Executive Summary
There is no denying the fact that the financial system plays a significant role in the economic development of a country. In fact, it is the system by which a country’s most profitable and efficient projects are systematically and continuously directed to the most productive sources of future growth. The financial system not only transfers funds from savers to investors: it must be able to select projects which will yield the highest returns, accumulate sufficient quantities of capital to fund the range of investment projects across economic activities, account for price risks across assets, monitor performance, and enforce contracts. The larger the financial sector in the context of the overall economy, the greater the share of lending by depository rather than central banks, and the greater the share of credit to private sector rather than public sector, the greater is the rate of economic growth.
Background
The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word ‘bank’ was probably derived from the word ‘bench’ as during ancient time Jews used to do money-lending business sitting on long benches. First modern banking was introduced in 1668 in Stockholm as ‘Svingss Pis Bank’ which opened up a new era of banking activities throughout the European Mainland. In the South Asian region, early banking system was introduced by the Afgan traders popularly known as Kabuliwallas. Muslim businessmen from Kabul, Afganistan came to India and started money lending business in exchange of interest sometime in 1312 A.D. They were known as ‘Kabuliawallas’.
Bank is very old institution that is contributing towards the development of any economy as well as plays a vital role of financial intermediary of a country. Bank is treated as an important service industry in modern world. But due to globalization and free market economy, this industry is facing severe competition in Bangladesh, and implementation of WTO will further increase this competition. Banking sector in Bangladesh can be divided mainly into four categories which are Nationalized Bank, Local Private Commercial Bank, Specialized financial institution and Foreign Bank. At present there are 49 scheduled banks are operating in Bangladesh. Of these 4 are nationalized, 5 are specialized, 30 are local private commercial banks and 10 are foreign bank (Malek, 2005). However, despite many fundamental banking reformations, still domestic banks are lagging behind on many fronts compared with foreign commercial banks with wide range of capitalization, overseas network, modern management expertise, experience, technological advancement, etc. That results for the domestic banks relative weakness in service quality and product quality as delivered to domestic customers.
Domestic banks management are now very strictly focusing on improved service quality and product if they are to build positive reputation and increase profits. Because reputation plays an especially important strategic role in service markets since the pre purchase evaluation of service quality is necessarily vague, and incomplete. As Julian and Ramashen, 1994 said delivering quality services and products to customers is essential for success and survival of today’s competitive banking environment. The provision of products and services of high quality enhances reputation, improves customer retention, attracts new customer through word of mouth, and increase financial performance, and profitability.
So it is therefore important for any retail bank in Bangladesh to understand the main drivers of Bank reputation as well as to take effective measure to improve both service and product quality which will enhance their reputations and thus attract a large share of profitable customers, and maintain a sustainable competitive advantage in the long run.
Our banking management started at 23rd December, 1971 by the decision of new born cabinet and the state bank of Pakistan was renamed as “Bangladesh Bank”. This day was “Thursday” and this day is the birthday of Bangladesh Bank. Though Bangladesh’s own banking system started at 16th December, 1971, however the truly banking system was started at 1st January, 1972.Though all offices of Bangladesh were opened on 19th December, 1971 but all banks were closed up to 31st December, 1971. Because there were no liquidity and all banks head offices were in West Pakistan. During these closing period liquidity was manages and fully banking services was started from 1st January, 1972. Mr. A.N. Hamidullah was appointed as a 1st Governor of Bangladesh Bank by the government at 12th January, 1972.
Objectives of the Study
The main objective of preparing this report is to analyze
- Different policies practiced by banking system of Bangladesh.
- Banking effect in Bangladesh economy.
- Rules and regulations in banking system from the beganing to today.
Methodology of the Study
It is an explanatory study that has tried to determine the Different changes for rules and regulations in banking system from the first moment to today. Both primary and secondary sources of information are used as sources of data collection.
Primary data: I have asked different questions to experienced officers and their suggestions are used as the sources of primary data collection.
Secondary data: Different web sites, books, annual report are used as the sources of secondary data collection.
Limitation of study
There are numbers of limitations in this study. The respondent of the population will be
limited in terms of size and composition. Since, the researcher has conducted survey, there were lot of chances that all the respondents will reluctant to fill up the questionnaire. First, data collection is restricted within Dhaka city only, which may fail to represent the actual scenario of the relationship between measured variables. The result could be different if people from outside Dhaka city were brought under consideration. Second, the researcher is only considering the clients of only one branch of each bank and thus, is not including the other clients
The Banking System in Bangladesh
The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all-banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 percent of total advances.
The government’s encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent.
The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh’s system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987.
One major exception to the management problems of Bangladeshi banks was the Grameen Bank, begun as a government project in 1976 and established in 1983 as an independent bank. In the late 1980s, the bank continued to provide financial resources to the poor on reasonable terms and to generate productive self-employment without external assistance. Its customers were landless persons who took small loans for all types of economic activities, including housing. About 70 percent of the borrowers were women, who were otherwise not much represented in institutional finance. Collective rural enterprises also could borrow from the Grameen Bank for investments in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation. The average loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the maximum was just Tk18,000 (for construction of a tin-roof house). Repayment terms were 4 percent for rural housing and 8.5 percent for normal lending operations.
The Grameen Bank extended collateral-free loans to 200,000 landless people in its first 10 years. Most of its customers had never dealt with formal lending institutions before. The most remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4 percent of Grameen Bank loans were overdue. The bank had from the outset applied a specialized system of intensive credit supervision that set it apart from others. Its success, though still on a rather small scale, provided hope that it could continue to grow and that it could be replicated or adapted to other development-related priorities. The Grameen Bank was expanding rapidly, planning to have 500 branches throughout the country by the late 1980s.
Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FY 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities. Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity.
Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than 2 months worth of imports. This represented a 20-percent increase of reserves over the previous year, largely the result of higher remittances by Bangladeshi workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion. Because of Bangladesh’s status as a least developed country receiving confessional loans, private creditors accounted for only about 6 percent of outstanding public debt. The external public debt was US$6.4 billion, and annual debt service payments were US$467 million at the end of FY 1986.
At the moment financial sector reform programmers are underway. Private Banks and insurance companies with few exceptions are functioning creditably. Uttara, Pubali and Rupali Banks which were formally owned by the GOB were privatized. Shadaran Bima Corporation’s (General Insurance) 49% shares are contemplated to be off loaded in the local stock markets soon.
Bangladesh pursues a liberal market economy. Bangladesh Bank is the apex bank of the country responsible for promoting healthy growth and development of the banking system. Banks and insurance companies, both in the private and public sectors, are operating freely and contributing to the economy. Foreign banks like American Express Bank, Standard Chartered Bank, Grindlays Bank, Indosuez Bank, etc. function in Bangladesh through their branches.
There are other specialized financial institutions like the Bangladesh Shilpa Bank (Industrial Bank), Bangladesh Shilpa Rin Sangstha (Industrial credit organization), Krishi (Agriculture) Bank, House Building Finance Corporation, Grameen (Rural) Bank and several cooperative banks. The Industrial Promotion and Development Corporation (IPDC) of Bangladesh and the Investment Corporation of Bangladesh (ICB) provide equity support to public limited companies in the private sector. The government has recently replaced the Controller of Capital Issues by establishing a full fledged Securities and Exchange Commission with enhanced power for the growth and development of the Securities market in Bangladesh. Liberal fiscal policy has resulted in the highest forex reserve.
During the last three years a number of steps have been taken to strengthen the country’s banking system. These include improvement of the regulatory environment. enforcement of loan classification guidelines and recapitalisation of nationalized commercial banks. Over the past two years, there has been a massive infusion of taka 32,000 million in the NCBs in the shape of government bonds to make up for capital and provisioning shortfalls.
The commercial banks are now diversifying and strengthening their portfolio. They have increased term lending. Upto April 1994 they have sanctioned term loans totaling taka 10,260 million. Disbursement agricultural loans stood at taka 9,660 million 31 % increase over the same period in 1993. NCBs have introduced loan programmes in off-farm and agro-based activities. NCBs, BSB and BSR have been able to rehabilitate 471 sick industrial units which have create 21,000 new jobs.
The government is keen to correct and remedy failures and imperfection in the financial markets. A small credit guarantee scheme has been introduced, to assist new entrepreneurs who can receive loan of taka 2.5 million without any collateral. To enlarge the activities of Grameen Bank, which serves the poor, particularly the women in the rural areas, the government has provided guarantee against loans amounting to taka 4,650 million in 1993-94 in addition to taka 1000 million provided directly by the Bangladesh Bank. In the fiscal year 1994-95 the government has already committed to Grameen Bank to provide loan guarantee for an additional amount of taka 3850 million.
The reforms of financial sector and trade liberalization are being complemented by appropriate forex regime. An active exchange rate policy to maintain the competitiveness of the economy is being followed in the backdrop of the Uruguay Round Multilateral Trade Agreements and particularly, the gradual merger of Multi-fiber arrangement into the GATT the exchange rate will be closely monitored. Taka has been made convertible on all international current transactions. Company laws have been reformed for boosting private investment.
Bangladesh has accepted the obligations of Article VIII of IMF Articles of Agreement which means removal of all restrictions on making payments and transfers for current international transactions. By accepting these obligations, Bangladesh has given a clear signal to the international community that it would pursue sound economic policies, and thereby create a congenial climate for investment.
The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh’s system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987.
Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FY 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities. Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity.
Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than 2 months worth of imports. This represented a 20-percent increase of reserves over the previous year, largely the result of higher remittances by Bangladeshi workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion. Because of Bangladesh’s status as a least developed country receiving concessional loans, private creditors accounted for only about 6 percent of outstanding public debt. The external public debt was US$6.4 billion, and annual debt service payments were US$467 million at the end of FY 1997.
International Banks
The World Bank has taken the lead in addressing some of the most deep-seated structural constraints in Bangladesh’s economy by providing productive employment for those without assets, promoting economic opportunities for women, and addressing the social and economic inadequacies of education, health, nutrition, and population programs. Among aid projects were the Irrigation Management Programme, which supports drainage and flood control as well as the introduction of pumps and drills; support for maintenance of the nation’s more than 43,000 primary schools (including repairs to existing buildings, additions to accommodate larger numbers of pupils, and construction of new schools where needed); and the 500,000-ton Ashuganj fertilizer complex, utilizing domestic natural gas, which came on stream in 1981. The World Bank has made loans to Bangladesh only from its “soft window,” the International Development Association. These interest-free loans provide for a 10-year grace period before repayment of principal begins and a 40-year repayment schedule, with the addition of a service charge of 1.5 percent.
The Asian Development Bank was the second largest donor, after the International Development Association, to Bangladesh’s development in the 1980s. As of the end of 1985, the Bank had approved 66 loans totaling US$1.8 billion. In 1985 alone, the bank approved loans of US$212.3 million for 6 new projects (down from US$306.8 million for 4 projects the year before). In addition, the bank provided local currency financing of US$59.8 million for 3 projects, co financing of US$10.5 million to projects with other donors, and a program loan of US$39 million for provision of fertilizer. About half of the Asian Development Bank’s financing has gone to agriculture and agro-industry. The 1985 package, for example, included a livestock development project intended to increase food production and improve rural incomes through expansion of veterinary services and livestock nutrition. In 1987 the Asian Development Bank approved a technical assistance grant (co financed by the Norwegian government) to explore the feasibility of growing rubber trees commercially in Bangladesh. The Asian Development Bank also has been active in the development of natural gas. In 1987 the bank approved a US$74 million loan for construction and extension of natural gas transmission and distribution pipelines to 5 districts in eastern Bangladesh. The loan was intended to cover 71 percent of project costs, including all of the foreign exchange requirements for the project. The bank has also supported transportation projects (development and improvement of feeder roads between local markets and primary roads, inland waterways, and railroads) and social welfare schemes for population control, health, and education.
Different types of Bank: The number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks, four are Nationalised Commercial Banks (NCBs), 28 local private commercial banks, 12 foreign banks and the rest five are Development Financial Institutions (DFIs).
Sonali Bank is the largest among the NCBs while Pubali is leading in the private ones. Among the 12 foreign banks, Standard Chartered has become the largest in the country. Besides the scheduled banks, Samabai (Cooperative) Bank, Ansar-VDP Bank, Karmasansthan (Employment) Bank and Grameen bank are functioning in the financial sector.The number of total branches of all scheduled banks is 6,038 as of June 2000. Of the branches, 39.95 per cent (2,412) are located in the urban areas and 60.05 per cent (3,626) in the rural areas. Of the branches NCBs hold 3,616, private commercial banks 1,214, foreign banks 31 and specialized banks 1,177. Bangladesh Bank (BB) regulates and supervises the activities of all banks. The BB is now carrying out a reform programme to ensure quality services by the banks.
Bangladesh Bank : Bangladesh Bank (BB) has been working as the central bank since the country’s independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. BB is also responsible for planning the government’s monetary policy and implementing it thereby. The BB has a governing body comprising of nine members with the Governor as its chief. Apart from the head office in Dhaka, it has nine more branches, of which two in Dhaka and one each in Chittagong, Rajshahi, Khulna, Bogra, Sylhet, Rangpur and Barisal.
Nationalized Commercial Banks (NCBs)
1. Sonali Bank Ltd. 2. Janata Bank Ltd. 3. Agrani Bank Ltd. 4. Rupali Bank Ltd.
Private Commercial Banks (PCBs)
1. Pubali Bank
2. Uttara Bank
3. National Bank Ltd.
4. The City Bank Ltd.
5. United Commercial Bank Ltd.
6. Arab Bangladesh Bank Ltd.
7. IFIC Bank Ltd.
8. Islami bank Bangladesh Ltd.
9. Al Baraka Bank Bangladesh Ltd.
10. Eastern Bank Ltd.
11. National Credit & Commerce Bank Ltd.
12. Prime Bank Ltd.
13. South East Bank Ltd.
14. Dhaka Bank Ltd.
15. Al-Arafah Islami Bank Ltd.
16. Social Investment Bank Ltd
17. Dutch-Bangla Bank Ltd.
18. Mercantile Bank Ltd.
19. Standard Bank Ltd.
20. One Bank Ltd.
21. EXIM Bank
22. Bangladesh Commerce Bank Ltd.
23. Mutual Trust Bank Ltd.
24. First Security Bank Ltd.
25. The Premier Bank Ltd.
26. Bank Asia Ltd.
27. The Trust Bank Ltd.
28. ShahJalal Islamic Bank Limited
Foreign Banks
1. American Express Bank 2. Standard Chartered Grind lays Bank 3. Habib Bank Ltd.
4. State Bank of India 5. Credit Agricole Indosuez (The Bank) 6. National Bank of Pakistan
7. Muslim Commercial Bank Ltd. 8. City Bank NA 9. Hanvit Bank Ltd. 10. HSBC Ltd. 11. Shamil Islami Bank of Bahrain EC 12. Standard Chartered Bank
Development Banks
1. Bangladesh Krishi Bank
2. Rajshahi KrishiUnnayan Bank
3. Bangladesh Shilpa Bank
4. Bangladesh Shilpa Rin Sangstha
5. Bank of Small Industries & Commerce Bangladesh Ltd.
Other
1. Ansar VDP Unnayan Bank 2. Bangladesh Samabai Bank Ltd. (BSBL) 3. Grameen Bank
4. Karmasansthan Bank
Banking Sector Performance, Regulation Supervision and Changes:
1. Industry Statistics of the banking sector and the performances trends have been discussed in this chapter. The banking sector of Bangladesh comprises of four categories of scheduled banks. These are nationalized commercial banks (NCBs), government owned development finance institutions (DFIs), private commercial banks (PCBs) and foreign commercial banks (FCBs). The number of banks remained unchanged at 48 in 2006. These banks had a total number of 6562 branches as of December 2006. The number of bank branches increased from 6402 to 6562 due to opening of new branches by the PCBs mainly during the year.
2. In 2006 the nationalized commercial banks (NCBs) held 32.7 percent of the total industry assets as against 37.4 percent in 2005. Evidently, NCBs’ domination in this area is showing a declining trend, while PCBs’ share rose to 47.7 percent in 2006 as against 45.6 percent in 2005. The foreign commercial banks held 11.8 percent of the industry assets in 2006, showing a satisfactory increase by 4.5 percentage points over the previous year. The DFIs’ share of assets was 7.8 percent in 2006 against 9.7 percent in 2005.
3 Total deposits of the banks in 2006 rose to Taka 1860.6 billion from Taka 1554.7 billion in 2005 showing an overall increase by 19.7 percent. The NCBs’ (comprising of 4 largest banks) share in deposits decreased from 40.0 percent in 2005 to 35.2 percent in 2006. On the other hand, PCBs’ deposits in 2006 amounted to Taka 955.5 billion or 51.3 percent of the total industry deposit against Taka 731.3 billion or 47.0 percent in 2005. FCBs’ deposits in 2006 rose by Taka 38.2 billion or 33.9 percent over the previous year. The DFIs’ deposits in 2006 were Taka 100.2 billion against Taka 89.5 billion in 2005 showing an increase of 12.0 percent over the year.
Assets of Scheduled Banks: Aggregate industry assets in 2006 registered an overall increase by 17.8 percent over 2005. During this period, NCBs’ assets increased by 3.1 percent and those of the PCBs’ rose by 22.9 percent. Loans and advances played a major role on the uses of fund. Loans and advances amounting to Taka 1543.6 billion out of aggregate assets of Taka 2406.7 billion constituted a significant portion (64.1 percent). Cash in tills were Taka 21.8 billion (below 1.0 percent); deposits with Bangladesh Bank were Taka 135.2 billion or 5.6 percent; other assets were Taka 454.0 billion or 18.9 percent and investment in government bills and bonds accounted for 10.5 percent (Taka 252.1 billion) of the assets.
Liabilities of Scheduled Banks: The aggregated liability portfolio of the banking industry in 2006 was Taka 2406.7 billion of which deposits constituted Taka 1860.6 billion, or 77.3 percent and continued to be the main sources of fund of banking industry. Capital and reserves of the banks were Taka 122.9 billion or 5.1 percent of aggregate liabilities in 2006, as against Taka 89.9 billion or 4.4 percent in 2005.
Liquidity of Scheduled Banks: Commercial banks deposits are at present subject to a statutory liquidity requirement (SLR) of 18 percent inclusive of average 5 percent (at least 4 percent in any day) cash reserve requirement (CRR) on bi-weekly basis. The CRR is to be kept with the Bangladesh Bank and the remainder as qualifying secure assets under the SLR, either in cash or in government securities. SLR for the banks operating under the Islamic Shariah is 10 percent and the specialized banks are exempt from maintaining the SLR. Liquidity indicators measured as percentage of demand and time liabilities (excluding inter-bank items) of the banks indicate that all the banks had excess liquidity
Total Capital of Scheduled Banks: The overall capital situation of the banks improved in December 2008. The capital of all banks stood at Tk. 205.8 billion in December 2008 as compared with Tk. 123.4 billion in December 2007 and Tk. 76.1 billion during the end of 2006. The year-end capital position in 2008 witnessed an increase of 66.8 percent as compared with 62.0 percent in the preceding year. Grouped by ownership, total capital (unadjusted) of SCBs, PCBs, SBs and FCBs stood at Tk. 32.0 billion, Tk. 141.4 billion, Tk. (-) 9.2 billion, and Tk. 41.5 billion respectively in December 2008 as compared with Tk. (-) 29.1 billion for SCBs, Tk.16.2 billion for SBs, Tk.101.7 billion for PCBs, and Tk.34.5 billion for FCBs in December 2007 (Figure 3.5.1). Out of total capital for all banks, 73.4 percent was maintained as core capital in December 2008 which was 71.8 percent in December 2007. The amount of core capital in December 2008 was 47.7 percent higher than the requirement (5.0 percent of the risk weighted asset). Disaggregated figures show that actual core capital was 79.5 percent and 318.4 percent higher than the required core capitals for PCBs and FCBs respectively. This shows high concentration in Tier I capital for PCBs and FCBs. In the case of SCBs and SBs, the actual level of core capital was 26.2 percent and 254.9 percent lower than their required levels.
Several Initiative for Risk Management of Scheduled Banks: Bangladesh Bank has adopted several initiatives to handle the banking industry with international best practices for risk management. To introduce risk analysis culture in the banking industry loan classification was a wide scheme for assessing the status of banking assets (vide BCD circular no. 34/89). In the year 2003, BB forwarded “Guidelines on Managing Core Risks” to the banks for complying with five core risks management in banks. Those were a) Credit Risk Management, b) Internal Control & Compliance, c) Asset & Liability Management, d) Foreign Exchange Risk Management, and e) Money Laundering Risk Management. The guidelines were minimum instructions for the banks and were asked to build up their own risk management manuals on the basis of those guidelines.
At present banks are required to make general provision for meeting any risk of unexpected losses. Thus banks are keeping specific provision at 5, 20, 50 and 100 percent against SMA, Sub-standard, Doubtful and Bad/Loss loan respectively to meet expected losses resulted from the obligor’s failure of agreement.
The Credit Risk Grading (CRG) is an outcome of collective information based on the pre-specified scale and reflects the underlying credit-risk for a given exposure. This grading system is used for assessing the credit risk status before a bank lend to its borrowing clients including banks & NBFIs. CRG scale for the banks consists of 8 categories i.e., Superior, Good, Acceptable, Marginal/ Watch-list, Special Mention, Sub standard, Doubtful, Bad & Loss.
Asset & Liability management is part of operational and supervisory activity of a bank. The Asset Liability Committee (ALCO), comprising of the senior management of a bank, is primarily responsible for Balance Sheet Management or more specifically Balance Sheet Risk Management. The results of balance sheet analysis along with recommendation is placed in the ALCO meeting by the Treasurer where important decisions are made to minimize risk and maximize returns.
Loans and Advance of Scheduled Banks: The asset composition of all commercial banks shows the concentration of loans and advances (64.1 percent) in total assets. The high concentration of loans and advances indicates vulnerability of assets to credit risk, especially since the portion of non-performing assets is significant. A huge infected loan portfolio has been the major predicament of banks particularly of the state-owned banks. In the total assets the share of loans and advances is followed by the investment in government securities and bills covering 10.5 percent.
Net interest income of Scheduled Banks: Aggregate net interest income (NII) of the industry has been positive and consistently increased from Taka 7.8 billion in 1999 to Taka 35.3 billion in 2005. However, the NII of the NCBs sharply declined from Taka 3.1 billion in 1999 to a negative amount of Taka 1.2 billion in 2000. The trend continued and the NCBs’ interest income in 2001 was less by Taka 1.8 billion than interest expenses, and in 2002 by Taka 1.5 billion, in 2003 by 0.3 billion and in 2004 by 1.1 billion but in 2005 their positive NII was Taka 7.7 billion. The DFIs had a negative NII in 1999, which was reversed in 2000 to Taka 1.0 billion and thereafter was positive in 2001(Taka 2.7 billion), 2002 (Taka 1.4 billion), 2003 (Taka 1.3 billion), 2004 (Taka 1.8 billion), 2005 (1.0 billion) and 2006 (Taka 1.7 billion). 5.26 In 2006, NCBs were able to increase their net interest income (NII) by reducing their cost of fund. The NII of the PCBs and FCBs has been very high over the period from 1999 through 2006. Overall industry NII shows a consistently upward trend. The trend of NII indicates that the PCBs and the FCBs are charging interests at very high rates on their lending as compared to the interest they are paying to the depositors.
Deposit Insurance System: A deposit insurance system has been introduced in Bangladesh in August 1984 to act as a safety net (Box 5.2). It aims at minimizing or eliminating the risk of loss of depositors’ fund with banks. Deposit Insurance in Bangladesh is now being governed by the Bank Deposit Insurance Act 2000. A Deposit Insurance Trust Fund (DITF) has also been created for providing limited protection (not exceeding Taka 1.0 lac) to a small depositor in case of winding up of any bank. The Board of Directors of the Bangladesh Bank is the Trustee Board for DITF. The DITF is now being administered and managed under the guidance of the Trustee Board. Bangladesh Bank is now a member of International Association of Deposit Insurers (IADI). As at December 2006, the total assets of the DITF stood at Taka 5.1 billion, which were invested in the Government Securities. Revised Risk basedpremium rate was introduced from January 2007. As per new schedule, the banks under Problem Bank category will have to pay 0.09 percent whereas other banks will pay 0.07 percent as premium on their deposits.
Capital Adequacy: Capital adequacy focuses on the total position of bank capital and protects the depositors from the potential shocks of losses that a bank might incur. It helps absorbing major financial risks (like credit risk, market risk, foreign exchange risk, interest rate risk and risk involved in off-balance sheet operations). Banks in Bangladesh have to maintain a minimum Capital Adequacy Ratio (CAR) of not less than 9.00 percent of their risk-weighted assets (with at least 4.50 percent in core capital) or Taka 1.00 billion whichever is higher.
Cash Reserve Requirements (CRR) of Scheduled Banks with Bangladesh Bank: The Cash Reserve Requirement (CRR) of the scheduled banks with the Bangladesh Bank which was fixed on 21 July, 2004 at 4.0 percent of their total demand and time liabilities (excluding inter-bank items). It was also mentioned in the circular that this amount of reserve must not be less than 3% in any single day. In pursuance of the objectives of monetary policy, the amount of CRR of scheduled banks has been increased to 5 percent from 4.5 percent of their total demand and time liabilities effective from 1 October 2005 and remained unchanged thereafter. However, banks are allowed to maintain CRR at the rate of 5 percent daily on bi-weekly average basis subject to the condition that the amount of CRR so maintained should not be less than 4 percent in any day.
Statutory Liquidity Requirement (SLR) of Scheduled Banks: The Statutory Liquidity Requirement (SLR) for the scheduled banks, excepting banks operating under the Islamic shariah and the specialized banks, was re-fixed 18 percent from 16 percent on 8 November 2003 and remained unchanged thereafter. The SLR for the Islamic banks remained unchanged at 10.0 percent. The specialized banks continued to remain exempted from the SLR.
Interest Rate Policy: Under the Financial Sector Reform Program, banks are free to charge/fix their deposit and lending rate other than export credit. At present, loans at reduced rates (7 percent) are provided for all sorts of export credit since January 2004. At present, banks can differentiate interest rate up to 3 percent considering comparative risk elements involved among borrowers in same lending category. With progressive deregulation of interest rates, banks have been advised to announce the migrate of the limit (if any) for different sectors and the banks may change interest 1.5 percent more or less than the announced mid-rate on the basis of the comparative credit risk.
Percentage of gross and net non-performing loans (NPLs) ; The most important indicator intended to identify problems with asset quality in the loan portfolio is the percentage of gross and net non-performing loans (NPLs) to total assets and total advances. FCBs have the lowest and DFIs have the highest ratio of NPLs. NCBs have gross NPLs to total assets of 14.6 percent whereas in case of PCBs, FCBs and DFIs, the ratios are 5.6 percent, 0.9 percent and 26.6 percent respectively. Similarly, NPLs net of provisions and interest suspense to the total assets is 9.1 percent, 2.1 percent and 10.5 percent for NCBs, PCBs and DFIs. FCBs are having excess provision for loan losses.
Bank Rate: The Bank Rate has been revised downward from 6 percent to 5 percent on 6 November 2003 and remained unchanged thereafter.
Basel II and Plan for its Implementation in Bangladesh: The G-10 countries have agreed to implement the Basel II in 2006 while non G-10 countries will take three more years startingfrom 2007. Keeping in view the global response towards Basel II, the Bangladesh Bank has decided in principle to adopt Basel II in Bangladesh. With a view to ensuring migration to Basel II in a non-disruptive manner, Bangladesh Bank has adopted a consultative approach. A high level National Steering Committee comprising of senior officials from banking industry, Bangladesh Bank, and Chartered Accountant firms has been constituted. Furthermore, a Coordination Committee and a Basel-II Implementation Cell have been established. The Bangladesh Bank intends to implement the new accord in early 2009. The Steering Committee is now working on preparation of a roadmap for implementation of the same. The Coordination Committee is assisting the steering committee for preparing such roadmap; consideration is being given on the existing capacity of banks and their financial position to meet the additional capital requirement. The Basel-II Implementation Cell has completed a self-audit on compliance with Basel Core Principles for Effective Banking Supervision which shows that in 2006, BB has achieved 9 compliant and 14 largely compliant status out of 25 Basel Core Principles for effective banking supervision as against 1 Compliant and 1 largely compliant in 2002. The BB has conducted a Quantitative Impact Study (QIS) with a view to assessing awareness and preparedness of the banks regarding Basel II implementation. It is to mention that all scheduled banks have formed a Basel-II Implementation Unit as instructed by Bangladesh Bank.
Electronic Banking in Bangladesh
Electronic Banking : Electronic Banking is transforming the financial services industry through various impossible innovations. The quantity of cross-border trading and other financial activities is increasing geometrically make possible by technology. It has been made possible by technology, particularly information technology to generate, collect and process information about bank operation and bank customers efficiently and effectively. It provides the ability to create more effective systems of controls in individual institutions and in the market themselves. Compared to the paper based operation, Electronic Banking Systems, in its most proficient form, offer instant verification and transfer and reduces the flow of costly paper in the record keeping process. Application of technology in banking offer opportunity for reduction of both paper and people. Banks have developed EBS for three main reasons (Horseman, Michael J. 1979)
Electronic banking allow banks to expand their markets for traditional deposit taking and credit extension activities, and to offer new products and services or strengthen their competitive position in offering existing payment services. In addition, electronic banking could reduce operating costs for banks. More broadly, the continued development of electronic banking and electronic money may contribute to improving the efficiency of the banking and payment system and to reducing the cost of retail transactions nationally and internationally. Although many financial instrument and systems are now considered as “Electronic Banking” came into the terminology of the financial world in the late 1980s, with the possibility of emergence of true electronic money. All sorts of back-office information management technology and financial services using electronic devices can be included into the term “Electronic Banking”. The development in information technology has contributed positively to economic growth through several channels. ICT
Structure of electronic banking : E-banking is a general term referring to various computer-based technologies for delivering banking services. Electronic banking systems can be divided into two categories by the functional characteristics, viz. back-office electronic banking, and electronic financial instruments or front-office electronic services. Back-office electronic banking provides information management services, and quick fund transfer facilities both for traditional banking and financial instruments and electronic financial instruments. Science inception of primary forms of electronic banking it has been passed through a comprehensive evolution process. Electronic banking services can be grouped into three generations of evolution:
Categorization of electronic banking services, Generation of electronic banking, Back-office, Front-office, First generation, Ledger , Cash management, Head office MIS, Cash dispensers, Second generation, Transaction processing [offline], ACHs, Generation of information for record keeping, Fund transfer, Telephone bill payment, POS systems, Check verification, ATMs, Authorization, Third generation, On-line transaction processing, Centralized processing at country level, Internet banking, Inter bank transaction processing, Automatic Fund, Transfers, On- line Banking, Home banking electronic, Direct Deposit, Check Truncation, Lock Box Check, Truncation, Electronic Fund Transfer, Internet Banking
Electronic facilities given by different bank in Bangladesh : The following Electronic facilities are providing by different Foreign and Private Commercial banks (PCBs) in Bangladesh Bank accounts: Savings, Current, FDR, PDS, and Term Deposit Scheme. All these accounts are maintained in electronic way for the sake of customer satisfaction in Bangladesh. People can deposit their money through electronic device and also can withdraw their money such way. These are the common bank accounts which maintained by the bank customer every now and then and bank is also given high priority or facilities in this regards to their customer.
Debit Point- of-Sale: An advanced payment system which enables consumers to use an AT M Card to pay for goods and services, electronically debiting the cardholders account and crediting the account of the merchant.
Cards: Credit/Debit Card: There are two different types of card. One is debit which designate to withdraw own money from the bank in any time. Another one is a credit system which provided by bank to their customer. Customer can enjoy their credit amount while they are in shopping, withdraw cash etc.
Internet Banking : Customers need an Internet access service to handle this type of banking. As an Internet Banking customer, he/she will be given a specific user ID and a confidential/secret or secured password so that they can access to their own account. Here customer can able to see the ledger balances, transfer his money, request something towards bank, etc.
9 DIGITAL BANGLADESH [A vision of the Government]:) BB has adopted advanced ICT to be digitized in all spheres of its functions including monetary policy, banking supervision and internal management. BB has already introduced e-commerce, e-banking, automated clearing house etc.; a historic move towards achieving higher productivity across all economic sectors including agriculture and SME through use of ICTs. Engineers could be pioneers innovating new applications of ICT, and reaching them to the doorstep of the common people.
The universal role of Information and Communication Technology (ICT) is vital for socio-economic development of a developing country like Bangladesh. Availability of information helps increase productivity, ensures fair and competitive market and empowers marginal people. Digital technology makes doing things easily from any place — using mobile phone as a medium of money transfer and payment of utility bills, for example..
If Bangladesh goes digital it will be an e-state combined with e-governance, e-banking, e-commerce, e-learning, e-agriculture, e-health and so on. However, the vision encompasses much more. There is a strong correlation between economic and social development of a country and its proficiency in science and technology, so we need a knowledge-based society, efficient management and skilled human resources as well.
We need to extend ICT facility to every village in Bangladesh, so that even farmers can get access to internet connectivity; acquire related information regarding his/her crop or product development, pricing etc. In this connection, the government has already taken initiatives to connect Bangladesh with the second Submarine Cable Network to have secured connectivity with the information superhighway. Realizing the potential of ICT for national development, the government has approved the National ICT Policy, 2009 on priority basis.
It is expected that by 2021, Bangladesh will have a countrywide ICT network and high-speed information flow between centre and periphery. Instructions will be transmitted electronically, which will accelerate the national decision-making process and monitor the performance of all agencies.
Bangladesh Bank, being the monetary authority of the country, is at the forefront of the government’s firm drive to digitize. We have already formulated a 5-year strategic plan for the financial sector based on advanced technological applications to deliver services with utmost efficiency. The ultimate goal is to make BB a world-class central bank with high applications of technologies. It should, in fact, transform itself into a paperless organization within this plan period.
BB has achieved a historic milestone in the trade and business arena, departing from conventional banking with the introduction of e-commerce recently; a giant stride towards digital Bangladesh. Banks have been allowed to make online money transactions, payment of utility bills through internet, transfer of funds (account to account), payments for trading goods and services, and facilitate online credit card payments in local currency.
Indeed, electronic payments will be considered as cash transactions, which will be regulated under the Anti-Money laundering Act as well as other relevant rules and regulations. It is expected that a national payment gateway, connecting all banks for inter-bank transactions (e-banking), will be established soon. Electronic fund transfer will also be possible in near future. Necessary preparations have already been taken in this direction.
Installation of Bangladesh Automated Clearing House (BACH) is another remarkable event in the history of the financial sector in Bangladesh. It will simplify the remittance channel and payment system and, therefore, bring dynamism in business activities. The system was started in early November 2009 on experimental basis, participated by some well-prepared banks, and will be inaugurated formally soon. Applying sophisticated methods, the system needs only images and corresponding information of the submitted cheque leaves instead of a physical one, and will send them to the Bangladesh Automated Cheque Processing System (BACPS) using a secured communication link.
Paying banks will examine the pertinent images and information, and send back to the BACPS for payment (further examination if any inconsistency like fund insufficiency or mismatch of signature etc.) Then BACPS will accumulate all the information, work out a single net amount for each bank, and send it back to the collecting banks. As such, the cheque clearing time is expected to be reduced to one day for countrywide payment. In other cases, this will be a matter of couple of hours only.
Mobile banking, using cell phone as a tool, extends banking services to the doors of the people. An account holder can check account history/statement, status on cheques, and payment order, or stop payment, and so forth.
However, initially, three commercial banks have been allowed mobile banking to accelerate inward remittance transfer with the help of the outlets of mobile companies. Recently, BB has strengthened its monitoring and supervision activities on agricultural and SME loans with the help of the existing countrywide mobile network, keeping records of cell phone numbers of farmers and small entrepreneurs.
Online Credit Information Bureau (CIB) report, a pivotal component of risk management measures, is expected to be launched by 2010. Banks and financial institutions will be able to access the CIB data base online, and get the credit report of the concerned borrower. The database will consist of detailed information of individual borrowers, owners and guarantors.
A central bank reform program initiated ICT packages include networking, banking application, enterprise resources planning solution, enterprise data warehouse etc., with a view to ensuring efficient management of assets including human resources.
Under the networking program, all the departments of Bangladesh Bank Head Office and its nine branch offices have already been brought under a computer network (LAN/WAN), connecting almost 3,100 PCs. Therefore, any official sitting anywhere (head office or branches) has access to the same kind of resources, and can share knowledge and information and ensure knowledge based management.
Enterprise Resources Planning (ERP) solution covers digitization of procurement (e-procurement), cash management, access control etc. Meanwhile, recruitment process under BB has been digitized (online application, sorting, validation etc.).
Banking application includes automation of all the accounts with BB (banks, financial institutions and government), foreign exchange management, currency management, treasury and securities systems/module, public debt management module, and also establishment of a central depository system (CDS) to build a platform for secondary trading of treasury bills and bonds.
Enterprise Data Warehouse (EDW) creates an electronic data bank, which will provide all information and statistics of monetary, trade and fiscal areas of the national economy, where all the concerned people of BB will have access to use it for further policy analyses. BB is going to commence web based e-tendering system, which covers announcement of tender, distribution of schedules, bidding etc., to ensure simplicity and transparency of tendering process.
These are only a few examples of how fast the BB is progressing in the process of digitization of its activities. In addition, it is also taking other banks and government agencies on board to ensure speedy, credible, user-friendly financial services to all.
Moreover, BB has been encouraging green engineering by installing solar panels on its own premise and providing re-financing windows to support speedy development of solar energy, biogas and effluent treatment plants all around the country. And in all these activities the role of green engineers will be vital.
Challenges: The major challenges for Bangladesh are poverty reduction and sustainable development, but neither of these is possible without a strong science and technology base underpinned by excellence in education at all levels and a well-trained work force in ICT. There needs to be infrastructure development and technology transfer throughout the country to disseminate knowledge to even remote areas of the country.
However, the government has taken initiatives to promote ICT among all spheres of people, including the hard-to-reach areas; tax and duty cut on computers, promoting ISP services etc.
A broadband infrastructure is needed with access for all Bangladeshis from their homes, work places, schools and tele-centres with Wimax and 3G network. We also need a digitally literate population and workforce, digital business development, and a legal framework that assures freedom of expression while protecting the rights of creators and innovators towards building an indigenous knowledge and technological base.
At the beginning, we must concentrate on the development of infrastructure in terms of hardware, software and manpower. Skilled manpower from local market must be available to keep the system running without depending on foreign “experts.” Sustainability of digital Bangladesh depends on our enhanced ability to maintain, repair and expand once the system is installed.
In order to manage a sustainable digitized Bangladesh, we need a long-term plan to produce adequate number of scientists, computer and communication engineers, software engineers; technology management experts etc., for further development of our ICT sector and keeping pace with the technological advancement in the developed world.
Otherwise, digital Bangladesh would be highly vulnerable and dependent on foreign manufacturers and experts. Simultaneously, we must encourage our young engineers to move towards utilization of less or no fossil fuels. This green engineering will have to be one of the strategic components of digital Bangladesh.
Certainly, we will opt for a technology-based economy. But that economy must also be socially responsive to the needs of the disadvantaged. In other words, we pledge to build a more inclusive digital Bangladesh where engineers too will play the desired strategic role.
The vision is to see BB paperless within the shortest possible time — all correspondence (both internal and external) will be online — and achieve higher productivity across all economic sectors including agriculture and SME through use of ICTs. Steps have been taken already to bring overall functions and activities of BB under automation. Its supervisory functions have been further strengthened applying advanced banking techniques with innovative technology.
BB has already engaged banks in major programs of upgrading their IT platforms, with ample processing powers and online connectivity, to enable efficient data management, processing and analyses in banks for their own risk management purposes and for reporting to BB.
A holistic approach needs to be taken by all the stakeholders to reach the ICT facilities to the doorstep of the common people. Engineers could be pioneers in this regard, innovating new applications of ICT, and thus move the nation towards digital Bangladesh.
Simultaneously, they should also be responsive to the challenges of climate change, and hence move towards green engineering. BB is well aware of its responsibility in promoting green finance for greener Bangladesh. I am sure engineers too will play their desired role in this fight for a greener energy based digital Bangladesh.
Conclusion:
Strengthening the financial sector is a vital concern for an economy. Efficient banking or sound financial system serves as an effective channel for mobilizing funds from savers to productive sectors and thus helps to achieve economic growth. However, the idea of ‘Bank’ is so ancient and this concept is evolving over time. The reforms that have taken place over the past two decades helped the commercial banks to evolve to a stronger position compared to the past. It has gradually developed the rules and procedures along with the fit and proper test criteria to maintain financial sector discipline. These changes can increase financial intermediation and enhance financial deepening. However, it seems that many of the changes are donor dictated rather than to be domestically formulated. The chronology of the reforms and the evaluation of the various reforms associated with central bank and financial sector suggest and indicate donor participation.
Bibliography
1. www.Bangladesh%20 Bank%20reform
2. www. E-Banking and online Banking
3. Bangladesh Bank Order_1972
4. www.google.com
5. www.weikipedia.org
