1.

'Discovery of price in an IPO is both a science and an art'

Anup Chowdhury

HOW do the companies determine the price of their share during initial public offering
(IPO)? To answer this question, the Wall Street Journal said, "Discovery of price in an
IPO is both a science and an art. The issuer companies have two options for fixing the
price. They can either fix the price themselves or they can let the investors determine it.
The first method, in which the company itself fixes the price, is known as the fixed-price
method and the second, in which investors determine the price, is known as the book-
building method."

According to the fixed-price method, the issuers arrive at the fixed price, after taking into
consideration the reasonable value of their company plus a similar company traded in the
market. Theoretically, this price is equal to net asset value (NAV) of the firm and firm
has to disclose all the quantitative and qualitative factors to justify this price. Technically
in Dhaka Stock Exchange (DSE), companies are using this method to determine their IPO
price. However, unfortunately, researchers will hardly find this issue as being a feasible
one, in the case with the DSE. Because all the IPOs are extremely underpriced; price are
settled at a level lower than NAV. But this method has a major drawback as it does not
take into account investors' demand for price discovery purpose. If there is no demand for
this share in the market, it will fail to generate subscription. In the opposite scenario, if
the demand in the market is high, the price fixed by the issuer may not reflect the true
market value. As a result, the low price will attract investors and the share price will often
rise dramatically in the first few days of trading after listing of the issue with the stock
exchange as investors start positively revaluing the company.

On the contrary, book building method is more efficient as it solves the "leakage" of
value often seen with fixed-priced IPOs. Here the issuer sets a price range within which
the investor is allowed to bid for shares. The range is based on where comparable
companies are trading and also on an estimate of the value of the company that the
market will bear. The investors then bid to purchase an agreed number of shares for a
price which they feel reflects its fair value. Through this process, a final price for an IPO
is settled, which is known as the cut-off price. The cut-off price is the price at which the
demand for the shares meets the price as well as supply matches the demand.

Recently RAK Ceramic has come up with book building method for their price discovery
in the DSE. However, capital market experts are not happy with the process because of a
number of flaws. Only seven institutions were allowed to bid for it and there was a
ceiling on bid price. Experts said that such a structure is wrong entirely and against the
notion of this method. Under this process, the investors' demand determines the price; so
there should be no limit of investors and no limit on bid price. Furthermore, there was no
lock-in and price limit on trading on the debut of the issue. Thus the institutions, which
have got this share made large capital gains within a couple of days. The regulatory
authority should better explanation this situation.

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Mystery shrouds over our market about the meaning of price to earnings ratio (P/E). This
ratio is the most popular stock analysis ratio and investors are influenced by it for
purchasing or selling their stocks. The P/E ratio is also called "earnings multiple", or
simply "multiple". It measures the price paid (market price) for a share relative to the
annual net income or profit earned by the firm per share (EPS). Thus, a higher P/E ratio
means that investors are paying more for each unit of net income, so the stock is more
expensive compared to the one with lower P/E ratio. The practical explanation of P/E is a
unit of years, which can be interpreted as "number of years to pay back the purchase
price", ignoring the time value of money. For example, if an investor buys a share of a
certain company when the P/E ratio is 25, this implies investor has to hold this stock for
25 years to get back his initial purchase price (if not sold in the interim period for capital
gains).

Although there are some arguments that high P/E ratio is the result of market favourable
expectation toward the stock. However, firms having low P/E ratios do not necessarily
imply poor performance. There are lots of and other factors those need to be taken into
consideration before blanketing a single number for all share traded in the market.
Usually, an analyst will look at a company's P/E ratio compared to the industry the
company is in, the sector the company is in and also the overall market. Thus we are
surprised, when our capital market regulator comes up with number 75 as desirable P/E
ratio for loan facilities for all companies, irrespective of the nature of their businesses.
Typically, companies that are involved in infrastructure business do always have higher
P/E ratio than those in other industries. So it is desirable that P/E cut-off must be
different, based on the nature of the industry. That will make sense.

Last but not the least, differences among net asset value (NAV), earnings per share (EPS)
and dividend per share (DPS) are not clearly mentioned in our market, not even by the
regulatory authority. Net asset value (NAV) is equal to the net asset available to each
share. It is the value shareholders will receive if the firm is liquidated at any point of
time. Thus, higher NAV ensures higher expected return for the shareholders.
Furthermore, NAV is very much important for mutual funds and market analysts
recommend this as the benchmark price per unit of mutual funds. The market value of all
assets, according to them, can change every day and therefore, the NAV will change and
the price of mutual fund's unit will also change.

On the other hand, earnings per share (EPS) represent the portion of a company's
earnings, net of taxes, for each share of common stock. The figure can be calculated
simply by dividing net income earned in a given reporting period (usually quarterly or
annually) by the total number of shares outstanding during the same period. Similar to the
NAV, higher EPS of a company means it is earning more over the period and will
positively attract the shareholders. DPS is the sum of declared dividends for every
ordinary share issued. Dividend per share (DPS) is the total cash dividends paid out over
an entire year (including interim dividends but not including special dividends) divided
by the number of outstanding ordinary shares issued.

The definitions have clearly differentiated the meaning of each of the terms. However,

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once this writer had a discussion with one ex-SEC member on different issues of capital
market and at one point he said EPS and DPS are the same. At that time I had tried my
best to convince him and unfortunately I failed. All concerned should try to make a
visible distinction among NAV, EPS and DPS. Interestingly, denominator (number of
outstanding shares) is the same for their calculation but numerators are different, i.e., net
assets for NAV, net income for EPS and amount of cash dividend for DPS. Nevertheless,
there is a polar case, where EPS and DPS can be the same, if a firm declares entire
earnings as dividend. We will hardly find any company as an example in this world, who
paid their entire income as dividend among shareholders because, firms retain income
and reinvest them to ensure future growth rather paying dividend. That's why McDonald
and Microsoft waited 25 (±) years before declaring their first dividend.

Now it is also noteworthy to reiterate that EPS of financial institutions (FIs), i.e., banks,
leasing firms, and insurance companies, is definitely different than that of manufacturing
firms. To answer this query Prof. Mojib said, "Financial Institutions may have unrealised
earnings. However, most of the earnings of manufacturing firms are realised". Following
this explanation, we cannot compare the EPS and price-to-earnings (P/E) ratio of FIs to
those of manufacturing firms. Furthermore, as he added, NAV of utility-based industry
has more tangible elements in their assets than that of financial institutions; because, the
latter's assets are mostly intangible. Thus, net asset value is not even comparable.
Unfortunately, in our capital market this distinction has never been made.

The writer is a Senior Lecturer at BRAC Business School and can be reached at

e-mail: anup@bracu.ac.bd

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 2. Inflation, monetary policy and unemployment

M. Azizur Rahman

Bangladesh has been suffering from a sort of economic growth stagnation with its GDP
growing between 5.0 and 6.8 per cent for the last several years. At this moment, we need
to adopt an expansionary economic policy so that we can increase production,
productivity and consequent employment generation through higher investment. Inflation
has to be reduced by increasing productivity and supply and by decreasing average
production cost. As a result, the overall national production, per capita income, economic
growth and employment opportunities will increase.

From the economic point of view, it is not so easy to solve all economic problems at a
time. If we adopt an expansionary economic policy, the demand for commodities will
increase and to satisfy the increased demand for goods and services, production will go
up. But at the same time the prices of the commodities will also increase which is not
desirable. On the other hand, if we adopt the contractionary economic policy, the overall
production of the country will decrease and the rate of unemployment may go up. As a
result the government will face more difficulties in order to solve unemployment.
Therefore, the efforts for curing the economic ills only by increasing the aggregate
demand would prove futile. Productivity has to be increased and by increasing the
exchange rate, which, however, has to be kept under control as alternative way to stem
inflation.

We want to increase the overall production and productivity to reduce the problem of
unemployment and at the same time we also want to keep the prices of the commodities
under control.

Actually, the country is facing an economic dilemma. If we adopt contractionary

monetary policy to prevent inflation, our unemployment will go up. On the contrary, if
expansionary monetary policy is adopted to reduce unemployment, inflation will
increase. So, the situation demands policy measures that would keep inflation under
control and at the same time help creation of employment generation. As a long term
solution, we can increase the national productivity through the increase of the rate of
literacy and standard of education, development of manpower and adoption of modem
technology and the measures for quality production and creating an environment of hard
work. It will lead to the increase of the per capita income. We can produce many goods,
including essentials of standard quality. As a result, the unemployment will decrease with
an increase in quality manpower.

On the other hand, as a result of enhanced production and supply, the inflation will be
prevented with an increase in the buying capacity of the consumers. Besides, we will be
able to earn foreign currencies by exporting low cost goods and services.

To prevent inflation in an import-oriented country like Bangladesh, the exchange rate of

our currency will have to be depreciated. However, it is not so easy to implement. It is

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necessary to adopt contractionary economic policy with a view to enhancing the flexible
exchange rate. It will lead to the increase of the rate of interest. The flow of foreign
currency will increase into Bangladesh. As a result of contractionary economic policy,
both the price of our commodities and inflation will decrease. Our level of competition
will rise in the international markets. It will help increase our export. But, due to
contractionary economic policies the income, production and the supply of everyday
essential goods of the country will be decrease. So measures to prevent inflation might
aggravate the problem. Higher unemployment may lead to political unrest and make the
economic situation worse in this densely populated country. So, it is hard to support
contractionary economic policies.

Normally we follow flexible economic policies designed to reduce the unemployment

problem. The official foreign exchange rate has been maintaining the same level for
months together. As the supply of money increases, the rate of interest will decrease in
the country leading to capital outflow. The price of locally produced goods will increase
due to expansionary monetary policy. The level of our competitiveness will go down in
the international markets. The export will decrease but the import will increase.

It appears from this discussion that as a result of expansionary monetary policies both
production and import would increase. But in such a situation there remains no control
over upward movement of inflation and over depreciation of Bangladesh Taka. We want
to adopt the expansionary monetary policy to decrease unemployment problem. We shall
adopt either expansionary monetary policy or expansionary fiscal policy or both. It will
help increase the income and production, import of everyday essential commodities, and
buying capacity of the citizens.

We are experiencing the present inflation primarily because of external reasons. It is not
the inflation due to increase in aggregate demand only. This inflation has occurred for the
upward movement of the production cost. The exchange rate will usually decrease as an
effect of expansionary monetary policy. As a result, we will not be able to buy foreign
goods easily. At this situation, we should increase the foreign exchange rate of our
currency and control it strictly. If it is possible to mix and coordinate appropriate fiscal
and monetary policies effectively, the country might be able to decrease unemployment
problem to some extent.

(Dr. M. Azizur Rahman is vice-chancellor and chief adviser, Institute of Policy Research
(IPR), Uttara University.)

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 3. Rising mobile phone consumer expectations driving demand for
more novel features Mobile phone users
Ahsen Javed

In 2010, the number of mobile phone subscriptions is expected to reach five billion
globally. The outlook for telecommunications providers is dynamic, but far from certain.

Growing competition from non-traditional providers, rapidly rising demand for network
bandwidth and consumer expectations for new technologies have emerged as key issues
that will shape the future of the sector.

Against this backdrop, Oracle has released the findings of its Opportunity Calling: The
Future of Mobile Communications report. More than 3,000 mobile phone users around
the world were surveyed on their use and perceptions of mobile phones, interest in new
technologies, and expectations for the next generation of mobile communication. Twenty
per cent were from the Asia Pacific.

The Asia Pacific market contains unrealised potential for telecommunications providers.
For example, whereas 41 per cent of consumers globally use more than one mobile
handset, just 26 per cent in the Asia Pacific do so.

This article summarises the findings of the survey and concludes with some
recommendations on how telecommunication companies can use them to plan ahead for
growth and generate new revenue opportunities.

Reliability and price

Despite the smartphone revolution, this Oracle study shows that consumers everywhere
still value reliability and price over technological innovation. Less than half the
respondents said they look for state-of-the-art handsets. By comparison, 85 per cent rated
reliability and 81 per cent rated price as top priorities.

Notably, however, 77 per cent said price would be their main motivator to change service
providers. Further, although 82 per cent of customers said their provider was currently
doing a good job, more (83 per cent) said they might consider switching to non-
traditional providers such as Google, Sony, Apple or Facebook, if these offered similar
pricing and service quality.

By comparison, consumers in the Asia Pacific market seem slightly more conservative.
Fewer (73 per cent compared to 77 per cent) said they would switch to another provider
because of better pricing and less (78 per cent compared to 83 per cent) would consider a
non-telecom company as their provider.

Globally, consumers are keen to cut the overall cost of their communications. Less than a
third (26 per cent) of those interviewed currently bundle their mobile phone bill with
other communications services, but an overwhelming 88 per cent said they might do so if

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buying more saved them in the long run. In contrast, 42 per cent of Asia Pacific
consumers already bundle two or more of their communications services.

New mobile technologies and applications

Of course, the mobile market is not just about costs and reliability. Within five years,
more users are likely to connect to the Internet using their handsets than from desktop
PCs, a trend that is driving demand for more innovative features. This should, in turn,
mean new revenue opportunities for providers.

According to the Oracle report, 54 per cent of mobile phone users expect their phones to
replace their GPS systems and iPod or MP3 player within five years. Phones are likely to
supersede digital cameras according to 52 per cent of respondents, 27 per cent want to
use them as their PC and video recorder, 22 per cent as an e-reader and 16 per cent as a
television.

Predictably, the younger demographic-those aged 18-33 years-are three times as likely to
use their phone as an entertainment device and twice as likely to use their phone as a
personal computer than those aged 46-64 years.

In terms of general usage, 94 per cent of Asia Pacific customers use their phone as a
communications device and 29 per cent as a mini computer. Notably, 38 per cent use it
for entertainment, which is well ahead of uptake in the United States (20 per cent),
Europe (33 per cent) and the Middle East (32 per cent). In the Asia Pacific, 81 per cent of
consumers have used their phone to send a text message, 47 per cent to read or send
email, and 18 per cent to update their status on a social media site.

Respondents to the Oracle survey anticipated that by 2015, their phones would
incorporate a raft of practical new applications and features that would enable them to do
everything from starting a car to being used as a credit card.

Although the majority (58 per cent) indicated that they would like to use their phones-
instead of cash or cards-for purchases, there is still some caution about the prospect.
Thirty-nine per cent said they were not comfortable with the idea, but this was offset by
the fact that 61 per cent were.

Citizens in the Generation Y category (respondents born between 1977 and 1992), were
more at home with the concept of using their phones to make purchases, while slightly
more than half (52 per cent) of Baby Boomers (respondents born between 1946 and
1964) were comfortable with the concept. In both generation groups, males were more
comfortable with the idea than females.

Consumers have a number of new or upcoming features on their mobile phone wish list.
These include the ability to chat via video and scan barcodes to access online content.
However, the survey reveals that while most want these features, only 17 per cent and 10
per cent respectively would be prepared to pay for them. Of greatest interest was the

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ability to monitor and manage home electricity use. Sixty-seven per cent of respondents
said they wanted this feature and 22 per cent would be willing to pay for it.

Five years from now, 49 per cent of Asia Pacific consumers expect their phone to replace
their digital camera, 34 per cent their credit card and 30 per cent their PC. Notably, they
are also more likely than their global counterparts to have used their mobile phone to
purchase an item online (14 per cent compared to 7.0 per cent) and to have the ability to
chat via video on their phones (11 per cent compared to 6.0 per cent).

Advertising revenue

Advertising direct to mobiles is a potential revenue generator. In the survey, 68 per cent
of respondents said they would be happy to receive advertising on their mobile phones in
exchange for price discounts or added services.

Most interest came from younger users, with the average customer willing to receive up
to six 15-second advertisements each month if they were given extra calling minutes,
texts or free downloads.

This was particularly evident in the Asia Pacific market, where 13 per cent of survey
respondents said they would be interested in receiving free downloads in exchange for
listening to or watching advertisements on their handsets, compared to just 7.0 per cent
globally.

Worldwide, there is real reluctance to receive localised commercial content based on user
location. Only 33 per cent expressed any interest in the idea, citing privacy and security
concerns. Forty-four per cent were emphatically opposed to being tracked by their mobile
provider, meaning telcos have a lot of work to do if location-based advertisements are
going to gain traction.

Recommendations for telcos

The Oracle report confirms that while technical innovation is essential to meeting the
future demands of consumers, it will be critical to first ensure that the 'brass tacks' of
service activation, delivery and billing are seamless, accurate and fast.

According to the report, telcos need to build and analyse customer data to ensure
customer needs are met quickly. To fully capitalise on potential revenue streams they
need to learn more about customers' privacy concerns and take measures to resolve them.

Finally, telcos need to plan for the future by working with their technology providers to
ensure network and back-end systems are scalable, securely open to developers, and
integrated across services.

The writer is Managing Director, Pakistan and South Asia Growth Economies, Oracle
Corporation.

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 4. Told and untold myths of stock market

Anup Chowdhury

A "stock" is a share in the ownership of a company. It represents a claim on a company's

assets and earnings. As one acquires more stocks, his or her ownership stake in the
company becomes greater. In finance, a share is a unit of account for various financial
instruments including stocks, mutual funds, limited partnerships, and real estate
investment trust. In other way, a share or stock is a document issued by a company. This
entitles its holder to be one of the owners of the company. Sometimes different words
like shares, equity, stocks etc., are used. All these words mean the same thing.

So, what does ownership of a company give one? Holding a company's stock means that
one is one of the many owners (shareholders) of a company and, as such, he or she has a
claim to everything the company owns. This means that technically one owns a tiny little
piece of all the furniture, every trademark, and every contract of the company. As an
owner, one is also entitled to his or her share of the company's earnings as well. The
company may distribute some or all portion of this earnings in the form of 'dividend',
provided they do not have better use of this funds. However, the companies are not
legally obligated to distribute dividends. Take the example of McDonald's Corporation.
The company started in the 1950s, paid its first dividend in 1975. Though it was a billion-
dollar company, Microsoft, which was established in 1975, paid its first dividend in 2003.
If we analyse the history of dividend payment pattern of different companies, then we
will see that firms with high growth rates are likely to pay no or lower dividends.

Hence, the Dhaka Stock Exchange (DSE) is categorising their listed companies on the
basis of percentage of dividend declared each year, e.g., with 10% dividend a company
can be listed in 'A' category. And failure to follow this instruction is penalised by
downgrading to 'B' or 'Z' category. This regulation is hardly found in other stock
exchanges of the world. Legal experts in company law may see this directive of the DSE
to be ultravires of the real epitome of company formation or its operation. That is why,
companies may be prohibited to talk about future dividend even in their prospectus. In
addition to this, while becoming public, companies should have a dividend policy. This
document is not found in the case of any firm operating in our country. However,
Securities Exchange Commission (SEC) and DSE have not indicated anything about their
stance on this issue.

Now, a question might come into one's mind about why the founders of a company
would like to share the profits with thousands of people when they could keep profits to
themselves. The reason is that at some point every company needs to "raise money". To
do this, companies can either borrow the same from somebody or raise the amount by
selling ownership of the company. The later is known as issuance of stock. Issuing stock
is advantageous for the company because it does not require the company to pay back the
money or make interest payments along the way.

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Investors, on their part, enter the secondary market (stock market) with the hope that they
can make money on a stock through the appreciation of its price. Sometimes they can
earn 100% or more capital gain if the company is successful. However, by becoming an
owner, investors also assume the risk of the company not being successful and, thus, may
incur capital loss. At this point, it is noteworthy that investors' risk is locked by 'limited
liability'. This means, as owners of a stock, investors are "not personally liable" if the
company is not able to pay its debt.

Companies are sharing their profit with millions of shareholders only to raise equity
funds from the capital market. But what would be the situation when sponsors themselves
are in the capacity of financing maximum part of their fund requirements? This will then
mean general investors will be fighting for only a small portion of shares available in the
market and pull the demand curve. This is very true in our capital market. In most of the
companies sponsors are holding more than 50% of the shares and in some instances, the
percentage soars up to ninety. As our market regulators are talking about market
correction, price stabilisation, lack of supply, increase of market depth, fundamental
analysis before investment and so on, then why are the SEC and DSE allowing this big
holding? Is it because of poor demand for initial public offerings (IPOs)? We believe the
demand for IPOs is not low. The subscription result of last ten IPOs does not allow us to
draw any contrary conclusion. In most cases, all such issues were oversubscribed five to
ten times. This high demand shows investors' confidence in those IPOs and ultimately,
when such shares are traded in the secondary market, their prices rise to unexpected
height. Thus, genuine investors are not getting time for their fundamental analysis.
Moreover, when excess demand makes the share overpriced, market regulators then
intervene in the name of market correction. Who is the loser in this correction process?
Obviously, the small investors, who bought those shares observing the market trends
before intervention.

There is a confusion about the definition and implication of face value of shares in our
market. The face value of a common stock is the nominal value assigned by a corporate
charter, and has no specific financial relevance after the issue date. It is also known as par
value of share and a company decides what will be the par value of its share. However, it
depends on two different factors: authorised capital and number of shares they want to
issue. Authorised capital is the maximum capital a company can raise in its lifetime and
is mentioned in its legal documents (Article of Incorporation and Memorandum of
Association). A company also decides how many investors they want to share their
ownership, i.e., the number of shareholders. When authorised capital is divided by the
number of shares, a company gets face value or par value of its share.

In our capital market we have experienced certain comments on face value, e.g., no firm
can issue share for more than Tk. 10 or Tk. 100. There is, thus, a strong trend to ensure a
uniform face value for all companies to minimise the ambiguity between market price
and par value. This has largely misguided the investors because fundamentally face value
has no connection to the market price and not even is a determinant. For example, if there
are two companies with net asset value of Tk. 500, the share of one can have a face value
of Tk. 10 and that of the other, Tk. 100. In that case, what would be the expected market

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price of shares of each company or at what price an investor should buy the share from
that the market, assuming the risk and all other market-related parameters are exactly the
same for both companies? Both the shares should definitely be traded in the market at
around Tk. 500 (±). Now the question is, how is the face value creating ambiguity in this
case? Or how is this 'non-uniformity' of the face value misdirecting the investors? The
regulatory body might have different explanations. Furthermore, the company law
provides no scope for such 'uniformity' or 'ambiguity'. The law says company is the only
authority to determine their par value.

One more issue related to face value and market value may be discussed here.
Fundamentally, they have no connection. For any shareholder, the price of a stock
(market value) is equal to what he or she has paid for it in the secondary market, other
than IPOs. Even, if the firm issues shares at a premium, the price will be more than par
value at the time of subscription for IPOs. Nonetheless, at a later date when companies
announce earnings, they declare the same on face value because of accounting
convenience. So as an investor, one needs to calculate the value of his or her return, as
compared to market value, not on par value. Let this issue be illustrated with an example.
Let us say one has bought one share at Tk. 200 (investor's investment is Tk. 200) from
the market, whereas its face value is Tk. 10 and then the concerned company announces
50% dividend. In that case, the investor will receive Tk. 5.0 (Tk. 10 x 50% x 1 share) on
his or her investment. Therefore, his or her actual return (dividend only) on one share is
2.5% (Tk. 5.0/Tk. 200). Based on this calculation, the distinction between par value and
market value is clearly visible. An investor might become very happy over the
announcement of 50% dividend on par value; however, the eventual impact on his or her
wealth is only 2.5%. It is a tricky game!

The writer is a Senior Lecturer at BRAC Business School and can be reached at

e-mail: anup@bracu.ac.bd

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 5. How the economic crisis will affect environment

Billy I Ahmed

GIVEN the dimension and scope of the current economic crisis, the world will no doubt
experience a significant economic downturn -- of what degree and duration, no one can
say -- abysmally affecting all aspects of U.S. and international society.

Of the many areas that will be shocked by the downturn, the environment stands out in
particular.

The downturn is closely tied to the tempo of resource consumption, and significant
efforts to ameliorate environmental decline will prove expensive and out of reach for
already-stretched budgets.

The question thus arises: Will the crisis be good or bad for the environment, especially
with global warming?

To put this question in perspective, it is necessary to first look at the environmental

situation before the crisis.

By all accounts, the steady growth in the world economy -- much of it driven by
phenomenal economic expansion in China, India, and other nations -- was producing a
similar increase in demand for energy of all forms, especially greenhouse-gas emitting
fossil fuels.

According to the latest pre-crisis projections by the U.S. Department of Energy (DOE),
combined energy consumption by all nations of the world was expected to grow by 22
per cent between 2005 and 2015, from 462 to 563 quadrillion British thermal units
(BTUs).

Most of this increase, almost 90 per cent, was expected to come from fossil fuels -- oil,
coal, and natural gas.

The result, not surprisingly, was a dramatic projected increase in emitting carbon dioxide
(CO2), the leading source of climate-changing greenhouse gases.

Again using DOE projections, total world emissions of CO2 were expected to increase by
a frightening 22 per cent between 2005 and 2015, from 28.1 to 34.3 billion metric tons.

This increased rate of greenhouse-gas emissions would precipitate global climate change,
resulting in persistent droughts, increased storm activity, and a significant rise in the sea
level.

At the same time, however, the rising price of oil -- itself caused by the sharp increase in
demand -- combined with growing awareness of the risks of global warming to create a

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phenomenal gush in investment in alternative energy ventures.

Many governments, energy firms, and venture capitalists have announced plans to spend
vast sums on developing climate-friendly alternative fuels and improved methods for
getting energy from wind and solar power.

In November 2007, for example, Google announced that it would invest hundreds of
millions of dollars in developing advanced renewable energy sources.

These efforts, and others like them, wouldn't reverse the trend toward higher CO2
emissions between 2005 and 2015 but could set the stage for a dramatic turnaround in the
years that follow.

How will the current economic crisis affect this picture? As in so many things, there's
both good news and bad news.

The good news is that economic hard times will cause people to drive less, fly less, and
otherwise consume less energy, thus lowering expectations for greenhouse-gas emissions.

According to the most recent projections from the International Energy Agency (IEA) in
Paris, global oil demand in 2008 will be 240,000 barrels per day less than in its earlier
predictions, and 440,000 barrels per day less than in its predictions for 2009.

As petroleum consumption declines, the price of oil is also likely to drop -- thereby
discouraging investment in many costly and environmental dangerous energy projects.

The current economic crisis is closely linked with housing, and this too has a silver
lining. Many houses built in the heyday of subprime lending were oversized homes in
distant suburbs far removed from public transit, or second homes in Sunbelt vacation
sites far from owners' primary residences.

These houses consumed much energy and needed long commutes. Now, many of these
exurban/vacation homes are up for sale and it is doubtful that many of them will be
occupied for a long-time to come.

People are staying where they are, moving closer to public transit, and flying less to
second homes. This will also produce a large decrease in energy use and CO2 emissions.

But there is a downside to all this as well. Most serious is the risk that venture capitalists
will avoid from pouring big money into innovative energy projects.

Governments could also have a hard time coming up with the funds to finance alternative
energy projects.

Moderators at the presidential debates repeatedly asked both John McCain and Barack
Obama what programs they would cut to finance the massive financial-rescue packages

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the Bush administration has engineered in order to avert further economic distress.

Both insisted that their respective energy initiatives would be spared any such belt-
tightening.

It is likely, however, that costly endeavours of this sort will be scaled back or postponed
once the extent of the financial rescue effort becomes clear.

The same is true for Europe and Japan, who have also pledged to undertake ambitious
energy initiatives in their drive to reduce greenhouse-gas emissions.

Indeed, leaders of some European Union countries are calling for a slowdown in efforts
to curb emissions of greenhouse gases due to the burgeoning economic crisis.

Under a plan adopted by the EU in 2007, member countries pledged to reduce such
emissions by 20 per cent below 1990 levels by 2020, which is far more ambitious than
the Kyoto Protocol.

At some point, the price of gasoline will fall so low that many drivers will once again
engage in the wasteful driving habits they may have given up when the price of gas
soared over $3.0 per gallon.

This may not occur right away. But with crude oil at $70 per barrel, half of what it was in
August, a corresponding drop in the price of refined products will eventually follow.

And that could lead people to see cheap gasoline as one bright spot on an otherwise
dismal horizon.

It is unclear at this point whether the crisis will do more good or more harm for the
environment. In the short-term, it will certainly slow the increase in carbon dioxide
emissions.

Billy I Ahmed is a tea planter, columnist and researcher

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 6. Managing capital of banks: some important issues

Main Uddin

ONE of the most critical of all banking problems in recent years centers upon raising and
maintaining sufficient capital. Capital of any bank has been very significant as it is used
as key defense to guard against banking failure. It has been observed that the capital
account represents each bank's ultimate line of defense against failure, protecting the
bank against risk in its various forms. If capital of a bank is higher, the depositors feel
safer in case of any unfavorable situation for the business.

There is a long standing debate between bankers and regulators over how much and what
types of capital banks should hold. The view is changing regarding the definition,
concept and role of capital with the passage of time. Again, some risks are coming
forward which are now taken under the protective measures of capital.

In addition, there is a controversy regarding the amount of capital as it was the case
earlier. The amount of capital is determined by both regulators and marketplace.
Regulators entered due to fears that the private marketplace was not completely reliable
as regulator for the bank capital. It is argued that free markets are not effective controllers
of all risks to the public from loss of deposit. Managers among the bankers want to use
less capital to magnify the assets earnings and so earn higher equity rate of return. In
contrast, the regulators prefer that banks increase their capital to ensure their safety and
soundness in the event of earnings become negative.

Factors to be considered while deciding on the amount of capital for a bank: A bank
might have capital below the minimum level as imposed by the regulators; still it can be a
sound bank from market viewpoint. Again a well capitalized bank can not say for sure
that it will not fail. Banking failure depends on many factors and if a bank fails, the
capital is used to retain the confidence of people by paying all of its liabilities to its
clients. A bank in question knows better than other how much capital it needs. But the
amount of capital is not randomly decided. While determining the appropriate level of
capital some factors must be taken into consideration and these factors, in no ways, are
common to all; rather, they are bank-specific commensurate with the nature of operations
and the economy where it works.

All the banks operating in any economy are subject to various kinds of risks. To preserve
the confidence of a particular bank by paying the deposits back along with interests due
on them, it needs a huge amount of capital. Hence there exists a good relation between
bank capital and risks. Higher is the degree of risk, the higher is the amount of capital a
bank needs. While banks assess their capital requirement they need to consider some
risks very carefully. Risks principally taken into consideration for assessing the amount
of capital are credit risk, market risk, liquidity risk, operational risk, legal risk and
reputation risk.

Some qualitative factors are also taken into consideration to establish appropriate capital

15 | P a g e
levels and those are: experience and quality of management and key personnel; the nature
of market in which it operates; quality, reliability, and volatility of earnings; quality of
capital and access to new capital; diversification of activities; adequacy of risk
management systems and controls. At times a bank may fail although it has capital as
required by the regulators. Thus, we need to add some factors that can work well as the
substitute of capital. For example, efficient management of a bank will be far-sighted to
select investment portfolios in such a way that minimize the degree of risk and their
capital can be substantially lower than other banks engaged in holding risky portfolios.

There are some other factors which should be taken into account to determine the
appropriate amount of capital. These are: 1) develop an overall financial plan for the
bank, 2) determine the amount of capital that is appropriate for the bank given its goals,
planned service offering acceptable risk exposure, 3) determine how much capital can be
generated internally through profit retained in the business, and 4) evaluate and choose
that source of capital best suited to the bank's needs and goals.

Why the determination of appropriate level of capital is so critical: How much capital a
bank should have has been one of the most controversial issues in the history of banking
industry. It is controversial because: who should set the standard of capital for banks and
what should be the reasonable standard? There are some purposes of regulating bank
capital and for, determination of appropriate capital has been tricky. A bank requires such
amount of capital that would not only protect the interest of depositors and regulators but
also preserve the confidence of the public in it.

Considerable research has been conducted in recent years on the issue of whether the
private marketplace or government regulatory agencies exert a bigger effect on bank risk-
taking and on bank capital decisions. The results certainly vary from one to one, but most
find that the private marketplace is probably more important than government regulation
in the long run in determining the amount and type of capital banks must hold.

Some research findings observe that financial markets seem to react differential risks
position of banks by downgrading the debt and equity securities offered by riskier
banking companies. However, we are not at all sure market disciplining works as well for
small- and medium-size banks, whose securities are not actively traded in the open
market. Also, while the market may make efficient use of all the information it possesses,
some of the most pertinent information needed to assess a bank's level of risk exposure is
hidden from the market. Thus, sometimes it becomes difficult to say that market can
clearly establish the precise amount of capital for all the banks, irrespective of their size
and risk exposure.

For many years capital-to-assets ratio was considered a better measurement for
determining proper amount of capital. But at the end of the day, many research studies
found that there is a little connection between capital ratios and incidence of bank failure.
Many banks would still fail even if their capital were doubled or tripled. So it is not well
established that imposing higher capital requirements will eliminate banks' risk. Again,
the idea of imposing minimum level of capital on all banks is also cumbersome. When

16 | P a g e
the people see a bank's capital ratio is dropping below the minimum required, its largest
depositors may start a run on it even if it has adequate capitalization from a market
perspective. It is also observed if all banks hold at least the minimum required amount of
capital, this may suggest that all banks are equally safe - which is obviously untrue.

The imposition of minimum capital requirements by Basel accord and drawbacks in

Basel accord's risk-based capital framework: The idea of imposing minimum capital on
all banks actually began in the United States in December 1981. Then in 1987 the Federal
Reserve Board representing the United States, and the representatives of 11 other leading
industrial countries (Belgium, France, Germany, Italy, Japan, the Netherlands, Sweden,
Switzerland, the United Kingdom and Luxemburg) announced preliminary agreement on
new capital standards - often referred to as the Basel Agreement - that would be
uniformly applied to all banking institutions in their respective jurisdictions. The
approval, in 1988, of Basel Agreement, with some of its dark sides, was really a
masterpiece to strengthen the capital position of the banks that can safeguard their
depositors from diverse risks. Although this agreement was fully enforceable on January
1, 1993, modification and adjustments continued to be made on some issues deemed
required. Before that actually there was no uniform requirement of capital by each bank
and banks used to hold capital according to the opinion of some key personnel in the
bank.

The 1988 Basel Capital Accord (Basel Committee, 1988) is a commitment by financial
authorities to apply a minimum capital requirement to internationally active banks. It
defines a measure of capital and a measure of risk, the latter measure known as 'risk-
weighted assets.' While the groundbreaking 1988 Basel Accord established minimum
capital levels for international banks, some imperfections exist because of incorporating
off-balance-sheet exposures and a risk-weighting system. Two basic problems can be
identified from the Basel Accord: First, applying the bank's risk weighting, as set by the
Basel Accord, did not always provide the default risk measurement precision supervisors
called for. Second, another concern had to do with credit risk as predominant focus to the
exclusion of risks associated with a broad range of bank products. Another glaring hole
left by the original Basel Agreement on the bank capital was its failure to deal with
market risk. The risk weights were primarily designed to take account of credit risk. But
banks also face significant market risk arising out of the change in interest rate, price,
exchange rate etc. Some other problems of the Basel Accord were identified by different
studies conducted by many scholars. The calculation of risk-weighted assets is crude.
Bank has incentives to collect risks they consider under-priced by the Basel Regime, and
to sell risk that are they consider overpriced. Problem also surfaces when two banks are
treated in a same manner just on the basis of capital requirement although they have
different management quality.

Basel II, its framework, and flaws: Because of having some problems associated with the
Basel Accord, (Basel Accord, 1988) voices were raised from different corners regarding
its applicability to the bank capital requirements. It was found that many banks collapsed
although they had sufficient capital as required by this Accord. Hence amendments in the
existing framework have been of much importance.

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Consequently, the Basel Committee is changing the rules and engaged in a lengthy
interactive process of designing and consulting on new proposal officially known as
Basel II. The Committee plans to implement the new proposals made therein in the
member countries at the end of 2006. Basel II aims at encouraging the bank to use
modern risk management techniques as well as to make their risk management
capabilities commensurate with the risks of their business.

The new amendments are much broader and are designed to sharpen regulatory capital's
role in measuring other risks beyond credit. Other risks include interest rate operational,
liquidity, legal and reputational risks. To address the aforesaid risks, the new
amendments call for "three pillars":

1. The first pillar is designed to set up minimum capital requirements. All the banks,
according to this pillar, are required to maintain a minimum level of capital irrespective
of risk exposure of them. They specify conditions under which banks determine their own
capital requirements. In this case, the supervisors verify not the input but the process by
which the input is estimated.

2. The second pillar sets up methodology dealing with supervisory review of capital
adequacy ensuring that a bank's capital position is consistent with its risk profile and its
overall strategy. Supervisors have the duty to review not only a bank's capital position
and strategy but also to ensure that capital is in accord with a bank's overall risk profile
and, furthermore, that bank is compliant with regulatory capital minimums.

3. The third pillar is related to market discipline/behaviour. Market behaviour has also a
significant role to determine capital adequacy. A bank should disclose summary
information about its entire capital structure. To be more consistent with this pillar, a
bank is also required to disclose reserves for credit losses, maturity, interest or dividend
deferrals, terms of derivatives and so forth. This will make all concerned clear about a
bank's loss-absorbing capacity.

Sadly but surely, the new Basel proposals have some fundamental weaknesses. The
problem regarding the 'Pillar 1' is that it relies on banks' own risk estimates and this is not
incentive-compatible. When their own estimates are used to set capital, banks have an
incentive to manipulate them.

There are also some evils regarding supervision, as was guided in the 'Pillar 2'. In reality
the supervisors may not have the skill, the power or the incentives to supervise
effectively. Again, a supervisory regime requires powerful yet generous supervisors, the
stock of which is limited. The supervision might not be appropriate if the members of this
board do not have enough power. Then again, supervision is intrinsically interpersonal,
and human relationships can distort decisions. It is argued that supervision is inherently
flexible and individualistic where there remains a great scope of unfairness, and indeed, it
is hard to apply judgment fairly. Again different individuals judge different cases and it
might not produce consistent result of supervision.

18 | P a g e
In addition the problems exist in 'Pillar 3' which excessively puts faith on disclosure
requirements. Production and processing of information is costly and the optimal
disclosure requirement is finite. Furthermore, disclosure can not correct all the market
failures; because supply of accurate and timely information is necessary, but not by itself
sufficient to discipline bankers. For example, the Nordic countries suffered a banking
crisis in the early 1990s in spite of high level of disclosure. Markets are driven by
expectation about average opinion and there is no reason to assume that 'average opinion'
should become stable with more information. Yes, more information will produce
homogeneity of expectations among the participants. Still some heterogeneity of
information is necessary for sound financial health. For example, if it is necessary for a
bank to disclose its individual capital requirement above minimum, the secret strategy
will be out.

Conclusion: As a part of the process for evaluating capital adequacy, a bank should be
able to identify and evaluate its risks across all its activities to determine whether its
capital levels are appropriate. The bank should make a complete review of its risk profile
so as to determine capital requirement carefully. To this end in view, a bank must
carefully scrutiny its loan portfolios along with their quality, internal risk management,
accuracy of risk measurement, earning possibility and so on.

Various studies on capital requirement for banks suggest that there is no single factor
considering which the appropriate level of capital can be determined. Sometimes, even a
rumour can push a bank to the point of failure by making its clients run towards it for
withdrawal of deposits although the bank is well capitalized from the view point of both
the regulator and the bank. Again, if the level of capital is determined corresponding to
the risks of a particular bank it can not be guaranteed that the bank, in question, will not
fail. At the same time, capital determined by the external authority without considering
the bank-specific risks can't assure risk-free operation of a bank. But many studies still
show that imposition of minimum capital has a significant effect on the sound operation
for banks in any economy.

The question may arise as to the appropriate level of capital, but it can not be ignored that
a bank needs a minimum amount of capital to protect it from different risks arisen out of
its activities. Though the debate may continued about elements of risk, measurement of
them, accuracy of measurement etc., yet there is no denying that a bank requires a
minimum amount of capital to protect its depositors against risks, foster public
confidence, absorb losses out of future earnings and continue sound operation.

The writer is Assistant Professor, Department of Banking, University of Dhaka

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 7. Strengthening the NBR to increase revenue earnings

Mamun Rashid

WHO knew a humble lunch could be so enlightening and insightful. A few days back, I
had the distinct opportunity to attend a luncheon meeting with the LTU (Large Tax
Payers Unit) officials of the National Board of Revenue (NBR). I possibly earned that
lunch as I am a senior executive of a large tax-paying entity in Bangladesh. A few
distinguished members of the NBR joined in the lunch. The lively discussion that ensued
shed light on some startling revelations concerning the premier revenue-earning arm of
our government. Contrary to popular belief, political pressure is not the primary barrier to
broadening our tax net. The critical areas that demand urgent attention are the
establishment of an efficient organogram, capacity-building including IT delivery
platform, flow of two-way information and a target-linked incentive system.

Gradually it became some sort of a pre-budget discussion session also. In the discussions,
it was found that the revenue collection target of the Government of Bangladesh for the
upcoming fiscal year might be fixed at Tk 92,947 crore, which is 16.93 per cent higher
than that of the current year. The revenue collection target of the National Board of
Revenue is likely to be increased by 19 per cent, and fixed at Tk 72,590 crore. This
ambitious target is mainly aimed at coping with the pressure of an enormous budget --
possibly in the range of Tk 132,000 crore.

However, we all agreed that, for a developing country like Bangladesh, the rapid increase
in the size of the budget is not at all surprising. And for attaining sustainable
development, the maximum share of such increase should be funded with domestic
revenue collection. To meet this goal, when the revenue collection target becomes
significantly higher than the GDP growth rate, the concerned arms of the government
must find ways to tap new sources of revenue - which is always a challenging task
indeed.

The revenue collection wings of the Government of Bangladesh, especially the National
Board of Revenue (NBR), has so far done a satisfactory job in supporting the government
by attaining high success rates against the targets set for them. In fact, in FY2007-08 they
exceeded the revenue target by increasing their year-on-year collection by 27%.
However, according to NBR sources, for the current fiscal year the revenue collection
target for NBR has been set at Tk. 61,000 crore against which collection in the first 8
months (till February 2010) has been Tk. 35,767 crore - a shortfall of about Tk. 5,000
crore from the 8-month target at an evenly distributed rate. The growth rate of revenue
collection in the first 8 months of the current fiscal year compared to the same period in
the previous year has been little over 17%. Given these statistics, the next year target of
Tk 72,590 crore (19% growth over the current year) seems quite challenging, but not
impractical by any means. In fact, looking at the growing consumerism in the country it
may appear that tax revenue collection target could have been kept even more aggressive,
we thought.

20 | P a g e
In order to achieve the stretching target for the next fiscal year, the NBR has planned to
set up upazila-level camps and recruit students and part-time workers. These are indeed
good initiatives. In addition to the same, the NBR needs to identify sectors currently
paying little or no tax to widen its tax net. The structural and capacity issues of NBR also
need to be addressed. The propositions discussed in these areas were: 1) One very large
sector that has recently experienced an exponential boom in terms of growth but is yet to
contribute significantly to the national exchequer is the capital market. Our capital market
already enjoys extremely encouraging tax incentives in the form of preferential rates
which is currently the lowest compared to peer countries. Despite this fact, the rate of tax
evasion in this sector is alarmingly high. Roughly there are about 23 lacs BO
(Beneficiary owners') accounts in the country through which the capital market
transactions are being executed and it is estimated that 70 per cent of these accounts are
not paying due taxes. The NBR needs to launch an immediate initiative to link all BO
accounts held with stock brokers to an acceptable TIN number and start monitoring the
transaction activities through those accounts. The NBR should consider setting up a
cross-regulator team with the SEC (Securities Exchange Commission) in this regard.

2) Another important sector that seems to be evading significant amount of tax is the real
estate sector. Over the last decade the price per square feet area in the prime locations of
Dhaka city (e.g. Gulshan-Baridhara) ranges from Tk 7500/- to Tk. 20,000/- and
transactions are indeed taking place quite regularly at such exorbitant prices. The growth
of real estate development projects in and around Dhaka city is phenomenal. This
indicates that everyday vast amounts of cash are changing hands in this sector. Currently,
there is a tendency of recording these real estate sector transactions at a price much lower
than actual to minimise the registration cost etc. A high registration fee puts pressure on
the buyer and discourages transaction. The government could consider further
rationalising the registration fees to encourage recording of transactions at actual rate and
thus increase its revenue on an absolute level.

It is evident that given the wealth accumulation by the middle class and the enormous
opportunity space existing in the above sectors, finding areas to widen the tax net should
not be the biggest challenge. Neither the political intervention nor the lack of political
will be the main hindrance to this effort. The more serious challenges are the structural
and capacity issues facing the NBR itself. There are also limitations in terms of
information availability as well as the capacity in analysing whatever information is
available.

Administratively, the NBR is under the Internal Resources Division (IRD) of the
Ministry of Finance (MoF). The Secretary, IRD is the ex-officio Chairman of the NBR.
The NBR is responsible for formulation and continuous re-appraisal of tax-policies and
tax-laws, negotiating tax treaties with foreign governments and participating in inter-
ministerial deliberations on economic issues having a bearing on fiscal policies and tax
administration. It is unfortunate but true that in spite of being the main revenue
generating arm of the government, the NBR has no revenue or expense budget approval
authority within itself. Any proposal of funding any initiative has to go through very
complex bureaucratic procedures through IRD and relevant sectors of MoF. Even trivial

21 | P a g e
administrative affairs within the NBR (e.g. leave applications for junior NBR officials)
have to go through the approval process of IRD. And this approval process is also not
flexible enough to incorporate two-way communication between the approvers and the
applicants. This type of structure is seriously detrimental to the NBR's expected role of
playing a proactive revenue-focused organisation. The NBR needs to have independent
authority to spend within a given budget, recruit as per its annual HR Plan and administer
its staff on its own.

To build up the capacity of the NBR the most important consideration should be the
quality of human resources in-take within the organisation. To be more effective in
identifying and pursuing new areas of increasing the tax net the NBR needs qualified
human resources in the form of statisticians, information technology specialists, qualified
accountants and economists, especially for its Central Intelligence Cell (CIC). Like any
other department of the government, the NBR is struggling in this area in competing with
the private sector of the economy which has by far taken a significant upper-hand over
the public sector in terms of compensating and thereby attracting proper talent. Hence,
the NBR, being a revenue-generating organisation, should have a proper compensation
structure in place to give adequate incentive to their staff in line with the private sector.
Otherwise, the organisation will fail to attract staff who will be superior in knowledge to
challenge tax-payers in the private sector.

Currently, only a few selected sections of NBR get a miniscule percentage of collected
revenue as incentive payment. This percentage should be increased and all circles and
sections of the NBR should be brought under this programme. The initiative of
structurally strengthening the NBR needs to go beyond revision of compensation
structure of the staff. The entire set-up of the NBR as an organisation needs to be
revisited. After establishment in 1972, the organogram of the NBR has been reviewed
only once (1991-92). Whether the current setup is conducive for attracting right human
resources is also questionable. The current organisational structure is very flat with only a
few layers and a large span of control. Such a setup does not encourage career
progression for the junior staff members and newcomers and hence discourages potential
recruits.

Another area of challenge for the NBR is the lack of cooperation and coordination among
the various regulatory wings of the government. The discussions identified that different
organs of the government hold information on economic activity in various sectors. For
example, the Ministry of Land has information regarding sale of land and real estate; the
Bangladesh Road Transport Authority (BRTA) has information on purchase and sale of
vehicles; the Central Bank, through its command over banks, has access to bank deposit
information and the SEC has access to capital market information. The NBR needs to
have free access to all these information sources to carry out focused and fruitful
research. In an ideal scenario, CIC should run a database of all valid TIN numbers which
should be automatically and regularly fed with information on their respective tax
returns, bank account balances, capital market transactions and real estate/vehicle
transactions. Setting up such a database is not impossible if quality human resources and
cooperation amongst the mentioned wings of the government can be ensured.

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Currently, our total revenue collection stands at a meagre 9 per cent of GDP. This
exposes our national budget to interest pressure and in fact government debt-to-revenue
ratio is a staggering 350 per cent at present. In the recently published Sovereign Credit
Rating report, the internationally renowned credit rating agency Moody's also came to the
same conclusion and identified this shortcoming in revenue generation as a serious rating
constraint. The rating agency will critically observe the tax reforms that may be
announced in the forthcoming budget and use the same as input to determine our credit
outlook. Increased revenue earnings will also allow the government to increase
employment-generating public expenditure and thus create a social safety net for the
marginalised

people.

We concluded that the NBR has so far done a commendable job in supporting the
revenue collection targets of the government. But to fund the development needs of our
fast-growing economy the revenue target and actual collection will need to be increased
exponentially in the coming years. Given the wealth and capital accumulation in the
country it is clear that abundant sources of tax revenue are present. All we need is to
adequately equip the NBR to tap those sources and in the process provide us the
financing needed to lead us to our goal of becoming a middle-income economy.

The writer is a banker and economic analyst. He can be reached at e-mail:

mamun1960@gmail.com

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 8. Basel III coming with stringent regulations

Afzalul Haq

Banking is a business, all over the world, where the contribution of capital becomes very
insignificant in the volume of total business thereof. Balance sheet of almost all the banks
must stand as the primary evidence of the comment. In a balance sheet, capital of most of
the banks is seen as a small part of the sources of fund which build the properties and
assets as shown therein.

General equation of any balance sheet or the affairs of any concern is that total of capital
and outsiders' liabilities always become equal to its properties and assets. In other words
internal liability (capital/equity) and external liability equate the total properties and
assets thereof. In modern terms it also may be equated as 'sources of fund vis-à-vis
application of fund'. For banks, sources of fund substantially consist of shareholders' and
depositors' fund and both are applied or invested in properties and assets thereof. So the
major category of sources of fund is divided into two: i) capital and ii) depositors' fund.
In other words, it is share holders' money versus depositors/ outsiders' money. All fund
are then applied in bank's assets of different forms.

Assets are again mostly represented by the loans, advances, investment and other fixed
assets. It is also notable that in case of banks, most of the initial capital is exhausted for
office premises and other fixed assets like electronic equipment, furniture, fixture, car for
executives and other pre-operative/ preliminary expenses etc. As a result, a small part of
capital remains available for investment. So the very truth for a bank is that most of the
loans and advances are financed by depositors' money. The amount of capital/
shareholders' money weighs too light as compared to others' fund. Bank is rich with
others' (dominated by depositors') money.

As the vital source of blood circulation of a bank is the depositors' money, a global
standard has been designed in the Bank for International Settlements (BIS). This
discipline or agreement is known as International Convergence of Capital Measurement
and Capital Standards. The standard was born in Basel of Switzerland. It has got a
nickname as Basel accord or just Basel a much talked about issue now-a-days in the
banking industry all over the world.

Again after updating, a Revised Standard known as Basel-II has now been prevailing. For
further updating, particularly in the backdrop of the latest financial meltdown, resulting in
fall of many, too big to fall' like Lehman Brothers, AIG and many a bailout programme
to save the drowning ones, Basel-III is being cooked with more stringent regulations.
Appreciation for this great and giant work, to make financial institutions safer, knows no
bounds. None could deny that Basel accord has vibrated the banking world to turn its
eyes towards banking/bank's health.

Designing three pillars as foundation of Basel to withstand against anticipated and

unanticipated financial storms obviously deserves credit. Extension of the purview of

24 | P a g e
risk, segregation of different risk components, prescription of different approaches to
measure them, suggesting different principles, and processes for supervisory review and
requirement of transparency through market discipline/public disclosure are all for a safer
global financial industry. All these steps are meant for keeping the confidence of the
stakeholders and interest of the depositors through a systematic and constant follow up.
This measure is comparable to regular/ routine human medical check up' for good health.

There remains no doubt that in the detail of the Basel, there are so many noble
prescriptions for checking the health of a bank along with the different techniques to
diagnose through sophisticated pathological test like VaR (Value at Risk) technique and
stress testing, including sensitivity analysis and so on. The issues of difficulty of
implementation or technicality of the process or the larger volume of works or need of
expertise to arrange such a technical medicare system or other usual limitations of Basel,
are not the subject matters of the article. Rather this writing raises the finger towards
relative emphasis on the issues or areas of concentration clustering the Basel accord.

It appears from the vibration of the concerned corners of the industry that maintenance of
minimum capital has become the burning area of concentration in Basel. Here is the point
of dissent in light of the facts portrayed in the beginning of the writing in respect of
scenario of a bank's balance-sheet. As already stated, usually capital of a bank is
insignificant as amount in the total business volume of any bank. Depositors as a whole is
the substantial contributor. On the other hand, the earning asset of a bank is mostly
represented by its loans and advances as a whole. Thus the portion that deserves more
importance in the liabilities side should have been the 'depositors money' (as opposed to
capital) and in the asset side it is the 'loans and advances'. Then in respect of importance,
the desired equilibrium should have been 'depositors money' versus loans and advances',
not 'capital versus loans and advances'. It is the board of directors of a bank as
representative of the equity holders, who to look after their capital and sound return
thereof? What the supervisor (central bank) be mostly concerned about? Of course it is
the interest of the outsiders, dominated by the depositors.

Now comes the question of the reason for which interest of the depositors need be
specially taken care of. The simple reply is that because the lion's share of the money,
injected to the borrowers, belongs to them (depositors). Credit or lending offered to the
borrowers has got inherent risk of not coming back to the bank to return to the actual
source i.e. to the depositors (on demand or at maturity). All the steps to assess risk of
non-recovery of credit as prescribed in the Basel standard is its real strength. The lower
the risk, the higher is the probability to recover money. The higher the recovery, the
higher is the Bank's ability to pay off the depositors as and when required. Thereafter
comes the question of protection of the depositors' money, when recovery is not
sufficient. In that case there must be fund from elsewhere to pay off the depositors. It is
nothing but the money or fund which is required for meeting crisis or on demand. It is
irrelevant whether it comes from capital or otherwise. Whatever might be the proportion
(between capital and outsiders' money), lent money consists of both the sources, internal
and external (unless capital is exhausted earlier for say preliminary expenses etc). It is
also irrelevant whether the size of capital is small or big. Important is the availability of

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fund. Capital does never mean availability of fund. Capital does not have any such
provision that it must be available in the bank's vault. So capital does not necessarily
mean liquidity to meet demand for fund. While lending, bank is rather constrained to lend
the whole of the deposit (by way of stipulation of mandatory maintenance provision of
CRR as well as SLR); but no such restriction is there against lending the full amount of
capital. There is no rule that the bank must lend only the depositors money keeping the
capital intact. In case of need, as the capacity in terms of liquidity becomes the dire
concern, primary precaution must be to ensure liquidity/convertibility of loans and
advances of the bank i.e. the health of the loans and advances. So making stringent
regulation for selecting good clients, processing and maintaining health of the credit are
more important than insisting on raising equity by 1.0 per cent or say 5.0 per cent even.
Because, if loan repayment is sound, depositors interest is protected by ensuring
availability of fund. An increased capital is never a guarantee for making fund available
for the depositors. So it is again the quality of utilisation of fund which is important; not
the amount of capital or the proportion of capital structure per se.

Now comes the question of bearing the burden of loss, if any, despite all the measures for
maintaining good health of the assets. It is clear that the pressure of loss at first hits the
capital. A loss upto the tune of capital is a loss of capital itself because of limited
company's rule. A loss beyond the amount of capital is the loss of the depositors or other
outsiders. So again it is the amount of capital (obviously not necessarily the ratio with the
Risk Weighted Asset) which determines whether the risk of loss is also to spread over the
depositors. No doubt higher the capital, the higher is the capacity to absorb loss. But this
capacity, in other words, is the 'mandatorily foregone claim' of the shareholders on the
asset of the bank. It is never the cash available by virtue of capital fund. Capital, be it
core, supplementary or even conservation buffer (as going to be imposed under ensuing
Basel-III), matters very little if it is not encashable in time of need. Capital is not enough
without liquidity. Both are to be ensured; rather liquidity is a must for facing insolvency
for loss resulting from non-performing loans (NPL) and/or from market/operational risk
of the bank.

Equilibrium between profitability and liquidity needs to be ensured prudently. Amount of

capital alone is not the major constrained. This refers to the latest financial meltdown
which has caused global recession and is still leading to closure of many financial
institutions even today. It is important to note that the key reason for failure of financial
institutions is always attributable to NPL and liquidity crisis, never was it for the lower
capital. Enough is enough. Crisis triggered by non-recovery of loans, widened for the
same and caused death of many for the same. This is not owing to small capital.

Liquidity or availability of fund is totally different from the concept of equity or capital.
Reckless lending with unscrupulous super rating, biased appraisal and processing of loans
created by way of so-called derivatives, having no real asset backing, going beyond
means tempted by greeds etc. are the key contributors for the red light. Could a bit higher
capital save them without available fund? Capital and fund in terms of financial
management are not synonymous.

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So quality of asset, parties concerned with the process of assessment of risk including the
external rating companies are to be taken into account for the good health of any bank. It
is fair to maintain a proportion between the capital and other liabilities and again between
capital and assets. It obviously makes sense. But without maintaining the asset-quality,
invested capital has a very little role to play in the course of action meant for 'salvation'.
Because both deposit and capital have been invested for earning.

For a safer banking industry, it needs to maintain good health of asset and the availability
of fund to absorb losses in crisis. It is true that the higher the capital, the higher is the
capacity to absorb loss. This is the only relevance of the capital to the interest of the
depositor. But the relative term of high capital to be compared not only to the RWA (risk
weighted asset), but also to deposit and above all that must have a relationship with the
liquidity. Capital without liquidity is no capital at all as coverage in need of fund. Fund
becomes available under two situations: i) When they are kept fully unutilised/liquid, ii)
When they are invested/ injected in assets qualified for routine/ quick encashment
without any loss. The former does not at all mean business as usually it earns nothing/ or
the least; it rather gets the risk of decay in value, for inflation. The latter (loans, advances
and investment) earns and stands well provided it is not classified. So, which to ensure is
quality of asset, not the amount of capital. Capital may not make fund available. A
powerful vaccine for hepatitis is not supposed to protect TB and so on. Overemphasis on
the ratio of capital amid being blind to the quality/reality of assets is tantamount to
vigorous labour pain of the Mountain giving birth to a mouse or at the best mice.

Again trial and error introduction of subordinated bonds in the name of Tier-2 & Tier-3
capital does not make any sense in terms of relevance to its purpose. The very purpose of
capital coverage is to protect the interest of the outsiders; depositors and other creditors.
But bond or other debt-holders themselves are never shareholders or contributors to
capital or equity (except some Islamic products under Mudaraba or Musharaka mode
where 'quasi equity' treatment is allowed). Equity is internal liability of the company
whereas debt-holders are externals. So bond/debt itself does not make sense of imitated
capital even. Yet, convertibility of bonds into shares is a different thing. Collecting
billions of money through so-called derivative of capital to satisfy regulatory capital
requirement and subsequent exclusion (prescribed for Basel-III) of such items from the
components of capital is like 'Tom & Jerry' game. Such a game, in an aristocrat industry
like banks, is not desirable. To fight consequence of so- called derivative loan products
(through excessive financial engineering), another derivative of capital, is introduced
which in turn again increases the volume of outsiders' claim against the bank. They
would also seek regulators' intervention for honouring their claims. Unless the
subordinate debts are converted into shares, they will be in the same platform with other
creditors to ask the bank to settle their debts duly, failure of which on the part of the
bank, would again chase them to look for bailout at the cost of society.

To protect the interest of the depositors, it is rather better to impose discriminating SLR
on the basis of quality of bank's assets. The higher the rate of NPL (non-performing
loans), the higher is to be the SLR and vice versa. SLR means liquidity, SLR means fund
to absorb the shock. Capital might be invisible when invited for absorbing shock of loss.

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But CRR and SLR would not flee. Capital of Tk.100 may once worth less than Tk.10 in
terms of liquidity to address crisis but SLR of Tk.100 need not be depreciated in this way.
Of course all the measures to guard against entering ill-credit or failing of credit ill must
be ensured and sharpened more as the most effective suggestion of Basel accord.
Moreover, in the present context of Bangladesh it would be more effective and
reasonable to contain/ restrain the banks from over-investment in the unfairly extremely
volatile bourses than to insist on increasing of 1.0 per cent or 2.0 per cent capital on risk
weighted amount of its asset leaving the substantial amount of its balance-sheet fraught
with severe risk. Besides, as a rule, speculation should not be the banking business.

The writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He
can be reached through email afzal@bankasia.com.bd Opinions expressed in the article
are of the writer's own and not necessarily of the organisation he is serving for.

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 9. Are we under high security risks?

Shamsher Chowdhury

I had been thinking for weeks now about the overall state of the country. As time
progresses it appears that security both of the country and the people at large is marching
fast towards a critical stage. Everyday in some corners, of the country some dens of
terrorists with possible links to Alqaida or Lashkar e Taiba are being discovered and a
number of members of such organizations are taken into custody. Some of the known
terror organizations have threatened action against foreign missions including paralyzing
and attacking government's operations.

A reliable source has told me that the Australian High Commission has ordered the
closure of its club at Gulshan for an indefinite period. So acute is the situation that even
some of intelligence officials themselves are feeling insecure. Despite the fact that
terrorists and terror outfits are unearthed every now and then I find no reason to be
complacent. Of utmost concern is also the fact that even women are also getting involved.
Twice shocking is the fact that at least the most recently arrested woman terrorist belongs
to none other than the ruling party.

At the backdrop of the above, it is my feeling that the government's overall programme of
interventions and management strategy are ill planned and wrongly focused. Experience
has shown that you cannot succeed tackling terrorism of any form particularly religious
extremism through mere policing and sheer banning of some known outfits here and
there.

Religious extremism or terrorism whatever you may choose to call it can never be
eliminated through armed interventions alone. We have in front of us the glaring
examples of Iraq, Afghanistan, and Pakistan. The USA, the lone super power of the world
in the process has not only burnt their fingers but also tarnished its image globally.

There is no point in hiding our faces under the sand like the ostrich. Let us face it
Bangladesh has ideal conditions for breeding and spread of religious extremists or their
kind. Consider the lack of education, the huge economic disparity between the rich and
the poor, the miserable state of our intelligence agencies further contribute to the
developing scenario. On top of it, poor and inefficient administration has also become yet
another contributing factor for the recent heightened activities of terrorists.

To my mind among others the terrorists do find that right at this moment the government
is particularly vulnerable.

Its law enforcing agencies are already head over heels with such high profiled trials like
Bangabandhu Murder case, the BDR trial, the 21st grenade attack, the war crime trials so
on and so forth. Added to this is this business of carrying a crusade against the opposition
and all opposing forces and the overall deteriorating state of law and order.

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Government has opened too many fronts all at one time. These are no ordinary criminal
cases.

They are not only complex issues but also have too many high profiled people both from
political circles and otherwise have their stakes in these cases.

Besides one has to understand that public memory is short and with passage of time these
cases have lost a good deal of relevance with the people at large.

What we have to understand is this that terror acts by religious extremists are often
triggered by people who feel that they are isolated and marginalized socially economic
and otherwise.

There are several factors that contributed to the build-up of religious extremism in the
country. Primarily these are economic and social. Besides one also has to understand that
these brands of people are no ordinary people As much as operators on the ground come
from a section of the poor and disadvantaged duly brain washed, the truth remains that
the men behind them are considerably literate and do have exceptional organizing
capacities.

Not only that they do have an agenda of their own both political- cum- religious. They
are fully committed to their objectives and goals. They do have a large networking spread
all over the world particularly in countries dominated by Muslims. On the other hand,
they have adequate access to financial resources to carry out with their operations and
organizational activities.

The gap between the rich and the poor is widening and an all round social unrest and
discontent is climbing. On the other hand the common man today is ever more
disillusioned by government's failures in dealing with many contentious issues that
continue to adversely affect their day-to-day living. The environment thus is ideal for
growth of religious extremists. No terror acts can flourish without sympathizers within
the social framework.

I have this eerie feeling that given the existing environment the extremists will be gaining
more ground in the coming weeks and months. As it is our intelligence agencies have
their hands full with such high profiled cases like the War crimes trials, Bangabandhu
murder trial, 21st August grenade attack etc. To put it bluntly I do not see the government
having adequate resources and qualified manpower to effectively deal with all these trials
let alone deal with growing religious extremism.

The government most unwisely has put its fingers into too many pies without duly
assessing the resources required and possible consequences to follow.

We often fail to understand that not all popular issues are necessarily the right issues and
the right issues are not necessarily popular. Besides I continue to have the feeling that the
administration has knowingly or unknowingly turned these issues of national concern

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into partisan issues.

Conversely it made matters more complicated by preempting a particular political

element as the sole perpetrator.

I live on the seventh floor of an apartment complex less than half a kilometer from the
BDR complex as the crow flies I do not know of others but every day in the wee hours
the night I wake up from my sleep and I wait for ominous sounds and I am scared.

Finally I would like to conclude this short commentary with the following remarks for
consideration of the present Administration:

1. Government must rethink and revise its strategies in tackling religious extremists or
else there is every possibility that this country might turn out into yet another mini-
Pakistan

2. Take lessons from the Pakistan experience.

3. It must proceed with extreme caution particularly before entering into international
agreement with any foreign power including the super power

4. There should be no community profiling at any cost.

5. It must build up a political consensus on the matter taking all political parties into
confidence.

6. Whatever agreements and polices are contemplated and planned must be thoroughly
discussed and debated with all sections of the society, like the intellectuals, the civil
society and related professionals and think tanks including religious leaders.

7. There should be no undue provocations of sorts against possible suspects or

individuals.

8. In the process of dealing and tackling religious extremists caution must be exercised in
not hurting the religious sentiments of the common man perceived or real.

The writer can be reached at

e-mail: chowdhury.shamsher@yahoo.com

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 10. Bus rapid transit for solving Dhaka's traffic congestions

Md Salaha Uddin (Pavel)

THE policy makers have before them many options to solve the city's crippling traffic
jams. More efficient public transport for the roads, underground railway and elevated
roads are among the options.

But what will be the best solution for the beleaguered city of Dhaka to ease its growing to
traffic congestion. At a workshop on, 'Better urban transport in Dhaka', the organisers,
Japan International Cooperation Agency (JICA), presented its Dhaka Urban Transport
Network Development Study (DHUTS). Experts opined that the rail-based mass rapid
transit (MRT) or bus rapid transit (BRT) would be the best possible solution to the
perennial gridlock. Studies show that bus rapid transit could provide the quickest possible
solution.

No doubt, compared to other systems, bus rapid transit would be a better solution. Of
course, it would call for a detailed study from technical, socio-economic and political
perspectives.

And again political considerations seem to be the biggest snag on the way to taking the
decision to solve any problem. So feasibility study must not disregard the obstructive
political considerations. Bus rapid transit would require huge investment, which can be
mobilised through public-private partnership.

Possibly, the private sector alone cannot solve such a big problem. Moreover, the existing
bus operators can raise issues. And it is beyond the capacity of existing bus owners to
provide the massive service to meet the growing requirement. No single private bus
company can do it alone either. Introduction of bus rapid transit requires shutting down
the existing bus services. The existing companies have to be integrated to pull their
resources. Then other, even bigger stake holders would have to be involved. There should
be no monopoly. The routes should be split and the operation should be assigned to
different companies segment by segment.

The existing structure of the passenger transportation business, using bus, will not easily
allow the development of the massive bus rapid transit system, by either the government
or a pull of private investors.

In Bogota, Columbia, the bus rapid transit system is facing serious agitation due to its
monopoly image. Citizens' groups are favouring a solution other than bus rapid transit for
Bogota. To avoid a situation like this, the government has to mobilise the surplus in a
way that does not create a monopoly. Otherwise, agitations by citizens groups could
obstruct a solution.

For efficiency the bus rapid transit system must be kept beyond the reach of extortionists.
Tackling the business groups operating buses now should be planed ahead.

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For the bus rapid transit to be efficient, the use of private cars has to be discouraged.
Many people will prefer to use the bus rapid transit system as the city roads give no
comfort to driving cars. The growth of commuter has to be anticipated to constantly
improve the bus rapid transit service, so that it can cope with the growing needs.

Coordinated decision and action by government departments, now lacking, would

facilitate the solution. All the actors should be identified, and involved with
implementation, operation and maintenance. Only an organised management chain can
optimise the efficiency of the system. How each actor like BRTC and Dhaka
Metropolitan Police, or the others would interact should be clearly defined. Otherwise,
the system could collapse.

With realistic planning, bus rapid transit system can provide a solution faster than any
other system.

The writer, an M.Sc Student (Urban Planning and Policy Design), Faculty of Architecture
and Society, Milano Leonardo Campus, Politecnico Di Milano (POLIMI), Milan, Italy,
can be reached at e-mail: msupavel@yahoo.com

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