CASH MANAGEMENT
Cash Management In Bangladesh
June 5, 2007
Kamal Ahsan, HSBC Global Payments and Cash Management - - Originally published in HSBC Guide to Treasury and Cash Management in Asia Pacific 2007

Despite volatile oil prices, removal of the quota system for the Bangladeshi ready-made garments (RMG) sector, and other political and economic changes, cash management in Bangladesh continued to achieve growth in 2006. The removal of the quota system in 2005 led to positive growth in the RMG sector and other export-oriented sectors.

With the establishment of Government Export Processing Zones, export oriented foreign direct investment (FDI) is on an upward trend, and economic growth continues. One negative impact of economic growth is the rise in spending power, leading to a massive upsurge in imports. Hence the paradox that the country faces today as it deals with rises in call money rates, devaluation of the dollar and related impacts.

Cash management now plays an important role in banks, as it provides an alternative deposit attracting mechanism, instead of simply raising the interest rate. Local private banks are becoming savvier, setting up branches online.

Economic Markets Overview

In this fiscal year, the economy grew by 5.8%. The adverse impact of rising oil prices was largely offset by increases in exports and workers' remittances. The economy's growth was maintained partly through a continued improvement in macroeconomic performance, despite adverse external developments such as oil and commodity price rises.

Export earnings recorded a growth of 25% while import spending grew by 26%. At the same time, remittances from non-resident Bangladeshi nationals increased by 19%, which led to a further rise in foreign exchange reserves.

Banking and Clearing Systems

There are four types of scheduled banks in Bangladesh (see Figure 1 below). The banking system continues to be dominated by national commercial banks (NCBs), which hold 47% of the industry's assets and 50% of the deposits. Development financial institutions (DFIs) were created under a special mandate to address the financing needs of specific sectors such as agriculture and industry. The clearing system in Bangladesh is governed by the Bangladesh Bank (BB), which owns and manages the clearing houses and is responsible for the country's clearing rules and regulations.

All foreign commercial banks and some major private commercial banks are connected to the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system, which only handles international payments. SWIFT has yet to be implemented for local currency payments.

Same-Day Clearing System

In 2004, BB set up a quick clearing system for cheques and other instruments to the value of more than Bangladesh taka/BDT500,000. This system operates among 202 bank branches in Dhaka City. The system allows bank customers to cash cheques and other instruments on the day of submission. Initially, the system was introduced in branches of all the nationalised, private commercial banks (PCBs) and foreign commercial banks (FCBs) in Dhaka that are members of the BB clearing house. From Saturday to Wednesday, the same-day clearing system starts at 11:00am and closes at noon, while the return clearing starts at 2:00pm. On Thursdays, the clearing starts at 10:00am and closes at 11:00am and the return clearing starts at noon.

BB has recently taken on a project jointly with the Department for International Development (DFID) to set up an automated clearing house, primarily to handle wage earners' remittance disbursement in Bangladesh more efficiently.

Bank Account Structure

The country's scheduled banks offer a wide range of products and services including corporate, trade, investment and retail banking. The banks offer BDT savings and current accounts, which may be opened by resident and non-resident Bangladeshis. BB regulations prohibit credit interest being paid against deposits in current accounts.

Resident companies are permitted to borrow local currency. However, non-resident companies are not allowed to borrow local currency from any scheduled bank. No foreign currency borrowing is allowed unless BB gives its permission.

Regulatory Framework

BB, the central bank, was established as a corporate body through the Bangladesh Bank Order in 1972. The primary objectives of BB are to regulate the issue of BDT and the keeping of reserves and to manage the country's monetary and credit systems with a view to stabilising domestic monetary value. BB also promotes and maintains a high level of production, employment and real income in Bangladesh, as well as fostering growth and development of the country's productive resources for national interest.

Currency Controls

BDT is convertible for payments under documentary credit for the import of goods (except restricted items) with clearance from BB. Repatriation of capital and profits of joint ventures and other foreign-owned companies operating in Bangladesh is permitted, subject to reporting to BB with related supporting documents. BB also allows foreign airlines, shipping and courier companies operating in Bangladesh to remit surplus funds through the submission of statements to the remitting bank, which later presents the statements to BB on the client's behalf.

Capital Market

The capital market has demonstrated a notable improvement in terms of market index, capitalisation and turnover. The trend of initial public offers (IPOs) attracts a massive subscriber turnout, where a typical IPO from a notable organisation receives oversubscription by 15 to 20 times. The investor base is considerable due to the fact that returns are three to five times higher than the buying price of IPO shares, within four to five months.

Cash Management Overview

Cash management in Bangladesh has made significant progress. All the FCBs operate online and more and more PCBs are investing in online and automated banking systems. The FCBs introduced cash management in the late 1990s for their multinational corporate clients, along with electronic banking systems that provide hourly and intra-day account balances, information services, reports from international sources and a facility that allows customers to initiate book transfers.

The electronic system stores information for repetitive transfers and bulk payments processing. The regulatory framework allows pooling of BDT accounts through the physical transfer of funds, but notional pooling with interest compensation is not allowed. The regulatory framework allows bank-to-bank transfers through cheques or cashier orders, but not electronic transfers between banks.

The range of cash management products offered includes collections, collections reconciliation (new in Bangladesh since 2005), payments, bulk payments, cheque warehousing, electronic and Internet banking, and sweeping for efficient liquidity management.

Payments Management

The primary payment mechanism in Bangladesh is by cheque. There is no centralised clearing and settlement system for the electronic transfer of funds, although there are arrangements available for the telegraphic transfer of funds between cities. The NCBs and PCBs offer this service through their branch networks. The use of pay orders and demand drafts is very common in Bangladesh. Pay orders are used for payments within the same city or clearing zone, whereas demand drafts are issued on behalf of any branch other than one in the same clearing zone or city. Telegraphic transfers are made domestically, but primarily intra-bank, rather than inter-bank.

Collections Management

Collection is mostly manual. In the cities where BB operates, clearing is much faster. In locations where the Sonali Bank acts as the clearing bank, funds are cleared within one to two days. All other locations may take more than five to seven days. FCBs now offer reconciliation systems in Bangladesh, deliverable through Internet banking, where collections are automatically matched against receivables and reports are delivered via the Internet.

Challenges to Payments and Collections Management

Despite the advances made in collections and payments by FCBs and PCBs, a few major obstacles to cash management in Bangladesh still exist. The existing postal, transport and landline communication systems are inefficient and unreliable. Telephone and fax services have yet to become available across the country and are only available in some cities.

Electronic Banking

Although proprietary and web-based electronic banking are available in the market, electronic banking in Bangladesh has yet to be widely used. However, major FCBs along with some PCBs offer these services to companies. While FCBs continue to emphasise e-banking products, PCBs are moving towards automation and some are investing heavily in online and dial-up networks between their branches.

Foreign Investment

Foreign investors are free to make investments in Bangladeshi industrial enterprises. An industrial business may be set up in collaboration with local investors or even be wholly owned by foreign investors. No permission is required for entrepreneurs to set up a business with their own funds. However, to make use of facilities and institutional support from the government, entrepreneurs are advised to apply for registration with the Board of Investment. Non-residents are free to invest in shares and securities quoted on the stock exchanges with foreign exchange sent or brought into Bangladesh. Shares may also be issued in favour of foreign investors for the supply of capital machinery.

The following incentives are also provided:

• Foreign investors enjoy income tax exemptions for around five to seven years. Investors in the power generation sector receive income tax exemptions for 15 years.
• Foreign investors residing in countries with a bilateral agreement with Bangladesh can avoid double taxation on their income.
• Expatriate employees in certain industries, as specified in the income tax ordinance, can enjoy an exemption on income tax for up to three years.
• There is no import duty for export-orientated industries. Otherwise, import duty is 5% of the import value (depending on the product code).
• Facilities are available for the full repatriation of invested capital, profit and dividends. To do this, a foreign investor must first wind up a company through the decision of the annual or extraordinary general meeting, and then obtain authorisation from the central bank for the repatriation of funds.

Conclusion

Cash management in Bangladesh has yet to be fully recognised as a product-based solution for companies. Impediments include the lack of automated clearing and real-time gross settlement. However, cash managers in multinational and international organisations operating in the country and those from local companies have learned that increased competition between banks in Bangladesh is beneficial. It is also seen that cash management is playing a more effective role gathering deposits rather than simply raising interest rates to collect deposits for the banks.

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