Topics

31

MBA Discussion Forum / BANKS’ LOAN POLICIES

« on: August 06, 2016, 01:00:14 PM »

The students of Finance and Banking may find this topic relevant for them

BANKS’ LOAN POLICIES
Factors that influence a Banks’ Loan Policies:
The restrictions imposed by statutory law and administrative regulations do not provide answer to many questions. Regarding safe, sound and profitable bank lending, questions regarding the size of loan portfolio, desirable loan maturities, and the types of loans to be made are unanswered. These questions and many others about lending must be answered by each individual bank. Many banks have developed formal written lending policies in recent years. Although written lending policies serve a number of purposes, the most important is that they provide guidance for lending officers and thereby establish a greater degree of uniformity in leading practices. Since lending is important both to the bank and to the community it serves, loan policies must be worked out carefully after considering many factors. For the most part, these same factors determine the size and composition of the secondary reserve and the investment account of a bank. Some of the very important factors are mentioned here and discussed only briefly.

1. Capital Position
2. Risk and Profitability of various types of loans
3. Stability of deposits
4. Economic Conditions
5. Influence of monetary policy and fiscal policy.
6. Ability and experience of bank personnel
7. Credit needs of the area served.

Capital Position:
The capital of a bank serves as cushion for the protection of the depositors’ fund. The size of the capital in relation to deposits influences the amount of risk that a bank can afford to take. Banks with a relatively large capital structure can make loans of longer maturities and greater credit risk.
.
Risks and Profitability of Different Types of loan:
Since earnings are necessary for successful operation of a bank, all banks consider this important factor in formulating loan policy. Some banks may emphasize earnings more than others.Banks with greater need for earnings might adopt more aggressive lending policies than those that do not consider earnings to be paramount. An aggressive lending Policy might call for making a relatively large amount of term or consumer loans, which normally are made at higher rates of interest than short-term business loans.

The stability of Deposits:
The fluctuation and types of deposits must be considered by a bank in formulating its loan policy. After adequate provisions have been made for the primary and secondary reserves, banks can then engage in lending. Even though these two reserves are designed to take care of predictable deposit fluctuations
and loan demands, unpredictable demands force banks to give consideration to the stability of deposits in formulating loan policy.
.
Economic Condition:
The economic conditions of the area served by a bank are important in determining its loan policy. A stable economy is more conducive to liberal loan policy than is one that is subject to seasonal and cyclical movements. Deposits of feast or famine economies (weak economies) fluctuate more violently than do deposits in an economy noted for its stability. Consideration must also be given to the national economy. Factors that adversely affect the nation as a whole, if they are of serious magnitude, eventually affect local conditions.
.
Monetary and Fiscal policies:
The lending ability of bank is also influenced by monetary and fiscal policies. If monetary and fiscal policies are expansionary and additional reserves are made available to the commercial banking system, the lending ability of bank is increased. Under these conditions banks can have more liberal loan policy than if the opposite situation exists.
The Expertise of Bank Personnel:
The expertise of lending personnel is not insignificant in the establishment of bank loan policy. For example, officers may have considerable ability and experience in business lending but practically none in making real estate loans, while in other banks their specialty may be consumer lending. One of the probable reasons that banks were slow in entering the consumer lending field is the lack of skilled personnel. Some banks may be so specialized in certain fields of lending that their presence may influence the loan policy of other banks.
.
The Area Served by Banks:
An obvious factor influencing a commercial bank’s loan policy is the area it serves. The major reason banks are chartered is to serve the credit needs of their communities. If this cannot be done, there is little justification for their existence. Banks are morally bound to extend credit to borrowers who present logical and economically sound loan requests. Banks in areas where the economy predominantly one of cattle raising, for example, cannot turn their back on this type of lending, but should tailor policy to fit the needs of this economic activity.
.
To be continued………..
The Tools Commercial Lenders Need and Use.....
The Formal Credit Analysis Procedure…………...
Structuring A Credit Proposal………………….......

32

BBA Discussion Forum / BANKS’ LOAN POLICIES

« on: August 06, 2016, 12:59:16 PM »

The students of Finance and Banking may find this topic relevant for them

BANKS’ LOAN POLICIES
Factors that influence a Banks’ Loan Policies:
The restrictions imposed by statutory law and administrative regulations do not provide answer to many questions. Regarding safe, sound and profitable bank lending, questions regarding the size of loan portfolio, desirable loan maturities, and the types of loans to be made are unanswered. These questions and many others about lending must be answered by each individual bank. Many banks have developed formal written lending policies in recent years. Although written lending policies serve a number of purposes, the most important is that they provide guidance for lending officers and thereby establish a greater degree of uniformity in leading practices. Since lending is important both to the bank and to the community it serves, loan policies must be worked out carefully after considering many factors. For the most part, these same factors determine the size and composition of the secondary reserve and the investment account of a bank. Some of the very important factors are mentioned here and discussed only briefly.

1. Capital Position
2. Risk and Profitability of various types of loans
3. Stability of deposits
4. Economic Conditions
5. Influence of monetary policy and fiscal policy.
6. Ability and experience of bank personnel
7. Credit needs of the area served.

Capital Position:
The capital of a bank serves as cushion for the protection of the depositors’ fund. The size of the capital in relation to deposits influences the amount of risk that a bank can afford to take. Banks with a relatively large capital structure can make loans of longer maturities and greater credit risk.
.
Risks and Profitability of Different Types of loan:
Since earnings are necessary for successful operation of a bank, all banks consider this important factor in formulating loan policy. Some banks may emphasize earnings more than others.Banks with greater need for earnings might adopt more aggressive lending policies than those that do not consider earnings to be paramount. An aggressive lending Policy might call for making a relatively large amount of term or consumer loans, which normally are made at higher rates of interest than short-term business loans.

The stability of Deposits:
The fluctuation and types of deposits must be considered by a bank in formulating its loan policy. After adequate provisions have been made for the primary and secondary reserves, banks can then engage in lending. Even though these two reserves are designed to take care of predictable deposit fluctuations
and loan demands, unpredictable demands force banks to give consideration to the stability of deposits in formulating loan policy.
.
Economic Condition:
The economic conditions of the area served by a bank are important in determining its loan policy. A stable economy is more conducive to liberal loan policy than is one that is subject to seasonal and cyclical movements. Deposits of feast or famine economies (weak economies) fluctuate more violently than do deposits in an economy noted for its stability. Consideration must also be given to the national economy. Factors that adversely affect the nation as a whole, if they are of serious magnitude, eventually affect local conditions.
.
Monetary and Fiscal policies:
The lending ability of bank is also influenced by monetary and fiscal policies. If monetary and fiscal policies are expansionary and additional reserves are made available to the commercial banking system, the lending ability of bank is increased. Under these conditions banks can have more liberal loan policy than if the opposite situation exists.
The Expertise of Bank Personnel:
The expertise of lending personnel is not insignificant in the establishment of bank loan policy. For example, officers may have considerable ability and experience in business lending but practically none in making real estate loans, while in other banks their specialty may be consumer lending. One of the probable reasons that banks were slow in entering the consumer lending field is the lack of skilled personnel. Some banks may be so specialized in certain fields of lending that their presence may influence the loan policy of other banks.
.
The Area Served by Banks:
An obvious factor influencing a commercial bank’s loan policy is the area it serves. The major reason banks are chartered is to serve the credit needs of their communities. If this cannot be done, there is little justification for their existence. Banks are morally bound to extend credit to borrowers who present logical and economically sound loan requests. Banks in areas where the economy predominantly one of cattle raising, for example, cannot turn their back on this type of lending, but should tailor policy to fit the needs of this economic activity.
.
To be continued………..
The Tools Commercial Lenders Need and Use.....
The Formal Credit Analysis Procedure…………...
Structuring A Credit Proposal………………….......

33

Business & Entrepreneurship / THE IMPORTANCE OF CREDIT

« on: July 21, 2016, 11:05:52 AM »

This topic may be useful for Students of Finance and Banking

THE IMPORTANCE OF CREDIT

The importance of credit depends on the level of self financing by enterprise in a country: it is less important when self financing is high and more important when self financing is low. On the other hand, credit may play a very important role in financing increase in public investment, and it will also promote economic growth, provided that there is a positive correlation between the use of credit and public sector investment.

Another function the financing of current activity is the basic function of traditional financial intermediaries, particularly the banking system and is common to all countries. This function is related to maintenance of a given level of economic activity and for it to be effective; the financial instruments involved in the debt credit process have to grow more rapidly than the national product. The development of a dynamic banking system capable of guaranteeing a suitable degree of liquidity has over the years been an essential component in financing an expanding economy.

The next function of the financing of consumption is more directly linked to the maintenance or expansion of the level of effective demand, which is of particular significance in at least two situations. The first which is of a continuing nature, involves covering expenditure on customer durables of high unit values, the sale prices of which may not be in line with the average current income of the population. The second occurs when it is wished to raise the level of effective demand, if demand has contracted because of temporary phenomena or is depressed because income has contracted at the higher level of income scale. In this latter case, increasing the size of loans for consumption purpose and their repayment periods may expand the effective market to include the middle income strata, enabling them to increase expenditure by going heavily into debt In the long run, however greater participation by this group cannot be sustained unless their share of total income cannot be modified. This kind of credit instrument has been used by banks and also by agencies outside the banking system to cope with the first situation in developed capitalist countries and both situations in developing countries.

Besides the above, financial intermediation can create credit for purchasing existing real or financial assets for purposes of speculation or accumulation, in which case it does not have a functional relationship with actual production, consumption and investment flows. As the returns on such operations depend to large extent on prevailing institutional conditions, it tends to fluctuate violently and amplifies the normal cycles of capitalist economy. It should be remembered, however, that this kind of financial accumulation gave birth to and promoted the capital markets. Its main purpose was, therefore, not to finance fixed capital formation, although this is not to say, that it has no direct or indirect effects in the rate of real investment. In actual fact, in as such much as financial accumulation yields healthy profits, it stimulates economic activity, boosts demand and strengthens and steps up the expansion of economy. This, in turn may raise real investment to level higher than can be financed out of financial expansion alone. On the other hand, a drop in the rate of accumulation, through a crisis in demand may bring about a more depressed situation in which opportunities for profitable investment may disappear, for a while at least.

Provision of Entrepreneurial Talent
Another Possible function, although it is not inherent in the definition of banking system, is the provision of entrepreneurial talent and guidance for the economy as a whole. That is, instead of restricting themselves to a purely intermediary function, bankers may actively seek out and exploit profitable undertakings in manufacturing, commerce or any other productive activities. The dynamic role of the commercial banks in Germany and developing banking institutions in some countries may serve as a lesson for many other developing countries.

Changes in the Financial World
It May be noted that financial world is constantly changing very fast. There are four particular trends that are making life harder for financial firms and for central banks and financial regulators, who act as guardian of financial system.
 First, due to modern communication technology, information is transmitted faster and traders and investors can also respond instantly to news. Second, in many countries there has been a shift from banks and other depository institutions, the traditional focus of financial regulation, to capital markets. Third, the driving line between different types of   financial intermediaries and between different markets is becoming blurred. In America, many mutual firms and stock broking firms now offer chequeing accounts. And around the world, different sorts of institutions, such as banks and insurers are forming gigantic financial alliances. Lastly but by no means the least, international liberalization is creating a global capital market. Cross border transactions in bonds and shares, for instance have increased rapidly. In theory, the more internationally integrated financial system become, the easier it will be for funds to flow to the most productive investments, to the benefit both to borrows and savers, and to economies as a whole . Unfortunately, as international capital has become highly mobile, so the risk has risen that departing capital may cause a financial crisis.
Financial Innovation

It may be noted that financial innovation and globalization are the catalyst behind the evolving financial services industry and the restructuring of financial markets. It respects the systematic process of change in instruments, institutions and operating policies that determine the structure of financial system in a country. Innovations take the form of new securities and financial markets, new products and services, new organizational forms, and new delivery systems. Financial institutions change the characteristics of financial instruments traded by the public and

 Create new financial markets, which provide liquidity. Bank managers change the composition of their banks’ balance sheets by altering the mix of products and services offered and by competing in extended geographic markets. Financial institutions from holding companies, acquire subsidiaries, and merge with other entities. Financial institutions form holding companies, acquire subsidiaries, and merge with other entities. Finally institutions may modify the means by which they offer products and services, and merge with other entities. Finally, institutions may modify the means by which they offer products and services. Recent trends incorporate technological advances with the development of cash management accounts, including the use of automatic teller machines, Home banking via the computer and internet, and shared national and international electronic fund transfer system.
We also notice that foreign markets and institutions are becoming increasingly international in scope. U.S. corporations, for example, can borrow from domestic or foreign institutions. They can issue securities denominated in us dollars or foreign currencies of countries in which they do business. Foreign companies have the same alternatives. Investors increasingly view securities issued in different countries as substitutes. Large firms thus participate in both domestic and foreign markets such that interest rates on domestic instruments closely track foreign interest rates. This globalization is the gradual evolution of markets and institutions such that geographic boundaries do not restrict financial transactions. 

 
Innovations have many causes. Firms may need to stop the loss of deposits, enter new geographic or product markets, and deliver services with cheaper and better technology, increase their capital base, alter their tax position, reduce their risk profile, or cut operating costs. In virtually every case, the intent is to improve their competitive position. The external environment, evidenced by volatile economic conditions, new regulations, and technological developments, creates the opportunity for innovation.

Financial Development and Real Development:
Several empirical studies have confirmed that there is a strong link between financial development and economic growth. Countries with well-developed banking system and capital markets tend to enjoy faster growth than those without. A study by rose Levine and Sara Zervos examined forty seven countries from 1976 to 1993. They found that stock market liquidity (the value of shares traded relative to stock market capitalization) and the size of the banking sector (measured by the lending to the private sector as a percentage of GDP) are good predictors of future rate of growth, even after controlling for other factors, such as initial level of income, education and political stability.

In rich economies, the assets of financial intermediaries and the size of stock and bond markets all tend to be bigger in relation to GDP than in poor ones. In emerging economies, banking system is quick to develop, but capital markets take longer, because capital market need a financial infrastructure that provides, among other things, adequate accounting standards, a legal system that provides , among other things, adequate accounting standards, a legal system that enforces contracts and protects property rights, and bankruptcy provisions.

However, the relationship between the real and financial components of the development process is to a large extent, influenced by large number of factors. They include factors affecting financial growth whose relationship with economic development is very difficult to pinpoint, For example, the degree of centralization of economy, international relations, methods of financing public debt and existence of acute or chronic inflation. Another set of factors which affect the structure and modus operandi of the economy and financial system include the subsistence nature of economy, the degree of sectoral and spatial diversification, Pattern and level of urban consumption compared with average disposable income, and prevailing habits and forms of savings by economics agents. Although, the fundamental dynamics of development lie outside the banking system, the way the system is structured can either significantly hasten or retard development.

It must be remembered that the method of operation of financial institutions and the way in which agents and functions are specialized depend to a large extent on the characteristic of each country, especially its policy guide lines, relation between the public and private sector as regards financial matters and the level of openness of self financing of the dominant enterprises.

Financial Repression and Financial Liberalization:
The formal banking and financial sector is repressed primarily by interest rate ceilings that are particularly binding when inflation is high; or artificially low (sometimes even negative).Real returns discourage the holdings of bank deposits, holding down intermediation through the banks and savings in total. On the other hand, artificially low loan rates create an excess demand for loanable funds that may be rationed through favoritism to licensed imports, large scale exporters, protected manufactures and government agencies. Un favored enterprises are excluded from the long term finance of the formal banks and left to borrow at much higher rates from the informal financial sector of local money lenders, landlords, pawnbrokers etc. McKinnon makes this point clear by citing a truly alarming difference between official and unofficial lending rates in Ethiopa 6 to 9 percent versus 100 to 200 percent respectively. This is true for many other developing countries of Asia, Africa and Latin America. Extending the usury ceiling to the formal sector by the government does not remedy the problem, but worsens it by making credit still less available.

The remedy lies in eliminating financial repression so that bank intermediated funding becomes available to entrepreneur throughout the economy. With free entry into banking, the money lenders can transform their own operations in to formal of quasi formal banks.
In fact monetary and financial regulatory policies that stifle domestic intermediation, creating “financial Repression” are primarily responsible for poorly functioning domestic monetary system and capital markets, and thus for poor growth. Interest rate ceilings on deposits and loans, combined with inflationary rates of monetary expansion, are the most important policies creating financial repression.

In developing countries, there is considerable debate about the desirability of moving away from controlled economic order and toward a more liberal one. Financial Market liberalization refers to decontrol of interest rates, the removal of exchange controls, the exchange rate float, the abolition ratio requirements etc.

According to shaw Financial liberalization (reforms) brings the following benefits to an economy.
a.   It tends to raise the rations of private domestic savings to income.
b.   It permits the financial process of mobilizing and allocation of savings..
c.   It opens the way to superior allocations of savings by widening and diversifying the financial markets where investment opportunities compete for the savings flow. Financial liberalization and financial deepening contribute to the stability and growth of output and employment.

Once an economy is sufficiently liberalized, the above benefits may be ensured, whereas in a financially repressed economy, prices are distorted due to interventionist policy of the government. It is argued that piecemeal reforms may not achieve the objectives for which reform measures are adopted. Where financial reforms have been successful, it involved complete or near complete removal of controls in favor of market generated solutions.

34

MBA Discussion Forum / Entrepreneurship

« on: June 07, 2016, 09:58:22 AM »

What is Entrepreneurship?
Answer: Entrepreneurship is a process through which people and team pursue an opportunity, use resources, and initiate change to create value. Entrepreneurs are driven by a need to control their own destinies and bring their dreams to market place.
Who are Entrepreneurs?
Answer: According to some experts entrepreneurs are people who interpret problems as opportunities, and accept calculated risk in the hope of creating value. Entrepreneurs find it more rewarding to solve problems in their own business than to do so in another person’s business.
Successful entrepreneurs do the following:
1. Recognize opportunity by identifying ultimate need or want, and then deliver a product or service that needs it.
2. Verify that others are willing to pay for the product or service.
3. Manage risk by educating those involved about potential risks and problems.
4. Determine the resources they will need and where to find them.
5. Build a network or team of advisors, employees and mentors who have the information and skills to keep the business succeed.

Starting a business takes time. It requires balancing commitments, it costs money, and it involves taking risks. Before starting a business one needs to learn the basics of entrepreneurship.

Successful Entrepreneurs develop possible ideas into profitable business. An entrepreneur does not need a novel or unique idea on which to take an enterprise. Most entrepreneurs start companies based on essential products and services whose market is well established. Few new enterprises are based on new discoveries or inventions. The wise entrepreneur selects people who possess the articles needed to help the new business succeed. Many failing businesses have been taken over by new more skilled management who turn around the fortunes of the company.

For recognizing an entrepreneur we should understand the following aspects:
1. Recognizing Opportunities.
2. Defining a business Concept.
3. Model, feasibility, checklist
4. Product, Service Planning
5. Management and organization Planning.
6. Market Planning: Market Analysis
7. Market Planning: Penetration
8. Market Planning: Pricing
9. Market Plan Sales and inventory.
10. Market Planning: Cash Outlays and Sources
11. Market Planning: financial Statement Planning.
12. Market Planning: Finalizing Business Planning.

Entrepreneurship Characteristics:
1. Determination
2. Thrive on Uncertainty
3. Self Confidence
4. Energy
5. Self Discipline
6. Social Responsibilities.
7. Business knowledge
8. Good people Judgment.
Further in discussing the nature of entrepreneurship, we need to put in to perspective three key concepts. These are Entrepreneurship, Entrepreneurs, and Intrapreneurship.
Entrepreneurship: Entrepreneurship is a process of innovation and new venture creation by individual, organization, environment and process- and aided by collaborate network in government, education and institutions.
Entrepreneurs: The entrepreneurs are a catalyst for economic change that uses purposeful searching, careful planning, and sound judgment in carrying out the entrepreneurial process. The entrepreneur works creatively to establish new resources or endow old one’s with new capital for the purpose of creating new wealth.
Intrapreneurship: Intrapreneurship is any of the dreamers who take hands on responsibilities for creating innovation of any type within an organization. A dreamer figures out how to turn an idea into a profitable reality.

35

BBA Discussion Forum / Entrepreneurship

« on: June 07, 2016, 09:57:28 AM »

What is Entrepreneurship?
Answer: Entrepreneurship is a process through which people and team pursue an opportunity, use resources, and initiate change to create value. Entrepreneurs are driven by a need to control their own destinies and bring their dreams to market place.
Who are Entrepreneurs?
Answer: According to some experts entrepreneurs are people who interpret problems as opportunities, and accept calculated risk in the hope of creating value. Entrepreneurs find it more rewarding to solve problems in their own business than to do so in another person’s business.
Successful entrepreneurs do the following:
1. Recognize opportunity by identifying ultimate need or want, and then deliver a product or service that needs it.
2. Verify that others are willing to pay for the product or service.
3. Manage risk by educating those involved about potential risks and problems.
4. Determine the resources they will need and where to find them.
5. Build a network or team of advisors, employees and mentors who have the information and skills to keep the business succeed.

Starting a business takes time. It requires balancing commitments, it costs money, and it involves taking risks. Before starting a business one needs to learn the basics of entrepreneurship.

Successful Entrepreneurs develop possible ideas into profitable business. An entrepreneur does not need a novel or unique idea on which to take an enterprise. Most entrepreneurs start companies based on essential products and services whose market is well established. Few new enterprises are based on new discoveries or inventions. The wise entrepreneur selects people who possess the articles needed to help the new business succeed. Many failing businesses have been taken over by new more skilled management who turn around the fortunes of the company.

For recognizing an entrepreneur we should understand the following aspects:
1. Recognizing Opportunities.
2. Defining a business Concept.
3. Model, feasibility, checklist
4. Product, Service Planning
5. Management and organization Planning.
6. Market Planning: Market Analysis
7. Market Planning: Penetration
8. Market Planning: Pricing
9. Market Plan Sales and inventory.
10. Market Planning: Cash Outlays and Sources
11. Market Planning: financial Statement Planning.
12. Market Planning: Finalizing Business Planning.

Entrepreneurship Characteristics:
1. Determination
2. Thrive on Uncertainty
3. Self Confidence
4. Energy
5. Self Discipline
6. Social Responsibilities.
7. Business knowledge
8. Good people Judgment.
Further in discussing the nature of entrepreneurship, we need to put in to perspective three key concepts. These are Entrepreneurship, Entrepreneurs, and Intrapreneurship.
Entrepreneurship: Entrepreneurship is a process of innovation and new venture creation by individual, organization, environment and process- and aided by collaborate network in government, education and institutions.
Entrepreneurs: The entrepreneurs are a catalyst for economic change that uses purposeful searching, careful planning, and sound judgment in carrying out the entrepreneurial process. The entrepreneur works creatively to establish new resources or endow old one’s with new capital for the purpose of creating new wealth.
Intrapreneurship: Intrapreneurship is any of the dreamers who take hands on responsibilities for creating innovation of any type within an organization. A dreamer figures out how to turn an idea into a profitable reality.

36

MBA Discussion Forum / Preparation of banks in implementing Basel III

« on: May 29, 2016, 09:56:50 AM »

According to latest information from Bangladesh Bank, Bangladesh is planning to prepare banks for implementing Basel III (The Daily Star, May22, 2016). Bangladesh Bank has given directions to banks to implement Basel III from January 01, 2015 in phases and fully by January 01, 2019. As Basel III framework was basically the response of global banking regulators to deal with the factors, more specifically those relating to the banking system that lead to the global economic crisis or the great recession, Basel III Provides improved risk management systems in banks. By practicing these risk management systems, banks therefore are expected to be more shock absorbent in future.
However some economists think that Bangladesh bank may face some challenges. Any change brings some challenges. So it is expected that Bangladeshi banks will face several challenges to implement Basel III.  As per guidelines of Bangladesh Bank, banks maintained 10 percent of risk-weighted asset in 2015, But gradually it will go up and finally banks will maintain 12.50 percent in 2019 when full implementation of capital ratios will be executed. Besides, banks need to maintain leverage ratio of 3 percent based on amount of Tier-I capital as percentage to total exposure of banks. Seemingly, private commercial banks (PCBs) are capable of increasing these percentages comfortably. However, the recent deterioration of asset quality of state-owned commercial banks (SCBS) and some PCBs has created uncertainty about their capacity to generate capital internally. In this perspective, banks can initiate to amplify their internal ability for generating capital through reducing costs, ensuring quality of loans and forming loan portfolio contemplating the risk weights fixed by Bangladesh Bank. In case of necessity of adding capital from external sources, the government may follow traditional trajectory through injecting new capital to SCBs for ensuring sufficient amount of capital.  Additionally, banks can raise the amount of capital by offloading a certain percentage of shares, inviting organizations like International Finance Corporation (IFC), and Islamic Corporation for the Development of the Private Sector (ICD) for participation in banks' capital and issuing different debt securities.
Fiscal and monetary authority can motivate banks for utilizing these innovative options for the enhancement of capital through giving necessary policy supports. It is well accepted that the government may not inject capital to SCBs for unlimited period from the taxpayers' money.  Banks, therefore, need to enhance their internal capacity to increase necessary amount of capital for covering risk exposure they undertake.
In case of liquidity framework, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are actually framed as liquidity performance parameters. Through these ratios, banks can visualize well ahead of incurring liquidity problems and take necessary steps to address this problem without the help of the central bank. It is anticipated that banks of Bangladesh will not face major challenges in maintaining both ratios. Bangladesh Bank has already observed ability of banks in maintaining ratios on a trial basis almost for one year and found all banks with a few exceptions are capable to maintain these parameters.
A few other factors like technology, skills development and governance are being considered as challenges in implementing Basel III. The revised approaches for using risk-weighted assets will be dependent on a number of computational requirements. Banks may need to upgrade their systems and processes to be able to compute an amount of risk-weighted assets as well as capital requirements based on revised guidelines. Apart from technological up gradation, higher specialized skills development in the supervised banks and within Bangladesh Bank is a challenge to ensure proper implementation of Basel III. Top management and human resource development policy of banks, thus, need to get tuned with this requirement. The central bank also needs to improve skills in regulating and supervising under the new system.
The Basel Committee on Banking Supervision added a separate principle on corporate governance in its core principles in 2012. It is welcomed in Bangladesh in the sense that while strong capital gives financial strength, it cannot assure good performance unless good corporate governance exists. We need to fix and ensure this issue for the interest of having a strong financial sector like global community. We believe that banks of Bangladesh have the capacity to address these challenges for the full implementation of Basel III. If any lacking does exist, it is expected that banks will take required initiatives to bridge the gap.

37

MBA Discussion Forum / The Application of Monetary Policy: Rules, Discretion & Central bank Autonomy

« on: May 24, 2016, 10:49:18 AM »

The Application of Monetary Policy:
Rules, Discretion & Central bank Autonomy
Rafiqul Islam
Published in "The Financial Express"
Wednesday, January 22,2014
The debate about whether monetary policy decisions should be governed by rules or discretion has a long history. However, neither pure discretion nor fixed adherence to an intermediate monetary target has proved satisfactory. In their place several countries are moving toward a regime in which there is a clear target for the ultimate objective of monetary policy, together with a statement of the authorities decision making practices that is as open and transparent as possible.
We notice three broad phases in the approach to policy making in the postwar period. Until about the late 1960s, it was taken for granted, that formulating monetary policy required a substantial amount of discretion. From the early 1970s until the 1980s, there was a growing emphasis on rules. By the late 1980s; however, there was a swing away from rule based policy regimes. The relationship between intermediate targets and ultimate objectives became more variable under the influence of financial liberalization and innovation. In recent years it seems most central banks have recognized the need for a return to greater discretion in the use of monetary instruments. In this context, it is necessary to provide the definition of a few terms, because the same expressions may be used to mean different things by different authors. Central banks use policy instruments to pursue ultimate policy objectives. Along the way, they are concerned with intermediate variables which are part of the policy transmission process as well as with indicator variables, which may provide information about the impact of policy, without themselves being part of the transmission mechanism.
Rules are generally taken to require the authorities to use the instruments of monetary policy to achieve a given predetermined path for an intermediate variable (usually a monetary aggregate). Intermediate variables are those which the monetary authorities may attempt to target because of their presumed relationship with the ultimate objectives of monetary policy. The most common example of an intermediate variable is the money stock or credit stock. To the extent that growth in monetary aggregates is stably related to the ultimate objective of monetary policy (the steady growth of the nominal value of output) and to the extent that it is more feasible to control the money stock than nominal output, it makes sense to direct policy instruments towards the achievement of an intermediate variable.
Indicator variables can be defined as those that have information value about the impact of instrument on policy outcomes but are not themselves an object of control. In fact the whole range of economic quantities has a bearing on monetary policy decisions. They can include variables that in another context may be viewed as intermediate target. For example the growth of money stock can be regarded as object to be controlled. It can also be regarded as one indicator (among others) of the potential strength of demand in the economy. This underlines an important point just because a monetary variable is not used as an object of control does not mean that it does not play an important role in evaluating the stance of monetary policy.
Other indicator variables are those that convey information about the future of the economy, and the balance between inflationary and recessionary forces. They include all variables relating to the current and prospective level of real economic activity [GDP growth, industrial production, retail sales, consumer and business spending surveys, etc.]. They also include cost and price indicators [wages, import costs, consumer and producer price indices] and expectation indices, including expectations derived from financial variables such as the shape of the yield curve. The distinction between whether variables are to be treated as indicators or intermediate targets is crucial to the distinction between rules and discretion. However, the distinction between rules and discretion is not straightforward, and, hence deserves some clarification. The use of discretion in monetary policy is clearly not intended to imply randomness in decision making. A discretionary policy action usually reflects a systematic response by policy authorities, taken in the light of their objectives and their perceptions as to how the economy will respond to particular economic stimuli.
Arguments for discretion in the formulation and implementation of policy:
First, economics is subject to both supply shocks and demand shocks. The appropriate monetary policy response will be quite different in the two cases. If the authorities can identify the nature of different shocks, they will be able to improve welfare by exercising discretion in how they respond to them. A second argument for discretion lies in the fact that the speed with which an economy returns to price stability following an inflationary or deflationary shock has implications for output and employment. The use of discretion may enable the central bank to tolerate some overshooting of the monetary targets to allow the return to price stability to take place in a more orderly manner. A third argument for discretion is that the structure of the economy is changing through time in ways that cannot easily be predicted in advance. The relationship between intermediate variables and the ultimate objectives of policy can be affected by technical developments. Under such circumstances discretion, rather than a set rules, could be more appropriate.
Arguments for rules
One view is that, in a democracy, discretion from decision making should be removed from individuals and vested in rules and laws. Perhaps the more important economic argument for rule is that there is fundamentally stable relationship between an intermediate variable (a monetary aggregate) and the ultimate objective of monetary policy (the growth of nominal income). The benefits of discretion are, therefore small, since it is not possible to improve much of the outcome generated by adopting a stable money growth target. On the other hand, so the argument goes, the costs of discretion are potentially large
A subsidiary argument for rules is that financial markets operate most efficiently in the presence of certainty. If in addition to the inherent uncertainties generated by outside economic shocks, there are uncertainties about the authorities’ policy response, the difficulties faced by markets will be compounded. This argument has been formalized in the literature on the time consistency problem and the value of rules that pre-commit the authorities to a particular course of action. The arguments in favor of rules are based more on the quality of discretionary action, than on discretion per se. it may be argued that discretionary monetary policy is subject to two systematic sources of adverse bias: too little, too late. For example, there will be greater willingness to lower interest rates than to raise them.
The Central Bank Independence: Rationale and Reality
One of the primary tenets of accepted central banking thought has been the importance of keeping central banks politically independent. No other aspect of central banking has evoked more attention and discussion than the advocacy of central bank independence of political authority. The concept of an independent central bank separates the power to create money from the power to spend money (vested in the executive). Hence, the strongest argument for an independent central bank rests on the view that subjecting the central bank to more political pressure would impart an inflationary bias to monetary policy. In the view of many observers, politicians in a democratic society are short sighted, because they are driven by the need to win their next election and they are unlikely to focus in long run objectives, such as promoting a stable price level. Instead they will seek short run solutions to problems even if the short run solutions have undesirable long run effects. A politically insulated central bank is more likely to be concerned with long run objectives and thus be a defender of a sound currency and a stable price. Putting the central bank under the control of the government is considered dangerous because the central bank can be used to facilitate financing large budget deficits and thus this help out might lead to a more inflationary bias in the economy. An independent central bank is better able to resist this pressure from government expenditure without raising taxes. An independent central bank largely removed from political pressure is needed to ensure justice to those who lose from inflation.
Another argument for central bank independence is that conduct of monetary policy is too important to leave to politicians who may have lack of expertise at making hard decisions on issues of great economic importance, such as reforming the banking system, or reducing the budget deficit. The crucial parameters like price level and exchange rate under no circumstances should be transferred into political control variable. But the removal of monetary policy form the political sphere is itself a political act. There seems to be an even stronger case for independent central bank in the developing countries given the greater frequency and arbitrariness of political change coupled with the politicization of finance. Recent research demonstrates that political instability causes instability at the central bank too, although the spillover varies across countries and type of political traditions. These are hard question which have not been addressed in the debate on central bank independence.
According to some experts, for Bangladesh, an autonomous central bank is necessary to conduct sound monetary policy and to exercise utmost prudence in such matters as the licensing of new banks and the use of directed credit. Experience with government intervention in these matters in Bangladesh justifies the importance of establishing an autonomous central bank in our country. The board of directors of the state owned banks and financial institutions need to be constituted with people having a sound knowledge of national economy and the financial sector. However Bangladesh Bank has not been given any authority in appointing independent directors to private banks under the recently amended Banking Companies Act 2013. Bangladesh Bank can remove MDs of State owned banks but has no authority over Board Directors. A strict application of the criteria set by the Bangladesh bank for selection of qualified persons with good reputation and right professional profile for the board of directors in the state run banks is imperative so that the directors in the state run banks can perform with desired level of competence to keep the banking system in the right path.
However, the central bank must take an objective and independent attitude to the various sectors and interest in the economy and it should have a reputation for impartiality. The personality, prestige and the competence of the central bank management in any country can go a long way in persuading the banks and the government to formulate and implement appropriate monetary policy for a country.
The Case against Independence of Central Bank
Proponents of control of central bank by government argue that it is undemocratic to have monetary policy (which affects everyone in the economy) formulated by an elite group responsible to none. The public holds the president or parliament responsible for the economic well being of the country, yet they lack control over the government agency, the central bank that may well be the most important factor in determining the health of the economy. Monetary policy involves difficult decisions that need a long run point of view. The public holds the government responsible for the economic conditions that result from all the policies followed by government. Hence the government should have control over monetary policy. It seems to be undemocratic to say that elected officials, in a parliamentary democracy, should not be trusted to judge monetary policy. Monetary and fiscal policies should be integrated and adequate integration cannot be achieved merely by a process of informal consultation. Rather it requires that the central bank be part of the administration. Giving the government control over the central bank need not necessarily weaken its influence, but might even strengthen it. If it were a part of the administration, the central bank counsel would then be better heeded by the government. However, there is yet no consensus on whether an independent central bank is a good idea, although public support for independence of central bank seems to have been growing in various countries of the world.
The for and against arguments for independence of central bank may give the misleading impression that the choice is between two irreconcilable extremes. But this is not so. Even if the central bank were to lose its formal independence and become a part of government administration, there could still be an attempt to keep it out of partisan politics.
Professor of Economics, Faculty of Business & Economics, Daffodil International University.

38

Business Administration / The Application of Monetary Policy: Rules, Discretion & Central bank Autonomy

« on: May 24, 2016, 10:46:46 AM »

The Application of Monetary Policy:
Rules, Discretion & Central bank Autonomy
Rafiqul Islam
Published in "The Financial Express"
Wednesday, January 22,2014
The debate about whether monetary policy decisions should be governed by rules or discretion has a long history. However, neither pure discretion nor fixed adherence to an intermediate monetary target has proved satisfactory. In their place several countries are moving toward a regime in which there is a clear target for the ultimate objective of monetary policy, together with a statement of the authorities decision making practices that is as open and transparent as possible.
We notice three broad phases in the approach to policy making in the postwar period. Until about the late 1960s, it was taken for granted, that formulating monetary policy required a substantial amount of discretion. From the early 1970s until the 1980s, there was a growing emphasis on rules. By the late 1980s; however, there was a swing away from rule based policy regimes. The relationship between intermediate targets and ultimate objectives became more variable under the influence of financial liberalization and innovation. In recent years it seems most central banks have recognized the need for a return to greater discretion in the use of monetary instruments. In this context, it is necessary to provide the definition of a few terms, because the same expressions may be used to mean different things by different authors. Central banks use policy instruments to pursue ultimate policy objectives. Along the way, they are concerned with intermediate variables which are part of the policy transmission process as well as with indicator variables, which may provide information about the impact of policy, without themselves being part of the transmission mechanism.
Rules are generally taken to require the authorities to use the instruments of monetary policy to achieve a given predetermined path for an intermediate variable (usually a monetary aggregate). Intermediate variables are those which the monetary authorities may attempt to target because of their presumed relationship with the ultimate objectives of monetary policy. The most common example of an intermediate variable is the money stock or credit stock. To the extent that growth in monetary aggregates is stably related to the ultimate objective of monetary policy (the steady growth of the nominal value of output) and to the extent that it is more feasible to control the money stock than nominal output, it makes sense to direct policy instruments towards the achievement of an intermediate variable.
Indicator variables can be defined as those that have information value about the impact of instrument on policy outcomes but are not themselves an object of control. In fact the whole range of economic quantities has a bearing on monetary policy decisions. They can include variables that in another context may be viewed as intermediate target. For example the growth of money stock can be regarded as object to be controlled. It can also be regarded as one indicator (among others) of the potential strength of demand in the economy. This underlines an important point just because a monetary variable is not used as an object of control does not mean that it does not play an important role in evaluating the stance of monetary policy.
Other indicator variables are those that convey information about the future of the economy, and the balance between inflationary and recessionary forces. They include all variables relating to the current and prospective level of real economic activity [GDP growth, industrial production, retail sales, consumer and business spending surveys, etc.]. They also include cost and price indicators [wages, import costs, consumer and producer price indices] and expectation indices, including expectations derived from financial variables such as the shape of the yield curve. The distinction between whether variables are to be treated as indicators or intermediate targets is crucial to the distinction between rules and discretion. However, the distinction between rules and discretion is not straightforward, and, hence deserves some clarification. The use of discretion in monetary policy is clearly not intended to imply randomness in decision making. A discretionary policy action usually reflects a systematic response by policy authorities, taken in the light of their objectives and their perceptions as to how the economy will respond to particular economic stimuli.
Arguments for discretion in the formulation and implementation of policy:
First, economics is subject to both supply shocks and demand shocks. The appropriate monetary policy response will be quite different in the two cases. If the authorities can identify the nature of different shocks, they will be able to improve welfare by exercising discretion in how they respond to them. A second argument for discretion lies in the fact that the speed with which an economy returns to price stability following an inflationary or deflationary shock has implications for output and employment. The use of discretion may enable the central bank to tolerate some overshooting of the monetary targets to allow the return to price stability to take place in a more orderly manner. A third argument for discretion is that the structure of the economy is changing through time in ways that cannot easily be predicted in advance. The relationship between intermediate variables and the ultimate objectives of policy can be affected by technical developments. Under such circumstances discretion, rather than a set rules, could be more appropriate.
Arguments for rules
One view is that, in a democracy, discretion from decision making should be removed from individuals and vested in rules and laws. Perhaps the more important economic argument for rule is that there is fundamentally stable relationship between an intermediate variable (a monetary aggregate) and the ultimate objective of monetary policy (the growth of nominal income). The benefits of discretion are, therefore small, since it is not possible to improve much of the outcome generated by adopting a stable money growth target. On the other hand, so the argument goes, the costs of discretion are potentially large
A subsidiary argument for rules is that financial markets operate most efficiently in the presence of certainty. If in addition to the inherent uncertainties generated by outside economic shocks, there are uncertainties about the authorities’ policy response, the difficulties faced by markets will be compounded. This argument has been formalized in the literature on the time consistency problem and the value of rules that pre-commit the authorities to a particular course of action. The arguments in favor of rules are based more on the quality of discretionary action, than on discretion per se. it may be argued that discretionary monetary policy is subject to two systematic sources of adverse bias: too little, too late. For example, there will be greater willingness to lower interest rates than to raise them.
The Central Bank Independence: Rationale and Reality
One of the primary tenets of accepted central banking thought has been the importance of keeping central banks politically independent. No other aspect of central banking has evoked more attention and discussion than the advocacy of central bank independence of political authority. The concept of an independent central bank separates the power to create money from the power to spend money (vested in the executive). Hence, the strongest argument for an independent central bank rests on the view that subjecting the central bank to more political pressure would impart an inflationary bias to monetary policy. In the view of many observers, politicians in a democratic society are short sighted, because they are driven by the need to win their next election and they are unlikely to focus in long run objectives, such as promoting a stable price level. Instead they will seek short run solutions to problems even if the short run solutions have undesirable long run effects. A politically insulated central bank is more likely to be concerned with long run objectives and thus be a defender of a sound currency and a stable price. Putting the central bank under the control of the government is considered dangerous because the central bank can be used to facilitate financing large budget deficits and thus this help out might lead to a more inflationary bias in the economy. An independent central bank is better able to resist this pressure from government expenditure without raising taxes. An independent central bank largely removed from political pressure is needed to ensure justice to those who lose from inflation.
Another argument for central bank independence is that conduct of monetary policy is too important to leave to politicians who may have lack of expertise at making hard decisions on issues of great economic importance, such as reforming the banking system, or reducing the budget deficit. The crucial parameters like price level and exchange rate under no circumstances should be transferred into political control variable. But the removal of monetary policy form the political sphere is itself a political act. There seems to be an even stronger case for independent central bank in the developing countries given the greater frequency and arbitrariness of political change coupled with the politicization of finance. Recent research demonstrates that political instability causes instability at the central bank too, although the spillover varies across countries and type of political traditions. These are hard question which have not been addressed in the debate on central bank independence.
According to some experts, for Bangladesh, an autonomous central bank is necessary to conduct sound monetary policy and to exercise utmost prudence in such matters as the licensing of new banks and the use of directed credit. Experience with government intervention in these matters in Bangladesh justifies the importance of establishing an autonomous central bank in our country. The board of directors of the state owned banks and financial institutions need to be constituted with people having a sound knowledge of national economy and the financial sector. However Bangladesh Bank has not been given any authority in appointing independent directors to private banks under the recently amended Banking Companies Act 2013. Bangladesh Bank can remove MDs of State owned banks but has no authority over Board Directors. A strict application of the criteria set by the Bangladesh bank for selection of qualified persons with good reputation and right professional profile for the board of directors in the state run banks is imperative so that the directors in the state run banks can perform with desired level of competence to keep the banking system in the right path.
However, the central bank must take an objective and independent attitude to the various sectors and interest in the economy and it should have a reputation for impartiality. The personality, prestige and the competence of the central bank management in any country can go a long way in persuading the banks and the government to formulate and implement appropriate monetary policy for a country.
The Case against Independence of Central Bank
Proponents of control of central bank by government argue that it is undemocratic to have monetary policy (which affects everyone in the economy) formulated by an elite group responsible to none. The public holds the president or parliament responsible for the economic well being of the country, yet they lack control over the government agency, the central bank that may well be the most important factor in determining the health of the economy. Monetary policy involves difficult decisions that need a long run point of view. The public holds the government responsible for the economic conditions that result from all the policies followed by government. Hence the government should have control over monetary policy. It seems to be undemocratic to say that elected officials, in a parliamentary democracy, should not be trusted to judge monetary policy. Monetary and fiscal policies should be integrated and adequate integration cannot be achieved merely by a process of informal consultation. Rather it requires that the central bank be part of the administration. Giving the government control over the central bank need not necessarily weaken its influence, but might even strengthen it. If it were a part of the administration, the central bank counsel would then be better heeded by the government. However, there is yet no consensus on whether an independent central bank is a good idea, although public support for independence of central bank seems to have been growing in various countries of the world.
The for and against arguments for independence of central bank may give the misleading impression that the choice is between two irreconcilable extremes. But this is not so. Even if the central bank were to lose its formal independence and become a part of government administration, there could still be an attempt to keep it out of partisan politics.
Professor of Economics, Faculty of Business & Economics, Daffodil International University.

39

BBA Discussion Forum / Entrepreneurship, Innovation and Change

« on: May 22, 2016, 01:14:40 PM »

Each of these concepts plays a unique, yet complementary role, reflecting “Unity is diversity”
“Change” represents perhaps the most fundamental concept, without the possibility of change, the very idea of entrepreneurship and innovation would have little meaning. On the other hand “Innovation” as a product of science and technology is today the foundation of political and socio economic development, Characterizing an information and knowledge based society. Yet the process of innovation and ‘Change’ is driven by entrepreneurial spirit.
‘Change Management’ and Human Factors:
Change is a promise and opportunity. Internal reasons for change is triggered by external factors, it is reactive. Change begins and ends with people, so as many people as possible should be involved with the change Process, particularly those likely to be affected by change. Managing change involves change in attitudes, organizational culture, and selective and appropriate tools and techniques. It may also be required to explain why such changes are necessary. Because family, society and community are all conserving institutions, they like stability and hence try to prevent change and at least let it down.
However modern organizations must be prepared for ‘Innovation’. According to Schumpeter innovation is a ‘creative destruction’.
Growth and development of an economy is largely a function of innovation. Society and business are becoming more knowledge- based, competition is becoming increasingly global, technology is developing quickly and the aspirations of the workplace and their values are changing the entire business environment.               .
To survive and succeed an organization must be flexible, It must have more ‘Surface’ exposed to the environment and with a host of sensing mechanism for recognizing emerging changes and their implications. But it is also true that change is disturbing when it is forced on an organization. It is exhilarating when it is done by the organization at its own Speed.

40

MBA Discussion Forum / The BRICS Bank: a new development bank

« on: September 23, 2014, 11:37:27 AM »

The BRICS Bank: a new development bank
Thirteen years ago, Brics was a marketing ploy dreamt up by Jim O’Neill, then chief economist at Goldman Sachs. Now it is a bank. Next thing you know, it will have its own line of designer handbags. This month in Fortaleza, the five Brics nations – Brazil, Russia, India, China and South Africa – agreed to establish a development bank. They also set up a $100bn swap line, known formally as a contingent reserve arrangement, a deal that gives each country’s central bank access to emergency supplies of foreign currency. To borrow a phrase from Anton Siluanov, Russia’s finance minister, the five countries are attempting to conjure a mini-World Bank and a mini-International Monetary Fund.

The Brics’ plan is good for the world, although you would not know it from the sniffy reaction in the west. There have been two default positions. One is to scoff at the very idea of five such disparate nations organising anything coherent or staying the course. The other is to worry that the world order reflected in the two US-led institutions set up at the Bretton Woods conference of 1944 is about to crumble.  This is a reprimand to western-led institutions that have failed to adapt. If the postwar order really is being upended, the right response is “hear, hear.” The new Brics bank, which will fund infrastructure projects, will have initial capital of $50bn and maximum allowable capital of $100bn. Each country will pay in $10bn, giving them a theoretically equal say. The bank will be based in Shanghai, a sop to Beijing, which clearly intends to wield influence. Yet the presidency will be rotated, starting with India. China will not have a turn until 2021.

By contrast, the five countries will contribute to the CRA swap line according to size, with China pitching in $41bn to South Africa’s $5bn. The contingent reserve is a safety net for times of financial stress, for example if one country’s currency comes under speculative attack. It is modelled on the Chiang Mai Initiative, a $240bn Asian currency swap arrangement concluded after the 1997 Asian crisis when the region’s proposal to launch its own IMF equivalent was squashed by Washington. The Brics bank, too, was born of frustration. The IMF in particular is disliked in much of the developing world. In the 1990s, its rigid adherence to market reforms led many to see it as an instrument to keep poor countries down, not to lift them out of poverty. In Asia, it is regarded as hypocritical. In 1997, it insisted on ruinous austerity in countries such as Indonesia. Following the 2008 financial crisis it has happily embraced monetary and fiscal laxity in the west.

If the IMF has changed its spots it has not changed its structure. Its quota system, which determines what each country pays in and how many votes they are given, fails to reflect the reality of a changing world. The Brics nations, which account for more than a fifth of global output, have just 10.3 per cent of quota. European countries, by contrast, are allocated 27.5 per cent for just 18 per cent of output. To add insult to injury, the IMF presidency is reserved for a European, while that of the World Bank routinely goes to an American. Reforms were agreed in 2010 that would have doubled the IMF’s capital to $720bn and transferred 6 percentage points of quota to poorer countries. That this did not go far enough is a moot point. The reforms were never ratified by the US Congress. From the Brics’ perspective, the global financial system is stacked against them. Raghuram Rajan, governor of the Reserve Bank of India, has accused rich countries of pursuing selfish policies with no thought of their impact on emerging economies. The fact that the US Federal Reserve, without warning, announced plans to “taper” its bond purchases showed it was willing to turn the monetary spigots on and off even at the expense of turmoil in poor countries.

One reason to welcome the new bank is that it will bring competition. China’s lending in Africa has drawn valid criticism that it is not tied to good governance or environmental standards. Yet the presence of alternative Chinese funding in Africa has been a net positive. The same should be true of the new Brics bank, given the huge number of roads, power plants and sewerage systems that need funding. “Any new institution that is adding to long-term capital has to be good for the world,” says Urjit Patel, deputy governor of India’s central bank, who was in Fortaleza. The new bank is no panacea. As critics point out, it is relatively small. Ben Steil and Dinah Walker of the US-based Council on Foreign Relations note that, between them, China, India and Brazil have borrowed $66bn from the World Bank alone, more than the entire subscribed capital of the Brics bank. Similarly, while the idea of conditionality can be overdone, it would not be a good thing if the new bank lent willy-nilly to dictators intent on ransacking their countries’ natural resources. Nor is the Brics bank necessarily as democratic as it makes out. Its articles ensure the founders will never see their voting rights drop below 55 per cent, no matter how many countries join. Still, the Bretton Woods institutions reflect the realities of a receding age. The world has changed, mostly for the better, as poor countries close the gap on rich ones. The Brics bank encapsulates this. It is a glimpse of the future.


Professor Rafiqul Islam
Dean
Faculty of Business & Economics

41

Business & Entrepreneurship / The BRICS Bank: a new development bank

« on: September 23, 2014, 11:37:09 AM »

The BRICS Bank: a new development bank
Thirteen years ago, Brics was a marketing ploy dreamt up by Jim O’Neill, then chief economist at Goldman Sachs. Now it is a bank. Next thing you know, it will have its own line of designer handbags. This month in Fortaleza, the five Brics nations – Brazil, Russia, India, China and South Africa – agreed to establish a development bank. They also set up a $100bn swap line, known formally as a contingent reserve arrangement, a deal that gives each country’s central bank access to emergency supplies of foreign currency. To borrow a phrase from Anton Siluanov, Russia’s finance minister, the five countries are attempting to conjure a mini-World Bank and a mini-International Monetary Fund.

The Brics’ plan is good for the world, although you would not know it from the sniffy reaction in the west. There have been two default positions. One is to scoff at the very idea of five such disparate nations organising anything coherent or staying the course. The other is to worry that the world order reflected in the two US-led institutions set up at the Bretton Woods conference of 1944 is about to crumble.  This is a reprimand to western-led institutions that have failed to adapt. If the postwar order really is being upended, the right response is “hear, hear.” The new Brics bank, which will fund infrastructure projects, will have initial capital of $50bn and maximum allowable capital of $100bn. Each country will pay in $10bn, giving them a theoretically equal say. The bank will be based in Shanghai, a sop to Beijing, which clearly intends to wield influence. Yet the presidency will be rotated, starting with India. China will not have a turn until 2021.

By contrast, the five countries will contribute to the CRA swap line according to size, with China pitching in $41bn to South Africa’s $5bn. The contingent reserve is a safety net for times of financial stress, for example if one country’s currency comes under speculative attack. It is modelled on the Chiang Mai Initiative, a $240bn Asian currency swap arrangement concluded after the 1997 Asian crisis when the region’s proposal to launch its own IMF equivalent was squashed by Washington. The Brics bank, too, was born of frustration. The IMF in particular is disliked in much of the developing world. In the 1990s, its rigid adherence to market reforms led many to see it as an instrument to keep poor countries down, not to lift them out of poverty. In Asia, it is regarded as hypocritical. In 1997, it insisted on ruinous austerity in countries such as Indonesia. Following the 2008 financial crisis it has happily embraced monetary and fiscal laxity in the west.

If the IMF has changed its spots it has not changed its structure. Its quota system, which determines what each country pays in and how many votes they are given, fails to reflect the reality of a changing world. The Brics nations, which account for more than a fifth of global output, have just 10.3 per cent of quota. European countries, by contrast, are allocated 27.5 per cent for just 18 per cent of output. To add insult to injury, the IMF presidency is reserved for a European, while that of the World Bank routinely goes to an American. Reforms were agreed in 2010 that would have doubled the IMF’s capital to $720bn and transferred 6 percentage points of quota to poorer countries. That this did not go far enough is a moot point. The reforms were never ratified by the US Congress. From the Brics’ perspective, the global financial system is stacked against them. Raghuram Rajan, governor of the Reserve Bank of India, has accused rich countries of pursuing selfish policies with no thought of their impact on emerging economies. The fact that the US Federal Reserve, without warning, announced plans to “taper” its bond purchases showed it was willing to turn the monetary spigots on and off even at the expense of turmoil in poor countries.

One reason to welcome the new bank is that it will bring competition. China’s lending in Africa has drawn valid criticism that it is not tied to good governance or environmental standards. Yet the presence of alternative Chinese funding in Africa has been a net positive. The same should be true of the new Brics bank, given the huge number of roads, power plants and sewerage systems that need funding. “Any new institution that is adding to long-term capital has to be good for the world,” says Urjit Patel, deputy governor of India’s central bank, who was in Fortaleza. The new bank is no panacea. As critics point out, it is relatively small. Ben Steil and Dinah Walker of the US-based Council on Foreign Relations note that, between them, China, India and Brazil have borrowed $66bn from the World Bank alone, more than the entire subscribed capital of the Brics bank. Similarly, while the idea of conditionality can be overdone, it would not be a good thing if the new bank lent willy-nilly to dictators intent on ransacking their countries’ natural resources. Nor is the Brics bank necessarily as democratic as it makes out. Its articles ensure the founders will never see their voting rights drop below 55 per cent, no matter how many countries join. Still, the Bretton Woods institutions reflect the realities of a receding age. The world has changed, mostly for the better, as poor countries close the gap on rich ones. The Brics bank encapsulates this. It is a glimpse of the future.


Professor Rafiqul Islam
Dean
Faculty of Business & Economics

42

BBA Discussion Forum / The BRICS Bank: a new development bank

« on: September 23, 2014, 11:35:38 AM »

The BRICS Bank: a new development bank
Thirteen years ago, Brics was a marketing ploy dreamt up by Jim O’Neill, then chief economist at Goldman Sachs. Now it is a bank. Next thing you know, it will have its own line of designer handbags. This month in Fortaleza, the five Brics nations – Brazil, Russia, India, China and South Africa – agreed to establish a development bank. They also set up a $100bn swap line, known formally as a contingent reserve arrangement, a deal that gives each country’s central bank access to emergency supplies of foreign currency. To borrow a phrase from Anton Siluanov, Russia’s finance minister, the five countries are attempting to conjure a mini-World Bank and a mini-International Monetary Fund.

The Brics’ plan is good for the world, although you would not know it from the sniffy reaction in the west. There have been two default positions. One is to scoff at the very idea of five such disparate nations organising anything coherent or staying the course. The other is to worry that the world order reflected in the two US-led institutions set up at the Bretton Woods conference of 1944 is about to crumble.  This is a reprimand to western-led institutions that have failed to adapt. If the postwar order really is being upended, the right response is “hear, hear.” The new Brics bank, which will fund infrastructure projects, will have initial capital of $50bn and maximum allowable capital of $100bn. Each country will pay in $10bn, giving them a theoretically equal say. The bank will be based in Shanghai, a sop to Beijing, which clearly intends to wield influence. Yet the presidency will be rotated, starting with India. China will not have a turn until 2021.

By contrast, the five countries will contribute to the CRA swap line according to size, with China pitching in $41bn to South Africa’s $5bn. The contingent reserve is a safety net for times of financial stress, for example if one country’s currency comes under speculative attack. It is modelled on the Chiang Mai Initiative, a $240bn Asian currency swap arrangement concluded after the 1997 Asian crisis when the region’s proposal to launch its own IMF equivalent was squashed by Washington. The Brics bank, too, was born of frustration. The IMF in particular is disliked in much of the developing world. In the 1990s, its rigid adherence to market reforms led many to see it as an instrument to keep poor countries down, not to lift them out of poverty. In Asia, it is regarded as hypocritical. In 1997, it insisted on ruinous austerity in countries such as Indonesia. Following the 2008 financial crisis it has happily embraced monetary and fiscal laxity in the west.

If the IMF has changed its spots it has not changed its structure. Its quota system, which determines what each country pays in and how many votes they are given, fails to reflect the reality of a changing world. The Brics nations, which account for more than a fifth of global output, have just 10.3 per cent of quota. European countries, by contrast, are allocated 27.5 per cent for just 18 per cent of output. To add insult to injury, the IMF presidency is reserved for a European, while that of the World Bank routinely goes to an American. Reforms were agreed in 2010 that would have doubled the IMF’s capital to $720bn and transferred 6 percentage points of quota to poorer countries. That this did not go far enough is a moot point. The reforms were never ratified by the US Congress. From the Brics’ perspective, the global financial system is stacked against them. Raghuram Rajan, governor of the Reserve Bank of India, has accused rich countries of pursuing selfish policies with no thought of their impact on emerging economies. The fact that the US Federal Reserve, without warning, announced plans to “taper” its bond purchases showed it was willing to turn the monetary spigots on and off even at the expense of turmoil in poor countries.

One reason to welcome the new bank is that it will bring competition. China’s lending in Africa has drawn valid criticism that it is not tied to good governance or environmental standards. Yet the presence of alternative Chinese funding in Africa has been a net positive. The same should be true of the new Brics bank, given the huge number of roads, power plants and sewerage systems that need funding. “Any new institution that is adding to long-term capital has to be good for the world,” says Urjit Patel, deputy governor of India’s central bank, who was in Fortaleza. The new bank is no panacea. As critics point out, it is relatively small. Ben Steil and Dinah Walker of the US-based Council on Foreign Relations note that, between them, China, India and Brazil have borrowed $66bn from the World Bank alone, more than the entire subscribed capital of the Brics bank. Similarly, while the idea of conditionality can be overdone, it would not be a good thing if the new bank lent willy-nilly to dictators intent on ransacking their countries’ natural resources. Nor is the Brics bank necessarily as democratic as it makes out. Its articles ensure the founders will never see their voting rights drop below 55 per cent, no matter how many countries join. Still, the Bretton Woods institutions reflect the realities of a receding age. The world has changed, mostly for the better, as poor countries close the gap on rich ones. The Brics bank encapsulates this. It is a glimpse of the future.


Professor Rafiqul Islam
Dean
Faculty of Business & Economics

43

MBA Discussion Forum / Knowledge-based Economy

« on: May 25, 2014, 01:52:54 PM »

For Students

Meaning of New Economy
The term new economy is also referred to as K-economy or knowledge-based economy. According to OECD, knowledge-based economy is one that is directly based on the production, distribution and use of knowledge and information (OECD 1996). A knowledge-based economy is characterized by strong technological capabilities and an increasing emphasis on intellectual property, such as brand names, patents and software.

Knowledge is crucial for development, because everything we do depends on knowledge and that knowledge has overtaken as the most important factor determining a nation’s standard of living. Given such extensive proliferation of technological advancements and rapid globalization in recent years, transition to a knowledge-based economy has become a crucial factor for further prosperity and progress for a nation. In such an economy, knowledge has the key competitive advantage, so investment in human capital and development of an environment is conducive to continued learning and use of technology is of utmost importance.

The development of knowledge-based economy:
The creation and diffusion of knowledge, concurrent with the advances in information technologies is changing the way the goods and services are produced, distributed and consumed. This also alters the competitive economic landscape when nations transact with one another to maintain or upgrade their standard of living. The business environment and market demand are changing rapidly. Markets are opening up, with free flow of trade, capital, technology and goods and services and people. With the advent of the internet, the world is now connected and wired up.

Knowledge-based economy and knowledge-based industries:
There are differences between knowledge-based economy and knowledge-based industry. The distinction has important implications. A knowledge-based economy refers to all elements of the economy from education, the regulatory environment, the macro-economic setting and workplace changes through the issues of access to capital, science and technology and the encouragement of knowledge-intensive industries. Such a broad definition highlights the need for a whole government approach.

On the other hand the term knowledge-based industries refer to those industries which are relatively intensive in their inputs of technology and/or skills, i.e., human capital. There is generally a close correlation between research and development in an industry and investment in human capital. In addition to the commonly identified manufacturing industries, service activities such as finance, insurance and communications should be included in the category of knowledge-based industries.

Information management can dramatically reduce the costs of transacting business and deliver a substantial return to the economy, especially in information intensive sectors such as banking, insurance, finance, wholesale and retail trade, legal and accounting services and education and health.

The role of Government
Since the emergence of knowledge-based economics will have its impact on economic growth, the organization of production and employment, it does warrant consideration of both the private sector and the government. At the early stage, governments need to consider industry policy measures to create a framework that supports continued development of scientific and technological expertise, fosters competition and encourages a culture of enterprise and innovation. The government needs to ensure that impediments to KBE are removed, that regulations are consistent with the intensification and spreading of competition associated with KBE, and that knowledge-based activities are treated consistently with other activities. The government should consistently seek out ways to render its services at a lower cost.

Professor Rafiqul Islam
Advisor, Faculty of Business & Economics
Daffodil International University

44

BBA Discussion Forum / Knowledge-based Economy

« on: May 25, 2014, 01:52:36 PM »

For Students

Meaning of New Economy
The term new economy is also referred to as K-economy or knowledge-based economy. According to OECD, knowledge-based economy is one that is directly based on the production, distribution and use of knowledge and information (OECD 1996). A knowledge-based economy is characterized by strong technological capabilities and an increasing emphasis on intellectual property, such as brand names, patents and software.

Knowledge is crucial for development, because everything we do depends on knowledge and that knowledge has overtaken as the most important factor determining a nation’s standard of living. Given such extensive proliferation of technological advancements and rapid globalization in recent years, transition to a knowledge-based economy has become a crucial factor for further prosperity and progress for a nation. In such an economy, knowledge has the key competitive advantage, so investment in human capital and development of an environment is conducive to continued learning and use of technology is of utmost importance.

The development of knowledge-based economy:
The creation and diffusion of knowledge, concurrent with the advances in information technologies is changing the way the goods and services are produced, distributed and consumed. This also alters the competitive economic landscape when nations transact with one another to maintain or upgrade their standard of living. The business environment and market demand are changing rapidly. Markets are opening up, with free flow of trade, capital, technology and goods and services and people. With the advent of the internet, the world is now connected and wired up.

Knowledge-based economy and knowledge-based industries:
There are differences between knowledge-based economy and knowledge-based industry. The distinction has important implications. A knowledge-based economy refers to all elements of the economy from education, the regulatory environment, the macro-economic setting and workplace changes through the issues of access to capital, science and technology and the encouragement of knowledge-intensive industries. Such a broad definition highlights the need for a whole government approach.

On the other hand the term knowledge-based industries refer to those industries which are relatively intensive in their inputs of technology and/or skills, i.e., human capital. There is generally a close correlation between research and development in an industry and investment in human capital. In addition to the commonly identified manufacturing industries, service activities such as finance, insurance and communications should be included in the category of knowledge-based industries.

Information management can dramatically reduce the costs of transacting business and deliver a substantial return to the economy, especially in information intensive sectors such as banking, insurance, finance, wholesale and retail trade, legal and accounting services and education and health.

The role of Government
Since the emergence of knowledge-based economics will have its impact on economic growth, the organization of production and employment, it does warrant consideration of both the private sector and the government. At the early stage, governments need to consider industry policy measures to create a framework that supports continued development of scientific and technological expertise, fosters competition and encourages a culture of enterprise and innovation. The government needs to ensure that impediments to KBE are removed, that regulations are consistent with the intensification and spreading of competition associated with KBE, and that knowledge-based activities are treated consistently with other activities. The government should consistently seek out ways to render its services at a lower cost.

Professor Rafiqul Islam
Advisor, Faculty of Business & Economics
Daffodil International University

45

Business Administration / Knowledge-based Economy

« on: May 25, 2014, 01:52:07 PM »

For Students

Meaning of New Economy
The term new economy is also referred to as K-economy or knowledge-based economy. According to OECD, knowledge-based economy is one that is directly based on the production, distribution and use of knowledge and information (OECD 1996). A knowledge-based economy is characterized by strong technological capabilities and an increasing emphasis on intellectual property, such as brand names, patents and software.

Knowledge is crucial for development, because everything we do depends on knowledge and that knowledge has overtaken as the most important factor determining a nation’s standard of living. Given such extensive proliferation of technological advancements and rapid globalization in recent years, transition to a knowledge-based economy has become a crucial factor for further prosperity and progress for a nation. In such an economy, knowledge has the key competitive advantage, so investment in human capital and development of an environment is conducive to continued learning and use of technology is of utmost importance.

The development of knowledge-based economy:
The creation and diffusion of knowledge, concurrent with the advances in information technologies is changing the way the goods and services are produced, distributed and consumed. This also alters the competitive economic landscape when nations transact with one another to maintain or upgrade their standard of living. The business environment and market demand are changing rapidly. Markets are opening up, with free flow of trade, capital, technology and goods and services and people. With the advent of the internet, the world is now connected and wired up.

Knowledge-based economy and knowledge-based industries:
There are differences between knowledge-based economy and knowledge-based industry. The distinction has important implications. A knowledge-based economy refers to all elements of the economy from education, the regulatory environment, the macro-economic setting and workplace changes through the issues of access to capital, science and technology and the encouragement of knowledge-intensive industries. Such a broad definition highlights the need for a whole government approach.

On the other hand the term knowledge-based industries refer to those industries which are relatively intensive in their inputs of technology and/or skills, i.e., human capital. There is generally a close correlation between research and development in an industry and investment in human capital. In addition to the commonly identified manufacturing industries, service activities such as finance, insurance and communications should be included in the category of knowledge-based industries.

Information management can dramatically reduce the costs of transacting business and deliver a substantial return to the economy, especially in information intensive sectors such as banking, insurance, finance, wholesale and retail trade, legal and accounting services and education and health.

The role of Government
Since the emergence of knowledge-based economics will have its impact on economic growth, the organization of production and employment, it does warrant consideration of both the private sector and the government. At the early stage, governments need to consider industry policy measures to create a framework that supports continued development of scientific and technological expertise, fosters competition and encourages a culture of enterprise and innovation. The government needs to ensure that impediments to KBE are removed, that regulations are consistent with the intensification and spreading of competition associated with KBE, and that knowledge-based activities are treated consistently with other activities. The government should consistently seek out ways to render its services at a lower cost.

Professor Rafiqul Islam
Advisor, Faculty of Business & Economics
Daffodil International University