Thesis Report on Commercial Private Banks in Bangladesh

Introduction
Generally by the word “Bank” we can easily understand that the financial institutions deal with money. But there are different types of banks like; Central Banks, Commercial Banks, Savings Banks, Investment Banks, industrial Banks, Cooperative Banks etc. Commercial banks are the primary contributor to the economy of a country. So i can say commercial banks are a profit making institution that holds the deposit of the individuals & business in checking & savings account and than uses these funds to make loans. For these, people and government are very much dependent on these banks. As banks are profit earning concern; they collect deposit at the lowest possible cost and provide loans and advances at higher cost. The differences between two are the profit for the bank.

Private Banking sector is spending its hand in different financial event every day. At the same time the banking process is becoming faster, easier and the banking arena is becoming wider. As a result, it has become essential for every person to have some idea on the bank and banking procedure.

Generally these types of Commercial Banks are collecting their capital from money market that is through Securities and Exchange Commission. So it is necessary to report annually to its shareholders.

1.1 Origin of the Report

The report was originated to make a study on the preparation and presentation of financial statements with special reference to Bangladesh Accounting Standards (BASs) and as a part of the fulfillment of thesis program required for the completion of the BBA program of the Accounting Faculty of Business Administration of Stamford University Bangladesh. The report was prepared under the supervision of Ms. Farjana Afrin, Asst. Professor, Department of Accounting, Faculty of Business Administration, and Stamford University Bangladesh.
1.2 Background of the Report

Bangladesh Accounting Standards are the authoritative statements of how particular types of transactions and other events should be reflected in financial statements prepared by the Private Banks in Bangladesh listed in the Stock Exchanges of our country. According to Securities and Exchange Rules 1987, every listed company is required to prepare its financial statements in conformity with Bangladesh Accounting Standards. Private Banks in Bangladesh follow the requirements of BASs in presenting information with few exceptions.

1.3 Objectives of the Report

The main objectives of this report are to analyze the financial statements of Private Banks in Bangladesh and help their management in future policy formulation that is likely to improve the quality of their financial reporting.

The specific objectives are:

• To gain an understanding of relevant laws and rules followed in preparing financial statements.
• To analyze the financial statements to explain the BASs adopted in preparing financial statements.
• To review the voluntary disclosure issues and reporting procedure of non-financial information.
• To provide some recommendations on the basis of my findings.

1.4 Scope of the Report

Financial reporting of Private Banks in Bangladesh is a broad area. Within the limited time period of thesis, it is virtually impossible to cover all aspects of financial reporting. So, the scope of my report is limited only to the compliance of those Bangladesh Accounting Standards (BASs) as followed by Private Banks in Bangladesh in preparing its financial statements and some other areas of voluntary information disclosure. In preparing the report, I review and analyze the information published in the annual report for the year 2007. Any change in accounting policies in respect of providing information after this period is beyond the scope of my report. In Bangladesh there are 29 Private Banks. I choose only ten (10) Private Banks for the purpose of my study. They are:

• Arab Bangladesh Bank limited (AB).
• Export and Import Bank limited (EXIM).
• AL- Arafah Islami Bank limited (AIBL).
• Standard Bank limited (SBL).
• City Bank limited (City).
• Mutual Trust Bank limited (MTBL).
• Jamuna Bank limited (JBL).
• International Finance Investment and Commerce Bank limited (IFIC).
• ONE Bank limited (ONE).
• Southeast Bank limited (SB).

1.5 Methodology

This report has been prepared on the basis of experience gathered through learning Private Banks annual report. For preparing this report, I have also get information from website of Private Banks. I have presented my experience and finding by using different tables, which are presented in the analysis part.

The details of the work plan are furnished below:

• Data collection method:
Relevant data for this report has been collected primarily by direct investigations of different banks annual report and website.

• Data sources:
The information and data for this report have been collected from secondary sources. The secondary sources of information are annual reports, websites and different manuals.

• Data processing:
Data collected from secondary sources have been processed manually and qualitative approach in general and quantitative approach in some cases has been used throughout the study.

• Data analysis and interpretation:
Qualitative approach has been adopted for data analysis and interpretation taking the processed data as the base. So the report relies primarily on an analytical judgment and critical reasoning.

1.6 Limitations of the report

The scope of the study is only limited to annual report and website. The report covers Private Banking sectors financial reporting system that is whether they follow applicable laws and regulations to prepare their financial reporting. Following are the main limitations of the report:
• It was very different to collect the information form Private Banks sectors.
• Bank policy was not disclosing some data and information for obvious reasons.
• Because of the limitation of information some assumption was made. So there may be some personal mistake in the report.
• The time is insufficient to know all activities of the branch are preparing the report.

CHAPTER TWO

2.1 Overview of the Private Banking Sector in
Bangladesh

Bangladesh appeared as a new nation on the world map in the year 1971. After independence financial institutions, especially banks played a vital role in re-constructing the war-torn economy of Bangladesh. As reported by BSB (P. 29, 1993), “the banking system of Bangladesh is a mixed one comprising nationalized, private and foreign commercial banks. Bangladesh Bank is the central bank of the country and is in charge of monetary policies of the Government and controls all commercial banks.” The commercial banking system dominates Bangladesh’s financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector.

After Independence of Bangladesh the banking sector was restructured as a fall out of war of liberation. Banking grew primarily in the public sector with main emphasis development needs of the war-torn economy. With gradual liberalization in subsequent years, it was increasingly felt that banks should be allowed in the private sector for giving a fillip to development process on the basis of private initiative. In the 80’s for the first time a number of banks in the private sector were allowed. Subsequently in the mid 90’s some more banks in private sector commenced operations.

When the nation was in the grip of severe recession, Govt. took the farsighted decision to allow in the private sector to revive the economy of the country. Several dynamic entrepreneurs came forward for establishing a bank with a motto to revitalize the economy of the country. National Bank Limited was born as the first hundred percent Bangladeshi owned Bank in the private sector. From the very inception it is the firm determination of National Bank Limited to play a vital role in the national economy. The then President of the People’s Republic of Bangladesh Justice Ahsanuddin Chowdhury inaugurated the bank formally on March 28, 1983 but the first branch at 48, Dilkusha Commercial Area, Dhaka started commercial operation on March 23, 1983. The 2nd Branch was opened on 11th May 1983 at Khatungonj, Chittagong.

Since the very beginning, the Private Banks exerted much emphasis on overseas operation and handled a sizeable quantum of homebound foreign remittance. The Private Banks established extensive drawing arrangement network with other Private Banks and Exchange Companies located in important countries of the world. Expatriates Bangladeshi wage earners residing in those countries can now easily remit their hard-earned money to the country with confidence, safety and speed. Banking is not only a profit-oriented commercial institution but it has a public base and social commitment. Admitting this true Private Banks is going on with its diversified banking activities. Private Banks introduced National Bank Monthly Savings Scheme (NMS), Special Deposit Scheme, Consumer’s Credit Scheme and NBL Housing Loan, NBL Small Business Loan, Small House Loan Scheme, Festival Small Business loan etc. to combine the people of lower and middle-income group. Inspired by its social obligation and commitment and responsibility, Private Banks has been running a School and College up to Class XII solely on its own guardianship. From the very inception, this institution has been maintaining a good track record of results at the SSC and HSC Examinations. Conducted by a well-educated and trained team of teachers, reputation of this institution has been increasing day-by-day as a result of their relentless and sincere endeavor.
Private Banks provides us with certain essential services without which we cannot think of working and living in the modern world. If we have more money than we need at the moment, we deposit it in banks for safekeeping; if we need to transfer money to someone, we do it through cheques, letters of credit, drafts or other such banking devices; if we need to set up an industry and we do not have enough money, we go to banks to borrow money and even more amazingly, now-a-days we even borrow money from banks to buy a piece of land, a car, an apartment or computer.

Private Banks do all these things not out of any altruistic motives of helping us out of our financial problems or difficulties but for the pure and simple purpose of earning a hefty profit. For every financial service a bank provides, it takes a fee or a service charge along with a hefty interest on the borrowings.

To Private Banks, money is a commodity to be bought and sold at the highest possible profit and most of the money they trade in, does not belong to them at all but belongs to people who deposit the money in Private Banks. Unregulated by the State, the profit motive and greed can overcome every other consideration and lead to the sort of financial and economic crisis that we see devouring the world right now.

Banks in Bangladesh, particularly the privately owned ones, are no different than banks anywhere else, in the sense that they will attempt to make a buck if they can, however immoral the act is, both from the point of view of law and morality. The realities of Bangladesh however, are different from many other parts of the world; a majority of our people are so poor that they can hardly afford two square meals a day and naturally banks to do not provide access to such people because such people are not really “invest-able” and they do not have the means to permit banks to garner profits.
To absolute extent private banks in Bangladesh are preserves of the rich and the powerful that have little if any moral obligations towards anyone least of all to the common man or woman and who have no scruples in maximizing profits in whatever way they can. The decade of the 1990s saw a massive proliferation of private banks in Bangladesh and those who invested in and sponsored these banks had massive amounts of surplus “black money” which they needed to put somewhere and so our nation’s politicians, many of whom were themselves masters of these “black money”, with the active support and participation of the State’s financial and other regulatory institutions found a way out to legalize and secure these colossal fortunes through the establishment and institution of banks.

Private banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products. The private banks in bangladesh are as follows:
• AB Bank Limited
• BRAC Bank Limited
• Eastern Bank Limited
• Dutch Bangla Bank Limited
• Dhaka Bank Limited
• Islami Bank Bangladesh Ltd
• Pubali Bank Limited
• Uttara Bank Limited
• IFIC Bank Limited
• National Bank Limited
• The City Bank Limited
• United Commercial Bank Limited
• NCC Bank Limited
• Prime Bank Limited
• SouthEast Bank Limited
• Al-Arafah Islami Bank Limited
• Social Investment Bank Limited
• Standard Bank Limited
• One Bank Limited
• Exim Bank Limited
• Mercantile Bank Limited
• Bangladesh Commerce Bank Limited
• Mutual Trust Bank Limited
• First Security Bank Limited
• The Premier Bank Limited
• Bank Asia Limited
• Trust Bank Limited
• Shahjalal Bank Limited
• Jamuna Bank Limited

2.2 Rules & Regulations of Bangladesh Bank for
Private Banks

Bangladesh Bank (BB) regulates and supervises the activities of all banks. The BB is now carrying out a reform program to ensure quality services by the banks. Bangladesh Bank (BB) has been working as the central bank since the country’s independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. BB is also responsible for planning the government’s monetary policy and implementing it thereby. BB usually follows the Banking Companies Act, 1991 to supervise other banks. The Act has 123 sections but all 3sections are not applicable for Private Banks. The sections of the Banking Companies Act, 1991 are applicable for Private Banks in Bangladesh is as follows:

4. Power to suspend operation of this Act. :

(1) The Government if, on a representation made by the Bangladesh Bank in this behalf it is satisfied that it is expedient so to do, may by notification in the official Gazette suspend for at most 60 days the operation of all or any of the provisions of this Act in relation to any specified banking company.
(2) The Government may, by notification in the official Gazette, extend from time to time, the period of any suspension under sub-section (1) for such period or periods, not exceeding 60 days at one time, as it thinks fit, so however that the total period does not exceed one year.
(3) Notifications issued under this section shall be submitted to the national parliament as follows:
• If it is in session, within 10 days of the issue of the notification, and
• If it is not in session, within 10 days of the beginning of the session following the issue of the notification.
7. Business of Banking Companies:
(1) In addition to the business of banking, a banking company may engage in all or any of the following forms of business, namely:-
o The borrowing, raising or taking up of money;
o The lending or advancing of money either upon or without security;
o The drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange,
o The granting and issuing of letters of credit, traveler’s checks, and circular notes;
o The buying, selling and dealing in gold and silver coins and coins of other metals;
o The buying and selling of foreign exchange including foreign bank notes;
o The negotiating of loans and advances;
o The acquiring, holding, issuing on commission, underwriting and dealing in stocks,
o The purchasing and selling of bonds, scrips or other forms of securities
o The receiving of all kinds of bonds or other valuables on deposit or for safe custody or otherwise;
o Providing vaults for the safety of the deposits
o The collecting and transmitting of money against securities;
o Acting as agents for the Government, local authorities or any other person;
o Contracting for public and private loans and negotiating and issuing the same;
o The carrying on and transacting of every kind of guarantee and indemnity business;
o Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company;
(2) No banking company shall engage in any form of business other than those referred to in subsection (1).
10. Disposal of non-banking assets:
(1) Notwithstanding anything contained in section 7, no banking company shall hold any immovable property howsoever acquired, except such as is required for its own use, for any period exceeding 7 years from the acquisition thereof or from the commencement of this Act, whichever is later.
(2) Notwithstanding anything contained in subsection (1), the Bangladesh Bank may extend the period mentioned in subsection (1) by a period not exceeding 5 years where it is satisfied that such extension would be in the interest of the depositors of the banking company.
(3) For the purpose of this section, property a substantial portion of which is used by a banking company for its own genuine requirements shall be deemed to be property for its own use.
13. Minimum paid up capital and reserves:

(1) Unless it has paid-up capital and reserves of such aggregate value as is required by this section,-
• No banking company in existence on the commencement of this Act shall, after the expiry of two years from such commencement, if it is incorporated in Bangladesh and of six months, if it is incorporated outside Bangladesh, carry on business in Bangladesh;
• No other banking company, except the banking companies mentioned in clause a), shall commence its business after the commencement of this Act:
Provided that the Bangladesh Bank may, if it thinks fit in any particular case, extend the period referred to in this sub-section by a further period not exceeding one year in the case of banking companies incorporated in Bangladesh and six months in the case of banking companies incorporated outside Bangladesh.

(2) In the case of new banks and special banks the amount of the paid-up capital and reserves shall not be less than the amount determined in or under the Act under which the said banks have been established, or an amount representing 6 percent of the total demand and time liabilities of such company at the close of the last working day of the previous financial year, whichever is higher.

(3) The amount of paid-up capital and reserves of all banks except new banks and special banks shall not be less than one hundred million Takas, or an amount representing 6 per cent of the total demand and time liabilities of such company at the close of the last working day of the previous financial year, whichever is higher.

(4) In the case of a banking company incorporated outside Bangladesh the amount of its paid-up capital and reserves shall not at the close of any working day of such company be less than one hundred million Takas, or an amount representing 6 per cent of the total demand and time liabilities of such company in Bangladesh at the close of the last working day of the previous financial year, whichever is higher.

(5) Any amount deposited with the Bangladesh Bank under subsection (4) by any banking company incorporated outside Bangladesh shall, in the event of the company ceasing for any reason to carry on its banking business in Bangladesh, be an asset of the company and the claims of the creditors of the bank in Bangladesh on this amount shall be a first charge.

(6) If any dispute arises in computing the amount of the paid-up capital and reserves of any banking company, the decision of the Bangladesh Bank thereupon shall be final.

(7) If the Bangladesh Bank is convinced that any bank fails to preserve the minimum revised capital and reserves in accordance with this section, the banking company concerned shall be forced to pay such fine as may be prescribed.
14. Regulation of paid-up capital subscribed capital and authorized capital and voting rights of share-holders:
(1) No banking company incorporated in Bangladesh, except new banks and special banks shall commence its business in Bangladesh unless it satisfies the following conditions, namely:-
• That its subscribed capital is no less than one half of the authorized capital;
• That its paid-up capital is no less than one half of the subscribed capital;
• that if the capital is increased it complies with the conditions prescribed in clause a) and b) within such period, not exceeding two years, as the Bangladesh Bank may determine;
• That its capital consists of ordinary shares only;
• That, subject to the provisions contained in clause f), the voting rights of any of its shareholders are proportionate to the contribution made by him to the paid-up capital of the company;
• That the voting rights of any one shareholder, except those of the Government, do not exceed five per cent of the total voting rights of all the shareholders.

(2) Notwithstanding anything contained in any law for the time being in force or in any contract or instrument, no suit or other proceeding shall be filed against any person registered as the holder of a share in a banking company other than a new or special bank on the ground that the title to the said share has been vested in a person other than the registered holder:
Provided that nothing contained in this subsection shall apply in case that a suit or other proceeding is filed by one of the following persons, namely:-

• Any person having obtained the transfer of a share from a registered shareholder in accordance with the laws relating to the transfer of shares;
• Any other person acting on behalf of a minor or lunatic person on the ground that he holds as the registered holder the share on behalf of the minor or lunatic.

(3) Every chairman, managing director, director or chief executive officer, by whatever name called, and all of his family members, of any banking company except new and special banks shall transmit to the Bangladesh Bank through that banking company accounts containing full particulars of the extent and value of his holding of shares, assets and obligations, whether directly or indirectly, in the said banking company or any other company and of any change in the extent of such holding or any variation in the rights and duties attaching thereto and such other information relating to those shares, assets and obligations as the Bangladesh Bank may, by order, require and in such form and at such time as may be specified by the Bangladesh Bank in the order.
15. Election of new directors:
(1) The Bangladesh Bank may, by order, require any banking company except new and special banks to call a general meeting of the company within two months from the date of the order or within such further time as the order may allow in this behalf, to elect in accordance with the provisions of this ordinance new directors.
(2) Every director elected under subsection (1) shall hold office until the date up to which his predecessor would have held office, if the election had not been held.
(3) Any election duly held under this section shall not be called in question in any court.
(4) The Bangladesh Bank may, by general order, make provisions to the effect that no banking company except new and special banks shall appoint its managing directors or chief executive officers, whatever be the name of the office, without the previous approval of the Bangladesh Bank and no managing director or chief executive officer appointed in this way shall be removed from his office, acquitted or dismissed without the previous approval of the Bangladesh Bank.
16. Restriction on the period of office of directors:
(1) No person except the chief executive officer of a banking company, by whatever name called, shall hold the office of a director for more than six years in continuance.
Explanation- In this subsection a period of six years in continuance shall be equivalent to a interval of no less than three years.
(2) No person having hold an office for a period of six years without cessation according to subsection (1) shall be again eligible as director unless three years have passed since the end of the said period.
17. Vacancy of the office of a director:
(1) If any director of a banking company fails to-
• pay advances or loans accepted by him or installments or interests on that advances or loans, or
• pay the money he is bound to for any security, or
• accomplish any duty to be accomplished by him and the responsibility for which he has taken on in writing,
and the said banking company gives him order through a notice by the Bangladesh Bank to pay the said advances, loans, installments, interests or money or to accomplish the said duties and he fails to accomplish those duties and payments within two months after receipt of the order, in that case the office of director shall be vacant beginning from the expiry of the said term.
(2) Whoever has received a notice under sub-section (1) may, within thirty days after receipt of the notice, send his statements on the subject in question, if any, in written form to the Bangladesh Bank, and a copy thereof to the banking company who issued the notice.
(3) The decision of the Bangladesh Bank on any statement under subsection (2) shall be final.
19. Restrictions on commission of sale of shares, brokerage, discount etc.: Notwithstanding anything to the contrary in sections 105 and 105 A of the Companies Act, no banking company shall pay out directly or indirectly by way of commission, brokerage, discount or remuneration or otherwise in respect of any shares issued by it, any amount exceeding two and one-half per cent of the paid-up value of the said shares.
20. Prohibition of charge on unpaid capital: No banking company shall create any charge upon any unpaid capital of the company and any such charge, if created, shall be invalid.
21. Prohibition of floating charge on assets:
(1) Notwithstanding anything contained in section seven no banking company shall create a floating charge on the undertaking or any property of the company or any part thereof, unless the creation of such a floating charge is certified in writing by the Bangladesh Bank as not being detrimental to the interests of the depositors of the banking company.
(2) Any charge mentioned in subsection (1) shall, without the certificate of the Bangladesh Bank, be invalid.
(3) Any banking company aggrieved by the refusal of certificate under subsection (1) by the Bangladesh Bank may, within ninety days from the date on which such refusal is communicated to it, appeal to the Government.
(4) The decision of the Government where an appeal has been prefered to it under subsection (3) or of the Bangladesh Bank where no such appeal has been preferred shall be final.

22. Restrictions on the payment of dividends:
(1) No banking company except new and special banks shall pay any dividend on its shares, unless-
• All its capitalized expenses including preliminary expenses, organization expenses, commission for share selling and brokerage, losses and other items have been completely written off, or
• It manages to preserve constantly six per cent of its temporary and demand deposits as discharged and reserved capital.

(2) Notwithstanding anything to the contrary contained in subsection (1) or in the Companies Act, any banking company may pay dividends on its shares without writing off under the following circumstances:

• In any case where the depreciation of its investments in approved securities has not actually been capitalized or otherwise accounted for as a loss,
• In any case where adequate provision for the depreciation in the value of its investments in shares, debentures or bonds (other than approved securities) has been made to the satisfaction of the auditor of the banking company,
• In any case where adequate provision for bad debts has been made to the satisfaction of the auditor of the banking company.

24. Reserve Fund:
(1) Every banking company incorporated in Bangladesh shall create a reserve fund and if the amount in such fund together with the amount in the share premium account is not less than its paid-up capital or the amount of the premium settled from time to time in this behalf for any banking company by the Bangladesh Bank, shall, out of the profit as disclosed in the profit and loss account prepared under section 38 and before any money is transferred to the Government or declared as profit, transfer to the reserve fund a sum equivalent to not less than twenty per cent of that profit.
(2) Where a banking company appropriates any money from the reserve fund or the share premium account for any purpose, it shall, within twenty-one days from the date of such appropriation, report the fact to the Bangladesh Bank:
Provided that the Bangladesh Bank may extend the period for such report or condone any delay in the making of such report.
25. Cash Reserve:

(1) Every banking company, not being a scheduled bank, shall maintain in Bangladesh by way of cash reserve in cash with itself, or with the Bangladesh Bank or its agent, or both banks in equal parts, a sum equivalent to not less than five per cent. of its time and demand liabilities:
Provided that the Bangladesh Bank may, in any particular case, change, by notification in the official Gazette and subject to the conditions settled therein in this behalf, the requirements relating to the cash reserve or repeal, on previous approval by the Government, such requirements.

Explanation- (1) For the purpose of this section “liability” shall not include the paid-up capital or the cash reserves or the credit balance in the profit and loss account of the banking company or the amount of any loan taken from the Bangladesh Bank

(2) Every banking company, not being a scheduled bank, shall, if the Bangladesh Bank requires any information regarding funds reserved in accordance with the provisions of subsection (1), submit a report containing that information and signed by two officers of the said company to the Bangladesh Bank.

(3) Every banking company failing to submit a report in accordance with the provisions of subsection (2) shall be punishable by the Bangladesh Bank with a fine of no more than 2500 Taka for every day it fails so to do.

(4) If a report submitted under subsection (1) shows that the banking company which submitted the report maintained an amount of cash less than the amount determined under subsection (1) at the close of any working day preceding the submission of the report, the Bangladesh Bank may order the banking company to pay it for those days a penal interest on the said deficit exceeding by three per cent the bank rate, and if a subsequent report shows again that the said banking company maintained an amount of cash less than the amount determined under subsection (1) at the close of any working day preceding the day determined for the submission, the Bangladesh Bank may order the banking company to pay it for those days a penal interest on the said deficit exceeding by five per cent the bank rate.

(5) If a banking company has been ordered on the basis of a report submitted by itself to pay a penal interest exceeding by five per cent the bank rate under subsection (4) and if a subsequent report shows that it maintains an amount of cash less than the amount determined under subsection (1), the Bangladesh Bank may order the said banking company not to accept new deposits from such date as the Bangladesh Bank may determine, and if the said banking company accepts any deposit in disregard of that order, the Bangladesh Bank may inflict a fine of no more than 5000 Taka on it for every day it does so, to be paid to the Bangladesh Bank.

(6) Any fine inflicted under this section shall be realized within such period as the Bangladesh Bank may determine and if it has not been realized within the said period, it shall be recoverable as public demand.
26. Subsidiary Companies:
(1) A banking company shall not form any subsidiary company except a subsidiary company formed for one of the following purposes, namely:-
• The undertaking and executing of trusts;
• the undertaking of the administration of any property as executor, trustee or otherwise;
• The provision of safe vaults in order to provide for the security of the deposits;
• The undertaking of the business of banking in accordance with the directions of the shariat;
• With the previous permission in writing of the Bangladesh Bank,-
o The carrying on of the business of banking exclusively outside Bangladesh;
o The carrying on of the business of banking on the basis of deposits received from nonresidents in foreign cash and which are freely transferable;
• With the previous permission of the Government, the promoting of such business as may, in the opinion of the banking company, help to expand and develop the business of banking in Bangladesh, advance the interests of the people or be useful in any other way.
• Save as provided in subsection (1), no banking company shall hold shares in any company whether as pledge, mortgagee or absolute owner of an amount exceeding the lesser of the following amounts, namely:-
o Thirty per cent of the total amount of the paid-up and reserve capital of the said company, or
o Thirty per cent of the paid-up capital of the said company:

Provided that no banking company which is, on the date of commencement of this Act, holding shares of an amount exceeding the amount approved by this subsection shall be liable to any penalty therefore, if the said banking company-
• Reports the matter without delay to the Bangladesh Bank, and
• Reduces the amount of the said shares to the amount approved by the provisions of this subsection within such period, not exceeding two years from the commencement of this Act, as the Bangladesh Bank may determine.

(3) Notwithstanding anything contained in subsection (2), no banking company shall, after the expiry of one year from the date of commencement of this Act, hold shares, whether as pledged, mortgagee or absolute owner, in any company in the management of which any managing director or manager of the banking company is concerned or interested.
27. Restrictions on loans and advances: No banking company-
• Shall make any loans or advances on the security of its own shares;
• Shall, without security, make any loan or advance to any of the following persons or institutions, or make any loan or advance in cases where those persons or institutions are guarantors-
o any of its directors;
o any member of the family of any of its directors;
o any commercial institution or private company in which the banking company itself, or any of its directors or any member of the family of any of its directors is involved as director, owner or shareholder;
o any public limited company which is in some way or other controlled by the company itself, or any of its directors or any member of the family of any of its directors, or the shares of which are held by any of the said persons to such an extent as to give it control of no less than twenty per cent of the voting rights.

28. Restrictions on the respite of loans:
(1) No banking company shall, without the previous approval of the Bangladesh Bank, grant respite of loans taken from it by any of the following persons or institutions,-
• Any of its directors, and his family members;
• A commercial institution or company in which any director of the banking company is interested as landowner, co-director, managing agent; and
• Any such person in whom any director of the banking company is interested as partner or landowner.

(2) Any respite of loans in disregard of the provisions of subsection (1) shall be illegal, and whoever is responsible for such a respite shall be punishable with imprisonment for no more than three years or a fine of no more than thirty thousand Taka or both.

29. Power of the Bangladesh Bank to control the giving of advances:

(1) Whenever the Bangladesh Bank is satisfied that it is necessary or expedient so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular and when the policy has been so determined, all banking companies or the banking company concerned shall be bound to follow the policy so determined.
(2) Without prejudice to the generality of the power vested in the Bangladesh Bank under subsection (1), the Bangladesh Bank may give directions, strictly to be complied with, to banking companies either generally or to any banking company or group of banking companies in particular with regard to the following items,-
• The upper limit of the loan to be given;
• The ratio to be maintained between the total amount of an advance and loans of little amount or of other kind;
• The purposes for which advances may or may not be given;
• The upper limit of advances to be given to any banking company or any group of banking companies or person or assembly of persons;
• The limit of interests on secured advances and advances; and
• The rate of interest to be charged on advances.
30. Jurisdiction of Courts regarding interest rates: Notwithstanding any Act for the time being in force, no transaction between a banking company and any of its debtors shall be triable by a Court on the mere ground of excessiveness of the interest rate taken by the banking company.
32. Restrictions on opening of new, and transfer of existing places of business:
(1) Without the previous permission in writing of the Bangladesh Bank-
• No banking company shall open a new place of business in any part of Bangladesh or change the location of an existing place of business; and
• No banking company incorporated in Bangladesh shall open a new place of business outside Bangladesh or change the location of an existing place of business outside Bangladesh.

(2) The provisions of subsection (1) shall not apply to the opening for a period not exceeding one month of new places of business for the purpose of offering bank services temporarily on the occasion of exhibitions, meals, conferences or other like occasions:
Provided that information of such opening is given to the Bangladesh Bank within one week of the date of opening.

(3) The Bangladesh Bank may, before giving the permission referred to in subsection (1) to any banking company, require to be satisfied by an inspection under section 44 or otherwise regarding any subject of that banking company.

33. Maintenance of liquid assets: Every banking company shall maintain in Bangladesh in cash, gold or unencumbered approved securities valued at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than the percentage of its time and demand liabilities the Bangladesh Bank determines from time to time.
36. Half-yearly report etc…
(1) Every banking company shall submit every half year, on the thirty-first day of December and the thirtieth day of June, a report showing its assets and liabilities in Bangladesh in the prescribed form and manner to the Bangladesh Bank.
(2) The Bangladesh Bank may, by notice in writing, require banking companies generally, or any banking company in particular, to furnish it within the time specified therein with statements and information’s etc. relating to the banking business including other forms of business the banking company may be engaged in.
(3) The Bangladesh Bank may, without prejudice to the generality of the power granted under subsection (2), call from time to time for information regarding the investments of a banking company in industrial enterprises, commerce or agriculture.
37. Power to publish information: The Bangladesh Bank may, if it considers it in the public interest so to do, publish in consolidated form or otherwise any information relating to loans or advances seized under this Act and outstanding for more than thirty days.

38. Accounts and balance sheet:
(1) At the expiration of each financial year every banking company incorporated inside or outside Bangladesh shall, in respect of all business transacted by it and through its branches within that year, prepare a balance sheet and profit and loss account as well as a financial report as on the last working day of the year in the forms set out in the first schedule or as near thereto as possible.
(2) The balance sheet, profit and loss account and financial report of any banking company-
• Shall be signed in the case of a banking company incorporated in Bangladesh, by its managing director or its principal officer and where there are more than three directors of the banking company, by at least three of those directors, and where there are not more than three directors, by all of them;
• Shall be signed in the case of a banking company incorporated outside Bangladesh, by the manager or agent of the principal office of the company in Bangladesh and by another officer next in seniority to the manager or agent.

39. Audit:

(1) The profit and loss account and financial report of a banking company shall be audited in accordance with the balance sheet prepared under section 38 by a person qualified under the Bangladesh Chartered Accountants Order, 1973 (P.O. No. 2 of 1973), or any other law for the time being in force to be an auditor of companies and approved by the Bangladesh Bank to be qualified to audit a banking company.

(2) The auditor referred to in subsection (1) shall have the powers and duties of, and shall be subject to the obligations and penalties imposed on, auditors of companies by Section 145 of the Companies Act.

40. Submission of reports: The accounts, balance sheets and reports referred to in section 38 and the auditor’s report as approved by the Management Board, or as the case may be, by the shareholders in the General Meeting of the company shall be published in the prescribed manner and three copies of each shall be furnished to the Bangladesh Bank within three month of the close of the period to which those accounts, balance sheets and reports relate:
Provided that the Bangladesh Bank may extend the period for submitting the reports by a further period not exceeding three month.
41. Transmission of balance sheets etc. to Registrar: Where a banking company in any year submits its financial report, profit and loss account, balance sheet and the auditor’s report in accordance with the provisions of section 40 it may, when it is a private company, at the same time send also to the registrar three copies of that balance sheet, account and report, and where such copies have been sent, it shall not be necessary for the company to send again copies of that balance sheet, account and report to the registrar as required by the provisions of section 134 (1) of the Companies Act, and those copies shall be charged with the fees to be paid in accordance with that section and they shall be deemed in all respects copies submitted under that section.
42. Display of audited balance sheets by banking companies incorporated outside Bangladesh: Every banking company incorporated outside Bangladesh-
• Shall display a copy of the last balance sheet and profit and loss account prepared under section 38 at any day proceeding the first Monday of February of the year which follows the year that balance sheet and account relates to in a conspicuous place in its principal office and every branch office in Bangladesh and shall keep it uninterruptedly displayed until its subsequent balance sheet and account are displayed in the same manner;
• Every such banking company shall in addition display in like manner copies of its complete audited balance sheet and profit and loss account relating to its business as soon as they are available and shall keep the copies uninterruptedly displayed until such subsequent balance sheet and account are displayed.

2.3 Product and Service offered by the Private
Banks

Private Banks offers different types of corporate and personal services involving all segments of the society within the purview of the rules and regulations as laid by the Central Bank and other Regulatory Authorities. In my study this 10 Private Banks commonly offers the following services:

Deposit Products:

1. All types of Deposit Accounts.

2. Special Deposit Schemes:
• Monthly Savings Scheme
• Double/ Triple Growth Deposit Schemes
• Monthly Benefit Scheme
• Marriage Scheme
• Education Savings Scheme
• Loan Products

3. SME Credit Scheme:
• Double Loan (Double amount of loan of FDR value)
• Loan for purchase of possession right for shop/ business
• Festival Credit
• Shop/business office renovation loan
• Loan for purchasing capital machinery and vehicle
• Working capital/ Trade Finance
• Flexible working capital loan
• Loan for Herbal industry
• Loan for women Entrepreneur

4. Retail Credit Products:
• Any purpose Lifestyle loan
• Household Durable loan
• Loan against salary
• Study loan
• CNG convocation loan
• Debit and Credit Card
• Car loan
• Doctors’ loan
• Travel loan
• Consumer loan

5. Electronic Products:
• Real time On-line any branch banking
• 24 hours ATM
• Debit Card
• Credit Card
• Telephone banking
• SMS banking.
• Internet banking.
banking.
• Internet banking.
2.4 Capital Structure of the Private Banks

The capital structures of the ten (10) private banks in 2007 are:

Figure in million Taka

2.5 The Financial Performance of the Private Banks at a glance

Capital adequacy ratio (%) 10.75 11.23 – 18.61 12.61 10.19. 12.42 12.69 10.25 13

2.6 Operating Results of the Private Banks

In 2007 the operating profits after tax of the ten (10) private banks are:

Figure in million Taka

2.7 Corporate Social Responsibility (CSR) of the
Private Banks

Arab Bangladesh Bank Foundation (ABBF) is the vehicle for specific program oriented CSR activities of the bank. AB has organizing “Siraj Smirity Cricket Tournament” an age-group competition conducted at the district levels for the last 10 years in a row. AB bank has been sponsoring the Golf Tournament at the Bhatiary Golf Club for the last 10 years in a row. Banks also run a media campaign for SIDR rehabilitation program. Foundation also contributed taka 2.0 lack towards Sabina Yasmeen Chikitsha Shahayok Committee fund for treatment of his renowned singer of the soil.

EXIM bank foundation has already been registered and obtained certificate of incorporation in August’07. it is solely dedicated to the welfare of the helpless and poor people of the society. The bank contributes 2% of its operating profits to the foundation to undertake various charitable activities.

The sponsors while setting up the Standard bank committee to donate a portion of profit every year for saving the common people as well as contribute for social development. In the year 2007 Bank donated a total amount of TK. 1, 40, 71,630.00 to government relief fund.

In response to social commitment and responsibility, City Bank has always contributed to the society as a good corporate citizen. For medical treatment and education of under privileged and intellectually disabled children, bank has been assisting through SEID Trust. During the year 2007 bank has contributed to Center for the Rehabilitation of the Paralyses (CRP) Saver. In a view to assist the SIDR affected people bank has donated to Chief Advisors Relief Fund.

Mutual Trust Bank donated TK 50 lack to the Chief Advisors Relief and Welfare Fund in aid of the flood affected people. The bank also distributed dry food among the flood victims.

Jamuna Bank Limited is committed to the case of humanity and fulfilling social responsibilities. JBL contributed Tk. 50 million to Atish Dipanker University, one of the leading universities of the country. The bank also help the famous singer Sabina Yasmin by contributing TK. 0.5 million for treatment. Besides, the bank donated TK. 5.00 million to Chief Advisor’s Relief Fund for the flood affected people and TK. 2.5 million to the Army Chief of Staff’s Relief Fund for helping the SIDR affected people.

Southeast Bank Limited banking business depends on a network of relationship with their customers, employees, shareholders, suppliers, business associates and the community. Their corporate social responsibility is about addressing the needs of all the parties in a way that both advances the bank’s business and makes a positive contribution to the society.

2.8 Review of Literature

Private Banking sector is now a well-established means of financing in Bangladesh. Since its introduction, Private Banks has become extremely popular and convenient for both large and small businesses. Private Banks have now greatly expanded their spheres of activity and their product and services range from the traditional Banking products to term loans, short term finance, factoring, home and car loans, term deposit products, syndication services, merchant banking and a host of other such offerings.

Financial reporting has long been recognized as one of the qualitative attributes of general purpose financial reports (AICPA, 1973; APB, 1970; FASB, 1979). Empirical research on financial reporting provides evidence that the degree of financial reporting of information release has information content (Beaver 1968) and affects firm value (Chambers & Penman, 1984; Givoly & Palmon, 1982; Kross & Schroeder, 1984; Schwartz & Soo, 1996). Recognizing the theoretical and practical importance of financial information, regulatory agencies around the world have set statutory maximum time limits within which public companies are required to issue audited financial statements to shareholders and other external users and file them with concerned regulatory bodies (for a summary of maximum allowable reporting lags in different countries, see Alford et al. 1993, pp 188-190). Most organized stock exchanges have similar or more stringent reporting and filing requirements.

Financial statements prepared for this purpose meet the common needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions since they largely portray the financial effects of past events and do not necessarily provide non-financial information. Private Banks in Bangladesh compliance with the required rules and regulations in order to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

It is also important to issue audited financial statements in timely. The motivation of this study is derived from a long-standing problem of a lack of provision of corporate financial information in Bangladesh. A survey of 650 Bank Company’s financial statement users and preparers of financial reports in Bangladesh reveals that an overwhelming majority of respondents – both preparers and users (93.8%) – believe that the observed time lag in publishing corporate annual reports is too long and should be reduced substantially (Karim, 1995). While approximately 10% of listed companies do not publish annual reports even three years after fiscal year-end dates, considerable delays are observed among those who publish their annual reports.

Dyer and McHugh (1975) pioneers in research on financial reporting, find that financial reporting is inversely related to client size, directly related to busy season (June 30) year-ends, and related to relative profitability. Whittred (1980b) replicates Dyer and McHugh (1975) and finds that the average reporting of Australian listed companies have not significantly changed after the revision of a listing requirement allowing companies to complete financial statement. Whittred (1980a) finds that the incidence of qualified report delays the release of financial statements and that the delay increases with seriousness of the qualification.

Davies and Whittred (1980) extend Dyer and McHugh (1975) and Whittred (1980b) by adding three new variables, namely, audit firm size, auditor change, and the presence of extraordinary items to the conventional audited attributes of size, profitability and year-end dates. They find that ‘small’ and ‘large’ companies are significantly more compliance with legislative rules and regulations in preparing financial statements than ‘moderate’ sized companies. Among the new variables, auditor size and extraordinary items are found to explain little variation in any of the defined while auditor change significantly increases preliminary reporting misstatement with little influence on other misstatement measured in the study.

Courtis (1976) finds no significant association between reporting and corporate size, age, number of shareholders, and length of annual report in New Zealand. However, he finds an inverse relationship between absolute profit and reporting. He also observes that fuel and energy and finance companies were faster reporters than companies in service industries and in mining and exploration.

Liu, Ryan, Wahlen (1997) finds in many countries financial reporting Standards require that Private Banks loan loss provisions reflect changes in management’s expectations of future loan losses. For some Private Banks these provisions are largely discretionary (Diaz, McLeay, 1996). Some Private Banks currently gauge potential loan losses on a reasonably effective case-by-case assessment (Griffin, 1998; Mohrman, 1996). IASs approach requires more thorough analysis, including the use of historic default ratios and sophisticated scenario modeling. Banking institutions will need to demonstrate and document the statistical validity of their evaluations and disclose about the setting up of provisions. According to IAS 30 a bank “shall disclose the nature and amount of contingent liabilities and commitments” in accord to IAS 37 (Par. 26). IAS 37 distinguishes “provisions from contingent liabilities”. Provisions are liabilities and are recognized as such if all the recognition criteria are met. Contingent liabilities are not recognized on the balance sheet because either: a) they are possible, rather than present, obligation – that is, they are not liabilities; b) they are present obligations but they do not meet the recognition criteria for a provision – that is, they are liabilities but that do not meet the recognition for liabilities. According to IAS 37 (par. 14) a provision should be recognized when: “a) an enterprise has a present obligation as a result of a past event; b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; c) a reliable estimate can be made of the amount of the obligation”. If these conditions are not met, a provision should not be recognized. In many countries banks use different criteria to set up provisions (Beattie, Casson, Dale, McKenzie, Sutcliffe and Turner, 1995).

As an example Private Banks of Italy rules (mandatory for all Italian financial institutions for financial statements closed before 01.01.05) state that a Private Banks can recognize provision for liability of uncertain timing or amount (Marasca, 2003). According to National Bank rules a Private Banks can also recognize provisions in 2 more situations: a) to cover “less than probable” (rischio eventuale) credit risk; b) covering general business risk. These don’t` meet the condition for provision recognition under IAS 37 and so the first time adoption could generate some problems.

Financial institutions, particularly Private Banks, are at the center of the debate over fair value accounting (Nelson, 1996). IAS 39 requires that all financial assets and all financial liabilities, including all derivatives, are recognized on the balance sheet and measured at fair value except for those unquoted equity securities whose fair value cannot be measured reliably. There has been considerable controversy in the accounting literature about the pricing of fair value financial assets (Ryan, Herz, Iannacconi, Maines, Palepu, Schrand, Skinner, Vincent, 2002b). The arguments for amortized cost accounting and for fair value accounting for financial instruments has been especially intense with regard to the Private banks since they hold a large percentage of their assets and liabilities as financial instruments that have to reported (Gray, 2003). Institutions will need to adopt fair value across a diverse range of contracts and incorporate these changes into reporting systems (Barth and Landsman, 1995). This introduces significant systems requirements, particularly for those banking institutions that lack the sophisticated trading functions used for pricing to market on a real-time basis (Gebhardt, Reichardt and Wittenbrink, 2004). Further complications arise from the requirement to split out and separately fair value embedded derivatives (Woods and Margison, 2004), such as mortgage loans with prepayment options and guaranteed equity bonds.

Private Banks wishing to adopt hedge accounting need to get compliance with the requirements. Strict conditions must be met before hedge accounting is applied (Pwc, 2003). Private Banking sectors will need to consider the cost/benefit equation of developing systems to achieve better financial reporting system. (Ryan, Herz, Iannacconni, Maines, Palepu, Schrand, Skinner, Vincent, 2002a).

Many models which contains reasons for international private banks financial reporting differences have been proposed in literature (Belkaoui, 1995; Doupnik and Salter, 1995; Nobes and Parker, 1995; Radebaugh and Gray, 1993; Choi and Mueller, 1992; Gray, 1988; Zysman, 1983; Nair and Frank, 1980) but no a general theory. Nobes (1998 and 2004) developed a model to explain international financial reporting differences. According to Nobes (1998) the major reason in financial reporting is different purposes for that reporting. He suggested that financing reporting system is relevant in determining the purpose of financial system. Zysman (1983) suggests 3 types of financing systems: a) capital market based, in which prices are established in competitive markets (UK and US); b) credit based system: governmental, in which resources are administrated by the government (France and Japan); c) credit based system: financial institutions, in which private banks and other financial institutions are dominant (Germany).

Javed Siddiqui, Jyotirmoy Podder (Managerial Auditing Journal Volume: 17, Page: 502 – 510, 2002) The study examines the effectiveness of financial audit of banking companies operating within Bangladesh. The scope of bank audit has also been examined. The audited financial statements of 14 sample banking companies have been considered. The study identifies seven sample companies that have actually overstated their profits. In spite of that, the firms auditing those financial statements have failed to issue qualified audit reports. Therefore, the study questions the level of independence, objectivity and competence of the auditors assigned for auditing banking companies.

Thorsten Beck (CentER, Department of Economics, Tilburg University, World Bank Policy Research Working Paper No. 3938, June 1, 2006) While Bangladesh has embarked on a path to reform its financial reporting system, most prominently by privatizing its government-owned banks, the Nationalized Commercial Banks (NCBs), a sustainable long-term expansion of the financial reporting system requires a more substantial change in the role of government. Using recent research and international comparisons, this paper argues that the government should move from its role as an operator and arbiter in the financial reporting system to a facilitator role. This implies not only divestment from government-owned banks, but also private banks failure resolution framework that focuses on intermediation and not on the rescue of individual institutions. Most important, the government should move away from the implicit guarantee for depositors and owners to applying the existing limited explicit deposit insurance for depositors, while simultaneously relying more on market participants to monitor and discipline banks instead of micro-managing financial institutions. This redefinition of government’s role should not be limited to the banking system, but applies to other segments of the financial system, such as capital markets and the micro-finance sector, and should be seen as an essential element in the governance reform agenda and in the movement from a relationship-based economy to a market and arms-length economy.

Super Admin (Published in 28 August 2006) “GAAP principles have been developed by the accounting profession over the years to provide a consistent system of financial reporting in a constantly changing environment”. Go through any annual report of a banks and evaluate how the banks are applying these GAAP principles (example:- Cost, Double Entry, Stable Monetary, Cash or Accrual, Accounting Period, Conservatism, Business Entity Concept etc.) in preparing their financial statement. From this annual report I want to find how the company used the principles of accounting in preparing their financial statement. By going through the financial statement I know how they used different kind of principles in different circumstances. This concept will help me a lot in future. As I became familiar with these principles, so I can use these kinds of principles in the financial statement for any company later. Even in future if I start a business then I can apply these principles for the financial statement of my company also.

Clarity Systems, a supplier of corporate performance management (CPM) solutions, has introduced Clarity Financial Statement Reporting (FSR), a comprehensive solution for the creation of an organization’s external financial reporting processes. The Toronto-based company says Clarity FSR provides a comprehensive, end-to-end solution for the “last mile” in the financial reporting process–preparing and automating statutory filings (10-K, 10-Q, board book, annual report, etc.) for publication and distribution.

The issues of financial reporting and corporate communication in connection with corporate governance. The analysis is based on the studies conducted in the Anglo-American and the European academic literature both from a normative and a positive perspective. It is discussed why accounting standards are not able by themselves to avoid corporate “miscommunication”, and how a good corporate governance system is a sine qua non to improve the quality of corporate communication and financial reporting. The analysis also shows how the effectiveness of the systems of financial reporting and corporate governance seems to be highly correlated. (Source: Cardiff University )
ROBERT HERZ BECAME CHAIRMAN of the Financial Accounting Standards Board (FASB) during one of the accounting industry’s most tumultuous periods. His July 2002 start date came just months after corporate disasters at Enron and WorldCom put an intense spotlight on financial reporting practices. A few weeks later, U.S. President George W. Bush signed the Sarbanes-Oxley Act of 2002 into law, enacting the country’s most sweeping accounting reforms since the 1930s. Herz entered his new post well-prepared. Before joining the FASB, he was a senior partner with PricewaterhouseCoopers, in charge of the North American professional, technical, risk management, and quality areas, and a member of the firm’s global and U.S. boards. He also served as a part-time member of the International Accounting Standards Board (IASB) and chaired both the American Institute of Certified Public Accountants’ (AICPA’s) U.S. Securities and Exchange Commission (SEC) Regulations Committee and the Transnational Auditors Committee of the International Federation of Accountants. Herz’s extensive list of professional affiliations has no doubt helped facilitate the FASB’s efforts to meet recent challenges. An ongoing “convergence” project, for example, requires the FASB to work extensively with the IASB to find common ground on accounting standards. Coordination with the AICPA and SEC also are integral to the success of the FASB’s efforts. And with calls among its constituency for simplified financial reporting, increased small-business guidance, and expanded use of fair value measurements, the FASB must balance the needs of numerous parties while continually managing change. Herz recently spoke to Internal Auditor from his office in Norwalk, Conn., to discuss the FASB’s current work.
We have selectively introduced more use of fair value–particularly for financial instruments–during the last 10 or 15 years. I think investors and other users of financial statements generally believe that a full conversion is long overdue and that we should be requiring all financial instruments to be carried at fair value. Nonetheless, we’re proceeding cautiously. We issued a statement earlier this year–Standard 157–that, while not introducing new fair value measurements, describes what we mean by “fair value” and explains how to develop these kinds of measurements. That way, when people come across them in the existing literature, they’ll know better what to do. Over the years, use of the term fair value has varied throughout the accounting literature. We wanted to establish a more common understanding of that concept. We’re also working on an option that would allow companies to elect fair value for virtually any financial instrument. The effort is aimed at reducing some of the accounting problems that have occurred due to the mixed attribute model, particularly for financial institutions. We’re working on a project with the IASB and other standard setters around the world to improve our conceptual framework. We want to produce a common global framework to help resolve key differences among the various standard setters and as a basis for developing future standards. One of the areas we’re going to address through this process is measurement in accounting. Where should historical cost be used? Where should fair value or other forms of current value be used? An open debate on these issues will begin in 2007, including roundtable discussions around the globe.( Source: Internal Auditor, Feb, 2007 by David Salierno)

CHAPTER THREE

3.1 Financial Reporting System

Financial reporting is potentially important means of management to communicate accounting information for the assessment of firm performance and governance to outside investors. Separation of ownership from management leading to delegation of management responsibility of the owner’s resources to hired agent necessitates providing information about agent’s performance in discharging this stewardship function. Management provides information through regulated financial reports, including the financial statements, footnotes, management discussion and analysis, letters to stockholders, director’s report, auditor’s report and other regulatory filings.

The most important tool for financial reporting used by most Private Banks to disclose corporate information to their shareholders is the annual report. The value of the annual report rests in the provision of a wide range of summarized, relevant information in a single document, which enable all stakeholders to obtain a comprehensive understanding of an entity’s objectives and performance in financial and non-financial terms.

The most widely read parts of the annual report are the full set of financial statements and notes to the financial statements which enhances the understanding of financial statements. There is a misconception that financial reporting and financial statements carry the identical meaning. But the scope of financial reporting is broad and should not be confined to financial statements only. The FASB also takes this stance in Statement of Financial Accounting Concepts no. 1, Objectives of Financial Reporting by Private Banks.

The FASB draws no clear distinction between financial reporting and financial statements and leaves extremely broad the scope of financial reporting. The position taken by FASB in this issue is summarized in the following excerpts from the statement:

Financial statements are a central feature of financial reporting. They are a principal means of communicating accounting information to those outside an enterprise. Although financial statements may also contain information from sources other than accounting records, accounting systems are generally organized on the basis of the elements of financial statements (assets, liabilities, revenues, expenses, etc.) and provide the bulk of the information for financial statements. The financial statements now most frequently provided are:

• Balance sheet or statement of financial position,
• Income or earnings statement,
• Statement of retained earnings,
• Statement of other changes in owners’ or stockholders’ equity, and
• Statement of changes in financial position.

Financial reporting includes not only financial statements but also other means of communicating information that relates, directly or indirectly, to the information provided by the accounting system.

3.2 Objectives of Financial Reporting of the
Private Banks

In simple sense, financial reporting is providing information that is useful in making economic decisions. The primary objective of financial reporting is to mitigate the informational needs of external users who lack the authority to prescribe the information they need and rely on information management communicates to them. The FASB spells out the objectives of financial reporting in Statement of Financial Accounting Concepts No. 1. The objectives of financial reporting are summarized in the following excerpts from the statement:

The objectives of this 10 Private Banks like AB, EXIM, SBL, City, MTBL, JBL, IFIC, One and SB begin with a broad focus on information that is useful in investment and credit decisions; then narrow that focus to investors’ and creditors’ primary interest in the prospects of receiving cash from their investments in or loans to business enterprises and the relation of those prospects to the enterprise’s prospects; and finally focus on information about an enterprise’s economic resources, the claims to those resources, and changes in them, including measures of the enterprise’s performance, that is useful in assessing the enterprise’s cash flow prospects.

Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.

3.3 Framework for the Preparation and
Presentation of Financial Statements

The IASB Framework was approved by the IASC Board in April 1989 for publication in July 1989, and adopted by the IASB in April 2001. This Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The Framework deals with:

• The objective of financial statements;
• The qualitative characteristics that determine the usefulness of information in financial statements;
• The definition, recognition and measurement of the elements from which financial statements are constructed; and
• Concepts of capital and capital maintenance.

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. Financial statements prepared for this purpose meet the common needs of most users. The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future.

The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows:

• An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
• A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
• Equity is the residual interest in the assets of the entity after deducting all its liabilities.

The elements of income and expenses are defined as follows:
• Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
• Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

An item that meets the definition of an element should be recognized if:
• It is probable that any future economic benefit associated with the item will flow to or from the entity; and
• The item has a cost or value that can be measured with reliability.

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement. All Private Banks in my study like AB, EXIM, AIBL, SBL, City, MTBL, JBL, IFIC, One and SB are follow the framework of IASB for preparation and presentation of financial statement.

3.4 FULL DISCLOSURE IN FINANCIAL REPORTING

Full disclosure involved with:
Full disclosure principle
Increase in reporting requirements
Differential disclosure

Notes to financial statements
1. Accounting policies
2. Common notes

Disclosure issues
1. Special transactions or events
2. Post balance sheet events ‘diversified companies
3. Interim reports

Auditor’s and management ‘s reports
1. Auditor’s report
2. Management’s report

Current reporting issues

1. Reporting on forecasts and projections
2. Internet financial reporting
3. Fraudulent financial reporting
4. Criteria for accounting and reporting policies

3.5 Notes to the financial statements

Notes are the means of amplifying or explaining the items presented in the main body of the statements. Information pertinent to specific financial statement items can be explained in qualitative terms and supplementary data of quantitative nature can be provided to expand the information in the financial statements. Restrictions imposed by financial arrangements or basic contractual agreements also can be explained in the notes.

1. Accounting policies: Accounting policy of a given entity are the specific accounting principles and methods currently employed and considered most appropriate to present fairly the financial statements of the enterprise.

All Private Banks in my study such as AB, EXIM, AIBL, SBL, City, MTBL, JBL, IFIC, One and SB prepare the financial statements to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates is revised and in any future periods affected.

There were no changes in accounting policy in the year 2007. However this 10 Private Banks had changed its accounting policy in relation to accounting of leasing transactions with effected from January 1, 2004 with the adoption of International Accounting Standard 17 “leases” by the Institute of Chartered
Accountants of Bangladesh. Due to the changes in the accounting policy
Accounting for leasing operation is now done under financing method of lease
Accounting. Prior to the adoption of this standard, books and accounts for leasing transactions were kept under operating method of lease accounting.

2. Common notes: The more common notes are as follows

Inventory
Property, plant and equipment
Credit claims
Equity holder’s claim
Changes in accounting policies

3.5 Summary of The Notes to the financial statements of the private banks

 Status of compliance with the conditions imposed by the securities and exchange commissions notification no. SEC/CMRRCD/2006 158/ADMIN/02-08 DATED 20^TH FEBRUARY 2006 issued under section 2CCof the Securities and Exchange Commission Ordinance,1969 (Xvii of 1969) regarding Corporate Governance is given below in pursuance of condition No. 5.00 of the said notification:

3.9 Accounting Standards Relating With Private Banks

3.9 BAS 1 (IAS 1)
Presentation of Financial Statements

BAS 1, Presentation of Financial Statements, refers to financial statements as “a structured financial representation of the financial position of and the transactions undertaken by an enterprise” BAS 1 prescribes the basis for presentation of general purpose financial statements, to ensure comparability both with the banks financial statements of previous periods and with the financial statements of other banks.

All Private Banks in my study includes AB, EXIM, AIBL, SBL, City, MTBL, JBL, IFIC, One and SB presents balance sheet, profit and loss account, statement of changes in equity and cash flow statement as full set of financial statements along with notes to the financial statements comprising a summary of significant accounting policies and other explanatory notes. In preparing these statements, Private Banks fully complies with the disclosure requirements of BAS 1 and requirements of The Bank Company Act 1991, Companies Act 1994 and Securities and Exchange Rules 1987, the rules and regulations issued by the Bangladesh Bank and other applicable laws and regulations.

This 10 Private Banks asserts that the elements of financial statements have been measured on historical cost convention. The Financial Statements are prepared following accrual basis of accounting. In balance sheet, assets are classified as current and fixed assets and lease hold assets. Shareholders’ equity and liabilities classifying as current liabilities and provisions and non-current liabilities are shown separately. Current liabilities and provisions are deducted from current assets and shown as net current assets.

In profit and loss accounts, this 10 Private Banks discloses operational revenue, operating expenses, classifying as general and administrative expenses & finance costs, other income not related to the central operations of the company, profit on merchant banking operation, profit before taxation and after taxation and available for appropriation. This 10 Private Banks such as AB, EXIM, AIBL, SBL, City, MTBL, JBL, IFIC, One and SB also reports earnings per share and number of shares used to compute EPS. In statement of changes in equity, this 10 Private Banks reports share capital adjusted with bonus shares issued, right share issued, stock dividend declared. In retained earnings section, this 10 Private Banks reports the opening balance of retained earnings adjusted with the amount of cumulative effect of changes in accounting policy, net profit or loss for the period, statutory reserve, proposed dividend, payment of dividend and dividend distribution tax and all of Private Banks in my study like AB, EXIM, AIBL, SBL, City, MTBL, JBL, IFIC, One and SB presents a cash flow statement showing separately cash inflow and outflows from operating, investing and financing activities.

3.10 BAS 7 (IAS 7)
Cash Flow Statements

BAS 7 prescribes the principles in preparing a cash flow statement, which is presented as an integral part of the financial statements. The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities. A cash flow statement provides information on changes in cash and cash equivalents during a reporting period. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value.

SB prepared cash flow statement under the direct method for the period, classified by operating, investing and financing activities as prescribed in paragraph 10 and 18 (a) of BSA 7. IFIC prepared cash flow statement principally in accordance with IAS 7 and the cash flow from the operating activities has been presented under direct method as prescribed by the SEC Rules 1987. And other Private Banks in my study includes AB, EXIM, AIBL, SBL, City, MTBL, JBL, and One Bank presents a cash flow statement showing separately cash inflows and outflows from operating, investing and financing activities using direct method. This 10 Private Banks cash flow from operating activities include cash receipts from customers and others and cash paid to suppliers and employees, interest and income tax paid, cash flow from investing activities include acquisition and disposal of property, plant and equipment and cash flow from financing activities include receipt of long term loan, payment of short term loan and dividend.

The purpose of this statement is to provide information about the operating cash receipts and cash payments of an entity during a period as well as providing insights into its investing and financing activities. It is a vitally important financial statement, because the ultimate concern of investors is the reporting entity’s ability to generate cash flows which will support payment to the owners. Because of articulation of one statement with others, interpreting and analyzing the overall performance of the company is highly attached with the presentation of information in a more detailed and objective way in each statement.

To make the Cash Flow Statement more understandable and user friendly about the constitution of figures inserted into the Cash Flow Statement, this 10 Private Banks uses a number of notes have been given in the notes to the accounts.
3.11 BAS 8 (IAS 8)
Accounting Policies, Changes in Accounting Estimates and Errors

Information contained in an entity’s financial statements over a period of time must be comparable if they are to be of value to users of those statements. Users of financial statements usually seek to identify trends in the entity’s financial position, performance and cash flows by studying and analyzing the information contained in these statements. Thus it is imperative that the same accounting policies be applied from year to year in the preparation of financial statements and that any departures from this rule are clearly indicated.

BAS 8 deals with accounting changes (i.e. changes in accounting estimates and changes in accounting principles) and addresses the correction of errors. The objective of this Standard is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. The Standard is intended to enhance the relevance and reliability of an entity’s financial statements and the comparability of those financial statements over time and with the financial statements of other entities.

All Private Banks in my study such as AB, EXIM, AIBL, SBL, City, MTBL, JBL, IFIC, One and SB prepare the financial statements to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates is revised and in any future periods affected.

There were no changes in accounting policy in the year 2007. However this 10 Private Banks had changed its accounting policy in relation to accounting of leasing transactions with effected from January 1, 2004 with the adoption of International Accounting Standard 17 “leases” by the Institute of Chartered Accountants of Bangladesh. Due to the changes in the accounting policy accounting for leasing operation is now done under financing method of lease accounting. Prior to the adoption of this standard, books and accounts for leasing transactions were kept under operating method of lease accounting.

All the requirements of BAS 8 are satisfactorily satisfied. Because accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. It is also helpful in comparing with year to year or with bank to bank.

3.12 BAS 12 (IAS 12)
Income Taxes

Accounting for income taxes is made complicated by the fact that the amount of revenues and expenses recognized in a given period for taxation purposes will not correspond to what is reported under GAAP for financial reporting purpose. The matching principle states that for financial reporting purposes the amount presented as current period tax expense should relate appropriately to the amount of pretax accounting income being reported. That expense would rarely equal the current period’s tax payment obligation. The solution is to record deferred income tax assets and liabilities as the difference between the amount owed and the amount accruable for financial reporting purposes.

All Private Banks in my reports includes AB, EXIM, AIBL, SBL, City, MTBL, JBL, IFIC, One and SB made income tax as per Income Tax Ordinance 1984 and Finance Ordinance, provision for income tax has been made at the rate of 45% on net profit. In the calculation of provision for income tax, capital gain on sale of shares but without considering the disallowances. This 10 Private Banks reports income tax expense in the profit and loss account and income tax payable in the liability section of the balance sheet under the head “Current Liabilities and Provisions” and deferred tax liability under the head “Non-Current Liabilities”. The particulars, computation and consequential effects off income tax and income tax payable have elaborately been stated in the notes.

The income tax expense of this 10 Private Banks is comprised of two components. One is current tax and other is deferred tax. Current tax has been provided on the estimated taxable profit for the year under review at 45% tax rate being the rate applicable for Private Banks. It also includes adjustments for earlier year’s short /excess provision. This 10 Private Banks policy of recognition of deferred tax assets/liabilities is based on temporary differences (Taxable or deductible) between the carrying amount (Book value) of assets and liabilities for financial reporting purposes and its tax base, and accordingly, deferred tax income/expenses has been considered to determine net profit after tax and Earnings Per Share (EPS). Deferred tax expense/income is the difference between deferred tax liability at the beginning of the period and that of the end.

So, it would be a better practice for these 10 Private Banks to present, at least in a concise format, a statement showing reconciliation of net profit before tax with taxable profit. This would certainly raise user’s understandability of the amount of deferred tax expense or benefit relating to the origination and reversal of the temporary differences, which is also a disclosure requirement of BAS 12.

3.13 BAS 18 (IAS 18)
Revenue

The standard addressing revenue recognition principles in general terms is BAS 18. It prescribes the accounting treatment for revenue arising from certain types of transactions and events and, while useful, is not a comprehensive treatise on the peculiarities on all the diverse form of revenue and of possible recognition strategies that could be encountered.

Revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.

EXIM Bank uses the accounting policies adopted for recognition of revenue are profit on investment is taken into income account, fees and commission income are recognized when earned, dividend income is recognized at the time when it is realized and income on investment is recognized on accrual basis. In terms of the provisions of the BSA 18, City Bank recognizes the interest income and income on investment on accrual basis. JBL calculate Interest on daily product on unclassified loans and advances but charged on quarterly and monthly basis, where applicable and Interest is charged on classified loans and advances as per BCD Circular No. 34 of 1989, BCD Circular No. 20 of 1994, and BCD Circular No. 12 of 1995. BRPD Circular No. 16 of 1998 and BRPD Circular No. 9 of 2001 and such interest is not included in income and credited to interest suspense account. And other Private Banks in my study includes AB, AIBL, SBL, MTBL, IFIC, One and SB usually recognized revenue during the year as prescribed above and on following basis to satisfy all conditions of revenue recognized as provided in BAS- 18.
• Income from interest accounted for in terms of the provisions of the BAS- 18 on revenue and disclosure of the financial statements of the bank, the interest income receivables is recognized on accrual basis.
• Commission and discounts on bills purchased and discounted are recognized at the time of realization.
• Interest on investment in government and other trust securities, debentures and bonds etc. is accounted for as income on accrual basis.
• Fees and commission arises on services provided by the bank and recognized in cash receipts basis. Commissions charged to customers on letters on credit and letters of guarantee and credited to income at the time of effecting the transaction.
• Profits is charged on unclassified investment on daily product basis and charged to the clients on quarterly and monthly basis, where applicable.
• Profit is calculated on classified investment and is being credited to profit suspense account.

A cursory look in the profit and loss account makes it clear that major source of revenue of Bank Company’s comes from investment, loans and advances. In the financial statements, operational revenue does not say any thing about significant transactions and costs incurred or yet to incur to complete the transaction. I think if Private Banks incorporates more information with regard to each significant contract than its compliance with BAS 18 will be more transparent.

3.14 Compliance of Bangladesh Accounting Standards (BASs) of
Private Banks

CHAPTER FOUR

4. 1 SWOT Analysis of the Private Banks

SWOT analysis means identifying the strength, weakness, opportunities and threats.
Strength
• Provide decision makers with the right information at the right time
• Incorporate new procedures into your everyday operations
• Prepare reports that communicate data clearly and effectively
• Improving Management Effectiveness through Reporting
Weakness

• Manual customer service.
• Sometimes fails to provide efficient customer service.
• Fail to adjust customer values and beliefs.

Opportunities

• To establish relationship banking and improve service quality through development of Strategic Marketing Plans.
• To maintain a healthy growth of business with desired image.
• To maintain adequate liquidity to meet maturing obligations and commitments.
• To develop and retain a quality work-force through an effective human Resources Management System.
• To ensure optimum utilization of all available resources.
• To pursue an effective system of management by ensuring compliance to ethical norms, transparency and accountability at all levels.
• To maintain adequate control systems and transparency in procedures.
• Increasing the efficiency of the supervisory task of the Bank through the introduction of IFRS and the development of a financial reporting system that supports the analytical work of supervision

Threats
• Fails to get timely Information Requirements.
• Designing the Reporting System, which become inefficient.
• Appointment the unethical employees.
• Unable to meet customer requirement.

CHAPTER FIVE

Major Findings of the Report and Recommendation

5.1 Major Findings of the Study

Private Banks have now greatly expanded their spheres of activity and their product and services range from the traditional Banking products to term loans, short term finance, factoring, home and car loans, term deposit products, syndication services, merchant banking and a host of other such offerings.

The competitive environment for financial institutions is even more challenging, as they have to compete with other banks which have low cost and even zero cost funds. But there is a concept among public that Private Banks does report financial information properly to take huge and unhealthy tax advantage. Moreover Private Banks are following varied accounting practices with respect to their transactions. Private Banks being service organization have huge financial assets such as deferred tax, investment in shares, loan etc. which simply can be much more than fixed assets groups. The existence of these sort of financial assets in Bangladesh whose capital market is highly immature and not well established requires Private Banks proper financial reporting and strictly compliance of all applicable reporting standards namely BASs .

In this report, I have tried my level best to cover the requirements of Bangladesh Accounting Standard (BASs) as applicable to Private Banks in preparing its financial statements and some information provided willingly. I have investigated only few BASs that are followed by Private Banks in preparing its financial statements. All the requirements of BASs and other legislative laws and regulations are satisfactorily satisfied by Private Banks. I believe that the Accounts department equipped with knowledgeable, professional, skilled, experienced and dedicated staffs possesses the power necessary to reach the landmark of quality financial reporting.

5.2 Observation and Recommendation

Private Banks doesn’t follow properly an important BAS i.e., BAS 36 titled ‘Impairment of Assets’ that is very vital in present situation when the market price of assets changes very frequently because of technological advancement, competition, inflation etc. Private Banks should follow BAS 36 and make an assertion that the carrying amounts of the Banks assets are reviewed at each balance sheet date whenever there is any indication of impairment. If any such indication exists, the assets recoverable amount is estimated. An impairment loss is recognized whenever the carrying amount of the asset or its cash- generating unit exceeds its recoverable amount. Impairment losses, if any, are recognized in profit and loss account. The adoption of these standards will enhance the quality of its financial reporting.

The application of BAS in the preparation, presentation, analysis, monitoring and evaluation of the financial statements and governance of corporate bodies is mandatory. This is in order to reflect the true and fair financial position of the entities with a view to safeguarding the interest of the stakeholders of all categories. It is generally believed in our country that financial statements do not exhibit true and fair financial position of the entities as application of accounting standards and disclosures requirements are not strictly complied with while preparing the financial statements. Private Banks in Bangladesh would be an exception to this view.
CHAPTER SIX

6.1 Experience and Conclusion

To prepare this report, I am faced different situation and gather much experience. I know how to prepare annual report by different private banks, how many private banks are now working in Bangladesh, and different types of services offered by private banks. I am also know that International Accounting Standards (IASs) adopted in Bangladesh as Bangladesh Accounting Standards (BASs) applicable in preparing financial report and different rules and regulations applicable for private banks in Bangladesh to prepare their financial report accepted by users.

Private banks in Bangladesh prepared their financial report in accordance with Generally Accepted Accounting Principles (GAAP), International Accounting Standards (IASs) adopted as Bangladesh Accounting Standards (BASs) on the basis of going concern under historical cost convention and applicable legislative laws and regulations.

The future prospects of private banks in Bangladesh are bright, if the private banks able to meet customer requirement as required by customer and provide timely information to its users. And also if private banks able to pursue an effective system of management by ensuring compliance to ethical norms, transparency and accountability at all levels, maintain adequate control systems and transparency in procedures and to ensuring optimum utilization of all available resources

Private Banks must be persuaded by regulations and monitoring to invest, at low profit margins, in sectors such as agriculture, small cottage enterprises and in other small businesses in villages and sub-urban areas which employ most of our populace and where most of our people live. Private Banks also must be taxed heavily on both corporate profits and individual earnings.

This is not to discourage private banks or the motive for earning money; this is to encourage it because by such re-distribution of wealth, in the long term there will be more people with more money to keep in private banks and to borrow from private banks. Private Banks ultimately will make more money and be better off and so will the rest of the nations.