does this as well, with a ‘dot plot’, so an economic forecast chart with dots looking forward,
showing where the Federal Reserve thinks interest rates will go in the future.
And that leads us to the final responsibility of central banks across the world, which is setting monetary policy.
Monetary policy has a wide array of individual tools, and the key one is setting interest rates. Lower interest rates
mean easier access to credit for households, businesses and anyone in the economy who needs a loan. Higher
interest rates mean the opposite – more expensive and limited access to credit. When economic times are tough
and there is slower economic growth, central banks have the responsibility to reduce interest rates to make sure
that there is easier access to credit in the economy. Examples of that in current times (November 2018) include, in
the UK, keeping interest rates at a low level while Brexit uncertainties unfold, while in the US the central bank is
starting to raise interest rates because economic growth has been so good. In addition, we see the Chinese central
bank reacting to slower global trade and tariffs across the world being increased for Chinese exports by reducing
the interest rate in China to make sure that the country’s growth remains on track.
So, different central banks across the world are working with difference macroeconomic environments and will
react in a specific way to make sure their own economy is performing at the level that they would like. Many
central banks have mandates or goals – most of these include price stability, which is inflation, and because of
those economic reports that they produce, central banks are able to track inflation and price stability to make
decisions on interest rates.
6. :Functions of Central Bank:
The functions of central bank are different from other banks. The following functions of central bank are
stated below:
A. Traditional or general functions:
1. Issue of notes and coins:
The first and foremost function of central bank is to issue notes and coins as per needs of the public and
requirement of business and commerce. As per rules, notes are issued against gold, silver and foreign
currency. Central Bank keeps foreign currency reserves as security against issuance of notes. Central
bank unilatarilly reserves the right to issue notes.
• The arguments in its favour are as follows:
• To maintain equilibrium in quality between notes and currency issue
• To maintain equilibrium in size, types and values of notes and currency
• To maintain stability in rates of exchange both inland and foreign
• To create confidence on the people
• To control money market.
2. Government Bank:
Central Bank acts as banker and economic adviser of the Government. The central bank conducts and
maintains Government accounts for all Government receipts and payments.
7. 3. Banker’s Bank:
Central Bank acts as banker’s bank. As a rule, all scheduled and commercial banks have to maintain Statutory
Liquidity Reserve (SLR) with Central Bank.
4. Lender of the last Resort:
In case of financial crisis of the commercial banks, central bank acts as a lender of the last resort through
lending against first class securities, bill of exchange etc.
5. Reservoir of foreign currency:
Central Bank maintains Foreign Currency Reserve. For the purpose of control of foreign currency, the
following factors are responsible:
• For issuance of notes
• For payments of liabilities
• For payments of debts.
6. Clearing House:
Central Bank acts as a Clearing House for settlement of inter bank transactions.
7. Credit Control:
Credit Control is one of the major functions of central bank. The following are the ways of controlling credit:
• Change in bank rates
• Open market operation
• Change ( increase or decrease) in reserve- ratio
• Selective credit
• Direct influence
8. B. Purposeful functions:
(a) Control Currency Market:
Central Bank acts as a controller and guardian of the currency market. For the purpose of formation, control
and maintenance of currency market and for its overall development, central bank is the pioneer.
(b) Stabilize Exchange Rate:
Central Bank maintains stability of the foreign currency exchange rates by means of controlling credit.
Stable exchange rates position helps create favourable balance of trade and acceptability of stable currency
gets momentum in the international market.
(c) Maintain Gold Standard:
Central Bank is responsible for maintenance and control of gold reserve.
(d) Stabilize Price-Level:
Fluctuations and frequent changes of price-level affect economic growth. With a view to making good of
the economic imbalances and crisis situations, central bank takes necessary measures for stabilizing price-
level.
(e) Stabilize business activities:
Central Bank formulates credit policy and with this spirit, central bank takes necessary steps to protect
economic depression for stabilizing business activities.
(f) Employment opportunities:
Central Bank takes initiatives for creating employment opportunities by means of credit-control mechanism.
9. C. Expansion and Development Functions:
(a) Development of Agriculture Sector: Central Bank formulates policy for expansion of agri-sector for
the purpose of economic upliftments in the country.
(b) Development of Industry Sector:
(c) Development of natural resources: Central Bank plays vital role for tapping natural resources
which may lead to economic growth.
D. Other Functions:
(a) Adviser and Representative of Government: Central Bank advises Government on economic issues
and sometimes acts as a representative of the Government.
(b) Economic Research: Central Bank conducts various economic research works and formulates
policies for economic development. Central Bank conducts survey on different economic issues for the
knowledge of the general public of the country.
10. Relationship between Central Bank and Government
The relationship between a central bank and the government is crucial for the functioning of an economy. Here are some key
aspects of their relationship:
1.Monetary Policy: Central banks are responsible for formulating and implementing monetary policy, which involves
managing the money supply, interest rates, and credit conditions in the economy. However, monetary policy often operates
within a framework set by the government. For example, the government may provide the central bank with a mandate, such
as maintaining price stability or promoting full employment, within which the central bank operates.
2.Independence: In many countries, central banks operate independently from the government. This independence is designed
to insulate monetary policy decisions from short-term political influence, allowing central banks to focus on long-term
economic objectives. However, the degree of independence varies between countries, and in some cases, the government may
exert more influence over monetary policy decisions.
3.Fiscal Policy Coordination: While central banks focus on monetary policy, governments are responsible for fiscal policy,
which involves taxation, government spending, and budgeting. Coordination between monetary and fiscal authorities is
important to ensure that both policies work together effectively to achieve economic goals. For example, if the government
implements expansionary fiscal policy (increased spending or tax cuts), the central bank may adjust monetary policy to
complement these actions and prevent overheating of the economy.
4.Government Debt Management: Central banks often play a role in managing government debt by conducting open market
operations, which involve buying and selling government securities. This can influence interest rates and the availability of
credit in the economy. Additionally, central banks may provide advice to the government on debt issuance and management
strategies.
5.Financial Stability: Both the central bank and the government have a shared interest in maintaining financial stability.
Central banks often have regulatory responsibilities over the banking sector and may collaborate with government agencies to
develop and implement financial regulations aimed at preventing systemic risks and crises.
11. Monetary management
Monetary management as generally understood means the management of the money
supply and monetary and credit-market conditions by the monetary authority (the
central bank) in the pursuit of certain general social objectives. These objectives may
either be assigned to the central bank by the national government or be left to the central
bank to establish for itself, depending on whether the central bank is a subordinate
instrumentality of national economic policy or is allowed a substantial measure of
independence.
Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy
used by the government of a country to achieve macroeconomic objectives like
inflation, consumption, growth and liquidity.
Monetary Policy Techniques: General and Selective Methods
Broadly, instruments or techniques of monetary policy can be divided into two
categories:
(A) Quantitative or General Methods.
(B) Qualitative or Selective Methods.
12. A. Quantitative or General Methods:
1. Bank Rate or Discount Rate: Bank rate refers to that rate at which a central bank is ready to lend money to
commercial banks or to discount bills of specified types. Thus by changing the bank rate, the credit and further
money supply can be affected. In other words, rise in bank rate increases rate of interest and fall in bank rate
lowers rate of interest. During the course of inflation, monetary authority raises the bank rate to curb inflation.
Higher bank rate will check the expansion of credit of commercial banks. They will be left with less resources
which would restrict the credit creating capacity of the bank. On the contrary, during depression, bank rate is
lowered, business community will prefer to have more and more loans to pull the economy out of depression.
Therefore, bank rate or discount rate can be used in both types of situation i.e. inflation and depression.
2. Open Market Operations: By open market operations, we mean the sale or purchase of securities. As is
known that the credit creating capacity of the commercial banks depend on the cash reserves of the banks. In this
way, the monetary authority (Central Bank) controls the credit by affecting the base of the credit-creation by the
commercial banks. If the credit is to be decreased in the country, the central bank begins to sell securities in the
open market. This will result to reduce money supply with the public as they will withdraw their money with the
commercial banks to purchase the securities. The cash reserves will tend to diminish. This happens in the period
of inflation. During depression when prices are falling, the central bank purchases securities resulting in
expansion of credit and aggregate demand.
13. 3. Variable Reserve Ratio: The commercial banks have to keep given percentage as cash-reserve with the
central bank. In lieu of that cash ratio, it allows commercial banks to contract or expand its credit facility. If the
central bank wants to contract credit (during inflation period) it raises the cash reserve ratio. As a result,
commercial banks are left with less amount of deposits. Their favour to credit is curtailed. If there is depression
in the economy, the reserve ratio is reduced to raise the credit creating capacity of commercial banks. Therefore,
variable reserve ratio can be used to affect commercial banks to raise or reduce their credit creation capacity.
4. Change of Liquidity: According to this method, every bank is required to keep a certain proportion of its
deposits as cash with it. When the central bank wants to contract credit, it raises its liquidity ratio and vice versa.
B. Qualitative or Selective Methods:
1. Change in Marginal Requirements:
Under this method, the central bank effects a change in the marginal requirement to control and release funds.
When the central bank feels that prices are rising on account of stock-piling of some commodities by the traders,
then the central bank controls credit by raising the marginal requirements. (Marginal requirement is the
difference between the market value of the assets and its maximum loan value). Let us suppose, a borrower
pledged goods worth BDT 1000 as security with a bank and gets a loan amounting to BDT 800.Thus marginal
requirement is BDT 200 or 20 percent. If this margin is raised, the borrower will have to pledge goods of greater
value to secure loan of a given amount. This would reduce money supply and inflation would be curtailed.
Similarly, in case of depression, central bank reduces margin requirement. This will in turn raise the credit
creating capacity of the commercial banks. Therefore, margin requirement is a significant tool in the hands of
central authority during inflation and depression.
14. 2. Regulation of consumer credit: During inflation, this method is followed to control excess spending of
the consume BDT Generally the hire purchase facilities or installment methods are used to reduce to the
minimum to curb the expenditure on consumption. On the contrary, during depression period, more credit
facilities are allowed so that consumer may spend more and more to pull the economy out of depression.
3. Direct Action: This method is adopted when some commercial banks do not co-operate with the central
bank in controlling the credit. Thus, central bank takes direct action against the defaulter. The central bank
may take direct action in a number of ways as under.
(i) It may refuse rediscount facilities to those banks who are not following its directions.
(ii) It may follow similar policy with the bank seeking accommodation in excess of its capital and reserves.
(iii) It may change rates over and above the bank rate.
(iv) Any other strict restrictions on the defaulter institution.
4. Rationing of the credit: Under this method, the central bank fixes a limit for the credit facilities to
commercial banks. Being the lender of the last resort, central bank rations the available credit among the
applicants. Generally, rationing of credit is done by the following four ways.
(i) Central bank can refuse loan to any bank.
(ii) Central bank can reduce the amount of loans given to the banks.
(iii) Central bank can fix quota of the credit.
(iv) Central bank can determine the limit of the credit granted to a particular industry or trade.
15. 5. Moral Persuasion or Advice: In the recent years, the central bank has used moral
suasion also as a tool of credit control. Moral suasion is a general term describing a
variety of informal methods used by the central bank to persuade commercial banks to
behave in a particular manner. Moral suasion takes the form of Directive and Publicity.
In-fact, moral persuasion is a sort of advice. There is no element of compulsion in it. The
central bank focuses on the dangerous consequences of the credit expansion and seeks
their co-operation. The effectiveness of this method depends on the prestige enjoyed by
the central bank on the degree of co-operation extended by the commercial banks.
6. Publicity: Publicity is also another qualitative technique. It means to force them to
follow only that credit policy which is in the interest of the economy. The publicity
generally takes the form of periodicals and journals. The banks are not kept informed
about the type of monetary policy, the central bank regards goods for the economy.
Therefore, the main aim of this method is to bring the banking community under the
pressure of public opinion.
16. Bangladesh Bank :
Bangladesh Bank acts as the Central Bank of Bangladesh which was established on December 16, 1971
through the enactment of Bangladesh Bank Order 1972- President’s Order No. 127 of 1972 (Amended in
2003). The general superintendence and direction of the affairs and business of BB have been entrusted to
a 9 members' Board of Directors which is headed by the Governor who is the Chief Executive Officer of
this institution as well. BB has 45 departments and 10 branch offices.
In Strategic Plan (2010-2014), the vision of BB has been stated as, “To develop continually as a forward
looking central bank with competent and committed professionals of high ethical standards, conducting
monetary management and financial sector supervision to maintain price stability and financial system
robustness, supporting rapid broad based inclusive economic growth, employment generation and poverty
eradication in Bangladesh”.
The main functions of BB are (Section 7A of BB Order, 1972) -
1.to formulate and implement monetary policy;
2.to formulate and implement intervention policies in the foreign exchange market;
3.to give advice to the Government on the interaction of monetary policy with fiscal and exchange rate
policy, on the impact of various policy measures on the economy and to propose legislative measures it
considers necessary or appropriate to attain its objectives and perform its functions;
4.to hold and manage the official foreign reserves of Bangladesh;
5.to promote, regulate and ensure a secure and efficient payment system, including the issue of bank
notes;
6.to regulate and supervise banking companies and financial institutions.
17. Central Bank and Monetary Management in Bangladesh: The main objectives of monetary
policy of Bangladesh Bank are:
1.Price stability both internal & external
2.Sustainable growth & development
3.High employment
4.Economic and efficient use of resources
5.Stability of financial & payment system
Bangladesh Bank declares the monetary policy by issuing Monetary Policy Statement (MPS) twice
(January and July) in a year. The tools and instruments for implementation of monetary policy in
Bangladesh are Bank Rate, Open Market Operations (OMO), Repurchase agreements (Repo) &
Reverse Repo, Statutory Reserve Requirements (SLR & CRR).
Bank rate: Bank rate is the rate charged by the central bank for lending funds to commercial banks.
Bank rates influence lending rates of commercial banks. Higher bank rate will translate to higher
lending rates by the banks. In order to curb liquidity, the central bank can resort to raising the bank
rate and vice versa. Current bank rate of Bangladesh bank is 4%.
18. open-market operation, any of the purchases and sales of government securities and sometimes
commercial paper by the central banking authority for the purpose of regulating the money
supply and credit conditions on a continuous basis. Open-market operations can also be used to stabilize
the prices of government securities, an aim that conflicts at times with the credit policies of the central
bank. When the central bank purchases securities on the open market, the effects will be (1) to increase
the reserves of commercial banks, a basis on which they can expand their loans and investments; (2) to
increase the price of government securities, equivalent to reducing their interest rates; and (3) to
decrease interest rates generally, thus encouraging business investment.
Repurchase Agreements (Repo): Repurchase Agreements (Repo) are conducted whenever the Central
Bank is mopping up excess liquidity from the domestic market. A Repo is a collateralized loan
involving a contractual arrangement between two parties, whereby one party sells a security at a
specified price with a commitment to buy back the same at a later date. The repo rate is the interest paid
by the Central Bank to Commercial Banks for lending money in the repo market. Current Repo rate of
Bangladesh bank is 8%.
Reverse Repos : Reverse Repos, on the other hand, are conducted whenever the Central Bank is
injecting liquidity into the domestic market. Reverse Repo transactions therefore, involve purchase of
Government securities by the Central Bank from Commercial Banks. The reverse repo rate is the
interest paid by commercial banks for borrowing money from the Central bank. Current Reverse Repo
rate of Bangladesh bank is 6.50%.
19. The Statutory Reserve Requirement (SRR): The Statutory Reserve Requirement (SRR) is an instrument to manage
liquidity. Banking institutions are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to
a certain proportion of their eligible liabilities (EL), this proportion being the SRR rate. The SRR may be raised to
manage the significant build-up of liquidity, which may result in financial imbalances and create risks to financial
stability. Conversely, the Bank may lower the SRR if necessary to support the transmission of monetary policy rates to
retail rates. However, it is important to note that changes to SRR should not be construed as a signal on the stance of
monetary policy.
Cash Reserve Ratio, or popularly known as CRR is a compulsory reserve that must be maintained with central bank.
Every bank is required to maintain a specific percentage of their net demand and time liabilities as cash balance with the
central bank. CRR is the percentage of total deposits, which a commercial bank has to keep as reserves in the form of
cash with the central bank. The banks are not allowed to use that money, kept with central bank, for economic and
commercial purposes. It is a tool used by the apex bank to regulate the liquidity in the economy and control the flow of
money in the country. Therefore, if the central bank wants to increase the money supply in the economy, it will reduce
the rate of CRR while, if central bank seeks to decrease the money supply in the market then it will increase the rate of
CRR. Current CRR of Bangladesh bank is 4% for both conventional and Islamic banks.
On the other hand, Statutory Liquidity Ratio, shortly called as SLR also an obligatory reserve to be kept by the banks,
as prescribed securities, based on a certain percentage of net demand and time liabilities.
SLR is a percentage of Net Time and Demand Liabilities kept by the bank in the form of liquid assets. It is used to
maintain the stability of banks by limiting the credit facility offered to its customers. The banks hold more than the
required SLR and the purpose of maintaining the SLR is to hold a certain amount of money in the form of liquid assets,
so as to fulfill the demand of the depositors when arises. Current SLR of Bangladesh bank is 13% for conventional
banks and 5.5% for Islamic banks.
