BANGLADESH RESEARCH PUBLICATIONS JOURNAL ISSN: 1998-2003, Volume: 8, Issue: 1, Page: 89-95, January - February, 2013

BANKING SCENARIOS IN BANGLADESH

M. J. A. Siddikee1, S. Parvin1 and M. S. Hossain2 M. J. A. Siddikee, S. Parvin and M. S. Hossain (2013 Banking Scenarios in Bangladesh. Bangladesh Res. Pub. J. 8(1): 89-95. Retrieve from http://www.bdresearchpublications.com/admin/journal/upload/1308104/1308104.pdf

Abstract
The study focuses on banking system in Bangladesh. Banking sector as the major sector contribute to the national economy. The business of banking is expanding in Bangladesh and the activities of bank are being explored to serve the clients. The study has been made based on using information taken from annual reports of Government Banks, the Commercial Banks, Islamic Banks and Foreign banks, and information taken from different journal, articles, publication paper, and other sources. It has been emphasized and tried in a great manner to find out the true picture of banking industry in Bangladesh. However, there are a lot of secret matters in the banking sectors. As it the researcher cannot reach to secret information that was needed for the core analysis .

Key words: Bank, Business, service product, deposit and activity.

Introduction Banks are among the most important sources of short term working capital for businesses and have become increasingly active in recent years in making long-term business loans (Rose & Hudgins, 2005). The main function of a commercial bank is to mobilize deposits and to provide loans to people and organizations to finance their consumptions and business activities. Thus banks encourage the flow of money to productive use and investment which accelerates the flow of economic growth (Ashraf Ali & Howlader, 2005). Shahid, Banerjee & Mamun (2004) state that the economy of Bangladesh has been growing gradually and as such it needs the support of a financial structure. Samina and Alam (2011) state that Banking industry in Bangladesh up to now is leading the financial system. Based on the time of inception all the commercial banks have been divided into three generations. Banks of all the three generations are introducing new and new products to meet the dimensional demands of customers. After the liberation, the Bangladesh government initially nationalized the entire domestic banking system by Presidential Order No. 26 titled Bangladesh Banks Nationalization Order, 1972 and proceeded to reorganize and rename the various banks. Foreign owned banks were permitted to continue doing business in Bangladesh .At birth, Bangladesh inherited an interest based banking system, which was introduced here earlier when the country was a part of British Colony. Since its inception Bangladesh saw a new trend in banking both at home and abroad. Islamic banking was successfully tries in Egypt. After the Mit Ghamar Model, Naser Social Bank was in the process of establishment (Sarker). The Banking sector in Bangladesh is different from the banking as seen in other developed countries. This is one of the Major Service sectors in Bangladesh economy, which divided into four categories of scheduled Banks. These are Nationalized Commercial Banks (NCBs), Government Owned Development Financial Institutions (DFIs), Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs). Banks across the globe have received the considerable amount of pressure from its diverse stakeholders including shareholders, investors, media, NGOs and customers (Bhattacharya et al., 2004 ;) to carry out business in a responsible and ethical manner. Siddique and Islam (2001) states that Banking sector of Bangladesh is one of the major sectors, which contributes significantly to
Corresponding authors email: msiddikee@yahoo.com 1Department of Finance and Banking, and 2Department of Marketing, Hajee Mohammad Danesh Science and Technology University, Dinajpur, Bangladesh

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the national economy. The sector comprises a number of banks in various categories. As bank is service is always treat as a pure service. Services have some exceptional characteristics that make them different from physical products (Zeithaml and Bitner, 1996). A bank connects customers with capital deficits to customers with capital surpluses. Bangladesh Bank supervises and regulates the countrys banking sector where it has significant improvements (Ahmed, 2006). Green (1989) revealed that a bank's responsibility extends to Government, customers, shareholders, staff, and the community. Companies do have ethical responsibility, but it is not protected by limited liability from the consequences of their actions. Lyne, Nielson, and Tierney (2009) evaluated and analyzed10,000 Multilateral Development Banks (MDBs) loans from 1980 to 2000. They found that (MDBs) dramatically increased social lending for health, education, and safety nets after 1985. Yet the great powers social policy preferences remained relatively static from 1980 to 2000. This contradicts the conventional view that powerful states control International Organizations (IOs). They argued that highly institutionalized IOs like MDBs require a complete model of possible member-state coalitions encompassing the preferences of all member statesnot just major powers Objectives The study is aimed at knowledge enhancement as well as gathering real life banking environment in Bangladesh. The objectives of this study are focused i. ii. iii. To introduce with banking business in Bangladesh. To know the knowledge of banking activities practically. To know the overview activity of prime bank limited

Methodology The study is a descriptive research in nature and thus it is really made on the information from secondary sources of data. Yet, this study has the implications of primary data based on personal observation of banking of banking policies, discussion with the stakeholders of bank from different departments. Secondary data has the major implications in the study to be prepared. Secondary data were gathered from the annual reports of banks, relevant published books, journal, newspapers etc. Private commercial banks: Islamic and traditional, public commercial banks, foreign commercial banks, specialized development Banks, grammeen bank and the central bank of Bangladesh had been included in this study. Results and Discussion Concept of bank Bank is the financial institution that deals with money and money worth instruments. A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank is a financial establishment which uses money deposited by customers for investment, pays it out when required, makes loans at interest Oxford Dictionary (2008). "Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise According to Section 5(b) of Banking Regulation Act, 1949. "A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use According to Professor Kinley. Brief history of Banking in Bangladesh The banking history of Bangladesh (super Admin, 2006): 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
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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. 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
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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 concession 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. Bangladesh Bank is the banker to the government as well as to other banks. It formulates and implements monetary policy, manages foreign exchange reserve and is the authority to supervise and regulate other banks and non-bank financial institutions. The financial sector of Bangladesh has gone through a lot of reforms in the past two decades and central bank reform was a key element of the reform agenda. Banking industry The major indicator of the banking system showed improvement during year 2008. Total deposit and advances of the banking sector increased by 16.03 percent and 18.84 percent respectively in 2008 compared with their 2007 levels. The countrys banking system remained shield from the global financial turmoil mainly due to low level of global; integration and good health underpinned by president regulation and sound management. The major of contribution of this growth came from PCBs, FCBs, and SDBs showing a consistent growth of loans and deposits. Deposit and Advances position of banking industry as on 27th November 2008 are as follows: Table 1 showed that the deposit, credit provided, investment securities and money at call at short notice were highest in PCBs. Credit Deposit Ratio and Borrowing from Bank were the top in SDBs. Investment Deposit Ratio was the highest in SCBs. Table1. Loan and advances position of banking industry (tk in million)
SL 1 Particulars Deposit (excluding interbank item) Demand Deposit Time Deposit Credit provided in Bangladesh Loan and Advances Inland Bills Foreign Bills Credit Deposit Ratio (%) Investment securities ( Book value) Investment Deposit Ratio( Percent) Money at Call at short notice Borrowing from Bank SCBs 4 758.80 194.38 564.42 528.81 474.42 25.22 29.17 69.69% 203.5 26.82% 4.55 .10 PCBs 30 1450.68 232.68 1218 1283.66 1207.88 66.94 8.84 88.49% 185.63 12.80% 19.5 25.20 FCBs 9 214.1 71.59 142.51 149.46 143.23 3.15 3.08 69.81% 38.66 18.06% 6.94 .03 SDBs 5 137.81 17.5 120.31 147 144.98 1.39 .64 106.67% 8.42 6.11% 2.01 62.59 Total 2561.39 516.15 2045.24 2108.93 1970.51 96.69 41.73 82.34% 436.21 17.03% 33 87.92

3 4 5 6 7

Source: Brack Bank Limited Annual Report 2008, Weekly Financial Position of Schedule banks, Bangladesh Bank. List of banks The banking system is composed of four state-owned commercial banks, five specialized development banks, thirty private commercial Banks and nine foreign commercial banks. The Nobel-prize winning Grameen Bank is a specialized micro-finance institution, which revolutionized the concept of micro-credit and contributed greatly towards poverty reduction and the empowerment of women in Bangladesh. a. b. c. d. e. Central Bank State-owned Commercial Banks Private Commercial Banks Foreign Commercial Banks Specialized Development Banks

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Central Bank: Bangladesh bank Pursuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank with retrospective effect from 16 December 1971. 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. State-owned Commercial Banks The banking system of Bangladesh is dominated by the 4 Nationalized Commercial Banks, which together controlled more than 54% of deposits and operated 3388 branches. The nationalized commercial banks are: Sonali Bank, Janata Bank, Argali Bank and Rupali Bank. And Specialised Bank of Bangladesh are Karmosangesthan Bank and Bangladesh Krishi Bank. Private Commercial Banks Private Banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products. These banks are AB Bank Ltd, BRAC Bank Limited, Eastern Bank Limited, Dutch Bangla Bank Limited, Dhaka Bank Limited, Islami Bank Bangladesh Ltd, Pubali Bank Limited, Uttara Bank Limited, IFIC Bank Limited, National Bank Limited, The City Bank Limited, United Commercial Bank Limited, NCC Bank Limited, Prime Bank Limited, South East Bank Limited, Al-Arafah Islami Bank Limited, Social Islami Bank Limited, Standard Bank Limited, One Bank Limited, Exim Bank Limited, Mercantile Bank Limited, Bangladesh Commerce Bank Limited, Mutual Trust Bank Limited, First Security Islami Bank Limited, The Premier Bank Limited, Bank Asia Limited, Trust Bank Limited, Shahjalal Islami Bank Limited, Jamuna Bank Limited,ICB Islami Bank and Moon Bank Limited. Foreign Commercial Banks The foreign commercial banks are Citibank, HSBC, Standard Chartered Bank, Commercial Bank of Ceylon, State Bank of India, Habib Bank, National Bank of Pakistan, Woori Bank and Bank Alfalah. Specialized Development Banks Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector while the other two ( Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) are for extending term loans to the industrial sector. The Specialized banks are: Grameen Bank, Bangladesh Krishi Bank, Bangladesh Development Bank Ltd, Rajshahi Krishi Unnayan Bank, Basic Bank Ltd, Bangladesh Somobay Bank Limited (Cooperative Bank) Ansar VDP Unnyan Bank and BASIC Bank Limited Note: Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) have merged named Bangladesh Development Bank Limited (BDBL), (Source Daily Star) Products and services of the Bank Consumer Credit Scheme relates to provide financial assistance to the limited income group for raising their standard of living by acquiring domestic durables like Refrigerator, T.V., Washing machine, Furniture, Computer, Motor Car, etc. Consumer Credit Products relates to Household Durable Loan, Doctors Loan, Any Purpose Loan, Travel Loan, Car Loan, Advance Against Salary, Education Loan, Marriage Loan and so on. Deposit Schemes focus Contributory Savings Scheme, Education Savings Scheme, Short Term Deposit, Double Benefit Deposit Scheme, Resident Foreign Currency Deposit Account, Non-resident Taka Account, House Building Deposit Scheme, Monthly Benefit Deposit Scheme, Fixed Deposit Scheme, Lakhopati Deposit Scheme, Foreign Currency Account etc. Customer Friendly Deposit Schemes focus Pension Savings Scheme,
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Education Savings Scheme, Marriage Savings Scheme, Savers Benefit Deposit Scheme etc. Loan Schemes focus on General Loan Scheme, Lease financing, House / building and apartment loan scheme, Small and medium Enterprise, Consumer credit scheme Hire purchase, Advance against share. Table 2. Function of bank
Primary or Traditional Functions Accepting Deposits Functions of Banks Agency Functions General Utility Functions

1. Fixed Deposits Account 2. Current Account 3. Saving Account

Advancing of 1. Payment of 1. Security of Wealth and Assets Loans cheques, bills and letters of credit. 1. Cash Credit 2. Receiving Payment 2. Arrangement of Travellers for customers cheques and letter of credit 2. Loans and 3. Payment on behalf 3. Information relating to Advances of customers Economic Position 3. Overdraft 4. Transfer of money 4. Financial Adviser 5. Publication of Information

4. Home Safe Account 4. Discounting 5.Purchase and sale of of Bills shares of securities 5. Indefinite Period 6. Deposits Account 7. Other Deposits A/C

6. Function of manager, 6. Accepting of Bills Trustee and Executor 7.Underwriting Functions 7. Security of loans 8. Other Functions 8. Personal credit 9. Management of Public Debt 10. Share market function 11. Management of Foreign Exchange

Source: I.V.Trivedi, C.M. Chaudhary and S.B. Kumar The activities of the banks are usually accomplished by divisional formats. Financial Control and Accounts Division (FCAD) performs the activities as like financial planning, budget preparation and monitoring, payment of salary, controlling inter-branch transaction, disbursement of bills, preparation of annual reports, and so on. International Division (ID) performs the activities as like agency arrangement and credit line with correspondent banks, compile and circulate the foreign exchange circulars to the branches, foreign remittance, controlling test key and authorized signature etc. Credit and Loan Administration Division focuses on the activities as like loan administration and disbursement, project evaluation, processing and approving credit proposals of the branches, documentation, arranging different credit facilities, providing related statements to the Bangladesh bank and other departments. Human Resource Division (HRD) performs the activities related to administration and personnel. The main functions of HRD are: recruiting, training and development, compensation, employee benefit, leaves and service rules program and up gradation, placement and performance appraisal of employees, preparing related reports to the executive committee/ board on related matters, promotional campaign and press release, plan and manage human resources and development of human resources, arrange for selection, recruitment and induction of employees, arrange for promotion of employee performance appraisal report of the employees, transfer and posting of employees etc. Information Technology (IT) Departments function are software development, network management and expansion, software and hardware management, member banks reconciliation, data entry and processing, procurement of hardware and maintenance. Branches Control & Inspection Division relate the functions like controlling different functions of the branches and search for location for expansion, conducting internal audit and inspection both regularly and suddenly, ensuring compliance with Bangladesh Bank (BB), monitoring BBs inspection and external audit reports. Outreach Divisions activities are new product development and marketing analysis on financial services, mass media, event management and protocol, liability marketing, improvement of policies and strategies, management information system. Marketing Division maintains communication with corporate clients. Treasury Division continues to efficiently manage banks cash flow and optimizes the investment of the banks excess liquidity and provides quality services and products to meet demand of the
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customer needs and play a major role in raising banks income. Committees and Group Division reviews the principles, policies rules and gives a decision exercises the power delegated by the Board from time to time, guidelines regarding deposit, loans, gives different ideas, decision regarding various issues. Conclusion Sound profitability and growth of banks in Bangladesh has a major impact on internal capital generation. The commercial banking system dominates Bangladesh's financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector that control other banks. The activities of bank in Bangladesh are presenting the increasing trend. In the most sectors the banking operation plays the significant role for economic development. The technologies are being associated with banking activities. The activities of banks are not limited to take deposit and granting loan. Their activities are being specified and being focused on widespread. In Bangladesh, the banking business is being more competitive as new banks are being established. Recently, products and services of banks attract the potential clients to be involved in banking business. References Annual Report 2003, 2007 and updated news of 2008 (unreleased) Prime Bank LTD, Magazine - Credit Policy Manual, Credit Operation Manual, PBL. Banking Regulation Act (1949). Section 5(b). Bhattacharya, C. B. and Sen, S. (2004), Doing Better at Doing Good: When, Why, and How Consumers Respond to Corporate Social Initiatives: California Management Review, Vol. 47 No.1, pp. 9-25 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh: An application of CAMELS rating. Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008) 141-152. Brack Bank Limited Annual Report 2008, Weekly Financial Position of Schedule banks, Bangladesh Bank. By Super Admin Published 21 September 2006 pp.1 -2. "Development Bank takes off". The Daily Star, Retrieved 4 January 2010. Green, C.F. (1989). Business Ethics in Banking. Journal of Business Ethics 8(8) pp. 631-634. H. A. Ahmed, 2006 Bangladesh Bank Reform Changes and Challenges. CGS Working Paper CGS WP 4. .Trivedi, C.M. Chaudhary and S.B. Kumar (2010) Indian banking system. Jaipur: Ramesh Book Depot. pp. 1.6. Lyne, M.M., Nielson, D.D. and Tierney, M.J. (2009). Controlling Coalitions: Social Lending at the Multilateral Development Banks. The Review of International Organizations 4(4) pp. 407-403. Md. Abdul Awwal Sarker: Islamic banking in Bangladesh: performance, problems & prospects: International Journal of Islamic Financial Services Vol. 1 No.3 Oxford Dictionary (2008). Quazi Sagota Samina1 and Md. Razib Alan, (September 2011): Promotional activity involvement of commercial banks: A comparative analysis among three generation banks in Bangladesh, International Review of Business Research Papers Vol.7. No. 5. pp. 35-52 Rose, Peter S & Hudgins, Sylvia C 2005, Bank Management & Financial Services, 6th Edition, Mc Graw Hill International Edition, New York. SR. Siddique and A. F. M. M. Islam (2001): Banking Sector in Bangladesh: Its Contribution and Performance, Journal of Business Research, vol. 3. The information regarding Bangladesh is re-published from the Library of Congress Country Studies and the CIA World Fact book, September 1988. Wikipedia, the free encyclopedia. Zeithaml, V.A. and M.J. Bitner, (1996), Services Marketing, international edition, McGraw Hill, New York.
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