What are the core risks in Banking Sector of Bangladesh?

The banking sector in Bangladesh has experienced remarkable growth and transformation in recent years. With a focus on financial inclusion and technological advancements, it has become an integral part of the nation’s economic landscape. However, like any other industry, the banking sector is not immune to risks. Understanding these core risks in Banking Sector is essential for both financial institutions and regulators to ensure the stability and sustainability of the sector.

Risk is an inseparable part of every business which deals with money directly. In this point of view, banking sector is one step ahead of risk. Risk in banking sector to some extent has expanded substantially due to the expansion of business, addition of branch networks, globalization, diversified & sophisticated banking products/services, introduction of risk-based capital framework, application of information technology and stringent regulatory compliance.

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What are the Core Risks in Banking Sector?

Banks are highly leveraged business organization that deals with the money of countless depositors. To ensure the safeguard of depositor’s money and defective lending, banking sector has to face enormous risks in various forms. To date, there are Seven core risks in Banking Sector that prevailed strongly. In this article, we will delve into core risks in banking sector of Bangladesh, shedding light on the challenges and potential solutions. Let’s move on;

In terms of BRPD Circular No # 17 dated 07.10.2003 as best practice guideline wherein 5(Five) Core Risks were identified such as;

01. Internal Control & Compliance Risk

02. Money Laundering Risk

03. Credit Risk

04. Asset Liability Management Risk and

05. Foreign Exchange Risk.

Subsequently, another risk i.e. Information Technology Risk was included in the Core Risk in terms of BRPD Circular No#14 dated 23.10.2005. Recently Environment and Social Risk is added to this list.

Internal Control & Compliance (ICC) Risk:

ICC risk arises from day to day operation of the Bank. An effective internal control system continuously recognizes and assesses all of the material risks that would adversely affect the achievement of the Bank’s goal.

Internal control is the process, that’s put into effect by an organization’s board of directors, management and other personnel, and it is designed to provide reasonable assurance regarding the achievement of objectives with effectiveness and efficiency of operations, the reliability of monetary reporting, and compliance with applicable laws, regulations and internal policies.

Money Laundering Risk:

It is the process by which black money turns into white money with a view to hide the illegal source of money. Money laundering takes place in three stages;

1. Placement: Physically disposing of the Cash.

2. Layering: Separating the criminal proceeds from sources via complex financial transactions.

3. Integration: Placing the laundered process back into the economy.

Trade-based money laundering is a growing concern for the banking sector. More than 80% of money laundering happens through Trade-based money laundering. In the case of trade-based money laundering techniques, over-and under-invoicing of goods and services and false declaration of goods are commonly found in our country.

Money laundering takes place by arrangement between importers and exporters and bank officials are often forced to get involved in the illegal transactions.
To minimize this risk possible measures are;
01. Frequently monitor the transaction type of the suspicious transaction.
02. Monitor the frequency of the suspicious transaction
03. Monitor the large transaction that happens unusually.
04. Monitor the sources and geographical origin of the suspicious transaction.
05. Monitor if any changes are made in the operating instructions in which suspicious transactions happen.

Credit Risk:

Credit risk is a vital risk for banks. Credit Risk is the possibility that a borrower or counterparty will fail to meet its obligation in accordance with agreed terms. It arises from the Bank’s dealing with or lending to corporate, individuals and other banks or Financial Institutions.

Asset Liability Management (ALM) Risk:

It is the risk that arises from the management of Assets and Liabilities of the Bank. It is mainly called Balance Sheet risk.

  1. Weakness in analyzing Balance Sheet and other operations
  2. Absence of proper analysis of interest rate risk and liquidity risk
  3. Absence of contingency plan for an unforeseen or unexpected change in interest rate, competitive market condition, economic development etc.
  4. Absence of proper counterparty limits.

Foreign Exchange Risk:

It is the risk that arises from handling foreign exchange transactions. This risk is found in cross-border investing and operating activities. A major source of the Bank’s foreign exchange is the inward remittances from overseas by migrant workers, non-resident nationals, etc., as well as export proceeds.

Money laundering, terrorist financing, remittance inward through improper channels may cause risk for the bank as well as the country. Foreign exchange risk is also known as translation risk and it is sometimes captured as a component of market risk. Foreign exchange risk may also arise from accrual accounts denominated in foreign currency, including loans (i.e. L/C, Bank Guarantee), deposits, and equity investments.

Information Technology (IT) Risk:

The risk which arises from the use of information technology is called information technology risk. Information Technology (IT) Risk may arise in the form of;

  1. Network Risk – Improper Configuration, Authentication etc.
  2. Data Centre Risk- Server Failure, Monitoring Failure, hacking etc.
  3. Hardware Risk – Power Faults, Equipment Incompatibilities, damage etc.
  4. Software Risk- Malicious or harmful software trespass, Software with Limitations, Functionality Mismatch etc.

Environmental & Social Risk:

Environmental and Social Risk refers to the uncertainty or probability of losses that originates from any adverse environmental or social change (natural or manmade) or non-compliance with the existing Bangladesh Bank environmental regulation.


The banking sector in Bangladesh is undoubtedly on a growth trajectory, but it is not without its share of risks. Understanding and effectively managing these seven core risks is essential for banks to ensure their stability and long-term success. Moreover, regulators and policymakers must continue to play a proactive role in monitoring and addressing these risks to maintain a resilient and sustainable banking sector that can support the country’s economic development and financial stability. 

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