of ree3) 6. Amendment of articles of association Chapter-4 (ACT NO. XXVIT DMDEND, LTQUID ASSETS THE FINANCIAL INSTITUTIONS ACT, Table of Contents

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1 Chapter-4 THE FINANCIAL (ACT NO. XXVIT Table of Contents INSTITUTIONS ACT, of ree3) r 993 Page No. t About the Act t65 Meaning of Financial lnstitution I 65 Some important definitions LICENSE OF FINANCIAL INSTITUTION l. License of financial institution 2. Considerations for granting license 3. Minimum capita 4. Restrictions on opening 5. Cancellation of license 6. Amendment of articles of association t t67 RESERVE FUND, I. Reserve fund DMDEND, LTQUID ASSETS Restrictions on payment of dividend Holding of liquid assets SUBMISSION OF ACCOUNTS AND AUDIT I Submission of accounts Appointment of auditor Duties of auditor Disqualifications of managing directors Removal of Chairman t69 t P/Niz ants of Bangladesh

2 INTRODUCTION Section Overview Cancellation of License of Financial lnstitution Duties and responsibilities of an auditor of financial institution I. ABOUT THE ACT Non-banking financial institutions are governed by Bangladesh Bank (BB) in terms of the provisions of the Financial lnstitutions Act This Act delimits the scope of activities of non-banking financial institutions. lt provides for the regulatory steps w'hich may be taken by Bangladesh Bank, including powers to license and give directions to such companies in the public interest, in the interest of monetary policy, in ordlr to prevent the affairs of such companies being conducted in a manner detrimental to the interest of the companies or depositors, and to ensure their proper management. 2. MEANING OF FINANCIAL INSTITUTION Section 2(b) of the Financial lnstitution Acq 1993 defines that'financial lnstitution'means a non-banking institution which i. gives loans or advances for industry, commerce, agriculture or housing, or ii. carries on business of the underwriting or acquisition of, or the investment or re-investment in, shares, stock, bonds, debentures or debenture stock or securities or marketable other securities issued by the Government or any statutory body, or iii. carries business of hire purchase transactions including leasing of machinery or equipment, or iv. finances venture capital, and includes merchant bank, investment company, mutual association, mutual company, leasing company or building society. 3. SOME IMPORTANT DEFINITIONS ln order to understand the definition of 'Financial lnstitution', we must have clear understanding about some relevant concepts used in that definition. Some of the important terms are being defined below: l. Investment Company: lnvestment Company means a company ortrustthat uses its capitalto invest in other companies [section 2(l), Financial lnstitution Act, 1993]. 2. Building Society: Building Society means any association which receives as savings and gives loan for housl building and property purchases [section 2(m), Financial lnstitution Act, I 993]. 3. Merchant Bank: Merchant Bank means a bank which undertakes the responsibility fir the liabilities if other establishments or the securities of the companies and also gives advice for amalgamation of such customers or to any business enterprise [section 2(p), Financial lnstitution Act, Mutual Association: Mutual Association means such a savings association which does not issue stock of capital and whose depositors and debtors are the owners and regulators [section 2(q), Financial lnstitution Act, 1993]. 5. Mutual Company: Mutual Company means such as association which distribute the net profit among owner-client at the rate exiting between the non capital and the business transactions [section 2(r), Financial lnstitution Act, 1993]' P/Niz

3 6. Leasing Company: Leasing Company means a compan), which carries on its business or part of its business for the leasing of machinery or equipment or financing of such leasing operations [section 2(s), Financial lnstitution Act, 1993]. QUESTTONS FOR DISCUSSION I. Explain the term 'financial institution' as defined in the Financial lnstitution Act I Explain the terms investment company, building society, merchant bank, mutual association and mutual company. LICENCE OF FINANCIAL INSTITUTIONS I. LICENCE OF FINANCIAL INSTITUTIONS To operate as a financial institution, licence is mandatory. Section 4 of the Financial lnstitution Act, 1993, states that no person shall carry on financing business in Bangladesh unless he holds a licence of financial institution issued by the Bangladesh Bank. lf any financial institution is in existence, it shall apply in writing to the Bangladesh Bank for a licence before the expiry of three months from the date of commencement of this Act. However, nothins shall be deemed to prohibit a financial institution in existence on the date of commencement of this Act, if- (a) its application remains under consideration, (b) Bangladesh Bank has not informed by notice that licence shall not be granted to it. The Act contains stringent punishment if any financial institution operates without licence. According to section 30, whoever deals in financing business without having licensed to do or whoever deals in financing business after the licence thereof is cancelled, shall be punished with a fine which may extend to five lakh taka, or with improvement fro a term which may extend to two years, or wit both. 2. CONSIDERATIONS FOR GRANTING LICENCE Section 4(3) requires that before issuing licence to any financial institution, the Bangladesh Bank has to be satisfied on the following matters of the proposed financial institution, namely;- (a) Financialcondition; (b) Characteristics of the management; (c) Adequacy of the capital and earning ProsPect; (d) The objectives specified in the memorandum of Association; (") Public interest. Moreover, the Bangladesh Bank may issue licence to a financial institution subiect to such conditions as it may think fit to impose [section 4(4)]. 3. MINIMUM CAPITAL According to section 6, the following two provisions will apply relating to minimum capital of a financial institution: The Bangladesh Bank shall determine the minimum capital of any financial institution. lf the issued capital and paid up capital of a financial institution falls shorc of the minimum capital determined under sub-section (l), it shall not be granted licence, and if it already has obtained a licence, shall be liable to be cancelled. P/l{iz

4 4. RESTRICTION ON OPENING OF BRANCH According to section 7(l), no financial institution shall open its new branch or office within or outside Bangladesh and change the location of existing branch without prior written approval of the Bangladesh Bank,. Sub-section (2) states that, after considering an application for opening a branch or office of a financial institution, the Bangladesh Bank shall grant permission or reject the application. The decision of the Bangladesh bank in this respect shall be final. 5. CANCELLATION OF LICENCE According to section 8(l), the Bangladesh Bank may cancel a licence granted to a financial institution on the following conditions: a) ceasing to carry on the business for which it has been established ; b) goes into liquidation or suspension of business ; c) furnishing false or misleading information or document for obtaining licence ; d) carrying on business detrimental to the interest of depositors; e) insufficient assets to cover the liabilities of its depositors; 0 carrying on business while paid up capital is less than the minimum capital g) contravening the conditions of licence ; h) conviction of the financial institution or any of its directors for any offence under this Act. However, section 8(2) states that no licence of any financial institution shall be cancelled unless it is called upon to show cause by a l5 days written notice as to why its licence shall not be cancelled. 5. AMENDMENT OF ARTICLES OF ASSOCIATIONS OF FINANCIAL INSTITUTIONS According to section 46, notwithstanding anything contained in the Companies Act no application for amendment in the Articles of Association of any financial institution shall be accepted unless it is accompanied by a certificate of the Bangladesh Bank stating that there is no objection to the concerned amendment in the Articles of the Association. lf any financial institution violates the provisions of this section, it shall be punished with fine of fifty thousand taka for each day of violation. QUESTTONS FOR DTSCUSSTON l. What aspects are to be taken into consideration by Bangladesh Bank while granting license to a financial institution? 2. Under what grounds license of Financial lnstitution can be cancelled? 3. State the provision of Financial lnstitution Act 1993 regarding minimum capital. 4. What restrictions are there in the Financial lnstitution Act 1993 in regard to opening of branches? RESERVE FUND, D V DENDS AND LtQUtD ASSET I. RESERVE FUND Section 9 of the Financial lnstitution Act 1993 states that every financial institution shall maintain a reserye fund in such manner as may be prescribed by regulations. ln this regard, section 4(d) of the Financial lnstitutions Regulations, 1994 requires that in the case of a company registered in Bangladesh, P/Itliz P/I,{iz

5 the amount of its paid - up capital or the said capital and reserve capital collectively should be equal to taka 5 crores or 6 percent of its total liability, which is higher, and in the case of a company registered in foreign country, it shall maintain the availability of the same financial resource. 2. RESTRICTION ON PAYMENT OF DIVIDENDS No financial institution shall pay dividend on its share until all its capitalized expenditure including preliminary expenses, organizational expenses, share selling commission, brokerage, losses incurred and expenses on other items which turned into capital including any item of expenditure has been completely written off (sec. I0). 3. HOLDTNG OF LTQUTD ASSETS a) b) c) d) e) Liquid assets to be held by a financial institution are fixed by the Bangladesh Bank from time to time. Section l9(2) states that 'liquid assets' meansnotes and coins that are legal tender in Bangladesh ; net balances at banks in Bangladesh ; the amount of call money in Bangladesh Bangladesh Treasury bills; other assets prescribed by the Bangladesh Bank ; QUESTTONS FOR DTSCUSSTON l. 'State the requirement of maintaining reserve fund under the Financial lnstitution Act What restrictions are there in payment of dividend under the Financial lnstitution Act 1993? 3. Mention the provisions of Financial lnstitution Act I993 relating to holding of liquid assets. P/I{iz

6 SUBMISSION OF ACCOUNTS AND AUDIT I. SUBMISSION OF ACCOUNTS TO THE BANGLADESH BANK The directors of a financial institution shall submit to the Bangladesh bank a copy of the profit and loss account and balance sheet made in accordance with the Companies Act (sec. 23). 2. APPOINTMENT OF AUDITOR Every financial institution must appoint an auditor annually and approval of the Bangladesh Bank must be obtained in this regard. If any financial institution fails to appoint an auditor or, if in the opinion of the Bangladesh Bank, it is desirible that another auditor should act with the auditor so appointed, the Banlladesh Bank may appoint an auditor for any financial institution and the remuneration to be paid by the financial institution to that auditor shall be fixed by that Bank [sec. 24(l) (2)]' 3. DUTIES OF AUDITORS The duties of an auditor of financial institution have been prescribed in section 74(3-6) of the Financial lnstitution Act, Such duties are summarized below: a) to carry out audit of the accounts of the financial institution for the year in respect of which he is appointed; b) to make a report on the basis of the audit; c) to attached the report with the balance sheet and the profit and loss account and a copy thereof shall be transmitted to the Bangladesh Bank; d) e) to report to the Bangladesh Bank if there has been a serious breach or non-observance of the proyiiions of this Act or a criminal offence involving fraud or dishonesty has been committed; to repoft to the Bangladesh Bank if the capital funds of the financial institution has been reduced by 50% due to losses incurred; 0 to report to the Bangladesh Bank if serious irregularities have occurred about the certainty of payment to the creditors including other serious irregularities; g) to report to the Bangladesh Bank if there is doubt whether the assets are sufficient to meet the claims of the creditors Besides the above mentioned duties, the Bangladesh Bank may impose upon the auditor such other duties as may be specified by it and the auditor shall be entitled to additional remuneration for such additional duties. 4. DISQUALIFICATION OF MANAGING DIRECTORS According to section 25, no person shall be eligible to be a director, or to continue as a director or to be appointed to any position in connection with the management of a financial institution: a) if he has been adjudged insolvent; or b) if he had atany time suspended payments of creditors; or c) if has been exempted from payment of creditors by mutual arrangement; or d) e) if has been convicted of an offence involving moral turpitude by a criminal court. if he has been a director of, or directly concerned with management of a financial institution which declared wound up under this Act without the previous approval of the Bangladesh Bank. P/Niz a

7 It should be mentioned that notwithstanding anything contained in any other, no person shall be a director of more than one financial institution or of more than one bank company or of more than one general insurance company. 5. REMOVAL OF CHAIRMAN Bangladesh Bank can remove the chairman, chief executive officer, boarded of directors or a director if the Bank is of the opinion that such person or persons should be removed to prevent the affairs of a financial institution being conducted in a manner detrimental to the interest of its depositors or ensure the proper management of a financial institution in the public interest. Before any order is given by the Bangladesh Bank the person concerned shall be given an opportunity of being heard (sec. 26). QUESTTONS FOR DISCUSSION l. Discuss the procedure for appointment of auditor in a financial institution. 2. What duties an auditor of financial institution are responsible to perform? 3. Mention the disqualification of managing director of a financial institution. P/I,{iz