According to the 2005-2006 annual report of the Bangladesh Bank published in 2007, Article 26 of the Bangladesh Bank Order of 1972 empowers the Bank to issue notes and coins and manage the currencies in circulation. The Order does not make any specific mention of the Bank's responsibility for payment systems in the country. However, according to its 2005-2006 annual report, the Bank's authority and responsibility are implicit. The Bangladesh Bank undertakes the task as the country's central bank, motivated by its interests in a stable currency and financial system and the smooth operation of monetary policies. The 2007 Bank's annual report acknowledges that the existing payments and settlement system in Bangladesh does not conform to international practices. However the same report states that the central bank has been focusing on modernizing the payment systems in the country, and that includes modernizing the legal and regulatory framework governing the systems. The envisaged legal system will better meet the requirements of the modern payment systems by vesting explicit regulatory and oversight powers pertaining to payment systems in the central bank, and will include clear rules, policies, and procedures for the soon-to-be-introduced Bangladesh Automated Clearing House. The project incorporates the implementation of a real time gross settlement system, the formation of the National Payments Council to lay down policies and long-term strategies for the implementation of a modern payments system, the issuance of a modern Cheque Design Standards, and the expansion of the use of modern and innovative payment instruments like credit and debit cards, point of sale systems, and high-value interbank payments. The expected completion date of the project is 2008-2009, and it promises to make the payment systems in the country conform to international standards.

General Overview

The Bangladesh Bank (BB), per its 2005-2006 annual report, performs its primary function of issuing notes and coins and managing the currencies in circulation through its Department of Currency Management and Payment Systems under the authority of Article 26 of the Bangladesh Bank Order of 1972. The Bangladesh Bank Order does not make any specific mention of the BB's responsibility towards payment systems in the country. However, its authority and responsibility are implicit. The BB undertakes the task as the country's central bank and is motivated by its interest in ensuring the stability of the currency and the financial system as a whole, as well as the smooth operation of monetary policies. The annual report notes that the Bank has been focusing on modernizing the payment systems in the country, and that includes modernizing the legal and regulatory framework governing the systems.

According to the BB's 2005-2006 annual report, there are four payment and settlement systems operating in Bangladesh: (1) the BB's Clearing House in Dhaka with branches in seven other cities; (2) Sonali Bank's Clearing Houses in 31 cities where the BB has no branch (3) the BB large value check settlement system; and (4) the Bangladesh Bank Foreign Currency Clearing System in Dhaka, which clears and settles foreign currency checks and pay orders. The report acknowledges that the existing payments and settlement system in Bangladesh "is not at par with international best practice" which calls for timely, fast, efficient and secure systems. Settlement of transactions can take between two and three days. Clearing is manual and very tedious. It requires that idle funds be maintained at each branch to cover transaction demands, which results in poor liquidity management. End-of-day instead of real-time settlement carries credit, liquidity, and systemic risks. However, the annual report observes that the BB is cognizant of the situation and is taking steps to develop a modern payment system. The BB is reviewing the existing system, building capacity, and defining a long-term strategy to modernize the system. The report mentions two other initiatives, such as automated check clearing and capacity building over the long term. The BB is part of a project funded by the United Kingdom (UK) Department for International Development (DFID) titled Remittance and Payments Partnership (RPP). This project aims to expand the use of credit and debit cards, point of sale (POS) systems, and interbank payments, and to introduce payment mechanisms capable of large-value transfers to enable fast, secure, and reliable payments. Complementing these efforts will be a focus on implementing a real time gross settlement (RTGS) system, though the BB concedes that it will not be able to undertake this mission on its own. One of the objectives of the project is the formation of the National Payments Council (NPC) chaired by the BB and comprising selected commercial banks and other stakeholders in the system, like the Securities and Exchange Commission (SEC). The NPC is expected to lay down policies and long-term strategies for the implementation of modern payments system -- including the RTGS system -- in Bangladesh. The 2005-2006 annual report expected the NPC to be functional by February 2007.

The BB's 2005-2006 annual report notes that, in the ongoing modernization program, the BB has issued new 'Cheque Design Standards' (CDSs) in September 2006, which stipulates features like Magnetic Ink Character Recognition (MICR) encoding and information recording through imaging. The CDSs incorporate international design and standards. The BB has asked banks to comply with the CDSs by December 31, 2007. Along with the new check design and processing system, the BB has also planned the introduction of the Bangladesh Automated Clearing House (BACH) with "systems and processes that support modern automated check processing utilizing MICR, ICR, and imaging technologies" (p. 90). The BB hopes that the new check processing system will be in place by March 2008, with operation at the Dhaka clearing house commencing soon, and automation being fully operational nationwide by the end of 2008. These systems promise to conform to international best practices and make clearing house operations significantly more efficient.

Cash remains the most commonly used payment instrument in Bangladesh, followed by domestic currency checks, which the BB 2005-2006 annual report calls "the second most systemically important payment medium for national payments" (p. 88). As against cash, which is used predominantly by individuals for small as well as large value transactions, checks and pay orders are used largely by the industrial and commercial sector. Further, checks drawn on the BB are used by the commercial banks for large-value transactions such as interbank transfers and government payments. The BB report notes that the annual volume and value of checks have shown a steady increase between 1999 and 2005. Another 2007 BB publication, titled "Financial Sector Review," provides detailed statistics of the payment and transactions products in Bangladesh. It finds that the use of cash has shown a steady increase between 2002 and 2006. Checks are the next most dominant means of payment, and the most important among the non-cash instruments. The publication observes that the value and volume of checks roughly doubled between 2003 and 2006, as evidenced from settlements in the BB and Sonali bank clearing houses. Other traditional non-cash payment instruments include demand drafts, payment orders, telegraphic transfers, mail transfers, and bills. These instruments have also seen increased use over the years. Modern and innovative non-cash payment products and services are also steadily making inroads in the Bangladeshi financial system, though their reach is largely limited to the urban centers. They include credit and debit cards, automated teller machines (ATM), POS, online banking, and the Society for Worldwide Interbank Financial Telecommunication (SWIFT), among others. The publication notes that during 2005-2006, although ATM withdrawals have shown a rise, this volume remains insignificant compared to withdrawals through bank branches. The number of banks providing credit/debit card and ATM/POS facilities is increasing, accompanied by a steady increase in their use. However, banks allowing SWIFT transfers remained the same, and the transaction volume through SWIFT declined in 2005-2006.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

II

The Bangladesh Bank, per its 2005-2006 annual report, performs its primary function of issuing notes and coins and managing the currencies in circulation through its Department of Currency Management and Payment Systems under authority by Article 26 of the Bangladesh Bank Order of 1972. The Bangladesh Bank Order does not make any specific mention of the Bangladesh Bank's responsibility towards payment systems in the country. However, the authority and responsibility is implicit. The Bangladesh Bank undertakes the task as the country's central bank and is motivated by its interest in ensuring the stability of the currency and the financial system as a whole, as well as the smooth operation of monetary policies.

The 2005-2006 annual report notes that the Bangladesh Bank has been focusing on modernizing the payment systems in the country, and that includes modernizing the legal and regulatory framework governing the systems. Under the RPP project, consultants have been reviewing and making recommendations to strengthen the legal and regulatory infrastructure so as to better meet the requirements of modern payment systems and vest explicit regulatory role and oversight powers pertaining to payment systems to the Bangladesh Bank. The modernization of the legal structure would also include clear rules, policies, and procedures for the BACH. The annual report expects the RPP project to be completed in approximately three or four years, and hopes that the result will be a modern payment system that answers well to international standards. Apart from these facts, there is little further information publicly available that directly addresses Bangladesh's compliance with this principle.

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

II

There is insufficient information publicly available information as to Bangladesh's compliance with this principle.

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

II

There is insufficient information publicly available information as to Bangladesh's compliance with this principle.

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

II

According to the 2005-2006 annual report of the Bangladesh Bank, clearing of checks, bank drafts, pay orders, etc. occurs twice each day at the Bangladesh Bank's clearing houses, at 9.30 a.m. and 5.30 p.m. The annual report also states that, apart from the Dhaka and Chittagong clearing houses, which are partially computerized and accept diskettes from commercial banks detailing their accounts payable and receivable, all other branches clear and settle accounts manually. However, the volume of funds cleared in branches is insignificant compared to Dhaka. There is little further information publicly available as to Bangladesh's compliance with this principle.

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

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There is insufficient information publicly available as to Bangladesh's compliance with this principle.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

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There is insufficient information publicly available as to Bangladesh's compliance with this principle.

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

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There is insufficient information publicly available as to Bangladesh's compliance with this principle.

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

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There is insufficient information publicly available as to Bangladesh's compliance with this principle.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

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There is insufficient information publicly available as to Bangladesh's compliance with this principle.

X. The system's governance arrangements should be effective, accountable and transparent.

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There is insufficient information publicly available as to Bangladesh's compliance with this principle.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

II

The 2004-2005 Bangladesh Bank annual report states that the Bank "oversees the activities of clearing houses" (p. 82) and "adopts corrective measures whenever necessary" (p. 82). There is little further information publicly available as to Bangladesh's compliance with this principle.

B. The central bank should ensure that the systems it operates comply with the Core Principles.

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There is insufficient information publicly available that directly addresses Bangladesh's compliance with this principle.

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

II

The 2004-2005 Bangladesh Bank annual report states that the Bank "oversees the activities of clearing houses" (p. 82) and "adopts corrective measures whenever necessary" (p. 82). There is little further information publicly available as to Bangladesh's compliance with this principle.

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

II

There is insufficient information publicly available regarding Bangladesh's compliance with this principle.