by Richard Giedroyc
May 14, 2013 – Bangladesh has a challenging problem regarding its current coinage shortage. Commercial banks are resisting distributing coins, despite the fact the banks are mandated to do so. The Bank of Bangladesh is somewhat frustrated by this. Central bank currency officer Saiful Islam Khan was quoted in the January 28 online issue of bdnews24.com as saying, “An additional amount of coins remains idle in Bangladesh Bank vaults. We can supply coins as much as the banks ask for.
Bangladesh banks are mandated to give out 1.5 percent of all cash in over-the-counter transactions in coins. Banks are also required to have a special counter as well as appropriate signage where clients can redeem worn and soiled bank notes. The banks simply aren’t complying. The result is that there are insufficient coins in circulation, while the currency system is plagued with severely worn bank notes that should have been replaced.
The coin denominations themselves have not kept up with the times. Bangladesh’s coins were introduced in 1973 in denominations of 5, 10, 25, and 50 poisha. The smaller change 1-poisha coin followed in 1974, with the larger 1-taka coin in 1975. It wasn’t until 2004 that the 2- and the 5-taka coins were introduced. Due to their lack of purchasing power the 1- and 5-poisha coins are rarely seen in circulation today. The 10, 25, and 50-poisha coins don’t get much use either. The taka denominated coins are in general usage, as long as the banks are willing to distribute them. Paper bank notes in the 1- and 5-taka denominations are still available as well, but are being gradually replaced with their coin counterparts.
The real problem is how to motivate the banks into doing what they are supposed to do. The central bank holds monthly meetings with commercial banks. At the February meeting Bangladesh Bank Executive Director Subhankar Saha warned the banks of their failure to comply with coin distribution regulations. Nothing was reported regarding the reaction of the commercial banks, but it appears some sort of positive motivation might be more effective than is a stern warning.
The government has two obvious choices. It could enforce the law through fines and other penalties or it could offer the banks incentives. It appears from Saha’s recent comments the former option is more likely.
The real problem is that the banks incur additional costs when supplying coins properly. There are handling expenses, storage expenses, security to be considered, and transportation expenses. The public is usually unaware banks must pay to ship and receive coins from a mint or from a central bank storage source. The overhead involved in ensuring coins are available for use is the reason the Bangladesh banks are reluctant to do as they have been mandated.
Banks all over the world incur the same overhead when coins are issued and redeemed, yet in most countries banks cooperate with the government rather than try to evade using coins entirely. Perhaps Bangladesh needs to look at successful models used in other countries, then conclude which approach will be more effective for their individual situation.