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Research Workshop on Benefits and Potentials of Interest Rate Hedging: Bangladesh Perspective held in BIBM


Press Release
Dhaka,22 March,2018
A day long research workshop was held at the Bangladesh Institute of Bank Management (BIBM) on March 22, 2018, in its auditorium. A paper titled " Benefits and Potentials of Interest Rate Hedging: Bangladesh Perspective " was presented in the workshop by Dr. Shah Md. Ahsan Habib, Professor & Director (training) of BIBM. Other members of the research workshop team are Md. Nehal Ahmed, Professor, BIBM; Mohammed Sohail Mustafa, Associate Professor, BIBM; Alamgir Morshed, Managing Director and Head of Financial Markets, Standard Chatered Bangladesh; Iftekhar Ahmed Zafar, Executive Director of Financial Markets, Standard Chatered Bangladesh.
The study identifies the problem areas as well as success factors in Interest Rate Hedging in Bangladesh. A good number of participant’s senior bank executives, academicians, media representatives, faculty members, officers of BIBM participated in the review workshop.
Bangladesh Bank’s banking reform adviser SK Sur Chowdhury, BIBM chair professor Muzaffer Ahmed, former Dhaka University economics department professor Barkat-e-Khuda, BIBM supernumerary professors Md Yasin Ali and Helal Ahmed Chowdhury, its faculty member Syed Mohammad Bariqullah, Bangladesh Krishi Bank managing director Md Ali Hossain Prodhania and Trust Bank chief executive officer and managing director Faruq Moinuddin Ahmed spoke, among others, at the workshop.

Bangladesh Bank’s banking reform adviser SK Sur Chowdhury said, banking  sector  faces  numerous  risks  and  the  transit  towards  risk  management practices has become imperative in the present scenario. Present day measured risk could be a potential loss to the bank.  Risk  measurement  of  revenue  and  cost  potential  of  a  bank  is comparatively apparent while the interest rate risk is not as visible as these tangible revenues and  costs.  Modeling the  interest  rate  risk  management  practices  for  banks  has  potential incentives to the sector as a whole in the form of improved profits, capital and integration with economic  expectations he added.

He also said, Bangladeshi commercial banks have long used risk management activities such as duration and gap analysis. Risk management through derivative securities has  been  another  prospect  for  banks  to  refine  risk  management  practices.  Similar  to  other international  markets,  price  and  interest  rate  volatility  in  Bangladeshi  financial  markets  is high; hence the implications of not hedging the bank portfolio may prove to be disastrous. Derivatives  give  commercial  banks  an  opportunity  to  manage  their  risk  exposure  and  to generate revenue beyond that available from traditional bank operations.

Academics and bankers said inadequate regulatory framework and fear factor have been holding back the launch in the country of financial derivatives which have immense importance in hedging risks in the banking sector.
‘Interest rate hedging has become one of the most discussed financial concepts in recent years to have a protection for the interest rate volatility, which is basically the practice of looking into a financial derivative to reduce the risk of interest rate changes,’ Ahsan said in the research paper.
In Bangladesh, time has already come to think about the hedging of interest rate with a view to reducing risk of interest rate volatility, he said.
He also suggested introducing the hedge products to reduce interest risk of the foreign currency loan as there is no instrument to mitigate the risk.

Helal Ahmed Chowdhury said, ‘We will have to introduce new products to meet the demands which the country is going to face after the graduation from least developed country to a developing one.’
Emphasizing the training of the officials responsible for the treasury management department.
He said, ‘We will also have to overcome the fear factor regarding the derivative products.’To this end, introducing a secondary bond market would be very much vital, Helal said.

‘It requires knowledge and mentality to introduce or adopt anything new,’ said Md Yasin Ali. Learning the merits and demerits of interest rate hedging would be very much essential along with an enabling environment, he said. He also said, ‘It may take time to launch derivative market to hedge interest risk of one per cent or two in the context where we have concerns whether we will get back our principal or not due to non-performing loans of more than 10 per cent.’

The concept of derivatives is not that old and it’s about 30 years many of the counties have been using this concept to hedge different financial risks, said Syed Mohammad Bariqullah. He also said that Bangladesh lacked environment for flourishing the derivative market.
The organizations which tried to explore the avenue had faced different complicacies as it requires taking approval from the central bank as well as from the capital market regulator, the BIBM faculty member said.
He also said, ‘We are not confident to launch the service as we do not know whether it will be a successful initiative or failure due to the failure incident in 2008, hampering total financial system in the USA.’
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Written by Manager

Sunday 25th March 2018