Letter of submission

Date: July 24, 2011To

The Supervisor

Mr.Arjun Kumar Das

Assistant Professor

Faculty of Business Studies

Premier University Chittagong, Bangladesh

Subject: Submission of Internship Report.

Sir

It is a great pleasure for me to submit the term Paper. I have successfully finished my term paper on “Corporate governance of financial institutions with particular reference to banking sector of Bangladesh”. During the period, I worked on “different corporate activities of Banks " performed by commercial bank Bangladesh. On the basis of my study I am submitting this report on the actual facts & findings of my work. I like to thank for your kind supervision.

I enjoyed in preparing the report because it provide me the chance to put my theoretical knowledge in a

real life problem.

Sincerely yours

( )

Name :

Student ID :

Masters of Business Administration

Faculty of Business Studies

Premier University Chittagong, Bangladesh

Major In Finance

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Preface

Theoretical knowledge is not sufficient for a student to get clear concept about any subject or any field or an institution. It can only give wound concepts to overcome this lacking, So, practical knowledge is necessary. The context of modern business world, more important to perfect coordination between theory and practical knowledge. Research program can be treated as a primary knowledge. Research program can be treated as a primary level for student to get knowledge in the practical field. It can fulfill degree requirement and enhance career preparation that will laundering himself a better job. It spread our knowledge by coordinating theory and practice. Research helps us to understand and identify the differences between the theoretical and practical knowledge for the first time. Undoubtedly, it is an appreciable and valuable addition of the educational institution.

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Acknowledgement

At the very outset, I would like to express any deep gratitude towards Almighty Allah for the successful completion of the research paper.

It would not be possible on any part to complete the research paper successfully and submit the same without any co-operation and inspiration of some individuals.

First of all, I would like to offer my heart felt thanks to my supervisor for his valuable guidelines during the period. Without his help this report could not been possible.

I am very much grateful to different branch Manager & Sr. Asstt. Vice President of the Banks who has provided me guidelines, necessary information and documents related to my study. Without his inspiration/suggestion this report would not been possible to complete.

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Executive Summary

A commercial Bank is a lender of depositor’s money. It is taking deposit from those who have surplus money, and lending the money to those who are in need of temporary accommodation. Banking business first made its acceptance in the process of taking deposits and till now it remains the Principal Function of a commercial Bank. The primary assets of any financial Institution/commercial Bank Consists of its loans and Advances and other investments, credit facilities etc., to their clients.

Credit is the confidence of the lender in the ability and willingness of the borrower to re-pay the loan at a future date. It is generally believed that confidence is the basis of all credit transactions. The fundamental principles upon which credit is generally based are character, capacity, responsibility and resources of the borrower. Lending is a function but that is most important to the banker, because of the associate risk and profit potential. Totality of lending depends on safety, liquidity, productivity, national and social interest, management ability, borrower analysis and business analysis.

While allowing credit facilities to the borrowers in the form of loan, overdraft, cash credit etc. We must ensure proper documentation to safeguard future interest of the bank. So whenever an advance is made in any form we must obtain proper document from the borrower. Good documentation takes time, but saves time and banks.

So, in view of these, scheduled banks/bankers are to follow some rules and regulerations in lending their money. Now in these tropics I shall try to give total lending procedure of loans and advances, wich gives us guide in our day by day work & ensure full security of bank and banker, when lending the money.

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Table of Contents Page no.

Chapter 1 Introduction 1.1 Social responsibility

description 1.2 Areas of study1.3 Methodology of study 1.4 Limitations of the study

Chapter 2 Statement of the problem literature and theoretical reviews

Chapter 3 Sample enterprise at a glance

Chapter 4 Practical aspects 4.1 Historical perspective of

the issue4.2 Economic benefits 4.3 Socio cultural benefits 4.4 Structural features

Chapter 5 Concluding remarksRecommendations for future development

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Corporate governance of financial institutions withparticular reference to banking sector of Bangladesh.

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Chapter: 1

Introduction:

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. An important theme of corporate governance is the nature and extent of accountability of particular individuals in the organization, and

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mechanisms that try to reduce or eliminate the principal-agent problem. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, trade creditors,suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large corporations, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc.

Definition:Many of the "definitions" of corporate governance are merely descriptions of practices or preferred orientations. For example, many authors describe corporate governance in terms of a system of structuring, operating and controlling a company with a view to achieving long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. However, there is substantial interest in how external systems and institutions, including markets, influence corporate governance.

Corporate governance refers to the structures and processes for the direction and control of companies. It

concerns the relationships among the management, Board of Directors, controlling shareholders, minority

shareholders and other stakeholders. In general, Governance is the exercise of authority, direction and

control of an organization in order to ensure its purpose is achieved. It refers to

who is in charge of what;

who sets the direction and the parameters within which the direction is to be pursued;

who makes decisions about what;

who sets performance indicators, monitors progress and evaluates results; and,

who is accountable to whom for what.

Corporate governance is generally seen as the systems or processes by which entities are managed and

controlled. These are usually summarized in the rules and regulations governing the entity.

But corporate governance is more than just rules and regulations. In his address to the 23rd Conference on

Bank Structure and Competition, held in Chicago, Illinois, the Governor of the Federal Reserve, Alan

Greenspan observed

“…rules cannot substitute for character. In virtually all transactions, whether with customers or colleagues, we rely on the word of those with whom we do business. If we do not do so, goods and services could not be exchanged efficiently. Even when we followed to the letter, rules guide only a small number of day-to-day decisions required of corporate management.

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Corporate governance models around the world

There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or multi-stakeholder model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community.

Codes and guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. For example, companies quoted on the London, Toronto and Australian Stock Exchanges formally need not follow the recommendations of their respective codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance.

One of the most influential guidelines has been the 1999 OECD Principles of Corporate Governance. This was revised in 2004. The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes, the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) has produced their Guidance

Parties to corporate governance

The most influential parties involved in corporate governance include government agencies and authorities, stock exchanges, management (including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line management,shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large.

The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns (risk) are necessarily lower for a controlling shareholder.

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A board of directors is expected to play a key role in corporate governance. The board has the responsibility of endorsing the organization's strategy, developing directional policy, appointing, supervising and remunerating senior executives, and ensuring accountability of the organization to its investors and authorities.

All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments , while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with corporate social performance.

A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. When this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action.

Popularity espoused principles of corporate governance

Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.

Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.

Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.

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Integrity and ethical behavior: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.

Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behavior, an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability.

[edit]Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[17] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.

Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to

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provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting

Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.

Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

In publicly-traded U.S. corporations, boards of directors are largely chosen by the President/CEO and the President/CEO often takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). The practice of the CEO also being the Chair of the Board is known as "duality". While this practice is common in the U.S., it is relatively rare elsewhere. It is illegal in the U.K.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:

competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market media pressure takeovers

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1.2 Areas of study

This paper highlights the corporate governance of financial institutions withparticular reference to banking sector of Bangladesh. The importance ofcorporate governance of banks remains crucial given their contribution ineconomic growth through financial development. This paper has shed light onthe structures of corporate governance of banks in Bangladesh involving theirownership structure, board issues, executive aspects, disclosure, and auditpractices along with their associated weaknesses. The paper has also showedhow political interference and failure by the regulators has contributed to thegovernance problems in the banks.

1.3 methodology of the study

The choice of methodological approach depends upon the nature of theinvestigation to be carried out, its purpose and problem statement. For thisproject, the main approach was mainly determined by the guidelines for the task.The problem statement and purpose that was composed for the project in thebeginning has guided the work from collection of information to analysis offindings in relation to theory.

1.4 limitations of the study

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In every program or activities, one has to face numerous constraints. During my 3 months internship

program, I have also faced some problems. These are:

1. Bank is a busy organization with comparison to others. There are rushes of people for about

whole the day and the officers have to transact with them. So it is very much tough for them to

allocate time for an internee.

2. The duration of our internship program is only 3 months. The allocated time is not sufficient

for us to gather knowledge and to make the study a complete and fruitful one.

3. The study also suffered from inadequacy of data.

4. Many procedural matters were written from own observation, which may also vary from

person to person.

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Chapter 2

Statement of the problem

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Literature and theoretical review

Globalization of financial markets and fears of financial instability have brought the issue of the corporate governance into forefront of the policy discussions. In an increasingly deregulated policy environment, the big corporate failures such as Enron, Vivendi, Barrings have raised the need for implementing competent corporate governance practices. The recent financial crises in different countries have verified how the lack of good governance practices in the financial institutions can lead to a crisis in the system leaving long-term consequences to the economy. Among the financial institutions, the corporate governance of banks has received very little attention only. In developing countries, banks have a dominant position in the financial systems and a discussion on corporate governance of banks required special attention. This paper addresses the corporate governance of banking sector in the context of Bangladesh. Corporate governance (CG) is an important effort to ensure accountability and responsibility and is a set of principles, which should be incorporated into every part of the organization. This study focused on the state of Corporate Governance (CG) in three sectors of the economy: the private company (public-listed company), the financial enterprises, and the State Owned Enterprises (SOEs). To understand the state of CG, three broad aspects of governance and management issues were studied. These are: a) shareholders’ rights, b) public disclosure of information, c) effectiveness ofthe Board. Within each of these many sub-categories were studied which were discussed in this paper. The study used interviews with key stakeholders, experts and executives of these types of companies, aquestionnaire survey and also group discussions. In terms of the three sectors, this study found that public-listed companies are more open to their shareholders with respect to shareholders rights and disclosures of information. With regards to public disclosure of information and transparency, companies use “box checking” method rather than understanding the spirit of the disclosure. On the issue of the active participations of the independent directors SOEs had a better rating than others. In public limited companies study found that in 40% of the cases independent directors rarely disapproved the agenda placed in the board. In the best practice guidelines of CG three major committees arerecommended, study found other than SOE, financial and non-financial institutions are not complying with the best practices.

The need for corporate governance arises from the potential conflicts of interest amongstakeholders in the corporate structure. These conflicts of interest often arise from twomain reasons. First, different stakeholders have different goals and preferences. Second,the stakeholders have imperfect information as to each others actions, knowledge, and

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preferences. Corporate governance (CG) is an important effort to ensure accountability andresponsibility and is a set of principles, which should be incorporated into every part ofthe organization. Though it is viewed as a recent issue, there is, in fact, nothing newabout the concept. Because it has been in existence as long as the corporation itself-aslong as there has been large – scale trade, reflecting the need for responsibility in thehandling money and the conduct of commercial activities. In the wake of accounting,leadership, and governance scandals at such large companies as Enron, Tyco, andWorldCom, corporate governance has succeeded to attract a great deal of interest as itfocuses not only the long term relationship, which has to deal with checks and balances,incentives for managers and communications between management and investors but alsothe transactional relationship, which involves dealing with disclosure and authority.Numerous works, studies, and researches have been conducted to enact principles, codes,and guidelines for ensuring good corporate governance systems and culture within theorganizations.

CORPORATE GOVERNANCE AND BANKING INSTITUTIONS

The need for a competent financial sector is important to stimulate and support economic growth through efficient resource allocation. The financial system also enhances growth by pooling risks and facilitating transactions (World Bank, 1989). The role of financial sector in economic growth is even greater in developing countries as their tolerable margin of errors in resource allocation is small1. Different cross-country studies support the idea that countries with efficient and strong financial markets experience higher rates of economic growth. Somestudies have also found the strong evidence of relationship between the size and operation of financial markets and/or the development and structure of banking sector and economic growth. The number of bank failures and financial crises during the last two decades raises questions on the competency of the governance practices of the banking system. The undesirable banking practices such as poor risk diversification, inadequate loan evaluation, fraudulent activities were as much responsible as other macroeconomic factors in causing banking crises which shook the financial systems of countries such as Argentina, Chile, Malaysia, Philippines, Spain, Thailand etc.Winkler (1998) insists that the quality of corporate governance of banking institutions determines the success of the financial development. Absence of proper monitoring and control mechanism cripples the potential good effect of financial development on the economic growth. The fact that banking companies are allowed to collect deposit and utilize them for profit making activities, could create opportunities of moral hazards. The possibility/motivation of plundering depositor’s money, who happens to be the primary principal in banking companies, by the agents is greater in banking companies as the agents who founded the bank had to contribute very little through equity in accumulating the assets. One reason why banking stimulates financial development is that people entrust the banks with their deposits as the banks are expected to

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carefully select investment opportunities and then prudently monitor the loan borrowers which could have controlled the problemsassociated with information asymmetry. However, in reality the agents may not be selecting and monitoring the loans, particularly when the loans are connected to agents and their beneficiaries. The implementation of sound governance mechanisms could reduce the risk of moral hazards and enhances the process of financial development. 3 Banking companies pose unique corporate governance attention as they differ greatly with other types of firms in terms of broader extent of claimants on the banks assets and funds. A group of entrepreneurs and/or executives could set up a banking business by putting very little equity from their own pocket as the nature of business itself guarantees flow of enormous amount of funds in the form of deposits. The general approach to corporate governance argue in favor of the shareholders rights only, as managers/executives may not always work in the best interest of the shareholders. But the shareholders actually account for a very tiny portion of the bank’s assets and funds. Rather almost every bit of banks’ investments are financed by the depositors’ funds. In case of losses or failures it will be depositors’ savings that the banks would lose. Such risks demand priority in protection of depositors that ushers in a broader view of corporate governance that suggests the interest and benefits of the suppliers of funds for a firm should be upheld. Macey and O’Hara also argue that a broader view of corporate governance should be adopted in the case of banking institutions, arguing that because of the peculiar contractual form of banking, corporate governance mechanisms for banks should encapsulate depositors as well as share holders. Arun and Turner supported the need for the broader approach to corporate governance for banking institutions and also argue for government intervention to restrain the behavior of bank management. In many countries, deposit insurance is used as a mechanism to safeguard the banking system as well as the depositors. The self-dealing activities by the bank insiders are very dangerous to the performance and survival of the banks as scores of previous bank failures have been caused by risky self-dealing by the bank insiders. The presence of heavy liquid assets and potential lack of depositors’ interest to actively control and monitor banks’ risky decisions as a result of the insurance guarantees simplifies and aggravates the sharking in the banking firms. Banks in developing countries are faced with high risk of sharking as a result of heavy government ownership, lack of prudential regulation, weak legal protection and presence of special interest groups ((BCBS, 1999; Arun and Turner, 2003). The independent regulatory agencies are important in developing countries to act against the frequent collusion among government, businesses and bankers to serve special interest groups (Shleifer and Vishny, 1997; Arun and Turner, 2002). However, there is an argument that active role by regulators may cause problems as well, as regulators may not have a convincing/sufficient motivation to monitor the banks as they do not have much at stake in case of bank failures (Macey and Garrett, 1988). Recently, the financial markets of developing economies have experienced rapid changes due to the growth of wider range of financial products. As a result of this, banks havebeen involved with high risk activities such as trading in financial markets and different off balance sheet activities more than ever before which necessitates an added emphasis on quality of corporate governance of banks in developing economies.

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Chapter 3

Sample sector

CORPORATE GOVERNANCE AND BANKING SECTOR IN BANGLADESH

As in many developing countries, banks play a vital role in Bangladesh economy, as the dominant financier for the industrial and commercial activities. Since the independence in 1971, the government until 1982, when the ‘ownership reform’ measures started in the financial sector, had carried out the regulation and ownership of all the financial institutions. During the reform period, two out of six National Commercial Banks (NCBs) were denationalized and private commercial banks were allowed to operate in the country. In 2003, out of the 49 banksoperating in Bangladesh, 9 belong to the public sector3, 30 are local private and 10 are foreign owned banks (Bangladesh Bank, 2003).

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Despite the expansion, the operational efficiency of the banking institutions has continued to be dismal. The sector witnessed decreasing profitability, increasing non-performing assets, provision and capital shortfalls, eroded credit discipline, rampant corruption patronized by political quarters, low recovery rate, inferior asset quality, managerial weaknesses, excessive interference from government and owners, weak regulatory and supervisory role etc. Internal control system along with accounting and audit qualities are believed to have been substandard. Many of the problems have been attributed to lack of sound corporate governance among the banks. The reports by the Banking Reform Commission (1999) and BEI (2003) raises serious concerns on the banking sector and criticize the quality of governance that prevails in the banking sector in Bangladesh, which provides an impetus to explore the governance issues in detail in this paper. As in many other countries, there were no available structured databases on corporate governance in Bangladesh that led us to the obvious choice of generating data through a structured survey of banking institutions in the country. The structured questionnaire survey aimed at finding out the prevailing situation in the banking sector with respect to the core elements of corporate governance such as ownership/shareholding structure, control of firms, board issues, management contracts and compensation, audit and disclosure. Because of close geographical proximity, the entire banking (49) population was targeted in the survey. A total of 35 banks have responded including 4 NCBs, 3 SCBs, 24 PCBs and 4 FCBs. In addition to this, semi-structured and unstructured interviews were used to explore the practical dynamics of corporate governance within the institutions which was difficult to explore in a structured 6 questionnaire. A total of 21 interviews have been conducted which included the central bank governor, 14 top management officials of all types of banks, members of three different banks’ boards , one economist, one chartered accountant and the registrar of Joint Stock Company. The data relating to the performance of the banks have been obtained from off-site supervision unit of the central bank. It was not possible to get the entire sector’s data from any other source as the public sector banks do not publish annual reports regularly and the foreign banks only publish consolidated annual reports based on global operations.

Ownership/ Shareholding Structure

The banks in Bangladesh can be considered as extremely closely held corporations, since the majority of the banks are not publicly listed companies. An average of only 20 per cent shares of banks is publicly available in Bangladesh and a large majority of the shares are owned by a small number of ‘Sponsor’ shareholders4 leaving a small portion of the shareholding to the ‘General’ shareholders5. The number of executive shareholding is very minimal among the banks in Bangladesh. There is a legal restriction on bank executives becoming sponsor shareholders of the banks. The executives can only buy shares (IPOs) when banks go for public offering or from the secondary equity market and even for that the evidence of executive shareholding have been found onlyin 14 per cent of the banks. The private banks in Bangladesh do have shares held by families and institutions. However, the banking law prohibits shareholding of more than 10 per cent by members of one family6. The survey has noticed heavy presence of block holders in the banking sector7, and the overwhelming majority of these block holders are from the sponsors’ category. The issue of sponsors as a single interest group requires further analysis. This is due to the fact that the lead sponsor, who normally after getting political assurance of being awarded bankinglicense, assembles ten 8 or more sponsors from his/her family, relatives and business and social friends. The tendency is to remain within the reliable known people with the main objective to retain the control of the bank. And they do retain the control of the banks in almost all the cases. Even in cases where the bank is a listed company the sponsors hold the control as the general shareholders are large in number,

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highly dispersed, disorganized and are not sophisticated enough to understand many governance and performance related issues. Most of7 them buy the shares form the secondary market with the objective of making gain in share trading. In the absence of executive shareholding and organized small general shareholders, the sponsor shareholders have an open field to rule. In the PCBs the sponsors control virtually everything, from appointment /firing of CEO to loan approval to purchase decision to salary determination. And these sponsor and large shareholders have heavily misused their overwhelming ownership and control in both public and private sector banks. Government has used its banks to support its political objectives as well as the politicians in thegovernment have used them to fill in their and their close ones’ pockets at the expense of banks’ funds which actually come from the depositors. Majority of the loans of these banks have been approved and disbursed on the instructions/request of the government officials and politicians without any proper and effective credit and risk analysis. And these public sector banks are today all burdened with heavy non-performing loans and losses. One banker linked 90 per cent of the default loans to politically directed lending. The scenario is no different in the PCBs. The PCBs sponsors have heavily plundered the banks’ money showing little respect to the systematic credit analyses and depositors’ well being. The PCB owners are more interested in loan money than making profit as the benefit of plundering was greater than the profit ofmaking profit. In 1998 a total of BDT 13 billion was borrowed from the PCBs by 152 of their shareholders. To make the situation worse, it’s widely believed that the PCB owners have borrowed even more on third party or fictitious companies’/individuals’ names to avoid any attention by public or regulators. And no wonder a number of these loans have already turned non-performing or bad loans making the banks lose the depositors’ money they invested. Besides the loans, the PCBs sponsor shareholders have been involved with misusing/plundering of banks’ funds in many other ways just to add benefits to their own pockets. Its worthwhile to mention that general shareholders do not have any of these privileges at all. The only involvement, if there is any, they have with the banks is going to the AGMs and receiving dividends. The foreign banks, although owned completely by their parent companies, are reportedly to be free of any sort of owner interference.

Boards

Boards have been cited as major corporate governance mechanism and are entrusted with the responsibility of strategically leading a firm with effective decision making and proper 8 monitoring on behalf of the principals of the firms. In Bangladesh, the average number of directors in the bank boards stands at 10, and the boards are overwhelmingly dominated by the non executive members. There is very thin presence of executive membership in the bank boards most of whom are the CEOs who by the virtue of the banking regulation must be included in the bank boards. Among the non-executive board members, the scale is heavilytilted towards shareholder directors almost all of who are sponsor shareholders. Only the public sector banks have non-executive independent directors where as there are only two independent directors in the boards of the private banks.The normal tenure of the board members turns out to be 3 years for the majority of the banks. This can be attributed to the recent regulation issued by the central bank which limits the tenure of board membership for the private banks into two terms of 3 years each. The survey also reveals that none of the banks in Bangladesh have more than one level of boards such as management board or supervisory boards. Both the owner members and the independent members of the boards are remunerated through board meeting fees only. There is no

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remuneration for board work of the executive members as they are all ex-officio members of the boards. It seems the board members of the private banks remain in the board for long time as about 40 per cent of the board members are in their respective boards for more than 5 years. The issue of large shareholders discussed in section 3.1 becomes more prominent due to the total domination by those shareholders in the boards of the banks in Bangladesh. In the PCBs nine out of the 10 members of the boards are shareholder directors. The other rest goes mainlyto the CEOs as the law requires them to be in the board. The entire private banking has only two independent directors. So it’s not difficult for one to understand who controls the boards in PCBs in Bangladesh banking. And according to the banking law as well corporate by-laws, it’s basically the board which takes majority of the decision regarding banks operations includingloans, investments, appointments, audits etc. The corporate by-laws of most of the banks restrict entry of one to the bank’s boards if he/she is not a sponsor shareholder. And the sponsors left no stones unturned in taking full advantage of their total reign in the bank boards that decide almost everything about those banks. In the public sector banks the boards are comprised of politically appointed independent directors who are put in those positions by the 9 ruling politicians with special instruction and objectives to serve the purposes of special quartersinvolving politicians and business houses. And with government’s total and unchallengeable authority to remove any director any time coupled with the directors’ political loyalty, boards in these public sector banks continue to serve the politicians as ‘Rubber Stamps’. The FCBs boards are however completely comprised of the executives who are accountable to senior regionaland global managers. And these board members happen to work with full autonomy and usually work very professionally.

Management, Contracts and Incentives

The owners of the banks heavily control the management activities in Bangladesh. The shareholders, either directly in case of public sector banks, or through boards as in cases of the private banks, have total control on the fate of the executives. In 82 per cent of the banks, the CEOs are directly accountable to the boards and for the others it’s mostly the owners directly except for few foreign banks where accountability is to the seniors in the global chain. The contract that dictates the managements’ contribution to the banks’ benefits seem to be fine for the local private and foreign banks as almost all of their CEOs’ contracts are linked toperformance. But the public sector banks do not care to design the contract of their CEOs in a way that brings performance into focus. The management compensation also seem to work better in the foreign and local private banks while the public sector banks remain far behind in terms of salary or performance based payment or compensations. The salary level of the top management executives is almost 20 times more in the foreign banks and 10 times more in thelocal private banks compared to the public sector banks. The majority of the decisions are thrust upon thee executives by the owners of the PCBs andNCBs. And non-compliance means sure departure from the job – only the timeline may vary. The government banks are in the worst condition. The executives there are not only ‘dancing dolls’ of the politicians but also they severely lack qualification and motivation. The politicians sitting at the Ministry of Finance dictate all appointment, transfers and promotions. That made many bankers to go easy on performance, as they know political allegiance will ensure retainingthe job as well as promotions. Lack of accountability among the executives is very acute in thee banks as a result of political interference. Moreover the compensation packages are extremely 10 low, almost 10 times lower than the private banks and 20 times than the foreign banks. Lack of accountability and low

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compensation packages have pushed these bankers to heavy corruption. Small and medium scale loan applicants can easily get their applications approved just by paying a per centage to the bank executives. The reign of trade unions runs supreme in those banks. The trade union leaders, being backed by politicians, force management to approve many loan applications, give them undue benefits and even play an important role in appointing new CEOs. The private banks are in a little better position. Other than the cases involving board members or sponsors, the executives are strictly held accountable to the board and the ownersfor their activities. The executives are also more qualified than those of public sector’s in terms of both profession and education. Also given the market conditions in Bangladesh, the executives of the private banks are very well paid in fact they are the highest paid executives among any Bangladeshi companies. The partial accountability along with sufficient motivational packages make theexecutives work hard for the betterment of the banks and its depositors and shareholders. Though the FCBs executives do not have any direct supervision of the owners, they work under a very well designed and strict accountability system. Also they are very highly qualified professionals getting extremely attractive benefits. The FCBs executives are in fact highest paid of any type of company executives in Bangladesh. Additional financial incentives and advancement in career has been linked to their and the banks’ performance. All of these actually make them work very hard for the profitability of the banks that ultimately takes good care of the depositors’ funds they are entrusted with.

Audit and Disclosure Findings

Proper and effective audit coupled with full and right disclosure helps to maintain accountability and bring transparency of firms. For banking companies, which collect people’s money and make profit by investing those funds require more stringent audit and disclosure practices than non-financial firms. Here is how the audit and disclosure is like in the banking sector of Bangladesh. About 95 per cent of the banks in Bangladesh have their internal audit department regularlytaking account of important decision makings/operations within the bank. In 69 per cent of the 11 cases the internal audit section reports to the board of directors while the other 31 per cent reports to senior management. More than half of the banks’ internal audit found evidence of fraud in their audits. Interestingly 29 per cent of the banks did not opine to answer this question. Another interesting part is that all the banks in Bangladesh do have external auditors and it’s usually the accounting firms who work as external auditors. But its worthwhile to mention that the banking law requires all the banks to appoint external auditors and stipulates that the external auditor must be an accounting firm. Once again thanks to a very recent banking regulation because of which all the banks now do have a board audit committee. However, only 5 per cent of the banks said they disclose the internal audit reports to the shareholders in the AGM while only 9 per cent of the banks disclose their board audit committee’s report publicly. When it came to disclosing performance to the depositors only the foreign banks came with a positive answer while no public and local private banks appear to be doing so.The survey noticed that except for the foreign banks no local bank has any corporate by-law or practice of disclosing connected/insider lending in any sorts of the reports nor do they reveal methods to determine the salaries and benefits of the executives. And survey information reveals that only the foreign banks along with one local private bank are required by their corporate by-laws to reveal information on third party transactions9. And more surprisingly it has been found in the survey that except for one public sector and one local private sector banks no other banks have board committees on nomination and remuneration affairs making the those activities non-transparent. In an ideal scenario any wrongdoing by shareholders or executives are supposed to be exposed if there remains an effective audit and disclosure system. From outside, the audit picture in Bangladesh banking sector looks very bright. All the banks

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have internal audit department, external auditors, board audit committees and special audit by the central bank. But then how come the irregularities are taking place? It’s mainly because of problems in implementing audit findings coupled with low quality and integrity of auditors. In the NCBs and PCBs the internal audits tend to avoid irregularities associated with owners/board members. However the internalaudits often discover fraudulent activities by executives. But in NCBs, the culprits manage to stall actions through political or union influence. In PCBs, if the discovery is not linked to any 12 shareholder/board member, then action immediately follows. Accounting firms usually conduct the external audits in Bangladesh. Banks happen to be very lucrative client and in most of the cases the audit firms are also linked with personal businesses of the bank owners. As a result the auditors tend to give into the demands of the bank owners and prepare audit reports, as the banks want them to. Lax accounting standard and weak regulatory watch on the accountants make things easier. Till year 2000, the banks in Bangladesh were not required to use the IAS-30 that is a widely accepted accounting standard for financial institutions. As a result many of the disclosures made by the banks were and are not still correct. There are allegations of ‘window dressing’ by the banks to hide underlying problems, weaknesses and irregularities. There are many examples of banks revealing different figures under same head in different disclosures. In practice there are almost no disclosures in the public sector banks. The only reports they submit go to MoF and the central bank. PCBs do bring out annual reports but there are widespread allegations of doctoring figures and facts in those reports. Surprisingly in the NCBs and PCBs there are very little disclosures made even to internal executives and employeesabout targets, achievements, corporate plans etc. Until the central bank issued a directive, except for two -no other banks had a board audit committee. To date none except those two have formed board committees on remuneration and nomination. In fact none of their corporate by-laws include any clause for establishing those board committees and surprisingly the FCBs also appear to have this problem. However, the FCBs follow their global policies on audit and disclosure. Audit system and practice is very stringent and effective. They make full disclosures using international accounting standards on loan positions, executive remuneration, third party transactions etc. They always communicate their corporate goals, achievements and future plans with the executives. The FCBs even make direct disclosure of their financial performance to the depositors.

Role of Central Bank, Other Regulators and Corporate Governance

The primary regulator for the banks in Bangladesh is the central bank, known as Bangladesh Bank. Among other regulators are RJSC, SEC, ICAB and the legal authorities. The BB remains under full control and influence of the government. It acutely lacks quality in its staffs in terms of prudent monitoring and supervision. Low compensation packages have also contributed 13 much in curbing BB’s reign on the banks. Its is very easy to buy out an auditor of the BB who in return submits favorable reports on the banks. Political interventions, lack of quality andcorruption has created great obstacles for the central bank to play the expected role. The RJSC remains just as a ‘license issuing authority’ permitting firms to come into existence. With lack of determination, quantity and quality of staffs and modern technology the RJSC makes very little contribution as a regulator of firms. Its worthwhile to mention that there is neither computer nor any computer literate staff in RJSC which handle more than 1,00,000 company files. The SEC is trying hard to bring discipline in the listed companies but in the banking sector where the majority is not publicly listed, SEC’s scope to act is limited. Moreover SEC also suffers from shortages of qualified staffs. There is only on full time corporate accountant working at the agency. ICAB is the supreme authority for affiliations and regulations of accountants in Bangladesh. The ICAB failed to design effective regulations for its members as well fell

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short of properly monitoring and acting upon the activities of the accountants in Bangladesh. It has also failed to generate sufficient number of qualified accountants and implement international accounting standards. Finally everything in Bangladesh banking gets stuck once it reaches courts. The legal backup to banks is very weak and often takes courts ages to give a verdict. Defaulters often go to the court and win an injunction barring banks to sell the collaterals or calling them ‘defaulter’ until the case is solved. And a decade is a very common timeframe for courts to come up with verdicts. Again lack of sufficient legal personnel in Bangladesh is accountable for this problem. Altogether the regulatory authorities, particularly the central banks have failed the depositors and small shareholders in rendering its duty properly in termsof prudential regulation and supervision.

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Chapter: 4

Analysis and findings

4.1 Historical perspective of the issue

In 2002, Bangladesh Enterprise Institute embarked on a project to examine the current state ofcorporate governance norms and practices in Bangladesh, India, Sri Lanka, and Pakistan. Fromthe outset, we knew that Bangladesh lagged behind its South Asian neighbours with regard tocorporate governance standards and practice and hoped that a comparative analysis wouldprovide regional examples of initiatives that could be applied in Bangladesh to improve thesituation. This publication is the product of the first stage of the project, which comprised of fourreports on the state of corporate governance in Bangladesh, India, Sri Lanka, and Pakistan. Wewere fortunate to be able to work with experts in corporate governance in each of the countriesinvolved.The process of strengthening corporate governance in South Asia is ongoing. As the reports inthis volume point out, there are many aspects of the corporate governance regime in South Asiancountries that continues to lack strength. As Ajith Nivard Cabraal points out in his report on SriLanka, there are questions regarding actual corporate governance performance compared to statedcorporate governance practices. Procedures for bankruptcy and insolvency in India are identified

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as a sticking point by Omkar Goswami. Finally, Faisal Bari and Ali Cheema question whetherthe requirements enshrined in the Pakistani Code of Corporate Governance will be too onerousfor small companies.However, Bangladesh has much to learn from its South Asian neighbours and learn it must. ForBangladesh to improve its economic performance, it must attract more investment capital bothfrom domestic and foreign investors. Better corporate governance is a prerequisite for investorsto entrust their funds to corporations. For Bangladesh, the first step in strengthening the role ofstakeholders in corporate governance is raising awareness regarding these issues and increaseconsensus about the need for better corporate governance. In addition, there should be morerecognition that corporate governance is integral and necessary to the development of the privatesector in Bangladesh. To achieve these goals of better awareness and recognition of goodcorporate governance practices, starting in August 2003, Bangladesh Enterprise Institute isconvening a Taskforce on Corporate Governance that will develop and endorse a Code ofCorporate Governance for Bangladesh. This Taskforce will begin the first step in bringingBangladesh up to a level equivalent with international and regional standards of corporategovernance.

In Bangladesh, however, there have been no serious corporate scandals which have been enoughto send shock waves to undermine confidence in the financial system, nor has the country foundthat it has reached the limits of conventional corporate financing mainly through bank lending.The country report identifies that “the relatively low level of international investment inBangladesh does not provide a sufficient motivation for improving corporate governance, nor arethere many traditional domestic motivations for improvement in corporate governance practicesin Bangladesh”. Nevertheless, the report concludes that this does not mean that Bangladeshshould give low priority to corporate governance, as there are reasons other than capital marketreforms to focus on corporate governance. The Bangladesh country report notes the significanceof corporate governance for a competitive private sector in a global market as well as forefficiently utilizing domestic investment to achieve greater economic development. Goodcorporate governance practices will help develop and stimulate better business management,strategic management, and risk management, which, in the long-term, will make Bangladeshibusinesses more competitive. In addition, the lessons from the experience of the neighbouringcountries in South Asia are such that Bangladesh can deploy good corporate governance toprevent the problems which have afflicted other countries rather than to solve them after theevent.

The country reports go beyond describing the significance of corporate governance in theoreticaland policy terms – they also provide indications of the effectiveness of corporate governance.Perhaps the most important question for corporate governance is whether well-governedcompanies perform better (in terms of growth, profitability and share price) and behave better (interms of corporate social and environmental responsibility and of corporate citizenship, especiallyin tackling the supply side of corruption) than do badly-governed companies. Good corporategovernance is virtuous, but does it deliver results? It could be said that this question implicitlyruns like a theme through the Bangladesh country report, and explicitly emerges in conclusionssuch as “nor are there many traditional domestic motivations for improvement in corporategovernance practices in Bangladesh”. There is a possible challenge that, unless there aresatisfactory answers to this question of the efficacy of corporate governance, Bangladesh – and

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other countries – will, quite reasonably, not be convinced of the need to assign high priority tocorporate governance programmes.

4.2 Economic benefits

Corporate governance ensures that an organization's assets and authority focus on the corporation's defined purpose and are not diverted elsewhere. Sir Adrian Cadbury, chair of the committee that produced the foundational 1992 "Code of Best Practices," defined corporate governance as "a series of structures and processes for the direction and control of a company." He pointed out that governance specifies rights and responsibilities of all corporate participants, including board members, management and shareholders. According to the Organization for Economic Cooperation and Development (OECD), it also balances economic, social, individual and community goals, encourages stewardship and aligns "the interests of individuals, corporations and society."

Advantages

David M. H. Phillips and Alison Thomas of Price water house Coopers identified three main benefits of corporate governance: "better decision-making; lower stock-price volatility and cost of capital; and better stakeholder engagement." The Management Study Guide on Corporate Governance identified five more: ensure corporate success and economic growth; maintain investor confidence; induce owners and managers to achieve objectives in the best interest of the organization and its shareholders; minimize waste, corruption, risks and mismanagement; and help in brand formation and development.

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Prudent Management

The basis of corporate governance concerns determining effective decision-making strategies. While ultimate authority rests with the board of directors, corporate governance ensures that managers, owners and the board are all adhering to corporate goals rather than self-promoting practices. This creates a climate of transparency that reduces opportunities for corruption and mismanagement. Careful accounting and oversight identifies areas of waste and improves risk assessment.

Stock Price Stability and Capital Costs

The International Finance Corporation (IFC) reports that "well-governed companies receive higher market valuations," making them more attractive to investors. A corporate governance program gives potential partners and capital investors more confidence in a business seeking new funds. Corporations adopting transparent governance policies develop improved systems for controlling internal procedures, leading to greater financial accountability and higher profit margins and allowing investors to better predict future performance. Better predictions lead to higher intrinsic stock values, which then remain stable despite market fluctuations, allowing investors to determine margins of safety.

Stakeholder Engagement

Companies that are proactive in sharing credible corporate information can improve their relationships with all stakeholders. Employee retention increases, and customer confidence that the company will deliver on promises improves its reputation in the press and chat rooms. Case studies show that a company's ability to negotiate sensitive contracts is strengthened and that suppliers are more willing to commit their own capital when there is an open, trusted relationship through corporate governance reporting.

Brand Awareness

Improved stakeholder relationships and stable stock prices improve the corporation's brand formation and development internally and in the marketplace. Solid governance practices lead to consumer protections that develop brand loyalty. As consumer confidence rises, corporate success trends upward.

An effective corporate governance framework can minimize the agency costs and hold-upproblems associated with the separation of ownership and control.

There are broadly three types of mechanisms that can be used to align the interests and objectives of managers with those of shareholders and overcome problems of management entrenchment and monitoring:−One method attempts to induce managers to carry out efficient management by directlyaligning managers interests with those of shareholders e.g. executive compensation plans,stock options, direct monitoring by boards, etc.

−Another method involves the strengthening of shareholder’s rights so shareholders have botha greater incentive and ability to monitor management. This approach enhances the rights ofinvestors through legal protection from expropriation by managers e.g. protection and

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enforcement of shareholder rights, prohibitions against insider-dealing, etc.

−Another method is to use indirect means of corporate control such as that provided by capitalmarkets, managerial labour markets, and markets for corporate control e.g. take-overs.

Moreover, the absence of an effective market for corporate control may also impede thedevelopment of an international production base, and may prevent firms from entering through domesticacquisitions. In Germany, for example, the limited importance of listed joint-stock companies, the role ofcross-shareholdings between partner firms, and the important role of employee representation on companyboards, all make it very difficult for outsiders to buy German firms. At a time of globalization this may beincreasingly costly to firms.

4.3 Socio-cultural benefits of corporate governance

Benefits of Good Corporate Governance

A good system of corporate governance contributes to sustainable economic development by enhancing

the performance of companies and increasing their access to outside capital. Good corporate governance

has both a stabilizing impact as well as a growth impact on the macro economy.

In terms of growth, the argument is straight forward. Good governance encourages confidence in the

financial system leading to increased mobilization and investment. All things being equal the increased

invest will lead to increased growth in the economy. It is important to note that because good governance

ensures that resources are allocated to those that use it best, productivity would be enhanced and

consequently growth is enhanced.

Good corporate governance would also lead to a stable macroeconomic situation. This requires an all

embracing interpretation of good corporate governance. Imagine a situation in which government is the

largest shareholder in most of the banks. Government then selects both senior management and members

of the board of directors. If the selection is not based on qualification and competence, but rather political

cronyism and nepotism, then there is a strong possibility for the emergence of poor corporate governance.

In such situations, Government is more likely to finance its deficits through bank borrowing with all its

attendant problems of high inflation and “crowding out” of the private sector. In other words, a poor

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corporate governance structure is more likely to lead to an unstable macroeconomic system than a good

one.

4.4 Structural features

Corporate structures differ from one country to another. In most western economies corporate power is

left in the hands of the board of directors and senior management who are appointed by the shareholders

to act in a way so as to maximize shareholders’ value. This structure referred to as the Anglo-American

system contrasts with the “stakeholder” system, as is practiced in places like Germany and Japan. In the

stakeholder or relational system, shareholding is more concentrated, with large blocs held by banks, other

corporations, and families. These blocs tend not to be actively traded. They have greater reliance on debt

financing and a governance role for banks. Banks hold equity either in direct or depositary form, and may

be represented on the board of directors. Shares also are held by key customers, suppliers, and allied

corporations, often on a reciprocal basis. Concentrated, dedicated holdings make it difficult to establish a

market for corporate control. Finally, employees play a role in corporate governance in the stakeholder

system.

Thus, under the stake holder system creditors control the company while in the Anglo-American system

the Board of Directors and the top management acts agents for the shareholders in maximizing their

value.

The macro impact of corporate governance differs under the different scenarios. Imagine a situation of

excessive capital expenditure leading to excess aggregate supply in the economy. Simple Keynesian

remedy would suggest increasing aggregate demand through tax cuts, public works projects, and the like.

While under both systems the Keynesian demands can be satisfied, the low risk profile of creditor

controlled firms will lead them to more increased market-share objectives than pragmatic but risky

ventures likely to get the economy out of the doldrums.

CONCLUSIONS

Banking sector remains of enormous importance for Bangladesh who is striving hard to strengthen its developing yet fragile economy. To move from the agriculture based economy to an industry-based one, Bangladesh needs its banking sector, which is the single largest element of the financial sector, to operate at its best with utmost efficiency. Anything short of that and even a slight instability in this area would wreck long term havoc on Bangladesh’s development. And sound corporate governance remains to be a key requirement for efficient and stable banking system. We have discussed in this paper how uniqueness of banking companies and banking business require special corporate governance attention on a priority

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basis particularly 14 for the developing countries where prudential regulation and supervision is inadequate to provide a safety net for the depositors and stakeholders of the banks. In the case of Bangladesh as well, we have noticed that the owners of banks holding large shares have been misusing the banks’ funds utilizing their control over the institutions. They have used their domination in the board positions as well as lack of effective, stringent and full audit and disclosure to plunder public’s money showing little respect for the depositors and the institutions. And the regulatory stakeholders have totally failed to design, implement prudent regulations as well as effective motivations and supervisions. The result is a near-collapse condition of the banking sector with low profitability and high-risk indicators for the local banks while the foreign banks, in spite of operating in the same environment, tend to show better results and stability with good governance practices. In order to restore discipline and bring sound corporate governance the first priority is to keep the system out of political influence. The political considerations/influence reigns supreme in Bangladesh banking from running the public sector bank to issuing private bank licenses and from interfering with the central bank to protecting bank defaulters. Banks and regulators need total autonomy and must be allowed to deal with banking issues in terms of economic and commercial viability. The central bank must be given the freedom of acting on behalf of thedepositors. However the central bank needs to restructure it self with better monitoring techniques, use of technology and improve the quality and accountability of its own human resources. The preferential treatment of ‘Sponsor’ shareholders is creating a large chunk of the problems in the local private banks. Equal treatment and rights of all shareholders would bring about much positive disciplinary change in the banks. The banks in Bangladesh are still closely heldcompanies. Releasing more shares to public and particularly to institutional investors should be encouraged as it will bring about market-driven and closer monitoring of bank activities. Prudential regulation should be designed taking into account the audit and disclosure problems that make much of the baking decisions non-transparent. The central bank should work closely with the other regulators such as ICAB to make improvements in the audit and disclosurepractices of the banks without which good governance will be difficult to achieve. Had these 15 issues been considered more than 20 years ago when government started to liberalize the banking sector, the sector could have avoided many of the underlying problems and losses it is burdened with today. In other words the issue of corporate governance of financial institutions must get due importance along with the decision of financial liberalization or else liberalization would only add to the woes of thousands of depositors along with inefficient banking system.16

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References

Arun, T.G. and J. Turner (2002) ‘Public Sector Banks in India:

Arun, T.G. and J. Turner (2003) ‘Corporate Governance of Banks in Developing Economies: Concepts and Issues’, Corporate Governance: An International Review, Vol. 12, No. 3, pp.371- 377. Bangladesh Bank (2003) Annual Report. Bangladesh Enterprise Institute (BEI) (2003) ‘

A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh’ BEI, Dhaka, Bangladesh. Banking Reform Commission (1999) The Report of the Banking Reform Commission, formed by the Government of Bangladesh.

Financial Development’, Working Paper, University of Chicago. Raquib, A. (1999) ‘Financial Sector Reform in Bangladesh: An Evaluation’, Bank Porikroma, Vol. XXIV, No. 3 and 4. Sayeed, Y. (2002) ‘Bangladesh: Strategic Issues and Potential Response Initiatives in the Finance Sector: Banking Reform and Development’, Paper Presented at Seminar Organized by Asian Development Bank and AIMS of Bangladesh, Dhaka, July 22.World Bank (1989) World Development Report. World Bank (1998) ‘Bangladesh: Strategy for Establishing a Sound and Competitive Banking Sector’, Vol. 1 & 2, Finance and Private Sector Unit, South Asia Region, World Bank. 19

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