Banks have been asked to develop their own outsourcing policy to mitigate risks and monitor their compliance with regulatory requirements.

Bangladesh Bank spelled out a guideline in this regard through a circular issued yesterday.

Banks can initiate their engagement with outsourcing service providers only after being able to fully comply with the instructions of the circular.

Moreover, all existing engagements must be made compliant, including taking the central bank approval where necessary within 2015.

Banking institutions throughout the world are increasingly using “outsourcing” as a means of both reducing costs and achieving strategic aims, said the circular.

When these third-party service providers play their significant parts for the bank’s regulated and unregulated activities, their roles may impact on the banks’ risk management ability.

Banks can mitigate these risks by taking steps to draw up comprehensive and clear outsourcing policies, analyze financial and infrastructure resources of service providers, negotiate appropriate outsourcing contracts, make contingency plan for outsourcing firms and establish effective risk management programmes, added the circular.

According to the guideline, a bank seeking to outsource activities will develop a comprehensive policy approved by its board of directors.

The policy should include the identification of relevant activities that are appropriate for outsourcing, criteria for selecting suitable service providers, risk mitigation measures and governance structure clearly defining roles and responsibilities of the board of directors.

The circular defines that outsourcing refers to any activity of a bank company carried out by another party (Service Provider) from inside or outside the bank premises, or from within Bangladesh or abroad.

Generally, banks should only outsource those activities which can be effectively supervised by them, and compliance with the BB requirements for receiving outsourcing should be ensured.

Banks shall not outsource its core management functions, any of its risk management functions or core banking operations.

The guideline restricts sub-contracting by the service provider for material outsourcing both for home and abroad. Material outsourcing arrangements are those which, if disrupted, have the potential to significantly impact the business operations, reputation or profitability.

Banks should ensure that all information prohibited from sharing by laws or regulations are not disclosed to service providers.

When engaging with service providers of a foreign country, banks should take into account and closely monitor their government policies, plus political, social, economic and legal conditions of those countries.

Any outsourcing from outside Bangladesh will require prior approval of Bangladesh Bank.