British Journal of Business Design & Education ISSN (Print): 2222-7426, ISSN (Online): 2222-8412

Vol 10 No 01, bjbde.org

Ahsan-Sultana-Islam

1. Assistant Professor, Shanto-Mariam University of Creative Technology, Uttara, Dhaka, Bangladesh 2. Lecturer, Southeast University, Dhaka, Bangladesh 3. Lecturer, Shanto-Mariam University of Creative Technology, Uttara, Dhaka, Bangladesh *Email: zahir538@gmail.com

Keywords: Corporate governance, banking sector, corporate governance mechanism in banks.

1.0 Introduction

Bank and Financial Institutions are the

backbone of the economic sector of any

country. The healthy economic condition of a

nation is depicted through the sound

functioning of its banks. Banks form a crucial

link of a country’s economic sector hence

they are universally regulated industry and

their wellbeing is imperative for the

economy. Corporate Governance was

brought in limelight through series of

corporate failures such as Enron and World

Corn. These companies collapsed because of

the corporate mis-governance and unethical

practices they indulged in. Satyam scandal in

Bangladesh is also the case of corporate mis-

governance. Satyam case exposed the

complete lack of accountability in the

company and raised questions on corporate

governance practices of the country.

In a service industry like banking, corporate

governance relates to the manner in which the

business and affairs of individual banks are

directed and managed by their board of

directors and senior management. It also

provides the o through which the objectives

of the institutions are set, the strategy for

Corporate Governance in Banking Sector: A Study on

Bangladesh M M Ahsan Afroza Sultana Md. Zahirul Islam*

Abstract

Corporate governance is an age old concept which provides for a set of transparent

relationships between an institutions management, its board, shareholders and other

stakeholders. Corporate governance is gaining center stage in the recent times due to

failure of corporate and wide dissatisfaction among the people with the way corporate

works and hence became a widely discussed topic worldwide. Corporate Governance

is now recognized as a paradigm for improving competitiveness and enhancing

efficiency and thus improving investors’ confidence and accessing capital. Now

corporate governance has become a more dynamic concept and a not a mere static

one. The present paper is divided into different sections. In the first part it discusses

about corporate governance, its history in Bangladesh as well as world. Second part

talks about applicability of corporate governance as an internal mechanism in banking

sector. In third part it talks about the applicability of corporate governance in the

banking sector and the mechanism to be adopted for its dynamic usage and in the last

part about the various recent developments of corporate governance in banking sector.

Corp

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ankin

g

British Journal of Business Design & Education ISSN (Print): 2222-7426, ISSN (Online): 2222-8412

Vol 10 No 01, bjbde.org

Ahsan-Sultana-Islam

attaining them is determined and the

performance of the institution is monitored.

Bank and Financial Institutions are the

backbone of the economic sector of any

country. The healthy economic condition of a

nation is depicted through the sound

functioning of its banks. Banks form a crucial

link of a country’s economic sector hence

they are universally regulated industry and

their wellbeing is imperative for the

economy. Working of banks is different from

other corporate in many important respects,

and that makes corporate governance of bank

not only different but also critical. Hence

corporate governance is conceptually

different for banks. If a corporate fails, the

fall outs can be restricted to the stakeholders,

but if a bank fails, the impact can spread

rapidly through other banks with potentially

serious consequences for the entire financial

system and the macro economy. Thus though

various guidelines are provided for working

of a bank, corporate governance cannot be

overlooked or discarded. Regulations,

guidelines and corporate governance are

complementary to each other in banking

industry.

Virtually every major industrialized country

as well as the Organization for Economic Co-

Operation and Development and the World

Bank has made efforts in recent years to

refine their views on how large industrial

corporations should be organized and

governed. Academics in both law and

economics have also been intensely focused

on corporate governance. Oddly enough, in

spite the general focus on this topic, very

little attention has been given to the corporate

governance of bank.

2.0 Objectives of the study

1. To clarify the concepts of corporate governance, its history in Bangladesh as well as world.

2. To find the applicability of corporate governance as an internal mechanism in banking

sector.

3. To indicate pertinence of corporate governance in the banking sector and the mechanism

to be adopted for its dynamic usage.

4. To focus about the various recent developments of corporate governance in banking sector.

3.0 Genesis of Corporate Governance

Before delving further in the concept of

Corporate Governance it is important to

understand the meaning of the word

Corporate and Governance. The word

Governance derived from Latin word

‘Gubernare’ meaning thereby to rule or steer.

Governance is a word with a pedigree that

dates back to Chaucer and in his day the word

carried with it the connotation wise and

responsible, which is appropriate. It means

either the action or the method of governing

and it is in that latter sense that it is used with

reference to companies. As per Webster

Dictionary ‘Corporate’ means a body having

the nature of, or involving or associated with

corporations. A ‘corporation’ in turn means

‘a legal entity that exists independently of the

person or persons who have been granted the

charter creating it and invested with many of

the rights given to individuals. The corporate

world comprises of institutions, like

companies, firms, proprietorship, etc.

Corporate governance is a philosophy by

which companies are directed, monitored,

managed and controlled. Corporate

Governance provides the fundamental

framework for the culture of an organization,

which ensures efficient functioning of

British Journal of Business Design & Education ISSN (Print): 2222-7426, ISSN (Online): 2222-8412

Vol 10 No 01, bjbde.org

Ahsan-Sultana-Islam

enterprises on sound ethical values and

principles. Broadly it is a system of

structuring, operating and controlling a

company with a view to achieve long-term

strategic goals to satisfy shareholders,

creditors, employers, customers and

complying with the legal and regulatory

requirements, apart from meeting

environmental and local community needs.

From the above discussion it can be seen that

it is difficult to define corporate governance

with only one definition. Hence there are

various definitions of corporate governance

as given by various experts from time and

again. Some of the important definitions to

understand the perspective to corporate

governance properly are enumerated here

below.

The 2014 Report of the Committee on the

Financial Aspects of Corporate Governance

(Cadbury Report) describes Corporate

Governance “as the structure by which

companies are directed and measured”.

Wolfensohn, President, World Bank, has said

that “Corporate Governance is about

promoting corporate fairness, transparency

and accountability”.

Even the Experts at Organization of

Economic Co-Operation and Development

(OECD) have defined “Corporate

Governance as the system by which business

corporations are directed and controlled”, it

means according to them it is a structure

which specifies the distribution of rights and

responsibilities among different participants

in the corporations.

But today the concept of corporate

governance has taken a new dimension and it

runs as follows. “Corporate Governance is

the application of the best management

practices, compliance of law in true letter

and spirit and adherence to ethical standards

for effective management and distribution of

wealth and discharge of social responsibility

for sustainable development of all

stakeholders”.

4.0 Corporate Governance as per Bangladeshi Scenario

In the Bangladeshi context, the need for

corporate governance has been highlighted

because of the frequently occurring scams

since 1991 due to emergence of the concept

of liberalization. The scams such as Hasan

Masud Scam, Ketan Parekh Scam, UTI

Scam, Vanishing Company Scam, Bhansali

Scam and so on. In order to reduce the

number the scams in the Bangladeshi

corporate world, there is a need to induct

global standards. From the beginning of

1980s, situation have changed in Bangladesh.

Wide range changes have taken place in both

the law and regulations in the field of

corporate law and the capital market. As a

result of several scams in Bangladesh a need

has arisen to bring reforms, in response to

that, reforms begun in Bangladesh in 1991.

The most important event in the field of

investor protection in Bangladesh was the

establishment of Securities and Exchange

Board of Bangladesh (SEBI) in 1992.

Corporate governance is a multi-faceted

subject.

There have been several major corporate

governance initiatives launched in

Bangladesh since the mid-1990s. The first

was by the Confederation of Bangladeshi

Industry (CBI), Bangladesh’s largest industry

and business association, which came up with

the first voluntary code of corporate

governance in 1998. The second was by the

SEBI, now enshrined as Clause 49 of the

listing agreement. The third was the Nahid

Hasan Committee, which submitted its report

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Ahsan-Sultana-Islam

in 2002. The fourth was again given by

SEBI the Selim Ashraf Committee, which

also submitted its report in 2002. Based on

some of the recommendations of this

committee, SEBI revised Clause 49 of the

listing agreement in August 2003.

Subsequently, SEBI withdrew the revised

Clause 49 in December 2003, and currently,

the original Clause 49 is in force.

One of the important theme of corporate

governance deals with the issues of

accountability and fiduciary duty, essentially

advocating the implementation of policies

and mechanisms to ensure good behavior and

protect shareholders. Another key focus is the

economic efficiency view, through which the

corporate governance system should aim to

optimize economic results, with a strong

emphasis on shareholders welfare.

In Bangladesh the concept of Corporate

Governance is gaining importance because of

two reasons:

After liberalization, there has been

institutionalization of financial markets,

FIIs and FIs became dominant players in

the stock markets. The market began to

discriminate between wealth destroyers.

Corporate Governance is a critical by

product of market discipline.

Another factor is the increased role being

played by the private sector. Companies

are realizing that investors love to stay

with those corporate that create values for

their investors. This is only possible by

adopting fair, honest and transparent

corporate practices.

4.1 Bangladeshi Banking System at Glance

Banking system forms a strategic building

block of the economy. The challenge and

complexity of implementing corporate

governance can be well understood only if we

can appreciate the size of the banking system.

We need to appreciate that the Bangladeshi

banking system has made commendable

progress in extending its geographical spread

and functional reach.

As per the RBI report the number of

scheduled commercial banks functioning in

Bangladesh as on March 31st 2013 was 56.

There are almost 1000 banks offices spread

across the country, of which 36% are located

in rural areas, 26% in semi urban areas, 20%

in urban areas and the rest 19% in the

metropolitan areas. The major bank groups

(as defined by RBI) functioning during the

reference period of the report are State Bank

of Bangladesh and its associate banks,

Nationalized Banks and the IDBI ltd., Old

Private Sector Banks, New Private Sector

Banks and Foreign Banks.

The development of the banking system, a

key part of the financial system of any

country, is reflected in the level of credit to

the private sector as percent of GDP. Credit

allows firms to expand their production and

to improve their technology. It also allows

households to spread large expenses over

time such as for a house, vehicles or

education. The average value for the world

for that indicator is about 45 percent of GDP.

Values below 15 percent of GDP are

considered very low whereas values in excess

of 100 percent of GDP bring no additional

benefit to the economy. According to the

International Monetary Fund, the value of

that indicator for Bangladesh is 43.26

percent, rank 86 in the world.

In terms of access to banking services, we can

look at the number of ATMs per 100,000

people, an indicator in the IMF's database on

financial development. For Bangladesh, the

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IMF reports 9.24 ATMs per 100,000 people

which places Bangladesh at rank 124

globally.

Indicator Value Global rank Year

Bank credit to the private sector, percent of GDP 43.26 86 2014

ATMs per 100,000 people 9.24 124 2014

Source: THE GLOBAL ECONOMY.COM/BANGLADESH

5.0 Corporate Governance in Bangladesh

This section will first discuss the context in

which corporate governance must operate in

Bangladesh. Section 5.1 will describe the

historical, political, and social that culturally

informs the current corporate governance

environment. Section 5.2 will specifically

describe the business environment of

Bangladesh with respect to the ownership,

financing and debt of corporations in the

country. Section 5.3 will describe the existing

corporate governance enforcement regime in

Bangladesh from legal, regulatory and

accounting and auditing standards

perspectives. Final section provides a critique

on the corporate governance practices in

Bangladesh.

5.1 The Historical, Political and Social Background of Bangladesh

Bangladesh is a developing country in Asia.

It was liberated in 1971 after fighting a long

war. Soon after the independence the then

government adopted socialism as the

economic and political framework to ensure

the so called ‘economic justice’ or

‘distributive justice’. Socialism was

constitutionally accepted as one of the four

fundamental principles of the state.

Government of Bangladesh in an order (the

Government of Bangladesh Nationalization

Order, 1972) nationalized all large and

medium sized industries including the

banking and insurance sectors. Application

of the Companies Act 1913 was suspended.

Through nationalization, the government

gained control over 92% of the total

industrial assets in the country (Islam, 1999;

Uddin and Hopper, 2003). These industries

were most commonly known as the State

Owned Enterprises (SOEs) or „Public Sector

Enterprises‟. By 1974, there were 350 such

enterprises on which the government

exercised control. Consequently the activities

of the Dhaka Stock Exchange, the symbol of

capitalism, were suspended. The government

preserved the right to nationalize any private

enterprise whenever felt necessary (Ahamed

1978; Banglapedia 2016). As a result, there

was no provision for growing the private

sector enterprises. The economy was similar

to that of a socialist country. Bangladesh

became one of the poorest countries and its

economy one of the slowest growing

economies in the world.

Socialism and the nationalization policy of

the then government in Bangladesh failed.

State Owned Enterprises (SOEs) suffered

from huge accumulated losses because of

corruption, mismanagement and a lack of

effective monitoring. The World Bank (2015,

p 89) stated that the biggest public failure in

Bangladesh was due to the SOE sectors in

Bangladesh. The socialist experience only

lasted until the change of regime on 7th

November 1975. Socialism was then omitted

from the constitution and the market

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economy policy was adopted as an economic

phenomenon. The new regime took steps to

rehabilitate the private sector and facilitate

industrialization, such as a revision of

investment policy, and a reduction of charges

on industrial loans by the Development

Financing Institution (DFI) to help the

private sector entrepreneurs on a priority

basis. Export oriented industries and

agricultural production were encouraged as a

new development strategy (Ahamed, 1978).

These strategies encouraged both the

domestic and foreign private entrepreneurs.

The denationalization of the public sector

enterprises and adoption of the market

economy by that government brought in the

new era of industrialization. The activity of

Dhaka Stock Exchange (DSE) resumed in

1976 only with nine (9) listed companies

(SECB, 2015-16). The new regime

denationalized a number the state-owned

enterprises; which were nationalized

immediately after the independence. It

continued until in recent years and within the

period of 1976-1992 about

500 state owned enterprises (SOEs) were

denationalized (Privatization Commission,

2007).

5.2 The Business Environment of Bangladesh

Since the inception of privatization in 1976,

many of the corporate bodies, including

major portions of the banking and jute

sectors, paper and textile mills,

telecommunications, railways and airlines

industries were either reserved for the

government sector or could not be

denationalized due to various difficulties, and

so they continued to remain under

government control. These enterprises

presented a very painful experience to the

nation. For example, The Adamjee Jute Mills

Corporations Ltd., the largest jute mill in the

world collapsed in 2002 costing the jobs of

17,000 workers, because of a failure of

corporate governance in terms of

mismanagement and corruption. In the last 30

years that enterprise had an accumulated loss

of Taka 11,080 million, approximately

equivalent to 221.6 million Australian dollars

(Star, 2014). Soon after the adoption of

market economy and the „rehabilitation‟ of

the private sector, it experienced a huge

growth. For example the industrial GDP

increased from 7.19% in 1974 to 10.88% in

1980 (Alauddin, 2014). It increased to 27.8%

in 2004 (Bangladesh Bank, 2003-04).

Figure-1

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Although the performances of the State

Owned Enterprises (SOE) were very poor

even before the growth of private sector, the

SOE‟s could not survive the competition

from the huge growth in private sector

enterprises over this period. Consequently

the focus of corporate governance has shifted

from the public sector to the private sector.

This was also encouraged by other

environmental factors such as the stock

market collapse in 1996 at Dhaka and

Chittagong Stock Exchanges, along with

inefficiencies and underperformance causing

collapses of some privatized jute and textile

mills (Bhaskar and Khan, 1995; Uddin and

Hopper, 2013). These failures highlighted

greatly the importance of good corporate

governance in the private sector in

Bangladesh.

Figure-2

The spread of share ownership in public

limited companies in Bangladesh is not wide,

and the economic power of the businesses is

concentrated in dominant shareholder

groups. A few shareholders account for a

significant portion of total share value and

most companies are managed and owned

primarily by founding family members,

holding company (or cross shareholding) or

institutional investors leading to very high

degrees of concentration of ownership

control. Apart from the controlling

ownership by foreign investors, government

and institutions, the joint stock companies in

Bangladesh are mainly controlled by

founding family members.

Figure-3

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Due to underdeveloped, poor and less liquid

stock market operations, there is a lack of

effective corporate governance practice, poor

legal enforcement and an excessive reliance

on bank financing. Consequently, the control

of the companies remains in the hands of

sponsors, directors, and founding family

members leading to a concentrated

shareholding and control. Most of these

concentrated owners hold a position in the

company management and board, leading to

poor monitoring of corporate governance

practices. Haque et al (2016) documented

that the boards of the Bangladeshi firms are

mostly family dominated and executive

management is family aligned. This is typical

of circumstances found in the countries

affected by the Asian Crisis as ADB (2015, p

2) documented that,

“……weaknesses in corporate governance in

these countries appear to owe much too

highly concentrated ownership ……. under-

developed capital markets, and the weak

legal and regulatory framework for investor

protection”

5.3 The Existing Corporate Governance Regime in Bangladesh

LLSV3 (2015) suggest that like many

developing countries the enforcement of law

in Bangladesh is either very poor or difficult

to enforce. The degree of compliance with

existing financial regulation is historically

very low in Bangladesh (Ahmed and

Nichollas 2014). An independent survey in

late 2016 with the help of Securities and

Exchange Commission, Bangladesh revealed

that about 55 percent of companies do not

comply with the good practice guidelines and

only about of 33 percent companies

appointed the independent directors (Jai Jai

Din, 2016). Such poor law enforcement is

exemplified by occurrences of the 1996

Bangladesh stock market collapse, in which a

syndicate of company directors and brokers

had proceedings brought against them by the

Securities and Exchange Commission of

Bangladesh. Subsequently there is no

evidence of punishment to these company

directors and the brokers of the syndicate,

because the proceedings were abandoned due

to poor enforcement of the law. This example

suggests that the investor’s protection is very

low in Bangladesh, and so poor corporate

governance is of increased concern

.

Figure-4

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The first instance of corporate governance

disclosure in Bangladesh is Padma Textile, a

subsidiary of the BEXIMCO group of

companies, who published two pages in their

annual report on corporate governance,

stating “recognizing the importance of it, the

board and other senior management remained

committed to high standards of corporate

governance”. Thereafter the report contains a

series of statements about “internal financial

control”, “management structure of the

company”, “financial reporting”, etc. (cited

in Haque, 2012). However companies in

Bangladesh are not required to report

information on corporate governance in their

financial reports (OECD, 2013). The

corporate governance practices were only

made mandatory for the first time in

Bangladesh following the SECB

announcement of “Corporate Governance

Notification” in 2016.

Section 5.3.1 to follow will describe the

existing corporate governance enforcement

regime from a legal perspective. Section

5.3.2 will describe the regulatory regime,

while section 5.3.3 will give an overview of

prevailing accounting and auditing

contributions to the corporate governance

environment in Bangladesh. Section 5.3.4

will describe the capital markets in

Bangladesh.

5.3.1 Corporate Legal Environment in Bangladesh

The corporate legal framework in Bangladesh

consists of certain Acts and

Ordinances, numerous subordinate

legislative instruments such as orders,

notifications, rules, regulations and circulars,

which are issued by the Government, the

Bangladesh Bank, the Securities and

Exchange Commission (SECB), the National

Board of Revenue (NBR) and other

governmental agencies. Moreover the stock

exchanges, chambers of commerce and other

self-regulatory agencies in the private sector

also form a part of the legal and regulatory

framework for corporate governance in

Bangladesh.

On 1st January 1995, the new Companies Act

of 1994 came into effect. Among several

types of legislation, the „Companies Act

1994‟ is the main governing law for the

companies in Bangladesh. This law was put

in effect to provide more accountability and

openness in managing the companies,

leading to greater confidence in the corporate

environments. However, that Act does not

say anything regarding the ultimate share

ownership, director’s qualifications, age,

composition of the board and the leadership

structures in the board and management,

particularly the role of chairperson5 and

CEO, director’s responsibility etc. Rather,

the law is very much related to the formation,

management and liquidation of companies.

The capital markets in Bangladesh are

regulated by several types of legislation,

including the Trust Act 1882, Capital Issues

(Continuance of Control) Act 1947,

Securities and Exchange Ordinance 1969,

Securities and Exchange Rules 1987,

Securities and Exchange Commission Act

1993, Securities and Exchange Commission

(Amendment) Act 1993, Securities and

Exchange Commission (Brokers, Stock-

Dealers, Stock-Brokers and Authorized

Representative) Regulation 1994, Securities

and Exchange Commission (Merchant

Bankers and Portfolio Managers) Regulation

1994, Securities and Exchange Commission

(Mutual Funds) Regulation 1994, Prohibition

of Insider Trading Regulation 1995, Initial

Public Offering (IPO) Rules 1998, The

Depository Act 1999 and Margin Rules 1999.

Moreover, there are some specific rules and

regulations which are issued by SECB from

time to time for controlling the operation of

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stock exchanges, companies and share

markets.

5.3.2 Regulatory Control of the Securities and Exchange Commission of Bangladesh

The Securities and Exchange Commission,

Bangladesh (SECB) was established on 8th

June 1993 under the Securities and Exchange

Commission Act, 1993. The SECB holds

very wide-ranging powers and regulates the

activities of the capital market in Bangladesh

including licensing and regulation of capital

market participants and intermediaries such

as stock exchanges, brokers and dealers,

merchant banks and portfolio managers.

Much of the powers of the SECB are aimed

at proper disclosure to investors, which is at

the heart of good corporate governance. It

provides policy direction to the industry and

administers the securities legislation and acts

as an administrative tribunal for decisions on

the capital markets (SECB, 2014-15). Listed

companies are required to submit the copy of

their Annual Report and the proceedings of

their annual general meeting to the SECB.

Besides regulating the capital markets, the

SECB has the other objectives of promoting

investors‟ awareness including investment

guidelines and the correct format for lodging

a complaint, caution notices regarding the

circulation of fake shares, an investors’

education program and the provision of

training for intermediaries of the securities

market

(SECB, 2015).

5.3.3 Financial Reporting, Accounting and Auditing Standards

Two professional accounting bodies, the

Institute of Chartered Accountants of

Bangladesh (ICAB) and the Institute of Cost

and Management Accountants of Bangladesh

(ICMAB) regulate the accounting profession

in Bangladesh. ICAB is the national

professional accounting body of Bangladesh

established under the Bangladesh Chartered

Accountants Order (Presidential Order

Number 2 of 1973). The Institute of Cost and

Management Accountants of Bangladesh

(ICMAB) was established in 1977 under the

„Cost and Management Accounting

Ordinance‟ mainly to regulate the Cost and

Management Accounting profession in

Bangladesh. Both the accounting bodies are

fostering the acceptance and observance of

International Accounting Standards (IAS)

and International Financial Reporting

Standards (IFRS) and their adoption as

Bangladesh Accounting Standards (BASs).

The Companies Act 1994 allows the

members of both ICAB and ICMAB to audit

companies to ensure that their accounts

conform to all Bangladesh Accounting

Standards.

To ensure the transparency, accountability

and good governance in the corporate sector

effective from February 2000, the Securities

and Exchange Commission Bangladesh by a

notification on 29th December 1997 required

all listed companies to abide by „Accounting

Standards‟ adopted by ICAB and ICMAB as

Bangladesh Accounting Standards (BASs).

Thus these accounting standards are

mandatory for all companies listed in Dhaka

and Chittagong Stock Exchanges

.

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5.3.4 Capital Markets in Bangladesh

The Bangladeshi capital market is one of the

smallest in Asia, and has a lot of problems

including a non-developed securities market,

investor non-awareness, a lack of research,

non-professionalism of the brokerage

business and market intermediaries, and a

tendency towards unethical gains by insider

trading and a lack of transparency

(Chowdhury, 2014 and SECB, 2015-16).

By the end of June, 2006 there were 303

securities of 256 companies listed on the DSE

with a market capitalization of Taka 225.30

billion (SECB, 2016). The All Share Price

Index‟ at Dhaka Stock Exchange was

introduced on 16th September 1986. The

Dhaka Stock Exchange is a self-regulated

non-profit organization. Its activities are

regulated by its „Articles of Association‟ and

„rules and regulations‟ and „by-laws‟ along

with the Securities and Exchange Ordinance,

1969, Companies Act 1994 and Securities

and Exchange Commission Act, 1993. The

Chittagong Stock Exchange (CSE) was

established as a Public Limited Company in

April 1995. Similar to Dhaka Stock

Exchange, the activities of Chittagong Stock

Exchange are regulated by its „Articles of

Association‟ and „rules and regulations and

by-laws‟ along with the Securities and

Exchange Ordinance, 1969, Companies Act

1994 and Securities and Exchange

Commission Act, 1993. By the end of June

2006 there were 213 securities of 196

companies listed with CSE with a market

capitalization of Taka 196.34 billion (SECB,

2015).

6.0 Need for Corporate Governance in Banking System

Banks are critical components of the

economy while providing finance for

commercial enterprises, basic financial

services to a broad segment of the population

and access to payment systems. Banks in

Bangladesh are facing increasing

competition, within and outside Bangladesh,

both in terms of markets for its products and

for sources of fund.

The importance of banks to national

economies is underscored by the fact that

banking is, almost universally, a regulated

industry and that banks have access to

government safety nets. In order to meet the

statutory need of having sound Capital

Adequacy requirements, banks are accessing

the Capital Market at regular intervals. Hence

the banks need to stimulate the interest of

investors at all times. Investors believe that a

bank with good governance will provide

them a safe place for investment and also give

netter returns. Good corporate governance is

therefore an important factor in a competitive

environment. Investors, customers,

employees and vendors have all become

more discerning and are demanding greater

transparency and fairness in all dealings. To

attract and retain the commitment of

investors, customers, employees, Banks

should ensure that they match the global

benchmark in Corporate Governance

Practices.

Banks are also important catalysts for

economic reforms, including corporate

governance practices. Because of the

systemic function of banks, the incorporation

of corporate governance practices in the

assessment of credit risks pertaining to

lending process will encourage the corporate

sector in turn to improve their internal

corporate governance practices, importance

of implementing modern corporate

governance standards is conditioned by the

global tendency to consolidation in the

banking sector and a need in further

capitalization. It is of crucial importance

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therefore that have strong corporate

governance practices.

Banks, just like any other organization are

incorporated entities. As a result of which,

the primary requirements of corporate

governance apply to them as any other

incorporated entity. Added to this certain

features that are very specific to banks, ads

on to the importance of Corporate

Governance issues in banks.

Among other features, the most important

one is the fact that banks form an integral part

of the economy of the country, and any

failure in a bank might have a direct bearing

on the financial health of the country. Banks,

help in channelizing the people’s saving.

The capital structure of bank is unique in two

ways. First, banks tend to have very little

equity relative to other firms. Second, banks’

liabilities are largely in the form of deposits,

which are available to creditors/depositors on

demand, while their assets often take the

form of loans that have longer maturities.

Thus, the principle attribute that makes banks

as financial intermediaries “special” is their

liquidity production function. By holding

illiquid assets and issuing liquid liabilities,

banks create liquidity for the economy. The

liquidity production function may cause a

collective-action problem among depositors

because banks keep only a fraction of

deposits on reserve at any one time.

Depositors cannot obtain repayment of their

deposits simultaneously because the bank

will not have sufficient funds on hand to

satisfy depositors at once. This mismatch

between deposits and liabilities becomes a

problem in the unusual situation of a bank

run.

The second important driver of a good

corporate governance stems from their

funding patterns. Banks, by their basic

definition are highly leveraged financial

institutions, with the equity capital of the

shareholders being reduced to a miniscule

proportion of loan capital in the form of

borrowing and deposits of deposits from

customers of the bank. As a result of this, the

stakeholders in banks, (mainly the depositors

and lenders) have a rightful claim of

accountability from the banks and their

boards.

The third important element in the Corporate

Governance structure relates to the control

function. It is imperative to discuss the same

in brief. Control functions in banks deal with

internal frauds as well as external frauds. The

former relates to situations where the banks

own personnel indulge in corrupt and

unethical practices. The latter deals with

situations where the customers of the bank try

to seek for malpractices. The incidents of the

external frauds are so devastating that special

attention is being mandated both for their

prevention as well as their post scenario

analysis. In this connection it is important to

remind of the COSO framework that was

framed with this intention in mind.

Finally, failing to comply with stipulated

norms can be one of the challenging issues of

Corporate Governance framework. With

Banks being under intense watch of the

central bank as well as other regulatory

bodies, it is a common observation, that most

failures (crashes) in banks have occurred due

to compliance failure situations. With a lot of

reports and norms, being introduced (The

Basel II norms being the latest of them),

failure to adhere to the regulatory norms have

never reduced

.6.1 BASEL II Recommendation

The Basel Committee on Banking

Supervision is a committee, of banking

supervisory authorities, established by the

Central Bank Governors of the G10

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developed countries in 1975. The Committee

in 1988 introduced the Concept of Capital

Adequacy framework, known as Basel

Capital Accord, with a minimum capital

adequacy of 8 percent. It also issued a

consultative document titled “The New Basel

Capital Accord” in April 2003, to replace the

1988 Accord, which re-enforces the need for

capital adequacy requirements under the

current conventions. This accord is

commonly known as Basel II and is currently

under finalization. Basel II is based on three

pillars:

Pillar 1 – Minimum Capital Requirements

Pillar 2 – Supervisory Review Process

Pillar 3 – Market Discipline

6.2 Enhancing Corporate Governance in Banks The Basel committee had issued, in August

1999, a guidance paper entitled “Enhancing

Corporate Governance for Banking

Organizations” to supervisory authorities

worldwide to assist them in promoting the

adoption of sound corporate governance

practices by banks in their countries.

6.3 Importance of Corporate Governance for Banks From a banking industry perspective,

corporate governance involves the manner in

which their boards of directors and senior

management govern the business and affairs

of individual banks, affecting how banks set

their corporate objectives, run day-to-day

operations, consider the interests of various

stakeholders, align corporate activities with

the expectation that banks will operate in a

safe and sound manner and in compliance

with applicable laws and regulations and

protect the interests of depositors.

6.4 Sound Corporate Governance Practices for Banks According to the paper some of the best

corporate governance practices for banks

include establishing strategic objectives and

a set of corporate values communicated

throughout the organization, strong risk

management functions, special monitoring of

risk exposures, setting and enforcing clear

lines of responsibility, etc.

6.5 Role of RBI in Promoting Corporate Governance

The growing competitiveness and

interdependence between banks and financial

institutions in local and foreign markets have

increased the importance of corporate

governance and its application in the banking

sector. Corporate governance in banks can be

achieved through a set legal, accounting,

financial and economic rules and regulations.

To make sure that the competence and

integrity in banking sector is maintained, the

need for uniform standards of the concept of

governance in private and public sector is

emphasized. The regulatory framework

implemented by the central bank can affect

the overall wellbeing of banking sector.

6.6 Best Practices of Banking System in Corporate Governance

Good governance can be built based on the

business practices adopted by the board of

directors and management. Many bank

failures in the past have been attributed to

inadequate and insufficient management

which enabled the banks to accept low

quality assets and assume additional risks

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that extend beyond the level appropriate for

the banks’ capacity.

Important commandments for ensuring

corporate governance in banks are:

Banks shall realize that the times are changing

Banks shall establish an Effective, Capable and Reliable Board of Directors

Banks shall establish a Corporate Code of Ethics for themselves

Banks shall consider establishing an office of the Chairman of the Board

Banks shall have an effective and Operating Audit Committee, Compensation Committee and

Nominating/ Corporate Governance Committee

Banks shall consider Effective Board Compensation

Banks shall disclose the information

Banks shall recognize that duty is to establish Corporate Governance Procedures that will serve

to enhance shareholder value

6.7 Recent Scenario Recent steps taken by Banks in Bangladesh for Corporate Governance are:

Introduction of non-executive members on the Board

Constitution of various Committees like Management Committee, Audit Committee,

Investor’s Grievances Committee, ALM Committee etc.

Gradual implementation of prudential norms as prescribed by RBI

Introduction of Citizens Charter in Banks

Implementation of “Know Your customer” (KYC) concept.

7.0 Conclusion

Banks and financial sector being a highly

service oriented sector, making corporate

governance effective is a great challenge.

More so, when the driving force of

commercial banks is to grab the opportunity,

trading profits with only focus on

profitability. The levers of systemic control

have to be not only progressively tightened

but they are also to be scrutinized from the

point of deliverables. Moreover the recent

global financial crisis leading to the demise

of several reputed global investment banks

exposes the fissure in the effectiveness of

corporate governance model.

Banking sector is the key for monetary

conditions in a country. Due to the special

nature of the activities carried on by the

banks, they face a lot of problems as far as the

area of corporate governance is concerned. In

the Bangladeshi scenario, due to the peculiar

nature of bank holdings there are a lot of

embedded conflicts. The guidance paper

issued by the Basel Committee is of

paramount significance in enforcing

corporate governance standards in various

countries across the world.

Corporate Governance is now identified and

acknowledged as a powerful tool to generate

trust and confidence in an institution. The

trend in the world of targeting governance

practices in the banking sector to be at the

cutting edge of prevailing practices

worldwide is a significant step in the right

direction and should continue to be so in the

future as well.

Bangladesh has one of the best Corporate

Governance legal regimes but poor

implementation. SEBI has carved out a

certain more stringent provisions relating to

listed companies as a condition of the Listing

Agreement.

The special nature of banking institutions

necessitates a broad view of corporate

governance where regulation of banking

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activities is required to protect depositors. In

developed economies, protection of

depositors in a deregulated environment is

typically provided by a system of prudential

regulation, but in developing economies such

protection is undermined by the lack of well-

trained supervisors, inadequate disclosure

requirements, the cost of raising bank capital

and the presence of distributional cartels. Due

to special nature of the activities carried on

by the banks, they face a lot of problems as

far as the area of corporate governance is

concerned. Also, in the Bangladeshi scenario,

due to the peculiar nature of bank holdings

there are a lot of embedded conflicts. There

exists a doubt as to what standard should be

applied while enforcing corporate

governance in banks. Central banks play an

important role in this regard. As far as best

corporate governance practices for banks are

concerned, they may include realization that

the times are changing, establishing an

effective, capable and reliable board of

directors, establishing a corporate code of

ethics by the banks for themselves,

considering establishing an office of the

chairman of the board, having an effective

and operating audit committee, compensation

committee and nominating/ corporate

governance committee in place, considering

effective board compensation, disclosing the

information and recognizing their duty to

establish corporate governance procedures

that will serve to enhance shareholder value.

Finally this study concluded that, the

corporate governance practices in the

banking and financial sector in Bangladesh

should improve for best investment policies,

appropriate internal control systems, better

credit risk management, better customer

service and adequate automation in order to

achieve excellence, transparency and

maximization of stakeholder’ value and

wealth.

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