Functions of Central Bank

GROUP MEMBERS:
Bangladesh
Name ID
BANK
Mehryn Murshed 151 2966 660
Tahsin Hossain 152 1822 660
Mohammad Johny 161 2270 060
Maskuna Islam Shila 152 1592 660
Himel Roy 161 2415 060

Faculty Advisor:
Course: FIN- 644 Professor Dr. Prashanta k. Banerjeee
Section: 01
 A central bank is a monopolized and often nationalized institution given privileged
control over the production and distribution of money and credit.
In the context of Bangladesh, the central bank is known as the Bangladesh Bank.
History: It was established in Dhaka as a body corporate vide, the Bangladesh Bank
Order, 1972 with effect from 16th December, 1971.
Branches: At present it has 10 offices located at
Motijheel, Sadarghat, Chittagong, Khulna, Bogra,
Rajshahi, Sylhet, Barisal, Rangpur and Mymensingh
in Bangladesh.
Staff: Total of 5,807 employees, of which officials
were 3,981 and subordinates were 1,826
 Controlling inflation and credit

Giving monetary policy

Clearing house function

Money laundering prevention

Monopoly of note issue

Banker, agent and advisor of the government

Custodian of nations reserves of international currencies

Lender of the last resort

Custodian of cash reserves of commercial banks

 Bangladesh Bank

State-owned Private commercial Foreign commercial Non-bank financial Specialist banks

commercial banks banks banks institutions
Bangladesh
e.g (IDLC, Krishi Bank
e.g (Sonali Bank, e.g (Dhaka Bank, e.g(Citibank N.A, LankaBangla
Janata Bank) Prime Bank) SCB) Rajshahi Krishi
Finance)
Unnayan Bank
 The main objective of this function for the Bangladesh bank is to bring price stability along with full employment.

Instruments used to control inflation and credit:

Cash Reserve Ratio

Current ratio 6.5%

Bank / Discount Rate

Open Market Operation
Current bank rate 5%
Buying or selling of
securities and treasury bills
1. Bank rate
This is the rate of interest at which the central bank lends to commercial banks. It is in a way, a cost of
borrowing. When there is excess demand and inflationary pressure, the central bank increases the bank rate.
High bank rate forces the commercial banks to raise, in turn, the rate of interest which makes credit expensive.
As a result, demand for loans and other purposes falls. The increase in bank rate by the central bank adversely
affects credit creation by commercial banks. A decrease in bank rate will have the opposite effect.
2. Open Market Operation
These refer to buying and selling of government securities by central bank to public and banks. This is done to
influence money supply in the country. Sale of government securities to commercial banks mean flow of money
into the central bank which reduces cash reserves. Consequently credit availability of commercial banks is
controlled. When central bank buys securities, it increases cash reserves of banks and their ability to give credit.

3. Cash Reserve Ratio

Commercial banks are required to keep a certain percentage of their total deposits with
the central bank in the form of cash reserves, known as CRR. It is a powerful instrument to
control credit and lending capacity of the banks. To curtail the giving capacity of the banks,
central bank raises the CRR but when it wants to enhance the credit giving powers to the
bank, it reduces the CRR. Another measure is called the SLR (Statutory Liquid Ratio)
whereby a fixed percentage of assets is required to be kept as deposit. But SLR is reduced
when the situation in the economy demands expansion of credit.
Monetary policy is a process to control the supply of money by central bank, often
targeting an inflation rate or interest rate to ensure price stability.

Role of central bank is to ensure economic development through a trade off

between-
Credit growth, and
Inflation

Central bank contain or stabilize the Inflation (CPI) with three anchor instruments.
i. Reserve Money (RM): Currency in Circulation + Bankers Deposits with BB + Other Deposits
with BB
ii. Broad Money (M2): In economics, broad money is a measure of the money supply that
includes more than just physical money such as currency and coins; it generally indicates
demand deposits at commercial banks.
iii. Domestic Credit: Lending or credit that central bank makes available to borrowers within
its own territory; this may include commercial banks and even involve the government itself.
In 2017, public sector credit reduced by 16.2% whereas private sector credit grew by 16%.

Exchange Rate Stability
- Pursue a stable exchange rate
to attract foreign investments.
- BB may regulate the money
supply to maintain this rate.
Price Stability
- Stability of the general price level.
- Price instability leads to Inflation
and Deflation
Neutrality of Money
A change in the stock of money affects
variables like prices, wages, and
exchange rates; while not affecting
variables like employment, real GDP and
real consumption.
Control of Cyclical Fluctuations
- Monetary policy influences the
inflation.
- Inflation influences the business cycle
Economic Growth
- Money supply controls price level
(ultimately inflation).
- Long-run economic growth is
affected.
 The process by which Central bank transfers funds from one bank to another for mutual
transaction settlement is called the Clearing House function.

How Clearing House function works:

All the commercial banks have their account with central bank.
Additionally the commercial banks are bound to maintain a cash reserve in central bank.
So, when ever any bank (Bank A) receives a cheque from other bank (Bank B), that bank (Bank
A) transfers that cheque to central bank through Bangladesh Automated Cheque Processing
System (BACPS).
Central bank (Bangladesh Bank) pays the bank (Bank A) on behalf of the other bank (Bank B)
from their cash reserve which was previously held in the central bank as Cash Reserve.
 OBJECTIVE OF CLEARING HOUSE FUNCTION

The objectives of clearing house are as follows-

a. Quick settlement of transaction.
b. To take economic policy.
c. To save time.
d. To accelerate the advantages of transaction.
e. Influences on the cash deposit of bank.
f. Assistance in realizing economic condition.
g. Helpful in transfer of money.
 Money laundering (ML) and terrorist financing (TF) as one of the
major threats to the stability and the integrity of the financial
system.
BFIU has issued Money Laundering and Terrorist Financing Risk
Assessment Guidelines for banking sector on January, 2015.
The purpose of this guidance is to outline the legal and regulatory
framework for anti-money laundering.
Fundamental concept of money laundering is the process by which
proceeds from a criminal activity is disguised to conceal their illicit
origins.
The conversion or transfer of property, knowing that such property is
derived from any offense, e.g. drug trafficking.

Traditionally it has been accepted that the money laundering process

comprises three stages:
I. Placement
II. Layering
III. Integration
 The client cannot provide satisfactory evidence of identity.
Situations where it is very difficult to verify customer
information.
Situations where the source of funds cannot be easily
verified.
 Bangladesh Bank has the sole authority to issue banknotes in
Bangladesh.
Bangladesh Bank, like other central banks the world over,
changes the design of banknotes from time to time.
Current Banknotes are
 The Central bank will act as banker to the other banks in the country.
It is a common habit for the central bank to insist that the other banks
hold non-interest bearing reserves with in proportion to their deposit.
Bangladesh Bank acts as a agent of the peoples republic of Bangladesh. It
receives revenues for Taxes and other income and pay out money for
the governments expenditure.
The central bank will corporate with the government on economic policy
generally and will produce advice on monetary policy and economic
matters.
 A central bank is the custodian of foreign exchange reserves and nations
gold.
Foreign-exchange reserves are, in a strict sense, only the foreign-currency
deposits held by national central banks and monetary authorities.
These foreign-currency deposits are the financial assets of the central
banks and monetary authorities that are held in different reserve
currencies .
All the foreign currency received by the citizens has to be deposited with
the central bank; and if citizens want to make payment in foreign
currency, they have to apply to the central bank.
 Central bank is the lender of last resort, for it can give cash to the
member banks to strengthen their cash reserves position by
rediscounting first class bills in case there is a crisis or panic which
develops into run on banks or when there is a seasonal strain.

This facility of turning their assets into cash at short notice is of great
use to them and promotes in the banking and credit system economy,
elasticity and liquidity.
 The lending of last resort function of
Bangladesh Bank the central bank imparts greater
liquidity and elasticity to the entire
credit structure of the country.
Lender of
Last Resort The essential duty of the central
bank as the lender of last resort is to
make good shortage of cash among
the competitive banks.
Member Banks
 To control inflation and the credit growth

-Cash Reserve Ratio, Statutory Liquidity Ratio.

Besides CRR, Banks have to invest certain percentage of their deposits in specified
financial securities like Central Government or State Government securities. This
percentage is known as SLR.

This money is predominantly invested in government approved securities (bonds),

Gold, which mean the banks can earn some amount as 'interest' on these
investments as against CRR where they do not earn anything.
 Total Deposits ( 1000)
6.5%
13%
65
130 CRR

SLR
80.5%

805 Free to Lend

Penalty-
Penal Interest (Bank Rate plus 5%) and Penalty will be charged according to the
instructions of BB Order, 1972 and DOS Circular No. 03/2010 for CRR related issues.
 BB Refinance Scheme
- Women and New Entrepreneur, Agro-Based Industry
School Banking (Financial Inclusion)
Green Banking
- Solar Energy, Bio-gas, ETP and Hybrid Hoffman Kiln (HHK) in
brick field
CSR Initiatives by Banks/NBFIs
-Education, Healthcare, Relief for Natural Calamity.
Financial Literacy