Accountant July September 2015

8/20/2019 Accountant July September 2015

1/131

July-September 2015

IDENTIFY

ANALYZE

ACTION

MONITOR

CONTROL

RISK MANAGEMENT

BUSINESS


2/131

Editorial 2President’s Desk 4

ARTICLESFraud Risk Management in Banking Industries: 6Strategy and Schema for Grappling the Challenges

- M Jalal Hussain FCAImplementing the Cash-Basis IPSAS: 10

The First Step in the Journey

- Doctor Wayne Bartlett CPADefaulted Loans and Risk Management in Banking Sector 13- M. Idris Ali FCAMonetary Policy Needs Consistency with other Economic Policies 18- Md. Shahadat Hossain FCARisk Management in Public Financial Sector 20

- Dr Muhammad Abdul MazidManaging Business Risks 28- Ashish Kumar Paul FCAOperational Risk – Role of Accountants in Managing 32Operational Risk in Commercial Banks

- Nigar SultanaBangladesh Economy: Performance, Problems & Prospects 41- Masih Malik Chowdhury FCACorporate Governance and Accountants 47- Dr. Rukshana BegumRisks and Risk Management in Banks 52- Md Abdus Salam FCA, FCSMaking it with ICT – for Emerging Entrepreneurs 57

- K Atique-e-Rabbani FCAEffective Risk Management in Business 59- Md. Hafizur Rahman ACA

A Study on the Compliance of Bangladesh Bank’s 65Policy Guidelines for Green Banking

- 1Md. Ahasan uddin | - 2Sabuj Chandra BhowmikLiquidity Position of Private Commercial Banks (PCBs) 78in Bangladesh: An Empirical Overview

- 1Sujan Chandra Paul ACA | - 2Abdul Alim Baser ACMA- 3Mohammad Rakibul IslamBusiness Risk Management 86- Muhammed Omar Faruk Ripon ACARisk Management by Bangladesh Bank: New Steps 94

- Raihan M ChowdhuryEnterprise Risk Management 98- Aisha Siddiqua ACAImposition of Income Tax on Employee Tax Payers on 104Medical Aid Vis-a-Vis Justice and our Constitution

- Md. Asaddar Ali FCAEvolving Business Risk Management 106- Md. Ziaur Rahman ACAManaging Risk in Banking 110- Md. Ashraful Azim FCAMicro Finance Business & Its Risk Management 117- Naznin Sultana ACAIn Remembrance of Jamaluddin Ahmed and Rezaur Rahman 123- M. Matiul Islam FCA

CONTENTS ISSN 1993-3649

"The opinions expressed in this publication are those of therespective authors themselves and do not necessarily reflect theviews of the Editorial Board of the Institute of Chartered

Accountants of Bangladesh (ICAB) or the ICAB itself."

DISCLAIMER

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 FCADr. 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 ACAAbu 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 SecretaryMohammed Emdadul Haque FCA

Technical Adviser-ICAB

Published by the Editorial Board of the Council

The Institute of Chartered Accountants of Bangladesh (ICAB)CA Bhaban, 100 Kazi Nazrul Islam Avenue, Dhaka 1215Tel : 9117521, 9112672, 9115340, 9137847

Email : [email protected]

Website : www.icab.org.bd


3/131


4/131

The Bangladesh Accountant July - September 2015 03

Md Abdus Salam FCA, FCSChairman, Editorial Board andCouncil Member & Past President-ICAB

cent of the national economy..

Finance Minister AMA Muhith, MPdeserves 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 theBangladesh Accountant

(July-September 2015) deals with

such facts those affect the

economy in covertly and discussed

way forward to get rid from the

risks.

It is my privilege to communicate to

you, the distinguished Members of

this noble fraternity of accountancy

profession through this journal

covering some crucial economic

issues of the country. The honorable

writers have come up with their

diversified thoughts regarding

business risk management in this

issue.

Dear esteemed Members, we seek

your good self to kindly give us

your feedback about the articles,

contents and any other matterswhich may enrich our only CA

professional mouthpiece. Your

valuable suggestions and opinions

will highly be appreciated.

Please accept our heartiest

greetings on Eid-ul-Azha.


5/131

July - September 2015 The Bangladesh Accountant04

Grooming up members

with recurrentprofessional issues

PRESIDENT’S DESK

This issue of the BangladeshAccountant would reach to your

hands in a critical juncture; the

Institute of Chartered Accountants

of Bangladesh has passed through

& entered into. As we are allaware, 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 enactedthe Law. It ignored ICAB’s 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 bysowing the seed of a stronger

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 outoptimum 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 forMembers so far of the year. CAs as

stakeholders always aspire in quest

of searching knowledge &

wisdom, which was manifested bytheir 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 peoplein 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 ofuniquely 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- MutualRecognition 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 ICTMinistry, 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. IBCSPrimax 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 CAStudents on 18 August 2015. In

order to maintain world class


6/131

Masih Malik Chowdhury FCAPresident-ICAB


education environment, ICAB

refurbished its new rented campus

building. A private Universityunder 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 ProfessionalExcellence (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 inICAB.

ICPE has organized the 3rd

consecutive yearly training

program on IFRS & IAS forBangladesh 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 publicfinancial 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 AccountingStandards (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 itsresource 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 ICAB’s

stand, the Financial Express on 13

August 2015 published my

interview over the issue with due

importance. In that interview, Istressed 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.


7/131


IntroductionThe 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 difficulty. 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 theyears 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 don’t haveprescribed systems and procedures in

Fraud Risk Management in BankingIndustries: Strategy and Schema for

Grappling the ChallengesM Jalal Hussain FCA

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, benefit 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?

There’s 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 actionsconnecting 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 orbusiness advantage.”


8/131


It’s 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 for Prevention of

Frauds in Banking Industries

From the long time research on

fraud reduction strategies,prevention and disavowal are

considered as one the best

strategies. Prevention is better than

a cure, the universal adage, hasbeen proved to be the most

effective strategy for fraud risk

management. Preventive controls,

measures and ways are designed tohelp 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 significantrole 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 highestlevel for ethical and accountable

business practices. Board of

Directors has special duty to

ensure that it has active policy andplanning to thwart and encounter

risk of frauds and wrong doings. It

should:

• Review and discuss the issues

relating to entity’s fraud and

misconduct assessment with

the concerned departments;

• Establish code of conducts and

related standards for the

managers of the entity;

• Review and discuss with

internal and external auditors

and take actions on their

suggestion for anti-fraud

strategies.

Senior Management

Senior management to help ensure

fraud control remains effective in

line with international standard.Fraud and risk management

AN EFFECTIVE

WAY TO PREVENT FRAUD

IN THE BUSINESS IS TO

CREATE A POSITIVE

WORK CULTURE. IT’S

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.


9/131

approach should be shared with

the managers and staff. The Chief

Executive Officer (CEO) is ideally

positioned to influence and guideemployee actions through his

executive leadership. CEO canlead 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.

Employee & Third Party Due

Diligence

An important part of an effectivefraud 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 temporaryemployees who may have access

to confidential information anddata, may help prevent fraudulent

device.Screening applicants

thoroughly before hiring the right

employees is the best way to stop

fraud before it happens. It’s 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 byExample

An effective way to prevent fraud

in the business is to create a

positive work culture. It’s

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 industryshould establish a system that

makes it easy for employees,

vendors and customers to

anonymously report suspected

fraud activities.

Strategies to Detect Fraudsin Banking Industries

Detecting controls are archetypes

to unearth fraud, misappropriationand embezzlement in banking and

financial industries. The followingsteps may help delve fraud andcorruption in banking industries:

• Fraud Delving in Real Time:Fraud, whether less or more, is

dangerous for businesses. Evenanything less is ahole-in-the-wall for thecriminals to get away. For

batch processes, the scoringengine should evaluate thetransaction, and anauthorization or declinedecision should take placeprior to funds movement.

• Analysis of Data: Proper

analytics is the only way toactually detect fraudulentpatterns of behavior efficiently.

The output of the analysisshould contain a customerscore, which determines howthe activity corresponds to thecustomers’ actual behavior. Atransaction fraud score, which

determines the fraudulentnature of the transaction.Understanding customer

performance isindispensable—it helps reducethe impact on the customers

and the fraud operation byreducing false positives.Certain customers transact inways that may appearfraudulent. Ultra-high-net

worth individuals are morelikely to spend at higher edgesand in more outlandishinternational locations. Small

business owners may havemore unpredictable payment

activity and online banking

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 andmanage each customer’s 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. Acohesive and flexible

workflow engine allows

analysts to consolidate and, in

many cases, automate the

remediation process.

• Effectual Rules Engine: The

rules engine links the analyticscoring to an action based on

the currently available

information. Rules are

essential to react swiftly to shutdown 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 takecorrective action and remedy the



10/131

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 havesaved the banking institutions from

incurring massive loss.

Conclusion

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, legalcosts, 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 thepolicy 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 strongemphasis 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


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 fraudand 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 beheld 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, legalaction, if necessary to realize any

amount embezzled.

Fraud Risk Management in

Banking Sector in Bangladesh

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 alarmingloan 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 crorehave 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

country’s corrupt leaders,

accepting mimic, forged andfabricated documents and ignoring

the collateral security rules. In

August 2014 the central bank

unearthed a 36 billion taka loan

scam at one of the country’s 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 riskmanagement that helps bring down


11/131


It is rather strange that for many years inmany 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 thatsomehow 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

doesn’t 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 ensurethat 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

Implementing the Cash-Basis IPSAS:The First Step in the Journey

Doctor Wayne Bartlett CPA

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 comprehensiveaccruals-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 ofAccounting 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 statementsrequired by the IPSAS Cash-Basis

Standard. The first of them is the


12/131


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. Notethe 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 isthe 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. Thefinancial 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 ismandatory and defines what

should be included in the core

financial statements and the

disclosure notes that accompanythem. 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.

These additional disclosures are

substantially based on what wemight 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 expenditureon an asset has been spent, the

asset gets effectively forgotten

about in accounting terms.

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 ofaccounting means that this is

exactly what happens.

Of course the move to

accruals-based accounting and

reporting within the IPSAS

framework will not be easy. It will

challenge both students andeducators. Research from many

countries suggests that a major

accounting transition on this scale

can stretch public sector educatorsto the limit. In this context, it is

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 BEREALISTIC; 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.


13/131

The Author is a Member of

CPA Ireland

perhaps timely to remind ourselves

that ICAB have recently signed a

Memorandum of Understandingwith CPA Ireland regarding the

distribution of the latter’s 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 andvaluable aid to students in

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 importantfirst 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?



14/131


Banking sector plays a vital role in theeconomy 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 andmake 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 beginswhile 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

Defaulted Loans and Risk Management in Banking Sector

M. Idris Ali FCA

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 processcontinues 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 ofTk 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:


15/131


In the first part of this article I wish topresent some facts and incidenceshow defaulted loans arose in thestate-owned banks and what is the

current status of those defaultedloans. On taking over charge fromhis predecessor the PresentChairman of Basic Bank said in aManagers‘ meeting that “It is notirregularity, it is dacoity that hastaken place in our bank, but suchdacoity will no longer be allowed tohappen in future, now it is time toturn the Bank into solvent one and toregain the confidence of depositorssteps will have to be taken in all

phases.” In fact compared to thequantum and nature of irregularitiesthat have happened in Basic Bank,the statement of the chairman wasnot an exaggeration. But hisdissatisfaction, at the same timeassurance had indicated that a fewdacoits will be caught and punished,but so far no visible action has beennoticed. This bank was in a far betterposition in the past, had defaultedloan of about 5% only and used to

pay dividend to Government. Thesituation worsened just within a span

4 to 5 years during formerChairman’s tenure. This bank lent totop 100 defaulters an amount of4,085 crore Taka which was 89% of

total disbursed loans. As on 30th June 2014, the bank had totaldefaulted bad loans of Tk 4,591crore. This amount was lent toalmost 1500 individuals andcompanies/ entities most of whichare owned by one person in groupsand have no addresses. On closingof the year 2014, the state-ownedbank kept aside an amount of Tk2,999 crore in the Financialstatements on the plea that these

loans were disbursed during theperiod of previous Board and theborrowers are non-existent. In facttotal loan balance was shown at Tk8,939 crore although it should havebeen Tk 11, 939 crore and bad loanswere shown at Tk 5,109 crorealthough it should have been Tk8,108 crore. The difference of Tk2,999 crore is hidden,in other wordsmight have been written off. It has tobe noted that Paid up capital of Basic

Bank has been contributed from thetax payers’ money who are public in

RISK

MANAGEMENT IN A

BANK IS EVERYONE’S

RESPONSIBILITY, NOT

JUST THE RISK

DEPARTMENT’S.

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.

Taka in crore

BANK Disbursed loan Defaulted loan percentage

State-owned:

Basic 8,964 5,080 56.67%Sonali 29,045 8,323 28.66%

Agrani 21,663 4,116 19.0%

Janata 29,907 3,888 13.0%

Rupali 12,470 1,247 10.0%

Krishi 16,308 5,373 33.0%

Rakab 4,450 1,441 32.39%

BDBL 1,409 603 42.81%

Commerce 1,541 495 32.14%

Private and Foreign:

ICB Islamic 920 713 77.49%

NBP 1,563 828 53%

St Bk of India 416 100 24%Habib Bk 388 87 22.23%

Wori Bk 233 24 10%

Std.Chartd 10,516 573 5.45%

Al Falah 677 37 5.45%HSBC 6,264 153 2.45%

City NA 1,000 21 2.13%


16/131

general. If the Bank earns profit thestate or people will get dividend, ifit incurs loss the state or peoplewill lose. The defaulted loanswhich will add to loss of the bank

could be used for developmentwork of the country. Due to badloans capital shortage or deficit ofthe bank is now Tk 3,634 crore. Inthe budget of 2015-2016 fiscalyear a lump sum allocation of Tk5,000 crore has been made to bailout the state-owned banks.Obviously this money will be usedfor making good the deficit. Thustax payers’ money will bail out thesick state-owned banks

continuously for years wastingpublic funds.

The largest state-owned bank,Sonali has an amount of Tk 8,323crore defaulted loans againstdisbursed figure of Tk 29,000 croreindicating a percentage of 28.7%.Sonali Bank had a far betterposition earlier about 2 years backbefore happening of the Hallmarkscandal. Hallmark scandal was

unique and dangerous oneinvolving not only the executivesand officers of Sonali Bank, butalso involving those of otherstate-owned and private banks.This was a cunning forgery for theentire banking practice. If theaccused persons are not punishedbanking sector may face same typeor more clever forgeries in future.Among the state-owned banksAgrani Bank stands third in rank in

respect of defaulted loans showingpercentage of 19% of disbursedloans which is not acceptable.

Janata bank ‘s defaulted loansindicate percentage of 13% ofdisbursed loans which was mainlydue to Bismillah Group’s defaultrecently. These five state-ownedbanks have lost about ten thousandcrore Taka by way of defaultedloans which are very unlikely to berecovered. Except the M.D of

Hallmark Group, the defaulters areat large,touring all over the worldand some of them have bought

houses, cars abroad which they areenjoying. Some of the defaultersseem to be so much powerful thateven the Govt. has failed to detainand take action against them. In

some cases top officials and seniorexecutives of the banks are alsoinvolved, but no action has beentaken against them. This fact isclear from a recent (July) statementof the honourable Minister ofFinance during his budgetsubmission that the defaultersbelong to Government party,hence it is difficult to take actionagainst them. He has alsomentioned that due to corruption

GDP of the country goes down by2 to 3 percent. The Minister mustbe thanked for his honest andsincere statement.

During the years from 2010 to2014 a total amount of almost Tk10,000 crore has become bad debtor in other words it has beenmisappropriated by those involvedin the deal. This has taken place inthe state-owned banks Sonali,

Janata,Basic and Agrani. Givingloans to borrowers who havenames or fake names but noexistence, who have no addressesor have fake addresses, who havesubmitted no collateral documentsor have submitted fake documentsand so on, seem to be willfuloffences. Most of those executivesor officers who have committedthese offences are yet to bepunished. If they are not brought to

legal punishment then this type ormore severe offences will continueto be committed which may turnthe banking sector vulnerable andmay affect the economic growth ofthe country. Bangladesh Bankbeing the authority for control ofbanks, have submitted their reportsafter investigating the offences butACC (Dudak) has not yet imposedany punishment except a fewcases. Ortho Rin Adalat has not

also punished any of the offendersor recovered any loan as yet. Itmay be said that there is an

anarchy going on in thestate-owned banks which is badindication. The banking sector as awhole is therefore, suffering fromtwo sicknesses, firstly those which

have defaulted loans are facingliquidity crisis and have no fundsfor further disbursement unlesstheir capital deficit is made good.Hence their operational losses areaccumulating day by day. On theother hand, those which haveexcess liquidity are unable to lendout it,because businessmen areeither not investing in newindustries or factories or they arewaiting for further reduction of

interest rate. We must rememberthat for the last 2 to 3 years,banking system in Bangladesh hasbeen holding an excess liquidity ofTk 1 lac to 1.3 lacs crore. Thisexcess liquid cash is adding to costof funds but not earning anyinterest by way of loan leading tooverall increase of operationalexpenses and reduction ofoperational profit. This unhappysituation has made some banks

desperate to apply unethicalprocedures to maintain their profitat minimum level or increase it.They are misusing the instructionof Bangladesh Bank. Firstly thesebanks are not keeping adequateprovisions in the relevant yearagainst the defaulted loans butspreading it over the rescheduledperiod in respect of defaulted loanswhich were rescheduled on theplea of loss of business due to

political instability during the lastpart of the year 2013. Not only thatTk 5,000 crore interest wasexempted and Tk 11,000 croredefaulted loan (principal) waswritten off during four and half

years. Due to this practice banks’profits went down during the year2013 and 2014 against thoseduring the previous years. Thesame trend is still going on.Consequently some banks are

playing with provisions. Accordingto an instruction of BangladeshBank in case of loans sanctioned to



17/131

general entrepreneurs a provisionof 5% has to be maintained,but incase of loans given to SME, only0.25% provision is acceptable. Inorder to increase their profits, some

banks are classifying generalcustomers’ loans as SME loans andkeeping 0.25% provision only.This way banks’ unrealized profitsin cash are going away toshareholders illegally. Bangladesh

Bank should detect thismalpractice soonest. BangladeshBank should also be strict infollowing up to ensure that itsinstructions are complied.

Risk Management

Banks are invariably faced withdifferent types of risks that mayhave a potentially negative effecton their business. Risk

management in bank operationsincludes risk identification,measurement and assessment andits objective is to minimizenegative effects risks can have onthe profitability, liquidity and

capital of a bank. Banks are,therefore, required to maintain anorganizational unit in charge of riskmanagement. This unit willprescribe procedures for risk

identification, measurement andassessment and will carry outprocedures for prevention oridentification of risks.

The risks to which a bank is

particularly exposed in its

operations are: liquidity risk, creditrisk, market risks (interest rate risk,foreign exchange risk and risk fromchange in market price ofsecurities, financial derivatives and

commodities), exposure risks,investment risks, risks relating tothe country of origin of the entityto which a bank is exposed,operational risk, legal risk,reputational risk and strategic risk.

In Bangladesh total defaulted loansas up to 31 December, 2014amounted to Tk 51,000 crore out

of which according to Financial

Stability report of BangladeshBank, 77.8% ie Tk 39,000 crore isnot recoverable. Compared to2013 the defaulted loans have

increased by Tk 7,100 crore during2014. And 53.60 % of these loans

are existing in 5 state-owned bankswhich has affected the profitabilityand liquidity of overall bankingbusiness. If we analyze thereasons, it can be straightwayopined that there was no practice

or even existence of riskmanagement in those banks. Anaudit committee or an Internalaudit department may have been

in existence which carry out mostof the time post facto examinationor analysis after the loans aredisbursed. This department takesthe place of Risk Managementactivities without producingeffective result. Consequently

identification, measurement andassessment of risk remainsunearthed before sanction anddisbursement of the loans. In someof the banks non professional or

inexperienced officers are giventhe responsibility of appraisal,examination of the auditedFinancial Statements, genuinenessof collaterals,etc. Their reportstherefore, remain defective and

risky. At times reports prepared bythe Audit Committee or Internalaudit department are ignored bythe higher Management with illintention. Had the banks attendedto risk management, then there

would not have been the flood ofdefaulted loans. The banks lostsight of the requirement to managerisk effectively and, in many cases,it is questionable if the basics ofrisk management were ever put in

place. Adhering to managingrisks—not ignoring them orbelieving they can be passedoff—is the cure for the ailment ofhuge defaulted loans. Let us review

“The Seven Tenets of Risk

Management” to see itsfundamental features.

1. Establish one Language System

to Discuss and Categorize Risk

A risk manager is often overheardat intra-departmental meeting: The

Basel II second pillar requires thatthe Board of the bank fulfill theirobligations in all respect. At some

points many of the participantshave no idea what the riskmanager is talking about, but theyare too afraid to ask questions sothey nod their heads in polite

agreement and hope no one willask them for their personalopinion. It is incumbent upon riskexperts to translate risk issues into

a language and terms that allinterested parties can understand,

and it is the responsibility of theother functions to make the effortto understand.

2. Develop a “Big Picture” Viewof Risk Exposure and Focus on the

Most Important

Not all risks are created or endequally. Banks need to be mindful

of credit, market, and operationalrisks. Within the three main areas

of risk, further stratification isembedded to allow for acomprehensive overall view ofrisk. Tools such as VaR (Value atRisk), Monte Carlo simulations,CFaR (Cash Flow at Risk), stress

testing, and others are applied to judge the level of risk andsubsequently the actions requiredto contain the risks

3. Centralize Ownership ofProcess and DecentralizeDecision Making

The Head office of a bank preparespolicies,SOP, rules andregulations, but the branchesshould have the liberty to take theirdecision as per policies and sendreturns to Head Office. The Centralbank in Bangladesh has currentlydecentralized its authorities so thatcommercial banks can take theirown decision in accordance with



18/131

through its behaviors and throughthe systems and programs it putsinto place. In Bangladesh riskmanagement culture and practicehas not grown up. It is high time

now that with a view to preventingconcurrent defaults the banks mustintroduce risk managementexpertise. A risk-managementculture can be embedded in thebank through training,communications and incentives.

Conclusion

The banking sector is now almostover-burdened with defaultedloans. It is high time the Top

Management of all banks mustrealize the importance of riskmanagement. The role of auditcommittee or Internal auditDepartment has proved ineffective,as such this Department should bekept as supplementary to riskmanagement. The Central Bankshould also realize the vitality of arisk management Unit and adviseevery bank to establish it headedby qualified experts andexperienced executives as soon as

possible. On 9th August 2015, in ameeting of Chairmen andManaging Directors of Sonali,Rupali, Agrani and Janata Banksthe Governor of Bangladesh Bankalerted the Top leaders of thesebanks with firm warning that iftheir banks do not make financialprogress by recovering defaultedloans observers will be appointedaccording to CAMELS rating andthe Government will no longer

allocate public funds to make goodtheir capital deficits. The Governordeserves thanks for his concern,but he could also advise banks toopen risk management unitssimultenously.

The Author is a

Fellow Member, ICAB


policies and send its returnsimplying post facto control. Riskmanagement can be most effectivewhen it is applied consistentlyacross the banking organization

with policies and proceduresdeveloped by risk experts whohave the training and experiencefor their specific country, area, andclient mix. It is incumbent uponfront-line officers to use the toolsand processes to guide their dailyinteractions with customers.Interactions are clear. Answers aregiven in a timely manner and theresponses leave no ambiguityabout what the bank is able to do

for its customer.

4. Drive the Process from the Topand Clearly Define Roles andResponsibilities

In Bangladesh the banks weremaking unexpected profits duringthe years 2010 and 2011 byengaging in share business andthey piled up huge stock of sharesexceeding the legal limits. Whenbubble in share market burst, thebanks started selling the shares atcost prices and lower than costprices. So the profits starteddiminishing. The situation wasworse due to defaulted loans, theycould not recover their lowprofitability as up to now. Riskmanagement in a bank iseveryone’s responsibility, not justthe risk department’s. Leadershipmust not only espouse a vision butalso behave in a manner consistentwith it and demonstrate toemployees that prudent riskmanagement is a cornerstone tosuccess.

5. Quantify Risk Exposure andCosts/ Benefits

Consistent and rigorous assessmentof risk and quantification of the netbenefits of appropriately dealing

with the risk cannot be replacedwith promises of above-averagereturns with no knowledge of thepotential downsides. Models ofapplying risk management

fundamentals can be preparedwhich would be applied by alldepartments. On the other handeven the most sophisticatedmodels will not make anorganization 100 percent foolproofunless it is given due importanceand applied. Regardless, strongand rigorous analytical capabilitieswill lessen the chance of failure.

6. Embed IT Systems to Facilitate

the Risk-Management Process

The value of IT appears to beincreasing over time to bankingorganizations as the environmentgrows ever more complex—sothere is no change in this variablein troubled times. In most countriesincluding Bangladesh the CentralBank even controls the commercialbanks through online IT modelsand formats. However, the IT valuewill be realized only if IT systemsdevelopment is driven by userneeds and not vice versa. ITsystems, if properly developed andused, can assist the bank in riskmanagement by providing controland compliance monitoringtechnology, databases, market andindustry research and analysistools, and communication tools.These are all critical tools that assistin the delivery of the requiredinformation to decision makers inthe bank. This can happen if the ITsystems are developed with theuser’s needs in mind.

7. Embed a Risk-ManagementCulture

If a bank is serious about riskmanagement, then it should beserious from the top to bottom.Leadership will espouse a cultureof responsible risk management


19/131


Monetary policy is one of the importantissues of the economy of a country.Monetary policy means a process by whichthe monetary authority i.e. the central bankof a country controls the supply of moneyoften targeting a rate of interest for thepurpose of promoting economic growthand stability. The objective of monetary

policy is to ensure economic growththrough exchange stability, price, fullemployment, credit control, reduction ofinequality and wealth etc. Every financialyear Bangladesh bank publishes monetarypolicy for the period July to December and January to June. Recently, for the first halfof the financial year 2016, BangladeshBank has published monetary policy. Mainfeatures of that monetary policy are tosupport the 7 percent growth target and the6.2 percent inflation target for the fiscalyear 2016. Reserved money is projected togrow at 16 percent and broad money at15.6 percent which are adequate tosupport the growth and inflation targets.Domestic credit is projected to grow at16.5 percent at the end of the fiscal year2016. Private sector credit has beenprojected to grow at 15 percent and publiccredit sector at 23.7 percent. It isworthwhile to mention that whatever mightbe the objective of the monetary policy, itsultimate target should be the economicdevelopment of the country. For economic

development of the country there must beconsistency among the various policiessuch as monetary policy, fiscal policy,

Monetary Policy Needs Consistency

with other Economic PoliciesMd. Shahadat Hossain FCA

export and import policy etc. But how farthere remains coordination among thevarious policies of the country, is a seriousquestion. Because, to give an overviewabout the objective in the monetary policy,it has been mentioned “The main objectiveof Bangladesh Bank’s monetary policy ismoderation and stabilization of CPIinflation alongside supporting output and

employment growth.” But it is logical tomention that inflation depends on variousissues such as supply of broad money,supply of commodity, fluctuation of pricein international market, indirect tax,government expenditure, growth of creditetc. Bangladesh Bank as the monetaryauthority can only control the supply ofbroad money and growth of credit. Otherissues depend on fiscal policy of thecountry and utilization of governmentfund. For example- higher indirect taxes

can cause cost push inflation which canlead to a rise in inflation, If we pay ourattention to the budget speech of the fiscal2016, it may be observed that as regards tothe inflation it has rightly been pointed outthat average inflation rate graduallydeclined and stood at 6.6 percent by theend of April, 2015. Such declining trendwas supported by lower fuel prices in theinternational market, supportive fiscal andmonetary policies, satisfactory agriculturalproduction and improved distribution

system. From the statement as mentionedin the budget speech it appears thatlowering down the inflation rate was a


20/131


combined effort of all the sectors ofthe economy. It was not the monetarypolicy only to control the inflation.The issues as described above, revealthat the monetary policy as published

recently might have someeffect/impact on prevailing fiscalpolicy and how the negative impact,if any, of fiscal policy might beaddressed by the monetary policy.One of the objectives of the monetarypolicy is to maintain equilibrium inthe balance of payment. In themonetary policy of the first half of theFY-16, balance of payment has beenprojected to reach USD 3.55 billiondeficit which will eventually reducethe overall balance to USD 1.13 bill.The jump in current account deficitfrom USD 1.63 billion to USD 3.55billion is mainly originating from anaugmenting trade deficit that isexpected to rise from USD 10.02billion in the financial year 2015 toUSD 13.42 billion in the FY 16.Negative growth of trade deficit is theeffect of 14 percent projected growthof import as against 7.5 percentprojected growth of export. Therecently developed export policy,

which is effective from 1st July 2015,is targeted to achieve the export by2021 by the amount of USD 60billion as against present exportamount is USD 31.20 billion. If welike to achieve the target, the yearlygrowth rate will have to be 12percent instead of 7.5 percent asconsidered in monetary policy. So,the monetary policy which has beenpublished by the Bangladesh Bank isnot consistent with the export policyof the government. Another importantelement behind the decrement of theoverall balance one of thecomponents of balance of payment isabnormal decreasing projectionunder heading ‘other investments’.During the financial year 2014-15,overall balance has been estimatedUSD 4.16 billion but in financial year2015-16 overall balance has beenprojected USD 1.33 billion. In thefinancial year 2015-16, overallbalance has been reduced by the

amount of USD 3.03 billion. Mainreason behind such abnormalreduction of overall balance is

abnormal less projection underheading 'other investment'. Duringthe financial year 2014-15 otherinvestment was projected USD 2.67billion but in the year 2015-16 such

investment was projected USD 1.33billion i.e. 50 percent less than theprevious year’s estimation. Butnothing has been disclosed in themonetary policy as regards to thehuge reduction of the foreign otherinvestment. Issues other than asmentioned above may be pertinent tobring into notice that despite beingone of the objectives of the monetarypolicy no detailed information orways and means have been

mentioned in the recent publishedmonetary policy about fullemployment. Likewise, one of theinstruments of achieving the objectiveor goal of the monetary policy is thebank rate policy. The bank rating isthe minimum lending rate of thecentral bank at which it rediscountsthe first class bills of exchange andgovernment securities held by thecommercial banks.

When the central bank finds that

inflationary pressures have storedemerging within the economy,central bank uses various instrumentssuch as Bank rate policy, OpenMarket Operation, changes inReserve Ratio and selective creditcontrol etc. The expansionary andcontraction impact of differentinstruments in the economy isdifferent. So, it is very important todisclose instrument wise policy to befollowed to increase the total supply

of money in the economy morerapidly than usual underexpansionary policy and undercontraction policy to expand moneysupply more slowly than usual oreven shrinks. Finally for betterment ofthe national economy, the monetarypolicy should be consistent withother economic policies as well asmore detailed, informative, analyticalto make it transparent to all thestakeholders.

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

ECONOMICDEVELOPMENT 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


21/131


Risk Management : TheConceptual Frame Work

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)

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 thanexpected 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,

Risk Management inPublic Financial Sector

Dr Muhammad Abdul Mazid

regret and reward probabilities into an

expected value for that outcome.

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 commonprocess. 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 workplaceand can reduce the likelihood of an

incident negatively impacting on any

financial dealing.

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, marketcompetition). Before beginning the

identification of risks, the review of critical


22/131


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 ofpower 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 aboutwhat possible future events could

affect the business. Analyzing the

scenarios that might lead to an event

and what the outcome could be. Thiswill 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 formanaging them.

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.

I d e n t

i f y &

A n a l y z e E x p o s

u r e sL e g a l &

E x a m i n e

R i s k M a n a g e m

e n t

T e c h n i q u e s

S e l e

c t

R i s k

M a n

a g e m

e n t

T e c h n i

q u e s

I m p l e m e n t T e c h n i q u e s

M o n i t

o r

R e s u

l t s

RiskManagement


23/131


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 risksinvolves 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

one’s 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 ontheir strategic and economic

priorities and growing aspiration

levels) into a true competitive

advantage—ultimately 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 issubstantiated with industry-specific

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 governanceand 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 affectthe 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) Thesemethods 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 hassome 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

organization—and not only the risk

organization—play a crucial role in

the execution of a company’s

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 company´s 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 client’s

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) CashFlow at Risk (CFAR) Models .


24/131

Managing Risks in Publicsector

Six Principles

Principle One

An engaged Board focuses the

business on managing the things

that matter

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 andaccountability 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 therisk 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 toerror.

• 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. Uncertaintyin the measurement is often

large in both cases.

• 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 adverseconsequences of the

contaminant (for example,

chemical, radiation, noise, etc.)

and the strength of the

evidence it can have that effect.

• The second step for (chemical)

risk assessment is determining

the relationship between dose

and the probability or the

incidence of effect

(dose-response assessment).

• The third step, Exposure

Quantification, aims to

determine the amount of a

contaminant (dose) that

individuals and populations

will receive.

Potential risks in Public FinancialManagement

• Actual costs of public projects

are typically higher thanestimated 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 beoptimism bias and strategic

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 processweaknesses

• 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, marketrisk, 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.

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 andcompetitiveness of

procurement



25/131

(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 torisk management in departments

and some arm’s-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


• Maintaining spending control

and creation maintenance fund

• Establishing policy (like

transport policy) review process

• Re establish professionalism

• Establish public oversight of

physical infrastructure built upprojects

• 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 effectivenessof the mitigating actions they take

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 arm’s-lengthfrom 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;


26/131

management is not an end in itself

but contributes to performance

improvements in the delivery of

the organization’s objectives.Within the main body of this

report, they have includedsummaries 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

Accountant July September 2015

Documents