Remittances Management Of Non Resident Business Operations (Nrb) Of Eastern Bank Ltd. & Its Impact on National Economy
OVERVIEW OF EASTERN BANK LIMITED (EBL)
The needs for commercial banks in any country are important for its economic growth. Primarily, commercial banks are the one of the major source of funds in the economy. By borrowing money from the locals and lending the same to the locals as loans and advances, they perform an important function. People and Govt. itself are very much dependent on the effective and efficient services provided by the banks in the financial markets of the country. Commercial banks act as financial intermediaries by performing the functions of mobilizing the funds and utilizing them in the proper way. Banks make reasonable amount of profit after meeting the cost of fund. In Bangladesh, one common problem is the cost of fund is very high because of the high transaction and ledger costs and limited source of fund. Competition is intense for funds in the country. Combining all these issues, financial environment is tough to operate in Bangladesh; moreover the stringent rules, regulations, and Govt. control on market make things worse. Now this report focuses on an important side of banks that is how efficient they are in providing credit facilities. Their efficiency is reflected by the amount of classified loan. Another two factors are also associated with these classified loans provisioning strategy and recovery strategies.
In pursuance of the “Bank of Credit and Commerce International (Overseas) Limited in Bangladesh (Reconstruction) Scheme, 1992”, framed by the Bangladesh Bank and approved by the Government of Bangladesh, the Eastern Bank Limited was formed as a public limited company incorporated in Bangladesh with primary objective to carry on all kind of banking business in and outside the country. Eastern Bank Limited had also taken over the business, assets and liabilities of erstwhile Bank of Credit and Commerce International (Overseas) Limited branches in Bangladesh with effect from 16h August, 1992.
VISION OF EBL
‘To become the bank of choice by transforming the way we do business and developing a truly unique financial institution that delivers superior growth and financial performance and be the most recognizable brand in the financial services in Bangladesh.’
MISSION OF EBL
v We will deliver service excellence to all our customers, both internal and external
v We will constantly challenge our systems, procedures and training to maintain a cohesive and professional team in order to achieve service excellence
v We will create an enabling environment and embrace a team-based culture where people will excel
v We will ensure to maximize shareholders’ value.
EASTERN BANK’S VALUE
Eastern Bank Limited Values Statement is “Simple Math”
CURRENT BANKING SCENARIO IN BANGLADESH & EBL’S POSITION
From the beginning of the year 2006, the entire banking industry in Bangladesh started facing stiff competition to procure business, under the changed circumstances of the policy of Bangladesh bank to lower the rates of interest in lending and to go for syndication against large loan portfolios with the objective to ensure better operation and control of all functions of the bank.
Despite such situation the year was a remarkable one for Eastern Bank Ltd. when the bank finally completed the introduction of a state-of-the art IT technology platform of FLEXCUBE, a world class banking software. All of bank’s 34 branches were connected to this IT platform giving an enviable opportunity to all the EBL customers to obtain the most coveted services that no other bank could offer them yet.
Customers of new century are self-motivated, vigilant and informed about the market conditions, further more development of information technology and telecommunication systems created an environment whereby customers demand convenience, reasonably priced better quality financial products and personalized services. Customer demand together with technological advancement created new challenges and opportunities in the banking sector in Bangladesh. Adapting realistic and timely business policies, investments in IT are now prejudicing to stay at the edge of this assertive and competitive banking business of the country. Invention of new financial products and services and introduction of new delivery methods are the key concern of staying close to customers.
To cope with the status quo, Eastern Bank Limited welcomed these developments and restructured the bank to meet the challenges in future. The branches of the bank are now termed as the “Sales & Services Center” which are solely concentrated providing service to the corporate and consumer clients and maintain relationship with them. The strategic changes that it initiated back in 2002 to face this changing circumstance, completed in 2006. As a result, this new business structure supported with the robust banking solution will allow the bank to focus on customers’ needs and provide the best services and products to customer’s doorstep at an attractive price.
Keeping in mind such changed circumstances the bank concentrated not only on wholesale banking but also on other alternatives. For example, introducing new products; diversifying Bank’s activities in consumer and retail banking; simultaneously securing low cost deposits to sustain profitability, increase shareholders’ wealth; rationalizing the expenses and optimizing fruitful use of the funds. The cost to operating income ratio of the bank in 2006 was at the lowest bracket compared with other banks.
PERFORMANCE OF EBL IN RECENT YEARS
Eastern bank limited began its stressful journey in 1992 and shaped itself to this position as a healthy financial institution and enjoy today commendable reputation in all circles in the country as well as abroad due to transparency in all layers of its transactions following the rules of business set by the Finance Ministry and Bangladesh Bank without any lapse. It has thus culminated a spirit of honest teamwork amongst the management and staff to produce strong balance sheets, quality portfolios, maintain high capital adequacy, paid up capital and reserves.
Eastern Bank Limited today has a strongly motivated and dedicated management and staff who are the pathfinders for introduction of sophisticated products. It has introduce the Automated Teller Machine (ATM), Point of Sales, Internet Banking, Phone Banking, Debit Card, etc. and also new products. Already it has introduced ATM Machines in its branches. Debit Card has also been launched. Clients can also do their business transactions through Internet Banking. For example, they can pay their utility bills through Internet Banking. These positive things shall broaden its customer base and enable the bank to have a competitive edge on other banks. For serving at a different way EBL introducing some SME products like EBL Agrim, EBL Asha, EBL Mukti and so on. They have also several types of Consumer Loan facilities, Consumer Deposit facilities and EBL Card facilities for instant cash transaction, travel card, life style card etc.
CORPORATE GOVERNANCE & REGULATORY COMPLIANCE
Eastern Bank Limited practiced the principles of good corporate governance over the years that covered compliance of regulatory requirements, responsive to various stakeholders. Spirit of corporate governance also included practicing of the corporate culture within the organization and shared this by the employees.
Eastern Bank Limited complied with all the regulatory guidelines prescribed by the Banking Companies Act, Bangladesh Bank, National Board of Revenue and Securities & Exchange Commission, International Accounting Standards, etc.
MANAGEMENT & ORGANIZATIONAL STRUCTURE OF EBL
The board of directors being at the highest level of organizational structure plays an important role on the policy formulation. The board of directors is not directly concerned with the day-to-day operation of bank; it has delegated authority to its management committee. The board establishes the objectives and policies of the bank. The board has the authority to declare dividend, to approve the balance sheet, etc. The Chairman informs the board of directors on the progress of the bank and implements the policies established.
There are three committees of the board for different purposes, which are-
1. Executive committee comprises seven members of the board
2. Committee of the board for Administrative matter
3. Committee to examine Bad Loan Cases
Management Hierarchy: EBL Eastern Bank Limited
|BOARD OF DIRECTORS|
|DEPUTY MANAGING DIRECTOR|
|EXECUTIVE VICE PRESIDENT|
|SENIOR VICE PRESIDENT|
|SENIOR ASSISTANT VICE PRESIDENT|
|FIRST ASSISTANT VICE PRESIDENT|
|SENIOR PRINCIPAL OFFICER|
|MANAGEMENT TRAINEE OFFICER|
DEPARTMENTS OF EBL
EBL operates through a network of 34 branches around the country. 17 of those branches are located in Dhaka, 9 in Chittagong, 4 in greater Sylhet and the rest in other four commercially important cities (Khulna, Bogra, Rajshahi & Jessore).
CORPORATE BANKING DIVISION
Corporate Banking is an integrated specialized area of the Bank, which addresses the diverse financial needs of Corporate Customers. Local and Foreign Business Houses (Public and Private Limited Companies), NGO’s, Associations, Not for profit Organizations, Sole Proprietorship Concerns, Partnerships and Various Government Bodies/Corporations etc are considered to be our Corporate Customers. Services provided by Corporate Banking are as follows-
Ø Structuring of Facilities for Corporate Customers
Ø Develops understanding of customer businesses and advises Financial Solutions
Ø Arrange Loan Syndications
Ø Developing Relationship between the Clients and the Bank
Ø Processing credit facility requirements and arranging approvals for credit facilities.
Ø Handles pricing issues and Wallet Sizing Exercises to maximizes the earnings of the Bank as well as of the Client
Ø Ensures Corporate customers’ complaints and Service issues are promptly addressed.
Ø Coordinates activities of support unit Credit Administration unit which prepares security documentation, security registration, and CIB related issues.
Ø Coordinates activities of operating departments in obtaining Central Bank approvals where necessary.
CREDIT RISK MANAGEMENT DEPARTMENT
All sorts of Credit facilities need to be approved by the Credit Risk Management (CRM) department. This department monitors the risk aspects of the various credit facilities and the clients and then decides whether to allow a particular client to avail the credit facilities. Its objective is to ensure better management of asset relationships. This department has made significant progress in upgrading the asset portfolio of the bank by booking high quality accounts (blue chip local corporate and multinational). Other functions include introducing new monitoring standards, periodical portfolio review, credit approval guidelines and initiating the process to establish a separate Credit Administration Unit to ensure greater control. This brought better management of assets.
SPECIAL PROJECT- CRM
The assignment provided by CRM (Credit Risk Management) was based on analysis of different banking and non-banking financial institutions and particularly we, Group# A, were assigned to do analysis of 46 Financial Institutions (FIs) which include Development Financial Institutions (DFI), Nationalized Commercial Banks (NCBs), Local Private Banks and Foreign private banks. The main purpose of the analysis was to figure out the overall performance, creditworthiness using specific parameters (See Annexure A) in comparison to CAMEL rating (formal credit rating system of Bangladesh Bank). As a result, financial statements of all the 46 banks for the last three years (2001, 2002 & 2003) have been collected. Financial spreads of all those FIs were prepared. A good number of ratios have been calculated from those spreads. A summary schedule containing all the financial indicators has been prepared. Finally, a new credit scoring method is proposed based on that information.
Credit administration department is responsible of preparing the documents related to loans and performing the tasks related to credit approval. They are directly involved in disbursing and booking of transactions of any approved loan.
- Scrutinizing and ensuring that all necessary papers are received by the bank
- Monitoring of the inspection reports on an interval basis
- Scrutinize the value of the collateral and monitor the value
- Appraisal of collaterals done by third party e.g. Tangible properties (real estate)
- Doing the Bangladesh Bank reporting (CIB reporting and collection)
- Supervise the loan disbursing process (e.g. Limit load etc.)
TRADE SERVICE DEPARTMENT
The Trade Service Department consists of three sub-units. The sub-units are Import Unit, Export Unit and Guarantee Unit. These three units handle all the necessary import-export transactions and provide guarantee.
v IMPORT UNIT:
§ When an importer approaches the bank for opening an import LC (Letter of Credit), the bank primarily verifies the importer’s authenticity by checking- Trade License, TIN, Vat Registration, IRC (Import Registration Certificate)
§ Documents to be submitted by the importer are LC Application, Pro-Forma invoice, LCA form, IMP Form, Insurance Cover notes etc.
§ Import unit checks whether the products are importable as per the import policy and other regulations of the Govt.
§ If all the documents are in order, EBL (Issuing Bank, IB) transmits a SWIFT message to the Advising bank for opening LC.
§ After the shipment of goods exporter sends the documents to IB via Negotiating Bank (NB).
§ If EBL (IB) is satisfied that all the documents are in compliance with the master LC EBL confirms NB about payment.
v EXPORT UNIT:
- Export Department advises and negotiates the LCs
- Check points for the Beneficiary- Valid ERC (Export Registration Certificate) issued by CCIE, valid for 1 yr; past export performance; CIB report, TIN and VAT certificate.
- After the shipment of goods, exporter submits the export bill to the Negotiating Bank (NB). Normally, Negotiating Bank and Advising bank is the same bank.
- After receiving the “export bill” negotiating bank checks whether there is any discrepancy between master LC and the submitted documents by the exporter.
- If issuing bank is satisfied with the documents, it either makes the payment instantly (for sight LC) or it promises to make payment on a future date (for issuance LC).
- For foreign bills, the Issuing bank credits EBL’s Nostro account in a corresponding bank. For example NY SCB is EBL’s corresponding bank.
- When the negotiating bank finally receives the payment the money is apportioned in the following fashion adjust client’s B2B LC margin (if there is any), exporter’s retention quota FCY account, handling charge of .15%, courier charge, overdue charge (in case Issuing Bank delays payment).
INTERNATIONAL DIVISION & TREASURY SUPPORT UNIT
Treasury unit is a Core banking unit with its leading-edge technology and steadily growing volume of activity in the markets, EBL’s treasury unit and currency dealing desks have consolidated its position as a well-known and well established counterpart in the newly transformed Free Floating rate, dealing daily with a wide circle of both bank and non-bank customers all over Bangladesh.
v Money Market
Money market desk deals with Bangladesh Taka in Inter-bank market from Liquidity and Arbitrage perspective. Everyday EBL lends and borrows a substantial amount of money, which make EBL a strong contender for market maker –
§ Overnight and term placement/borrowing
§ Repo (Repurchase Agreement) of Security scrip with Central Bank & other Commercial Banks
§ Government bond purchase and sales on behalf of customers.
v Foreign Exchange
Foreign Exchange dealing desk deals with USD (US Dollar), EUR (Euro), GBP (Great Britain Pound), JPY (Japanese Yen), SGD (Singapore Dollar) in the Inter-bank market, from Liquidity and Arbitrage perspective. Everyday EBL offer competitive rates for these foreign currencies against BDT.
Key Areas to Focus-
- Offer greater customer convenience and speed up growth in transaction volume.
- Ensure strict control of all risks by closely monitoring market movements
In addition to foreign exchange and money market activities, EBL’s treasury continues to chair Bank’s Assets & Liabilities Committee (ALCO) and pursue its successful management of the Bank’s liquidity position by optimum utilization.
EBL Deals with inward/outward remittance in SD/GBP/EUR/JPY/SGD. We have 3 USD settlement a/c in New York, 6 USD settlement a/c in South-east Asia, 2 EUR a/c in London and Frankfurt, 1 JPY a/c in Tokyo, 1 SGD a/c in Singapore.
v Exchange House
Eastern Bank Limited has established formal relationship with two exchange houses to facilitate its foreign remittance business into a new dimension.
SPECIAL ASSET MANAGEMENT
In terms of quality, assets (loans) are classified into 7 categories. These categories are good, acceptable, marginal/ watch list, special mention, sub-standard, doubtful, bad and loss, when loans are classified, asset management starts supervising the loan: loan monitoring, persuasion of clients, negotiation, pursue legal options, inspecting mortgaged assets (land & building), auction of mortgaged assets in case of non-repayment, reschedule loans, monitor client’s performance after rescheduling, Provide regular feedback to top management.
EBL Consumer Banking deals with the day-to-day financial wants of the consumer clients. EBL’s consumer banking products are designed keeping in mind the financial necessities and affordability of the clients. The new IT platform of EBL has enabled its Consumer Banking to offer world class and comprehensive range of financial products and services. And with EBL’s Internet banking service, the client can now have access to his/ her EBL accounts and EBL’s services at the click of the computer-mouse.
CONSUMER FINANCE CENTER (CFC)
CFC is a proposed department for evaluating credit risk in consumer lending. The department consists of a team of people to identify, analyze, measure and manage risk related to consumer goods.
v Structure of CFC
CFC is set up at Dhaka and Chittagong. Chittagong takes care of loan of Chittagong branch. Dhaka takes care of all other branches’ consumer loan. Both teams will report to the Head of Consumer Finance Center. CFC consists of 4 different segments: Officer, Lending Support, Officer, Security Management, Officer, Disbursement, Officer and Collection & Recovery.
CFC currently analyzes 2 types of Retail loan: Auto Loan & Executive Loan. Other products involve: Professional Loan (Proposed product). Steps of Loan Processing & Monitoring: Evaluation, Processing, Disbursement, Collection in conjunction with the branches, Monitoring. Any aspirant can apply for retail loans directly from the branch or through the bridge of DSO (direct sales officer).
EBL launched Visa Electro Debit Card, which can be used to withdraw cash from different ATM’s situated in different locations or/and can be used to purchase goods/services from thousands of Point of Sales (POS).
The characteristics of charging Debit Card in different POS is unique in terms of EBL Visa Electron Debit Card, since this feature is offered by EBL only, unlike other Bank’s ATM/Debit Card currently providing service in this country.
Though this department is run based on one single person, formally, this department’s significance is very much meticulous and precise, particularly in the light of current EBL’s concentration of retail banking wing.
HUMAN RESOURCE DIVISION
Human Resources Division (HRD), unlike any other department, integrates and communicates the standard operation procedure (SOP) of the entire EBL. The motto of HR of EBL is-
“Employer of Choice”
The HR mission statement of EBL is-
“We will inculcate a high performance culture where we will work with fun and pride.”
But one very important term, used here to turn these missions into reality, is ‘WE’; i.e., the Human Resource. So, in order to maintain a strong human resource base, we need to bring into the picture words like motivation, accountability, employees’ social values and ethics.
The HRD of EBL used to do many common HR related jobs, like other companies’ HRD do, along with some special tasks, which are particularly unique for EBL.
Some of the customary tasks, what HR of EBL does, are: Leave Management, Performance appraisal, Recruitment and selection, Circular Communication, Ensure Compliance of Standard Operation Procedure, Preparation and distribution of Salary Statement, Employee loan management, Training & Development, etc.
The specific and unique jobs done by EBL HRD are-
· Motivational activities
· Conflict Management
· Minimize Employee Turnover
· Career Growth enhancement
To promote performance-oriented culture, EBL maintains participative performance appraisal process. In this process, the overall performances of the incumbent are discussed, evaluated and, using these, training needs of that person are identified.
A world class banking software “Flexcube” was selected to provide Online Banking, Internet Banking, Automated Teller Machine (ATM), Telephone Banking, Point of Sales (POS) dispenser, Debit Card facility, etc., to the customer to satisfy their demand of the 21st century. Necessary steps were taken by the IT Department to select and procure the compatible hardware, software, communication links, network system equipment (LAN, WAN), etc.
EBL’s strength is the state of the art technology, which gives the institution an edge over the competitors in the market. EBL’s Main back bone is the software “FLEXCUBE” of ‘I-FLEX CO.” Flexcube has two modules, one is Flexcube Retail and another is Flexcube Corporate. IT department also takes care of the IT related inventory management. The main backbone of IT department depends on the servers of EBL which are thirty nine in numbers. The main categories of the servers are live, mail, file, support, transaction, Internet banking, ATM, intranet, and OBU (Off-shore Banking Unit) server is on the process of installation.
Support Operators: LAN, MAIL, Desk Services.
Figure-1: IT Support Operation
FINANCE & ACCOUNTS DEPARTMENT
Finance & Accounts is a support division of EBL. It gives services to the other departments of EBL. Every day it checks the pulse of the bank.
- Preparing financial reports. It’s finance division’s responsibility to ensure the reports are accurate and they reflect the true picture of the bank.: Balance Sheet, Profit & Loss Account, Cash flow statement
- Oversee the Management accounting and management information functions, which includes ManCom Report, ALCO report and review of business causes.
- Co-operate the treasury functions so that treasury finance and market risk issues are appropriately addressed. Bond/bill pricing, long term investment analysis.
- Corporate tax planning and management.
- Cost and income allocations
- Planning, budgeting, implementing, monitoring and controlling.
SERVICE DELIVERY DEPARTMENT
Service Delivery (SD) Department overlooks the delivery of different services to the bank’s client. This department mainly performs the back-end office functions as mentioned below-
v Cheque Clearing,
v Issuance and encashment of Sanchaypatra and coupons,
v NON-Resident Business (NRB) Operations,
v Pay Order, Demand Draft, etc.
Administration department is responsible for performing the tasks related to the logistics support of the organization. The smooth flow of the operations depends on the skill and performance of the administration department. The administration department maintains the inventory of all types of logistics of the organization.
· Managing logistics support
· Managing the bilateral and unilateral lease contracts
· Other conventional and routine administrative tasks
AUDIT & COMPLIANCE DEPARTMENT
Audit & Compliance Department conducts surprise, regular and comprehensive inspections and audits of Eastern Bank Limited branches. Bangladesh Bank Inspection Team carries out comprehensive audit on the bank’s operational results as well. Management takes necessary steps on the basis of observations and the suggestions made by the Auditors to improve overall operational efficiency of the bank.
Internal Control: It is implemented by the following 9 steps-
- Grading : There are 3 sorts of grading of events
- Condition : It includes the write-up of observations
- Criteria : It should be capped
- Cause : Express the cause of any mismatch
- Effect/risk : What are the risks associated by those figured out
- Recommendation : If any
- Benefits : Benefits of accepting the recommendations are
- Management Response : Here Management response enclosed
- Action Plan : The action plan is expressed in this segment of the
reporting the industry, etc.
IMAPCT ON NATIONAL ECONOMY
Remittance and flow of funds from migrant workers to their home countries have become a major source of resource in the developing and emerging economies. In case of Bangladesh the remittance from Non-Resident Bangladeshis (NRBs) and the deposits maintained by them with banks in Bangladesh form a substantial part of our external reserves. According to a recent World Bank Report, the top destination for migrants is the European Union, currently with 71 million, followed by the U.S.A. with more than 40 million. However, in case of Bangladesh, the majority of the migrants would be to the Middle East and the USA.
DEFINITION OF REMITTANCES
The term “Remittance” has generally come to refer to the transfers, in cash or in kind, from a migrant to household residents in the country of origin. The International Monetary Fund (IMF) has a broader definition and includes three (03) categories, namely-
1. Worker’s remittances or transfers in cash or in kind from migrants to resident households in the country of origin;
2. compensation to employees or the wages, salaries and other remuneration, in cash or in kind, paid to individuals who work in a country other than where they legally reside; and
3. Migrant transfers which refer to capital transfers of financial assets made by migrants as they move from one country to another and stay for more than one year.
THE GROWING IMPORTANCE OF REMITTANCES
Today, along with everything else, the household and the job market have gone global. Cross border households are increasingly common, generating incomes where there is work to be found and spending it closer to home where the elderly and more dependent members remain. Many migrant workers do not intend to remain their entire lives in the host country, just their productive years. Remittances are merely a way of getting the money from where it is earned to where it is most needed. Contributing to this phenomenon are the vast improvements and declining costs in modern international travel, communications and financial transactions.
As a result, remittances tend to be more stable flows nowadays that do not drop off after a certain number of years. While there is a consensus that remittances are growing fast, with total international remittance flows estimated to surpass USD 200 billion for 2006, there is at the same time an underlying feeling that the statistical evidence is sketchy and that we are dealing more in the realm of orders of magnitude than accurate statistical measurement. There is also a presumption that the high growth rates we are witnessing in recent years may be overestimating the actual situation, since they are probably also reflecting improved measurement procedures.
The economic importance of remittances flows, both at the micro and macro levels, must be taken into account by policy-makers in view of their positive development impact in various ways-
1. First and foremost, by permitting remittance recipients to accede to higher levels of consumption and improved living standards, including better health and education, these flows are contributing to the long-term development potential of the economy.
2. Secondly, and given the role played by the banking sector as either a direct or indirect intermediary in the remittance process, these flows represent an opportunity for broadening the financial inclusion of beneficiaries, providing access to bank credit for housing and microfinance to the lower-income population segments.
3. Last but not least, by strengthening the balance of payments and relaxing the traditional foreign exchange constraint faced by these economies, the a-cyclical nature of remittance flows improves creditworthiness and access to international capital markets, while reducing the cost of new debt.
Bangladesh Bank permits banks in Bangladesh to establish drawing arrangements with Foreign Banks and Exchange houses for facilitating remittance by Bangladeshi nationals living abroad. Persons willing to remit their earnings through official channels can buy either Taka draft or US dollar draft from these Foreign Banks and Exchange houses having drawing arrangements with different banks in Bangladesh. Bangladeshi nationals living abroad can send Foreign Exchange very easily and directly to their own bank accounts maintained in Bangladesh or to their nominated person’s/relative’s bank accounts in Bangladesh.
IMPACT OF REMITTANCES ON ECONOMY
IMPACT OF REMITTANCES ON MACRO-ECONOMY
The importance of the remittance flow to the economy of Bangladesh should not be underestimated. Table-1 illustrates this –
|Indicator||Relationship of Migrant Laborers’ remittances to indicator (in %)|
|Annual Development Budget||58.9|
|Total Foreign Exchange Earnings||46.3|
|Ratio of Imports to GDP||21.0|
|Foreign Aid Disbursed||167.0|
|Medium and Long-term Debt Service||31.0|
Table-1: Relationship of Migrant Laborers’ Remittances to the Economy
Remittances contributed more than 9 per cent to the country’s GDP and almost 47 per cent of foreign exchange earnings. Remittances amounted to one-third of the total amount of government revenue from taxes and to 30 per cent of the total amount of debt service payments. It equaled 60 per cent of the development budget. The total amount of foreign aid which flows into Bangladesh is less than the total amount of remittances.
IMPACT OF REMITTANCES ON MICRO-ECONOMY
v Additional Income Source, Improved Living Conditions And Investment
Remittances constitute an important extra income source for migrant families. In many cases this extra income allows families to meet their basic needs. It also opens up opportunities to invest in the family’s well-being, such as sending children to school, or improving the family’s health status and living conditions. The additional income also loosens constraints to invest in business or to save.
v Emergency Resources
Remittances function as emergency resources. Often, poor families have limited savings and therefore limited access to emergency resources. When money is needed at short notice to buy land, to send someone abroad, or in case of illness remittances can provide the resources.
v Social Security for the Elderly
Remittances form a major source of money for parental support and, as such, they act as a kind of social security resource base for the elderly in Bangladesh. The author warns that this system is coming under threat due to decreasing fertility rates, higher life expectancy and slow economic growth in Bangladesh.
v Boost Local Economy
An increased consumption demand can result in higher investments by other households or firms to fulfill this demand. Remittances indeed have resulted in a demand boost for certain products at the local level. As a consequence, certain economic activities which cater for these products flourish. At Sylhet district, migrants from neighboring and poorer regions are moving to the district in search of employment in economic sectors that have seen an economic boost due to remittances.
v Effect on Levels of Inequality
The debate about the impact of remittances on degrees of inequality in Bangladesh is still ongoing. On the one hand, the above mentioned positive aspects of remittances can result in more equitable income distribution among the population.
REMITTANCE FLOW: EFFECT ON HOUSEHOLDS
Remittances play an important role for households by increasing income and savings, improving the standard of living; and reducing poverty. Households receiving remittances are often among the poorest segment of the population, which makes this an effective buffer against earnings disparity. Poor recipients mainly use remittances to finance subsistence consumption. For many families, remittances constitute an essential source of extra income, allowing them to meet some basic necessities such as health and education; and open up opportunities for households to invest in productive activities or small businesses. This contributes to poverty reduction, both directly through transfers to low-income groups, and indirectly through the effects of remittances on the demand for labor and labor-intensive goods and services. It holds the potential to be a source of finance for developing SMEs in geographically dispersed locations. Most SMEs in Bangladesh still have difficulty obtaining loans from banks and other formal financial institutions, and have to rely on family borrowing for financing. Remittances can play a critical role in partly closing this gap. They can also finance the cost of sending other members of the recipient families for employment abroad.
Figure-2: The Development Perspective on Migration
Despite many benefits, remittances have some shortcomings. They often result in rise in consumption and not always in investment. Although remittances are pro-cyclical, causing higher likelihood of consumer price inflation, the relationship between remittances and inflation in Bangladesh is not strong. But as a sizable part of the remittances is used to purchase land, they may lead to increased land prices in small villages with a high concentration of remitters. Farmers and other low-income groups involved in agriculture, livestock, fisheries, horticulture, or similar activities that rely heavily on the availability of land may suffer if a large area of land is owned by a few families. To make the best use of remittances, most needs to be diverted into productive uses such as SME development.
REMITTANCE MARKET: SCENARIO OF BANGLADESH
Recent Flow in Migration
More than 581,500 workers migrated for foreign employment in 2008, which was 51% more than in 2005 (figures 13 and 14). About 335,400 left the country during the first half of 2007, an average of more than 1,850 a day. Remittances increased by 25% annually in FY2006 and FY2007, a result of the rise in oil price, some policy actions and improvement in banking, and stringent anti–money laundering activity worldwide.
Figure-3: Annual Labor Migrants from Bangladesh
Bangladesh Bank has taken a number of measures to address bottlenecks in sending remittances through official channels. Steps have been taken to facilitate remittances from the major migrating countries including the US, United Kingdom, Italy, and Middle-Eastern countries through electronic fund transfer systems. Local bank have improved their networks through affiliations with international money transfer agencies and some foreign banks. Foreign remittance monitoring cells have been opened in different banks to track inflows of remittances and address obstacles to the smooth flow of remittances. Actions were also taken against hundi, the major unofficial (also illegal) mode of money transfer. Under this system, the hundi operators receive foreign currency from migrant workers, and their relatives receive local currency at home. This deprives the receiving country of the economic benefits of remittance as the foreign currency is likely to remain outside the country.
The crackdown on illegal money transfers in the context of the war on terrorism and the anti-money laundering law, has also led to an increase in the flow of remittances through formal routes. People are now becoming more cautious about the rules and regulations in the sending countries in fear of funds being frozen or confiscated in suspect of terrorism financing or money laundering.
Figure-4: Destination of Emigrants from Bangladesh (Cumulative: 1976 To June 2007)
Most of the remittances in Bangladesh are generated from the Middle East, followed by the US, United Kingdom, Malaysia, Germany, and other countries. The boom in oil revenues in the Middle East since the mid- 1970s has created many job opportunities for Bangladeshi workers. Between 1976 and June 2007, about 47% of all migrants went to Saudi Arabia, 16% to United Arab Emirates, and 10% to Kuwait. This highlights the dominance of the Middle East as the migrants’ destination. About 63% of the remittance flow in FY2007 was generated from the region, although this share declined from a high of 80% in FY2001 because of a gradual rise in migration to other parts of the world. In FY2007, about 29% of the remittances came from Saudi Arabia, followed by 15% each from the US and United Kingdom, 13% from the United Arab Emirates, and 11% from Kuwait. Other Middle East countries contributed about 10%, with the rest of the world including Germany, Japan, and Malaysia contributing the remainder (Figure-5).
Figure-5: Remittance Flows To Bangladesh by Country of Origin (Fy2007*)
The Structure of Remittances Markets
The following Figure-6 illustrates in a very schematic manner the various channels through which personal remittances may flow from origin to destination. As with international trade, a primary distinction is drawn between institutional and informal channels, the former comprising the delivery of remitted funds through established business entities whether or not they are authorized to engage in such activity. The informal channels consist mainly of the physical transportation of cash or gifts brought into the home country by individuals (the actual remitter, friends and relatives, or couriers), or the use of non-established outfits such as the “Hundi” type systems.
Within the institutional channels there are registered and unregistered intermediaries, the latter consisting of entities formally established for other commercial purposes that offer money transfer services as an irregular side activity to their own cross-border transactions. They should not be confused with the agent network of the registered intermediaries, which usually consists of small commercial establishments on both sides of the border operating under contractual, commission-based arrangements. The registered intermediaries themselves are banks (as well as other depository institutions) that offer international money transfer services in their product menu, and the specialist money transfer companies (MTCs) such as Western Union or MoneyGram. Some MTCs use banks for the actual cross-border transfer of funds from the gathering points to the distribution centre, as illustrated by the diagonal arrow in Figure-6.
Figure-6: Possible Channels of Delivery for Personal Remittances
Hurdles of Official Transfers
The remitters encounter numerous problems in sending their remittances through the official channel, especially to remote areas of the country. The process of sending remittances through banks is slower and more cumbersome than with the informal channels. Paper work and documentation requirements are heavy, which the workers find difficult to accomplish. Lack of knowledge of banking procedures is a hindrance, particularly for the less educated; while many recipients do not even have bank accounts. In addition, remittance documents (e.g., drafts and money orders) may get lost in transit. But the process of sending money through informal channels is simpler and quicker; and involves less paperwork. According to various estimates, remittances sent through the official channels constitute only 50% of total remittances including that remitted through Hundi.
While a week, on average, might be required to receive remittances sent through the banks, most informal channels do not take more than 3 days. The Hundi system relies on trust and goodwill; and is efficient. Hundi operators maintain complete secrecy of transactions. The system requires much less documentation, speeding up the whole process. It is also more profitable as the remitters get a premium exchange rate, which is often significantly higher than the official rate. A prime reason why Hundi is a thriving activity is the demand for hard currency to finance smuggling and other illegal trade. Despite improvement, the Hundi-smuggling nexus still exists; and a large proportion of foreign exchange sent through informal channels supports a sizable illegal trade in goods. It is also believed to be aiding the process of capital flight out of Bangladesh. Absence of investment opportunities, political instability, and inadequate social security is also discouraging the inflow of remittances through the official channels.
Challenges & Threats
Remittances have increased very rapidly during the last decade. If the country can sustain the present pace in migration, remittances will continue to rise. But some challenges exist. The global economic slowdown, particularly in the developed countries and Middle East, may have an adverse impact on labor recruitment from labor-exporting countries. Future economic downswings may result in layoffs or depressed wages for low-skill labor. Mostly unskilled and semiskilled laborers migrate from Bangladesh (Figure-7). This type of labor is available in other least developed countries too. Unless Bangladesh can slowly move to exporting skilled labor, a potential threat of losing to other countries always exists.
Figure-7: Types of Workers Migrating from Bangladesh (Cumulative: 1976 to May 2007)
The increase in terrorist activities in some regions has made obtaining visas and entering many countries difficult. A significant slowdown in migration was noticed immediately following the 11 September 2001 terrorist attacks in the US. Any recurrence of a similar event may aggravate the already tense cross-border migration situation, which might affect the high flow of remittances to Bangladesh. The immigration authority needs to put adequate surveillance and monitoring in place to ensure that only genuine migrants/workers leave the country. Bangladesh cannot afford to lose its credibility in the international community because of a few incidents of fraud and inadequate border control. The Government recently decided to decentralize the passport issuing process. This is an encouraging move, and will ease the migration process for the rural population. But surveillance has to remain strong to prevent forgery.
IMPROVING INFLOW OF REMITTANCES
Efforts need to be accumulated to divert the huge amount of remittances channeled through the illegal networks to the official route. Boosting the capacity and efficiency of financial institutions is crucial to direct more funds under the formal network. Banking services in the country should be improved with emphasis on computerization of the banking system, connecting branches through the computer network, and developing an electronic money transfer system. Private commercial banks that are more efficient service providers, but have a limited number of branches in rural areas, need to create a better network in partnership with licensed microfinance institutions or even local post offices to broaden the service area coverage. The increasing volume of remittances processed by private banks is encouraging (Figure-8). The wide network of mobile phone companies can be used as official remittance distribution centers. The six mobile phone companies have numerous kiosks, billing centers, and regional offices nationwide. These outlets, equipped with computers, printers, and Internet access, can be used to channel remittances in rural areas with no bank branches. The Philippines has been a major success in implementing a mobile phone-based remittance distribution system, which can be remodeled in Bangladesh.
The Hundi-smuggling network needs to be addressed and dismantled on a priority basis. Since the survival of the Hundi system depends to a great extent on the demand for remittance money to finance illegal international transactions, policy actions must focus on reducing incentives for such trade. As long as incentives for smuggling and other illegal transactions in international trade remain, Hundi operators will find innovative ways to transfer remittances through informal channels. The market-oriented floating exchange rate system has provided a good incentive for official transfer of remittances, and discouraged illegal trade to a large extent. Increasing public awareness of the benefits of the legal banking system and potential hazards of informal transfers will greatly help those who are unaware. Although international efforts to disarm money laundering have already created much concern among many, others still need to be properly informed.
Regulators and financial institutions of source and destination countries need to harmonize their legal and compliance frameworks to enable better functioning of the whole system. Institutional mechanisms should be strengthened to increase labor exports. Workers currently employed abroad need to be helped to retain their jobs and understand the legal and cultural requirements of the country. The new workforce needs to be encouraged to get training and become skilled. More vocational training centers with public-private partnerships need to be in place. To compete with other countries like the PRC, India, and Philippines, Bangladesh needs to focus on exporting more skilled labor.
The country can significantly bolster the existing benefits of remittances by making fund transfers easier and cheaper, directing flows from consumption to investments, and shifting the existing informal flows into the formal route. An electronic remittance clearinghouse is urgently needed to ensure standardized remittance instructions among participants in the delivery system. Innovative delivery agents such as courier/postal service, non-government organization offices, mobile phone outlets, points of sale, and bank ATM/booths need to be used to compensate for the limited rural banking network. Institutional effectiveness, accountability, and transparency of government organizations involved in out-of-country employment and expatriate welfare need to be strengthened to facilitate safe migration and reduce illegal human trafficking. Policies should also support financial deepening to provide savings instruments for remittances, such as remittance securitization.
To meet the challenges and increase remittances, new avenues of employment need to be explored. Priority should be given to sending more skilled workers to command higher wages. The demand for different types of workers in different countries should be assessed. Many countries have a high demand for workers proficient in welding, electrical works, carpentry, house painting, air-conditioning, refrigeration, and similar work. Some countries need highly skilled professionals, including doctors, nurses, engineers, accountants, and information technology experts. Although getting these jobs may require expensive education and training, the payoffs are high.
REMITTANCE MANAGEMENT OF EBL
NRB remittance business set up in later half in 2005 EBL non Resident Business (NRB) unit under consumer banking has passed a very successful year 2006 with inward remittance of US$ 89.46 million. In the year of 2008 this inward remittance increased nearly US$ 140 million (Approx.). This unit has built up a network of 20 Exchange houses based mainly in Middle East and active efforts are way to spread it to other strategic countries including Saudi Arabia. With promote and efficient service provided to the foreign remitter, this unit has already achieved a remarkable level of customer satisfaction manifested by their Enhanced remittance flow.
EBL Deals with inward/outward remittance in USD/GBP/EUR/JPY/SGD. EBL has US$ settlement A/C in New York, US$ settlement A/C in South-east Asia, EUR A/C in London and Frankfurt, 1 JPY A/C in Tokyo, 1 SGD A/C in Singapore. Through this A/C we can handle both corporate and retail transaction with great efficiency. EBL offer best service and rates (See Rates) in the market.
v To put our effort to increase the smooth inflow of foreign remittances from Bangladeshi expatriates living in middle-east.
v To encourage the expatriates for sending their hard earning money through legitimate manner.
v To step in the global market and promoting EBL by rendering faster and smooth services delivery.
Ø The expatriates can send money through exchange houses in the form of DD/TT/MT in US Dollar and BD Taka currency to the beneficiary.
Ø The said draft will be valid to be enchased for 90 days at any branch counter of EBL.
At present EBL has arranged with 20 Exchange houses based in U.A.E., U.S.A., Oman, Qatar, Kuwait, Bahrain, U.K., and Malaysia. Other parts of world has also come under the umbrella of EBL remittance service to facilitate Non Resident Bangladeshis to sent their hard earned foreign currencies though the MoneyGram. There are some country wise exchange companies name given below-
Table-2: Country wise name of the Exchange Companies
SINGING AGREEMENT WITH EXCHANGE HOUSE
Figure-9: Singing Agreement with Exchange Companies and Obtaining the Permission of Bangladesh Bank
TYPES OF FOREIGN REMITTANCE
The ForeignRemittances transaction of the bank can be two types: Inward remittances and outward remittances. Only authorized dealer branches can handle the foreign exchange transactions. Other than T/C and FCY transaction, all inward and outward FCY remittances are centralized at Service Delivery-Dhaka for all Dhaka based branches and Service Delivery-Chittagong for all Chittagong based branches.
Inward remittances: Inward means any remittance from abroad in favor of any accountholder of the bank or it may also be in favor of an accountholder of another bank.
Outward remittances: Outward transfer of FCY for any transfer falls under this categories. It may be Draft or TT.
Collection & Payment System of Inward Remittances
Collection of Inward Remittances of NRB-Ops
The various Exchange houses of different countries collect remittances through their representative from the Bangladesh nationals’ working there. After that, the authority of Exchange house communicates to the NRB head office and the Treasury Support & International Division Unit to send the payment instructions of the beneficiaries and to fix the currency exchange rate as per their agreement.
Payment of Inward Remittances of NRB-Ops
To make the payment EBL has made agreements with the various Local Banks. Under these agreements EBL sends fund tran